<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 28, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 33-76306
GREAT AMERICAN COOKIE COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1295221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4685 FREDERICK DRIVE, S.W.
ATLANTA, GEORGIA 30336
(Address of principal executive offices)
(404) 696-1700
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
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<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 28, 1997 and June 29, 1997
Statement of Operations for the thirteen week periods ended
December 28, 1997 and December 29, 1996
Statement of Operations for the twenty-six week periods ended
December 28, 1997 and December 29, 1996
Statement of Changes in Stockholder's Equity for the
twenty-six week period ended December 28, 1997
Statement of Cash Flows for the twenty-six week periods ended
December 28, 1997 and December 29, 1996
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
-2-
<PAGE> 3
GREAT AMERICAN COOKIE COMPANY, INC.
(a wholly-owned subsidiary of Cookies USA, Inc.)
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
December 28, June 29,
1997 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,123,311 $ 4,883,991
Accounts receivable - trade 1,911,592 1,701,587
Inventory 1,549,689 1,291,907
Prepaid expenses 1,185,165 1,227,378
Current deferred tax benefit 4,578 4,578
Current portion of notes receivable 167,505 867,207
Other receivables 10,508 8,548
----------- -----------
Total current assets 11,952,348 9,985,196
----------- -----------
Property and equipment, net of accumulated depreciation 5,716,131 6,304,591
Construction in progress, net of construction deposits received from franchisees 170,785 91,759
----------- -----------
5,886,916 6,396,350
----------- -----------
Other assets
Deferred loan costs, net of accumulated amortization
of $2,337,600 and $2,049,700, respectively 1,762,169 2,050,069
Notes receivable, net of current portion 318,183 302,512
Deferred tax benefit 1,293,006 1,293,006
Deposits 48,624 49,615
Accrued straight-line minimum rent receivable for subleases to franchisees 1,371,191 1,266,701
----------- -----------
4,793,173 4,961,903
----------- -----------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $3,539,551 and $3,104,351, respectively 31,412,774 31,847,974
----------- -----------
$54,045,211 $53,191,423
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 587,867 $ 376,035
Sales taxes payable 195,809 105,065
Accrued interest payable 1,994,044 1,993,750
Accrued expenses 1,048,603 1,040,067
Deposits 711,563 673,277
Dividends payable 0 125,000
----------- -----------
Total current liabilities 4,537,886 4,313,194
----------- -----------
Capital lease obligations, net 48,204 62,214
----------- -----------
Accrued straight-line minimum rent payable 2,197,490 2,113,057
----------- -----------
Long-term debt 40,000,000 40,000,000
----------- -----------
Commitments and contingencies
Stockholder's equity
Common stock, no par value, 2,000 shares authorized:
210 shares issued and outstanding 13,500,000 13,500,000
Additional paid-in capital 336,063 336,063
Accumulated deficit (6,574,432) (7,133,105)
----------- -----------
7,261.631 6,702,958
----------- -----------
$54,045,211 $53,191,423
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<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 28, 1997 DECEMBER 29, 1996
----------------- -----------------
<S> <C> <C>
Revenue:
Cookie and beverage sales $ 5,390,271 $6,369,721
Batter sales to franchisees 3,428,958 3,244,272
Franchise royalties 1,542,753 1,369,818
Franchise sales - existing and new stores 110,230 97,968
Other - net 79,744 (219)
----------- ----------
Total revenue 10,551,956 11,081,560
----------- ----------
Operating expenses:
Cost of sales 4,564,552 4,864,280
Retail store occupancy 1,460,465 1,649,943
Other retail store expenses 252,745 259,302
Selling, general and administrative expenses 1,536,586 1,566,635
----------- ----------
Total operating expenses 7,814,348 8,340,160
----------- ----------
Other (income) expenses, net:
Interest income (80,664) (59,446)
Interest expense 1,088,894 1,090,245
Amortization of deferred loan costs 144,100 143,100
----------- ----------
Total other expenses, net 1,152,330 1,173,899
----------- ----------
Income before taxes 1,585,278 1,567,501
State and federal income tax expense 684,713 678,338
----------- ----------
Net income $ 900,565 $ 889,163
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4 -
<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 28, 1997 DECEMBER 29, 1996
<S> <C> <C>
Revenue:
Cookie and beverage sales $10,381,930 $12,193,673
Batter sales to franchisees 6,139,547 5,666,276
Franchise royalties 2,774,839 2,468,552
Franchise sales - existing and new stores 900,597 883,276
Other - net 72,072 (29,373)
----------- -----------
Total revenue 20,268,985 21,182,404
----------- -----------
Operating expenses:
Cost of sales 8,816,089 9,442,712
Retail store occupancy 3,020,873 3,398,007
Other retail store expenses 486,746 508,305
Selling, general and administrative expenses 3,452,178 3,387,346
----------- -----------
Total operating expenses 15,775,886 16,736,370
----------- -----------
Other (income) expenses, net:
Interest income (148,943) (92,276)
Interest expense 2,178,472 2,180,615
Amortization of deferred loan costs 288,300 286,200
----------- -----------
Total other expenses, net 2,317,829 2,374,539
----------- -----------
Income before taxes 2,175,270 2,071,495
State and federal income tax expense 991,597 952,544
----------- -----------
Net income $ 1,183,673 $ 1,118,951
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<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 28, 1997
------------------------------------------------------
Additional
Common Paid In Accumulated Total
Stock Capital Deficit Equity
<S> <C> <C> <C> <C>
Balance at June 29, 1997 $13,500,000 $336,063 $(7,133,105) $6,702,958
Dividends declared -- -- (625,000) (625,000)
Current period net income -- -- 1,183,673 1,183,673
----------- -------- ----------- -----------
$13,500,000 $336,063 $(6,574,432) $ 7,261,631
=========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<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 28, 1997 DECEMBER 29, 1996
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,183,673 $1,118,951
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 808,086 893,617
Amortization of cost in excess of fair value of net assets acquired (goodwill) 435,200 435,200
Amortization of deferred loan costs 287,900 286,200
Net gain on sales and disposals of property and equipment (404,135) (508,125)
Net decrease in accrued straight-line minimum rent
receivable and payable (20,057) (25,865)
Changes in assets and liabilities:
Increase in accounts receivable (190,005) (372,479)
Increase in inventory (275,959) (201,788)
Decrease (increase) in prepaid expenses 42,213 (85,910)
Decrease in current deferred tax benefit 0 5,697
Increase in other receivables (1,960) (15,716)
Decrease in deposits 991 858
Increase (decrease) in accounts payable 211,832 (79,636)
Increase in sales taxes payable 90,744 28,973
Increase in accrued interest payable 294 1,288
Increase in accrued expenses 8,536 834,755
Increase in deposits 38,286 17,739
---------- ----------
Net cash provided by operating activities 2,215,639 2,333,759
---------- ----------
Cash flows from investing activities:
Acquisitions of property and equipment, including net increase in construction
in progress, net of construction deposits received from franchisees (1,013,905) (393,787)
Proceeds from sales and disposals of property and equipment 915,379 284,131
Acceptance of notes receivable 0 (2,224)
Proceeds from collection of notes receivable 886,217 443,564
---------- ----------
Net cash provided by investing activities 787,691 331,684
---------- ----------
Cash flows from financing activities:
Principal repayments under capital lease obligations (14,010) (13,153)
Dividends paid (750,000) (625,000)
---------- ----------
Net cash used for financing activities (764,010) (638,153)
---------- ----------
Net increase in cash and cash equivalents during period 2,239,320 2,027,290
---------- ----------
Cash and cash equivalents, beginning of period 4,883,991 3,301,627
---------- ----------
Cash and cash equivalents, end of period $7,123,311 $5,328,917
========== ==========
</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 28, 1997 DECEMBER 29, 1996
------------------ -------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $2,178,472 $2,179,327
========== ==========
State and federal income taxes $ 576,000 $ 250,750
========== ==========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
- ------------------------------------------------------------------------
During the twenty-six weeks ended December 28, 1997, notes receivable with face
amounts totaling $202,186 were received from unrelated franchisees in connection
with the sale of 3 Company-operated stores.
During the 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 a manufacturer of cookie
batter which is sold to Company-operated and franchised retail stores.
The accompanying financial statements of Great American Cookie Company,
Inc. (the "Company") for the thirteen weeks ended and for the
twenty-six weeks ended December 28, 1997 have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
These financial statements include all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position of the
Company, and the results of its operations and its cash flows for the
periods presented. However, these results are not necessarily
indicative of the results for any other interim period or the full
year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Management believes that the
disclosures included in the accompanying interim financial statements
and footnotes are adequate to make the information not misleading, but
should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the fiscal year ended
June 29, 1997. Earnings per share is not presented, as the Company is
wholly-owned.
2. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 28, JUNE 29,
1997 1997
----------- ----------
<S> <C> <C>
Notes receivable $485,688 $1,169,719
Less: current portion 167,505 867,207
-------- ----------
Notes receivable, net of current portion $318,183 $ 302,512
======== ==========
</TABLE>
Notes receivable are due from various franchisees and principally
result from the sale of existing Company-operated stores to
franchisees. Each note originating from the sale of a store is
guaranteed by the purchaser and collateralized by the assets sold.
Short-term notes generally carry an interest rate of 10% to 15% per
annum and are intended to serve as interim financing until the
franchisee can secure long-term financing from a third party lender.
Notes classified as non-current are generally due in monthly
installments of principal and interest, with the interest rates ranging
from 9% to 12.5% per annum.
-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 28, JUNE 29,
1997 1997
----------- ---------
<S> <C> <C>
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 6,550,499 6,829,757
Furniture, fixtures, and equipment 3,135,486 3,228,241
---------- ----------
10,686,780 11,058,793
Less: accumulated depreciation (4,970,649) (4,754,202)
---------- ----------
Property and equipment--net $5,716,131 $6,304,591
========== ==========
</TABLE>
4. LONG-TERM DEBT
Notes payable as of December 28, 1997 and June 29, 1997 represent notes
issued in connection with the acquisition of the Company on December
10, 1993. Notes payable are described as follows:
10.875% Senior Secured Notes Payable due January 15, 2001,
Series B, (the "Notes"). Interest accrues daily and
is payable semi-annually on January 15 and July 15. $40,000 000
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
GREAT AMERICAN COOKIE COMPANY, INC.
(a wholly-owned subsidiary of Cookies USA, Inc.)
NOTES TO FINANCIAL STATEMENTS
5. LITIGATION
On September 12, 1997, nine Great American Cookies franchisees filed a
lawsuit against the Company and certain other parties alleging certain
anticipatory breaches of contract and violations of certain state
franchise laws. These allegations were made as a result of discussions
held between Cookies USA and Mrs. Fields Original Cookies, Inc. ("Mrs.
Fields") regarding the possibility of Mrs. Fields acquiring all of the
outstanding shares of Common Stock of Cookies USA, the sole stockholder
of Great American Cookies. As of February 11, 1998, no agreement with
Mrs. Fields has been reached. The Company has not responded to the
lawsuit because the plaintiffs have agreed to extend the time to do so
in order that discussions among all of the parties may continue.
Nevertheless, the Company believes that the claims of the plaintiffs
are without merit and intends to vigorously defend itself against the
claims if necessary. This action is at its earliest stages, and it is
not possible at this time to determine the outcome of the lawsuit or
the effect of its resolution on the Company's financial position or
operating results.
In addition, from time to time, the Company is subject to claims and
legal actions in the ordinary course of its business. Such claims or
legal actions would not have a material adverse effect on the Company
or its business, and the Company is not aware that any other litigation
is threatened.
-11-
<PAGE> 12
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 28, 1997 compared to the results of operations for the thirteen weeks
ended December 29, 1996 and for the twenty-six weeks ended December 28, 1997
compared to the twenty-six weeks ended December 29, 1996 is below. The factors
cited in the following discussion as contributing to changes in operating
results are listed in order of importance; however, unless otherwise indicated
in such discussion, the quantitative importance of any such factors cannot be
determined by management and is not stated.
The "forward-looking statements" contained in this section (Item 2)
represent the Company's expectations or beliefs concerning future events,
including statements regarding unit growth and cash requirements. The Company
cautions that a number of important factors could, individually or in the
aggregate, cause actual results to differ materially from those stated in the
forward-looking statements including, without limitation, the following:
consumer spending trends and habits, mall traffic trends, increased competition
among snack retailers, economic conditions in the regions where the Company and
its franchisees operate stores, the ability to identify and secure suitable
locations for new stores, the availability of experienced management and hourly
employees, and the laws and regulations affecting labor and employee benefit
costs.
THIRTEEN WEEKS ENDED DECEMBER 28, 1997 (SECOND QUARTER OF FISCAL 1998) COMPARED
TO THIRTEEN WEEKS ENDED DECEMBER 29, 1996 (SECOND QUARTER OF FISCAL 1997)
Company and Franchise Store Activity
As of December 28, 1997 there were 80 Company-operated stores and 246
franchised stores in operation. The store activity for the second quarter of
fiscal 1998 and second quarter of fiscal 1997 is summarized as follows:
<TABLE>
<CAPTION>
SECOND QUARTER SECOND QUARTER
OF FISCAL 1998 OF FISCAL 1997
-------------- --------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Stores open as of beginning of the quarter 84 241 101 229
Stores opened (including relocations) 0 3 0 3
Stores closed (including relocations) (1) (1) (1) (2)
Stores sold to franchisees (3) 3 (3) 3
Stores acquired from franchisees 0 0 1 (1)
--- --- --- ---
Stores open as of the end of the quarter 80 246 98 232
Satellite locations as of the end of the quarter 7 32 10 30
--- --- --- ---
Total outlets as of the end of the quarter 87 278 108 262
=== === === ===
</TABLE>
The above activity results in 1,064 Company-operated equivalent store
weeks and 3,163 franchisee-operated equivalent store weeks during the thirteen
week period ended December 28, 1997 compared to 1,298 Company-operated
equivalent store weeks and 2,988 franchisee-operated equivalent store weeks
during the thirteen week period ended December 29, 1996.
Total Revenue
Total revenue decreased approximately $530,000, or 4.8%, during the second
quarter of fiscal 1998 compared to the second quarter of fiscal 1997. Each of
the Company's revenue sources is discussed below:
-12-
<PAGE> 13
- Cookie and beverage sales at Company-operated retail stores
decreased approximately $979,000, or 15.4%, during the second
quarter of fiscal 1998 compared to the second quarter of
fiscal 1997. The decrease in revenue from Company-operated
retail stores was primarily attributable to (a) an 18.0%
decrease in Company-operated equivalent store weeks, offset by
(b) an increase in the average retail sales volume for
Company-operated stores. Specifically, the average retail
sales volume for Company-operated stores increased 2.7%. On a
comparable store basis, for those stores which were
Company-operated in the second quarter of both fiscal 1998 and
1997, sales volumes increased .4% during the quarter. The
average retail sales volume increased more than comparable
store sales volumes due to the Company's portfolio of stores
improving as a result of closing 9 "underperforming" Company-
operated stores during the third and fourth quarters of
fiscal 1997.
- Batter sales to franchisees increased approximately $185,000,
or 5.7%, during the second quarter of fiscal 1998 compared to
the second quarter of fiscal 1997. The increase in batter
sales to franchisees was primarily attributable to (a) a 5.1%
increase in franchisee-operated equivalent store weeks, offset
by (b) a 0.2% decrease in the volume of batter sold per
franchisee-operated equivalent store week.
- Franchise royalties increased approximately $173,000, or
12.6%, during the second quarter of fiscal 1998 compared to
the second quarter of fiscal 1997. The increase in franchise
royalties was attributable to (a) a 6.7% increase in the
average retail sales volume per franchisee-operated store and
(b) a 5.9% increase in franchisee-operated equivalent store
weeks. On a comparable store basis, for those stores which
were franchisee-operated in fiscal 1998 and 1997, management
estimates franchisees' sales volumes increased 5.1% during the
second quarter of fiscal 1998 compared to the second quarter
of fiscal 1997.
- Revenue from franchise sales increased approximately $12,000,
or 12.5%, during the second quarter of fiscal 1998 compared to
the second quarter of fiscal 1997. Revenue from selling
existing and new stores to franchisees is summarized as
follows (rounded):
<TABLE>
<CAPTION>
SECOND QUARTER SECOND QUARTER
FISCAL 1998 FISCAL 1997
------------ --------------
<S> <C> <C>
Number of licenses sold to franchisees
- existing stores 3 3
- new stores 2 3
Cash and notes from sale of existing stores $220,000 $200,000
Less: net book value of existing stores sold (160,000) (177,000)
-------- --------
Revenue from sale of existing stores 60,000 23,000
-------- --------
Revenue from license fees for new stores 50,000 75,000
Revenue from other fees 0 0
-------- --------
Revenue from license fees
for new stores and other fees 50,000 75,000
-------- --------
Total revenue from sale of existing
and new stores to franchisees $110,000 $ 98,000
======== ========
</TABLE>
-13-
<PAGE> 14
- - Other revenue increased approximately $80,000 during the second quarter
of fiscal 1998 compared to the second quarter of fiscal 1997. The
increase in other revenue is primarily attributable to (a) an increase
in sales of miscellaneous supplies to franchise stores, (b) an increase
in sales of premium items within Company-operated retail stores, and
(c) an increase in construction assistance revenue for construction
assistance performed by the Company on behalf of the franchisees,
offset by (d) an increase in sales discounts as a result of increased
batter sales to franchisees.
Cost of Sales
Cost of sales decreased approximately $300,000, or 6.2%, during the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997. The
decrease in cost of sales was primarily attributable to (a) a decline in cookie
and beverage sales due to an 18.0% decrease in Company-operated equivalent store
weeks, offset by (b) an increase in batter sales to franchisees and (c) a
decline in Company-operated retail store margins.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $189,000, or
11.5%, during the second quarter of fiscal 1998 compared to the second quarter
of fiscal 1997. The decrease was primarily attributable to (a) a decrease in
rent, utilities, and depreciation expense as a result of an 18.0% decrease in
Company-operated equivalent store weeks, offset by (b) an increase in repairs
and maintenance costs.
Other Retail Store Expenses
Other retail store expenses decreased approximately $7,000, or 2.5%,
during the second quarter of fiscal 1998 compared to the second quarter of
fiscal 1997. The decrease in other retail store expenses was primarily
attributable to (a) an 18.0% decrease in Company-operated equivalent store
weeks, offset by (b) an increase in both local store and point of sale marketing
costs for Company-operated stores.
Selling, General and Administrative
Selling, general and administrative expenses decreased approximately
$30,000, or 1.9%, during the second quarter of fiscal 1998 compared to the
second quarter of fiscal 1997. This decrease was primarily attributable to (a) a
decrease in salaries and benefits at the support center, (b) a decrease in
franchise sales advertising, and (c) a decrease in legal and professional fees,
offset by (d) an increase in marketing costs associated with local store and
point of sale marketing for franchise stores as well as other general marketing
costs.
Other Expenses, Net
Other expenses, net, decreased approximately $22,000, or 1.8%, during
the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997.
The decrease was primarily attributable to an increase in interest income.
Net Income
Net income increased approximately $ 11,000, or 1.3%, for the second
quarter of fiscal 1998 compared to the second quarter of fiscal 1997. The
increase in net income was primarily attributable to (a) a 1.8% decrease in
other expenses, net, offset by (b) a 0.9% increase in state and federal income
tax expense.
-14-
<PAGE> 15
TWENTY-SIX WEEKS ENDED DECEMBER 28, 1997 (FISCAL 1998 YEAR-TO-DATE) COMPARED TO
TWENTY-SIX WEEKS ENDED DECEMBER 29, 1996 (FISCAL 1997 YEAR-TO-DATE)
Company and Franchise Store Activity
As of December 28, 1997 there were 80 Company-operated stores and 246
franchised stores in operation. The store activity for fiscal 1998 year-to-date
and for fiscal 1997 year-to-date is summarized as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
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 91 233 104 225
Stores opened(including relocations) 2 6 0 5
Stores closed (including relocations) (1) (5) (1) (3)
Stores sold to franchisees (12) 12 (8) 8
Stores acquired from franchisees 0 0 3 (3)
--- --- --- ---
Stores open as of the end of the quarter 80 246 98 232
Satellite locations as of the end of the quarter 7 32 10 30
--- --- --- ---
Total outlets as of the end of the quarter 87 278 108 262
=== === === ===
</TABLE>
The above activity results in 2,228 Company-operated equivalent store
weeks and 6,229 franchisee-operated equivalent store weeks during the twenty-six
week period ended December 28, 1997 compared to 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.
Total Revenue
Total revenue decreased approximately $913,000, or 4.3%, during the
twenty-six weeks ended December 28, 1997 compared to the twenty-six weeks ended
December 29, 1996. Each of the Company's revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores
decreased approximately $1,812,000, or 14.9%, during the
twenty-six weeks ended December 28, 1997 compared to the
twenty-six weeks ended December 29, 1996. The decrease in
revenue from Company-operated retail stores was attributable
to (a) an 16.1% decrease in Company-operated equivalent store
weeks, offset by (b) a 1.2% 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 1998 and 1997, sales volumes increased .2%. The
average retail sales volume increased more than comparable
store sales volume due to the Company's portfolio of stores
improving as a result of closing 9 "underperforming"
Company-operated stores during the third and fourth quarters
of fiscal 1997.
- Batter sales to franchisees increased approximately $473,000,
or 8.4%, during the twenty-six weeks ended December 28, 1997
compared to the twenty-six weeks ended December 29, 1996. The
increase in batter sales to franchisees was primarily
attributable to (a) a 5.5% increase in franchisee-operated
equivalent store weeks, and (b) a 2.9% increase in the volume
of batter sold per franchisee-operated equivalent store week.
-15-
<PAGE> 16
- Franchise royalties increased approximately $306,000, or
12.4%, during the twenty-six weeks ended December 28, 1997
compared to the twenty-six weeks ended December 29, 1996. The
increase in franchise royalties was attributable to (a) an
increase in the average retail sales volume per
franchisee-operated store of 6.9%, and (b) a 5.5% increase in
franchisee-operated equivalent store weeks. On a comparable
store basis, for those stores which were franchisee-operated
in fiscal 1998 and 1997, management estimates franchisees'
sales volumes increased 4.8%.
- Revenue from franchise sales increased approximately $18,000,
or 2.0%, during the twenty-six weeks ended December 28, 1997
compared to the twenty-six weeks ended December 29, 1996.
Revenue from selling existing and new stores to franchisees is
summarized as follows (rounded):
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
----------- -----------
<S> <C> <C>
Number of licenses sold to franchisees
- existing stores 12 8
- new stores 4 5
Cash and notes from sale of existing stores $1,415,000 $1,327,000
Less: net book value of existing stores sold (625,000) (574,000)
---------- ----------
Revenue from sale of existing stores 790,000 753,000
---------- ----------
Revenue from license fees for new stores 100,000 125,000
Revenue from other fees 11,000 5,000
Revenue from license fees ---------- ----------
for new stores and other fees 111,000 130,000
---------- ----------
Total revenue from sale of existing
and new stores to franchisees $ 901,000 $ 883,000
========== ==========
</TABLE>
- Other revenue increased approximately $101,000, or 345%,
during the twenty-six weeks ended December 28, 1997 compared
to the twenty-six weeks ended December 29, 1996. The increase
in other revenue is primarily attributable to (a) an increase
in sales of premium items within Company-operated retail
stores, (b) an increase in sales of miscellaneous supplies to
franchise stores, and (c) an increase in construction
assistance revenue for construction assistance performed by
the Company on behalf of the franchisees, offset by (d) an
increase in sales discounts as a result of increased batter
sales to franchisees.
Cost of Sales
Cost of sales decreased approximately $627,000, or 6.6%, during the
twenty-six weeks ended December 28, 1997 compared to the twenty-six weeks ended
December 29, 1996. The decrease in cost of sales was primarily attributable to
(a) a decline in cookie and beverage sales due to an 16.1% decrease in
Company-operated equivalent store weeks, offset by (b) an increase in batter
sales to franchisees and (c) a decline in Company-operated retail store margins.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $377,000, or
11.1%, during the twenty-six weeks ended December 28, 1997 compared to the
twenty-six weeks ended December 29, 1996. The decrease was primarily
attributable to (a) a decrease in rent, utilities, and depreciation expense as a
result of a 16.1% decrease in Company-operated equivalent store weeks, offset by
(b) an increase in repairs and maintenance costs.
-16-
<PAGE> 17
Other Retail Store Expenses
Other retail store expenses decreased approximately $22,000, or 4.2%,
during the twenty-six weeks ended December 28, 1997 compared to the twenty-six
weeks ended December 29, 1996. The decrease in other retail store expenses was
primarily attributable to (a) a 16.1% decrease in Company-operated equivalent
store weeks, offset by (b) an increase in both local store and point of sale
marketing costs for Company-operated stores.
Selling, General and Administrative
Selling, general and administrative expenses increased approximately
$65,000, or 1.9%, during the twenty-six weeks ended December 28, 1997 compared
to the twenty-six weeks ended December 29, 1996. This increase was primarily
attributable to (a) an increase in marketing expenditures, (b) an increase in
the cost of training materials related to the rollout of a new training program,
and (c) increases in the cost of health and worker's compensation insurance,
offset by (d) a decrease in legal and professional fees, (e) a decrease in
salaries and benefits at the support center, and (f) a decrease in franchise
sales advertising.
Other Expenses, Net
Other expenses, net, decreased approximately $57,000, or 2.4%, during
the twenty-six weeks ended December 28, 1997 compared to the twenty-six weeks
ended December 29, 1996. The decrease was primarily attributable to an increase
in interest income.
Net Income
Net income increased approximately $65,000, or 5.8%, for the twenty-six
weeks ended December 28, 1997 compared to the twenty-six weeks ended December
29, 1996. The increase in net income was primarily attributable to (a) a 1.1%
increase in operating income and (b) a 2.4% decrease in other expenses, net,
offset by (c) a 4.1% increase in state and federal income tax expense.
-17-
<PAGE> 18
Fixed Charge Coverage
Earnings before interest, taxes, depreciation and amortization
("EBITDA") is presented below as management believes that certain investors find
it to be a useful tool for measuring the ability to service debt. EBITDA does
not represent net income or cash flows from operations as these terms are
defined by generally accepted accounting principles and does not necessarily
indicate whether cash flows have been or will be sufficient to fund cash needs.
Adjusted EBITDA includes adjustments to EBITDA used in the indenture for the
10.875% Senior Secured Notes Payable due January 15, 2001, (Series B) to
calculate compliance with the Fixed Charge Coverage Ratio per such indenture,
consisting of adding back interest income and the elimination of certain
non-cash charges, including losses on the sale of fixed assets and accrual of
lease expense in excess of cash paid. EBITDA and Adjusted EBITDA are calculated
as follows (000's omitted):
<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 28, 1997 DECEMBER 29, 1996 DECEMBER 28, 1997 DECEMBER 29, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income $ 901 $ 889 $1,184 $1,119
Add:
Depreciation 387 433 808 894
Amortization of goodwill 217 217 435 435
Interest expense,
net of interest income 1,008 1,030 2,029 2,088
Amortization of debt issue costs 144 143 288 286
Provision for income taxes 685 678 992 953
----- ----- ----- -----
EBITDA 3,342 3,390 5,736 5,775
Add:
Other non-cash items 62 29 106 47
Interest income 81 59 149 92
----- ----- ----- -----
Adjusted EBITDA $3,485 $3,478 $5,991 $5,914
====== ====== ====== ======
</TABLE>
Liquidity and Capital Resources
Working capital as of December 28, 1997 was approximately $7,414,000, a
$1,742,000 or 30.7%, increase compared to the working capital balance at the end
of the previous fiscal year (June 29, 1997). The increase in working capital is
primarily due to (a) cash and short-term notes received from the sale of 12
Company-operated stores during the first two quarters of fiscal 1998 totaling
$1,315,000 and (b) an increase in the balance of both receivables and inventory
as of December 28, 1997, primarily due to the normal increase in batter sales
and ingredient purchases during the Christmas shopping season.
The Company requires capital primarily to meet debt service obligations
on its Senior Secured Notes (See Note 4 of the financial statements) for the
development of new stores and for the remodel of its existing Company-operated
stores. The Company's principal sources of liquidity are cash flow from
operations and the sale of Company-operated retail units to franchisees.
The Company's Senior Secured Notes require semi-annual interest
payments of approximately $2,175,000 on January 15 and July 15 until the year
2001. Based on the terms of the Senior Secured Notes, the Company will not have
any mandatory debt amortization requirements until the year 2001. The Company
anticipates that additional cash flow will be generated primarily from the sale
of existing retail stores to franchisees so that, with cash generated from
retail store and
-18-
<PAGE> 19
batter operations, and royalties from franchisees, the Company will be able to
meet its debt service requirements as well as its capital expenditure
requirements for the foreseeable future. Notwithstanding the above, the
Company's liquidity is dependent upon its ability to sell both existing and new
stores to franchisees.
The Company continually invests in its business through the addition of
new Company-operated stores. These store additions are reflected as long-term
assets and not as part of working capital. The Company anticipates that it will
build approximately 3 Company-operated stores during fiscal 1998, requiring
aggregate expenditures of approximately $390,000 for store opening costs, in
addition to remodeling 5 Company-operated stores which will require estimated
expenditures of approximately $600,000. The Company anticipates that such costs
will be funded with cash flow from operations and the sale of existing
Company-operated stores to franchisees, including initial license fees. The
number of Company-operated stores to be opened may be greater or less than
anticipated depending upon a number of factors including the Company's ability
to obtain locations on acceptable lease terms and/or the Company's ability to
identify potential franchisees and to license such locations to franchisees
before construction and store opening costs are incurred. The Company's future
liquidity is dependent upon its ability to sell stores to franchisees.
During the twenty-six week period ended December 28, 1997, the Company
incurred total capital expenditures of approximately $1,014,000, including a net
increase in construction in progress of approximately $79,000. The Company
estimates that to adequately maintain the Atlanta batter production facility and
existing Company-operated retail units, approximately $300,000 to $400,000 of
capital expenditures are required annually.
The Company is a 100% subsidiary of Cookies USA, Inc. ("Cookies USA")
and the sole operating unit of the consolidated entity. As of December 28, 1997,
Cookies USA had outstanding debt consisting of $10 million of Subordinated
Notes. Additionally, as of December 28, 1997, Cookies USA had outstanding
securities and accrued dividends consisting of $13,053,658 of Senior Preferred
Stock, $3,006,678 of Junior Class A Preferred Stock, $902,003 of Junior Class B
Preferred Stock and $250,000 of common stock. The Company is the sole source of
any cash to be paid as interest, principal payments or dividends on such
securities or to pay any other expenses, including management fees and taxes,
incurred by Cookies USA. The Company expects to pay dividends and tax payments
to Cookies USA in amounts sufficient to service the cash flow requirements of
Cookies USA to the extent that such payments are permitted by the terms of the
Company's Senior Secured Notes. During the twenty-six week period ended December
28, 1997, the Company paid $750,000 of dividends to Cookies USA, of which,
$625,000 were declared in the second quarter of fiscal 1998.
Seasonality and Inflation
The Company's sales and profitability are subject to slight seasonal
fluctuation and are traditionally higher during the Christmas holiday season
because of various factors such as increased mall traffic and holiday gift
purchases.
The Company does not believe that historically inflation has materially
affected earnings. However, many of the Company's employees are paid hourly
rates related to the federal minimum wage which increased from $4.75 to $5.15 on
September 1, 1997. The minimum wage increase may negatively impact the 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 28,
1997.
-19-
<PAGE> 20
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 12, 1997, nine Great American Cookies franchisees filed a
lawsuit against the Company and certain other parties alleging certain
anticipatory breaches of contract and violations of certain state franchise
laws. These allegations were made as a result of discussions held between
Cookies USA and Mrs. Fields Original Cookies, Inc. ("Mrs. Fields") regarding the
possibility of Mrs. Fields acquiring all of the outstanding shares of Common
Stock of Cookies USA, the sole stockholder of Great American Cookies. As of
February 11, 1998, no agreement with Mrs. Fields has been reached. The Company
has not responded to the lawsuit because the plaintiffs have agreed to extend
the time to do so in order that discussions among all of the parties may
continue. Nevertheless, the Company believes that the claims of the plaintiffs
are without merit and intends to vigorously defend itself against the claims if
necessary. This action is at its earliest stages, and it is not possible at this
time to determine the outcome of the lawsuit or the effect of its resolution on
the Company's financial position or operating results.
In addition, from time to time, the Company is subject to claims and
legal actions in the ordinary course of its business. Such claims or legal
actions would not have a material adverse effect on the Company or its business,
and the Company is not aware that any other litigation is threatened.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended December 28, 1997.
-20-
<PAGE> 21
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 11, 1998 By: /s/David B. Barr
------------------------------------
David B. Barr, President,
Chief Financial Officer, and Treasurer
(Principal Financial Officer)
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 28, 1997 (UNAUDITED) AND THE STATEMENT OF OPERATIONS FOR THE
TWENTY-SIX WEEK PERIOD ENDED DECEMBER 28, 1997 (UNAUDITED) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> DEC-28-1997
<CASH> 7,123,311
<SECURITIES> 0
<RECEIVABLES> 2,079,097
<ALLOWANCES> 0
<INVENTORY> 1,549,689
<CURRENT-ASSETS> 11,952,348
<PP&E> 10,686,780
<DEPRECIATION> 4,970,649
<TOTAL-ASSETS> 54,045,211
<CURRENT-LIABILITIES> 4,537,886
<BONDS> 40,000,000
0
0
<COMMON> 13,500,000
<OTHER-SE> (6,238,369)
<TOTAL-LIABILITY-AND-EQUITY> 54,045,211
<SALES> 16,521,477
<TOTAL-REVENUES> 20,268,985
<CGS> 8,816,089
<TOTAL-COSTS> 15,775,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,317,829
<INCOME-PRETAX> 2,175,270
<INCOME-TAX> 991,597
<INCOME-CONTINUING> 1,183,673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,183,673
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
