-----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, QF4sQbkdVjs54cMNwnuRx08To2XKFsBwKanTJQL1w5m1GYaBj76K1m+aecaeJ5TJ izDNpTB7Z5ZNjD9MjEE7Jw== 0001035704-01-000014.txt : 20010123 0001035704-01-000014.hdr.sgml : 20010123 ACCESSION NUMBER: 0001035704-01-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010109 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: 1504417 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 d83098e10-q.txt FORM 10-Q FOR QUARTER ENDED NOVEMBER 30, 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 November 30, 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 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 5, 2001 the registrant had outstanding 1,961,284 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 Nine Months Ended November 30, November 30, 2000 1999 2000 1999 REVENUES Sales $ 5,490,053 $ 6,277,800 $ 14,576,507 $ 16,298,795 Franchise and royalty fees 849,749 778,855 2,586,054 2,420,427 Total revenues 6,339,802 7,056,655 17,162,561 18,719,222 COSTS AND EXPENSES Cost of sales 3,128,222 3,352,725 7,650,966 8,425,133 Franchise costs 320,872 237,320 848,847 698,122 Sales and marketing 286,022 303,915 855,234 997,101 General and administrative 395,742 416,440 1,256,555 1,310,475 Retail operating 861,773 1,258,376 3,063,472 3,866,836 Depreciation and amortization 302,060 385,251 941,619 1,173,615 Total costs and expenses 5,294,691 5,954,027 14,616,693 16,471,282 INCOME FROM OPERATIONS 1,045,111 1,102,628 2,545,868 2,247,940 OTHER INCOME (EXPENSE) Cost of unsolicited tender offer -- (255,774) -- (429,137) Interest expense (177,845) (145,251) (522,063) (438,966) Interest income 36,682 9,285 61,028 40,980 Other, net (141,163) (391,740) (461,035) (827,123) INCOME BEFORE INCOME TAXES 903,948 710,888 2,084,833 1,420,817 PROVISION FOR INCOME TAXES 349,825 275,110 806,830 549,855 NET INCOME $ 554,123 $ 435,778 $ 1,278,003 $ 870,962 BASIC EARNINGS PER COMMON SHARE $ .28 $ .17 $ .62 $ .33 DILUTED EARNINGS PER COMMON SHARE $ .28 $ .17 $ .62 $ .33 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,956,833 2,600,349 2,052,858 2,600,024 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS -- 35,384 6,493 21,364 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 1,956,833 2,635,733 2,059,351 2,621,388
The accompanying notes are an integral part of these financial statements. 3 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
November 30, February 29, ASSETS 2000 2000 CURRENT ASSETS Cash and cash equivalents $ 72,117 $ 128,192 Accounts and notes receivable, less allowance for doubtful accounts of $153,647 and $139,912 3,033,355 2,194,325 Refundable income taxes -- 76,689 Inventories 2,806,648 3,084,392 Deferred income taxes 438,999 188,999 Other 293,290 87,785 Total current assets 6,644,409 5,760,382 PROPERTY AND EQUIPMENT, NET 7,246,919 8,976,014 OTHER ASSETS Accounts and notes receivable 1,055,211 55,343 Goodwill, less accumulated amortization of $700,427 and $584,397 1,161,573 1,277,603 Other 619,750 370,514 Total other assets 2,836,534 1,703,460 Total assets $ 16,727,862 $ 16,439,856 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,663,000 $ 1,930,700 Line of credit 2,200,000 75,000 Accounts payable 916,756 1,055,910 Accrued salaries and wages 594,088 653,209 Other accrued expenses 569,873 456,300 Total current liabilities 5,943,717 4,171,119 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,525,986 3,773,851 DEFERRED GAIN ON SALE OF ASSETS 251,444 -- DEFERRED INCOME TAXES 61,797 61,797 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.03 par value, 7,250,000 shares authorized, 1,961,284 and 2,599,599 issued and outstanding 58,839 71,606 Additional paid-in capital 3,126,346 5,879,753 Retained earnings 3,968,479 2,690,476 Less notes receivable from officers and directors (208,746) (208,746) Total stockholders' equity 6,944,918 8,433,089 Total liabilities and stockholders' equity $ 16,727,862 $ 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
Nine Months Ended November 30, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,278,003 $ 870,962 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 941,619 1,173,615 Loss on sale of property and equipment 1,797 43,884 Changes in operating assets and liabilities: Increase in accounts and notes receivable (1,064,405) (977,573) Decrease in refundable income taxes 76,689 307,200 Decrease in inventories 277,744 146,039 Increase in other assets (205,505) (108,328) (Decrease) increase in accounts payable (139,154) 593,366 Increase in deferred income taxes (250,000) -- Increase in accrued liabilities 896 206,551 Net cash provided by operating activities 917,684 2,255,716 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets 787,370 511,267 Purchases of property and equipment (387,330) (640,164) Collection of loan from former officer -- 39,999 Increase in other assets (167,060) (58,364) Net cash provided by (used in) investing activities 232,980 (147,262) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 1,093,240 -- Payments on long-term debt (1,608,805) (1,437,107) Proceeds from line of credit 6,435,000 3,699,000 Payments on line of credit (4,310,000) (4,320,000) Repurchase of stock (2,847,424) (8,644) Proceeds from exercise of stock options 31,250 2,700 Net cash used in financing activities (1,206,739) (2,064,051) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (56,075) 44,403 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 128,192 317,155 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 72,117 $ 361,558
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 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. 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, 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:
November 30, 2000 February 29, 2000 Ingredients and supplies $ 1,341,220 $ 1,490,813 Finished candy 1,465,428 1,593,579 $ 2,806,648 $ 3,084,392
6 7 NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
November 30, 2000 February 29, 2000 Land $ 513,618 $ 513,618 Building 3,708,027 3,681,808 Machinery and equipment 6,993,175 7,590,205 Furniture and fixtures 1,448,074 2,127,282 Leasehold improvements 1,095,405 1,611,785 Transportation equipment 205,539 199,639 13,963,838 15,724,337 Less accumulated depreciation 6,716,919 6,748,323 Property and equipment, net $ 7,246,919 $ 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 LaSalle 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
Nine Months Ended November 30, 2000 1999 Cash paid (received) for: Interest $ 526,260 $ 433,240 Income taxes 575,499 (115,067) Supplemental schedule of non-cash investing and financing activities: Notes receivable in partial payment of asset sales 774,493 --
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 November 30, 2000 Total revenues $ 849,749 $ 4,631,711 $ 1,546,398 $ -- $ 7,027,858 Intersegment revenues -- (688,056) -- -- (688,056) Revenue from external customers 849,749 3,943,655 1,546,398 -- 6,339,802 Segment profit (loss) 307,176 1,273,703 (84,860) (592,071) 903,948 Total assets 1,704,559 9,351,333 3,266,703 2,405,267 16,727,862 Capital expenditures 3,206 1,792 10,277 1,845 17,120 Total depreciation & amortization 30,439 121,335 96,385 53,901 302,060 Three Months Ended 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
Nine Months Ended Franchising Manufacturing Retail Other Total November 30, 2000 Total revenues $ 2,586,054 $ 10,925,333 $ 5,621,713 $ -- $ 19,133,100 Intersegment revenues -- (1,970,539) -- -- (1,970,539) Revenue from external customers 2,586,054 8,954,794 5,621,713 -- 17,162,561 Segment profit loss) 1,089,180 3,077,199 (210,749) (1,870,797) 2,084,833 Total assets 1,704,559 9,351,333 3,266,703 2,405,267 16,727,862 Capital expenditures 31,651 118,749 162,211 74,719 387,330 Total depreciation & amortization 80,038 357,618 350,260 153,703 941,619 Nine Months Ended 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
8 9 NOTE 8 - STORE SALES In connection with the Company's plans to phase out its Company-owned stores, the Company sold twelve Company-owned stores resulting in sales proceeds consisting of cash and notes receivable of approximately $1.4 million and recognized and deferred gains of approximately $437,000 and $251,000, respectively. Additionally, the Company recorded a write-down of the carrying value of certain Company-owned store assets of approximately $441,000. 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 expand 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 and 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, 2000 COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1999 Net income was $554,123 for the three months ended November 30, 2000, or $.28 per share, versus $435,778, or $.17 per share, for the three months ended November 30, 1999. Costs associated with Whitman Candies, Inc.'s unsolicited tender offer negatively impacted earnings per share by approximately $.06 for the three months ended November 30, 1999. Revenues
Three Months Ended November 30, % ($'s in thousands) 2000 1999 Change Change Factory sales $ 3,943.6 $ 3,741.6 $ 202.0 5.4% Retail Sales 1,546.4 2,536.2 (989.8) (39.0%) Franchise fees 92.7 121.7 (29.0) (23.8%) Royalty and Marketing fees 757.1 657.1 100.0 15.2% Total $ 6,339.8 $ 7,056.6 $ (716.8) (10.2%)
Factory Sales Factory sales increased $202,000, or 5.4%, to $3.9 million in the third quarter of fiscal 2001, compared to $3.7 million in the third quarter of fiscal 2000. This increase in factory sales was due primarily to an increase in the number of franchised stores in operation in the third quarter of fiscal 2001 versus the third quarter of fiscal 2000. This increase was partially offset by a decrease in same store pounds purchased from the factory by franchised stores of 5.2% in the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000. 10 11 Retail Sales Retail sales decreased $990,000, or 39.0%, to $1.5 million in the third quarter of fiscal 2001, from $2.5 million in the third quarter of fiscal 2000. This decrease resulted from a reduction in the average number of stores in operation in the third quarter of fiscal 2001 (22) versus the same period last year (35) and a decrease in comparable store sales of 5.7%. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $100,000, or 15.2%, to $760,000 in the third quarter of fiscal 2001, compared to $660,000 in the third quarter of fiscal 2000. This increase resulted from growth in the average number of franchised stores in operation in the third quarter of fiscal 2001 versus the same period last year, offset in part by a decrease in same store sales at franchised stores of approximately 3.4%. 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 decreased in the third quarter of fiscal 2001 due to a decrease in the number of franchises sold versus the third quarter of fiscal 2000. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 57.0% in the third quarter of fiscal 2001 versus 53.4% in the third quarter of fiscal 2000. This increase was due primarily to decreased retail sales, which generate higher margins than factory sales. Factory margins declined to 37.1% in the third quarter of fiscal 2001 from 37.7% in the third quarter of fiscal 2000 as a result of increased sales of packaged product in fiscal 2001 versus fiscal 2000. Franchise Costs Franchise costs increased 35.2% from $237,000 in the third quarter of fiscal 2000 to $321,000 in the third quarter of fiscal 2001. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 37.8% in the third quarter of fiscal 2001 from 30.5% in the third quarter of fiscal 2000. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of increased franchise support expenditures. Sales and Marketing Sales and Marketing expenses decreased 5.9% to $286,000 in the third quarter of fiscal 2001 from $304,000 in fiscal 2000 due to more focused new channel sales efforts and a planned decrease in sales and marketing expenditures. General and Administrative General and administrative expenses decreased 5.0% from $416,000 in the third quarter of fiscal 2000 to $396,000 in the third quarter of fiscal 2001. As a percentage of total revenue, general and administrative expenses increased to 6.2% in fiscal 2001 compared to 5.9% in fiscal 2000 primarily as a result of the Company's efforts to phase out it's Company-owned store program. 11 12 Retail Operating Expenses Retail operating expenses decreased from $1.3 million in the third quarter of fiscal 2000 to $862,000 in the third quarter of fiscal 2001, representing a decrease of 31.5%. This decrease is due to a decline in the average number of stores open during the third quarter of fiscal 2001 versus the third quarter of fiscal 2000. Retail operating expenses, as a percentage of retail sales, increased from 49.6% in the third quarter of fiscal 2000 to 55.7% in the third quarter of fiscal 2000 due to the decrease in same store sales of 5.7%. Depreciation and Amortization Depreciation and amortization decreased 21.6% to $302,000 in the third quarter of fiscal 2001 from $385,000 in the third 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 $141,000 incurred in the third quarter of fiscal 2001 decreased 64.0% from the $392,000 incurred in the third quarter of fiscal 2000 due primarily to non-recurring costs of approximately $256,000 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 amounts outstanding of short-term debt. Income Tax Expense The Company's effective income tax rate in the third quarter of fiscal 2001 was 38.7%, which is approximately the same as the effective rate in the third quarter of fiscal 2000. NINE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED NOVEMBER 30, 1999 Net income was $1,278,003 for the nine months ended November 30, 2000 or $.62 per share versus $870,962 or $.33 per share for the nine months ended November 30, 1999. Costs associated with Whitman Candies, Inc.'s unsolicited tender offer negatively impacted earning per share by approximately $.10 for the nine months ending November 30, 1999. Revenues
Nine Months Ended November 30, % ($'s in thousands) 2000 1999 Change Change Factory sales $ 8,954.8 $ 8,427.3 $ 527.5 6.3% Retail sales 5,621.7 7,871.5 (2,249.8) (28.6%) Franchise fees 290.6 239.5 51.1 21.3% Royalty and Marketing fees 2,295.5 2,180.9 114.6 5.3% Total $ 17,162.6 $ 18,719.2 $ (1,556.6) (8.3%)
Factory Sales Factory sales increased $527,000, or 6.3%, to $8.9 million in the first nine months of fiscal 2001, compared to $8.4 million in the first nine 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 nine months of fiscal 2001 versus the first nine months of fiscal 2000. This increase was partially offset by a decrease in same store pounds purchased from the factory by franchised stores of 4.8% in the first nine months of fiscal 2001 compared to the first nine months of fiscal 2000. 12 13 Retail Sales Retail sales decreased $2.2 million, or 28.6%, to $5.6 million in the first nine months of fiscal 2001, compared to $7.9 million in the first nine months of fiscal 2000. This decrease resulted from a decline in the average number of stores in operation in the first nine months of fiscal 2001 (28) versus the same period last year (37) and a decrease in comparable store sales of 5.8%. 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 $115,000, or 5.3%, to $2.3 million in the first nine months of fiscal 2001, compared to $2.2 million in the first nine months of fiscal 2000. This increase is due to an increase in the average number of franchised stores in operation in the first nine months of fiscal 2001 versus the same period last year offset by a decrease in same store sales at franchised stores of approximately 3.7%. 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 first nine months of fiscal 2001 due to an increase in the number of franchises sold versus the first nine months of fiscal 2000. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales in the first nine months of fiscal 2001 was 52.5% versus 51.7% for the first nine months of fiscal 2000. 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 2001 to 58.6% versus 59.1% for the first nine months of fiscal 2000. Factory margins increased to 40.5% in the first nine months of fiscal 2001 from 38.3% in the first nine months of fiscal 2000 due to certain changes to the Company's manufacturing processes and cost structure. Franchise Costs Franchise costs increased 21.6% from $698,000 in the first nine months of fiscal 2000 to $849,000 in the first nine months of fiscal 2001. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 32.8% in the first nine months of fiscal 2001 from 28.8% in the first nine 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 6.8% increase in income from franchise fees and royalty and marketing fees. Sales and Marketing Sales and Marketing costs decreased 14.2% to $855,000 in the first nine months of fiscal 2001 from $997,000 million in 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 4.1% to $1.26 million in the first nine months of fiscal 2001 from $1.31 million in the first nine months of fiscal 2000. As a percentage of total revenues, general and administrative expenses increased to 7.3% in fiscal 2001 compared to 7.0% in fiscal 2000 primarily as a result of the Company's efforts to phase out it's Company-owned store program. 13 14 Retail Operating Expenses Retail operating expenses decreased from $3.9 million in the first nine months of fiscal 2000 to $3.1 million in the first nine months of fiscal 2001, representing a decrease of 20.8%. This decrease was due primarily to a decline in the average number of stores open during the first nine months of fiscal 2001 (28) versus the first nine months of fiscal 2000 (37). Retail operating expenses, as a percentage of retail sales, increased from 49.1% in the first nine months of fiscal 2000 to 54.5% in the first nine months of fiscal 2001 due to the decrease in same store sales of 5.8%. Depreciation and Amortization Depreciation and amortization decreased 19.8% to $942,000 for the first nine months of fiscal 2001 from $1.2 million for the first nine 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 $461,000 incurred in the first nine months of fiscal 2001 decreased 44.3% from the $827,000 incurred in the first nine months of fiscal 2000 due primarily 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, 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 nine months of fiscal 2001 was 38.7%, which is approximately the same as the effective rate in the first nine months of fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES As of November 30, 2000 working capital was $701,000, compared with $1.59 million as of February 29, 2000, a decrease of $889,000. 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 decreased from $128,000 as of February 29, 2000 to $72,000 as of November 30, 2000 as a result of cash flows used by financing activities in excess of cash provided by operating and investing activities. The Company's current ratio was 1.12 to 1 at November 30, 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 November 30, 2000 $1.8 million), and chattel mortgage notes (unpaid balance as of November 30, 2000 $3.4 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 ($800,000 available as of November 30, 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 may 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 November 30, 2000, approximately $335,000 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, 2000, there was $2.2 million 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 None B. Reports on Form 8-K Subsequent to the end of the quarter but prior to the filing of this report, the Company filed one report on Form 8-K dated December 29, 2000, announcing that it had received a Nasdaq notice regarding its listing and the Company's appeal of the Nasdaq notice. No financial statements were filed with that report. 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 9, 2001 /s/ Bryan J. Merryman -------------------------------------------------- Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer and Director 16 -----END PRIVACY-ENHANCED MESSAGE-----