-----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, RQ0jLJp2OCY6PJn/wJAeB5MsDUTtk7mK6duEz4BV4koyOy6PAJrXaSw9EYH92al3 EjehFgJMNp741bVVv4a/KQ== 0000950134-00-000314.txt : 20000202 0000950134-00-000314.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950134-00-000314 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000113 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: SEC FILE NUMBER: 000-14749 FILM NUMBER: 506782 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 FORM 10-Q FOR QUARTER ENDED NOVEMBER 30, 1999 1 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, 1999 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 of incorporation) (I.R.S. Employer Identification No.) 265 Turner Drive, Durango, CO 81301 (Address of principal executive offices) (970) 259-0554 (Registrant's telephone number, including area code) Indicate by checkmark whether the 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 . --- --- On January 7, 2000 the registrant had outstanding 2,534,979 shares of its common stock, $.03 par value. The exhibit index is located on page 19. 2 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FORM 10-Q TABLE OF CONTENTS
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3-9 Statements of Income 3 Balance Sheets 4 Statements of Cash Flows 5 Notes to Interim Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME
Three Months Ended Nine Months Ended November 30, November 30, 1999 1998 1999 1998 REVENUES Sales $ 6,277,800 $ 6,610,395 $ 16,298,795 $ 17,102,197 Franchise and royalty fees 778,855 701,051 2,420,427 2,400,695 Total revenues 7,056,655 7,311,446 18,719,222 19,502,892 COSTS AND EXPENSES Cost of sales (excluding depreciation and amortization) 3,352,725 3,289,660 8,425,133 8,405,525 Franchise costs 236,430 304,612 697,232 848,492 Sales and marketing 304,609 367,914 1,000,102 1,161,030 General and administrative 418,249 404,646 1,266,591 1,238,810 Retail operating 1,256,763 1,550,504 3,908,609 4,358,598 Depreciation and amortization 385,251 389,975 1,173,615 1,073,616 Total costs and expenses 5,954,027 6,307,311 16,471,282 17,086,071 INCOME FROM OPERATIONS 1,102,628 1,004,135 2,247,940 2,416,821 OTHER INCOME (EXPENSE) Cost of unsolicited tender offer (255,774) - (429,137) - Interest expense (145,251) (173,496) (438,966) (529,110) Interest income 9,285 12,454 40,980 54,743 Other, net (391,740) (161,042) (827,123) (474,367) INCOME BEFORE INCOME TAXES 710,888 843,093 1,420,817 1,942,454 PROVISION FOR INCOME TAXES 275,110 326,020 549,855 751,145 NET INCOME $ 435,778 $ 517,073 $ 870,962 $ 1,191,309 BASIC EARNINGS PER COMMON SHARE $ .17 $ .20 $ .33 $ .44 DILUTED EARNINGS PER COMMON SHARE $ .17 $ .20 $ .33 $ .44 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,600,349 2,599,599 2,600,024 2,687,156 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 35,384 9,054 21,364 13,433 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 2,635,733 2,608,653 2,621,388 2,700,589
The accompanying notes are an integral part of these financial statements. 3 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
November 30, February 28, ASSETS 1999 1999 CURRENT ASSETS Cash and cash equivalents $ 361,558 $ 317,155 Accounts and notes receivable, less allowance for doubtful accounts of $142,701 and $259,408 3,224,875 1,874,286 Refundable income taxes 76,311 383,511 Inventories 3,130,511 3,276,550 Deferred income taxes 433,229 433,229 Other 182,155 73,827 Total current assets 7,408,639 6,358,558 PROPERTY AND EQUIPMENT, NET 9,207,594 10,238,671 OTHER ASSETS Accounts and notes receivable 59,722 291,648 Goodwill, less accumulated amortization of $549,478 and $441,246 1,312,522 1,420,754 Other 344,767 342,469 Total other assets 1,717,011 2,054,871 Total assets $ 18,333,244 $ 18,652,100 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,837,000 $ 1,831,000 Line of credit 279,000 900,000 Accounts payable 1,660,352 1,066,986 Accrued salaries and wages 444,309 548,745 Accrued income taxes 357,722 - Other accrued expenses 440,141 453,407 Total current liabilities 5,018,524 4,800,138 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,806,662 5,249,769 DEFERRED INCOME TAXES 93,007 93,007 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.03 par value, 7,250,000 shares authorized, 2,600,349 and 2,599,599 issued and outstanding 78,010 77,988 Additional paid-in capital 7,040,914 7,046,032 Retained earnings 2,504,873 1,633,911 Less notes receivable from officers and directors (208,746) (248,745) Total stockholders' equity 9,415,051 8,509,186 Total liabilities and stockholders' equity $ 18,333,244 $ 18,652,100
The accompanying notes are an integral part of these financial statements. 4 5 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
Nine Months Ended November 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 870,962 $ 1,191,309 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,173,615 1,073,616 (Gain) loss on sale of property and equipment 43,884 (15,696) Increase in accounts and notes receivable (977,573) (1,005,864) Decrease in refundable income taxes 307,200 483,448 Decrease (increase) in inventories 146,039 (1,805,384) Increase in other assets (108,328) (81,063) Increase in accounts payable 593,366 1,600,319 Increase in income taxes payable 357,722 - Increase in deferred income taxes - (461,318) Increase (decrease) in accrued liabilities (151,171) 262,453 Net cash provided by operating activities of continuing operations 2,255,716 1,241,820 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets 511,267 37,500 Purchases of property and equipment (640,164) (1,209,762) Loans to officers and shareholders - (248,750) Collection of loan from former officer 39,999 - Increase in other assets (58,364) (843) Net cash used in investing activities of continuing operations (147,262) (1,421,855) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt - 1,774,941 Payments on long-term debt (1,437,107) (1,689,814) Proceeds from line of credit 3,699,000 8,025,000 Payments on line of credit (4,320,000) (7,025,000) Repurchase of stock (8,644) (1,773,266) Proceeds from exercise of stock options 2,700 79,309 Net cash used in financing activities of continuing operations (2,064,051) (608,830) NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 100,032 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44,403 (688,833) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 317,155 1,795,381 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 361,558 $ 1,106,548
The accompanying notes are an integral part of these financial statements. 5 6 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO INTERIM FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION Nature of Operations The Company is a manufacturer of an extensive line of premium chocolate candy for sale to its franchised and Company-owned Rocky Mountain Chocolate Factory stores located throughout the United States, and in Guam and Canada. The Company is also a retail operator and international franchiser. The majority of the Company's revenues are generated from wholesale and retail sales of candy. The balance of the Company's revenues are generated from royalties and marketing fees, based on a franchisee's monthly gross sales, and from franchise fees, which consist of fees earned from the sale of franchises. Basis of Presentation The accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The results of operations for the nine months ended November 30, 1999 are not necessarily indicative of the results to be expected for the entire fiscal year. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1999. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options. NOTE 3 - INVENTORIES Inventories consist of the following:
November 30, 1999 February 28, 1999 Ingredients and supplies $ 1,483,353 $ 1,594,579 Finished candy 1,647,158 1,681,971 $ 3,130,511 $ 3,276,550
6 7 NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
November 30, 1999 February 28, 1999 Land $ 513,618 $ 513,618 Building 3,681,808 3,672,870 Machinery and equipment 7,497,601 7,147,833 Furniture and fixtures 2,153,980 2,408,807 Leasehold improvements 1,620,230 1,876,223 Transportation equipment 199,639 199,639 15,666,876 15,818,990 Less accumulated depreciation 6,459,282 5,580,319 Property and equipment, net $ 9,207,594 $ 10,238,671
NOTE 5 - STOCKHOLDERS' EQUITY On May 15, 1998, the Company purchased 336,000 shares and certain of its directors and executive officers purchased 104,000 shares of the Company's issued and outstanding common stock at $5.15 per share from La Salle National Bank of Chicago, Illinois, which obtained these shares through foreclosure from certain shareholders unrelated to any transactions of the Company. The Company loaned certain officers and directors the funds to acquire 40,000 of the 104,000 shares purchased by them. The loans are secured by the related shares, bear interest payable annually at 7.5% and are due May 15, 2003. NOTE 6 - DISCONTINUED OPERATIONS In December 1997, the Company decided its Fuzziwig's Candy Factory Store ("Fuzziwig's") segment did not meet its long-term strategic goals, and accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the Company entered into a definitive agreement to sell substantially all the assets of its Fuzziwig's segment for $1.6 million. The transaction closed on July 31, 1998. Operating results of the discontinued operation and provisions relating to assets of the discontinued operation were previously reported in the Company's February 28, 1998 financial statements. Summarized financial information for the discontinued operation for the nine months ended November 30, 1998 is as follows: Sales $ 1,095,431 Loss before taxes (51,562) Loss from discontinued operations, net of income taxes (31,622) 7 8 NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended November 30, 1999 1998 Cash paid (received) for: Interest $ 433,240 $ 550,015 Income taxes (115,067) 176,352 Supplemental schedule of non-cash investing and financing activities: Property and equipment acquired in settlement of note receivable - 130,000
NOTE 8 - OPERATING SEGMENTS Effective May 31, 1998 the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which changes the way the Company reports information about its operating segments. The Company classifies its business interests into three reportable segments: Franchising, Manufacturing and Retail stores. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Company's financial statements included in the Company's annual report on Form 10-K for the year ended February 28, 1999. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company's reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All intersegment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:
Three Months Ended Franchising Manufacturing Retail Other Total November 30, 1999 Total revenues $ 778,856 $ 4,618,420 $ 2,536,193 $ - $ 7,933,469 Intersegment revenues - (876,814) - - (876,814) Revenue from external customers 778,856 3,741,606 2,536,193 - 7,056,655 Segment profit (loss) 300,165 1,214,701 53,152 (857,130) 710,888 Total assets 850,328 9,695,389 5,578,931 2,208,596 18,333,244 Capital expenditures 17,014 55,377 38,069 28,759 139,219 Total depreciation & amortization 46,383 131,782 159,185 47,901 385,251 Three Months Ended November 30, 1998 Total revenues $ 701,051 $ 4,752,789 $ 3,010,101 $ - $ 8,463,941 Intersegment revenues - (1,152,495) - - (1,152,495) Revenue from external customers 701,051 3,600,294 3,010,101 - 7,311,446 Segment profit (loss) 145,719 1,292,336 22,126 (617,088) 843,093 Total assets 1,078,872 10,731,607 7,457,766 2,531,209 21,799,454 Capital expenditures 1,847 369,362 81,436 55,165 507,810 Total depreciation & amortization 28,345 124,004 186,961 50,665 389,975
8 9
Nine Months Ended Franchising Manufacturing Retail Other Total November 30, 1999 Total revenues $ 2,420,428 $10,523,017 $ 7,871,454 $ - $20,814,899 Intersegment revenues - (2,095,677) - - (2,095,677) Revenue from external customers 2,420,428 8,427,340 7,871,454 - 18,719,222 Segment profit (loss) 955,643 2,599,909 97,682 (2,232,417) 1,420,817 Total assets 850,328 9,695,389 5,578,931 2,208,596 18,333,244 Capital expenditures 46,545 316,867 50,169 226,583 640,164 Total depreciation & amortization 140,055 395,085 499,772 138,703 1,173,615 Nine Months Ended November 30, 1998 Total revenues $ 2,400,695 $11,150,694 $ 8,602,193 $ - $22,153,582 Intersegment revenues - (2,650,690) - - (2,650,690) Revenue from external customers 2,400,695 8,500,004 8,602,193 - 19,502,892 Segment profit (loss) 769,182 2,830,905 205,725 (1,863,358) 1,942,454 Total assets 1,078,872 10,731,607 7,457,766 2,531,209 21,799,454 Capital expenditures 27,978 622,977 469,728 89,079 1,209,762 Total depreciation & amortization 75,582 356,303 491,448 150,283 1,073,616
NOTE 9 - STOCK REPURCHASES On December 22, 1999 and January 5, 2000, the Company purchased 15,000 and 50,370 shares of the Company's issued and outstanding common stock at $5.25 and $5.44 per share, respectively. 9 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the unaudited financial statements and related notes of the Company included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. The Company's ability to successfully achieve expansion of its Rocky Mountain Chocolate Factory franchise system depends on many factors not within the Company's control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion. Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depends on many factors not within the Company's control including the receptivity of its franchise system and of customers in potential new distribution channels to its product introductions and promotional programs. As a result, the actual results realized by the Company could differ materially from the results discussed in or contemplated by the forward-looking statements made herein. Words or phrases such as "will," "anticipate," "expect," "believe," "intend," "estimate," "project," "plan" or similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements made in this Quarterly Report on Form 10-Q. Results of Operations THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1998 Net income was $435,778 for the three months ended November 30, 1999 or $.17 per share versus $517,073 or $.20 per share for the three months ended November 30, 1998. Earnings per share was negatively impacted approximately $.06 for the three months ended November 30, 1999 by certain non-recurring general and administrative expenses and other expenses. Revenues
Three Months Ended November 30, % ($'s in thousands) 1999 1998 Change Change Factory sales $ 3,741.6 $ 3,600.3 141.3 3.9% Retail Sales 2,536.2 3,010.1 (473.9) (15.7%) Franchise fees 121.7 21.6 100.1 463.4% Royalty and Marketing fees 657.1 679.5 (22.4) (3.3%) Total $ 7,056.6 $ 7,311.5 (254.9) (3.5%)
10 11 Factory Sales Factory sales increased $141,000 or 3.9% to $3.7 million in the third quarter of fiscal 2000, compared to $3.6 million in the third quarter of fiscal 1999. This was due primarily to increased same store pounds purchased from the factory by franchised stores of 12.0% in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 and an increase in the total number of franchised stores in operation. The increase in revenues was partially offset by a decrease in sales to new distribution channels of 30.8% during the third quarter of fiscal 2000 compared to the same period last fiscal year. Decreased sales to new distribution channels was due to large initial orders from a single new customer that were shipped in the third quarter of fiscal 1999 and not duplicated in the third quarter of fiscal 2000. Retail Sales Retail sales decreased $474,000 or 15.7% to $2.5 million in the third quarter of fiscal 2000, compared to $3.0 million in the third quarter of fiscal 1999. This decrease resulted from a decrease in the average number of stores in operation in the third quarter of fiscal 2000 (35) versus the same period last year (43) and a decrease in comparable store sales of 3.7%. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees decreased $22,000 or 3.3% to $657,000 in the third quarter of fiscal 2000, compared to $679,000 in the third quarter of fiscal 1999. This decrease resulted primarily from a decrease in same store sales at franchised stores of approximately 0.8%. Franchise fee revenue in the third quarter of fiscal 2000 increased $100,000 or 463.4% to $122,000 from $22,000 in the third quarter of fiscal 1999. This increase is due to an increase in the number of new franchises sold in the third quarter of fiscal 2000 versus the third quarter of fiscal 1999. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 53.4% in the third quarter of fiscal 2000 versus 49.8% in the third quarter of fiscal 1999. This increase was due primarily to decreased retail sales, which generate higher margins than factory sales, and a decrease in Company-owned store margins for the third quarter of fiscal 2000 to 59.7% from 60.2% in the third quarter of fiscal 1999. Factory margins declined to 34.7% in the third quarter of fiscal 2000 from 38.7% in the third quarter of fiscal 1999 as a result of decreased sales of higher margin packaged product to new distribution channels in fiscal 2000 versus fiscal 1999. Franchise Costs Franchise costs decreased 22.4% from $305,000 in the third quarter of fiscal 1999 to $236,000 in the third quarter of fiscal 2000. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 30.4% in the third quarter of fiscal 2000 from 43.5% in the third quarter of fiscal 1999. This decrease as a percentage of royalty, marketing and franchise fees is a result of a planned decrease in franchise support expenditures as well as higher franchise fees due to increased franchise sales in the third quarter of fiscal 2000 relative to the third quarter of fiscal 1999. 11 12 Sales and Marketing Sales and Marketing expenses decreased 17.2% to $305,000 in the third quarter of fiscal 2000 from $368,000 in fiscal 1999 due to a planned decrease in sales and marketing expenditures. General and Administrative General and administrative expenses increased 3.4% from $405,000 in the third quarter of fiscal 1999 to $418,000 in the third quarter of fiscal 2000. The increase in general and administrative expenses is due to non-recurring costs of approximately $19,000 related to costs associated with mitigating potential Year 2000 issues (see Year 2000 Matters). Retail Operating Expenses Retail operating expenses decreased from $1.6 million in the third quarter of fiscal 1999 to $1.3 million in the third quarter of fiscal 2000; a decrease of 18.9%. This decrease is due to a decrease in the average number of stores open during the third quarter of fiscal 2000 versus the third quarter of fiscal 1999. Retail operating expenses, as a percentage of retail sales, decreased from 51.5% in the third quarter of fiscal 1999 to 49.6% in the third quarter of fiscal 2000. Other Expense Other expense of $392,000 incurred in the third quarter of fiscal 2000 increased 143.3% from the $161,000 incurred in the third quarter of fiscal 1999. This increase was due to non-recurring costs of approximately $256,000 related to the unsolicited tender offer for 100% of the Company's outstanding common stock by Whitman's Candies, Inc., which commenced in May 1999 and was withdrawn on November 4, 1999. These non-recurring expenses reduced earnings per share by approximately $.06 in the third quarter of fiscal 2000. This expense was partially offset by decreased interest expense on lower average amounts outstanding of long-term debt and lower average balances outstanding on the Company's revolving line of credit. DISCONTINUED OPERATIONS In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment did not meet its long-term strategic goals, and accordingly, made the decision to dispose of these operations. See "NOTE 6 - DISCONTINUED OPERATIONS" of notes to interim financial statements. 12 13 NINE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED NOVEMBER 30, 1998 Net income was $870,962 for the nine months ended November 30, 1999 or $.33 per share versus $1,191,309 or $.44 per share for the nine months ended November 30, 1998. Earnings per share was negatively impacted approximately $.11 for the nine months ending November 30, 1999 by certain non-recurring general and administrative expenses and other expenses. Revenues
Nine Months Ended November 30, ($'s in thousands) 1999 1998 Change Change Factory sales $ 8,427.3 $ 8,500.0 (72.7) (0.9%) Retail sales 7,871.5 8,602.2 (730.7) (8.5%) Franchise fees 239.5 131.3 108.2 82.4% Royalty and Marketing fees 2,180.9 2,269.4 (88.5) (3.9%) Total 18,719.2 19,502.9 (783.7) (4.0%)
Factory Sales Factory sales decreased $73,000 or 0.9% to $8.4 million in the first nine months of fiscal 2000, compared to $8.5 million in the first nine months of fiscal 1999. This was due to decreased sales to new distribution channels. Decreased sales to new distribution channels was due to large initial orders from a single new customer that were shipped in the first and third quarters of fiscal 1999 and not duplicated in the first and third quarters of 2000. Same store pounds purchased from the factory by franchised stores increased by 3.5% in the first nine months of fiscal 2000 compared to the first nine months of fiscal 1999 partially offsetting the decreased sales to new distribution channels. Retail Sales Retail sales decreased $731,000 or 8.5% to $7.9 million in the first nine months of fiscal 2000, compared to $8.6 million in the first nine months of fiscal 1999. This decrease resulted from a decrease in comparable store sales of 5.6% in the first nine months of fiscal 2000 compared to fiscal 1999 as well as a decrease in the average number of Company-owned stores from approximately 39 to 37 in the comparable nine month periods. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees decreased $88,000 or 3.9% to $2.2 million in the first nine months of fiscal 2000, compared to $2.3 million in the first nine months of fiscal 1999. This decrease resulted from a decrease in same store sales at franchised stores of approximately 2.4%. Franchise fee revenues in the first nine months of fiscal 2000 increased $108,000 or 82.4% to $239,000 from $131,000 in the first nine months of fiscal 1999. This increase is due to an increase in the number of new franchises sold in the first nine months of fiscal 2000 versus the same period in fiscal 1999. 13 14 Costs and Expenses Cost of Sales Cost of sales as a percentage of sales in the first nine months of fiscal 2000 was 51.7% versus 49.1% for the first nine months of fiscal 1999. This increase resulted from decreased retail sales, which generate higher margins than factory sales, and a decrease in Company-owned store margins for the first nine months of fiscal 2000 to 59.1% versus 60.7% for the first nine months of fiscal 1999. Factory margins declined to 34.3% in the first nine months of fiscal 2000 from 36.9% in the first nine months of fiscal 1999 as a result of decreased sales of higher margin packaged product to new distribution channels in fiscal 2000 versus fiscal 1999. Franchise Costs Franchise costs decreased 17.8% from $848,000 in the first nine months of fiscal 1999 to $697,000 in the first nine months of fiscal 2000. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 28.8% in the first nine months of fiscal 2000 from 35.3% in the first nine months of fiscal 1999. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of a planned decrease in franchise support expenditures as well as higher franchise fees due to increased franchise sales in the first nine months of fiscal 2000 relative to the same period in fiscal 1999. Sales and Marketing Sales and Marketing costs decreased 13.9% to $1.0 million in the first nine months of fiscal 2000 from $1.2 million in fiscal 1999 due to a planned decrease in sales and marketing expenditures. General and Administrative General and administrative expenses increased 2.2% from $1.24 million in the first nine months of fiscal 1999 to $1.27 million in the first nine months of fiscal 2000. The increase in general and administrative expense is due to non-recurring costs of approximately $56,000 related to costs associated with mitigating potential Year 2000 issues (see Year 2000 Matters). Retail Operating Expenses Retail operating expenses declined from $4.3 million in the first nine months of fiscal 1999 to $3.9 million in the first nine months of fiscal 2000; a decrease of 10.3%. Retail operating expenses, as a percentage of retail sales, decreased slightly from 50.7% in the first nine months of fiscal 1999 to 49.7% in the first nine months of fiscal 2000. Depreciation and Amortization Depreciation and amortization increased 9.3% to $1.2 million for the first nine months of fiscal 2000 from $1.1 million for the first nine months of fiscal 1999. The increase in depreciation and amortization is due primarily to increased depreciation on certain fixtures used in outside channels and increased goodwill amortization related to the acquisition of several stores from a franchisee in August of 1998. 14 15 Other Expense Other expense of $827,000 incurred in the first nine months of fiscal 2000 increased 74.4% from the $474,000 incurred in the first nine months of fiscal 1999. This increase was due to non-recurring costs of approximately $429,000 related to the unsolicited tender offer for 100% of the Company's outstanding common stock by Whitman's Candies, Inc., which commenced in May 1999 and was withdrawn on November 4, 1999. These non-recurring expenses reduced earnings per share by approximately $.10 in the first nine months of fiscal 2000. This expense was partially offset by decreased interest expense on lower average amounts outstanding of long-term debt and lower average balances outstanding on the Company's revolving line of credit. Discontinued Operations In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment did not meet its long-term strategic goals, and accordingly, made the decision to dispose of these operations. See "NOTE 6 - DISCONTINUED OPERATIONS" of notes to interim financial statements. LIQUIDITY AND CAPITAL RESOURCES As of November 30, 1999 working capital was $2,390,000, compared with $1,558,000 as of February 28, 1999, an increase of $832,000. Cash and cash equivalent balances increased from $317,000 as of February 28, 1999 to $362,000 as of November 30, 1999 as a result of cash flows generated by operating activities in excess of cash flows used by investing and financing activities. The Company's current ratio was 1.5 to 1 at November 30, 1999 in comparison with 1.3 to 1 at February 28, 1999. The Company's long-term debt is comprised primarily of a real estate mortgage facility used to finance the Company's factory expansion (unpaid balance as of November 30, 1999 $1.9 million), and chattel mortgage notes (unpaid balance as of November 30, 1999 $3.7 million) used to fund the fiscal 1996 and 1997 Company-owned store expansion. The Company has a $3.0 million ($2.7 million available as of November 30, 1999) working capital line of credit collateralized by substantially all of the Company's assets with the exception of the Company's retail store assets. The line is subject to renewal in July, 2000. The Company has secured a $1.0 million equipment loan, the proceeds of which will be used primarily to improve and automate the Company's factory and information system infrastructure. Fundings under the facility bear interest at the bank's prime rate and are due in monthly installments of between 36 and 60 months. As of November 30, 1999 $1.0 million was available to fund equipment purchases. The Company believes cash flows generated by operating activities and available financing will be sufficient to fund the Company's operations at least through the end of fiscal 2000. 15 16 YEAR 2000 MATTERS The Company recognized that the arrival of the year 2000 posed a unique worldwide challenge to the ability of systems to recognize the date change from December 31, 1999 to January 1, 2000. The year 2000 issue could have resulted, at the Company and elsewhere, in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or to engage in other normal business activities. The Company assessed its computer and business processes and reprogrammed and upgraded its computer applications to provide for their continued functionality. The Company developed and implemented a detailed year 2000 Conversion Project Plan ("Plan") to address the methods to correct possible disruptions of operations due to the year 2000 issue. The Plan considered the following items: (i) identification and inventorying of hardware, application software, and equipment utilizing programmable logic chips to control aspects of the Company's operation, with potential year 2000 problems; (ii) assessment of scope of year 2000 issues for, and assigning priorities to, each item based on its importance to the Company's operations; (iii) remediation of year 2000 issues in accordance with assigned priorities, by correction, upgrade, replacement or retirement; (iv) testing for and validation of year 2000 compliance; and (v) determination of key vendor and customers and their year 2000 compliance. The task of identifying and inventorying hardware and application software with year 2000 issues and developing specific strategies for compliance has been completed. The Company has also completed the process of upgrading both its main and non-critical systems and hardware for year 2000 compliance. The Company's operations are also dependent on the year 2000 readiness of third parties that do business with the Company. In particular, the Company's information technology systems interact with commercial electronic transaction processing systems to handle customer credit card purchases and other point of sale transactions, and the Company is also dependent on third-party suppliers of such infrastructure elements as telephone services, electric power, water, and banking facilities. The Plan includes identifying and initiating formal communications with key third parties and suppliers and with significant vendors to determine the extent to which the Company will be vulnerable to such parties' failure to resolve their own year 2000 issues. The Company has contacted its relevant third parties. Although the Company has not been put on notice that any known third party problem will not be resolved, the Company has limited information and no assurance of additional information concerning the year 2000 readiness of third parties. The resulting risks to the Company's business are very difficult to assess. The estimated cost for implementing the Plan including all required remediation and testing activities is between $100,000 and $150,000 and is being funded through operating cash flows. The Company anticipates that approximately 15% of these costs will relate to identification and assessment efforts, approximately 55% to the replacement of noncompliant software and equipment, approximately 5% to the correction of existing systems and approximately 25% to the testing of corrections implemented under the Plan. Costs incurred in connection with the Plan are not expected to result in significant delays or revisions to any of the Company's other pending or proposed information technology programs. Operating costs related to year 2000 compliance projects will be incurred over several quarters and will be expensed as incurred. As of November 30, 1999, the Company had incurred approximately $80,000 of expenses in connection with the Plan. 16 17 Based upon the testing and remediation completed prior to January 1, 2000, the Company believes that, with modifications to existing software, conversions to new software, and appropriate remediation of embedded chip equipment, it has adequately addressed its potential year 2000 problems. The arrival of the year 2000 has not interfered with the ordinary conduct of the Company's business or caused any of its principal systems to fail. As of the date of this report, the Company is not aware that any of its systems have experienced any disruptions as a result of the arrival of the year 2000. However, the Company is continuing to monitor its systems to identify any year 2000 issues that it may not have identified previously or that have not yet become evident. The Company is presently unable to assess the likelihood that the Company will experience operational problems due to unresolved year 2000 problems of third parties who do business with the Company. There can be no assurance that other entities have achieved timely year 2000 compliance; if they have not, year 2000 problems could have a material impact on the Company's operations. The Company's estimates of the costs of achieving year 2000 compliance are based on management's best estimates, which were derived using numerous assumptions about future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from these estimates. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in year 2000 remediation work, the ability to locate and correct all computer codes, the success achieved by the Company's suppliers in reaching year 2000 readiness, the timely availability of necessary replacement items and similar uncertainties. The Company presently believes that the most reasonably likely worst-case scenarios that the Company might confront with respect to year 2000 issues have to do with third parties not being year 2000 compliant. The Company has evaluated vendor and customer compliance and developed contingency plans, such as alternate vendor opportunities, after obtaining compliance evaluations from vendors. IMPACT OF INFLATION Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally the Company's future lease costs for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers. Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years may ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years. 17 18 SEASONALITY The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company's products have occurred during the Christmas holiday and summer vacation seasons. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings or stores closings and sales of franchises. Because of the seasonality of the Company's business and the impact of new store openings, store closings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrument transactions for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price risks. The Company frequently enters into purchase contracts for chocolate and certain nuts having durations ranging from six to eighteen months. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of November 30, 1999, approximately $912,000 of the Company's long-term debt was subject to a variable interest rate. The Company also has a $3.0 million bank line of credit under which borrowings bear interest at a variable rate. As of November 30, 1999, there was $279,000 outstanding under the line of credit. The Company does not believe that it is exposed to any material interest rate risk related to its long-term debt or the line of credit. The Chief Financial Officer and Chief Operating Officer of the Company has primary responsibility over the Company's long-term and short-term debt and for determining the timing and duration of commodity purchase contracts and negotiating the terms and conditions of those contracts. PART II. OTHER INFORMATION Item 1. Legal Proceedings Harbor Finance Partners, Individually and On Behalf of All Others Similarly Situated, v. Franklin E. Crail, Gary S. Hauer, Gerald A. Kien, Lee Mortenson, Everett A. Sisson, Fred Trainor and Rocky Mountain Chocolate Factory, Inc., Case No. 99 CV 349. On May 26, 1999, certain shareholders filed a class action complaint against the Company, its directors and certain former directors challenging certain actions that the plaintiffs allege were taken in response to the unsolicited tender offer for the Company's outstanding common stock commenced by Whitman's Candies, Inc. on May 10, 1999. The 18 19 bidder withdrew the tender offer on June 7, 1999. The plaintiffs filed an amended complaint on June 30, 1999. The plaintiffs seek injunctive relief and unspecified compensatory damages together with prejudgment interest, costs, attorneys' fees and expert witness' fees. The action was filed in the District Court for the City and County of Denver. It has been moved to La Plata County, Colorado, the county in which the Company's principal offices are located. On July 20, 1999, the Company filed a motion to dismiss the case. On December 15, 1999, the court dismissed the case on the grounds that the plaintiffs' claims were derivative in nature, the plaintiffs failed to satisfy certain requirements for bringing a derivative action and the plaintiffs could not bring a direct action. The plaintiffs have until January 29, 2000 to appeal the order of dismissal. The Company believes the plaintiffs' claims are without merit and intends to vigorously defend any claims asserted by them if the dismissal is appealed. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information As previously reported, the Company entered into a non-binding letter of intent dated August 5, 1999 with Whitman's Candies, Inc. relating to the proposed acquisition by Whitman's of 100% of the Company's issued and outstanding common stock for $6.25 per share. Based primarily on improving operating results, the Company announced on October 28, 1999 that its Board of Directors had decided not to accept Whitman's $6.25 per share offer. On November 4, 1999 Whitman's announced it was no longer interested in acquiring the Company. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 27.1 Financial Data Schedule for the nine months ended November 30, 1999. B. Reports on Form 8-K None 19 20 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. (Registrant) Date: January 13, 2000 /s/ Bryan J. Merryman -------------------------------------------- Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer and Director 20 21 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ------------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS FEB-29-2000 MAR-01-1999 NOV-30-1999 361,558 0 3,367,576 142,701 3,130,511 7,408,639 15,666,876 6,459,282 18,333,244 5,018,524 3,806,662 0 0 78,010 9,337,041 18,333,244 16,298,795 18,719,222 8,425,133 16,471,282 429,137 0 438,966 1,420,817 549,855 870,962 0 0 0 870,962 .33 .33
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