<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 August 31, 1997
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 0-14749
-------
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-0910696
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
265 TURNER DRIVE, DURANGO, CO 81301
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(970) 259-0554
--------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No .
--- ---
At October 6, 1997 there were 2,912,449 shares of common stock outstanding.
This document contains 23 pages including exhibits.
The exhibit index is located on page 19.
1
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q FOR THE QUARTER ENDED August 31, 1997
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Financial Statements
Balance Sheets - August 31, 1997(unaudited)
and February 28, 1997............................................... 4
Statements of Income - Six-month
periods ended August 31, 1997 (unaudited)
and August 31, 1996 (unaudited)..................................... 6
Statements of Income - Three-month
periods ended August 31, 1997 (unaudited)
and August 31, 1996 (unaudited)..................................... 7
Statements of Cash Flows
Six-month periods ended
August 31, 1997 (unaudited)
and August 31, 1996 (unaudited)..................................... 8
Statements of Cash Flows
Three-month periods ended
August 31, 1997 (unaudited)
and August 31, 1996 (unaudited)..................................... 9
3
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
August 31, February 28,
1997 1997
----------- ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,322,345 $ 792,606
Accounts and notes receivable -
trade, less allowance for doubtful
accounts of $215,249 at August 31 and
$202,029 at February 28 1,711,002 1,729,971
Inventories 2,782,310 2,311,321
Deferred tax asset 722,595 722,595
Other 249,262 181,133
----------- -----------
Total current assets 7,787,514 5,737,626
PROPERTY AND EQUIPMENT - AT COST
Land 122,558 122,558
Building 3,665,581 3,644,357
Leasehold improvements 2,110,206 2,213,116
Machinery and equipment 6,550,031 6,446,612
Furniture and fixtures 2,269,891 2,667,420
Transportation equipment 266,953 246,499
----------- -----------
14,985,220 15,340,562
Less accumulated depreciation
and amortization 4,072,176 3,565,194
----------- -----------
10,913,044 11,775,368
OTHER ASSETS
Notes and accounts receivable due
after one year 399,789 82,774
Goodwill, net of accumulated
amortization of $295,271 at
August 31 and $277,344 at February 28 539,729 312,656
Deferred income taxes 43,044 43,044
Other 597,821 638,637
----------- -----------
1,580,383 1,077,111
----------- -----------
$20,280,941 $18,590,105
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
4
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS - CONTINUED
August 31, February 28,
1997 1997
----------- ------------
LIABILITIES AND EQUITY (Unaudited)
CURRENT LIABILITIES
Current maturities of long-term debt 1,076,600 847,881
Accounts payable - trade 1,048,968 799,671
Accrued compensation 570,967 465,338
Accrued liabilities 777,569 867,961
Income taxes payable 264,282 -
Deferred income - 93,000
----------- -----------
Total current liabilities 3,738,386 3,073,851
LONG-TERM DEBT, less current maturities 6,181,086 5,737,312
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - authorized 7,250,000
shares, $.03 par value; issued
3,034,302 shares at August 31 and
at February 28 91,239 91,239
Additional paid-in capital 9,731,307 9,730,872
Retained earnings 1,554,492 972,565
----------- -----------
11,377,038 10,794,676
Less common stock held in treasury,
at cost - 128,853 shares at August 31,
and 129,003 at February 28 1,015,569 1,015,734
----------- -----------
10,361,469 9,778,942
----------- -----------
$20,280,941 $18,590,105
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
5
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
Six-month periods ended
--------------------------
August 31,
1997 1996
------------ -----------
REVENUES
Sales of candy $ 11,072,021 $ 9,634,395
Franchise and royalty fees 1,589,111 1,382,463
------------ -----------
12,661,132 11,016,858
------------ -----------
COSTS AND EXPENSES
Cost of sales 5,267,223 4,741,650
Franchise costs 1,102,346 994,482
General and administrative 840,416 868,003
Retail operating expenses 4,210,661 3,497,583
------------ -----------
11,420,646 10,101,718
------------ -----------
Operating income 1,240,486 915,140
OTHER INCOME (EXPENSE)
Interest expense (337,473) (198,024)
Interest income 45,524 19,111
------------ -----------
(291,949) (178,913)
INCOME BEFORE INCOME TAX EXPENSE 948,537 736,227
INCOME TAX EXPENSE
Provision for income taxes 366,610 277,560
------------ -----------
INCOME ALLOCABLE TO
COMMON STOCKHOLDERS $ 581,927 $ 458,667
------------ -----------
------------ -----------
INCOME PER COMMON AND EQUIVALENT SHARE $ .20 $ .16
------------ -----------
------------ -----------
Weighted average and equivalent shares 2,924,701 2,951,286
------------ -----------
------------ -----------
The accompanying notes are an integral part of these statements.
6
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
Three-month periods ended
-------------------------
August 31,
1997 1996
---------- -----------
REVENUES
Sales of candy 6,039,657 $5,374,541
Franchise and royalty fees 814,000 679,424
---------- -----------
6,853,657 6,053,965
---------- -----------
COSTS AND EXPENSES
Cost of sales 2,829,666 2,637,725
Franchise costs 556,064 509,015
General and administrative 416,266 453,945
Retail operating expenses 2,107,010 1,875,627
---------- -----------
5,909,006 5,476,312
---------- -----------
Operating income 944,651 577,653
OTHER INCOME (EXPENSE)
Interest expense (169,815) (112,810)
Interest income 30,065 8,397
---------- -----------
(139,750) (104,413)
INCOME BEFORE INCOME TAX EXPENSE 804,901 473,240
INCOME TAX EXPENSE
Provision for income taxes 311,095 178,410
---------- -----------
INCOME ALLOCABLE TO
COMMON STOCKHOLDERS $ 493,806 $ 294,830
---------- -----------
---------- -----------
INCOME PER COMMON AND EQUIVALENT SHARE $ .17 $ .10
---------- -----------
---------- -----------
Weighted average and equivalent shares 2,926,416 2,964,283
---------- -----------
---------- -----------
The accompanying notes are an integral part of these statements.
7
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Six-month periods ended
--------------------------
August 31,
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 581,927 $ 458,667
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 889,023 803,802
Gain on sale of assets (53,164) (84,610)
Changes in operating assets and
liabilities:
Notes and accounts receivable (298,046) 95,172
Inventories (470,989) (581,051)
Other assets (68,129) (53,981)
Accounts payable 249,297 211,873
Income taxes payable 264,282 43,684
Accrued liabilities 15,237 121,189
Deferred income (93,000) -
---------- ----------
Net cash provided by
operating activities 1,016,438 1,014,745
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 596,978 310,690
Additions to other long-term assets (94,838) (168,914)
Purchase of property and equipment (661,932) (2,807,431)
---------- ----------
Net cash provided by(used in)
investing activities (159,792) (2,665,655)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
treasury stock 600 -
Proceeds from long-term debt 1,132,043 5,612,005
Principal payments on long-term debt (459,550) (2,470,535)
Principal payments on line of credit - (1,000,000)
---------- ----------
Net cash provided by
financing activities 673,093 2,141,470
---------- ----------
NET INCREASE(DECREASE) IN CASH: 1,529,739 490,560
Cash and cash equivalents
at beginning of period 792,606 528,787
---------- ----------
Cash and cash equivalents
at end of period $2,322,345 $1,019,347
---------- ----------
---------- ----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 324,158 $ 197,997
---------- ----------
---------- ----------
Income taxes $ (94,198) $ 260,681
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
8
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three-month periods ended
--------------------------
August 31,
1997 1996
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 493,806 $ 294,830
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 430,025 423,738
Gain on sale of assets (40,650) (32,954)
Changes in operating assets and
liabilities:
Notes and accounts receivable (243,348) 222,471
Inventories (340,882) (337,171)
Other assets 3,329 303,526
Accounts payable 313,697 (69,062)
Income taxes payable 220,568 86,715
Accrued liabilities (27,332) (42,898)
---------- ----------
Net cash provided by operating
activities 809,213 849,195
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 419,870 155,190
Additions to other long-term assets (104,212) (132,781)
Purchase of property and equipment (556,989) (1,610,795)
---------- ----------
Net cash (used in)
investing activities (241,331) (1,588,386)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
treasury stock 600 -
Proceeds from long-term debt 373,773 952,539
Principal payments on long-term debt (243,603) (115,506)
---------- ----------
Net cash provided by
financing activities 130,770 837,033
---------- ----------
NET INCREASE(DECREASE)IN CASH: 698,652 97,842
Cash and cash equivalents
at beginning of period 1,623,693 921,505
---------- ----------
Cash and cash equivalents
at end of period $2,322,345 $1,019,347
---------- ----------
---------- ----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 168,131 $ 111,199
---------- ----------
---------- ----------
Income taxes $ 53,100 $ 105,967
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
9
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1997
1. The interim financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these financial statements be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K for the year ended February 28, 1997.
2. These statements reflect all adjustments which, in the opinion of
Management, are necessary for a fair presentation of the information
contained therein. Results of operations for interim periods are not
necessarily indicative of annual results.
3. Inventories consist of the following:
August 31, 1997 February 28, 1997
--------------- -----------------
Ingredients and supplies $1,342,302 $1,168,216
Finished candy 1,440,008 1,143,105
---------- ----------
$2,782,310 $2,311,321
---------- ----------
---------- ----------
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Rocky Mountain Chocolate Factory, Inc. is a manufacturer, franchiser and
operator of two retail concepts; Rocky Mountain Chocolate FactoryTM and
Fuzziwig's Candy FactoryTM. Headquartered in Durango, Colorado, the Company
manufactures an extensive line of premium chocolate candies and other
confectionery products for sale at its franchised and company-owned Rocky
Mountain Chocolate Factory Stores. Fuzziwig's Candy Factory is a new concept
store that sells hard conventional and nostalgic/unusual candies (which are
not manufactured by the Company, but procured from wholesale candy suppliers)
in a themed, self-serve environment featuring animation, movement, music,
color and entertainment.
The Company derives its revenues from four principal sources: (1)
factory sales, which consist of candy sales to its franchised store
locations; (2) retail sales, which consist of candy sales at retail by its
company-owned stores; (3) franchise fees, which consist of fees earned from
the sale of franchises; and (4) royalties and marketing fees.
RESULTS OF OPERATIONS
QUARTER ENDED AUGUST 31, 1997 COMPARED TO QUARTER ENDED AUGUST 31, 1996
The following table sets forth, for the periods indicated, certain
unaudited financial information and other operating data related to the
Company's operation:
(ALL AMOUNTS OTHER THAN STORE DATA IN THOUSANDS)
SECOND QUARTER SECOND QUARTER $ %
FISCAL 1998 FISCAL 1997 CHANGE CHANGE
----------- ------------ ------ ------
REVENUE COMPONENT
Factory Sales $2,281.2 $2,171.5 $109.7 5.1%
Retail Sales 3,758.4 3,203.0 555.4 17.3
Franchise Fees 87.0 52.1 34.9 67.0
Royalties/Marketing fees 727.0 627.4 99.6 15.9
-------- -------- ------ -----
Total $6,853.6 $6,054.0 $799.6 13.2%
-------- -------- ------ -----
STORE DATA
----------
ROCKY MOUNTAIN
CHOCOLATE FACTORY FUZZIWIG'S
---------------------- -----------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1997 1996 1997 1996
------ ------ ------ ------
Number Of Stores
Open At End Of Period:
Company 34 45 12 7
Franchised 179 167 2 0
--- --- -- --
Total 213 212 14 7
--- --- -- --
--- --- -- --
11
<PAGE>
REVENUES
FACTORY SALES. Factory sales increased $109,700 or 5.1% to $2.3 million
in the second quarter of fiscal 1998, compared to $2.2 million in the second
quarter of fiscal 1997. This increase resulted from the larger number of
franchised stores in existence throughout the quarter, augmented by the
impact of a 2.8% price increase effected in April of 1997. Same store pounds
purchased from the factory by franchised stores declined by 2.9% in the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997
partially offsetting the impact of increased stores and increased price. When
computing same store pounds purchased from the factory, purchases by stores
open for 3 months in each period are compared. The decline in same store
pounds purchased from the factory is believed to have resulted primarily from
an increase in the mix of store-made product and product purchased from
authorized vendors relative to factory-made products sold at franchised
stores.
RETAIL SALES. Retail sales increased $555,400 or 17.3% to $3.8 million
in the second quarter of fiscal 1998, compared to $3.2 million in the second
quarter of fiscal 1997. This increase resulted primarily from a larger
number of Company-owned store operating months, particularly of higher
revenue Fuzziwig's stores, in the current year quarter relative to last year
together with the impact of a 4.2% same store sales increase and an
approximate 2% price increase at Company-owned stores.
ROYALTIES/MARKETING FEES AND FRANCHISE FEES. Royalties and marketing
fees increased $99,600 or 15.9% to $727,000 in the second quarter of fiscal
1998, compared to $627,400 in the second quarter of fiscal 1997. This
increase resulted from increased royalty income from a larger number of
franchised stores operating in the second quarter of fiscal 1998 compared to
the second quarter of fiscal 1997, as augmented by the effect of an increase
in same store sales at franchised stores of 7.8%. Franchise fee revenues in
the second quarter of fiscal 1998 increased from that earned in the second
quarter of fiscal 1997 ($87,000 in comparison with $52,100). Franchise
signings increased to 5 in the second quarter of fiscal 1998 from 3 in the
second quarter of fiscal 1997. Increased balance due collections on
franchises previously signed also resulted in the increased franchise fee
revenue earned for the quarter.
COSTS AND EXPENSES
COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs
incurred by the Company to manufacture candy sold by its Company-owned stores
and to its franchised stores, increased 7.3% to $2.8 million in the second
quarter of fiscal 1998 from $2.6 million in the second quarter of fiscal
1997. Cost of chocolate sales as a percentage of revenue decreased to 46.9%
in the second quarter of fiscal 1998 from 49.1% in the second quarter of
fiscal 1997. This improvement resulted from an increase in higher margin
retail sales as a percentage of total revenue and by an increase in factory
margins from those existing in the second quarter of fiscal 1997.
Company-owned store margins for the quarter improved 2% absolute as a result
of an increase in retail price, a focus on higher margin products and
enhanced loss prevention measures. Factory margins improved as a result of a
2.8% price increase and improved factory efficiencies.
12
<PAGE>
FRANCHISE COSTS. Franchise costs increased 9.2% from $509,000 in the
second quarter of fiscal 1997 to $556,000 in the second quarter of fiscal
1998. As a percentage of the total of royalty and marketing fees and
franchise fee revenue, franchise costs decreased to 68.3% of such fees in the
second quarter of fiscal 1998 from 74.9% in the second quarter of fiscal
1997. Expenses of a newly formed Product Sales Development department
devoted to the improvement of total factory sales and in same-store pounds
sold from the factory is the primary cause of the absolute increase.
Strongly increased royalty and marketing fees revenue is the primary cause of
the decrease in relative percentage.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 8.3% from $454,000 in the second quarter of fiscal 1997 to
$416,000 in the second quarter of fiscal 1998, primarily as a result of the
effect of reduced bad debt expense. As a percentage of total revenues,
general and administrative expense declined from 7.5% in the second quarter
of fiscal 1997 to 6.1% in the second quarter of fiscal 1998, primarily due to
a significant increase in total revenues, without a proportionate increase in
general and administrative expenses.
RETAIL OPERATING EXPENSES. Retail operating expenses increased from
$1.9 million in the second quarter of fiscal 1997 to $2.1 million in the
second quarter of fiscal 1998; an increase of 12.3%. This increase resulted
largely from the effect of the larger number of Company-owned store operating
months as discussed above. As a percentage of retail sales, retail operating
expenses decreased from 58.6% in the second quarter of fiscal 1997 to 56.1%
in the second quarter of fiscal 1998 as a result of increased sales volume
leveraging resulting from the increase in same store retail sales at
Company-owned stores discussed above, and as a result of shutdown earlier in
the year of Company-owned stores with poor operating economics.
The Company is currently performing an assessment of its Fuzziwig's new
concept store program as a basis for determining future scope and potential
of the program. The Company has tentatively concluded that it will cease
further Fuzziwig's store additions.
OTHER EXPENSE
Other expense of $140,000 incurred in the second quarter of fiscal 1998
increased 34.6% from the $104,000 incurred in the second quarter of fiscal
1997. This increase resulted from increased interest expense caused by
borrowings in support of the Company's fiscal 1997 Company-owned store
expansion.
INCOME TAX EXPENSE
The Company's effective income tax rate in the second quarter of fiscal
1997 was 37.7% in comparison with the 38.7% in the second quarter of fiscal
1998. The increase resulted from utilization of remaining available state
net operating loss carryforwards in fiscal 1997.
13
<PAGE>
RESULTS OF OPERATIONS
FIRST HALF ENDED AUGUST 31, 1997 COMPARED TO FIRST HALF ENDED AUGUST 31, 1996
(ALL AMOUNTS OTHER THAN STORE DATA IN THOUSANDS)
FIRST HALF FIRST HALF $ %
FISCAL 1998 FISCAL 1997 CHANGE CHANGE
----------- ----------- ------ ------
REVENUE COMPONENT
Factory Sales $ 4,115.5 $ 3,899.6 $ 215.9 5.5%
Retail Sales 6,956.5 5,734.8 1,221.7 21.3
Franchise Fees 290.5 245.7 44.8 18.2
Royalties/Marketing
fees 1,298.6 1,136.8 161.8 14.2
--------- --------- -------- -----
Total $12,661.1 $11,016.9 1,644.2 14.9%
--------- --------- -------- -----
STORE DATA
----------
ROCKY MOUNTAIN
CHOCOLATE FACTORY FUZZIWIG'S
---------------------- -----------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1997 1996 1997 1996
------ ------ ------ ------
Number Of Stores
Open At End Of Period:
Company 34 45 12 7
Franchised 179 167 2 0
--- --- -- --
Total 213 212 14 7
--- --- -- --
--- --- -- --
REVENUES
FACTORY SALES. Factory sales increased $215,900 or 5.5% to $4.1 million
in the first half of fiscal 1998, compared to $3.9 million in the first half
of fiscal 1997. This increase resulted from the larger number of franchised
stores in existence throughout the half, augmented by the impact of a 2.8%
price increase effected in April of 1997. Same store pounds purchased from
the factory by franchised stores declined by 2.1% in the first half of fiscal
1998 compared to the first half of fiscal 1997 partially offsetting the
impact of increased stores and increased price. When computing same store
pounds purchased from the factory, purchases by stores open for 6 months in
each period are compared. This decline in same store pounds purchased is
believed to have resulted primarily from a shift in the mix of product retail
sales by franchised store locations to more store-made product and product
purchased from authorized vendors and away from product manufactured by the
Company.
14
<PAGE>
RETAIL SALES. Retail sales increased $1.2 million or 21.3% to $7.0
million in the first half of fiscal 1998, compared to $5.7 million in the
first half of fiscal 1997. This increase resulted primarily from an increased
number of Company-owned store operating months in the current year half
relative to the prior year augmented by the impact of a 3.9% same store sales
increase at Company-owned stores and a retail price increase.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and
marketing fees increased $162,000 or 14.2% to $1.3 million in the first half
of fiscal 1998, compared to $1.1 million in the first half of fiscal 1997.
This increase resulted from increased royalty income from a larger number of
franchised stores operating in the first half of fiscal 1998 compared to the
first half of fiscal 1997, augmented by the effect of an increase in same
store sales at franchised stores of 5.6%. Franchise fee revenues in the first
half of fiscal 1998 increased from that earned in the first half of fiscal
1997 ($291,000 in comparison with $246,000). Franchise signings increased to
14 in the first half of fiscal 1998 from 9 in the first half of 1997.
Increased balance due collections on franchises previously signed also
resulted in the increased franchise fee revenue earned for the first half.
COSTS AND EXPENSES
COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs
incurred by the Company to manufacture candy sold by its Company-owned stores
and to its franchised stores, increased 11.1% to $5.3 million in the first
half of fiscal 1998 from $4.7 million in the first half of fiscal 1997. Cost
of chocolate sales as a percentage of revenue decreased to 47.6% in the first
half of fiscal 1998 from 49.2% in the first half of fiscal 1997. This
improvement resulted from an increase in higher margin retail sales as a
percentage of total revenue together with the impact of improved factory
margins.
FRANCHISE COSTS. Franchise costs increased 10.8% from $994,000 in the
first half of fiscal 1997 to $1.1 million in the first half of fiscal 1998.
As a percentage of the total of royalty and marketing fees and franchise fee
revenue, franchise costs decreased to 69.4% of such fees in the first half of
fiscal 1998 from 71.9% in the first half of fiscal 1997. Increased
royalties/marketing fees and franchise fees revenues relative to the first
half of last year without an associated increase in expense is the primary
cause of this decrease in relative percentage.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 3.2% from $868,000 in the first half of fiscal 1997 to
$840,000 in the first half of fiscal 1998, primarily as a result of the
effect of reduced bad debt expense. As a percentage of total revenues,
general and administrative expense declined from 7.9% in the first half of
fiscal 1997 to 6.6% in the first half of fiscal 1998, primarily due to a
significant increase in total revenues, without a proportionate increase in
general and administrative expenses.
RETAIL OPERATING EXPENSES. Retail operating expenses increased from
$3.5 million in the first half of fiscal 1997 to $4.2 million in the first
half of fiscal 1998; an increase of 20.4%. This increase resulted largely
from the effect of the increased number of Company-owned store operating
months as discussed above. As a percentage of retail sales, retail operating
expenses decreased from 61.0% in the first half of
15
<PAGE>
fiscal 1997 to 60.5% in the first half of fiscal 1998 as a result of
increased sales volume leveraging resulting from the increase in same store
retail sales at Company-owned stores discussed above, and as a result of
shutdown earlier in the year of Company-owned stores with poor operating
economics.
OTHER EXPENSE
Other expense of $292,000 incurred in the first half of fiscal 1998
increased 63.2% from the $179,000 incurred in the first half of fiscal 1997.
This increase resulted from increased interest expense caused by borrowings
in support of the Company's fiscal 1997 Company-owned store expansion.
INCOME TAX EXPENSE
The Company's effective income tax rate in the first half of fiscal 1997
was 38.7% in comparison with the 37.7% in the first half of fiscal 1997. The
increase resulted from utilization of remaining available state net operating
loss carryforwards in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1997, working capital was $4,049,128 in comparison with
$2,663,775 at February 28, 1997, a $1,385,353 increase. This increase
resulted primarily from fixed asset financing achieved recovering cash from
investments in Company store operating assets previously funded from
operating cash flows.
Cash and cash equivalent balances increased from $792,606 at February
28, 1997 to $2,322,345 at August 31, 1997 as a result of this financing. The
Company's current ratio was 2.1/1 at August 31, 1997 in comparison with 1.9/1
at February 28, 1997.
The Company's long-term debt is comprised primarily of real estate
mortgage financing provided by a local banking facility used to finance the
Company Factory (unpaid balance as of August 31, 1997 $1,595,900), and
chattel mortgage financing (unpaid balance as of August 31, 1997 $5,661,800)
provided by both local and national financing facilities and used to fund the
fiscal 1996 and 1997 Company-owned store expansion.
The Company possesses a $2,000,000 working capital line of credit at
August 31, 1997 secured by accounts receivable and inventories which line had
a $-0-balance at that date. This line expires July, 1998.
For the balance of fiscal 1997, the Company anticipates making $550
thousand in capital expenditures. Of this sum, approximately $450 thousand
is anticipated to be used for the opening of new Company-owned stores, with
the balance anticipated to be used for the purchase of capital equipment for
the factory, as well as for additional computer equipment for the Company's
administrative functions.
The Company believes that existing cash balances, cash flow from
operating activities and the available bank line of working capital credit
will be sufficient to service debt, fund anticipated capital expenditures and
provide necessary working
16
<PAGE>
capital at least through the end of fiscal 1998. There can be no guarantee,
however, that unforeseen events will not require the Company to secure
additional sources of financing. The Company may also seek additional
financing from time to time, through borrowings or public or private
offerings of equity or debt securities, to fund its future expansion plans.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and
labor directly affect the Company's operations. Most of the Company's leases
provide for cost-of-living adjustments and require it to pay taxes, insurance
and maintenance expenses, all of which are subject to inflation.
Additionally the Company's future lease cost for new facilities may reflect
potentially escalating cost of real estate and construction. There is no
assurance that the Company will be able to pass on its increased costs to its
customers.
Depreciation expense is based on the historical cost to the Company of
its fixed assets, and therefore is less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior
years will ultimately have to be replaced at higher prices, it is expected
that replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday
and summer vacation seasons. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings
and sales of franchises. Because of the seasonality of the Company's
business and the impact of new store openings and sales of franchises,
results for any quarter are not necessarily indicative of results that may be
achieved in other quarters of for a full fiscal year.
EFFECT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued the following
Statements of Financial Accounting Standards:
(1) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 130, COMPREHENSIVE INCOME
EFFECTIVE: Financial statements for fiscal years beginning after December
15, 1997.
REQUIREMENTS: Requires entities other than not-for-profit entities to
include separately as part of the Income Statement, as a separate Statement
of Comprehensive Income or in the Statement of Changes in Equity, certain
items of income or loss previously reflected only as changes in balances in
shareholder's equity.
(2) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 131, DISCLOSURES OF SEGMENT
INFORMATION
17
<PAGE>
EFFECTIVE: Financial statements for periods beginning after December 15,
1997.
REQUIREMENTS: Requires disclosure by publicly held businesses of certain
"operating segment" information including segment profit or loss, certain
revenue and expense items and segment assets based on financial information
used internally for evaluating performance and allocating resources, as
well as certain additional information.
Additionally, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has adopted a Statement of
Position on "Reporting on the Cost of Start-Up Activities" requiring costs of
start-up of a new business activity (other than costs categorized as
"organization costs") to be expensed as incurred.
The adoption of these standards by the Company is not expected to have a
material impact on reported earnings. The Company does anticipate that
adoption of Financial Accounting Standard 131 will result in expanded
disclosure of results of operations of what will become "reportable segments"
not reported upon separately previously.
18
<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, 1997.
19
<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 8, 1997 /s/
--------------- ---------------------------------------
Franklin E. Crail
(Chairman of the Board, President and
Treasurer)
Date: October 8, 1997 /s/
--------------- ----------------------------------------
Lawrence C. Rezentes
(Chief Financial Officer)
20
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
Six-month periods ended
-----------------------
August 31,
1997 1996
---- ----
PRIMARY INCOME PER SHARE
Net income allocable to common and
common equivalent shares $ 581,927 $ 458,667
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 2,912,327 2,905,149
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price 12,374 46,137
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,924,701 2,951,286
---------- ----------
---------- ----------
Primary income per common
and common equivalent share $ .20 $ .16
---------- ----------
---------- ----------
22
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
Three-month periods ended
-------------------------
August 31,
1997 1996
PRIMARY INCOME PER SHARE ---- ----
Net income allocable to common and
common equivalent shares $ 493,806 $ 294,830
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 2,912,354 2,905,149
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price 14,062 59,134
---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,926,416 2,964,283
---------- ----------
---------- ----------
Primary income per common
and common equivalent share $ .17 $ .10
---------- ----------
---------- ----------
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 2,322,345
<SECURITIES> 0
<RECEIVABLES> 1,711,002
<ALLOWANCES> 0
<INVENTORY> 2,782,310
<CURRENT-ASSETS> 7,787,514
<PP&E> 14,985,220
<DEPRECIATION> 4,072,176
<TOTAL-ASSETS> 20,280,941
<CURRENT-LIABILITIES> 3,738,386
<BONDS> 6,181,086
0
0
<COMMON> 91,239
<OTHER-SE> 10,270,230
<TOTAL-LIABILITY-AND-EQUITY> 20,280,941
<SALES> 11,072,021
<TOTAL-REVENUES> 12,661,132
<CGS> 5,267,223
<TOTAL-COSTS> 11,420,646
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291,949
<INCOME-PRETAX> 948,537
<INCOME-TAX> 366,610
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 581,927
<EPS-PRIMARY> .20
<EPS-DILUTED> 0
</TABLE>
