10-Q 1 d80918e10-q.txt FORM 10-Q FOR QUARTER ENDED AUGUST 31, 2000 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 August 31, 2000 [ ] 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 October 6, 2000 the registrant had outstanding 1,956,784 shares of its common stock, $.03 par value. The exhibit index is located on page 16. 2 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FORM 10-Q TABLE OF CONTENTS
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 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 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURE 16
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME
Three Months Ended August 31, Six Months Ended August 31, 2000 1999 2000 1999 REVENUES Sales $ 4,656,501 $ 5,227,319 $ 9,086,454 $ 10,020,995 Franchise and royalty fees 928,585 845,718 1,736,305 1,641,572 Total revenues 5,585,086 6,073,037 10,822,759 11,662,567 COSTS AND EXPENSES Cost of sales 2,261,957 2,535,914 4,522,744 5,072,408 Franchise costs 268,476 235,106 527,975 460,802 Sales and marketing 281,472 355,400 569,212 693,186 General and administrative 404,785 431,544 857,752 848,342 Retail operating 1,048,434 1,245,642 2,201,699 2,608,460 Depreciation and amortization 312,293 385,159 639,559 788,364 Loss on sale of assets 2,971 48,841 3,061 45,693 Total costs and expenses 4,580,388 5,237,606 9,322,002 10,517,255 INCOME FROM OPERATIONS 1,004,698 835,431 1,500,757 1,145,312 OTHER INCOME (EXPENSE) Cost of unsolicited tender offer -- (166,507) -- (173,363) Interest expense (195,359) (139,025) (344,218) (293,715) Interest income 14,377 19,447 24,346 31,695 Other, net (180,982) (286,085) (319,872) (435,383) INCOME BEFORE INCOME TAXES 823,716 549,346 1,180,885 709,929 PROVISION FOR INCOME TAXES 318,780 212,595 457,005 274,745 NET INCOME $ 504,936 $ 336,751 $ 723,880 $ 435,184 BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .26 $ .13 $ .34 $ .17 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,956,784 2,600,129 2,100,349 2,599,864 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 5,571 25,268 9,704 14,429 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 1,962,355 2,625,397 2,110,053 2,614,293
The accompanying notes are an integral part of these financial statements. 3 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
August 31, February 29, 2000 2000 ASSETS CURRENT ASSETS Cash and cash equivalents $ 128,828 $ 128,192 Accounts and notes receivable, less allowance for doubtful accounts of $201,912 and $139,912 2,096,332 2,194,325 Refundable income taxes 36,129 76,689 Inventories 3,281,651 3,084,392 Deferred income taxes 438,999 188,999 Other 282,765 87,785 Total current assets 6,264,704 5,760,382 PROPERTY AND EQUIPMENT, NET 7,707,504 8,976,014 OTHER ASSETS Accounts and notes receivable 656,121 55,343 Goodwill, less accumulated amortization of $661,750 and $584,397 1,200,250 1,277,603 Other 646,099 370,514 Total other assets 2,502,470 1,703,460 Total assets $ 16,474,678 $ 16,439,856 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,758,000 $ 1,930,700 Line of credit 2,000,000 75,000 Accounts payable 842,615 1,055,910 Accrued salaries and wages 781,755 653,209 Other accrued expenses 452,418 456,300 Total current liabilities 5,834,788 4,171,119 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,971,957 3,773,851 DEFERRED GAIN ON SALE OF ASSETS 234,091 -- DEFERRED INCOME TAXES 61,797 61,797 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.03 par value, 7,250,000 shares authorized, 1,956,784 and 2,599,599 issued and outstanding 58,704 71,606 Additional paid-in capital 3,107,731 5,879,753 Retained earnings 3,414,356 2,690,476 Less notes receivable from employees and directors (208,746) (208,746) Total stockholders' equity 6,372,045 8,433,089 Total liabilities and stockholders' equity $ 16,474,678 $ 16,439,856
The accompanying notes are an integral part of these financial statements. 4 5 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
Six Months Ended August 31, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 723,880 $ 435,184 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 639,559 788,364 Loss on sale of property and equipment 3,061 45,693 Changes in operating assets and liabilities: Accounts and notes receivable 54,215 280,310 Refundable income taxes 40,560 339,860 Inventories (197,259) (26,023) Deferred tax assets (250,000) -- Other assets (194,980) (169,841) Accounts payable (213,295) 204,410 Accrued liabilities 66,870 (20,496) Net cash provided by operating activities 672,611 1,877,461 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets 775,170 503,640 Purchases of property and equipment (370,210) (500,945) Increase in other assets (211,167) (37,785) Net cash provided by investing activities 193,793 (35,090) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 1,093,240 -- Payments on long-term debt (1,067,834) (944,511) Proceeds from line of credit 4,820,000 2,280,000 Payments on line of credit (2,895,000) (3,180,000) Repurchase of stock (2,847,424) (8,644) Proceeds from exercise of stock options 31,250 2,700 Net cash used in financing activities (865,768) (1,850,455) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 636 (8,084) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 128,192 317,155 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 128,828 $ 309,071
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 retail operator and international franchiser. The Company is also 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, Canada and the United Arab Emirates. 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, 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 August 31, 2000 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 29, 2000. 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:
August 31, 2000 February 29, 2000 Ingredients and supplies $1,403,064 $1,490,813 Finished candy 1,878,587 1,593,579 $3,281,651 $3,084,392
6 7 NOTE 4 - PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following:
August 31, 2000 February 29, 2000 Land $ 513,618 $ 513,618 Building 3,708,027 3,681,808 Machinery and equipment 7,101,015 7,590,205 Furniture and fixtures 1,646,529 2,127,282 Leasehold improvements 1,247,882 1,611,785 Transportation equipment 205,539 199,639 14,422,610 15,724,337 Less accumulated depreciation 6,715,106 6,748,323 Property and equipment, net $ 7,707,504 $ 8,976,014
NOTE 5 - STOCKHOLDERS' EQUITY 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 and payable on May 15, 2003. NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended August 31, 2000 1999 Cash paid during the period for: Interest $351,364 $159,501 Income taxes $339,947 $ 1,753 Supplemental disclosure of non-cash investing activity: Notes receivable in partial payment for asset sales $557,000 $ --
7 8 NOTE 7 - OPERATING SEGMENTS The Company classifies its business interests into three reportable segments: Franchising, Retail stores and Manufacturing. 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 29, 2000. 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 August 31, 2000 Total revenues 928,585 3,345,863 2,076,288 -- $ 6,350,736 Intersegment revenues -- (765,650) -- -- (765,650) Revenue from external customers 928,585 2,580,213 2,076,288 -- 5,585,086 Segment profit (loss) 440,388 977,435 43,460 (637,567) 823,716 Total assets 1,493,806 8,820,066 3,570,249 2,590,557 16,474,678 Capital expenditures 23,072 34,943 37,312 51,048 146,375 Total depreciation & amortization 25,385 118,173 118,434 50,301 312,293 Three Months Ended August 31, 1999 Total revenues 845,718 3,089,748 2,835,088 -- $ 6,770,554 Intersegment revenues -- (697,517) -- -- (697,517) Revenue from external customers 845,718 2,392,231 2,835,088 -- 6,073,037 Segment profit (loss) 338,849 791,934 182,853 (764,290) 549,346 Total assets 919,937 8,873,566 5,279,436 2,383,734 17,456,673 Capital expenditures 4,023 214,224 7,984 134,352 360,583 Total depreciation & amortization 46,941 132,218 163,101 42,899 385,159
Six Months Ended Franchising Manufacturing Retail Other Total August 31, 2000 Total revenues 1,736,305 6,293,622 4,075,315 -- $ 12,105,242 Intersegment revenues -- (1,282,483) -- -- (1,282,483) Revenue from external customers 1,736,305 5,011,139 4,075,315 -- 10,822,759 Segment profit (loss) 782,004 1,803,496 (125,889) (1,278,726)) 1,180,885 Total assets 1,493,806 8,820,066 3,570,249 2,590,557 16,474,678 Capital expenditures 28,445 116,957 151,934 72,874 370,210 Total depreciation & amortization 49,599 236,283 253,875 99,802 639,559 Six Months Ended August 31, 1999 Total revenues 1,641,572 5,904,597 5,335,261 -- 12,881,430 Intersegment revenues -- (1,218,863) -- -- (1,218,863) Revenue from external customers 1,641,572 4,685,734 5,335,261 -- 11,662,567 Segment profit (loss) 655,478 1,385,208 44,530 (1,375,287) 709,929 Total assets 919,937 8,873,566 5,279,436 2,383,734 17,456,673 Capital expenditures 29,531 261,490 12,100 197,824 500,945 Total depreciation & amortization 93,673 263,302 340,587 90,802 788,364
8 9 NOTE 8 - STORE SALES In connection with the Company's plans to phase out its Company-owned stores, the Company sold eight Company-owned stores resulting in sales proceeds consisting of cash and notes receivable of approximately $1.2 million and recognized and deferred gains of approximately $407,000 and $234,000, respectively. Additionally, the Company recorded a write-down of the carrying value of certain Company-owned store assets of approximately $407,000. 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 depend 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. Therefore, 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 AUGUST 31, 2000 COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 1999 Net income was $504,900 for the three months ended August 31, 2000, or $.26 per share, versus $336,800, or $.13 per share, for the three months ended August 31, 1999. Earnings per share was negatively impacted approximately $.04 for the three months ended August 31, 1999 by costs associated with Whitman's Candies, Inc.'s unsolicited tender offer. Revenues
Three Months Ended August 31, % ($'s in thousands) 2000 1999 Change Change Factory sales $2,580.2 $2,392.2 $ 188.0 7.9% Retail sales 2,076.3 2,835.1 (758.8) (26.8%) Franchise fees 107.5 48.8 58.7 120.3% Royalty and Marketing fees 821.1 797.0 24.1 3.0% Total $5,585.1 $6,073.1 $(488.0) (8.0%)
Factory Sales Factory sales increased $188,000, or 7.9%, to $2.6 million in the second quarter of fiscal 2001, compared to $2.4 million in the second quarter of fiscal 2000. The increase in factory sales was due primarily to an increase in the number of franchised stores in operation in the second quarter of fiscal 2001 versus the second quarter of fiscal 2000. This increase was partially offset by a decrease in same store pounds purchased from the factory by franchised stores of 3.5% in the second quarter of fiscal 2001 compared to the second quarter of fiscal 2000. 10 11 Retail Sales Retail sales decreased $758,800 or 26.8%, to $2.1 million in the second quarter of fiscal 2001, compared to $2.8 million in the second quarter of fiscal 2000. This decrease resulted from a decrease in the average number of Company-owned stores in operation in the second quarter of fiscal 2001 (28) versus the same period last year (39) and a decrease in comparable store sales of 7.3%. Slower sales of Beanie Babies and related products in the children's/novelty section of the retail stores contributed significantly to the decrease in comparable store sales. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $24,100, or 3.0%, to $821,100 in the second quarter of fiscal 2001, compared to $797,000 in the second quarter of fiscal 2000. This increase resulted from an increase in the average number of franchised stores in operation in the second quarter of fiscal 2001 versus the same period last year offset by a decrease in same store sales at franchised stores of approximately 5.9%. Slower sales of Beanie Babies and related products in the children's/novelty section of the retail stores contributed significantly to the decrease in comparable store sales. Franchise fee revenues increased in the second quarter of fiscal 2001 due to an increase in the number of franchises sold versus the second quarter of fiscal 2000. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 48.6% in the second quarter of fiscal 2001 from 48.5% in the second quarter of fiscal 2000. This increase was due primarily to decreased retail sales, which generate higher margins than factory sales. Factory margins increased to 44.7% in the second quarter of fiscal 2001 from 42.0% in the second quarter of fiscal 2000. This improvement was due to certain changes to the Company's manufacturing processes and cost structure. Company-owned store margins for the second quarter of 2001 were consistent with the second quarter of fiscal 2000. Franchise Costs Franchise costs increased 14.2% from $235,100 in the second quarter of fiscal 2000 to $268,500 in the second quarter of fiscal 2001. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 28.9% in the second quarter of fiscal 2001 from 27.8% in the second quarter of fiscal 2000. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of increased franchise support costs. Sales and Marketing Sales and Marketing expenses decreased 20.8% to $281,500 in the second quarter of fiscal 2001 from $355,400 in the second quarter of fiscal 2000. This decrease is due to more focused new channel sales efforts and a planned decrease in sales and marketing costs. General and Administrative General and administrative expenses decreased 6.2% to $404,800 in the second quarter of fiscal 2001 from $431,500 in the second quarter of fiscal 2000. As a percentage of total revenues, general and administrative expenses increased to 7.2% in fiscal 2001 compared to 7.1% in fiscal 2000. 11 12 Retail Operating Expenses Retail operating expenses decreased 15.8% from $1.2 million in the second quarter of fiscal 2000 to $1.0 million in the second quarter of fiscal 2001. This decrease was due primarily to a decrease in the average number of stores open during the second quarter of fiscal 2001 (28) versus the second quarter of fiscal 2000 (39). Retail operating expenses, as a percentage of retail sales, increased from 43.9% in the second quarter of fiscal 2000 to 50.5% in the second quarter of fiscal 2001 due to a decrease in same store sales of 7.3%. Depreciation and Amortization Depreciation and amortization decreased 18.9% to $312,300 in the second quarter of fiscal 2001 from $385,200 in the second 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 and fewer fixtures used in outside channels. Other Expense Other expense of $184,000 incurred in the second quarter of fiscal 2001 decreased 45.1% from the $334,900 incurred in the second quarter of fiscal 2000 due primarily to non-recurring costs of approximately $166,500 in fiscal 2000 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, partially offset by increased interest expense on higher average outstanding amounts of short-term debt. Income Tax Expense The Company's effective income tax rate in the second quarter of fiscal 2001 was 38.7%, which is approximately the same rate as the second quarter of fiscal 2000. SIX MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE SIX MONTHS ENDED AUGUST 31, 1999 Net income was $723,900 for the six months ended August 31, 2000, or $.34 per share, versus $435,200, or $.17 per share, for the six months ended August 31, 1999. Earnings per share was negatively impacted approximately $.04 for the six months ended August 31, 1999 by costs associated with Whitman's Candies, Inc.'s unsolicited tender offer. Revenues
Six Months Ended August 31, % ($'s in thousands) 2000 1999 Change Change Factory sales $ 5,011.2 $ 4,685.7 $ 325.5 6.9% Retail sales 4,075.3 5,335.3 (1,260.0) (23.6%) Franchise fees 197.9 117.8 80.1 68.0% Royalty and Marketing fees 1,538.4 1,523.8 14.6 1.0% Total $10,822.8 $11,662.6 $ (839.8) (7.2%)
Factory Sales Factory sales increased $325,500, or 6.9%, to $5.0 million in the first six months of fiscal 2001, compared to $4.7 million in the first six months of fiscal 2000. The increase in factory sales was due primarily to an increase in the number of franchised stores in operation in the first six months of fiscal 2001 versus the first six months of fiscal 2000. This increase was partially offset by a decrease in same store pounds purchased from the factory by franchised stores of 2.5% in the first six months of fiscal 2001 compared to the first six months of fiscal 2000. 12 13 Retail Sales Retail sales decreased $1.3 million, or 23.6%, to $4.1 million in the first six months of fiscal 2001, compared to $5.3 million in the first six months of fiscal 2000. This decrease resulted from a decrease in the average number of stores in operation in the first six months of fiscal 2001 (30) versus the same period last year (38) and a decrease in comparable store sales of 7.6%. Slower sales of Beanie Babies and related products in the children's/novelty section of the retail stores contributed significantly to the decrease in comparable store sales. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $14,000, or 1.0% to $1.538 million in the first six months of fiscal 2001, compared to $1.524 million in the first six months of fiscal 2000 due to an increase in the average number of franchised stores in operation in the first six months of fiscal 2001 versus the same period last year offset by a decrease in same store sales at franchised stores of approximately 6.1%. Slower sales of Beanie Babies and related products in the children's/novelty section of the retail stores contributed significantly to the decrease in comparable store sales. Franchise fee revenues increased in the second quarter of fiscal 2001 due to an increase in the number of franchises sold versus the second quarter of fiscal 2000. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales decreased to 49.8% in the first six months of fiscal 2001 from 50.6% in the first six months of fiscal 2000. This improvement resulted from increased factory margins. Factory margins increased to 43.3% in the first six months of fiscal 2001 from 38.7% in the first six months of fiscal 2000 due to certain changes to the Company's manufacturing processes and cost structure. Company-owned store margins for the first six months of 2001 were consistent with the first six months of fiscal 2000. Franchise Costs Franchise costs increased 14.6% from $460,800 in the first six months of fiscal 2000 to $528,000 in the first six months of fiscal 2001. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 30.4% in the first six months of fiscal 2001 from 28.1% in the first six months of fiscal 2000. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of increased franchise support costs partially offset by a 5.8% increase in income from franchise fees and royalty and marketing fees. Sales and Marketing Sales and Marketing expenses decreased 17.9% to $569,200 in the first six months of fiscal 2001 from $693,200 in the first six months of fiscal 2000. This decrease is due to more focused new channel sales efforts and a planned decrease in sales and marketing costs. General and Administrative General and administrative expenses increased 1.1% to $857,800 in the first six months of fiscal 2001 from $848,300 in the first six months of fiscal 2000. As a percentage of total revenues, general and administrative expenses increased to 7.9% in fiscal 2001 compared to 7.3% in fiscal 2000. This increase, as a percentage of total revenues, resulted from increased general and administrative costs and a 7.2% decrease in total revenues. 13 14 Retail Operating Expenses Retail operating expenses decreased from $2.6 million in the first six months of fiscal 2000 to $2.2 million in the first six months of fiscal 2001, representing a decrease of 15.6%. This decrease was due primarily to a decrease in the average number of stores open during the first six months of fiscal 2001 (30) versus the first six months of fiscal 2000 (38). Retail operating expenses, as a percentage of retail sales, increased from 48.9% in the first six months of fiscal 2000 to 54.0% in the first six months of fiscal 2001 due to the decrease in same store sales of 7.6%. Depreciation and Amortization Depreciation and amortization decreased 18.9% to $639,600 in the first six months of fiscal 2001 from $788,400 in the first six months of fiscal 2000. The decrease in depreciation and amortization is due primarily to lower depreciation expense as a result of fewer Company-owned stores and fewer fixtures used in outside channels. Other Expense Other expense of $323,000 incurred in the first six months of fiscal 2001 decreased 32.9% from the $481,000 incurred in the first six months of fiscal 2000 due primarily to non-recurring costs of approximately $173,000 in fiscal 2000 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, partially offset by increased interest expense on higher average outstanding amounts of short-term debt. Income Tax Expense The Company's effective income tax rate in the first six months of fiscal 2001 was 38.7%, which is approximately the same rate as the first six months of fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES As of August 31, 2000, working capital was $430,000, compared with $1.59 million as of February 29, 2000, a decrease of $1.16 million. The decrease in working capital was due to increased short-term borrowings, the proceeds of which were used to purchase shares of the Company's common stock. Cash and cash equivalent balances increased from $128,000 as of February 29, 2000 to $129,000 as of August 31, 2000 as a result of cash flows generated by investing and operating activities in excess of cash flows used by financing activities. The Company's current ratio was 1.03 to 1 at August 31, 2000 in comparison with 1.38 to 1 at February 29, 2000. 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 August 31, 2000 of $1.8 million), and chattel mortgage notes (unpaid balance as of August 31, 2000 of $3.9 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 ($1.0 million available as of August 31, 2000) 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 2001. 14 15 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 August 31, 2000, approximately $448,000 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 August 31, 2000, $2.0 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. 15 16 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 27.1 Financial Data Schedule for the six months ended August 31, 2000. B. Reports on Form 8-K None 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: October 13, 2000 /s/ Bryan J. Merryman ----------------------------------------------- Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer and Director 16 17 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 Financial Data Schedule for the six months ended August 31, 2000.