<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1995
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
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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)
(303) 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 January 8, 1996 there were 3,030,149 shares of common stock outstanding.
This document contains 22 pages including exhibits.
The exhibit index is located on page 20.
1
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1995
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 4. Submission of Matters to a Vote of Security
Holders............................................ 18
Item 6. Exhibits and Reports on Form 8-K................... 18
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
Financial Statements
Balance Sheets - November 30, 1995(unaudited)
and February 28, 1995........................................... 4
Statements of Income - Nine-month
periods ended November 30, 1995 (unaudited)
and November 30, 1994 (unaudited)............................. 6
Statements of Income - Three-month
periods ended November 30, 1995 (unaudited)
and November 30, 1994 (unaudited)............................. 7
Statements of Cash Flows
Nine-month periods ended
November 30, 1995 (unaudited)
and November 30, 1994 (unaudited)............................. 8
Statements of Cash Flows
Three-month periods ended
November 30, 1995 (unaudited)
and November 30, 1994 (unaudited)............................. 9
3
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
NOVEMBER 30, FEBRUARY 28,
1995 1995
ASSETS (UNAUDITED)
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,848,988 $ 382,905
Accounts and notes receivable -
trade, less allowance for doubtful
accounts of $62,279 at November 30 and
$48,366 at February 28 2,089,028 1,179,019
Inventories 2,414,524 1,687,016
Deferred tax asset 68,586 68,586
Other 211,784 110,105
----------- -----------
Total current assets 6,632,910 3,427,631
PROPERTY AND EQUIPMENT - AT COST
Land 122,558 122,558
Building 3,571,411 2,453,069
Leasehold improvements 1,433,490 803,160
Machinery and equipment 4,163,279 2,917,148
Furniture and fixtures 2,030,654 1,086,282
Transportation equipment 226,909 197,346
----------- -----------
11,548,301 7,579,563
Less accumulated depreciation
and amortization 2,216,511 1,690,118
----------- -----------
9,331,790 5,889,445
OTHER ASSETS
Notes and accounts receivable due
after one year 114,696 136,132
Goodwill, net of accumulated
amortization of $247,839 at
November 30 and $230,136 at February 28 342,161 359,864
Other 664,306 368,098
----------- -----------
1,121,163 864,094
----------- -----------
$17,085,863 $10,181,170
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
4
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS - CONTINUED
NOVEMBER 30, FEBRUARY 28,
1995 1995
LIABILITIES AND EQUITY (UNAUDITED)
------------ ------------
CURRENT LIABILITIES
Current maturities of long-term debt 153,303 182,852
Accounts payable - trade 1,604,503 839,117
Accrued compensation 537,417 222,713
Accrued liabilities 235,049 283,330
Income taxes payable 185,939 272,593
----------- -----------
Total current liabilities 2,716,211 1,800,605
LONG-TERM DEBT, less current maturities 2,202,323 2,313,895
DEFERRED INCOME TAXES 159,863 159,863
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
$1.00 cumulative convertible preferred
stock authorized 250,000 shares, $.10
par value; issued and outstanding, no
shares at November 30 and 14,610
at February 28 - 1,462
Common stock - authorized 7,250,000
shares, $.03 par value; issued
3,009,302 shares at November 30 and
2,634,289 at February 28 90,280 79,029
Additional paid-in capital 9,594,735 4,700,527
Retained earnings 2,327,019 1,130,522
----------- -----------
12,012,034 5,911,540
Less common stock held in treasury,
at cost - 4,153 shares at November 30,
and 4,303 at February 28 4,568 4,733
----------- -----------
12,007,466 5,906,807
----------- -----------
$17,085,863 $10,181,170
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
5
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
------------------------
NOVEMBER 30,
1995 1994
---------- -----------
<S> <C> <C>
REVENUES
Sales of chocolate $11,828,868 $8,200,194
Franchise and royalty fees 1,942,733 1,656,184
------------ ----------
13,771,601 9,856,378
------------ ----------
COSTS AND EXPENSES
Cost of chocolate sales 6,122,721 4,119,835
Franchise costs 1,370,765 1,059,103
General and administrative 1,040,049 921,682
Retail operating expenses 3,130,088 1,992,084
------------ ----------
11,663,623 8,092,704
------------ ----------
Operating income 2,107,978 1,763,674
OTHER INCOME (EXPENSE)
Interest expense (235,016) (92,046)
Interest income 38,733 14,897
------------ ----------
(196,283) (77,149)
INCOME BEFORE INCOME TAX EXPENSE 1,911,695 1,686,525
INCOME TAX EXPENSE
Provision for income taxes 715,198 658,286
------------ ----------
NET INCOME 1,196,497 1,028,239
Dividend requirements on
preferred stock - 10,958
------------ ----------
INCOME ALLOCABLE TO
COMMON STOCKHOLDERS $ 1,196,497 $1,017,281
------------ ----------
------------ ----------
PRIMARY INCOME
PER COMMON AND EQUIVALENT SHARE $ .42 $ .40
------------ ----------
------------ ----------
Weighted average and equivalent shares 2,840,569 2,573,122
------------ ----------
------------ ----------
FULLY DILUTED INCOME
PER COMMON AND EQUIVALENT SHARE $ .42 $ .38
------------ ----------
------------ ----------
Weighted average and equivalent shares 2,843,868 2,718,251
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these statements.
6
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED
-------------------------
NOVEMBER 30,
1995 1994
----------- -----------
<S> <C> <C>
REVENUES
Sales of chocolate $5,025,228 $3,739,873
Franchise and royalty fees 616,779 534,372
---------- ----------
5,642,007 4,274,245
---------- ----------
COSTS AND EXPENSES
Cost of chocolate sales 2,633,778 1,965,161
Franchise costs 456,151 368,383
General and administrative 339,607 330,394
Retail operating expenses 1,288,210 792,401
---------- ----------
4,717,746 3,456,339
---------- ----------
Operating income 924,261 817,906
OTHER INCOME (EXPENSE)
Interest expense (77,814) (42,435)
Interest income 28,999 5,365
---------- ----------
(48,815) (37,070)
INCOME BEFORE INCOME TAX EXPENSE 875,446 780,836
INCOME TAX EXPENSE
Provision for income taxes 326,604 297,373
---------- ----------
NET INCOME 548,842 483,463
Dividend requirements on
preferred stock - 3,653
---------- ----------
INCOME ALLOCABLE TO
COMMON STOCKHOLDERS $ 548,842 $ 479,810
---------- ----------
---------- ----------
PRIMARY INCOME
PER COMMON AND EQUIVALENT SHARE $ .18 $ .18
---------- ----------
---------- ----------
Weighted average and equivalent shares 3,024,768 2,718,039
---------- ----------
---------- ----------
FULLY DILUTED INCOME
PER COMMON AND EQUIVALENT SHARE $ .18 $ .18
---------- ----------
---------- ----------
Weighted average and equivalent shares 3,024,768 2,723,816
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
7
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
------------------------
NOVEMBER 30,
1995 1994
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,196,497 $ 1,028,239
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 544,096 334,935
(Increase) in notes and
accounts receivable (888,573) (932,506)
(Increase) in inventories (727,508) (558,424)
(Increase) in other assets (101,679) (76,577)
Increase in accounts payable 765,386 431,616
Increase (decrease)in income tax payable (97,391) 217,888
Increase in accrued liabilities 277,160 278,511
---------- -----------
Net adjustments (228,509) (304,557)
Net cash provided by
operating activities 967,988 723,682
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other long-term assets (296,208) (61,232)
Purchase of property and equipment (3,968,738) (3,520,998)
------------ -----------
Net cash (used in)investing activities (4,264,946) (3,582,230)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends - (98,916)
Proceeds from stock offering 5,221,125 -
Cost of stock offering (364,988) -
Proceeds from exercise of
stock options 71,875 52,876
Proceeds from issuance of
treasury stock 2,175 1,500
Principal payments on line of credit (430,000) -
Principal payments on long-term debt (1,641,121) (220,818)
Proceeds from line of credit 430,000 495,825
Proceeds from issuance of long-term debt 1,500,000 2,076,060
Purchase and retirement of preferred stock (26,025) -
------------ -----------
Net cash provided by
financing activities 4,763,041 2,306,527
------------ -----------
NET INCREASE (DECREASE) IN CASH: $ 1,466,083 $ (552,021)
Cash and cash equivalents
at beginning of period $ 382,905 $ 996,746
------------ -----------
Cash and cash equivalents
at end of period $ 1,848,988 $ 444,725
------------ -----------
------------ -----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 223,858 $ 97,359
Income taxes $ 812,589 $ 440,152
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
8
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED
-------------------------
NOVEMBER 30,
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 548,842 $ 483,463
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 207,826 120,669
(Increase) in notes and
accounts receivable (834,461) (493,628)
(Increase) in inventories (399,289) (194,795)
(Decrease) in other assets 209,076 (5,803)
Increase in accounts payable 312,952 102,700
Increase in income tax payable 84,323 289,344
Increase in accrued liabilities 111,793 157,072
---------- -----------
Net adjustments (307,780) (24,441)
Net cash provided by operating
activities 241,062 459,022
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other long-term assets (288,358) (27,281)
Purchase of property and equipment (1,565,376) (1,192,752)
----------- -----------
Net cash (used in)investing activities (1,853,734) (1,220,033)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends - (3,651)
Proceeds from stock offering 5,221,125 -
Cost of stock offering (364,988) -
Proceeds from exercise of
stock options 31,250 -
Proceeds from issuance of
treasury stock 2,175 -
Principal payments on line of credit (180,000) -
Principal payments on long-term debt (1,516,583) (56,087)
Proceeds from line of credit 180,000 150,000
Proceeds from issuance of long-term debt - 729,926
----------- -----------
Net cash provided by
financing activities 3,372,979 820,188
----------- -----------
NET INCREASE IN CASH: $ 1,760,307 $ 59,177
Cash and cash equivalents
at beginning of period $ 88,681 $ 385,548
----------- -----------
Cash and cash equivalents
at end of period $ 1,848,988 $ 444,725
----------- -----------
----------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 80,884 $ 49,510
----------- -----------
----------- -----------
Income taxes $ 242,281 $ 7,440
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
9
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
November 30, 1995
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, 1995.
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:
NOVEMBER 30, 1995 FEBRUARY 28, 1995
----------------- -----------------
Ingredients and supplies $1,006,843 $ 712,727
Finished Candy 1,407,681 974,289
---------- ----------
$2,414,524 $1,687,016
---------- ----------
---------- ----------
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED NOVEMBER 30, 1995 COMPARED TO QUARTER ENDED NOVEMBER 30, 1994.
REVENUES
FACTORY SALES. Factory sales increased $500,400 or 22.5% to $2,727,800 in
the third quarter of 1996, compared to $2,227,400 in the third quarter of
1995. This increase resulted from the larger number of franchised stores in
existence throughout the quarter (151 at November 30, 1995 in comparison with
124 at November 30, 1994) and, to a lesser extent, a modest price increase
effected in April of 1995. Same store pounds purchased from the factory
increased by 1.7% in the third quarter of 1996 compared to the third quarter
of 1995, which also contributed to this increase. When computing same store
pounds purchased from the factory, purchases by franchised stores open for a
full 3 months in each quarter are compared. This increase in same store
pounds purchased and in factory sales is lower than was anticipated resulting
from unusually warm weather in August (affecting September factory sales) and
early to mid-September. The warm weather resulted in lower sales and
increased inventory levels at franchised stores, which adversely affected
factory sales to Company stores in September.
RETAIL SALES. Retail sales increased $784,900 or 51.9% to $2,297,400 in
the third quarter of 1996, compared to $1,512,500 in the third quarter of
1995. This increase resulted primarily from a larger number of Company-owned
stores in existence throughout the quarter (39 at November 30, 1995 in
comparison with 24 at November 30, 1994). The impact of a modest price
increase was offset by the effect of a 4.1% same store sales decline at
Company-owned stores partially counter-balancing the effect of the increased
number of stores. The Company believes the decline in same store retail sales
at Company-owned stores resulted from the effect of extreme heat in the first
half of September in geographical areas where Company stores are
concentrated, together with the effect of a decline in foot traffic and
consumer spending reflected in declining same store retail sales at the
factory outlet mall environment in which the preponderance of Company stores
are located. Additionally, the increase in October and November, 1995 sales
results at Company-owned stores were less than anticipated due to delay in
the establishment of new Company-owned stores resulting from delay in the
availability of space from developers.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing
fees increased $100,100 or 26.4% to $479,100 in the third quarter of 1996,
compared to $379,000 in the third quarter of 1995. This increase resulted
from increased royalty income from a larger number of franchised stores
operating in the third quarter of 1996 compared to the third quarter of 1995
as discussed above, abetted by increased same store sales at franchised
stores of .8%. Franchise fee revenues in the third quarter of 1996 of
$138,100 declined from the $155,500 in the third quarter of 1995. Franchise
signings declined to 10 in the third quarter of 1996 from 11 in the third
quarter of 1995. The Company's increased emphasis on the
11
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establishment of Company-owned stores is the primary cause of this reduction
in franchise fee revenues and signings.
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 34.0% to $2,633,800 in the third
quarter of 1996 from $1,965,200 in the third quarter of 1995. Cost of
chocolate sales as a percentage of total chocolate sales (defined as the
total of factory sales and retail sales) remained flat at approximately 52.5%
in the third quarters of both 1996 and 1995. Cost of chocolate sales as a
percentage of total chocolate sales had been expected to improve as a result
of an increase in higher margin retail sales as a percentage of total
chocolate sales brought about by the rapid and large increase in the number
of Company-owned stores, together with the effect of an approximate 2% retail
and factory price increase effected in April, 1995. This has not occurred due
to an absolute 2% decline in factory margins resulting from increased
material usage and lesser labor efficiencies in the manufacture of the
Company's products, together with certain price reductions in selected
categories of Company product sales. The Company is engaged in a concerted
effort to correct for the cause of increased material usage, as well as to
improve labor efficiencies with the goal of returning factory margins to
historical levels and to continue the improvement which it had been
experiencing in its margins.
FRANCHISE COSTS. Franchise costs increased 23.8% to $456,200 in the third
quarter of 1996 from $368,400 in the third quarter of 1995. As a percentage
of the total of royalties and marketing fees and franchise fees, franchise
costs increased to 73.9% of such fees in the third quarter of 1996 from 68.9%
in the third quarter of 1995. The hiring of additional field support and
associated administrative personnel to support the Company's accelerated pace
of store opening activities and the larger base of stores is the partial
cause of this increase. Additionally, the Company incurred increased
expenses for promotional programs and marketing materials to support the
larger base of stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 2.8% to $339,600 in the third quarter of 1996 from $330,400 in the
third quarter of 1995, as a result of increased expense for administrative
support personnel and increased depreciation expense for additional
investment in computer hardware and software. As a percentage of total
revenues, general and administrative expense declined to 6.0% in the third
quarter of 1996 from 7.7% in the third quarter of 1995, 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 62.6% to
$1,288,200 in the third quarter of 1996 from $792,400 in the third quarter of
1995. This increase resulted from the effect of the larger number of
Company-owned stores in existence throughout the third quarter as discussed
above. As a percentage of retail sales, retail operating expenses increased
to 56.1% in the third quarter of 1996 from 52.4% in the third quarter of
1995. As discussed above, the Company experienced a decline in same store
retail sales in the third quarter. This
12
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decline in same store retail sales resulted in total revenue growth not in
proportion to the increase in operating expenses.
OTHER EXPENSE
Other expense of $48,800 incurred in the third quarter of 1996 increased
31.6% from the $37,100 incurred in the third quarter of 1995. This increase
resulted from increased interest expense caused by borrowings in support of
the Company's factory expansion and Company-owned store expansion as
partially offset by increased interest income resulting from cash surpluses
generated by the Company's stock offering (see "Liquidity and Capital
Resources" discussed below).
INCOME TAX EXPENSE
The Company's effective income tax rate in the third quarter of 1996 was
37.3% compared to 38.0% in the third quarter of 1995. The absolute .7%
decrease in effective tax rates resulted from utilization of lower, more
representative, full year 1995 historical experience as a basis for
estimating the effective tax rate for the full year 1996.
RESULTS OF OPERATIONS
FIRST NINE MONTHS FISCAL 1996 IN COMPARISON WITH FIRST NINE MONTHS
FISCAL 1995
REVENUES
FACTORY SALES. Factory sales increased $1,570,700 or 34.1% to $6,173,400
in the first nine months of 1996, compared to $4,602,700 in the first nine
months of 1995. This increase resulted from the larger number of franchised
stores in existence throughout the nine months and, to a lesser extent, a
modest price increase effected in April of 1995. Same store pounds purchased
from the factory increased by 2.0% in the first nine months of 1996 compared
to the first nine months of 1995, which also contributed to this increase.
When computing same store pounds purchased from the factory, purchases by
franchised stores open for a full 9 months in each period are compared.
RETAIL SALES. Retail sales increased $2,058,100 or 57.2% to $5,655,500 in
the first nine months of 1996, compared to $3,597,400 in the first nine
months of 1995. This increase resulted primarily from a larger number of
Company-owned stores in existence throughout the period as abetted by the
effect of a .8% same store retail sales increase at Company-owned stores.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing
fees increased $343,200 or 30.5% to $1,468,100 in the first nine months of
1996, compared to $1,124,900 in the first nine months of 1995. This increase
resulted from increased royalty income from a larger number of franchised
stores operating in the first nine months of 1996 compared to the first nine
months of 1995, abetted by increased same store sales at franchised stores of
3.5%. Franchise signings decreased to 30 in the first nine months of 1996
from 33 in the first nine months of 1995. Franchise fee revenues in the first
nine months of 1996 of $474,600 declined from the $531,300 in the first nine
months of 1995 due to differences in
13
<PAGE>
the timing of revenue recognition, together with the reduced number of
franchise signings ($5,000 in revenue is recognized at the date of franchise
agreement signing).
COSTS AND EXPENSES
COST OF CHOCOLATE SALES. Cost of chocolate sales increased 48.6% to
$6,122,700 in the first nine months of 1996 from $4,119,800 in the first nine
months of 1995. Cost of chocolate sales as a percentage of total chocolate
sales (defined as the total of factory sales and retail sales) increased to
51.8% in the first nine months of 1996 from 50.2% in the first nine months of
1995. This increase in cost of chocolate sales as a percentage of total
chocolate sales resulted from unusual favorable cumulative adjustments in the
second quarter of fiscal 1995 reflecting: (1) unbooked (due to uncertainty at
the time of their discovery as to the likelihood of their realization)
positive physical inventory adjustments from the first quarter of fiscal
1995; and (2) increased manufacturing overhead absorption during 1995
resulting from higher than plan actual (and anticipated for the balance of
the fiscal year 1995) production volumes resulting in a lowered base for
comparison. Additionally, as discussed above, the third quarter of fiscal
1996 witnessed an absolute 2% decline in factory margins resulting from
certain increased costs and price reductions. The Company is engaged in a
concerted effort to ascertain and correct for the causes of reduced factory
margin with the goal of returning factory margins to historical levels and to
continue the improvement which the Company had been experiencing in its
margins.
FRANCHISE COSTS. Franchise costs increased 29.4% to $1,370,800 in the
first nine months of 1996 from $1,059,100 in the first nine months of 1995.
As a percentage of the total of royalties and marketing fees and franchise
fees, franchise costs increased to 70.6% of such fees in the first nine
months of 1996 from 63.9% in the first nine months of 1995. The hiring of
additional field support and associated administrative personnel to support
the Company's accelerated pace of store opening activities and the larger
base of stores is the partial cause of this increase. Additionally, the
Company incurred increased expenses for promotional programs and marketing
materials to support the larger base of stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 12.8% to $1,040,000 in the first nine months of 1996 from $921,700
in the first nine months of 1995, as a result of increased expense for
administrative support personnel and increased depreciation expense
representing additional investment in computer hardware and software. As a
percentage of total revenues, general and administrative expense declined to
7.6% in the first nine months of 1996 from 9.4% in the first nine months of
1995, 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 57.1% to
$3,130,100 in the first nine months of 1996 from $1,992,100 in the first nine
months of 1995. This increase resulted from the effect of the larger number
of Company-owned stores in existence throughout the first nine months. As a
14
<PAGE>
percentage of retail sales, retail operating expenses remained constant at
55.3% in the first nine months of 1996 and 1995.
OTHER EXPENSE
Other expense of $196,300 incurred in the first nine months of 1996
increased 154.6% from the $77,100 incurred in the first nine months of 1995.
This increase resulted from increased interest expense associated with
borrowings to finance the Company's factory expansion and Company-owned store
expansion, as partially offset by increased interest income resulting from
cash surpluses generated by the Company's stock offering which occurred in
the third quarter (see "Liquidity and Capital Resources" discussed below).
INCOME TAX EXPENSE
The Company's effective income tax rate in the first nine months of 1996
was 37.4% compared to 39.0% in the first nine months of 1995. The absolute
1.6% decrease in effective tax rates resulted from utilization of lower, more
representative, full fiscal year 1995 historical experience as a basis for
estimating the effective tax rate for the full fiscal year 1996.
NEW CONCEPT
The Company opened in September, 1995 a prototype store for a new store
concept. Fuzziwig's-TRADE MARK- Candy Factory, as it is called, offers
self-serve bulk candies, gifts and image merchandise in an entertaining,
themed environment utilizing creative lighting, music, animation and
movement to entertain customers.
During the coming months the Company intends to aggressively test the
concept in each of the environments (regional mall, factory outlet and
tourist) in which the Company currently operates, including centers with
existing Rocky Mountain Chocolate Factory Company-owned stores.
Preliminary test results from the first store are that Fuzziwig's will be
compatible with Rocky Mountain Chocolate Factory stores, since there is
little overlap in product type. If the test proves successful, the Company
plans to offer Fuzziwig's for franchising as early as May 1996 and thereafter
open Fuzziwig's stores as both franchised and Company-owned locations.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of fiscal 1996 the Company generated $968,000 in
operating cash flow (in comparison with $723,700 in the first nine months of
fiscal 1995). The Company used this operating cash flow in combination with
$1,500,000 in draws under its newly-acquired chattel mortgage financing,
utilization of existing cash balances and proceeds of its stock offering (as
discussed below) to fund $4,265,000 in capital expenditures, primarily for
completion of its plant expansion and new Company-owned store construction
and to increase cash balances.
At November 30, 1995, working capital was $3,916,700 in comparison with
$1,627,000 at February 28, 1995, a $2,289,700 increase. This increase
resulted from the surplus generated by the Company's improved operating cash
flows, and
15
<PAGE>
equity and debt financing proceeds, as partially utilized to fund
elements of the Company's facility expansion and Company-owned store
expansion.
Cash and cash equivalent balances increased from $382,900 at February 28,
1995 to $1,849,000 at November 30, 1995 as a result of this improved cash
flow and financing proceeds.
The Company's long-term debt includes a 20-year real estate mortgage loan
obtained in June 1994 ($1.6 million principal outstanding at November 30,
1995). In addition, the Company had a $1.5 million chattel mortgage facility
(the "Facility"), the entire amount of which was outstanding at August 31,
1995, but which was repaid in September, 1995 as discussed below. The
Company also has outstanding a chattel mortgage term loan obtained in June
1994 under a prior facility (balance $.7 million at November 30, 1995). The
aggregate $2.3 million outstanding at November 30, 1995 under the real estate
and chattel mortgage term loans was incurred to support the Company's
financing needs for completion of its factory expansion and for Company-owned
store openings and is secured by the Company's inventory, equipment,
furniture and fixtures. The Company on September 20, 1995 retired the $1.5
million outstanding under the Facility with a portion of the proceeds of its
recently completed public offering of common stock (see below).
The Company has a $1.0 million working capital line of credit, secured by
accounts receivable. The line had a zero balance at November 30, 1995. Terms
of the loan require that the line be rested (that is, that there be no
outstanding balance) for two periods of 30 consecutive days during the term
of the loan, which expires in July 1996. Interest on the line is at prime.
For the balance of fiscal 1996, the Company anticipates making $1.1 million
in capital expenditures, primarily for the completion of Company-owned
chocolate and new concept stores, which expenditures are expected to be
funded from current working capital balances and operating cash flows.
In September and October 1995, the Company completed a public offering of
common stock which provided it with net proceeds after payment of offering
expenses of approximately $4.8 million. As discussed above, approximately
$1.5 million of these net proceeds was utilized to retire existing debt. The
balance of approximately $3.3 million has augmented the Company's working
capital reserves, and was used in part for Company-owned store expansion.
The Company in September, 1995, opened a first store utilizing a new store
concept (see "New Concept" above). This initial store utilizing the new store
concept was funded from operating cash flows. The Company expects to test
additional prototype stores in the current fiscal year and early in fiscal
1997. These prototype stores will be Company-owned. The Company will fund the
prototype stores from operating cash flows. Should test results justify
further expansion of the new concept, a potentially significant portion of
working capital reserves would be likely to be used to establish additional
stores under the new concept.
The Company believes that cash balances, cash flow from operating
activities and available bank lines of credit will be sufficient to service
debt, fund anticipated capital expenditures and provide necessary working
capital. There can be no
16
<PAGE>
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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held on October 13, 1995, the following
matters were submitted to a vote by the shareholders and approved:
(1) The following directors were elected for one year:
Franklin E. Crail Ralph L. Nafziger Fred M. Trainor
Gerald A. Kien Everett A. Sisson Lee N. Mortenson
Tabulation of the votes is as follows:
For: 2,104,688 Withheld: 1,985
(2) The Company's 1995 Employee Stock Option Plan reserving
100,000 shares for issuance under the plan was approved.
Tabulation of the votes is as follows:
For: 2,015,997 Against: 82,390 Abstain: 4,889 Not Voted: 3,397
(3) An Amendment of the Company's 1990 Nonqualified Stock Option Plan for
Nonemployee Directors was approved increasing from 60,000 to 90,000 shares
the number of shares of the Company's common stock reserved for issuance
under the plan.
Tabulation of the votes is as follows:
For: 2,079,189 Against: 22,205 Abstain: 5,279
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
November 30, 1995.
18
<PAGE>
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: January 12, 1996 /s/ FRANKLIN E. CRAIL
---------------- ---------------------------------------
Franklin E. Crail
(Chairman of the Board, President and
Treasurer)
Date: January 12, 1996 /s/ LAWRENCE C. REZENTES
---------------- ---------------------------------------
Lawrence C. Rezentes
(Vice President - Finance)
19
<PAGE>
EXHIBIT 11.1
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
------------------------
NOVEMBER 30,
1995 1994
---- ----
<S> <C> <C>
PRIMARY INCOME PER SHARE
Net income $1,196,497 $1,028,239
Dividend requirements
on preferred stock - (10,958)
---------- ----------
Net income allocable to common and
common equivalent shares $1,196,497 $1,017,281
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 2,740,990 2,479,937
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price 99,579 93,185
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,840,569 2,573,122
---------- ----------
---------- ----------
Primary income per common
and common equivalent share $ .42 $ .40
---------- ----------
---------- ----------
FULLY DILUTED INCOME PER SHARE
Net income $1,196,497 $1,028,239
Less dividend requirements on
preferred stock - (10,958)
Add interest expense and loan costs
amortized on convertible debt - 12,339
---------- ----------
Net income allocable to common and
equivalent shares $1,196,497 $1,029,620
---------- ----------
---------- ----------
Weighted average number of common
shares outstanding 2,740,990 2,479,937
Assuming conversion of
convertible debt - 143,077
Net effect of dilutive stock options
based on the Treasury Stock Method
using the greater of the average
or ending market price 102,878 95,237
---------- ----------
Weighted average number of common
shares outstanding as adjusted 2,843,868 2,718,251
---------- ----------
---------- ----------
Income per common and common
equivalent share assuming
full dilution $ .42 $ .38
---------- ----------
---------- ----------
</TABLE>
21
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED
-------------------------
NOVEMBER 30,
1995 1994
---- ----
<S> <C> <C>
PRIMARY INCOME PER SHARE
Net income $ 548,842 $ 483,463
Dividend requirements
on preferred stock - (3,653)
---------- ----------
Net income allocable to common and
common equivalent shares $ 548,842 $ 479,810
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 2,932,517 2,629,986
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price 92,251 88,053
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 3,024,768 2,718,039
---------- ----------
---------- ----------
Primary income per common
and common equivalent share $ .18 $ .18
---------- ----------
---------- ----------
FULLY DILUTED INCOME PER SHARE
Net income $ 548,842 $ 483,463
Less dividend requirements on
preferred stock - (3,653)
---------- ----------
Net income allocable to common and
equivalent shares $ 548,842 $ 479,810
---------- ----------
---------- ----------
Weighted average number of common
shares outstanding 2,932,517 2,629,986
Net effect of dilutive stock options
based on the Treasury Stock Method
using the greater of the average
or ending market price 92,251 93,830
---------- ----------
Weighted average number of common
shares outstanding as adjusted 3,024,768 2,723,816
---------- ----------
---------- ----------
Income per common and common
equivalent share assuming
full dilution $ .18 $ .18
---------- ----------
---------- ----------
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 1,848,988
<SECURITIES> 0
<RECEIVABLES> 2,089,028
<ALLOWANCES> 0
<INVENTORY> 2,414,524
<CURRENT-ASSETS> 6,632,910
<PP&E> 11,548,301
<DEPRECIATION> 2,216,511
<TOTAL-ASSETS> 17,085,863
<CURRENT-LIABILITIES> 2,716,211
<BONDS> 2,202,323
0
0
<COMMON> 90,280
<OTHER-SE> 11,917,186
<TOTAL-LIABILITY-AND-EQUITY> 17,085,863
<SALES> 11,828,868
<TOTAL-REVENUES> 13,771,601
<CGS> 6,122,721
<TOTAL-COSTS> 11,663,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196,283
<INCOME-PRETAX> 1,911,695
<INCOME-TAX> 715,198
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,196,497
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
