<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, 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.
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(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 January 3, 1997 there were 2,912,299 shares of common stock outstanding.
This document contains 25 pages including exhibits.
The exhibit index is located on page 21.
1
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q FOR THE QUARTER ENDED November 30, 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 4. Submission of Matters to a Vote of Security Holders.... 20
Item 6. Exhibits and Reports on Form 8-K....................... 21
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, 1996 (unaudited)
and February 29, 1996................................................ 4
Statements of Income - Nine-month
periods ended November 30, 1996 (unaudited)
and November 30, 1995 (unaudited)................................... 6
Statements of Income - Three-month
periods ended November 30, 1996 (unaudited)
and November 30, 1995 (unaudited)................................... 7
Statements of Cash Flows
Nine-month periods ended
November 30, 1996 (unaudited)
and November 30, 1995 (unaudited)................................... 8
Statements of Cash Flows
Three-month periods ended
November 30, 1996 (unaudited)
and November 30, 1995 (unaudited)................................... 9
3
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
November 30, February 29,
1996 1996
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 491,047 $ 528,787
Accounts and notes receivable -
trade, less allowance for doubtful
accounts of $14,507 at November 30 and
$28,196 at February 29 2,259,929 1,463,901
Inventories 3,181,247 2,504,908
Deferred tax asset 59,219 59,219
Other 256,488 224,001
----------- -----------
Total current assets 6,247,930 4,780,816
PROPERTY AND EQUIPMENT - AT COST
Land 122,558 122,558
Building 3,634,317 3,596,905
Leasehold improvements 2,738,214 1,753,165
Machinery and equipment 6,987,132 4,898,174
Furniture and fixtures 3,139,708 2,330,057
Transportation equipment 250,509 228,816
----------- -----------
16,872,438 12,929,675
Less accumulated depreciation
and amortization 3,368,340 2,468,084
----------- -----------
13,504,098 10,461,591
OTHER ASSETS
Notes and accounts receivable due
after one year 97,974 111,588
Goodwill, net of accumulated
amortization of $271,443 at
November 30 and $253,740 at February 29 318,557 336,260
Other 661,831 624,185
----------- -----------
1,078,362 1,072,033
----------- -----------
$20,830,390 $16,314,440
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS - CONTINUED
<TABLE>
November 30, February 29,
1996 1996
LIABILITIES AND EQUITY ----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ 400,000 1,000,000
Current maturities of long-term debt 692,900 134,538
Accounts payable - trade 1,355,213 998,520
Accrued compensation 631,830 335,926
Accrued liabilities 225,217 214,460
Income taxes payable 86,900 54,229
----------- -----------
Total current liabilities 3,392,060 2,737,673
LONG-TERM DEBT, less current maturities 5,300,594 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
3,041,302 shares at November 30 and
3,034,302 at February 29 91,239 91,029
Additional paid-in capital 9,730,872 9,703,985
Retained earnings 3,055,851 2,338,267
----------- -----------
12,877,962 12,133,281
Less common stock held in treasury,
at cost - 129,003 at November 30 and
129,153 shares at February 29 1,015,734 1,015,899
----------- -----------
11,862,228 11,117,382
----------- -----------
$20,830,390 $16,314,440
----------- -----------
----------- -----------
</TABLE>
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>
Nine-month periods ended
November 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Sales of chocolate $16,095,205 $11,828,868
Franchise and royalty fees 2,007,238 1,942,733
----------- -----------
18,102,443 13,771,601
----------- -----------
COSTS AND EXPENSES
Cost of chocolate sales 8,090,329 6,122,721
Franchise costs 1,493,090 1,370,765
General and administrative 1,358,986 1,040,049
Retail operating expenses 5,700,752 3,130,088
----------- -----------
16,643,157 11,663,623
----------- -----------
Operating income 1,459,286 2,107,978
OTHER INCOME (EXPENSE)
Interest expense (331,416) (235,016)
Interest income 23,954 38,733
----------- -----------
(307,462) (196,283)
INCOME BEFORE INCOME TAX EXPENSE 1,151,824 1,911,695
INCOME TAX EXPENSE
Provision for income taxes 434,240 715,198
----------- -----------
INCOME ALLOCABLE TO
STOCKHOLDERS $ 717,584 $1,196,497
----------- -----------
----------- -----------
INCOME
PER COMMON AND EQUIVALENT SHARE $ .24 $ .42
----------- -----------
----------- -----------
Weighted average and equivalent shares 2,952,015 2,840,569
----------- -----------
----------- -----------
</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>
Three-month periods ended
November 30,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUES
Sales of chocolate $6,460,810 $5,025,228
Franchise and royalty fees 624,775 616,779
---------- ----------
7,085,585 5,642,007
---------- ----------
COSTS AND EXPENSES
Cost of chocolate sales 3,348,679 2,633,778
Franchise costs 498,608 456,151
General and administrative 490,983 339,607
Retail operating expenses 2,203,169 1,288,210
---------- ----------
6,541,439 4,717,746
---------- ----------
Operating income 544,146 924,261
OTHER INCOME (EXPENSE)
Interest expense (133,392) ( 77,814)
Interest income 4,843 28,999
---------- ----------
(128,549) ( 48,815)
INCOME BEFORE INCOME TAX EXPENSE 415,597 875,446
INCOME TAX EXPENSE
Provision for income taxes 156,680 326,604
---------- ----------
INCOME ALLOCABLE TO
STOCKHOLDERS $ 258,917 $ 548,842
---------- ----------
---------- ----------
INCOME
PER COMMON AND EQUIVALENT SHARE $ .09 $ .18
---------- ----------
---------- ----------
Weighted average and equivalent shares 2,944,898 3,024,768
---------- ----------
---------- ----------
</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>
Nine-month periods ended
November 30,
--------------------------------
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 717,584 $ 1,196,497
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,255,738 544,096
Gain on the sale of assets (84,610) -
(Increase) in notes and
accounts receivable (782,414) (888,573)
(Increase) in inventories (676,339) (727,508)
(Increase) in other assets (32,487) (101,679)
Increase in accounts payable 356,693 765,386
Increase (decrease) in income tax payable 32,671 (97,391)
Increase in accrued liabilities 306,661 277,160
---------- -----------
Net cash provided by
operating activities 1,093,497 967,988
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 310,690 -
Additions to other long-term assets (350,789) (296,208)
Purchase of property and equipment (4,193,479) (3,968,738)
---------- -----------
Net cash (used in) investing activities (4,233,578) (4,264,946)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock offering - 5,221,125
Cost of stock offering - (364,988)
Proceeds from exercise of
stock options 26,250 71,875
Proceeds from issuance of
treasury stock 1,012 2,175
Principal payments on line of credit (1,000,000) (430,000)
Principal payments on long-term debt (2,616,639) (1,641,121)
Proceeds from line of credit 400,000 430,000
Proceeds from issuance of long-term debt 6,291,718 1,500,000
Purchase and retirement of preferred stock - (26,025)
---------- -----------
Net cash provided by
financing activities 3,102,341 4,763,041
---------- -----------
NET (DECREASE) INCREASE IN CASH: $ (37,740) $ 1,466,083
Cash and cash equivalents
at beginning of period $ 528,787 $ 382,905
---------- -----------
Cash and cash equivalents
at end of period $ 491,047 $ 1,848,988
---------- -----------
---------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 322,323 $ 223,858
---------- -----------
---------- -----------
Income taxes $ 426,677 $ 812,589
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
Three-month periods ended
November 30,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 258,917 $ 548,842
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 451,936 207,826
(Increase) in notes and
accounts receivable (877,586) (834,461)
(Increase) in inventories (95,288) (399,289)
Decrease in other assets 21,494 209,076
Increase in accounts payable 144,820 312,952
(Decrease) Increase in income tax payable (11,013) 84,323
Increase in accrued liabilities 185,472 111,793
----------- -----------
Net cash provided by operating
activities 78,752 241,062
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other long-term assets (181,875) (288,358)
Purchase of property and equipment (1,386,048) (1,565,376)
----------- -----------
Net cash (used in) investing activities (1,567,923) (1,853,734)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock offering - 5,221,125
Cost of stock offering - (364,988)
Proceeds from exercise of
stock options 26,250 31,250
Proceeds from issuance of
treasury stock 1,012 2,175
Principal payments on line of credit - (180,000)
Principal payments on long-term debt (146,104) (1,516,583)
Proceeds from line of credit 400,000 180,000
Proceeds from issuance of long-term debt 679,713 -
----------- -----------
Net cash provided by
financing activities 960,871 3,372,979
----------- -----------
NET (DECREASE) INCREASE IN CASH: $ (528,300) $ 1,760,307
Cash and cash equivalents
at beginning of period $ 1,019,347 $ 88,681
----------- -----------
Cash and cash equivalents
at end of period $ 491,047 $ 1,848,988
----------- -----------
----------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 124,326 $ 80,884
----------- -----------
----------- -----------
Income taxes $ 165,996 $ 242,281
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
November 30, 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:
November 30, 1996 February 29, 1996
----------------- -----------------
Ingredients and supplies $1,473,401 $1,117,517
Finished Candy 1,707,846 1,387,391
---------- ----------
$3,181,247 $2,504,908
---------- ----------
---------- ----------
10
<PAGE>
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. Twelve Company-owned and one
franchised Fuzziwig's stores were in operation as of November 30, 1996.
RESULTS OF OPERATIONS
QUARTER ENDED NOVEMBER 30, 1996 COMPARED TO QUARTER ENDED NOVEMBER 30, 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)
THIRD QUARTER THIRD QUARTER $ %
FISCAL 1997 FISCAL 1996 CHANGE CHANGE
------------- ------------- -------- ------
REVENUE COMPONENT
Factory Sales $2,823.1 $2,727.9 $ 95.2 3.5 %
Retail Sales 3,637.7 2,297.4 1,340.3 58.3
Franchise Fees 73.0 138.1 (65.1) (47.1)
Royalties/Marketing 551.7 478.6 73.1 15.3
fees -------- -------- -------- -----
Total $7,085.5 $5,642.0 $1,443.5 25.6 %
-------- -------- -------- -----
STORE DATA
-----------------------------
NOVEMBER 30, NOVEMBER 30,
1996 1995
------------ ------------
NUMBER OF STORES OPEN AT END OF PERIOD:
COMPANY 58 39
FRANCHISED 168 151
--- ---
TOTAL 226 190
--- ---
--- ---
11
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REVENUES
FACTORY SALES. Factory sales increased $95,200 or 3.5% to $2.8 million in
the third quarter of fiscal 1997, compared to $2.7 million in the third
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 10.0% in the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996 largely 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
and products purchased from authorized vendors relative to factory-made
products sold at franchised stores. This decline continues what appears to
be a trend of a shift in sales mix toward store-made and authorized vendor
products producing decline in same store pounds purchased from the factory.
The Company has initiated a program of new product introductions with the
goal of reversing this decline.
RETAIL SALES. Retail sales increased $1,340,300 or 58.3% to $3.6 million
in the third quarter of fiscal 1997, compared to $2.3 million in the third
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 6.1% same store sales decline at Company-owned stores partially
offset the impact of this increased number of stores. This same store sales
decline was attributable exclusively to Rocky Mountain Chocolate Factory
concept stores since no Fuzziwig's concept store was open during the full
comparative period. 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 same store sales as well as 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 $73,100 or 15.3% to $551,700 in the third quarter of fiscal
1997, compared to $478,600 in the third quarter of fiscal 1996. This increase
resulted from increased royalty income from a larger number of franchised
stores operating in the third quarter of fiscal 1997 compared to the third
quarter of fiscal 1996, partially offset by the effect of a decline in same
store sales at franchised stores of 2.8%. Franchise fee revenues in the third
quarter of fiscal 1997 declined from that earned in the third quarter of
fiscal 1996 ($73,000 in comparison with $138,100). Franchise signings
declined to 6 in the third quarter of fiscal 1997 from 10 in the third
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
12
<PAGE>
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. Such decline in
available locations is causing a shortfall from anticipated levels of
franchise signings, which shortfall is expected to continue for the
foreseeable future. The impact of this decline in available locations and
associated reduced franchise signings is anticipated to be a continued
shortfall for the foreseeable future 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 27.1% to $3.3 million in the third
quarter of fiscal 1997 from $2.6 million in the third quarter of fiscal 1996.
Cost of chocolate sales as a percentage of revenue decreased to 51.8% in the
third quarter of fiscal 1997 from 52.4% in the third 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 third 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 4.6% absolute from depressed levels existing in the
second half of fiscal 1996, but factory margins currently remain
approximately 2.3% absolute below recent year historical averages. In the
third quarter of fiscal 1997, an additional factor reflected in achieved
factory margins, however, is factory sales volumes below planned levels
(resulting largely from the decline in same store pounds purchased from the
factory referenced above) used in the establishment of the Company's
manufacturing overhead rate and associated standard costs. As such volume
shortfalls result in "overhead underabsorption", such underabsorbed overhead
is charged to cost of chocolate sales adversely affecting factory margins.
The impact of such volume-related charges has produced the third quarter
decline in factory margins noted. Without these volume-related charges,
factory margins for the quarter would have improved by 2% absolute from those
existing in the prior year. 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. Reduced factory sales volumes relative
to plan will continue, however, to adversely affect factory margins for the
balance of the current fiscal year.
13
<PAGE>
FRANCHISE COSTS. Franchise costs increased 9.3% from $456,200 in the
third quarter of fiscal 1996 to $498,600 in the third quarter of fiscal 1997.
As a percentage of the total of royalty and marketing fees and franchise fee
revenue, franchise costs increased to 79.8% of such fees in the third quarter
of fiscal 1997 from 73.9% in the third quarter of fiscal 1996. The addition
of an expanded marketing group to support corporate public relations and
promotional programs and marketing materials in support of the Company's
larger base of stores is the primary cause of this increase. Decreased
franchise fee revenues relative to the third quarter of last year is also a
partial cause of this increase in relative percentage.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 44.6% from $339,600 in the third quarter of fiscal 1996 to $491,000
in the third quarter of fiscal 1997, as a result of increased expense for
administrative support personnel, increased depreciation expense for
additional investment in computer hardware and software and provision for
loss on the closing of one Company-owned store. As a percentage of total
revenues, general and administrative expense increased from 6.0% in the third
quarter of fiscal 1996 to 6.9% in the third quarter of fiscal 1997, primarily
due to the increase in expenses noted above.
RETAIL OPERATING EXPENSES. Retail operating expenses increased from $1.3
million in the third quarter of fiscal 1996 to $2.2 million in the third
quarter of fiscal 1997; an increase of 71.0%. This increase resulted
partially from the effect of the larger number of Company-owned stores in
existence throughout the third quarter and partially as a result of
amortization of capitalized expenditures incurred in the "start-up" phase of
many new stores established in late fiscal 1996. As a percentage of retail
sales, retail operating expenses increased from 56.1% in the third quarter of
fiscal 1996 to 60.6% in the third quarter of fiscal 1997 as a result of
insufficient sales volume leveraging resulting from the decline in same store
retail sales at Company-owned Rocky Mountain Chocolate Factory concept stores
as discussed above, and 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.
The Company has begun a program of sale of certain Company-owned stores to
potential franchisees and of closure of Company-owned stores not meeting
minimum economic criteria. The Company has also greatly reduced its expansion
program in the establishment of Rocky Mountain Chocolate Factory
Company-owned stores.
(Note that such sale, closure and slowdown of establishment of new Rocky
Mountain Chocolate Factory stores is currently not anticipated to affect its
expansion program for its new store concept Fuzziwig's and conversion of
existing Company-owned Fuzziwig's locations to franchised locations or
closure of such locations is not planned.) The Company does not expect sale
of stores 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. Any gains or losses realized on store disposition are also not
expected to be material to Company results of operations.
14
<PAGE>
Closure of stores or the provision for impairment losses on stores
potentially deemed impaired (in accordance with the guidelines contained in
Financial Accounting Standard (FAS) 121) but not closed could result in
future provision for losses of a currently indeterminate amount.
OTHER EXPENSE
Other expense of $128,500 incurred in the third quarter of fiscal 1997
increased 163.3% from the $48,800 incurred in the third quarter of fiscal
1996. 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 third quarter of fiscal
1997 was 37.7% approximating the 37.3% in the third quarter of fiscal 1996.
RESULTS OF OPERATIONS
FIRST NINE MONTHS FISCAL 1997 IN COMPARISON WITH FIRST NINE MONTHS FISCAL 1996
(ALL AMOUNTS OTHER THAN STORE DATA IN THOUSANDS)
FIRST NINE MONTHS FIRST NINE MONTHS $ %
FISCAL 1997 FISCAL 1996 CHANGE CHANGE
----------------- ----------------- -------- ------
REVENUE COMPONENT
Factory Sales $ 6,722.7 $ 6,173.4 $ 549.3 8.9 %
Retail Sales 9,372.5 5,655.5 3,717.0 65.7
Franchise Fees 318.7 474.6 (155.9) (32.8)
Royalties/Marketing
fees 1,688.5 1,468.1 220.4 15.0
--------- --------- -------- -----
Total $18,102.4 $13,771.6 $4,330.8 31.4 %
--------- --------- -------- -----
STORE DATA
--------------------------
NOVEMBER 30, NOVEMBER 30,
1996 1995
------------ ------------
NUMBER OF STORES OPEN AT END OF PERIOD:
COMPANY 58 39
FRANCHISED 168 151
--- ---
TOTAL 226 190
--- ---
--- ---
15
<PAGE>
REVENUES
FACTORY SALES. Factory sales increased $549,300 or 8.9% to $6.7 million
in the first nine months of fiscal 1997, compared to $6.2 million in the
first nine months of fiscal 1996. This increase resulted from the larger
number of franchised stores in existence throughout the period, augmented by
the impact of a 2.6% price increase effected in January of 1996. Same store
pounds purchased from the factory declined by 7.3% in the first nine months
of fiscal 1997 compared to the first nine months of fiscal 1996 largely
offsetting the impact of increased stores and increased price. When computing
same store pounds purchased from the factory, purchases by stores open for 9
months in each period are compared. This decline has largely resulted, as
discussed above, from what appears to be a trend toward 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. It has also partially resulted 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). As also
noted above, the Company has initiated a program of new product introductions
with the goal of reversing this decline.
RETAIL SALES. Retail sales increased $3,717,000 or 65.7% to $9.4 million
in the first nine months of fiscal 1997, compared to $5.7 million in the
first nine months of fiscal 1996. This increase resulted primarily from a
larger number of Company-owned stores in existence throughout the period.
The impact of a 1.8% same store sales decline at Company-owned Rocky Mountain
Chocolate Factory concept stores partially offset the impact of this
increased number of stores, with the causes for this same store sales decline
being those discussed above.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing
fees increased $220,400 or 15.0% to $1.7 million in the first nine months of
fiscal 1997, compared to $1.5 million in the first nine months of fiscal
1996. This increase resulted from increased royalty income from a larger
number of franchised stores operating in the first nine months of fiscal 1997
compared to the first nine months of fiscal 1996, augmented by the effect of
an increase in same store sales at franchised stores of .3%. Franchise fee
revenues in the first nine months of fiscal 1997 declined from that earned in
the first nine months of fiscal 1996 ($318,700 in comparison with $474,600).
Franchise signings declined to 15 in the first nine months of fiscal 1997
from 30 in the first nine months 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 first nine months.
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 32.1% to $8,090,300 in the first nine
months of fiscal 1997 from $6,122,700 in the first nine months of fiscal
1996. Cost of chocolate sales as a percentage of revenue decreased to 50.3%
in the first nine months of fiscal 1997 from 51.8% in the first nine months
of fiscal 1996. This
16
<PAGE>
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 first nine months of fiscal 1996, which
decline occurred for the reasons as discussed above.
FRANCHISE COSTS. Franchise costs increased 8.9% from $1,370,800 in the
first nine months of fiscal 1996 to $1,493,100 in the first nine months of
fiscal 1997. As a percentage of the total of royalty and marketing fees and
franchise fee revenue, franchise costs increased to 74.4% of such fees in the
first nine months of fiscal 1997 from 70.6% in the first nine months of
fiscal 1996. Decreased franchise fee revenues relative to the first nine
months of last year is the primary cause of this increase in relative
percentage. An additional major factor is the addition of an expanded
internal marketing group as discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 30.7% from $1,040,000 in the first nine months of fiscal 1996 to
$1,359,000 in the first nine months of fiscal 1997, as a result of increased
expense for administrative support personnel, depreciation expense and
provision made for one store closure, as discussed above. As a percentage of
total revenues, general and administrative expense remained approximately
constant (7.6% in the first nine months of fiscal 1996 compared to 7.5% in
the first nine months of fiscal 1997).
RETAIL OPERATING EXPENSES. Retail operating expenses increased from
$3,130,100 in the first nine months of fiscal 1996 to $5,700,800 in the first
nine months of fiscal 1997; an increase of 82.1%. This increase resulted
partially from the effect of the larger number of Company-owned stores in
existence throughout the first nine months and partially as a result of
amortization of capitalized expenditures incurred in the "start-up" phase of
many new stores established in late fiscal 1996. As a percentage of retail
sales, retail operating expenses increased from 55.3% in the first nine
months of fiscal 1996 to 60.8% in the first nine months of fiscal 1997 as a
result of insufficient sales volume leveraging resulting from the decline in
same store retail sales at Company-owned Rocky Mountain Chocolate Factory
concept stores discussed above, and 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.
OTHER EXPENSE
Other expense of $307,500 incurred in the first nine months of fiscal 1997
increased 56.6% from the $196,300 incurred in the first nine months of fiscal
1996. 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 nine months of fiscal
1997 was 37.7% approximating the 37.4% in the first nine months of fiscal
1996.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of fiscal 1997 the Company generated $1,093,497
in operating cash flow. The Company used this operating cash flow in
combination with $6.3 million from issuance of long-term debt to retire other
long-term debt, repay the working capital line of credit balance outstanding
at the end of fiscal 1996, and fund purchase of property and equipment.
At November 30, 1996, working capital was $2,855,870 in comparison with
$2,043,143 at February 29, 1996, a $812,727 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 decreased from $528,787 at February 29,
1996 to $491,047 at November 30, 1996. The Company's current ratio was 1.8/1
at November 30, 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's factory expansion (unpaid balance as of November 30, 1996
$1,623,355), and Chattel mortgage financing (unpaid balance as of November
30, 1996 $4,368,348) provided by both local and national financing facilities
and used to fund the Company's Company-owned store expansion.
The Company possesses a $2,000,000 working capital line of credit at
November 30, 1996 secured by accounts receivable and inventories which line
had a $400,000 balance at that date.
The Company possesses fixed asset availability lines of credit totaling
$5,250,000 for use by the Company in its Company-owned store expansion
program (balance utilized and owed at November 30, 1996, under these
availability lines, $3,927,064).
For the balance of fiscal 1997, the Company anticipates making $467
thousand in capital expenditures. Of this sum, approximately $447 thousand
is anticipated to be used for the opening of new Company-owned stores where
lease commitments have already been made, (as discussed above, the Company
has reduced its expansion program in the establishment of Rocky Mountain
Chocolate Factory Company-owned stores), with the balance anticipated to be
used for the purchase of 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. Such events could include the
need to repay loans secured by any Company-owned stores which may be closed.
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.
18
<PAGE>
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and
labor directly affect the Company's operations. Most of the Company's leases
provide for cost-of-living adjustments and require it to pay taxes, insurance
and maintenance expenses, all of which are subject to inflation.
Additionally the Company's future lease cost for new facilities may reflect
potentially escalating cost of real estate and construction. There is no
assurance that the Company will be able to pass on its increased costs to its
customers.
Depreciation expense is based on the historical cost to the Company of
its fixed assets, and therefore is less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior
years will ultimately have to be replaced at higher prices, it is expected
that replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday
and summer vacation seasons. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings
and sales of franchises. Because of the seasonality of the Company's
business and the impact of new store openings and sales of franchises,
results for any quarter are not necessarily indicative of results that may be
achieved in other quarters or for a full fiscal year.
EFFECT OF NEW ACCOUNTING STANDARD
Financial Accounting Standard (FAS) 121, "Accounting for the Impairment of
Long-Lived Assets", is effective for fiscal years beginning after December
15, 1995. This standard provides for the reduction of asset values of assets
defined in the Standard as long-lived, which the Company concludes are
"impaired" under criteria directed by the Standard, with the impact of this
reduction being charged to results of operations. The Company adopted the
Standard effective March 1, 1996, the beginning of its current fiscal year.
The Company at that time did not anticipate a material impact of adoption of
this new accounting standard on results of operations of the Company. The
Company will be assessing results of operations at a number of its
under-performing stores, many of which have been established 12 months or
less. As additional operating history becomes available over the coming
months, the Company may conclude that such stores are impaired, requiring an
impairment provision under (FAS) 121. Because of the uncertainties involved,
the Company is currently unable to assess the magnitude of such a potential
provision.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are forward-looking statements
that reflect assumptions made by management based on information currently
available to it, and the Company can give no assurance that the expectations
or potential occurrences reflected in such statements will be realized.
Should one
19
<PAGE>
or more of the uncertainties underlying such expectations materialize or
underlying assumptions prove incorrect actual results may vary materially
from those expected.
Whether factory margins continue to improve depends on many factors that
are not within the Company's control. Such factors include the ability of
the Company to reduce manufacturing overhead cost per pound through
correction of negative trends in same store pounds purchased and associated
factory sales and production volumes.
The Company's ability to successfully achieve expansion of its Rocky
Mountain Chocolate Factory and Fuzziwig's franchise systems depends on many
factors also not within the Company's control including the availability of
suitable sites for new store establishment, the availability of qualified
franchisees to support such expansion and acceptance by the public of the
Fuzziwig's concept.
Efforts to sell, close or improve operating results of under-performing
Company-owned stores depends on many factors not within the Company's control
including availability of qualified buyers and its ability to negotiate out
of existing leases under favorable terms, as well as on consumer traffic and
spending patterns.
Efforts to improve the decline in same store pounds purchased depends on
many factors not within the Company's control including the receptivity of
its franchise system to its new product introductions and promotional
programs, which receptivity is by no means assured.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held on October 4, 1996, 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 Gary S. Hauer Fred M. Trainor
Gerald A. Kien Everett A. Sisson Lee N. Mortenson
Tabulation of the votes is as follows:
For: 1,599,521 Withheld: 16,443
20
<PAGE>
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 23).
(b) REPORTS ON FORM 8-K
No reports on form 8-K were filed during the three months ended November 30,
1996.
21
<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 10, 1997 /s/ Franklin E. Crail
----------------------- ---------------------------------------
Franklin E. Crail
(Chairman of the Board, President and
Treasurer)
Date: January 10, 1997 /s/ Lawrence C. Rezentes
----------------------- ---------------------------------------
Lawrence C. Rezentes
(Chief Financial Officer)
22
<PAGE>
EXHIBIT 11.1
23
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
Nine-month periods ended
November 30,
-------------------------
1996 1995
---------- ----------
INCOME PER SHARE
Net income allocable to common and
common equivalent shares $ 717,584 $1,196,497
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 2,952,015 2,740,990
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price - 99,579
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,952,015 2,840,569
---------- ----------
---------- ----------
Income per common
and common equivalent share $ .24 $ .42
---------- ----------
---------- ----------
24
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
Three-month periods ended
November 30,
-------------------------
1996 1995
---------- ----------
INCOME PER SHARE
Net income allocable to common and
common equivalent shares $ 258,917 $ 548,842
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 2,944,898 2,932,517
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price - 92,251
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,944,898 3,024,768
---------- ----------
---------- ----------
Income per common
and common equivalent share $ .09 $ .18
---------- ----------
---------- ----------
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 491,047
<SECURITIES> 0
<RECEIVABLES> 2,259,929
<ALLOWANCES> 0
<INVENTORY> 3,181,247
<CURRENT-ASSETS> 6,247,930
<PP&E> 16,872,438
<DEPRECIATION> 3,368,340
<TOTAL-ASSETS> 20,830,390
<CURRENT-LIABILITIES> 3,392,060
<BONDS> 5,300,594
0
0
<COMMON> 91,239
<OTHER-SE> 11,770,989
<TOTAL-LIABILITY-AND-EQUITY> 20,830,390
<SALES> 16,095,205
<TOTAL-REVENUES> 2,007,238
<CGS> 8,090,329
<TOTAL-COSTS> 16,643,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307,462
<INCOME-PRETAX> 1,151,824
<INCOME-TAX> 434,240
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 717,584
<EPS-PRIMARY> .24
<EPS-DILUTED> 0
</TABLE>
