-----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, MFOjUhPQlAzr8780pp76Zg1D6rq9WQDVP56+j0QwX/IZnwk7sf2LgcrVsCcyocOS AZp8hgR7iGL06zVM/2m7uA== 0001047469-97-000440.txt : 19971014 0001047469-97-000440.hdr.sgml : 19971014 ACCESSION NUMBER: 0001047469-97-000440 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971010 SROS: NASD 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: 97694176 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 10-Q 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, 1997 ---------------- 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 or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 265 TURNER DRIVE, DURANGO, CO 81301 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (970) 259-0554 -------------- (Registrant's telephone number, including area code) Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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 . --- --- At October 6, 1997 there were 2,912,449 shares of common stock outstanding. This document contains 23 pages including exhibits. The exhibit index is located on page 19. 1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FORM 10-Q FOR THE QUARTER ENDED August 31, 1997 TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................... 19 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Page No. -------- Financial Statements Balance Sheets - August 31, 1997(unaudited) and February 28, 1997............................................... 4 Statements of Income - Six-month periods ended August 31, 1997 (unaudited) and August 31, 1996 (unaudited)..................................... 6 Statements of Income - Three-month periods ended August 31, 1997 (unaudited) and August 31, 1996 (unaudited)..................................... 7 Statements of Cash Flows Six-month periods ended August 31, 1997 (unaudited) and August 31, 1996 (unaudited)..................................... 8 Statements of Cash Flows Three-month periods ended August 31, 1997 (unaudited) and August 31, 1996 (unaudited)..................................... 9 3 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS August 31, February 28, 1997 1997 ----------- ------------ ASSETS (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 2,322,345 $ 792,606 Accounts and notes receivable - trade, less allowance for doubtful accounts of $215,249 at August 31 and $202,029 at February 28 1,711,002 1,729,971 Inventories 2,782,310 2,311,321 Deferred tax asset 722,595 722,595 Other 249,262 181,133 ----------- ----------- Total current assets 7,787,514 5,737,626 PROPERTY AND EQUIPMENT - AT COST Land 122,558 122,558 Building 3,665,581 3,644,357 Leasehold improvements 2,110,206 2,213,116 Machinery and equipment 6,550,031 6,446,612 Furniture and fixtures 2,269,891 2,667,420 Transportation equipment 266,953 246,499 ----------- ----------- 14,985,220 15,340,562 Less accumulated depreciation and amortization 4,072,176 3,565,194 ----------- ----------- 10,913,044 11,775,368 OTHER ASSETS Notes and accounts receivable due after one year 399,789 82,774 Goodwill, net of accumulated amortization of $295,271 at August 31 and $277,344 at February 28 539,729 312,656 Deferred income taxes 43,044 43,044 Other 597,821 638,637 ----------- ----------- 1,580,383 1,077,111 ----------- ----------- $20,280,941 $18,590,105 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these statements. 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS - CONTINUED August 31, February 28, 1997 1997 ----------- ------------ LIABILITIES AND EQUITY (Unaudited) CURRENT LIABILITIES Current maturities of long-term debt 1,076,600 847,881 Accounts payable - trade 1,048,968 799,671 Accrued compensation 570,967 465,338 Accrued liabilities 777,569 867,961 Income taxes payable 264,282 - Deferred income - 93,000 ----------- ----------- Total current liabilities 3,738,386 3,073,851 LONG-TERM DEBT, less current maturities 6,181,086 5,737,312 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Common stock - authorized 7,250,000 shares, $.03 par value; issued 3,034,302 shares at August 31 and at February 28 91,239 91,239 Additional paid-in capital 9,731,307 9,730,872 Retained earnings 1,554,492 972,565 ----------- ----------- 11,377,038 10,794,676 Less common stock held in treasury, at cost - 128,853 shares at August 31, and 129,003 at February 28 1,015,569 1,015,734 ----------- ----------- 10,361,469 9,778,942 ----------- ----------- $20,280,941 $18,590,105 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these statements. 5 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME (unaudited) Six-month periods ended -------------------------- August 31, 1997 1996 ------------ ----------- REVENUES Sales of candy $ 11,072,021 $ 9,634,395 Franchise and royalty fees 1,589,111 1,382,463 ------------ ----------- 12,661,132 11,016,858 ------------ ----------- COSTS AND EXPENSES Cost of sales 5,267,223 4,741,650 Franchise costs 1,102,346 994,482 General and administrative 840,416 868,003 Retail operating expenses 4,210,661 3,497,583 ------------ ----------- 11,420,646 10,101,718 ------------ ----------- Operating income 1,240,486 915,140 OTHER INCOME (EXPENSE) Interest expense (337,473) (198,024) Interest income 45,524 19,111 ------------ ----------- (291,949) (178,913) INCOME BEFORE INCOME TAX EXPENSE 948,537 736,227 INCOME TAX EXPENSE Provision for income taxes 366,610 277,560 ------------ ----------- INCOME ALLOCABLE TO COMMON STOCKHOLDERS $ 581,927 $ 458,667 ------------ ----------- ------------ ----------- INCOME PER COMMON AND EQUIVALENT SHARE $ .20 $ .16 ------------ ----------- ------------ ----------- Weighted average and equivalent shares 2,924,701 2,951,286 ------------ ----------- ------------ ----------- The accompanying notes are an integral part of these statements. 6 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME (unaudited) Three-month periods ended ------------------------- August 31, 1997 1996 ---------- ----------- REVENUES Sales of candy 6,039,657 $5,374,541 Franchise and royalty fees 814,000 679,424 ---------- ----------- 6,853,657 6,053,965 ---------- ----------- COSTS AND EXPENSES Cost of sales 2,829,666 2,637,725 Franchise costs 556,064 509,015 General and administrative 416,266 453,945 Retail operating expenses 2,107,010 1,875,627 ---------- ----------- 5,909,006 5,476,312 ---------- ----------- Operating income 944,651 577,653 OTHER INCOME (EXPENSE) Interest expense (169,815) (112,810) Interest income 30,065 8,397 ---------- ----------- (139,750) (104,413) INCOME BEFORE INCOME TAX EXPENSE 804,901 473,240 INCOME TAX EXPENSE Provision for income taxes 311,095 178,410 ---------- ----------- INCOME ALLOCABLE TO COMMON STOCKHOLDERS $ 493,806 $ 294,830 ---------- ----------- ---------- ----------- INCOME PER COMMON AND EQUIVALENT SHARE $ .17 $ .10 ---------- ----------- ---------- ----------- Weighted average and equivalent shares 2,926,416 2,964,283 ---------- ----------- ---------- ----------- The accompanying notes are an integral part of these statements. 7 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS (unaudited) Six-month periods ended -------------------------- August 31, 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 581,927 $ 458,667 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 889,023 803,802 Gain on sale of assets (53,164) (84,610) Changes in operating assets and liabilities: Notes and accounts receivable (298,046) 95,172 Inventories (470,989) (581,051) Other assets (68,129) (53,981) Accounts payable 249,297 211,873 Income taxes payable 264,282 43,684 Accrued liabilities 15,237 121,189 Deferred income (93,000) - ---------- ---------- Net cash provided by operating activities 1,016,438 1,014,745 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 596,978 310,690 Additions to other long-term assets (94,838) (168,914) Purchase of property and equipment (661,932) (2,807,431) ---------- ---------- Net cash provided by(used in) investing activities (159,792) (2,665,655) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of treasury stock 600 - Proceeds from long-term debt 1,132,043 5,612,005 Principal payments on long-term debt (459,550) (2,470,535) Principal payments on line of credit - (1,000,000) ---------- ---------- Net cash provided by financing activities 673,093 2,141,470 ---------- ---------- NET INCREASE(DECREASE) IN CASH: 1,529,739 490,560 Cash and cash equivalents at beginning of period 792,606 528,787 ---------- ---------- Cash and cash equivalents at end of period $2,322,345 $1,019,347 ---------- ---------- ---------- ---------- CASH PAID DURING THE PERIOD FOR: Interest $ 324,158 $ 197,997 ---------- ---------- ---------- ---------- Income taxes $ (94,198) $ 260,681 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these statements. 8 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS (unaudited) Three-month periods ended -------------------------- August 31, 1997 1996 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 493,806 $ 294,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 430,025 423,738 Gain on sale of assets (40,650) (32,954) Changes in operating assets and liabilities: Notes and accounts receivable (243,348) 222,471 Inventories (340,882) (337,171) Other assets 3,329 303,526 Accounts payable 313,697 (69,062) Income taxes payable 220,568 86,715 Accrued liabilities (27,332) (42,898) ---------- ---------- Net cash provided by operating activities 809,213 849,195 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 419,870 155,190 Additions to other long-term assets (104,212) (132,781) Purchase of property and equipment (556,989) (1,610,795) ---------- ---------- Net cash (used in) investing activities (241,331) (1,588,386) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of treasury stock 600 - Proceeds from long-term debt 373,773 952,539 Principal payments on long-term debt (243,603) (115,506) ---------- ---------- Net cash provided by financing activities 130,770 837,033 ---------- ---------- NET INCREASE(DECREASE)IN CASH: 698,652 97,842 Cash and cash equivalents at beginning of period 1,623,693 921,505 ---------- ---------- Cash and cash equivalents at end of period $2,322,345 $1,019,347 ---------- ---------- ---------- ---------- CASH PAID DURING THE PERIOD FOR: Interest $ 168,131 $ 111,199 ---------- ---------- ---------- ---------- Income taxes $ 53,100 $ 105,967 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these statements. 9 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS August 31, 1997 1. The interim financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended February 28, 1997. 2. These statements reflect all adjustments which, in the opinion of Management, are necessary for a fair presentation of the information contained therein. Results of operations for interim periods are not necessarily indicative of annual results. 3. Inventories consist of the following: August 31, 1997 February 28, 1997 --------------- ----------------- Ingredients and supplies $1,342,302 $1,168,216 Finished candy 1,440,008 1,143,105 ---------- ---------- $2,782,310 $2,311,321 ---------- ---------- ---------- ---------- 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Rocky Mountain Chocolate Factory, Inc. is a manufacturer, franchiser and operator of two retail concepts; Rocky Mountain Chocolate FactoryTM and Fuzziwig's Candy FactoryTM. Headquartered in Durango, Colorado, the Company manufactures an extensive line of premium chocolate candies and other confectionery products for sale at its franchised and company-owned Rocky Mountain Chocolate Factory Stores. Fuzziwig's Candy Factory is a new concept store that sells hard conventional and nostalgic/unusual candies (which are not manufactured by the Company, but procured from wholesale candy suppliers) in a themed, self-serve environment featuring animation, movement, music, color and entertainment. The Company derives its revenues from four principal sources: (1) factory sales, which consist of candy sales to its franchised store locations; (2) retail sales, which consist of candy sales at retail by its company-owned stores; (3) franchise fees, which consist of fees earned from the sale of franchises; and (4) royalties and marketing fees. RESULTS OF OPERATIONS QUARTER ENDED AUGUST 31, 1997 COMPARED TO QUARTER ENDED AUGUST 31, 1996 The following table sets forth, for the periods indicated, certain unaudited financial information and other operating data related to the Company's operation: (ALL AMOUNTS OTHER THAN STORE DATA IN THOUSANDS) SECOND QUARTER SECOND QUARTER $ % FISCAL 1998 FISCAL 1997 CHANGE CHANGE ----------- ------------ ------ ------ REVENUE COMPONENT Factory Sales $2,281.2 $2,171.5 $109.7 5.1% Retail Sales 3,758.4 3,203.0 555.4 17.3 Franchise Fees 87.0 52.1 34.9 67.0 Royalties/Marketing fees 727.0 627.4 99.6 15.9 -------- -------- ------ ----- Total $6,853.6 $6,054.0 $799.6 13.2% -------- -------- ------ ----- STORE DATA ---------- ROCKY MOUNTAIN CHOCOLATE FACTORY FUZZIWIG'S ---------------------- ----------------------- AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 1997 1996 1997 1996 ------ ------ ------ ------ Number Of Stores Open At End Of Period: Company 34 45 12 7 Franchised 179 167 2 0 --- --- -- -- Total 213 212 14 7 --- --- -- -- --- --- -- -- 11 REVENUES FACTORY SALES. Factory sales increased $109,700 or 5.1% to $2.3 million in the second quarter of fiscal 1998, compared to $2.2 million in the second quarter of fiscal 1997. This increase resulted from the larger number of franchised stores in existence throughout the quarter, augmented by the impact of a 2.8% price increase effected in April of 1997. Same store pounds purchased from the factory by franchised stores declined by 2.9% in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997 partially offsetting the impact of increased stores and increased price. When computing same store pounds purchased from the factory, purchases by stores open for 3 months in each period are compared. The decline in same store pounds purchased from the factory is believed to have resulted primarily from an increase in the mix of store-made product and product purchased from authorized vendors relative to factory-made products sold at franchised stores. RETAIL SALES. Retail sales increased $555,400 or 17.3% to $3.8 million in the second quarter of fiscal 1998, compared to $3.2 million in the second quarter of fiscal 1997. This increase resulted primarily from a larger number of Company-owned store operating months, particularly of higher revenue Fuzziwig's stores, in the current year quarter relative to last year together with the impact of a 4.2% same store sales increase and an approximate 2% price increase at Company-owned stores. ROYALTIES/MARKETING FEES AND FRANCHISE FEES. Royalties and marketing fees increased $99,600 or 15.9% to $727,000 in the second quarter of fiscal 1998, compared to $627,400 in the second quarter of fiscal 1997. This increase resulted from increased royalty income from a larger number of franchised stores operating in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997, as augmented by the effect of an increase in same store sales at franchised stores of 7.8%. Franchise fee revenues in the second quarter of fiscal 1998 increased from that earned in the second quarter of fiscal 1997 ($87,000 in comparison with $52,100). Franchise signings increased to 5 in the second quarter of fiscal 1998 from 3 in the second quarter of fiscal 1997. Increased balance due collections on franchises previously signed also resulted in the increased franchise fee revenue earned for the quarter. COSTS AND EXPENSES COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs incurred by the Company to manufacture candy sold by its Company-owned stores and to its franchised stores, increased 7.3% to $2.8 million in the second quarter of fiscal 1998 from $2.6 million in the second quarter of fiscal 1997. Cost of chocolate sales as a percentage of revenue decreased to 46.9% in the second quarter of fiscal 1998 from 49.1% in the second quarter of fiscal 1997. This improvement resulted from an increase in higher margin retail sales as a percentage of total revenue and by an increase in factory margins from those existing in the second quarter of fiscal 1997. Company-owned store margins for the quarter improved 2% absolute as a result of an increase in retail price, a focus on higher margin products and enhanced loss prevention measures. Factory margins improved as a result of a 2.8% price increase and improved factory efficiencies. 12 FRANCHISE COSTS. Franchise costs increased 9.2% from $509,000 in the second quarter of fiscal 1997 to $556,000 in the second quarter of fiscal 1998. As a percentage of the total of royalty and marketing fees and franchise fee revenue, franchise costs decreased to 68.3% of such fees in the second quarter of fiscal 1998 from 74.9% in the second quarter of fiscal 1997. Expenses of a newly formed Product Sales Development department devoted to the improvement of total factory sales and in same-store pounds sold from the factory is the primary cause of the absolute increase. Strongly increased royalty and marketing fees revenue is the primary cause of the decrease in relative percentage. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased 8.3% from $454,000 in the second quarter of fiscal 1997 to $416,000 in the second quarter of fiscal 1998, primarily as a result of the effect of reduced bad debt expense. As a percentage of total revenues, general and administrative expense declined from 7.5% in the second quarter of fiscal 1997 to 6.1% in the second quarter of fiscal 1998, primarily due to a significant increase in total revenues, without a proportionate increase in general and administrative expenses. RETAIL OPERATING EXPENSES. Retail operating expenses increased from $1.9 million in the second quarter of fiscal 1997 to $2.1 million in the second quarter of fiscal 1998; an increase of 12.3%. This increase resulted largely from the effect of the larger number of Company-owned store operating months as discussed above. As a percentage of retail sales, retail operating expenses decreased from 58.6% in the second quarter of fiscal 1997 to 56.1% in the second quarter of fiscal 1998 as a result of increased sales volume leveraging resulting from the increase in same store retail sales at Company-owned stores discussed above, and as a result of shutdown earlier in the year of Company-owned stores with poor operating economics. The Company is currently performing an assessment of its Fuzziwig's new concept store program as a basis for determining future scope and potential of the program. The Company has tentatively concluded that it will cease further Fuzziwig's store additions. OTHER EXPENSE Other expense of $140,000 incurred in the second quarter of fiscal 1998 increased 34.6% from the $104,000 incurred in the second quarter of fiscal 1997. This increase resulted from increased interest expense caused by borrowings in support of the Company's fiscal 1997 Company-owned store expansion. INCOME TAX EXPENSE The Company's effective income tax rate in the second quarter of fiscal 1997 was 37.7% in comparison with the 38.7% in the second quarter of fiscal 1998. The increase resulted from utilization of remaining available state net operating loss carryforwards in fiscal 1997. 13 RESULTS OF OPERATIONS FIRST HALF ENDED AUGUST 31, 1997 COMPARED TO FIRST HALF ENDED AUGUST 31, 1996 (ALL AMOUNTS OTHER THAN STORE DATA IN THOUSANDS) FIRST HALF FIRST HALF $ % FISCAL 1998 FISCAL 1997 CHANGE CHANGE ----------- ----------- ------ ------ REVENUE COMPONENT Factory Sales $ 4,115.5 $ 3,899.6 $ 215.9 5.5% Retail Sales 6,956.5 5,734.8 1,221.7 21.3 Franchise Fees 290.5 245.7 44.8 18.2 Royalties/Marketing fees 1,298.6 1,136.8 161.8 14.2 --------- --------- -------- ----- Total $12,661.1 $11,016.9 1,644.2 14.9% --------- --------- -------- ----- STORE DATA ---------- ROCKY MOUNTAIN CHOCOLATE FACTORY FUZZIWIG'S ---------------------- ----------------------- AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 1997 1996 1997 1996 ------ ------ ------ ------ Number Of Stores Open At End Of Period: Company 34 45 12 7 Franchised 179 167 2 0 --- --- -- -- Total 213 212 14 7 --- --- -- -- --- --- -- -- REVENUES FACTORY SALES. Factory sales increased $215,900 or 5.5% to $4.1 million in the first half of fiscal 1998, compared to $3.9 million in the first half of fiscal 1997. This increase resulted from the larger number of franchised stores in existence throughout the half, augmented by the impact of a 2.8% price increase effected in April of 1997. Same store pounds purchased from the factory by franchised stores declined by 2.1% in the first half of fiscal 1998 compared to the first half of fiscal 1997 partially offsetting the impact of increased stores and increased price. When computing same store pounds purchased from the factory, purchases by stores open for 6 months in each period are compared. This decline in same store pounds purchased is believed to have resulted primarily from a shift in the mix of product retail sales by franchised store locations to more store-made product and product purchased from authorized vendors and away from product manufactured by the Company. 14 RETAIL SALES. Retail sales increased $1.2 million or 21.3% to $7.0 million in the first half of fiscal 1998, compared to $5.7 million in the first half of fiscal 1997. This increase resulted primarily from an increased number of Company-owned store operating months in the current year half relative to the prior year augmented by the impact of a 3.9% same store sales increase at Company-owned stores and a retail price increase. ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing fees increased $162,000 or 14.2% to $1.3 million in the first half of fiscal 1998, compared to $1.1 million in the first half of fiscal 1997. This increase resulted from increased royalty income from a larger number of franchised stores operating in the first half of fiscal 1998 compared to the first half of fiscal 1997, augmented by the effect of an increase in same store sales at franchised stores of 5.6%. Franchise fee revenues in the first half of fiscal 1998 increased from that earned in the first half of fiscal 1997 ($291,000 in comparison with $246,000). Franchise signings increased to 14 in the first half of fiscal 1998 from 9 in the first half of 1997. Increased balance due collections on franchises previously signed also resulted in the increased franchise fee revenue earned for the first half. COSTS AND EXPENSES COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs incurred by the Company to manufacture candy sold by its Company-owned stores and to its franchised stores, increased 11.1% to $5.3 million in the first half of fiscal 1998 from $4.7 million in the first half of fiscal 1997. Cost of chocolate sales as a percentage of revenue decreased to 47.6% in the first half of fiscal 1998 from 49.2% in the first half of fiscal 1997. This improvement resulted from an increase in higher margin retail sales as a percentage of total revenue together with the impact of improved factory margins. FRANCHISE COSTS. Franchise costs increased 10.8% from $994,000 in the first half of fiscal 1997 to $1.1 million in the first half of fiscal 1998. As a percentage of the total of royalty and marketing fees and franchise fee revenue, franchise costs decreased to 69.4% of such fees in the first half of fiscal 1998 from 71.9% in the first half of fiscal 1997. Increased royalties/marketing fees and franchise fees revenues relative to the first half of last year without an associated increase in expense is the primary cause of this decrease in relative percentage. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased 3.2% from $868,000 in the first half of fiscal 1997 to $840,000 in the first half of fiscal 1998, primarily as a result of the effect of reduced bad debt expense. As a percentage of total revenues, general and administrative expense declined from 7.9% in the first half of fiscal 1997 to 6.6% in the first half of fiscal 1998, primarily due to a significant increase in total revenues, without a proportionate increase in general and administrative expenses. RETAIL OPERATING EXPENSES. Retail operating expenses increased from $3.5 million in the first half of fiscal 1997 to $4.2 million in the first half of fiscal 1998; an increase of 20.4%. This increase resulted largely from the effect of the increased number of Company-owned store operating months as discussed above. As a percentage of retail sales, retail operating expenses decreased from 61.0% in the first half of 15 fiscal 1997 to 60.5% in the first half of fiscal 1998 as a result of increased sales volume leveraging resulting from the increase in same store retail sales at Company-owned stores discussed above, and as a result of shutdown earlier in the year of Company-owned stores with poor operating economics. OTHER EXPENSE Other expense of $292,000 incurred in the first half of fiscal 1998 increased 63.2% from the $179,000 incurred in the first half of fiscal 1997. This increase resulted from increased interest expense caused by borrowings in support of the Company's fiscal 1997 Company-owned store expansion. INCOME TAX EXPENSE The Company's effective income tax rate in the first half of fiscal 1997 was 38.7% in comparison with the 37.7% in the first half of fiscal 1997. The increase resulted from utilization of remaining available state net operating loss carryforwards in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES At August 31, 1997, working capital was $4,049,128 in comparison with $2,663,775 at February 28, 1997, a $1,385,353 increase. This increase resulted primarily from fixed asset financing achieved recovering cash from investments in Company store operating assets previously funded from operating cash flows. Cash and cash equivalent balances increased from $792,606 at February 28, 1997 to $2,322,345 at August 31, 1997 as a result of this financing. The Company's current ratio was 2.1/1 at August 31, 1997 in comparison with 1.9/1 at February 28, 1997. The Company's long-term debt is comprised primarily of real estate mortgage financing provided by a local banking facility used to finance the Company Factory (unpaid balance as of August 31, 1997 $1,595,900), and chattel mortgage financing (unpaid balance as of August 31, 1997 $5,661,800) provided by both local and national financing facilities and used to fund the fiscal 1996 and 1997 Company-owned store expansion. The Company possesses a $2,000,000 working capital line of credit at August 31, 1997 secured by accounts receivable and inventories which line had a $-0-balance at that date. This line expires July, 1998. For the balance of fiscal 1997, the Company anticipates making $550 thousand in capital expenditures. Of this sum, approximately $450 thousand is anticipated to be used for the opening of new Company-owned stores, with the balance anticipated to be used for the purchase of capital equipment for the factory, as well as for additional computer equipment for the Company's administrative functions. The Company believes that existing cash balances, cash flow from operating activities and the available bank line of working capital credit will be sufficient to service debt, fund anticipated capital expenditures and provide necessary working 16 capital at least through the end of fiscal 1998. There can be no guarantee, however, that unforeseen events will not require the Company to secure additional sources of financing. The Company may also seek additional financing from time to time, through borrowings or public or private offerings of equity or debt securities, to fund its future expansion plans. IMPACT OF INFLATION Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally the Company's future lease cost for new facilities may reflect potentially escalating cost of real estate and construction. There is no assurance that the Company will be able to pass on its increased costs to its customers. Depreciation expense is based on the historical cost to the Company of its fixed assets, and therefore is 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 of for a full fiscal year. EFFECT OF NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued the following Statements of Financial Accounting Standards: (1) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 130, COMPREHENSIVE INCOME EFFECTIVE: Financial statements for fiscal years beginning after December 15, 1997. REQUIREMENTS: Requires entities other than not-for-profit entities to include separately as part of the Income Statement, as a separate Statement of Comprehensive Income or in the Statement of Changes in Equity, certain items of income or loss previously reflected only as changes in balances in shareholder's equity. (2) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 131, DISCLOSURES OF SEGMENT INFORMATION 17 EFFECTIVE: Financial statements for periods beginning after December 15, 1997. REQUIREMENTS: Requires disclosure by publicly held businesses of certain "operating segment" information including segment profit or loss, certain revenue and expense items and segment assets based on financial information used internally for evaluating performance and allocating resources, as well as certain additional information. Additionally, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has adopted a Statement of Position on "Reporting on the Cost of Start-Up Activities" requiring costs of start-up of a new business activity (other than costs categorized as "organization costs") to be expensed as incurred. The adoption of these standards by the Company is not expected to have a material impact on reported earnings. The Company does anticipate that adoption of Financial Accounting Standard 131 will result in expanded disclosure of results of operations of what will become "reportable segments" not reported upon separately previously. 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 11.1 Statement regarding computation of earnings per common share (filed herewith at page 20). (b) REPORTS ON FORM 8-K No reports on form 8-K were filed during the three months ended August 31, 1997. 19 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. Date: October 8, 1997 /s/ --------------- --------------------------------------- Franklin E. Crail (Chairman of the Board, President and Treasurer) Date: October 8, 1997 /s/ --------------- ---------------------------------------- Lawrence C. Rezentes (Chief Financial Officer) 20 EX-11.1 2 EXHIBIT 11.1 EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. COMPUTATION OF INCOME PER COMMON SHARE Six-month periods ended ----------------------- August 31, 1997 1996 ---- ---- PRIMARY INCOME PER SHARE Net income allocable to common and common equivalent shares $ 581,927 $ 458,667 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding 2,912,327 2,905,149 Net effect of dilutive stock options and warrants based on the Treasury Stock Method using average market price 12,374 46,137 ---------- ---------- Weighted average number of common and common equivalent shares outstanding 2,924,701 2,951,286 ---------- ---------- ---------- ---------- Primary income per common and common equivalent share $ .20 $ .16 ---------- ---------- ---------- ---------- 22 EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. COMPUTATION OF INCOME PER COMMON SHARE Three-month periods ended ------------------------- August 31, 1997 1996 PRIMARY INCOME PER SHARE ---- ---- Net income allocable to common and common equivalent shares $ 493,806 $ 294,830 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding 2,912,354 2,905,149 Net effect of dilutive stock options and warrants based on the Treasury Stock Method using average market price 14,062 59,134 ---------- ---------- Weighted average number of common and common equivalent shares outstanding 2,926,416 2,964,283 ---------- ---------- ---------- ---------- Primary income per common and common equivalent share $ .17 $ .10 ---------- ---------- ---------- ---------- 23 EX-27 3 EXHIBIT 27
5 6-MOS FEB-28-1998 MAR-01-1997 AUG-31-1997 2,322,345 0 1,711,002 0 2,782,310 7,787,514 14,985,220 4,072,176 20,280,941 3,738,386 6,181,086 0 0 91,239 10,270,230 20,280,941 11,072,021 12,661,132 5,267,223 11,420,646 0 0 291,949 948,537 366,610 0 0 0 0 581,927 .20 0
-----END PRIVACY-ENHANCED MESSAGE-----