-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JpaSsvXtWVDQAmGTDXWVfVJm1/8Rw7wZlunkWsnAecbZ3dUl6xXwlDfSGRbgQ6hH ASZVjbyeiqcgsWMNRO8TGg== 0000912057-96-000469.txt : 19960117 0000912057-96-000469.hdr.sgml : 19960117 ACCESSION NUMBER: 0000912057-96-000469 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960116 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKY MOUNTAIN CHOCOLATE FACTORY INC CENTRAL INDEX KEY: 0000785815 STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060] IRS NUMBER: 840910696 STATE OF INCORPORATION: CO FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14749 FILM NUMBER: 96503323 BUSINESS ADDRESS: STREET 1: 265 TURNER DR CITY: DURANGO STATE: CO ZIP: 81301 BUSINESS PHONE: 3032590554 MAIL ADDRESS: STREET 1: 265 TURNER DRIVE CITY: DURANGO STATE: CO ZIP: 81301 10-Q 1 10-Q 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 November 30, 1995 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-14749 ------- ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. (Exact name of registrant as specified in its charter) Colorado 84-0910696 - -------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 265 Turner Drive, Durango, CO 81301 - -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (303) 259-0554 -------------- (Registrant's telephone number, including area code) Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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 . --- --- At January 8, 1996 there were 3,030,149 shares of common stock outstanding. This document contains 22 pages including exhibits. The exhibit index is located on page 20. 1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1995 TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements............................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............................................ 18 Item 6. Exhibits and Reports on Form 8-K................... 18 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS PAGE NO. -------- Financial Statements Balance Sheets - November 30, 1995(unaudited) and February 28, 1995........................................... 4 Statements of Income - Nine-month periods ended November 30, 1995 (unaudited) and November 30, 1994 (unaudited)............................. 6 Statements of Income - Three-month periods ended November 30, 1995 (unaudited) and November 30, 1994 (unaudited)............................. 7 Statements of Cash Flows Nine-month periods ended November 30, 1995 (unaudited) and November 30, 1994 (unaudited)............................. 8 Statements of Cash Flows Three-month periods ended November 30, 1995 (unaudited) and November 30, 1994 (unaudited)............................. 9 3 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS NOVEMBER 30, FEBRUARY 28, 1995 1995 ASSETS (UNAUDITED) ----------- ------------ CURRENT ASSETS Cash and cash equivalents $ 1,848,988 $ 382,905 Accounts and notes receivable - trade, less allowance for doubtful accounts of $62,279 at November 30 and $48,366 at February 28 2,089,028 1,179,019 Inventories 2,414,524 1,687,016 Deferred tax asset 68,586 68,586 Other 211,784 110,105 ----------- ----------- Total current assets 6,632,910 3,427,631 PROPERTY AND EQUIPMENT - AT COST Land 122,558 122,558 Building 3,571,411 2,453,069 Leasehold improvements 1,433,490 803,160 Machinery and equipment 4,163,279 2,917,148 Furniture and fixtures 2,030,654 1,086,282 Transportation equipment 226,909 197,346 ----------- ----------- 11,548,301 7,579,563 Less accumulated depreciation and amortization 2,216,511 1,690,118 ----------- ----------- 9,331,790 5,889,445 OTHER ASSETS Notes and accounts receivable due after one year 114,696 136,132 Goodwill, net of accumulated amortization of $247,839 at November 30 and $230,136 at February 28 342,161 359,864 Other 664,306 368,098 ----------- ----------- 1,121,163 864,094 ----------- ----------- $17,085,863 $10,181,170 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these statements. 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS - CONTINUED NOVEMBER 30, FEBRUARY 28, 1995 1995 LIABILITIES AND EQUITY (UNAUDITED) ------------ ------------ CURRENT LIABILITIES Current maturities of long-term debt 153,303 182,852 Accounts payable - trade 1,604,503 839,117 Accrued compensation 537,417 222,713 Accrued liabilities 235,049 283,330 Income taxes payable 185,939 272,593 ----------- ----------- Total current liabilities 2,716,211 1,800,605 LONG-TERM DEBT, less current maturities 2,202,323 2,313,895 DEFERRED INCOME TAXES 159,863 159,863 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY $1.00 cumulative convertible preferred stock authorized 250,000 shares, $.10 par value; issued and outstanding, no shares at November 30 and 14,610 at February 28 - 1,462 Common stock - authorized 7,250,000 shares, $.03 par value; issued 3,009,302 shares at November 30 and 2,634,289 at February 28 90,280 79,029 Additional paid-in capital 9,594,735 4,700,527 Retained earnings 2,327,019 1,130,522 ----------- ----------- 12,012,034 5,911,540 Less common stock held in treasury, at cost - 4,153 shares at November 30, and 4,303 at February 28 4,568 4,733 ----------- ----------- 12,007,466 5,906,807 ----------- ----------- $17,085,863 $10,181,170 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these statements. 5 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME (unaudited)
NINE-MONTH PERIODS ENDED ------------------------ NOVEMBER 30, 1995 1994 ---------- ----------- REVENUES Sales of chocolate $11,828,868 $8,200,194 Franchise and royalty fees 1,942,733 1,656,184 ------------ ---------- 13,771,601 9,856,378 ------------ ---------- COSTS AND EXPENSES Cost of chocolate sales 6,122,721 4,119,835 Franchise costs 1,370,765 1,059,103 General and administrative 1,040,049 921,682 Retail operating expenses 3,130,088 1,992,084 ------------ ---------- 11,663,623 8,092,704 ------------ ---------- Operating income 2,107,978 1,763,674 OTHER INCOME (EXPENSE) Interest expense (235,016) (92,046) Interest income 38,733 14,897 ------------ ---------- (196,283) (77,149) INCOME BEFORE INCOME TAX EXPENSE 1,911,695 1,686,525 INCOME TAX EXPENSE Provision for income taxes 715,198 658,286 ------------ ---------- NET INCOME 1,196,497 1,028,239 Dividend requirements on preferred stock - 10,958 ------------ ---------- INCOME ALLOCABLE TO COMMON STOCKHOLDERS $ 1,196,497 $1,017,281 ------------ ---------- ------------ ---------- PRIMARY INCOME PER COMMON AND EQUIVALENT SHARE $ .42 $ .40 ------------ ---------- ------------ ---------- Weighted average and equivalent shares 2,840,569 2,573,122 ------------ ---------- ------------ ---------- FULLY DILUTED INCOME PER COMMON AND EQUIVALENT SHARE $ .42 $ .38 ------------ ---------- ------------ ---------- Weighted average and equivalent shares 2,843,868 2,718,251 ------------ ---------- ------------ ----------
The accompanying notes are an integral part of these statements. 6 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME (unaudited)
THREE-MONTH PERIODS ENDED ------------------------- NOVEMBER 30, 1995 1994 ----------- ----------- REVENUES Sales of chocolate $5,025,228 $3,739,873 Franchise and royalty fees 616,779 534,372 ---------- ---------- 5,642,007 4,274,245 ---------- ---------- COSTS AND EXPENSES Cost of chocolate sales 2,633,778 1,965,161 Franchise costs 456,151 368,383 General and administrative 339,607 330,394 Retail operating expenses 1,288,210 792,401 ---------- ---------- 4,717,746 3,456,339 ---------- ---------- Operating income 924,261 817,906 OTHER INCOME (EXPENSE) Interest expense (77,814) (42,435) Interest income 28,999 5,365 ---------- ---------- (48,815) (37,070) INCOME BEFORE INCOME TAX EXPENSE 875,446 780,836 INCOME TAX EXPENSE Provision for income taxes 326,604 297,373 ---------- ---------- NET INCOME 548,842 483,463 Dividend requirements on preferred stock - 3,653 ---------- ---------- INCOME ALLOCABLE TO COMMON STOCKHOLDERS $ 548,842 $ 479,810 ---------- ---------- ---------- ---------- PRIMARY INCOME PER COMMON AND EQUIVALENT SHARE $ .18 $ .18 ---------- ---------- ---------- ---------- Weighted average and equivalent shares 3,024,768 2,718,039 ---------- ---------- ---------- ---------- FULLY DILUTED INCOME PER COMMON AND EQUIVALENT SHARE $ .18 $ .18 ---------- ---------- ---------- ---------- Weighted average and equivalent shares 3,024,768 2,723,816 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements. 7 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS (unaudited)
NINE-MONTH PERIODS ENDED ------------------------ NOVEMBER 30, 1995 1994 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,196,497 $ 1,028,239 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 544,096 334,935 (Increase) in notes and accounts receivable (888,573) (932,506) (Increase) in inventories (727,508) (558,424) (Increase) in other assets (101,679) (76,577) Increase in accounts payable 765,386 431,616 Increase (decrease)in income tax payable (97,391) 217,888 Increase in accrued liabilities 277,160 278,511 ---------- ----------- Net adjustments (228,509) (304,557) Net cash provided by operating activities 967,988 723,682 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to other long-term assets (296,208) (61,232) Purchase of property and equipment (3,968,738) (3,520,998) ------------ ----------- Net cash (used in)investing activities (4,264,946) (3,582,230) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends - (98,916) Proceeds from stock offering 5,221,125 - Cost of stock offering (364,988) - Proceeds from exercise of stock options 71,875 52,876 Proceeds from issuance of treasury stock 2,175 1,500 Principal payments on line of credit (430,000) - Principal payments on long-term debt (1,641,121) (220,818) Proceeds from line of credit 430,000 495,825 Proceeds from issuance of long-term debt 1,500,000 2,076,060 Purchase and retirement of preferred stock (26,025) - ------------ ----------- Net cash provided by financing activities 4,763,041 2,306,527 ------------ ----------- NET INCREASE (DECREASE) IN CASH: $ 1,466,083 $ (552,021) Cash and cash equivalents at beginning of period $ 382,905 $ 996,746 ------------ ----------- Cash and cash equivalents at end of period $ 1,848,988 $ 444,725 ------------ ----------- ------------ ----------- CASH PAID DURING THE PERIOD FOR: Interest $ 223,858 $ 97,359 Income taxes $ 812,589 $ 440,152 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these statements. 8 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS (unaudited)
THREE-MONTH PERIODS ENDED ------------------------- NOVEMBER 30, 1995 1994 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 548,842 $ 483,463 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 207,826 120,669 (Increase) in notes and accounts receivable (834,461) (493,628) (Increase) in inventories (399,289) (194,795) (Decrease) in other assets 209,076 (5,803) Increase in accounts payable 312,952 102,700 Increase in income tax payable 84,323 289,344 Increase in accrued liabilities 111,793 157,072 ---------- ----------- Net adjustments (307,780) (24,441) Net cash provided by operating activities 241,062 459,022 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to other long-term assets (288,358) (27,281) Purchase of property and equipment (1,565,376) (1,192,752) ----------- ----------- Net cash (used in)investing activities (1,853,734) (1,220,033) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends - (3,651) Proceeds from stock offering 5,221,125 - Cost of stock offering (364,988) - Proceeds from exercise of stock options 31,250 - Proceeds from issuance of treasury stock 2,175 - Principal payments on line of credit (180,000) - Principal payments on long-term debt (1,516,583) (56,087) Proceeds from line of credit 180,000 150,000 Proceeds from issuance of long-term debt - 729,926 ----------- ----------- Net cash provided by financing activities 3,372,979 820,188 ----------- ----------- NET INCREASE IN CASH: $ 1,760,307 $ 59,177 Cash and cash equivalents at beginning of period $ 88,681 $ 385,548 ----------- ----------- Cash and cash equivalents at end of period $ 1,848,988 $ 444,725 ----------- ----------- ----------- ----------- CASH PAID DURING THE PERIOD FOR: Interest $ 80,884 $ 49,510 ----------- ----------- ----------- ----------- Income taxes $ 242,281 $ 7,440 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these statements. 9 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS November 30, 1995 1. The interim financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended February 28, 1995. 2. These statements reflect all adjustments which, in the opinion of Management, are necessary for a fair presentation of the information contained therein. Results of operations for interim periods are not necessarily indicative of annual results. 3. Inventories consist of the following: NOVEMBER 30, 1995 FEBRUARY 28, 1995 ----------------- ----------------- Ingredients and supplies $1,006,843 $ 712,727 Finished Candy 1,407,681 974,289 ---------- ---------- $2,414,524 $1,687,016 ---------- ---------- ---------- ---------- 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTER ENDED NOVEMBER 30, 1995 COMPARED TO QUARTER ENDED NOVEMBER 30, 1994. REVENUES FACTORY SALES. Factory sales increased $500,400 or 22.5% to $2,727,800 in the third quarter of 1996, compared to $2,227,400 in the third quarter of 1995. This increase resulted from the larger number of franchised stores in existence throughout the quarter (151 at November 30, 1995 in comparison with 124 at November 30, 1994) and, to a lesser extent, a modest price increase effected in April of 1995. Same store pounds purchased from the factory increased by 1.7% in the third quarter of 1996 compared to the third quarter of 1995, which also contributed to this increase. When computing same store pounds purchased from the factory, purchases by franchised stores open for a full 3 months in each quarter are compared. This increase in same store pounds purchased and in factory sales is lower than was anticipated resulting from unusually warm weather in August (affecting September factory sales) and early to mid-September. The warm weather resulted in lower sales and increased inventory levels at franchised stores, which adversely affected factory sales to Company stores in September. RETAIL SALES. Retail sales increased $784,900 or 51.9% to $2,297,400 in the third quarter of 1996, compared to $1,512,500 in the third quarter of 1995. This increase resulted primarily from a larger number of Company-owned stores in existence throughout the quarter (39 at November 30, 1995 in comparison with 24 at November 30, 1994). The impact of a modest price increase was offset by the effect of a 4.1% same store sales decline at Company-owned stores partially counter-balancing the effect of the increased number of stores. The Company believes the decline in same store retail sales at Company-owned stores resulted from the effect of extreme heat in the first half of September in geographical areas where Company stores are concentrated, together with the effect of a decline in foot traffic and consumer spending reflected in declining same store retail sales at the factory outlet mall environment in which the preponderance of Company stores are located. Additionally, the increase in October and November, 1995 sales results at Company-owned stores were less than anticipated due to delay in the establishment of new Company-owned stores resulting from delay in the availability of space from developers. ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing fees increased $100,100 or 26.4% to $479,100 in the third quarter of 1996, compared to $379,000 in the third quarter of 1995. This increase resulted from increased royalty income from a larger number of franchised stores operating in the third quarter of 1996 compared to the third quarter of 1995 as discussed above, abetted by increased same store sales at franchised stores of .8%. Franchise fee revenues in the third quarter of 1996 of $138,100 declined from the $155,500 in the third quarter of 1995. Franchise signings declined to 10 in the third quarter of 1996 from 11 in the third quarter of 1995. The Company's increased emphasis on the 11 establishment of Company-owned stores is the primary cause of this reduction in franchise fee revenues and signings. COSTS AND EXPENSES COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs incurred by the Company to manufacture candy sold by its Company-owned stores and to its franchised stores, increased 34.0% to $2,633,800 in the third quarter of 1996 from $1,965,200 in the third quarter of 1995. Cost of chocolate sales as a percentage of total chocolate sales (defined as the total of factory sales and retail sales) remained flat at approximately 52.5% in the third quarters of both 1996 and 1995. Cost of chocolate sales as a percentage of total chocolate sales had been expected to improve as a result of an increase in higher margin retail sales as a percentage of total chocolate sales brought about by the rapid and large increase in the number of Company-owned stores, together with the effect of an approximate 2% retail and factory price increase effected in April, 1995. This has not occurred due to an absolute 2% decline in factory margins resulting from increased material usage and lesser labor efficiencies in the manufacture of the Company's products, together with certain price reductions in selected categories of Company product sales. The Company is engaged in a concerted effort to correct for the cause of increased material usage, as well as to improve labor efficiencies with the goal of returning factory margins to historical levels and to continue the improvement which it had been experiencing in its margins. FRANCHISE COSTS. Franchise costs increased 23.8% to $456,200 in the third quarter of 1996 from $368,400 in the third quarter of 1995. As a percentage of the total of royalties and marketing fees and franchise fees, franchise costs increased to 73.9% of such fees in the third quarter of 1996 from 68.9% in the third quarter of 1995. The hiring of additional field support and associated administrative personnel to support the Company's accelerated pace of store opening activities and the larger base of stores is the partial cause of this increase. Additionally, the Company incurred increased expenses for promotional programs and marketing materials to support the larger base of stores. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 2.8% to $339,600 in the third quarter of 1996 from $330,400 in the third quarter of 1995, as a result of increased expense for administrative support personnel and increased depreciation expense for additional investment in computer hardware and software. As a percentage of total revenues, general and administrative expense declined to 6.0% in the third quarter of 1996 from 7.7% in the third quarter of 1995, primarily due to a significant increase in total revenues, without a proportionate increase in general and administrative expenses. RETAIL OPERATING EXPENSES. Retail operating expenses increased 62.6% to $1,288,200 in the third quarter of 1996 from $792,400 in the third quarter of 1995. This increase resulted from the effect of the larger number of Company-owned stores in existence throughout the third quarter as discussed above. As a percentage of retail sales, retail operating expenses increased to 56.1% in the third quarter of 1996 from 52.4% in the third quarter of 1995. As discussed above, the Company experienced a decline in same store retail sales in the third quarter. This 12 decline in same store retail sales resulted in total revenue growth not in proportion to the increase in operating expenses. OTHER EXPENSE Other expense of $48,800 incurred in the third quarter of 1996 increased 31.6% from the $37,100 incurred in the third quarter of 1995. This increase resulted from increased interest expense caused by borrowings in support of the Company's factory expansion and Company-owned store expansion as partially offset by increased interest income resulting from cash surpluses generated by the Company's stock offering (see "Liquidity and Capital Resources" discussed below). INCOME TAX EXPENSE The Company's effective income tax rate in the third quarter of 1996 was 37.3% compared to 38.0% in the third quarter of 1995. The absolute .7% decrease in effective tax rates resulted from utilization of lower, more representative, full year 1995 historical experience as a basis for estimating the effective tax rate for the full year 1996. RESULTS OF OPERATIONS FIRST NINE MONTHS FISCAL 1996 IN COMPARISON WITH FIRST NINE MONTHS FISCAL 1995 REVENUES FACTORY SALES. Factory sales increased $1,570,700 or 34.1% to $6,173,400 in the first nine months of 1996, compared to $4,602,700 in the first nine months of 1995. This increase resulted from the larger number of franchised stores in existence throughout the nine months and, to a lesser extent, a modest price increase effected in April of 1995. Same store pounds purchased from the factory increased by 2.0% in the first nine months of 1996 compared to the first nine months of 1995, which also contributed to this increase. When computing same store pounds purchased from the factory, purchases by franchised stores open for a full 9 months in each period are compared. RETAIL SALES. Retail sales increased $2,058,100 or 57.2% to $5,655,500 in the first nine months of 1996, compared to $3,597,400 in the first nine months of 1995. This increase resulted primarily from a larger number of Company-owned stores in existence throughout the period as abetted by the effect of a .8% same store retail sales increase at Company-owned stores. ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing fees increased $343,200 or 30.5% to $1,468,100 in the first nine months of 1996, compared to $1,124,900 in the first nine months of 1995. This increase resulted from increased royalty income from a larger number of franchised stores operating in the first nine months of 1996 compared to the first nine months of 1995, abetted by increased same store sales at franchised stores of 3.5%. Franchise signings decreased to 30 in the first nine months of 1996 from 33 in the first nine months of 1995. Franchise fee revenues in the first nine months of 1996 of $474,600 declined from the $531,300 in the first nine months of 1995 due to differences in 13 the timing of revenue recognition, together with the reduced number of franchise signings ($5,000 in revenue is recognized at the date of franchise agreement signing). COSTS AND EXPENSES COST OF CHOCOLATE SALES. Cost of chocolate sales increased 48.6% to $6,122,700 in the first nine months of 1996 from $4,119,800 in the first nine months of 1995. Cost of chocolate sales as a percentage of total chocolate sales (defined as the total of factory sales and retail sales) increased to 51.8% in the first nine months of 1996 from 50.2% in the first nine months of 1995. This increase in cost of chocolate sales as a percentage of total chocolate sales resulted from unusual favorable cumulative adjustments in the second quarter of fiscal 1995 reflecting: (1) unbooked (due to uncertainty at the time of their discovery as to the likelihood of their realization) positive physical inventory adjustments from the first quarter of fiscal 1995; and (2) increased manufacturing overhead absorption during 1995 resulting from higher than plan actual (and anticipated for the balance of the fiscal year 1995) production volumes resulting in a lowered base for comparison. Additionally, as discussed above, the third quarter of fiscal 1996 witnessed an absolute 2% decline in factory margins resulting from certain increased costs and price reductions. The Company is engaged in a concerted effort to ascertain and correct for the causes of reduced factory margin with the goal of returning factory margins to historical levels and to continue the improvement which the Company had been experiencing in its margins. FRANCHISE COSTS. Franchise costs increased 29.4% to $1,370,800 in the first nine months of 1996 from $1,059,100 in the first nine months of 1995. As a percentage of the total of royalties and marketing fees and franchise fees, franchise costs increased to 70.6% of such fees in the first nine months of 1996 from 63.9% in the first nine months of 1995. The hiring of additional field support and associated administrative personnel to support the Company's accelerated pace of store opening activities and the larger base of stores is the partial cause of this increase. Additionally, the Company incurred increased expenses for promotional programs and marketing materials to support the larger base of stores. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 12.8% to $1,040,000 in the first nine months of 1996 from $921,700 in the first nine months of 1995, as a result of increased expense for administrative support personnel and increased depreciation expense representing additional investment in computer hardware and software. As a percentage of total revenues, general and administrative expense declined to 7.6% in the first nine months of 1996 from 9.4% in the first nine months of 1995, primarily due to a significant increase in total revenues, without a proportionate increase in general and administrative expenses. RETAIL OPERATING EXPENSES. Retail operating expenses increased 57.1% to $3,130,100 in the first nine months of 1996 from $1,992,100 in the first nine months of 1995. This increase resulted from the effect of the larger number of Company-owned stores in existence throughout the first nine months. As a 14 percentage of retail sales, retail operating expenses remained constant at 55.3% in the first nine months of 1996 and 1995. OTHER EXPENSE Other expense of $196,300 incurred in the first nine months of 1996 increased 154.6% from the $77,100 incurred in the first nine months of 1995. This increase resulted from increased interest expense associated with borrowings to finance the Company's factory expansion and Company-owned store expansion, as partially offset by increased interest income resulting from cash surpluses generated by the Company's stock offering which occurred in the third quarter (see "Liquidity and Capital Resources" discussed below). INCOME TAX EXPENSE The Company's effective income tax rate in the first nine months of 1996 was 37.4% compared to 39.0% in the first nine months of 1995. The absolute 1.6% decrease in effective tax rates resulted from utilization of lower, more representative, full fiscal year 1995 historical experience as a basis for estimating the effective tax rate for the full fiscal year 1996. NEW CONCEPT The Company opened in September, 1995 a prototype store for a new store concept. Fuzziwig's-TRADE MARK- Candy Factory, as it is called, offers self-serve bulk candies, gifts and image merchandise in an entertaining, themed environment utilizing creative lighting, music, animation and movement to entertain customers. During the coming months the Company intends to aggressively test the concept in each of the environments (regional mall, factory outlet and tourist) in which the Company currently operates, including centers with existing Rocky Mountain Chocolate Factory Company-owned stores. Preliminary test results from the first store are that Fuzziwig's will be compatible with Rocky Mountain Chocolate Factory stores, since there is little overlap in product type. If the test proves successful, the Company plans to offer Fuzziwig's for franchising as early as May 1996 and thereafter open Fuzziwig's stores as both franchised and Company-owned locations. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of fiscal 1996 the Company generated $968,000 in operating cash flow (in comparison with $723,700 in the first nine months of fiscal 1995). The Company used this operating cash flow in combination with $1,500,000 in draws under its newly-acquired chattel mortgage financing, utilization of existing cash balances and proceeds of its stock offering (as discussed below) to fund $4,265,000 in capital expenditures, primarily for completion of its plant expansion and new Company-owned store construction and to increase cash balances. At November 30, 1995, working capital was $3,916,700 in comparison with $1,627,000 at February 28, 1995, a $2,289,700 increase. This increase resulted from the surplus generated by the Company's improved operating cash flows, and 15 equity and debt financing proceeds, as partially utilized to fund elements of the Company's facility expansion and Company-owned store expansion. Cash and cash equivalent balances increased from $382,900 at February 28, 1995 to $1,849,000 at November 30, 1995 as a result of this improved cash flow and financing proceeds. The Company's long-term debt includes a 20-year real estate mortgage loan obtained in June 1994 ($1.6 million principal outstanding at November 30, 1995). In addition, the Company had a $1.5 million chattel mortgage facility (the "Facility"), the entire amount of which was outstanding at August 31, 1995, but which was repaid in September, 1995 as discussed below. The Company also has outstanding a chattel mortgage term loan obtained in June 1994 under a prior facility (balance $.7 million at November 30, 1995). The aggregate $2.3 million outstanding at November 30, 1995 under the real estate and chattel mortgage term loans was incurred to support the Company's financing needs for completion of its factory expansion and for Company-owned store openings and is secured by the Company's inventory, equipment, furniture and fixtures. The Company on September 20, 1995 retired the $1.5 million outstanding under the Facility with a portion of the proceeds of its recently completed public offering of common stock (see below). The Company has a $1.0 million working capital line of credit, secured by accounts receivable. The line had a zero balance at November 30, 1995. Terms of the loan require that the line be rested (that is, that there be no outstanding balance) for two periods of 30 consecutive days during the term of the loan, which expires in July 1996. Interest on the line is at prime. For the balance of fiscal 1996, the Company anticipates making $1.1 million in capital expenditures, primarily for the completion of Company-owned chocolate and new concept stores, which expenditures are expected to be funded from current working capital balances and operating cash flows. In September and October 1995, the Company completed a public offering of common stock which provided it with net proceeds after payment of offering expenses of approximately $4.8 million. As discussed above, approximately $1.5 million of these net proceeds was utilized to retire existing debt. The balance of approximately $3.3 million has augmented the Company's working capital reserves, and was used in part for Company-owned store expansion. The Company in September, 1995, opened a first store utilizing a new store concept (see "New Concept" above). This initial store utilizing the new store concept was funded from operating cash flows. The Company expects to test additional prototype stores in the current fiscal year and early in fiscal 1997. These prototype stores will be Company-owned. The Company will fund the prototype stores from operating cash flows. Should test results justify further expansion of the new concept, a potentially significant portion of working capital reserves would be likely to be used to establish additional stores under the new concept. The Company believes that cash balances, cash flow from operating activities and available bank lines of credit will be sufficient to service debt, fund anticipated capital expenditures and provide necessary working capital. There can be no 16 guarantee, however, that unforeseen events will not require the Company to secure additional sources of financing. The Company may also seek additional financing from time to time, through borrowings or public or private offerings of equity or debt securities, to fund its future expansion plans. 17 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of shareholders held on October 13, 1995, the following matters were submitted to a vote by the shareholders and approved: (1) The following directors were elected for one year: Franklin E. Crail Ralph L. Nafziger Fred M. Trainor Gerald A. Kien Everett A. Sisson Lee N. Mortenson Tabulation of the votes is as follows: For: 2,104,688 Withheld: 1,985 (2) The Company's 1995 Employee Stock Option Plan reserving 100,000 shares for issuance under the plan was approved. Tabulation of the votes is as follows: For: 2,015,997 Against: 82,390 Abstain: 4,889 Not Voted: 3,397 (3) An Amendment of the Company's 1990 Nonqualified Stock Option Plan for Nonemployee Directors was approved increasing from 60,000 to 90,000 shares the number of shares of the Company's common stock reserved for issuance under the plan. Tabulation of the votes is as follows: For: 2,079,189 Against: 22,205 Abstain: 5,279 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 11.1 Statement regarding computation of earnings per common share (filed herewith at page 20). (b) REPORTS ON FORM 8-K No reports on form 8-K were filed during the three months ended November 30, 1995. 18 SIGNATURES Pursuant to the requirements 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. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. Date: January 12, 1996 /s/ FRANKLIN E. CRAIL ---------------- --------------------------------------- Franklin E. Crail (Chairman of the Board, President and Treasurer) Date: January 12, 1996 /s/ LAWRENCE C. REZENTES ---------------- --------------------------------------- Lawrence C. Rezentes (Vice President - Finance) 19 EX-11.1 2 EXHIBIT 11.1 EXHIBIT 11.1 EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. COMPUTATION OF INCOME PER COMMON SHARE
NINE-MONTH PERIODS ENDED ------------------------ NOVEMBER 30, 1995 1994 ---- ---- PRIMARY INCOME PER SHARE Net income $1,196,497 $1,028,239 Dividend requirements on preferred stock - (10,958) ---------- ---------- Net income allocable to common and common equivalent shares $1,196,497 $1,017,281 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding 2,740,990 2,479,937 Net effect of dilutive stock options and warrants based on the Treasury Stock Method using average market price 99,579 93,185 ---------- ---------- Weighted average number of common and common equivalent shares outstanding 2,840,569 2,573,122 ---------- ---------- ---------- ---------- Primary income per common and common equivalent share $ .42 $ .40 ---------- ---------- ---------- ---------- FULLY DILUTED INCOME PER SHARE Net income $1,196,497 $1,028,239 Less dividend requirements on preferred stock - (10,958) Add interest expense and loan costs amortized on convertible debt - 12,339 ---------- ---------- Net income allocable to common and equivalent shares $1,196,497 $1,029,620 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding 2,740,990 2,479,937 Assuming conversion of convertible debt - 143,077 Net effect of dilutive stock options based on the Treasury Stock Method using the greater of the average or ending market price 102,878 95,237 ---------- ---------- Weighted average number of common shares outstanding as adjusted 2,843,868 2,718,251 ---------- ---------- ---------- ---------- Income per common and common equivalent share assuming full dilution $ .42 $ .38 ---------- ---------- ---------- ----------
21 EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. COMPUTATION OF INCOME PER COMMON SHARE
THREE-MONTH PERIODS ENDED ------------------------- NOVEMBER 30, 1995 1994 ---- ---- PRIMARY INCOME PER SHARE Net income $ 548,842 $ 483,463 Dividend requirements on preferred stock - (3,653) ---------- ---------- Net income allocable to common and common equivalent shares $ 548,842 $ 479,810 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding 2,932,517 2,629,986 Net effect of dilutive stock options and warrants based on the Treasury Stock Method using average market price 92,251 88,053 ---------- ---------- Weighted average number of common and common equivalent shares outstanding 3,024,768 2,718,039 ---------- ---------- ---------- ---------- Primary income per common and common equivalent share $ .18 $ .18 ---------- ---------- ---------- ---------- FULLY DILUTED INCOME PER SHARE Net income $ 548,842 $ 483,463 Less dividend requirements on preferred stock - (3,653) ---------- ---------- Net income allocable to common and equivalent shares $ 548,842 $ 479,810 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding 2,932,517 2,629,986 Net effect of dilutive stock options based on the Treasury Stock Method using the greater of the average or ending market price 92,251 93,830 ---------- ---------- Weighted average number of common shares outstanding as adjusted 3,024,768 2,723,816 ---------- ---------- ---------- ---------- Income per common and common equivalent share assuming full dilution $ .18 $ .18 ---------- ---------- ---------- ----------
22 EX-27 3 EXHIBIT 27
5 9-MOS FEB-29-1996 MAR-01-1995 NOV-30-1995 1,848,988 0 2,089,028 0 2,414,524 6,632,910 11,548,301 2,216,511 17,085,863 2,716,211 2,202,323 0 0 90,280 11,917,186 17,085,863 11,828,868 13,771,601 6,122,721 11,663,623 0 0 196,283 1,911,695 715,198 0 0 0 0 1,196,497 .42 .42
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