-----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, QJ5Z7z8EqJvPRa1vhqNpjou0kmYvsPv0q3zDSukOjYjoU6okXRF2fPiM8KxN0qGA io/x+S9EfnE/O6ShAsbTbA== 0001035704-02-000524.txt : 20021015 0001035704-02-000524.hdr.sgml : 20021014 20021015134813 ACCESSION NUMBER: 0001035704-02-000524 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020831 FILED AS OF DATE: 20021015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKY MOUNTAIN CHOCOLATE FACTORY INC CENTRAL INDEX KEY: 0000785815 STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060] IRS NUMBER: 840910696 STATE OF INCORPORATION: CO FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14749 FILM NUMBER: 02788869 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 d00393e10vq.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 8/31/02 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, 2002 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 81303 (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 11, 2002 the registrant had outstanding 2,498,790 shares of its common stock, $.03 par value. The exhibit index is located on page 17. 1 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 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURE 17 CERTIFICATIONS 18-19
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME (unaudited)
Three Months Ended August 31, Six Months Ended August 31, 2002 2001 2002 2001 REVENUES Sales $ 3,976,609 $ 3,648,005 $ 6,927,411 $ 6,811,394 Franchise and royalty fees 1,089,751 1,041,686 2,111,288 2,111,071 Total revenues 5,066,360 4,689,691 9,038,699 8,922,465 COSTS AND EXPENSES Cost of sales 2,499,463 2,124,770 4,236,405 4,010,767 Franchise costs 306,852 362,722 598,883 684,129 Sales and marketing 323,159 323,385 636,972 610,761 General and administrative 498,127 408,472 966,099 924,735 Retail operating 213,997 218,751 412,597 577,575 Depreciation and amortization 205,939 229,325 411,985 453,683 Total costs and expenses 4,047,537 3,667,425 7,262,941 7,261,650 INCOME FROM OPERATIONS 1,018,823 1,022,266 1,775,758 1,660,815 OTHER INCOME (EXPENSE) Interest expense (88,140) (125,003) (173,688) (244,027) Interest income 59,412 80,185 126,657 124,705 Other, net (28,728) (44,818) (47,031) (119,322) INCOME BEFORE INCOME TAXES 990,095 977,448 1,728,727 1,541,493 PROVISION FOR INCOME TAXES 374,255 369,475 653,460 582,685 NET INCOME $ 615,840 $ 607,973 $ 1,075,267 $ 958,808 BASIC EARNINGS PER COMMON SHARE $ .25 $ .25 $ .43 $ .39 DILUTED EARNINGS PER COMMON SHARE $ .23 $ .23 $ .39 $ .37 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,498,699 2,464,219 2,491,693 2,484,167 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 207,378 150,249 245,601 111,546 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 2,706,077 2,614,468 2,737,294 2,595,713
The accompanying notes are an integral part of these financial statements. 3 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
August 31, February 28, 2002 2002 ASSETS (unaudited) CURRENT ASSETS Cash and cash equivalents $ 108,082 $ 165,472 Accounts receivable, less allowance for doubtful accounts of $63,247 and $73,269 3,025,923 2,724,907 Notes receivable 700,522 561,829 Inventories 3,891,980 3,127,090 Deferred income taxes 138,591 138,591 Other 482,995 313,943 Total current assets 8,348,093 7,031,832 PROPERTY AND EQUIPMENT, NET 5,767,792 5,983,906 OTHER ASSETS Notes receivable, less valuation allowance of $275,690 and $225,689 2,283,542 2,353,355 Intangible Assets, net 1,380,457 1,366,391 Other 74,845 59,907 Total other assets 3,738,844 3,779,653 Total assets $ 17,854,729 $ 16,795,391 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,137,900 $ 1,188,300 Line of credit 560,000 -- Accounts payable 918,692 667,419 Accrued salaries and wages 600,199 881,451 Other accrued expenses 312,942 354,912 Total current liabilities 3,529,733 3,092,082 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,773,276 4,324,746 DEFERRED GAIN ON SALE OF ASSETS 343,687 389,302 DEFERRED INCOME TAXES 168,464 168,464 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.03 par value, 7,250,000 shares authorized, 2,498,790 and 2,474,640 issued and outstanding 74,964 74,239 Additional paid-in capital 2,647,132 2,544,351 Retained earnings 7,317,473 6,242,206 Less notes receivable from employees and directors -- (39,999) Total stockholders' equity 10,039,569 8,820,797 Total liabilities and stockholders' equity $ 17,854,729 $ 16,795,391
The accompanying notes are an integral part of these financial statements. 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended August 31, 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,075,267 $ 958,808 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 411,985 453,683 Provision for doubtful accounts 50,000 62,046 Provision for inventory loss -- 62,000 (Gain) Loss on sale of property and equipment (87) (124,646) Changes in operating assets and liabilities: Accounts receivable (209,392) (383,929) Refundable income taxes -- 37,574 Inventories (764,890) (646,677) Other assets (169,052) (178,753) Accounts payable 251,273 (173,961) Accrued liabilities (368,837) 37,276 Net cash provided by operating activities 276,267 103,421 CASH FLOWS FROM INVESTING ACTIVITIES Addition to notes receivable (210,504) (355,053) Proceeds from sale of assets 960 181,100 Purchases of property and equipment (154,326) (450,491) Increase in other assets (71,422) (87,563) Net cash used in investing activities (435,292) (712,007) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt -- 6,027,429 Payments on long-term debt (601,870) (4,576,548) Proceeds from line of credit 1,900,000 5,775,000 Payments on line of credit (1,340,000) (6,185,030) Repurchase of stock -- (558,261) Costs of stock split (14,010) -- Reduction of loan from officer 39,999 48,750 Proceeds from exercise of stock options 117,516 16,000 Net cash provided by financing activities 101,635 547,340 NET DECREASE IN CASH AND CASH EQUIVALENTS (57,390) (61,246) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,472 87,301 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 108,082 $ 26,055
The accompanying notes are an integral part of these financial statements. 5 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 accounting principles generally accepted in the United States of America for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 six months ended August 31, 2002 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, 2002. 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 six months ended August 31, 2002 and 2001, 35,666 and 66,500 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:
August 31, 2002 February 28, 2002 Ingredients and supplies $1,744,976 $1,538,107 Finished candy 2,147,004 1,588,983 $3,891,980 $3,127,090
6 NOTE 4 - PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following:
August 31, 2002 February 28, 2002 Land $ 513,618 $ 513,618 Building 3,838,936 3,772,807 Machinery and equipment 6,588,738 6,512,836 Furniture and fixtures 594,042 592,677 Leasehold improvements 419,289 418,403 Transportation equipment 188,874 188,874 12,143,497 11,999,215 Less accumulated depreciation 6,375,705 6,015,309 Property and equipment, net $ 5,767,792 $ 5,983,906
NOTE 5 - STOCKHOLDERS' EQUITY Stock Split On January 28, 2002 the Board of Directors approved a four-for-three stock split payable March 4, 2002 to shareholders of record at the close of business on February 11, 2002. Shareholders received one additional share of Common Stock for every three shares owned prior to the record date and $18,560 was reclassified from additional paid-in capital to common stock for the par value of the additional shares. Immediately prior to the split there were 1,855,918 shares outstanding. Subsequent to the split there were 2,474,640 shares outstanding. All share and per share data have been restated in all periods presented to give effect to the stock split. Stock Repurchases Between March 6, 2001 and September 28, 2001, the Company repurchased 123,355 Company shares at an average price of $5.07 per share. Of the shares repurchased during this time period, 25,333 were repurchased from employees. On May 15, 1998, the Company purchased 448,000 shares and certain of its directors and executive officers purchased 138,667 shares of the Company's issued and outstanding common stock at $3.8625 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 53,333 of the 138,667 shares purchased by them. The loans were secured by the related shares, bore interest payable annually at 7.5% and were due May 15, 2003. These loans were paid in full in May, 2002. NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended August 31, Cash paid for: 2002 2001 Interest $ 173,191 $ 255,153 Income taxes 671,730 $ 300,234 Non-Cash Financing Activities Company financed sales of retail store assets $ 230,317 $1,039,500
7 NOTE 7 - OPERATING SEGMENTS The Company classifies its business interests into two reportable segments: Franchising and Manufacturing. Previously the Company segregated Retail as a third reportable segment. The Company has phased out its Company-owned store program to four remaining stores. The remaining stores provide an environment for testing new products and promotions, operating and training methods and merchandising techniques. Company management evaluates these stores in relation to their contribution to franchising efforts. The previously reported Retail segment is now included in the Franchising segment and all previously reported periods have been restated. 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, 2002. 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 inter-segment 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 Other Total August 31, 2002 Total revenues $ 1,476,774 $ 3,805,268 $ -- $ 5,282,042 Intersegment revenues -- (215,682) -- (215,682) Revenue from external customers 1,476,774 3,589,586 -- 5,066,360 Segment profit (loss) 516,979 1,049,171 (576,055) 990,095 Total assets 2,018,023 10,500,869 5,335,837 17,854,729 Capital expenditures 8,832 84,114 4,934 97,880 Total depreciation & amortization 50,631 106,108 49,200 205,939 Three Months Ended August 31, 2001 Total revenues $ 1,425,329 $ 3,570,164 $ -- $ 4,995,493 Intersegment revenues -- (305,802) -- (305,802) Revenue from external customers 1,425,329 3,264,362 -- 4,689,691 Segment profit (loss) 383,568 1,098,370 (504,490) 977,448 Total assets 2,073,784 9,784,662 4,955,457 16,813,903 Capital expenditures 8,605 55,743 43,853 108,201 Total depreciation & amortization 66,010 112,114 51,201 229,325
Six Months Ended Franchising Manufacturing Other Total August 31, 2002 Total revenues $ 2,820,061 $ 6,615,488 $ -- $ 9,435,549 Intersegment revenues -- (396,850) -- (396,850) Revenue from external customers 2,820,061 6,218,638 -- 9,038,699 Segment profit (loss) 954,614 1,885,643 (1,111,530) 1,728,727 Total assets 2,018,023 10,500,869 5,335,837 17,854,729 Capital expenditures 41,571 95,114 17,641 154,326 Total depreciation & amortization 101,263 212,322 98,400 411,985 Six Months Ended August 31, 2001 Total revenues $ 3,072,556 $ 6,437,231 $ -- $ 9,509,787 Intersegment revenues -- (587,322) -- (587,322) Revenue from external customers 3,072,556 5,849,909 -- 8,922,465 Segment profit (loss) 829,520 1,860,382 (1,148,409) 1,541,493 Total assets 2,073,784 9,784,662 4,955,457 16,813,903 Capital expenditures 53,936 119,606 276,949 450,491 Total depreciation & amortization 133,436 219,945 100,302 453,683
8 NOTE 8 - STORE SALES In connection with the Company's plans to phase out its Company-owned stores, the Company sold ten Company-owned stores in fiscal 2002 resulting in sales proceeds consisting of cash and notes receivable of approximately $1.2 million and recognized and deferred gains of approximately $124,000 and $386,000, respectively. In connection with the Company's plans to phase out its Company-owned stores, the Company sold eighteen Company-owned stores in fiscal 2001 resulting in sales proceeds consisting of cash and notes receivable of approximately $2.3 million and recognized and deferred gains of approximately $542,000 and $193,000, respectively. At August 31, 2002, the Company has $3,260,000 of notes receivable outstanding. The notes require monthly payments and bear interest at rates ranging from 7.25% to 12.5%. The notes mature through February 2006 and are secured by the assets of the sold stores. Of the notes receivable outstanding at August 31, 2002, $2,478,000 are from a single franchisee. These notes require variable monthly payments, bear interest at rates ranging from 7.25% to 12.0% and mature in February 2005. During fiscal 2002 the Company adjusted the repayment schedule of these notes to correspond to the franchisee's store operating cycles. The Company also financed an additional $300,000 of inventory and wrote-off $189,000 of the notes receivable. During fiscal 2003 the Company financed $230,000 for an additional store for the franchisee. NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS Effective March 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, SFAS 142, Goodwill and Intangible Assets and SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets. In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal Activities. SFAS 142 revised the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, will be tested for impairment annually and also in the event of an impairment indicator, and must be assigned to reporting units for purposes of impairment testing and segment reporting. The Company has historically amortized goodwill on the straight-line method over ten to twenty-five years. Beginning March 1, 2002, quarterly and annual goodwill amortization is no longer recognized. The Company completed a transitional fair value based impairment test of goodwill as of March 1, 2002. There were no impairment losses resulting from the transitional testing. The Company has two reports units with goodwill - Franchising and Manufacturing - which also are reportable segments. There were no changes to carrying amounts of goodwill for the six months ended August 31, 2002. Intangible assets consist of the following:
August 31, 2002 February 28, 2002 (unaudited) Amortization Gross Accumulated Gross Accumulated Period Carrying Amortization Carrying Amortization Value Value Intangible assets subject to amortization Store design 10 Years $ 173,391 $ 14,468 $ 149,883 $ 7,234 Packaging licenses 5 Years 95,831 45,027 95,831 28,383 Packaging design 10 Years 399,753 26,812 366,932 8,427 Total 668,975 86,307 612,646 44,044 Intangible assets not subject to amortization Franchising segment-Goodwill 1,235,000 534,529 1,235,000 534,529 Manufacturing segment-Goodwill 295,000 197,682 295,000 197,682 Total Goodwill 1,530,000 732,211 1,530,000 732,211 Total intangible assets $2,198,975 $ 818,518 $2,142,646 $ 776,255
9 Amortization expense related to intangible assets totaled $42,263 and $12,837 during the six months ended August 31, 2002 and 2001. The aggregate estimated amortization expense for intangible assets remaining as of August 31, 2002 is as follows: Remainder of fiscal 2003 $ 45,668 2004 87,200 2005 52,200 2006 52,200 2007 52,200 Thereafter 293,200 Total $582,668
Net income and earnings per share for the six months ended August 31, 2002 and 2001 adjusted to exclude goodwill amortization is as follows:
Three months ended Six Months ended August 31, August 31, 2002 2001 2002 2001 Reported net income $615,840 $607,973 $1,075,267 $958,808 Goodwill amortization, net of tax -- 18,288 -- 36,576 Adjusted net income $615,840 $626,261 $1,075,267 $995,384 Basic earnings per share: Reported net income $ .25 $ .25 $ .43 $ .39 Goodwill amortization, net of tax -- -- -- .01 Adjusted net income $ .25 $ .25 $ .43 $ .40 Diluted earnings per share: Reported net income $ .23 $ .23 $ .39 $ .37 Goodwill amortization, net of tax -- .01 -- .01 Adjusted net income $ .23 $ .24 $ .39 $ .38
SFAS 141 eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The implementation of this standard did not have an effect on the Company's financial position, results of operations or cash flows. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The implementation of this standard did not have an effect on the Company's financial position, results of operations or cash flows. SFAS 146 nullifies FASB Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the Financial Accounting Standards Board's conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. The Company does not expect SFAS 146 to have a material effect on the Company's financial position or results of operations. 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 to its product introductions and promotional programs. As of August 31, 2002, the Company has notes receivable of approximately $2.5 million outstanding from a single franchisee. The franchisee is delinquent in payment of principal and interest but is working with the Company to make payment. The notes are collateralized by the franchisee's underlying store assets, certain of which are now under Company control and which are being offered for sale to satisfy the debt. Recovery of the net carrying value of these notes is dependent upon, among other factors, the ability of the Company and the franchisee to sell certain of these assets at prices equivalent to those historically received by the Company and franchisees in comparable sales, the proceeds of which will be applied to amounts due under the notes. Whether these assets can be sold at these estimated fair market values depends on factors not within the control of the franchisee or the Company. Although there is no assurance that these stores will be sold, based on internal analysis by the Company, it believes that they will be sold at such prices within the next six to twelve months. As a result, the actual results realized by the Company could differ materially from results discussed in or contemplated by the forward-looking statements made herein including seasonality, consumer interest in the Company's products, general economic conditions, consumer trends, costs and availability of raw materials, competition and the effect of government regulation. 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, 2002 COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 2001 Net income was $616,000 for the three months ended August 31, 2002, or $.25 per basic share, versus $608,000, or $.25 per basic share, for the three months ended August 31, 2001.
Three Months Ended August 31, % ($'s in thousands) 2002 2001 Change Change Factory sales $3,589.5 $3,264.3 $325.2 10.0% Retail sales 387.1 383.7 3.4 0.9% Franchise fees 80.5 116.1 (35.6) (30.7%) Royalty and Marketing fees 1,009.3 925.6 83.7 9.0% Total $5,066.4 $4,689.7 $376.7 8.0%
11 Factory Sales Factory sales increased $325,000 or 10.0%, to $3.6 million in the second quarter of fiscal 2003, compared to $3.3 million in the second quarter of fiscal 2002. The increase in factory sales was due primarily to an increase of 103% in factory sales to customers outside the Company's system of franchised retail stores and an increase in the number of franchised stores in operation in the second quarter of fiscal 2003 versus the second quarter of 2002. These increases were partially offset by a decrease of 4.6% in same store pounds purchased by the franchise system. Retail Sales Retail sales increased $3,400 or 0.9%, to $387,000 in the second quarter of fiscal 2003 compared to $384,000 in the second quarter of fiscal 2002. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $84,000, or 9.0%, to $1.0 million in the second quarter of fiscal 2003, compared to $926,000 in the second quarter of fiscal 2002. This increase resulted from growth in the average number of franchised stores in operation in the second quarter of fiscal 2003 versus the same period last year. Same store sales were down at franchised stores by 3.8%. Franchise fee revenues decreased in the second quarter of fiscal 2003 due to a decrease in the number of franchises sold versus the second quarter of fiscal 2002. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 62.9% in the second quarter of fiscal 2003 from 58.2% in the second quarter of fiscal 2002. The increase resulted from increased factory sales, which generate lower margins than retail sales, and a decrease in factory margins to 34.3% in fiscal 2003 from 39.7% in the second quarter of fiscal 2002. The decrease in factory margins is due primarily to decreased production efficiencies due to lower than planned production levels, decreased trucking contribution due to lower than planned shipping volume and increased commodity costs. Company-owned store margins for the second quarter of 2003 increased to 63.4% compared to 59.7% in the second quarter of fiscal 2002 due to changes in mix of product sold. Franchise Costs Franchise costs decreased 15.4% from $363,000 in the second quarter of fiscal 2002 to $307,000 in the second quarter of fiscal 2003. The decrease is due primarily to more focused advertising. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 28.2% in the second quarter of fiscal 2003 from 34.8% in the second quarter of fiscal 2002. This decrease as a percentage of royalty, marketing and franchise fees is the combined result of decreased franchise costs and increased revenue. Sales and Marketing Sales and Marketing expenses of 323,000 in the second quarter of fiscal 2003 were comparable to the second quarter of fiscal 2002. General and Administrative General and administrative expenses increased 21.9% to $498,000 in the second quarter of fiscal 2003 from $408,000 in the second quarter of fiscal 2002 primarily due to increased professional fees and personnel costs. As a percentage of total revenues, general and administrative expenses increased to 9.8% in fiscal 2003 compared to 8.7% in fiscal 2002. 12 Retail Operating Expenses Retail operating expenses decreased 2.2% from $219,000 in the second quarter of fiscal 2002 to $214,000 in the second quarter of fiscal 2003. This decrease was due primarily to a decrease in administration costs for Company-owned stores. Retail operating expenses, as a percentage of retail sales, decreased from 57.0% in the second quarter of fiscal 2002 to 55.3% in the second quarter of fiscal 2003 due to more efficient operations. Depreciation and Amortization Depreciation and amortization decreased 10.2% to $206,000 in the second quarter of fiscal 2003 from $229,000 in the second quarter of fiscal 2002. The decrease in depreciation and amortization is due primarily to suspension of amortization expense ($29,000 quarterly) for goodwill beginning March 1, 2002. Goodwill has historically been amortized on the straight-line method over ten to twenty-five years. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible Assets, which revised the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but will be tested for impairment annually, and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 on March 1, 2002. Other Expense Other expense of $29,000 incurred in the second quarter of fiscal 2003 decreased 35.9% from the $45,000 incurred in the second quarter of fiscal 2002 due primarily to lower interest expense on lower average outstanding amounts of and rates on debt. Income Tax Expense The Company's effective income tax rate in the second quarter of fiscal 2003 was 37.8%, which is approximately the same rate as the second quarter of fiscal 2002. SIX MONTHS ENDED AUGUST 31, 2002 COMPARED TO THE SIX MONTHS ENDED AUGUST 31, 2001 Net income was $1,075,000 for the six months ended August 31, 2002, or $.43 per basic share, versus $959,000, or $.39 per basic share, for the six months ended August 31, 2001. Revenues
Six Months Ended August 31, % ($'s in thousands) 2002 2001 Change Change Factory sales $6,218.6 $5,849.9 $368.7 6.3% Retail sales 708.8 961.5 (252.7) (26.3%) Franchise fees 236.5 403.2 (166.7) (41.3%) Royalty and Marketing fees 1,874.8 1,707.9 166.9 9.8% Total $9,038.7 $8,922.5 $116.2 1.3%
Factory Sales Factory sales increased $369,000, or 6.3%, to $6.2 million in the first six months of fiscal 2003, compared to $5.8 million in the first six months of fiscal 2002. The increase in factory sales was due primarily to an increase of 85% in factory sales to customers outside the Company's system of franchised retail stores and an increase in the number of franchised stores in operation in the second quarter of fiscal 2003 versus the second quarter of 2002. These increases were partially offset by a decrease of 7.2% in same store pounds purchased by the franchise system. 13 Retail Sales Retail sales decreased $253,000, or 26.3%, to $709,000 in the first six months of fiscal 2003 compared to $962,000 in the first six months of fiscal 2002. This decrease resulted from a decrease in the average number of stores in operation in the first six months of fiscal 2003 (4) versus the same period last year (6). The decrease in the average number of stores in operation is due to completion of the Company's plan to convert its Company-owned stores to franchise-owned stores. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $167,000, or 9.8% to $1.9 million in the first six months of fiscal 2003, compared to $1.7 million in the first six months of fiscal 2002. This increase resulted from growth in the average number of franchised stores in operation in the first six months of fiscal 2003 versus the same period last year. Same store sales decreased minimally at franchised stores by 2.3%. Franchise fee revenues decreased in the first six months of fiscal 2003 due to a decrease in the number of franchises sold versus the first six months of fiscal 2002. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 61.2% in the first six months of fiscal 2003 from 58.9% in the first six months of fiscal 2002. This increase resulted from increased factory sales, which generate lower margins than retail sales, and a decrease in factory margins to 36.1% in fiscal 2003 from 38.1% in fiscal 2002. The decrease in factory margins is due primarily to decreased production efficiencies due to lower than planned production levels, decreased trucking contribution due to lower than planned shipping volumes and increased commodity costs. Company-owned store margins for the first six months of 2003 improved to 62.5% compared to 59.3% in the first six months of fiscal 2002 due to changes in mix of product sold. Franchise Costs Franchise costs decreased 12.5% from $684,000 in the first six months of fiscal 2002 to $599,000 in the first six months of fiscal 2003. The decrease is due primarily to more focused advertising and lower personnel costs. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 28.4% in the first six months of fiscal 2003 from 32.4% in the first six months of fiscal 2002. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of decreased franchise costs. Sales and Marketing Sales and Marketing increased 4.3% to $637,000 in the first six months of fiscal 2003 from $611,000 in the first six months of fiscal 2002. The increase is due primarily to increased personnel costs in support of franchisee marketing efforts. General and Administrative General and administrative expenses increased 4.5% to $966,000 in the first six months of fiscal 2002 from $925,000 in the first six months of fiscal 2002. The increase is due primarily to increased professional fees. As a percentage of total revenues, general and administrative expenses increased to 10.7% in fiscal 2003 compared to 10.4% in fiscal 2002. This increase, as a percentage of total revenues, resulted from increased general and administrative costs and a 1.3% increase in total revenues. 14 Retail Operating Expenses Retail operating expenses decreased from $578,000 in the first six months of fiscal 2002 to $413,000 in the first six months of fiscal 2003, representing a decrease of 28.6%. This decrease was due primarily to a decrease in the average number of stores in operation during the first six months of fiscal 2003 (4) versus the first six months of fiscal 2002(6). Retail operating expenses, as a percentage of retail sales, decreased from 60.0% in the first six months of fiscal 2002 to 58.2% in the first six months of fiscal 2003 due to a change in mix of stores in operation and related seasonality. Depreciation and Amortization Depreciation and amortization decreased 9.2% to $412,000 in the first six months of fiscal 2003 from $454,000 in the first six months of fiscal 2002. The decrease in depreciation and amortization is due primarily to suspension of amortization expense ($29,000 quarterly) for goodwill beginning March 1, 2002. Goodwill has historically been amortized on the straight-line method over ten to twenty-five years. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible Assets, which revised the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but will be tested for impairment annually, and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 on March 1, 2002. Other Expense Other expense of $47,000 incurred in the first six months of fiscal 2003 represents a 60.6% decline from the $119,000 incurred in the first six months of fiscal 2002 due primarily to lower interest expense on lower average outstanding amounts of and rates on debt. Income Tax Expense The Company's effective income tax rate in the first six months of fiscal 2003 was 37.8%, which is approximately the same rate as the first six months of fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES As of August 31, 2002, working capital was $4.8 million, compared with $3.9 million as of February 28, 2002, an increase of $0.9 million. The increase in working capital was primarily due to operating results. Cash and cash equivalent balances decreased from $165,000 as of February 28, 2002 to $108,000 as of August 31, 2002 as a result of cash flows used by investing activities in excess of cash flows provided by financing and operating activities. The Company's current ratio was 2.37 to 1 at August 31, 2002 in comparison with 2.27 to 1 at February 28, 2002. 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, 2002 of $2.0 million), and chattel mortgage notes (unpaid balance as of August 31, 2002 of $2.9 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 $2.5 million ($1.9 million available as of August 31, 2002) 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, 2003. 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 2003. 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, 2002, none of the Company's long-term debt was subject to a variable interest rate. The Company also has a $2.5 million bank line of credit that bears interest at a variable rate. As of August 31, 2002, $560,000 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. Item 4. Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect 16 these controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 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 and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The 2002 Annual Meeting of the Shareholders of the Company was held in Durango, Colorado on July 19, 2002. The matter voted on by the stockholders was the election of Franklin E. Crail, Bryan J. Merryman, Gerald A. Kien, Lee N. Mortenson, Fred M. Trainor and Clyde Wm. Engle as directors of the Company. No nominee received less than 98.8% of the shares voted. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K A. Exhibits 99.1 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer 99.2 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Financial Officer B. Reports on Form 8-K None Signature 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 14, 2002 /s/ Bryan J. Merryman ----------------------------------------------- Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer and Director 17 Certifications: I, Franklin E. Crail, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rocky Mountain Chocolate Factory, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 14, 2002 /s/ Franklin E. Crail ----------------------------------------------------- Franklin E. Crail, President, Chief Executive Officer and Chairman of the Board of Directors 18 Certifications: I, Bryan J. Merryman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rocky Mountain Chocolate Factory, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and d) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and c) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 14, 2002 /s/ Bryan J. Merryman ----------------------------------------------- Bryan J. Merryman, Chief Operating Officer Chief Financial Officer, Treasurer and Director 19 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 99.1 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer 99.2 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Financial Officer
EX-99.1 3 d00393exv99w1.txt CERTIFICATION PURSUANT TO SECTION 906 (CEO) Exhibit 99.1 Certification of Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Rocky Mountain Chocolate Factory, Inc. (the "Company") on Form 10-Q for the quarterly period ended August 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: October 14, 2002 By /s/ Franklin E. Crail ---------------------------------------------- Franklin E. Crail, President, Chief Executive Officer and Chairman of the Board of Directors EX-99.2 4 d00393exv99w2.txt CERTIFICATION PURSUANT TO SECTION 906 (CFO) Exhibit 99.2 Certification of Chief Financial Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Rocky Mountain Chocolate Factory, Inc. (the "Company") on Form 10-Q for the quarterly period ended August 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: October 14, 2002 By /s/ Bryan J. Merryman ------------------------------------------------- Bryan J. Merryman, Chief Operating Officer, Chief Financial Officer, Treasurer and Director -----END PRIVACY-ENHANCED MESSAGE-----