-----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, UEFlgoGtYq4+6R+1CE/ro2wE4RDnOH7xeClvaoTzEpPQ40rIlEHZ7TBFyiO3gJtD UVztMnYUuyPRFHm7bAlWoQ== 0000950134-01-504045.txt : 20010716 0000950134-01-504045.hdr.sgml : 20010716 ACCESSION NUMBER: 0000950134-01-504045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010713 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: 1681114 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 d89061e10-q.txt FORM 10-Q FOR QUARTER ENDED MAY 31, 2001 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 May 31, 2001 [ ] 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 (State of incorporation) 84-0910696 (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 June 22, 2001 the registrant had outstanding 1,852,568 shares of its common stock, $.03 par value. The exhibit index is located on page 13. 1 2 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FORM 10-Q TABLE OF CONTENTS
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3-5 Statements of Income 3 Balance Sheets 4 Statements of Cash Flows 5 Notes to Interim Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 13
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME
Three Months Ended May 31, 2001 2000 REVENUES Sales $ 3,163,389 $ 4,429,953 Franchise and royalty fees 1,069,385 807,720 Total revenues 4,232,774 5,237,673 COSTS AND EXPENSES Cost of sales 1,885,997 2,260,787 Franchise costs 321,407 259,789 Sales and marketing 287,376 287,740 General and administrative 516,263 452,767 Retail operating 358,824 1,153,265 Depreciation and amortization 224,358 327,266 Total costs and expenses 3,594,225 4,741,614 INCOME FROM OPERATIONS 638,549 496,059 OTHER INCOME (EXPENSE) Interest expense (119,024) (148,859) Interest income 44,520 9,969 Other, net (74,504) (138,890) INCOME BEFORE INCOME TAXES 564,045 357,169 PROVISION FOR INCOME TAXES 213,210 138,225 NET INCOME $ 350,835 $ 218,944 BASIC EARNINGS PER COMMON SHARE $ .19 $ .10 DILUTED EARNINGS PER COMMON SHARE $ .18 $ .10 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,878,086 2,243,913 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 54,098 13,837 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 1,932,184 2,257,750
The accompanying notes are an integral part of these financial statements. 3 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
May 31, February 28, 2001 2001 ASSETS CURRENT ASSETS Cash and cash equivalents $ 60,760 $ 87,301 Accounts receivable, less allowance for doubtful accounts of $53,389 and $59,342 1,940,524 2,161,457 Notes receivable 410,374 135,768 Refundable income taxes -- 37,574 Inventories 2,832,986 2,800,128 Deferred income taxes 113,906 113,906 Other 374,595 270,714 Total current assets 5,733,145 5,606,848 PROPERTY AND EQUIPMENT, NET 6,297,017 6,820,377 OTHER ASSETS Notes receivable, less allowance for doubtful notes of $205,248 and $143,202 2,283,108 1,212,572 Goodwill, less accumulated amortization of $644,005 and $614,603 885,995 915,397 Other 510,462 486,869 Total other assets 3,679,565 2,614,838 Total assets $ 15,709,727 $ 15,042,063 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 2,074,300 $ 1,556,800 Line of credit 1,745,000 550,000 Accounts payable 791,612 1,065,210 Accrued salaries and wages 565,402 1,006,630 Other accrued expenses 433,783 179,425 Total current liabilities 5,610,097 4,358,065 LONG-TERM DEBT, LESS CURRENT MATURITIES 2,333,843 3,297,340 DEFERRED GAIN ON SALE OF ASSETS 578,493 192,246 DEFERRED INCOME TAXES 131,985 131,985 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.03 par value; 7,250,000 shares authorized; 1,857,568 and 1,923,284 issued and outstanding 55,727 57,698 Additional paid-in capital 2,521,880 2,926,612 Retained earnings 4,597,699 4,246,864 Less notes receivable from employees and directors (119,997) (168,747) Total stockholders' equity 7,055,309 7,062,427 Total liabilities and stockholders' equity $ 15,709,727 $ 15,042,063
The accompanying notes are an integral part of these financial statements. 4 5 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
Three Months Ended May 31, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 350,835 $ 218,944 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 224,358 327,266 Provision for doubtful accounts 62,046 -- (Gain) loss on sale of property and equipment (124,646) 90 Changes in operating assets and liabilities: Accounts and notes receivable (146,252) (65,271) Refundable income taxes 37,574 13,648 Inventories (57,858) (134,993) Other assets (103,881) (119,080) Accounts payable (273,598) (14,941) Accrued liabilities (196,250) (38,780) Net cash provided by (used in) operating activities (227,672) 186,883 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets 181,100 676,850 Purchases of property and equipment (342,291) (223,835) Increase in other assets (28,728) (57,400) Net cash provided by (used in) investing activities (189,919) 395,615 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 50,400 1,093,240 Payments on long-term debt (496,397) (578,737) Proceeds from line of credit 2,430,000 3,670,000 Payments on line of credit (1,235,000) (1,870,000) Repurchase of stock (422,703) (2,840,618) Reduction of loan from officer 48,750 -- Proceeds from exercise of stock options 16,000 31,250 Net cash provided by (used in) financing activities 391,050 (494,865) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,541) 87,633 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 87,301 128,192 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 60,760 $ 215,825
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 Rocky Mountain Chocolate Factory, Inc. is an international franchiser, confectionery manufacturer and retail operator in the United States, Guam, Canada, and the United Arab Emirates. The Company manufactures an extensive line of premium chocolate candies and other confectionery products. The Company's revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees' sales; and sales at Company-owned stores of chocolates and other confectionery products. Basis of Presentation The accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments, which 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 three months ended May 31, 2001 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, 2001. 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. For the three months ended May 31, 2001 and 2000, 80,000 and 221,000 stock options were excluded from the computation of earnings per share because their effect would have been anti-dilutive. NOTE 3 - INVENTORIES Inventories consist of the following:
May 31, 2001 February 28, 2001 Ingredients and supplies $ 1,174,232 $ 1,312,014 Finished candy 1,658,754 1,488,114 $ 2,832,986 $ 2,800,128
6 7 NOTE 4 - PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following:
May 31, 2001 February 28, 2001 Land $ 513,618 $ 513,618 Building 3,708,027 3,723,086 Machinery and equipment 6,426,220 6,493,850 Furniture and fixtures 584,682 1,127,023 Leasehold improvements 417,984 832,148 Transportation equipment 271,044 205,539 11,921,575 12,895,264 Less accumulated depreciation 5,624,558 6,074,887 Property and equipment, net $ 6,297,017 $ 6,820,377
NOTE 5 - STOCKHOLDERS' EQUITY Between March 6, 2001 and April 19, 2001, the Company repurchased 69,716 Company shares at an average price of $6.06 per share. Of the shares repurchased during this time period, 19,000 were repurchased from employees. In January 2001 the Company repurchased 46,000 Company shares at an average price of $5.06 per share. On March 21, 2000, the Company commenced a tender offer to acquire shares of its common stock. Pursuant to the tender offer, which was completed on May 1, 2000, the Company acquired 447,595 shares of its issued and outstanding common stock at a purchase price of $6.25 per share. Between December 22, 1999 and February 7, 2000, the Company repurchased 213,470 shares of its issued and outstanding common stock on the open market at an average price of $5.48 per share. On May 15, 1998, certain of the Company's 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 - SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended May 31, Cash paid (received) for: 2001 2000 Interest $ 125,903 $ 136,436 Income taxes (861) 88,141 Non-Cash Financing Activities Company financed sales of retail store assets $ 1,039,500 $ 50,000
7 8 NOTE 7 - 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, 2001. 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 May 31, 2001 Total revenues 1,069,385 2,867,067 577,842 -- 4,514,294 Intersegment revenues -- (281,520) -- -- (281,520) Revenue from external customers 1,069,385 2,585,547 577,842 -- 4,232,774 Segment profit (loss) 548,308 762,012 (102,356) (643,919) 564,045 Total assets 3,139,094 8,815,812 1,517,253 2,237,568 15,709,727 Capital expenditures 15,438 63,864 29,893 233,096 342,291 Total depreciation & amortization 18,272 107,831 49,154 49,101 224,358 Three Months Ended May 31, 2000 Total revenues 807,720 2,947,759 1,999,027 -- 5,754,506 Intersegment revenues -- (516,833) -- -- (516,833) Revenue from external customers 807,720 2,430,926 1,999,027 -- 5,237,673 Segment profit (loss) 341,616 826,061 (169,349) (641,159) 357,169 Total assets 834,235 9,161,686 4,083,310 2,118,233 16,197,464 Capital expenditures 5,373 82,014 114,622 21,826 223,835 Total depreciation & amortization 24,214 118,110 135,441 49,501 327,266
NOTE 8 - STORE SALES In connection with the Company's plans to convert its Company-owned stores to franchised-owned stores, the Company sold ten Company-owned stores resulting in sales proceeds consisting of cash and notes receivable of approximately $1.2 million and recognized and deferred gains of $124,000 and $386,000, respectively. At May 31, 2001, the Company has approximately $2,900,000 in notes receivable outstanding. The notes require monthly payments and bear interest at rates ranging from 9.0% to 12.5%. The notes mature from December 2001 to March 2003 and are secured by the assets of the sold stores. 8 9 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 depend on many factors not within the Company's control including the receptivity of its franchise system 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 MAY 31, 2001 COMPARED TO THE THREE MONTHS ENDED MAY 31, 2000 Net income was $350,800 for the three months ended May 31, 2001, or $.19 per basic share, versus $218,900, or $.10 per basic share, for the three months ended May 31, 2000. Revenues
Three Months Ended May 31, % ($'s in thousands) 2001 2000 Change Change Factory sales $2,585.6 $2,431.0 154.6 6.4% Retail sales 577.8 1,999.0 (1,421.2) (71.1%) Franchise fees 287.1 90.4 196.7 217.6% Royalty and Marketing fees 782.3 717.3 65.0 9.1% Total $4,232.8 5,237.7 (1,004.9) (19.2%)
Factory Sales Factory sales increased $154,600, or 6.4%, to $2.6 million in the first quarter of fiscal 2002, compared to $2.4 million in the first quarter of fiscal 2001. This increase was due primarily to an increase in the number of franchised stores in operation in the first quarter of fiscal 2002 versus the comparable period last year. This increase was partially offset by a decrease in same store pounds purchased from the factory by franchised stores of 10% in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001. 9 10 Retail Sales Retail sales decreased $1.4 million, or 71.1%, to $578,000 in the first quarter of fiscal 2002, compared to $2.0 million in the first quarter of fiscal 2001. This decrease resulted primarily from a decrease in the average number of stores in operation in the first quarter of fiscal 2002 (9) versus the same period last year (32). Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $65,000, or 9.1%, to $782,000 in the first quarter of fiscal 2002, compared to $717,000 in the first quarter of fiscal 2001. This increase resulted from growth in the average number of franchised stores in operation in the first quarter of fiscal 2002 versus the same period last year, minimally offset by a decrease in same store sales at franchised stores of .7%. Franchise fee revenues increased in the first quarter of fiscal 2002 due to an increase in the number of franchises sold versus the first quarter of fiscal 2001. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 59.6% in the first quarter of fiscal 2002 from 51.0% in the first quarter of fiscal 2001. The increase resulted from decreased retail sales, which generate higher margins than factory sales, and a decrease in factory margins to 36.2% in fiscal 2002 from 41.7% in fiscal 2001. The decrease in factory margins is due primarily to decreased production efficiencies due to lower than planned production levels and increased inventory reserves due to planned packaging changes. Company-owned store margins for the first quarter of 2002 improved to 59% compared to 57.8% in the first quarter of fiscal 2001 due to changes in mix of product sold as well as operating efficiencies. Franchise Costs Franchise costs increased 23.7% from $260,000 in the first quarter of fiscal 2001 to $321,000 in the first quarter of fiscal 2002. The increase is due primarily to increased advertising and personnel costs as the Company continues to concentrate its efforts on supporting its current franchisees and expanding its franchise base. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 30.1% in the first quarter of fiscal 2002 from 32.2% in the first quarter of fiscal 2001. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of increased income from franchise fees and royalty and marketing fees. Sales and Marketing Sales and Marketing decreased 0.1% to $287,000 in the first quarter of fiscal 2002 from $288,000 in the first quarter of fiscal 2001. General and Administrative General and administrative expenses increased 14.0% to $516,000 in the first quarter of fiscal 2002 from $453,000 in the first quarter of fiscal 2001. The increase is due to increased personnel costs, primarily related to continued development and enhancement of information systems. As a percentage of total revenues, general and administrative expenses increased to 12.2% in fiscal 2002 compared to 8.6% in fiscal 2001. This increase, as a percentage of total revenues, resulted from increased general and administrative costs and a 19.2% decrease in total revenues. 10 11 Retail Operating Expenses Retail operating expenses decreased from $1.2 million in the first quarter of fiscal 2001 to $359,000 in the first quarter of fiscal 2002, a decrease of 68.9%. This decrease was due primarily to a decrease in the average number of stores in operation during the first quarter of fiscal 2002 (9) versus the first quarter of fiscal 2001 (32). Retail operating expenses, as a percentage of retail sales, increased from 57.7% in the first quarter of fiscal 2001 to 62.1% in the first quarter of fiscal 2002 due to a change in mix of stores in operation and related seasonality. Depreciation and Amortization Depreciation and amortization decreased 31.4% to $224,000 in the first quarter of fiscal 2002 from $327,000 in the first quarter of fiscal 2000. The decrease in depreciation and amortization is due primarily to lower depreciation expense as a result of fewer Company-owned stores. Other Expense Other expense of $75,000 incurred in the first quarter of fiscal 2002 represents a 46.4% decline from the $139,000 incurred in the first quarter of fiscal 2001 due primarily to lower interest expense on lower average outstanding amounts of long-term debt and increased interest income on higher average outstanding balances of notes receivable. Income Tax Expense The Company's effective income tax rate in the first quarter of fiscal 2002 was 37.8% which is approximately the same rate as the first quarter of fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES As of May 31, 2001 working capital was $123,000, compared with $1.2 million as of February 28, 2001, a decrease of $1.1 million. The decrease in working capital was primarily due to increased short-term borrowings, the proceeds of which were used to purchase shares of the Company's common stock and an increase in currently scheduled payments of long-term debt. Cash and cash equivalent balances decreased from $87,000 as of February 28, 2001 to $61,000 as of May 31, 2001 as a result of cash flows used by investing and operating activities in excess of cash flows provided by financing activities. The Company's current ratio was 1.02 to 1 at May 31, 2001 in comparison with 1.29 to 1 at February 28, 2001. 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 May 31, 2001 of $1.8 million), and chattel mortgage notes (unpaid balance as of May 31, 2001 of $2.6 million) used to fund the fiscal 1996 and 1997 Company-owned store expansion and improve and automate the Company's factory infrastructure. The Company has a $3.0 million ($1.3 million available as of May 31, 2001) 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, 2001. 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 2002. 11 12 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 the Company 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 will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years. 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 and sales of franchises. Because of the seasonality of the Company's business and the impact of new store openings 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 and interest rate risks. The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. 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 May 31, 2001, approximately $139,000 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 that bears interest at a variable rate. As of May 31, 2001, $1.7 million was 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. 12 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any legal proceedings that are material to the Company's business or financial condition. 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 None Item 6. Exhibits and Reports on Form 8-K A. Exhibits None B. Reports on Form 8-K None 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: July 13, 2001 /s/ Bryan J. Merryman --------------------------------- Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer and Director 13 -----END PRIVACY-ENHANCED MESSAGE-----