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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, 1996
/ / 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 7, 1996 there were 2,912,299 shares of common stock outstanding.
This document contains 24 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 August 31, 1996
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....................... 20
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
Financial Statements
Balance Sheets - August 31, 1996 (unaudited) and February 29, 1996.... 4
Statements of Income - Six-month periods ended August 31, 1996
(unaudited) and August 31, 1995 (unaudited)......................... 6
Statements of Income - Three-month periods ended August 31, 1996
(unaudited) and August 31, 1995 (unaudited)......................... 7
Statements of Cash Flows
Six-month periods ended August 31, 1996 (unaudited) and August 31,
1995 (unaudited)................................................... 8
Statements of Cash Flows
Three-month periods ended August 31, 1996 (unaudited) and August 31,
1995 (unaudited)................................................... 9
3
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
AUGUST 31, FEBRUARY 29,
1996 1996
ASSETS (UNAUDITED)
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,019,347 $ 528,787
Accounts and notes receivable - trade,
less allowance for doubtful accounts of
$21,031 at August 31 and $28,196 at
February 29 1,373,574 1,463,901
Inventories 3,085,959 2,504,908
Deferred tax asset 59,219 59,219
Other 277,982 224,001
----------- -----------
Total current assets 5,816,081 4,780,816
PROPERTY AND EQUIPMENT - AT COST
Land 122,558 122,558
Building 3,630,971 3,596,905
Leasehold improvements 2,154,732 1,753,165
Machinery and equipment 6,469,532 4,898,174
Furniture and fixtures 2,859,309 2,330,057
Transportation equipment 249,288 228,816
----------- -----------
15,486,390 12,929,675
Less accumulated depreciation and
amortization 3,051,017 2,468,084
----------- -----------
12,435,373 10,461,591
OTHER ASSETS
Notes and accounts receivable due after
one year 106,743 111,588
Goodwill, net of accumulated amortization
of $265,542 at August 31 and $253,740 at
February 29 324,458 336,260
Other 608,668 624,185
----------- -----------
1,039,869 1,072,033
----------- -----------
$19,291,323 $16,314,440
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
4
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS - CONTINUED
AUGUST 31, FEBRUARY 29,
1996 1996
LIABILITIES AND EQUITY (UNAUDITED)
----------- ------------
CURRENT LIABILITIES
Short-term debt $ - $ 1,000,000
Current maturities of long-term debt 564,166 134,538
Accounts payable - trade 1,210,393 998,520
Accrued compensation 278,700 335,926
Accrued liabilities 392,875 214,460
Income taxes payable 97,913 54,229
----------- -----------
Total current liabilities 2,544,047 2,737,673
LONG-TERM DEBT, less current maturities 4,895,719 2,183,877
DEFERRED INCOME TAXES 275,508 275,508
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 29 91,029 91,029
Additional paid-in capital 9,703,985 9,703,985
Retained earnings 2,796,934 2,338,267
----------- -----------
12,591,948 12,133,281
Less common stock held in treasury, at
cost - 129,153 shares at August 31, and
at February 29 1,015,899 1,015,899
----------- -----------
11,576,049 11,117,382
----------- -----------
$19,291,323 $16,314,440
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
5
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
SIX-MONTH PERIODS ENDED
AUGUST 31,
--------------------------
1996 1995
----------- -----------
REVENUES
Sales of chocolate $ 9,634,395 $6,803,640
Franchise and royalty fees 1,382,463 1,325,954
----------- ----------
11,016,858 8,129,594
----------- ----------
COSTS AND EXPENSES
Cost of chocolate sales 4,741,650 3,488,943
Franchise costs 994,482 914,614
General and administrative 868,003 700,442
Retail operating expenses 3,582,193 1,841,878
----------- ----------
10,186,328 6,945,877
----------- ----------
Operating income 830,530 1,183,717
OTHER INCOME (EXPENSE)
Gain on sale of assets 84,610 -
Interest expense (198,024) (157,202)
Interest income 19,111 9,734
----------- ----------
(94,303) (147,468)
INCOME BEFORE INCOME TAX EXPENSE 736,227 1,036,249
INCOME TAX EXPENSE
Provision for income taxes 277,560 388,594
----------- ----------
INCOME ALLOCABLE TO COMMON STOCKHOLDERS $ 458,667 $ 647,655
----------- ----------
----------- ----------
PRIMARY INCOME
PER COMMON AND EQUIVALENT SHARE $ .16 $ .24
----------- ----------
----------- ----------
Weighted average and equivalent shares 2,951,286 2,742,254
----------- ----------
----------- ----------
FULLY DILUTED INCOME
PER COMMON AND EQUIVALENT SHARE $ .16 $ .24
----------- ----------
----------- ----------
Weighted average and equivalent shares 2,957,419 2,742,204
----------- ----------
----------- ----------
The accompanying notes are an integral part of these statements.
6
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
THREE-MONTH PERIODS
ENDED AUGUST 31,
-----------------------
1996 1995
---------- ----------
REVENUES
Sales of chocolate $5,374,541 $3,779,843
Franchise and royalty fees 679,424 629,972
---------- ----------
6,053,965 4,409,815
---------- ----------
COSTS AND EXPENSES
Cost of chocolate sales 2,637,725 1,877,413
Franchise costs 509,015 465,081
General and administrative 453,945 352,982
Retail operating expenses 1,908,581 1,013,712
---------- ----------
5,509,266 3,709,188
---------- ----------
Operating income 544,699 700,627
OTHER INCOME (EXPENSE)
Gain on sale of assets 32,954 -
Interest expense (112,810) (95,364)
Interest income 8,397 2,712
---------- ----------
(71,459) (92,652)
INCOME BEFORE INCOME TAX EXPENSE 473,240 607,975
INCOME TAX EXPENSE
Provision for income taxes 178,410 227,991
---------- ----------
INCOME ALLOCABLE TO COMMON STOCKHOLDERS $ 294,830 $ 379,984
---------- ----------
---------- ----------
PRIMARY INCOME
PER COMMON AND EQUIVALENT SHARE $ .10 $ .14
---------- ----------
---------- ----------
Weighted average and equivalent shares 2,964,283 2,759,770
---------- ----------
---------- ----------
FULLY DILUTED INCOME
PER COMMON AND EQUIVALENT SHARE $ .10 $ .14
---------- ----------
---------- ----------
Weighted average and equivalent shares 2,964,283 2,760,694
---------- ----------
---------- ----------
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)
SIX-MONTH PERIODS
ENDED AUGUST 31,
------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 458,667 $ 647,655
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 803,802 336,270
Gain on sale of assets (84,610) -
Decrease (Increase) in notes and accounts
receivable 95,172 (54,112)
(Increase) in inventories (581,051) (328,219)
(Increase) in other assets (53,981) (310,755)
Increase in accounts payable 211,873 452,434
Increase (Decrease) in income tax payable 43,684 (181,714)
Increase in accrued liabilities 121,189 165,367
----------- -----------
Net cash provided by operating activities 1,014,745 726,926
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 310,690 -
Additions to other long-term assets (168,914) (7,850)
Purchase of property and equipment (2,807,431) (2,403,362)
----------- -----------
Net cash (used in)investing activities (2,665,655) (2,411,212)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 40,625
Principal payments on line of credit (1,000,000) (250,000)
Principal payments on long-term debt (2,470,535) (124,538)
Proceeds from line of credit - 250,000
Proceeds from issuance of long-term debt 5,612,005 1,500,000
Purchase and retirement of preferred stock - (26,025)
----------- -----------
Net cash provided by financing activities 2,141,470 1,390,062
----------- -----------
NET INCREASE (DECREASE) IN CASH: $ 490,560 $ (294,224)
----------- -----------
----------- -----------
Cash and cash equivalents at beginning of period $ 528,787 $ 382,905
----------- -----------
Cash and cash equivalents at end of period $ 1,019,347 $ 88,681
----------- -----------
----------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 197,997 $ 142,973
----------- -----------
----------- -----------
Income taxes $ 260,681 $ 570,308
----------- -----------
----------- -----------
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)
THREE-MONTH PERIODS
ENDED AUGUST 31,
------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 294,830 $ 379,984
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 423,738 176,882
Gain on sale of assets (32,954) -
Decrease (Increase) in notes and accounts
receivable 222,471 (134,151)
(Increase) in inventories (337,171) (396,882)
Decrease (Increase) in other assets 303,526 (266,933)
(Decrease) Increase in accounts payable (69,062) 439,682
Increase (Decrease) in income tax payable 86,715 (75,332)
(Decrease) Increase in accrued liabilities (42,898) 48,248
----------- -----------
Net cash provided by operating activities 849,195 171,498
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 155,190 -
Additions to other long-term assets (132,781) 9,891
Purchase of property and equipment (1,610,795) (943,656)
----------- -----------
Net cash (used in) investing activities (1,588,386) (933,765)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 40,625
Principal payments on line of credit - (100,000)
Principal payments on long-term debt (115,506) (71,697)
Proceeds from line of credit - 100,000
Proceeds from issuance of long-term debt 952,539 745,367
----------- -----------
Net cash provided by financing activities 837,033 714,295
----------- -----------
NET INCREASE(DECREASE)IN CASH: $ 97,842 $ (47,972)
Cash and cash equivalents at beginning of period $ 921,505 $ 136,653
----------- -----------
Cash and cash equivalents at end of period $ 1,019,347 $ 88,681
----------- -----------
----------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 111,199 $ 87,211
----------- -----------
----------- -----------
Income taxes $ 105,967 $ 298,323
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
9
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1996
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 29, 1996.
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, 1996 FEBRUARY 29, 1996
--------------- -----------------
Ingredients and supplies $1,350,825 $1,117,517
Finished candy 1,735,134 1,387,391
---------- ----------
$3,085,959 $2,504,908
---------- ----------
---------- ----------
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a manufacturer, franchiser and operator of two retail
concepts: Rocky Mountain Chocolate Factory and Fuzziwig's Candy Factory. The
Company derives its revenues from four principal sources: (1) factory sales,
which consist of candy sales to its franchised Rocky Mountain Chocolate
Factory store locations; (2) retail sales, which consist of candy sales at
retail by its Company-owned Rocky Mountain Chocolate Factory and Fuzziwig's
Candy Factory stores; (3) franchise fees, which consist of fees earned from
the sale of franchises; and (4) royalties and marketing fees.
NEW-STORE CONCEPT - FUZZIWIG'S
The Company is the operator and franchiser of a new concept store called
Fuzziwig's Candy Factory. This new concept store sells hard conventional and
nostalgic/unusual candies in a themed, self-serve environment featuring
animation, movement, music, color and entertainment. The first prototype
Fuzziwig's store opened in September, 1995. Six Company-owned Fuzziwig's
stores were in operation as of August 31, 1996 with five additional stores
under construction. The Company began franchising its Fuzziwig's concept
store in May, 1996 and one franchised Fuzziwig's store is scheduled to open
in December, 1996.
RESULTS OF OPERATIONS
QUARTER ENDED AUGUST 31, 1996 COMPARED TO QUARTER ENDED AUGUST 31, 1995
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 1997 FISCAL 1996 CHANGE CHANGE
-------------- -------------- ------- ------
REVENUE COMPONENT
Factory Sales 2,171.5 1,893.4 278.1 14.7%
Retail Sales 3,203.0 1,886.4 1,316.6 69.8
Franchise Fees 52.1 91.0 (38.9) (42.7)
Royalties/Marketing fees 627.4 539.0 88.4 16.4
------- ------- ------- -----
Total 6,054.0 4,409.8 1,644.2 37.3%
------- ------- ------- -----
STORE DATA
-----------------------
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
Number Of Stores Open At End Of Period:
Company 52 27
Franchised 167 142
--- ---
Total 219 169
--- ---
--- ---
11
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REVENUES
FACTORY SALES. Factory sales increased $278,100 or 14.7% to $2.2
million in the second quarter of fiscal 1997, compared to $1.9 million in the
second quarter of fiscal 1996. This increase resulted from the larger number
of franchised stores in existence throughout the quarter, augmented by the
impact of a 2.6% price increase effected in January of 1996. Same store
pounds purchased from the factory declined by 4.7% in the second quarter of
fiscal 1997 compared to the second quarter of 1996 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 resulted primarily from an increase in the mix of store-made products
relative to factory-made products sold at franchised stores.
RETAIL SALES. Retail sales increased $1,316,600 or 69.8% to $3.2
million in the second quarter of fiscal 1997, compared to $1.9 million in the
second quarter of fiscal 1996. This increase resulted primarily from a larger
number of Company-owned stores in existence throughout the quarter. The
impact of a 2.0% same store sales decline at Company-owned stores partially
offset the impact of this increased number of stores. The decline in same
store sales is believed to result from the effect of lower foot traffic in
the factory outlet mall environment in which most Company-owned stores
operate and as a result of a decline in revenues in the second year of
operation from grand opening levels of revenue at stores established in the
last fiscal year at new factory outlet malls.
Additionally, the majority of new Company-owned stores established in
the last fiscal year were located in geographical areas where the Company is
less well known and is seeking to establish name identification. The Company
believes that growth in same store sales as well as in absolute volume levels
are lower than they otherwise would be as a result of this effort to
establish itself in new markets.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing
fees increased $88,400 or 16.4% to $627,400 in the second quarter of fiscal
1997, compared to $539,000 in the second quarter of fiscal 1996. This
increase resulted from increased royalty income from a larger number of
franchised stores operating in the second quarter of fiscal 1997 compared to
the second quarter of fiscal 1996, partially offset by the effect of a
decline in same store sales at franchised stores of 3.5%. Franchise fee
revenues in the second quarter of fiscal 1997 declined from that earned in
the second quarter of fiscal 1996 ($52,100 in comparison with $91,000).
Franchise signings declined to 3 in the second quarter of fiscal 1997 from 7
in the second quarter of fiscal 1996, due to difficulty in obtaining
appropriate locations for new franchised stores. Decreased balance due
collections on franchises previously signed also resulted in the decreased
franchise fee revenue earned for the quarter. Franchise fee revenue is
recorded as conditions for earning the revenue are met: $5,000 is payable
upon franchise agreement signing, with the balance $14,500 being payable upon
signing of the lease of the facility representing the franchised location.
The Company is experiencing a decline in available locations resulting
primarily from reduced growth in new factory outlet centers, which is causing
a shortfall from anticipated levels in franchise signings which shortfall is
expected to continue at
12
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least for the balance of the current fiscal year. The impact of this decline
in available locations and associated reduced franchise signings is
anticipated to be a continued shortfall for at least the balance of the
fiscal year in franchise fee revenues relative to that earned in the prior
fiscal year.
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 40.5% to $2,638,000 in the second
quarter of fiscal 1997 from $1,877,000 in the second quarter of fiscal 1996.
Cost of chocolate sales as a percentage of revenue decreased to 49.1% in the
second quarter of fiscal 1997 from 49.7% in the second quarter of fiscal
1996. This improvement resulted from an increase in higher margin retail
sales as a percentage of total revenue as partially offset by a decline in
factory margins from those existing in the second quarter of fiscal 1996.
The Company in fiscal 1996 experienced a decline of factory margins of
4% absolute for the full year and 6.7% absolute in the second half from
factory margin results experienced in the prior year full year and second
half periods. The Company has made major improvement in manufacturing
performance as a result of its concerted effort to correct for the increased
material usage, reduced labor efficiencies and increased overhead spending
resulting in this decline in factory margins. As a result of its efforts,
factory margins have improved by 5.0% absolute from depressed levels existing
in the second half of fiscal 1996, but factory margins currently remain
approximately 1.7% absolute below recent year historical averages. The
Company is engaged in a concerted effort to correct for remaining causes of
margin shortfall 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 9.4% from $465,100 in the
second quarter of fiscal 1996 to $509,000 in the second quarter of fiscal
1997. As a percentage of the total of royalty and marketing fees and
franchise fee revenue, franchise costs increased to 74.9% of such fees in the
second quarter of fiscal 1997 from 73.8% in the second quarter of fiscal
1996. Decreased franchise fee revenues relative to the second quarter of last
year is the primary cause of this increase in relative percentage.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 28.6% from $353,000 in the second quarter of fiscal 1996
to $454,000 in the second quarter of fiscal 1997, as a result of increased
expense for administrative support personnel. As a percentage of total
revenues, general and administrative expense declined from 8.0% in the second
quarter of 1996 to 7.5% in the second quarter of 1997, 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
$1.0 million in the second quarter of 1996 to $1.9 million in the second
quarter of fiscal 1997; an increase of 88.3%. This increase resulted
partially from the effect of the larger number of Company-owned stores in
existence throughout the second quarter and partially as a result of
increased expenses incurred in the "start-up" phase of many new stores
established in late fiscal 1997. As a percentage of retail sales, retail
13
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operating expenses increased from 53.7% in the second quarter of fiscal 1996
to 59.6% in the second quarter of fiscal 1997 as a result of insufficient
sales volume leveraging resulting from the decline in same store retail sales
at Company-owned stores discussed above, partially as a result of this
"start-up" effect and partially as a result of sales volumes at many
Company-owned stores established within the last 12 months significantly
below Company expectations.
As noted above, the Company is experiencing disappointing foot traffic
in the factory outlet mall environment in which most of its new Company-owned
stores have been established. This lower foot traffic has resulted in the
poorer sales volumes than anticipated at its new Company-owned stores.
The Company has begun a program of conversion of Company-owned store
locations to franchised locations of stores not meeting minimum economic
performance criteria and to reduce its expansion program in the establishment
of Rocky Mountain Chocolate Factory Company-owned stores. The Company intends
to place for sale to franchisees Company-owned stores not meeting such
criteria and thereby not justifying ongoing investment of Company funds and
management time and attention. The Company does not expect such conversion
and sale to have appreciable positive or negative impact on Company earnings
performance because store profits sacrificed in such cases are expected to be
approximately compensated-for by royalties generated and cost of capital
saved. Gains realized on store disposition are also not expected to be
material to Company results of operations. There can be no guarantee,
however, that such conversions of Company-owned stores to franchised
locations will not create loss of Company-owned store profits in excess of
royalties generated and cost of capital saved thereby producing negative
impact on future Company profitability.
OTHER EXPENSE
Other expense of $71,500 incurred in the second quarter of fiscal 1997
decreased 29.7% from the $92,700 incurred in the second quarter of fiscal
1996. This decrease resulted from gain on sale of assets. Excluding this
gain, other expense increased as a result of interest expense caused by
borrowings in support of the Company's Company-owned store expansion.
INCOME TAX EXPENSE
The Company's effective income tax rate in the second quarter of 1997
was 37.7% approximating the 37.5% in the second quarter of fiscal 1996.
14
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RESULTS OF OPERATIONS
FIRST HALF ENDED AUGUST 31, 1996 COMPARED TO FIRST HALF ENDED AUGUST 31, 1995
(ALL AMOUNTS OTHER THAN STORE DATA IN THOUSANDS)
FIRST HALF FIRST HALF $ %
FISCAL 1997 FISCAL 1996 CHANGE CHANGE
----------- ----------- ------- ------
REVENUE COMPONENT
Factory Sales 3,899.6 3,445.5 454.1 13.2%
Retail Sales 5,734.8 3,358.1 2,376.7 70.8
Franchise Fees 245.7 336.5 (90.8) (27.0)
Royalties/Marketing fees 1,136.8 989.5 147.3 14.9
-------- ------- ------- -----
Total 11,016.9 8,129.6 2,887.3 35.5%
-------- ------- ------- -----
STORE DATA
-----------------------
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
Number Of Stores Open At End Of Period:
Company 52 27
Franchised 167 142
--- ---
Total 219 169
--- ---
--- ---
REVENUES
FACTORY SALES. Factory sales increased $454,100 or 13.2% to $3.9
million in the first half of fiscal 1997, compared to $3.4 million in the
first half of 1996. This increase resulted from the larger number of
franchised stores in existence throughout the quarter, augmented by the
impact of a 2.6% price increase effected in January of 1996. Same store
pounds purchased from the factory declined by 7.2% in the first half of
fiscal 1997 compared to the first half of fiscal 1996 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
resulted partially from the effect of different timing of product shipment
for the Easter holiday in fiscal 1997 relative to fiscal 1996 (an earlier
Easter in fiscal 1997 resulted in shipment of Easter product in the last
quarter of fiscal 1996). It is also believed to have resulted 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.
RETAIL SALES. Retail sales increased $2,376,700 or 70.8% to $5.7
million in the first half of fiscal 1997, compared to $3.3 million in the
first half of fiscal 1996.
15
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This increase resulted primarily from a larger number of Company-owned stores
in existence throughout the quarter. The impact of a .47% same store sales
decline at Company-owned stores partially offset the impact of this increased
number of stores. As discussed above, the decline in same store sales is
believed to result from the effect of lower foot traffic in the factory
outlet mall environment in which most Company-owned stores operate and as a
result of decline in revenues in the second year of operation from grand
opening levels of revenue at stores established in the last fiscal year at
new factory outlet malls.
As also discussed above, the majority of new Company-owned stores
established in the last fiscal year were located in geographical areas where
the Company is less well known and is seeking to establish name identification.
The Company believes that growth in same store sales as well as in absolute
volume levels are lower than they otherwise would be as a result of this effort
to establish itself in new markets.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and
marketing fees increased $147,300 or 14.9% to $1.1 million in the first half
of fiscal 1997, compared to $1.0 million in the first half of fiscal 1996.
This increase resulted from increased royalty income from a larger number of
franchised stores operating in the first half of 1997 compared to the first
half of fiscal 1996, partially offset by the effect of a decline in same
store sales at franchised stores of 3.45%. Franchise fee revenues in the
first half of fiscal 1997 declined from that earned in the first half of
fiscal 1996 ($245,700 in comparison with $336,500). Franchise signings
declined to 9 in the first half of fiscal 1997 from 20 in the first half of
1996, due to difficulty in obtaining appropriate locations for new franchised
stores. Decreased balance due collections on franchises previously signed
also resulted in the decreased franchise fee revenue earned for the first
half. Franchise fee revenue is recorded as conditions for earning the
revenue are met: $5,000 is payable upon franchise agreement signing, with the
balance $14,500 being payable upon signing of the lease of the facility
representing the franchised location.
As discussed above the Company is experiencing a decline in available
locations resulting primarily from dramatically reduced growth in new factory
outlet centers, which is causing a shortfall from anticipated levels in
franchise signings which shortfall is expected to continue at least for the
balance of the current fiscal year. The impact of this decline in available
locations and associated reduced franchise signings is anticipated to be a
continued shortfall for at least the balance of the fiscal year in franchisee
fee revenues relative to that earned in the prior fiscal year and to have a
negative impact on franchise revenues earned for at least the balance of the
fiscal year.
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 35.9% to $4,742,000 in the first half
of fiscal 1997 from $3,489,000 in the first half of fiscal 1996. Cost of
chocolate sales as a percentage of revenue decreased to 49.2% in the first
half of fiscal 1997 from 51.3% in the first half of fiscal 1996. This
improvement resulted from an increase in
16
<PAGE>
higher margin retail sales as a percentage of total revenue as partially
offset by a decline in factory margins from those existing in the first half
of fiscal 1996.
As discussed above, the Company in fiscal 1996 experienced a decline of
factory margins of 4% absolute for the full year and 6.7% absolute in the
second half from factory margin results experienced in the prior year full
year and second half periods. The Company has made major improvement in
manufacturing performance as a result of its concerted effort to correct for
the increased material usage, reduced labor efficiencies and increased
overhead spending resulting in this decline in factory margins. As a result
of its efforts, factory margins have improved by 5.0% absolute from depressed
levels existing in the second half of fiscal 1996, but factory margins
currently remain approximately 1.7% absolute below recent year historical
averages. The Company is engaged in a concerted effort to correct for
remaining causes of margin shortfall 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 8.7% from $915,000 in the
first half of fiscal 1996 to $994,000 in the first half of fiscal 1997. As a
percentage of the total of royalty and marketing fees and franchise fee
revenue, franchise costs increased to 71.9% of such fees in the first half of
fiscal 1997 from 69.0% in the first half of fiscal 1996. Decreased franchise
fee revenues relative to the first half of last year is the primary cause of
this increase in relative percentage.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 23.9% from $700,000 in the first half of fiscal 1996 to
$868,000 in the first half of fiscal 1997, as a result of increased expense
for administrative support personnel. As a percentage of total revenues,
general and administrative expense declined from 8.6% in the first half of
1996 to 7.9% in the first half of 1997, 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
$1,842,000 in the first half of 1996 to $3,582,000 in the first half of 1997;
an increase of 94.5%. This increase resulted partially from the effect of the
larger number of Company-owned stores in existence throughout the first half
and partially as a result of increased expenses incurred in the "start-up"
phase of many new stores established in late fiscal 1997. As a percentage of
retail sales, retail operating expenses increased from 54.8% in the first
half of 1996 to 62.5% in the first half of fiscal 1997 as a result of
insufficient sales volume leveraging resulting from the decline in same store
retail sales at Company-owned stores discussed above, partially as a result
of this "start-up" effect and partially as a result of sales volumes at many
Company-owned stores established within the last 12 months significantly
below Company expectations.
As noted above, the Company is experiencing disappointing foot traffic
in the factory outlet mall environment in which most of its new Company-owned
stores have been established. This lower foot traffic has resulted in the
poorer sales volumes than anticipated at its new Company-owned stores.
As discussed above, the Company has begun a program of conversion of
Company-owned store locations to franchised locations of stores not meeting
minimum economic
17
<PAGE>
performance criteria and to reduce its expansion program in the establishment
of Rocky Mountain Chocolate Factory Company-owned stores. The Company intends
to place for sale to franchisees Company-owned stores not meeting such
criteria and thereby not justifying ongoing investment of Company funds and
management time and attention. The Company does not expect such conversion
and sale to have appreciable positive or negative impact on Company earnings
performance because store profits sacrificed in such cases are expected to be
approximately compensated-for by royalties generated and cost of capital
saved. Gains realized on store disposition are also not expected to be
material to Company results of operations. There can be no guarantee,
however, that such conversions of Company-owned stores to franchised
locations will not create loss of Company-owned store profits in excess of
royalties generated and cost of capital saved thereby producing negative
impact on future Company profitability.
OTHER EXPENSE
Other expense of $94,300 incurred in the first half of fiscal 1997
decreased 36.1% from the $147,500 incurred in the first half of fiscal 1996.
This decrease resulted from gain on sale of assets. Excluding this gain,
other expense increased as a result of interest expense caused by borrowings
in support of the Company's Company-owned store expansion.
INCOME TAX EXPENSE
The Company's effective income tax rate in the first half of 1996 was
37.7% approximating the 37.5% in the first half of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
In the first half of fiscal 1997 the Company generated $1,014,745 in
operating cash flow. The Company used this operating cash flow in combination
with $5.6 million from issuance of long-term debt to retire other long-term
debt, repay the line of credit balance outstanding at the end of fiscal 1996,
and fund purchase of property and equipment.
At August 31, 1996, working capital was $3,272,034 in comparison with
$2,043,143 at February 29, 1996, a $1,228,891 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 $528,787 at February
29, 1996 to $1,019,347 at August 31, 1996 as a result of this financing. The
Company's current ratio was 2.3/1 at August 31, 1996 in comparison with 1.7/1
at February 29, 1996.
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, 1996 $1,631,752), and
Chattel mortgage financing (unpaid balance as of August 31, 1996 $3,819,551)
provided by both local and national financing facilities and used to fund the
Company store expansion.
18
<PAGE>
The Company possesses a $2,000,000 working capital line of credit at
August 31, 1996 secured by accounts receivable and inventories which line had
a $-0- balance at that date.
The Company possesses fixed asset availability lines of credit totaling
$5,000,000 for use by the Company in its Company-owned store expansion
program (balance utilized and owed at August 31, 1996, under these
availability lines, $3,819,551).
For the balance of fiscal 1997, the Company anticipates making $2.4
million in capital expenditures. Of this sum, approximately $1.8 million 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 cash flow from operating activities and
available bank lines of fixed asset and working capital credit will be
sufficient to service debt, fund anticipated capital expenditures and provide
necessary working capital at least through the end of fiscal 1997. 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 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.
19
<PAGE>
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,
1996.
20
<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: October 11, 1996 By: /s/ FRANKLIN E. CRAIL
------------------------------------
Franklin E. Crail
(Chairman of the Board, President
and Treasurer)
Date: October 11, 1996 By: /s/ LAWRENCE C. REZENTES
------------------------------------
Lawrence C. Rezentes
(Vice President - Finance)
21
<PAGE>
EXHIBIT 11.1
22
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
SIX-MONTH PERIODS ENDED
AUGUST 31,
-----------------------
1996 1995
---------- ----------
PRIMARY INCOME PER SHARE
Net income allocable to common and
common equivalent shares $ 458,667 $ 647,655
---------- ----------
---------- ----------
Weighted average number of common shares
outstanding 2,905,149 2,639,011
Net effect of dilutive stock options and
warrants based on the Treasury Stock Method
using average market price 46,137 103,243
---------- ----------
Weighted average number of common and common
equivalent shares outstanding 2,951,286 2,742,254
---------- ----------
---------- ----------
Primary income per common and common
equivalent share $ .16 $ .24
---------- ----------
---------- ----------
FULLY DILUTED INCOME PER SHARE
Net income allocable to common and
equivalent shares $ 458,667 $ 647,655
---------- ----------
---------- ----------
Weighted average number of common shares
outstanding 2,905,149 2,639,011
Net effect of dilutive stock options based on
the Treasury Stock Method using the greater
of the average or ending market price 52,270 108,193
---------- ----------
Weighted average number of common shares
outstanding as adjusted 2,957,419 2,747,204
---------- ----------
---------- ----------
Income per common and common equivalent
share assuming full dilution $ .16 $ .24
---------- ----------
---------- ----------
23
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
THREE-MONTH PERIODS ENDED
AUGUST 31,
-------------------------
1996 1995
---------- ----------
PRIMARY INCOME PER SHARE
Net income allocable to common and
common equivalent shares $ 294,830 $ 379,984
---------- ----------
---------- ----------
Weighted average number of common shares
outstanding 2,905,149 2,650,716
Net effect of dilutive stock options and
warrants based on the Treasury Stock Method
using average market price 59,134 109,054
---------- ----------
Weighted average number of common and common
equivalent shares outstanding 2,964,283 2,759,770
---------- ----------
---------- ----------
Primary income per common and common
equivalent share $ .10 $ .14
---------- ----------
---------- ----------
FULLY DILUTED INCOME PER SHARE
Net income allocable to common and
equivalent shares $ 294,830 $ 379,984
---------- ----------
---------- ----------
Weighted average number of common shares
outstanding 2,905,149 2,650,716
Net effect of dilutive stock options based on
the Treasury Stock Method using the greater
of the average or ending market price 59,134 109,978
---------- ----------
Weighted average number of common shares
outstanding as adjusted 2,964,283 2,760,694
---------- ----------
---------- ----------
Income per common and common equivalent
share assuming full dilution $ .10 $ .14
---------- ----------
---------- ----------
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 1,019,347
<SECURITIES> 0
<RECEIVABLES> 1,373,574
<ALLOWANCES> 0
<INVENTORY> 3,085,959
<CURRENT-ASSETS> 5,816,081
<PP&E> 15,486,390
<DEPRECIATION> 3,051,017
<TOTAL-ASSETS> 19,291,323
<CURRENT-LIABILITIES> 2,544,047
<BONDS> 4,895,719
0
0
<COMMON> 91,029
<OTHER-SE> 11,485,020
<TOTAL-LIABILITY-AND-EQUITY> 19,291,323
<SALES> 9,634,395
<TOTAL-REVENUES> 11,016,858
<CGS> 4,741,650
<TOTAL-COSTS> 10,186,328
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178,913
<INCOME-PRETAX> 736,227
<INCOME-TAX> 277,560
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 458,667
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
