-----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, AIy2xi7EhioT+OvbV4UdUSyrlz9s259YdHjTDZkkWiy76d8vgJ0OcS/dfbCqcEgP O3QSgDt3NO+brdCaio4xMA== 0001047469-98-037253.txt : 19981015 0001047469-98-037253.hdr.sgml : 19981015 ACCESSION NUMBER: 0001047469-98-037253 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981014 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: 98725581 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 FORM 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, 1998 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 September 23, 1998 the registrant had outstanding 2,591,599 shares of its common stock, $.03 par value. The exhibit index is located on page 20. 1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FORM 10-Q TABLE OF CONTENTS
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3-9 Statements of Income 3 Balance Sheets 5 Statements of Cash Flows 6 Notes to Interim Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 20
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME
Three Months Ended August 31, Six Months Ended August 31, 1998 1997 1998 1997 REVENUES Sales $ 5,682,996 $ 5,079,202 $10,491,802 $ 9,391,774 Franchise and royalty fees 934,902 814,000 1,699,644 1,589,111 Total revenues 6,617,898 5,893,202 12,191,446 10,980,885 COSTS AND EXPENSES Cost of sales 2,783,683 2,544,310 5,342,802 4,773,202 Franchise costs 289,181 277,488 568,170 542,987 Sales and marketing 428,807 278,576 827,571 559,359 General and administrative 463,228 451,453 932,945 910,790 Retail operating 1,661,386 1,427,818 3,107,272 2,917,797 Total costs and expenses 5,626,285 4,979,645 10,778,760 9,704,135 INCOME FROM OPERATIONS 991,613 913,557 1,412,686 1,276,750 OTHER INCOME (EXPENSE) Interest expense (176,946) (169,815) (355,614) (337,473) Interest income 16,952 30,065 42,289 45,524 Other, net (159,994) (139,750) (313,325) (291,949) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 831,619 773,807 1,099,361 984,801 PROVISION FOR INCOME TAXES 321,590 299,075 425,125 380,625 INCOME FROM CONTINUING OPERATIONS 510,029 474,732 674,236 604,176 INCOME (LOSS) FROM DISCONTINUED OPERATIONS - NET OF INCOME TAXES - 19,074 - (22,249) NET INCOME $ 510,029 $ 493,806 $ 674,236 $ 581,927
(CONTINUED) The accompanying notes are an integral part of these financial statements. 3 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME (CONTINUED)
Three Months Ended August 31, Six Months Ended August 31, 1998 1997 1998 1997 BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing operations $ .20 $ .16 $ .25 $ .21 Discontinued operations - .01 - (.01) Net income $ .20 $ .17 $ .25 $ .20 DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing operations $ .20 $ .16 $ .25 $ .21 Discontinued operations - .01 - (.01) Net income $ .20 $ .17 $ .25 $ .20 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,595,981 2,912,353 2,730,459 2,912,326 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 13,766 12,909 15,599 11,460 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 2,609,747 2,925,262 2,746,058 2,923,786
The accompanying notes are an integral part of these financial statements. 4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
August 31, February 28, 1998 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 176,374 $ 1,795,381 Accounts and notes receivable, less allowance for doubtful accounts of $202,173 and $214,152 1,876,155 2,174,618 Refundable income taxes - 483,448 Inventories 3,247,608 2,567,966 Deferred income taxes 360,849 257,176 Other 229,346 103,195 Net current assets of discontinued operations - 44,351 Total current assets 5,890,332 7,426,135 PROPERTY AND EQUIPMENT, NET 10,280,827 9,672,443 OTHER ASSETS Net noncurrent assets of discontinued operations - 1,555,681 Accounts and notes receivable 349,028 279,122 Goodwill, less accumulated amortization of $362,283 and $325,848 1,499,717 596,152 Other 362,030 338,359 Total other assets 2,210,775 2,769,314 Total assets $ 18,381,934 $ 19,867,892 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,140,500 $ 1,132,900 Line of credit 750,000 - Accounts payable 1,336,689 1,296,769 Accrued salaries and wages 675,740 707,737 Other accrued expenses 612,670 339,481 Total current liabilities 4,515,599 3,476,887 LONG-TERM DEBT, LESS CURRENT MATURITIES 5,092,574 5,993,273 DEFERRED INCOME TAXES 20,627 378,272 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.03 par value, 7,250,000 shares authorized, 2,599,599 and 2,912,449 issued and outstanding 77,988 87,373 Additional paid-in capital 7,037,172 8,719,604 Retained earnings 1,886,719 1,212,483 Less notes receivable from officers and directors (248,745) - Total stockholders' equity 8,753,134 10,019,460 Total liabilities and stockholders' equity $ 18,381,934 $ 19,867,892
The accompanying notes are an integral part of these financial statements. 5 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
Six Months Ended August 31, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 674,236 $ 581,927 Adjustments to reconcile net income to net cash provided by operating activities: Loss from discontinued operations - 22,249 Depreciation and amortization 683,641 698,119 Gain on sale of property and equipment (15,696) (53,164) Decrease in accounts and notes receivable 178,557 131,963 Decrease in refundable income taxes 456,460 159,099 Increase in inventories (679,642) (491,277) Increase in other assets (99,163) (60,157) Increase in accounts payable 39,920 249,297 Increase in income taxes payable - 264,282 Decrease in deferred income taxes 2,837 - Increase (decrease) in accrued liabilities (33,536) 23,707 Decrease in deferred income - (93,000) Net cash provided by operating activities of continuing operations 1,207,614 1,433,045 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets 37,500 - Purchases of property and equipment (701,952) (623,768) Loans to officers and shareholders (248,750) - Decrease (increase) in other assets 10,887 (85,159) Net cash used in investing activities of continuing operations (902,315) (708,927) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt - 1,132,043 Payments on long-term debt (893,099) (459,550) Proceeds from line of credit 4,925,000 - Payments on line of credit (4,175,000) - Repurchase of stock (1,773,266) - Proceeds from exercise of stock options 80,751 - Net cash provided by (used in) financing activities of continuing operations (1,835,614) 672,493 NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (88,692) 133,128 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,619,007) 1,529,739 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,795,381 792,606 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 176,374 $ 2,322,345
The accompanying notes are an integral part of these financial statements. 6 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO INTERIM FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION Nature of Operations Rocky Mountain Chocolate Factory, Inc. (the "Company") is a manufacturer, international franchiser and retail operator. The Company manufactures an extensive line of gourmet chocolates and other confectionery items. The Company sells its candies in over 220 Rocky Mountain Chocolate Factory stores as well as through a variety of third party retail and non-retail programs, including national and international retail, fundraising, corporate sales and internet programs. Basis of Presentation The accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The results of operations for the period March 1, 1998 to August 31, 1998 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, 1998. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options using the treasury stock method. 7 NOTE 3 - INVENTORIES Inventories consist of the following:
August 31, 1998 February 28, 1998 Ingredients and supplies $ 1,228,134 $ 1,153,433 Finished candy 2,019,474 1,414,533 $ 3,247,608 $ 2,567,966
NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
August 31, 1998 February 28, 1998 Land $ 513,618 $ 513,618 Building 3,665,581 3,665,581 Machinery and equipment 6,555,121 6,023,347 Furniture and fixtures 2,443,547 2,072,208 Leasehold improvements 1,732,637 1,389,608 Transportation equipment 199,639 293,357 15,110,143 13,957,719 Less accumulated depreciation 4,829,316 4,285,276 Property and equipment, net $ 10,280,827 $ 9,672,443
NOTE 5 - STOCKHOLDERS' EQUITY On May 15, 1998, the Company purchased 336,000 shares and certain of its directors and executive officers purchased 104,000 shares of the Company's issued and outstanding common stock at $5.15 per share from La Salle National Bank of Chicago, Illinois, which obtained these shares through foreclosure unrelated to any Company transactions from certain shareholders. The Company loaned certain officers and directors the funds to pay a portion of the purchase price for 40,000 of the 104,000 shares purchased by them. Additionally, on June 1, 1998 the Company loaned an officer approximately $49,000 to fund the exercise of options. These loans are secured by the related shares, bear interest payable annually at 7.5% and are due May 15, 2003. NOTE 6 - DISCONTINUED OPERATIONS In December 1997, the Company decided its Fuzziwig's Candy Factory Store ("Fuzziwig's") segment did not meet its long-term strategic goals, and accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the Company entered into a definitive agreement to sell substantially all the assets of its Fuzziwig's segment for $1.6 million. The divestiture of Fuzziwig's was completed as planned as of the close of business on July 31, 1998. 8 The operating results of Fuzziwig's have been segregated from continuing operations and reported as separate line items net of applicable income taxes in the accompanying statements of income. The current assets, net noncurrent assets and net cash flows of Fuzziwig's have been segregated and reported as separate line items in the accompanying balance sheets and statements of cash flows. The financial statements for prior periods have been restated to conform to this presentation. Summarized financial information for the discontinued operations follows:
Six Months Ended August 31, 1998 1997 Sales $ 1,095,431 $ 1,680,247 Loss before taxes (51,562) (36,264) Loss from discontinued operations, net of income taxes (31,622) (22,249)
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended August 31, 1998 1997 Cash paid (received) for: Interest $ 370,060 $ 324,158 Income taxes (88,029) (94,198) Supplemental schedule of non-cash investing and financing activities: Property and equipment acquired in settlement of note receivable 130,000 - Notes receivable from sale of property and equipment - 589,108
The statement of cash flows for the six months ending August 31, 1998 excludes the effects of certain non-cash investing and financing activities relating to the divestiture of Fuzziwig's (Note 6). The following is a summary of the non-cash effects of this transaction. Decrease in: Net current assets of discontinued operations $ 44,351 Net noncurrent assets of discontinued operations 1,555,681 Increase in: Short-term note receivable (80,000) Property and equipment (480,000) Excess purchase price over identifiable tangible assets (Goodwill) (940,000) Net increase in cash and cash equivalents $ 100,032
9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the unaudited financial statements and related notes of the Company included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. The Company's ability to successfully achieve expansion of its Rocky Mountain Chocolate Factory franchise system depends on many factors not within the Company's control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion. Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depends 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. Other factors that could affect the Company's ability to achieve the financial performance contemplated by the forward-looking statements include changing market conditions in the overall economy and retail industry, changes in consumer demand or competitive conditions and the success of the Company's strategy of expanding into new and previously untested distribution channels. As a result, the actual results realized by the Company could differ materially from the results discussed in or contemplated by the forward-looking statements made herein. Words or phrases such as "will," "anticipate," "expect," "believe," "intend," "estimate," "project," "plan" or similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements made in this Quarterly Report on Form 10-Q. Results of Operations THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 1997 Income from continuing operations for the three months ended August 31, 1998 was $510,029 or $.20 per share versus $474,732 or $.16 per share for the three months ended August 31, 1997. Income from discontinued operations was $19,074 or $.01 per share for the three months ended August 31, 1997. Net income was $510,029 for the three months ended August 31, 1998 or $.20 per share versus $493,806 or $.17 per share for the three months ended August 31, 1997. 10 Revenues
Three Months Ended August 31, % ($'s in thousands) 1998 1997 Change Change Factory sales $ 2,434.7 $ 2,281.4 $ 153.3 6.7% Retail sales 3,248.3 2,797.8 450.5 16.1 Franchise fees 43.8 87.0 (43.2) (49.7) Royalty and Marketing fees 891.1 727.0 164.1 22.6 Total $ 6,617.9 $ 5,893.2 $ 724.7 12.3%
Factory Sales Factory sales increased $153,000 or 6.7% to $2.4 million in the second quarter of fiscal 1999, compared to $2.3 million in the second quarter of fiscal 1998. This was due to an increase in the average number of franchised stores operating during the quarter from 176 for the three months ending August 31, 1997 to 183 for the three months ending August 31, 1998 and to an increase in sales of packaged product to new distribution channels. Total pounds shipped by the factory increased 14% to 503,000 in the second quarter of fiscal 1999 from 442,000 in the second quarter of fiscal 1998. The increase in pounds shipped was due primarily to a 17% and 13% increase in pounds shipped in the second quarter of fiscal 1999 related to packaged and bulk products, respectively, versus the second quarter of fiscal 1998. Same store pounds purchased from the factory by franchised stores declined by 2.2% in the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998, partially offsetting increased factory sales. The decline in same store pounds purchased from the factory resulted primarily from increased sales at franchised stores of store-made product and product purchased from authorized vendors relative to factory-made products. Retail Sales Retail sales increased $451,000 or 16.1% to $3.2 million in the second quarter of fiscal 1999, compared to $2.8 million in the second quarter of fiscal 1998. This increase resulted from an increase in the average number of stores in operation in the second quarter of fiscal 1999 (39) versus the same period last year (37) and an increase in comparable store sales of 3.7%. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $164,000 or 22.6% to $891,000 in the second quarter of fiscal 1999, compared to $727,000 in the second quarter of fiscal 1998. This increase resulted from an increase in the average number of franchised stores operating during the quarter to 183 in the second quarter of fiscal 1999 compared to 176 in the second quarter of fiscal 1998 and an increase in same store sales at franchised stores of approximately 8%. Franchise fee revenues decreased in the second quarter of fiscal 1999 approximately $43,000 due to a reduction in the number of new franchises sold versus the second quarter of fiscal 1998. The 11 Company expects its strategy of diversifying into new distribution channels to continue to reduce the percentage of the Company's revenues derived from the sale of new franchises to operate Rocky Mountain Chocolate Factory stores. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales decreased to 49.0% in the second quarter of fiscal 1999 versus 50.1% in the second quarter of fiscal 1998. This decrease resulted from increased retail sales (due to a greater number of Company-owned stores), which generate higher margins than factory sales, and from increased margins on factory sales. Company-owned store margins for the second quarter of 1999 were 64.3% versus 64.6% in the second quarter of fiscal 1998. Factory margins improved to 33.4% in the second quarter of fiscal 1999 from 31.9% in the second quarter of fiscal 1998 as a result of improved manufacturing efficiencies realized from increased volume. Franchise Costs Franchise costs increased 4.2% from $277,000 in the second quarter of fiscal 1998 to $289,000 in the second quarter of fiscal 1999. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 30.9% in the second quarter of fiscal 1999 from 34.1% in the second quarter of fiscal 1998. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of an increase in royalty and marketing fees of 22.6% offset by a 49.7% decrease in income from franchise fees and to a lesser extent increased franchise support costs. Sales and Marketing Sales and Marketing costs increased 53.9% to $429,000 in the second quarter of fiscal 1999 from $279,000 in fiscal 1998. This increase is due to: (1) expansion of the Company's sales and marketing group to support a larger base of franchised and Company-owned stores; (2) expansion of promotional programs and marketing materials made available to franchised and Company-owned stores; (3) establishment of a sales force focused on new distribution opportunities and related new distribution channel start-up costs; and (4) enhanced customer service and new product marketing programs. General and Administrative General and administrative expenses increased 2.6% from $451,000 in the second quarter of fiscal 1998 to $463,000 in the second quarter of fiscal 1999. As a percentage of total revenues, general and administrative expenses declined from 7.7% in fiscal 1998 to 7.0% in fiscal 1999. The Company expects the trend of decreasing general and administrative expenses as a percentage of sales to continue due to its policy of controlling its current cost structure. 12 Retail Operating Expenses Retail operating expenses increased from $1.4 million in the second quarter of fiscal 1998 to $1.7 million in the second quarter of fiscal 1999; an increase of 16.4%. This increase is due to an increase in the average number of stores open during the second quarter of fiscal 1999 versus the second quarter of fiscal 1998. Retail operating expenses, as a percentage of retail sales, increased slightly from 51.0% in the second quarter of fiscal 1998 to 51.1% in the second quarter of fiscal 1999. Other Expense Other expense of $160,000 incurred in the second quarter of fiscal 1999 increased 14.5% from the $140,000 incurred in the second quarter of fiscal 1998. This resulted from interest expense related to borrowings in support of the Company's fiscal 1996 and 1997 Company-owned store expansion and increased borrowing on the Company's line of credit facility. Income Tax Expense The Company's effective income tax rate in the second quarter of fiscal 1998 was 38.7%, which is approximately the same rate as the second quarter of fiscal 1999. Discontinued Operations In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment did not meet its long-term strategic goals, and accordingly, made the decision to dispose of these operations. See "NOTE 6 - DISCONTINUED OPERATIONS" of notes to interim financial statements. SIX MONTHS ENDED AUGUST 31, 1998 COMPARED TO THE SIX MONTHS ENDED AUGUST 31, 1997 Income from continuing operations for the six months ended August 31, 1998 was $674,236 or $.25 per share versus $604,176 or $.21 per share for the six months ended August 31, 1997. Loss from discontinued operations was $22,249 or $.01 per share for the six months ended August 31, 1997. Net income was $674,236 for the six months ended August 31, 1998 or $.25 per share versus $581,927 or $.20 per share for the six months ended August 31, 1997. Revenues
Six Months Ended August 31, % ($'s in thousands) 1998 1997 Change Change Factory sales 4,899.7 4,115.5 784.2 19.1% Retail sales 5,592.1 5,276.3 315.8 6.0 Franchise fees 109.7 290.5 (180.8) (62.2) Royalty and Marketing fees 1,589.9 1,298.6 291.3 22.4 Total 12,191.4 10,980.9 1,210.5 11.0%
13 Factory Sales Factory sales increased $784,000 or 19.1% to $4.9 million in the first six months of fiscal 1999, compared to $4.1 million in the first six months of fiscal 1998. This was due to a shift in product mix from lower price point bulk products to higher price point packaged products driven by sales to new distribution channels, and to an increase in the average number of franchised stores operating from 174 for the six months ended August 31, 1997 to 184 for the six months ended August 31, 1998. Total pounds shipped by the factory increased 15% to 931,000 in the first six months of fiscal 1999 from 811,000 in the first six months of fiscal 1998. The increase in pounds shipped was due to a 45% and 7% increase in pounds shipped in the first six months of fiscal 1999 related to packaged and bulk products, respectively, versus the first six months of fiscal 1998. Same store pounds purchased from the factory by franchised stores declined by 1.9% in the first six months of fiscal 1999 compared to the first six months of fiscal 1998, partially offsetting increased factory sales. The decline in same store pounds purchased from the factory resulted primarily from increased sales at franchised stores of store-made product and product purchased from authorized vendors relative to factory-made products. Retail Sales Retail sales increased $316,000 or 6.0% to $5.6 million in the first six months of fiscal 1999, compared to $5.3 million in the first six months of fiscal 1998. This increase resulted from the increased revenue associated with the Rocky Mountain Chocolate Factory stores acquired on July 1, 1998 in connection with the divestiture of Fuzziwig's and an increase in comparable store sales of 4.2% offset by two fewer stores (on average) in the first six months of fiscal 1999 compared to fiscal 1998. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $291,000 or 22.4% to $1.6 million in the first six months of fiscal 1999, compared to $1.3 million in the first six months of fiscal 1998. This increase resulted from an increase in the average number of franchised stores operating to 184 in the first six months of fiscal 1999 compared to 174 in the first six months of fiscal 1998 and an increase in same store sales at franchised stores of approximately 8.8%. Franchise fee revenues decreased in the first six months of fiscal 1999 due to a reduction in the number of new franchises sold versus the first six months of fiscal 1998. While franchise interest remains strong, continued lack of premium locations in proven environments has constrained sales of new franchises to interested parties. The Company expects its strategy of diversifying into new distribution channels to continue to reduce the percentage of the Company's revenues derived from the sale of new franchises to operate Rocky Mountain Chocolate Factory stores. 14 Costs and Expenses Cost of Sales Cost of sales as a percentage of sales in the first six months of fiscal 1999 was 50.9%, which is approximately the same percentage as the first six months of fiscal 1998. Company-owned store margins for the first six months of 1999 were 63.3% which is approximately the same percentage as the first six months of fiscal 1998. Factory margins improved to 32.9% in the first six months of fiscal 1999 from 31.3% in the first six months of fiscal 1998 as a result of improved manufacturing efficiencies realized from increased volume. Franchise Costs Franchise costs increased 4.6% from $543,000 in the first six months of fiscal 1998 to $568,000 in the first six months of fiscal 1999. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 33.4% in the first six months of fiscal 1999 from 34.2% in the first six months of fiscal 1998. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of an increase in royalty and marketing fees of 22.4% offset by a 62.2% decrease in income from franchise fees and to a lesser extent increased franchise support costs. Sales and Marketing Sales and Marketing costs increased 48% to $828,000 in the first six months of fiscal 1999 from $559,000 in fiscal 1998. This increase is due to: (1) expansion of the Company's sales and marketing group to support a larger base of franchised and Company-owned stores; (2) expansion of promotional programs and marketing materials made available to franchised and Company-owned stores; (3) establishment of a sales force focused on new distribution opportunities and related new distribution channel start-up costs; and (4) enhanced customer service and new product marketing programs. General and Administrative General and administrative expenses increased 2.4% from $911,000 in the first six months of fiscal 1998 to $933,000 in the first six months of fiscal 1999. As a percentage of total revenues, general and administrative expenses declined from 8.3% in fiscal 1998 to 7.7% in fiscal 1999. The Company expects the trend of decreasing general and administrative expenses as a percentage of sales to continue due to its policy of controlling its current cost structure. Retail Operating Expenses Retail operating expenses increased from $2.9 million in the first six months of fiscal 1998 to $3.1 million in the first six months of fiscal 1999; an increase of 6.5%. This increase is slightly higher than the attendant increase in retail sales as a result of start-up costs associated with several of the Company's new stores. 15 Retail operating expenses, as a percentage of retail sales, increased slightly from 55.3% in the first six months of fiscal 1998 to 55.6% in the first six months of fiscal 1999. Other Expense Other expense of $313,000 incurred in the first six months of fiscal 1999 increased 7.2% from the $292,000 incurred in the first six months of fiscal 1998. This resulted from interest expense related to borrowings in support of the Company's fiscal 1996 and 1997 Company-owned store expansion and increased borrowings on the Company's line of credit facility. Income Tax Expense The Company's effective income tax rate in the first six months of fiscal 1998 was 38.7%, which is approximately the same rate as the first six months of fiscal 1999. Discontinued Operations In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment did not meet its long-term strategic goals, and accordingly, made the decision to dispose of these operations. See "NOTE 6 - DISCONTINUED OPERATIONS" of notes to interim financial statements. LIQUIDITY AND CAPITAL RESOURCES As of August 31, 1998 working capital was $1,375,000, compared with $3,949,000 as of February 28, 1998, a $2,574,000 decrease. This decrease is primarily the result of the use of $1,773,000 of working capital to repurchase 336,000 shares of the Company's common stock at $5.15 per share and related transaction expenses, loans to officers and directors of $249,000 to acquire an additional 55,000 shares of the Company's common stock and cash flows used by investing and other financing activities in excess of cash flows generated by operating activities. Cash and cash equivalent balances decreased from $1,795,000 as of February 28, 1998 to $176,000 as of August 31, 1998 as a result of cash flows used by investing and financing activities in excess of cash flows generated by operating activities. The Company's current ratio was 1.3 to 1 at August 31, 1998 in comparison with 2.1 to 1 at February 28, 1998. 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, 1998 $1.9 million), and chattel mortgage notes (unpaid balance as of August 31, 1998 $4.3 million) used to fund the fiscal 1996 and 1997 Company-owned store expansion. The Company has a $3.0 million ($2,250,000 available as of August 31, 1998) working capital line of credit collateralized by certain of the Company's inventories and accounts receivable. The line is subject to renewal in July, 1999. 16 The Company is currently in the process of securing certain fixed asset based financings, the proceeds of which will be used to reduce amounts outstanding on its working capital line of credit. 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 1999. YEAR 2000 MATTERS The Company recognizes that the arrival of the year 2000 poses a unique worldwide challenge to the ability of systems to recognize the date change from December 31, 1999 to January 1, 2000. The year 2000 issue could result, at the Company and elsewhere, in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or to engage in other normal business activities. The Company has assessed its computer and business processes and is reprogramming and upgrading its computer applications to provide for their continued functionality. An assessment of the readiness of the external entities with which it interfaces is ongoing. The Company has developed a detailed year 2000 Conversion Project Plan ("Plan") to address the methods to correct possible disruptions of operations due to the year 2000 issue. The Plan takes into consideration the following items: (i) identification and inventorying of hardware, application software, and equipment utilizing programmable logic chips to control aspects of their operation, with potential year 2000 problems; (ii) assessment of scope of year 2000 issues for, and assigning priorities to, each item based on its importance to the Company's operations; (iii) remediation of year 2000 issues in accordance with assigned priorities, by correction, upgrade, replacement or retirement; (iv) testing for and validation of year 2000 compliance; (v) determination of key vendor and customers and their year 2000 compliance. Because the Company uses a variety of information technology systems, internally-developed and third-party provided software and embedded chip equipment, depending upon business function and location, various aspects of the Company's year 2000 efforts are in different phases and are proceeding in parallel. The task of identifying and inventorying hardware and application software with year 2000 issues and developing specific strategies for compliance has been completed. The Company is in the process of upgrading its main systems and hardware for year 2000 compliance. This critical remediation work will commence in the third quarter of fiscal 1999 and is scheduled to be tested and installed by March 1999. Non-critical system conversions have been identified and scheduled for completion by July 1999. This remediation process will commence in May of 1999 and encompasses all areas of operations of the Company, from verification of the year 2000 compliance of email systems to telephone systems. The Company's operations are also dependent on the year 2000 readiness of third parties who do business with the Company. In particular, the Company's information technology systems interact with commercial electronic transaction 17 processing systems to handle customer credit card purchases and other point of sale transactions, and the Company is also dependent on third-party suppliers of such infrastructure elements as telephone services, electric power, water, and banking facilities. The Plan includes identifying and initiating formal communications with key third parties and suppliers and with significant vendors to determine the extent to which the Company will be vulnerable to such parties' failure to resolve their own year 2000 issues. The Company has contacted its most relevant third parties and will commence its efforts to contact additional relevant third parties in the third quarter of fiscal 1999. Although the Company has not been put on notice that any known third party problem will not be resolved, the Company has limited information and no assurance of additional information concerning the year 2000 readiness of third parties. The resulting risks to the Company's business are very difficult to assess. The estimated cost for implementing the plan including all required remediation and testing activities is between $100,000 and $150,000 and is being funded through operating cash flows. The Company anticipates that approximately 15% of these costs will relate to identification and assessment efforts, approximately 55% to the replacement of noncompliant software and equipment, approximately 5% to the correction of existing systems and approximately 25% to the testing of corrections implemented under the Plan. Costs incurred in connection with the Plan are not expected to result in significant delays or revisions to any of the Company's other pending or proposed information technology programs. Operating costs related to year 2000 compliance projects will be incurred over several quarters and will be expensed as incurred. To date, the Company has incurred $29,000 of expenses in connection with the Plan. Based upon the planning completed to date, the Company believes that, with modifications to existing software, conversions to new software, and appropriate remediation of embedded chip equipment, the year 2000 issue is not reasonably likely to pose significant operational problems for the Company's information technology systems and embedded chip equipment as so modified and converted. The Company is presently unable to assess the likelihood that the Company will experience operational problems due to unresolved year 2000 problems of third parties who do business with the Company. There can be no assurance that other entities will achieve timely year 2000 compliance; if they do not, year 2000 problems could have a material impact on the Company's operations. Where commercially reasonable to do so, the Company intends to assess its risks with respect to failure by third parties to be year 2000 compliant and to seek to mitigate those risks. If such mitigation is not achievable, year 2000 problems could have a material impact on the Company's operations. The Company's estimates of the costs of achieving year 2000 compliance and the date by which year 2000 compliance will be achieved are based on management's best estimates, which were derived using numerous assumptions about future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from 18 these estimates. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in year 2000 remediation work, the ability to locate and correct all computer codes, the success achieved by the Company's suppliers in reaching year 2000 readiness, the timely availability of necessary replacement items and similar uncertainties. The Company presently believes that the most reasonably likely worst-case scenarios that the Company might confront with respect to year 2000 issues have to do with third parties not being year 2000 compliant. The Company is presently evaluating vendor and customer compliance and will develop contingency plans, such as alternate vendor opportunities, after obtaining compliance evaluations. The Company's timeline is to finalize these contingency plans by October 1999. 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 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. The Company anticipates that sales to new distribution channels will also be subject to seasonal fluctuation with stronger sales during the Christmas holiday season. Because of the seasonality of the Company's business results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year. 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings None 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 4.1 Amendment dated July 31, 1998 to Term Loan and Credit Agreement dated April 5, 1996 in the amount of $3,000,000 between Norwest Bank and the registrant. 27.1 Financial Data Schedule for the six months ended August 31, 1998. 27.2 Restated Financial Data Schedule for the six months ended August 31, 1997. B. Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. (Registrant) Date: October 14, 1998 /s/ Bryan J. Merryman --------------------------------------------- Bryan J. Merryman, Vice President - Finance Chief Financial Officer and authorized officer 20 EX-4.1 2 EXHIBIT 4.1 July 31, 1998 Mr. Bryan Merryman Rocky Mountain Chocolate Factory 265 Turner Dr. Durango, CO 81301 VIA FAX 970-385-5919 AND FIRST CLASS MAIL Subject: SEVENTH AMENDMENT TO TERM LOAN AND CREDIT AGREEMENT Dear Bryan: Rocky Mountain Chocolate Factory, Inc. ("RMCF") and Norwest Bank Colorado, N.A. (the "Bank") are parties to a certain Loan Agreement dated April 5, 1996 as amended six previous times (collectively, the "Agreement"). The purpose of this amendment (the "Seventh Amendment") is to make further changes to the Agreement as follows: The Revolving Line of Credit shall be increased from $2,000,000 to $3,000,000. Acceptable Accounts Receivable shall include receivables from Sam's Club less than 120 days old. Borrowing Base shall include 50% of Acceptable Inventory. The limit of $500,000 shall be deleted. Maintain quarterly a ratio of Indebtedness to Tangible Net Worth of not more than 1.6 to 1. Maintain quarterly a ratio of Current Assets to Current Liabilities of not less than 1.3 to 1. Maintain quarterly a minimum Cash Flow Coverage Ratio of more than 1.25 to 1. Cash Flow Coverage Ratio shall mean the ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") divided by the sum of all principal and interest payments. Maintain quarterly a Tangible Net Worth of more than $6,000,000. Maintain quarterly Working Capital of more than $1,500,000. Capitalized terms not further defined herein are defined in the Agreement. All other terms conditions shall remain the same. ACCEPTED AND AGREED BANK /s/ Bill Maurer - ------------------------------- Bill Maurer, V.P. RMCF /s/ Bryan Merryman - ------------------------------- Bryan Merryman, CFO EX-27.1 3 EXHIBIT 27.1
5 6-MOS FEB-28-1999 MAR-01-1998 AUG-31-1998 176,374 0 2,078,328 202,173 3,247,608 5,890,332 15,110,143 4,829,316 18,381,934 4,515,599 5,092,574 0 0 77,988 8,675,146 18,381,934 10,491,802 12,191,446 5,342,802 10,778,760 0 0 313,325 1,099,361 425,125 674,236 0 0 0 674,236 .25 .25
EX-27.2 4 EXHIBIT 27.2
5 6-MOS FEB-28-1998 MAR-01-1997 AUG-31-1997 2,322,345 0 1,926,251 215,249 2,573,843 7,787,514 12,731,677 3,780,578 20,356,966 3,738,386 6,181,086 0 0 87,163 10,274,306 20,356,966 9,391,774 10,980,885 4,773,202 9,704,135 0 0 291,949 984,801 380,625 604,176 (22,249) 0 0 581,927 .20 .20
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