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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 November 30, 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 of incorporation) (I.R.S. Employer Identification No.)
265 Turner Drive, Durango, CO 81301
(Address of principal executive offices)
(970) 259-0554
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
On January 13, 1998 the registrant had outstanding 2,912,449 shares of its
common stock, $.03 par value.
This document contains 18 pages including exhibits.
The exhibit index is located on page 15.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3-8
Statements of Income 3-4
Balance Sheets 5
Statements of Cash Flows 6
Notes to Interim Financial Statements 7-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
<TABLE>
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Sales $5,764,294 $5,772,275 $15,156,068 $14,756,557
Franchise and royalty fees 680,364 624,775 2,269,475 2,007,238
Total revenues 6,444,658 6,397,050 17,425,543 16,763,795
COSTS AND EXPENSES
Cost of sales 2,933,999 3,099,438 7,593,509 7,630,189
Franchise costs 585,658 498,608 1,688,004 1,493,090
General and administrative 428,243 490,983 1,268,659 1,358,986
Retail operating 1,546,777 1,770,851 4,648,640 4,883,844
Total costs and expenses 5,494,677 5,859,880 15,198,812 15,366,109
INCOME FROM OPERATIONS 949,981 537,170 2,226,731 1,397,686
OTHER INCOME (EXPENSE)
Interest expense (165,695) (133,392) (503,168) (331,416)
Interest income 26,488 4,843 72,012 23,954
Other, net (139,207) (128,549) (431,156) (307,462)
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES 810,774 408,621 1,795,575 1,090,224
PROVISION FOR INCOME TAXES 313,365 154,039 693,990 410,910
INCOME FROM CONTINUING
OPERATIONS $ 497,409 $ 254,582 $ 1,101,585 $ 679,314
</TABLE>
(CONTINUED)
The accompanying notes are an integral part of these financial statements.
3
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME (CONTINUED)
<TABLE>
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
DISCONTINUED OPERATIONS
Income (loss) from
discontinued operations
(net of income taxes) $ (68,600) $ 4,335 $ (90,849) $ 38,270
Provision for estimated
loss on disposition,
including provision
for operating losses
during phase out period
of $99,000 (net of
income taxes) (276,000) - (276,000) -
Total (344,600) 4,335 (366,849) 38,270
NET INCOME $ 152,809 $ 258,917 $ 734,736 $ 717,584
INCOME PER COMMON AND
COMMON EQUIVALENT SHARE
Continuing operations $ .17 $ .09 $ .38 $ .23
Income (loss) from
discontinued operations (.12) - (.13) .01
Net income $ .05 $ .09 $ .25 $ .24
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 2,933,459 2,944,898 2,927,010 2,952,015
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
November 30, February 28,
1997 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,800,242 $ 792,606
Accounts and notes receivable, less allowance
for doubtful accounts of $215,235 and $202,029 2,500,622 1,729,971
Inventories 2,514,212 2,082,566
Deferred tax asset 722,595 722,595
Other 249,954 178,067
Current assets of discontinued operations 219,269 231,821
Total current assets 8,006,894 5,737,626
PROPERTY AND EQUIPMENT, NET 9,152,894 9,740,341
OTHER ASSETS
Net noncurrent assets of discontinued operations 1,876,044 2,241,142
Notes and accounts receivable 288,878 82,774
Goodwill, less accumulated amortization of
$307,297 and $277,344 527,703 312,656
Deferred tax asset 43,044 43,044
Other 490,869 432,522
Total other assets 3,226,538 3,112,138
Total assets $ 20,386,326 $ 18,590,105
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,101,300 $ 847,881
Accounts payable 1,011,711 799,671
Accrued salaries and wages 764,560 465,338
Other accrued expenses 688,131 867,961
Income taxes payable 408,926 -
Deferred income - 93,000
Total current liabilities 3,974,628 3,073,851
LONG-TERM DEBT, LESS CURRENT MATURITIES 5,897,420 5,737,312
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.03 par value, 7,250,000
shares authorized, 3,041,302 issued 91,239 91,239
Additional paid-in capital 9,731,307 9,730,872
Retained earnings 1,707,301 972,565
Treasury stock, at cost, 128,853 and 129,003 shares (1,015,569) (1,015,734)
Total stockholders' equity 10,514,278 9,778,942
Total liabilities and stockholders' equity $ 20,386,326 $ 18,590,105
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
For the Nine Months Ended
November 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 734,736 $ 717,584
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss from discontinued operations 90,849 (38,270)
Provision for estimated loss on disposition of
discontinued business segment 276,000 -
Depreciation and amortization 998,527 1,083,813
Gain on sale of property and equipment (53,164) (84,610)
Increase in notes and accounts receivable (976,755) (782,414)
Increase in inventories (431,646) (444,572)
Increase in other assets (71,887) (16,187)
Increase in accounts payable 212,040 356,693
Increase in income taxes payable 408,926 32,671
Increase in accrued liabilities 119,392 306,661
Decrease in deferred income (93,000) -
Net cash provided by operating activities of
continuing operations 1,214,018 1,131,369
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 596,978 310,690
Purchases of property and equipment (1,084,120) (2,592,142)
(Increase) decrease in other assets (226,615) 236,906
Net cash used in investing activities of
continuing operations (713,757) (2,044,546)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,132,043 6,291,718
Payments on long-term debt (718,516) (2,616,639)
Proceeds from line of credit - 400,000
Payments on line of credit - (1,000,000)
Other 600 27,262
Net cash provided by financing activities of
continuing operations 414,127 3,102,341
NET CASH PROVIDED BY (USED IN) DISCONTINUED
OPERATIONS 93,248 (2,226,904)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,007,636 (37,740)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 792,606 528,787
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,800,242 $ 491,047
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Rocky Mountain Chocolate Factory, Inc. (the "Company") is a manufacturer,
franchiser and retail operator. The Company manufactures an extensive line
of premium chocolate candies and other confectionery products for sale at its
franchised and Company-owned stores.
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) franchise related royalty and marketing fees.
Basis of Presentation
The accompanying financial statements have been prepared by the Company,
without audit, and reflect all adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. The statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and Securities
and Exchange Commission regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring
nature) which are necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
results of operations for the three and nine months ended November 30, 1997
are not necessarily indicative of the results to be expected for the entire
fiscal year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1997.
Note 2 - Inventories
Inventories consist of the following:
November 30, 1997 February 28, 1997
Ingredients and supplies $ 1,191,616 $ 1,041,367
Finished candy 1,322,596 1,041,199
$ 2,514,212 $ 2,082,566
7
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NOTE 3 - Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations. The Company is
currently in negotiations with a potential buyer for certain of the
Fuzziwig's assets. There can be no assurance this transaction will be
consummated.
The operating results of Fuzziwig's, including provisions for estimated
disposition costs, lease termination costs and operating losses during the
phase-out period totaling $450,000, have been segregated from continuing
operations and reported as separate line items net of applicable income taxes
in the income statements. The current assets, net noncurrent assets and net
cash flows of Fuzziwig's have been segregated and reported as separate line
items in the balance sheets and statements of cash flows. The financial
statements for prior periods have been restated to conform to this
presentation.
Summarized financial information for the discontinued operations follows:
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
Sales $ 671,423 $688,535 $2,351,670 $1,338,648
Income (loss) before taxes $(111,820) $ 6,976 $ (148,084) $ 61,600
Income (loss) from
discontinued operations,
net of income taxes $ (68,600) $ 4,335 $ (90,849) $ 38,270
Note 4 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which requires that an enterprise report, by major components and as
a single total, the change in its net assets during the period from non-owner
sources; and SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, which establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers. Adoption of these
standards will not impact the Company's financial position, results of
operations or cash flows, and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Note 5 - SUPPLEMENTAL CASH FLOW INFORMATION
For the Nine Months Ended
November 30,
1997 1996
Interest paid $ 493,259 $ 322,323
Income taxes paid $ 2,306 $ 426,677
8
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the unaudited
financial statements and related notes of the Company included elsewhere in
this report. This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other parts of this Quarterly Report on Form
10-Q contain forward-looking statements that involve risks and uncertainties.
The Company's ability to successfully achieve expansion of its Rocky Mountain
Chocolate Factory franchise system depends on many factors not within the
Company's control including the availability of suitable sites for new store
establishment and the availability of qualified franchisees to support such
expansion.
The Company's ability to sell assets of its discontinued Fuzziwig's segment
on terms favorable to the Company, if at all, also depends on many factors
not within the Company's control.
As a result, the actual results realized by the Company could differ
materially from the results discussed in or contemplated by the
forward-looking statements made herein. Words or phrases such as "will,"
"anticipate," "expect," "believe," "intend," "estimate," "project," "plan" or
similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on the forward-looking
statements made in this Quarterly Report on Form 10-Q.
Results of Operations
THREE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1996
Income from continuing operations for the three months ended November 30,
1997 was $497,000 or $.17 per share versus $255,000 or $.09 per share for the
three months ended November 30, 1996. Loss from discontinued operations was
$344,600 for the three months ended November 30, 1997 or $.12 per share
versus income from discontinued operations of $4,000 or $.00 per share for
the three months ended November 30, 1996. Net income was $153,000 for the
three months ended November 30, 1997 or $.05 per share versus $259,000 or
$.09 per share for the three months ended November 30, 1996.
Revenues
Three Months Ended
November 30, %
($'s in thousands) 1997 1996 Change Change
Factory sales $3,055.1 $2,823.3 $ 231.8 8.2%
Retail sales 2,709.1 2,949.1 (240.0) (8.1)
Franchise fees 26.0 73.0 (47.0) (64.4)
Royalty and Marketing fees 654.4 551.7 102.7 18.6
Total $6,444.6 $6,397.1 $ 47.5 0.7%
9
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Factory Sales
Factory sales increased $232,000 or 8.2% to $3.1 million in the third quarter
of fiscal 1998, compared to $2.8 million in the third quarter of fiscal 1997.
This increase resulted from an increase in the number of franchised stores
from 167 as of November 30, 1996 to 183 as of November 30, 1997. Same store
pounds purchased from the factory by franchised stores declined by 4.9% in
the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997
partially offsetting increased sales from additional franchised stores and
increased factory prices. The decline in same store pounds purchased from
the factory results primarily from increased retail sales of store-made
product and product purchased from authorized vendors relative to
factory-made products.
Retail Sales
Retail sales decreased $240,000 or 8.1% to $2.7 million in the third quarter
of fiscal 1998, compared to $2.9 million in the third quarter of fiscal 1997.
This decrease resulted primarily from a decrease in the number of
Company-owned stores from 46 to 36, partially offset by an increase in
comparable store sales of 2.9%.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $103,000 or 18.6% to $654,000 in the
third quarter of fiscal 1998, compared to $552,000 in the third quarter of
fiscal 1997. This increase resulted from an increase in the number of
franchised stores operating to 183 in the third quarter of fiscal 1998
compared to 167 in the third quarter of fiscal 1997 and an increase in same
store sales at franchised stores of 5.5%. Franchise fee revenues decreased in
the third quarter of fiscal 1998 due to a reduction in the number of new
franchisees versus the third quarter of fiscal 1997.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 50.9% in the third
quarter of fiscal 1998 versus 53.7% in the third quarter of fiscal 1997.
This improvement resulted from increased margins on both factory and retail
sales. Company-owned store margins for the quarter improved to 64.2% in the
third quarter of fiscal 1998 from 60.6% in the third quarter of fiscal 1997
as a result of an increase in retail prices, a focus on higher margin
products and reduced inventory shrinkage. Factory margins improved to 28.1%
in the third quarter of fiscal 1998 from 24.4% in the third quarter of fiscal
1997 as a result of improved manufacturing efficiencies.
Franchise Costs
Franchise costs increased 17.4% from $499,000 in the third quarter of fiscal
1997 to $586,000 in the third quarter of fiscal 1998. As a percentage of total
royalty and marketing fees and franchise fee revenue, franchise costs
increased to 86.1% in the third quarter of fiscal 1998 from 79.8% in the
third quarter of fiscal 1997. These increased costs are the result of
increased spending on new product development, brand awareness and testing
and development of alternative distribution channel programs.
10
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General and Administrative
General and administrative expenses decreased 12.8% from $491,000 in the
third quarter of fiscal 1997 to $428,000 in the third quarter of fiscal 1998,
primarily as a result of reduced bad debt expense. As a percentage of total
revenues, general and administrative expense declined from 7.7% in fiscal 1997
to 6.6% in fiscal 1998.
Retail Operating Expenses
Retail operating expenses decreased from $1.77 million in the third quarter
of fiscal 1997 to $1.55 million in the third quarter of fiscal 1998; a
decrease of 12.7%. This decrease resulted from closing and selling certain
Company-owned stores. As a result, retail operating expenses, as a
percentage of retail sales, decreased from 60.0% in the third quarter of
fiscal 1997 to 57.1% in the third quarter of fiscal 1998.
Other Expense
Other expense of $139,000 incurred in the third quarter of fiscal 1998
increased 8.3% from the $129,000 incurred in the third quarter of fiscal
1997. This increase resulted from increased interest expense related to
borrowings in support of the Company's fiscal 1996 and 1997 Company-owned
store expansion.
Income Tax Expense
The Company's effective income tax rate in the third quarter of fiscal 1997
was 37.7% in comparison with the 38.7% in the third quarter of fiscal 1998.
The increase resulted from utilization of remaining available state net
operating loss carryforwards in fiscal 1997.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
segment did not meet its long-term strategic goals, and accordingly, has made
the decision to dispose of these operations. See "NOTE 3 - DISCONTINUED
OPERATIONS" of notes to interim financial statements.
NINE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
NOVEMBER 30, 1996
Income from continuing operations for the nine months ended November 30, 1997
was $1.1 million or $.38 per share versus $679,000 or $.23 per share for the
nine months ended November 30, 1996. Loss from discontinued operations was
$367,000 for the nine months ended November 30, 1997 or $.13 per share versus
income from discontinued operations of $38,000 or $.01 per share for the nine
months ended November 30, 1996. Net income was $735,000 for the nine months
ended November 30, 1997 or $.25 per share versus $718,000 or $.24 per share
for the nine months ended November 30, 1996.
11
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Revenues
Nine Months Ended
November 30, %
($'s in thousands) 1997 1996 Change Change
Factory sales $ 7,170.6 $ 6,722.8 $ 447.8 6.7%
Retail sales 7,985.4 8,033.8 (48.4) (0.6)
Franchise fees 316.5 318.7 (2.2) (0.7)
Royalty and Marketing fees 1,953.0 1,688.5 264.5 15.7
Total 17,425.5 $16,763.8 $ 661.7 3.9%
Factory Sales
Factory sales increased $448,000 or 6.7% to $7.2 million in the first nine
months of fiscal 1998, compared to $6.7 million in the first nine months of
fiscal 1997. This increase was due to an increase in the number of franchised
stores from 167 as of November 30, 1996 to 183 as November 30 1997. Same
store pounds purchased from the factory by franchised stores declined by 2.4%
in the first nine months of fiscal 1998 compared to the first nine months of
fiscal 1997 partially offsetting increased sales from additional franchised
stores and increased factory prices. The decline in same store pounds
purchased from the factory resulted primarily from increased retail sales of
store-made product and product purchased from authorized vendors relative to
factory-made products.
Retail Sales
Retail sales decreased $48,000 or 0.6% to $7.99 million in the first nine
months of fiscal 1998, compared to $8.03 million in the first nine months of
fiscal 1997. This decrease resulted primarily from the closing and selling
of certain stores in fiscal 1998 and was partially offset by an increase of
4.3% in comparable store sales in the first nine months of fiscal 1998 versus
the first nine months of fiscal 1997.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $265,000 or 15.7% to $2.0 million in
the first nine months of fiscal 1998, compared to $1.7 million in the first
nine months of fiscal 1997. This increase resulted from an increase in the
number of franchised stores operating to in the first nine months of fiscal
1998 compared to the first nine months of fiscal 1997 and an increase in same
store sales at franchised stores of 6.1%. Franchise fee revenues were
approximately the same for the first nine months of fiscal 1998 compared to
the first nine months of fiscal 1997.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 50.1% in the first nine
months of fiscal 1998 versus 51.7% in the first nine months of fiscal 1997.
This improvement resulted from increased margins on both factory and retail
sales. Company-owned store margins for the first nine months of fiscal 1998
improved to
12
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63.5% from 60.9% in the first nine months of fiscal 1997 as a result of an
increase in retail prices, a focus on higher margin products and reduced
inventory shrinkage. Factory margins for the first nine months of fiscal
1998 improved to 28.9% from 26.5% in the first nine months of fiscal 1997 as
a result of improved manufacturing efficiencies.
Franchise Costs
Franchise costs increased 13.1% from $1.5 million in the first nine months of
fiscal 1997 to $1.6 million in the first nine months of fiscal 1998. As a
percentage of total royalty and marketing fees and franchise fee revenue,
franchise costs remained constant at 74.4% in the first nine months of fiscal
1998 and 1997. Increased spending on new product development, brand
awareness and alternative distribution channel programs was offset (as a
percentage of sales) by a strong increase in royalty and marketing fee
revenues.
General and Administrative
General and administrative expenses decreased 6.6% from $1.36 million in the
first nine months of fiscal 1997 to $1.27 million in the first nine months of
fiscal 1998, primarily as a result of reduced bad debt expense. As a
percentage of total revenues, general and administrative expense declined
from 8.1% in fiscal 1997 to 7.3% in fiscal 1998.
Retail Operating Expenses
Retail operating expenses decreased from $4.9 million in the first nine
months of fiscal 1997 to $4.6 million in the first nine months of fiscal
1998; a decrease of 4.8%. This decrease is due to closure and sale of
certain stores. As a result, retail operating expenses, as a percentage of
retail sales, decreased from 60.8% in the first nine months of fiscal 1997 to
58.2% in the first nine months of fiscal 1998.
Other Expense
Other expense of $431,000 incurred in the first nine months of fiscal 1998
increased 40.2% from the $307,000 incurred in the first nine months of fiscal
1997. This increase resulted from increased interest expense related to
borrowings in support of the Company's fiscal 1996 and 1997 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% in comparison with the 38.7% in the first nine months of fiscal
1998. The increase resulted from utilization of remaining available state
net operating loss carryforwards in fiscal 1997.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
segment did not meet its long-term strategic goals, and accordingly, has made
the
13
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decision to dispose of these operations. See "NOTE 3 - DISCONTINUED
OPERATIONS" of notes to interim financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1997 working capital was $4,032,000 compared with
$2,664,000 as of February 28, 1997, a $1,368,000 increase. This increase is
primarily the result of cash flows generated by operating and financing
activities in excess of cash flows used in investing activities.
Cash and cash equivalent balances increased from $793,000 as of February 28,
1997 to $1,800,000 as of November 30, 1997 as a result of cash flows
generated by operating and financing activities in excess of cash flows used
in investing activities. The Company's current ratio was 2 to 1 at November
30, 1997 in comparison with 1.9 to 1 at February 28, 1997.
The Company's long-term debt is comprised primarily of a real estate mortgage
facility used to finance the Company's factory (unpaid balance as of November
30, 1997 $1,587,000), and chattel mortgage notes (unpaid balance as of
November 30, 1997 $5,412,000) used to fund the fiscal 1996 and 1997
Company-owned store expansion.
The Company has an unused $2,000,000 working capital line of credit secured
by accounts receivable and inventories which is subject to renewal in July,
1998.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and labor
directly affect the Company's operations. Most of the Company's leases
provide for cost-of-living adjustments and require it to pay taxes, insurance
and maintenance expenses, all of which are subject to inflation.
Additionally the Company's future lease costs for new facilities may include
potentially escalating costs of real estate and construction. There is no
assurance that the Company will be able to pass on increased costs to its
customers.
Depreciation expense is based on the historical cost to the Company of its
fixed assets, and is therefore potentially less than it would be if it were
based on current replacement cost. While property and equipment acquired in
prior years will ultimately have to be replaced at higher prices, it is
expected that replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday
and summer vacation seasons. 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.
14
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Stockholders meeting the following matters were
submitted and approved by the stockholders:
(1) The Company's stockholders elected the persons set forth in the
table below to serve as directors of the Company:
Votes For Votes Withheld
Franklin E. Crail 1,693,769 20,995
Gary S. Hauer 1,694,069 20,695
Fred M. Trainor 1,694,069 20,695
Gerald A. Kien 1,691,369 23,395
Everett A. Sisson 1,518,555 196,209
Lee N. Mortenson 1,515,404 199,360
(2) The stockholders approved and ratified a proposal to amend the
Company's 1995 Stock Option Plan to increase from 100,000 to
150,000 the aggregate number of shares of Common Stock that may
be issued thereunder. The shares voted at the Annual Meeting on
this proposal were voted as follows:
Votes for 1,458,054
Votes against 246,173
Abstentions 23,367
Non-Votes
Item 5. Other Information
None
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 17).
27.1 Financial Data Schedule
B. Reports on Form 8-K
None
15
<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, a duly authorized officer.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January 13, 1998 /s/ Bryan J. Merryman
-----------------------------------------
Bryan J. Merryman, Vice President Finance
Chief Financial Officer
16
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
Nine-month periods ended
November 30,
1997 1996
INCOME PER SHARE
Net income allocable to common and
common equivalent shares $ 734,736 $ 717,584
Weighted average number of
common shares outstanding 2,912,367 2,952,015
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price 14,643 -
Weighted average number of common
and common equivalent shares
outstanding 2,927,010 2,952,015
Income per common
and common equivalent share $ .25 $ .24
17
<PAGE>
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
Three-month periods ended
November 30,
1997 1996
INCOME PER SHARE
Net income allocable to common and
common equivalent shares $ 152,809 $ 258,917
Weighted average number of
common shares outstanding 2,912,449 2,944,898
Net effect of dilutive stock options
and warrants based on the Treasury
Stock Method using average market
price 21,010 -
Weighted average number of common
and common equivalent shares
outstanding 2,933,459 2,944,898
Income per common
and common equivalent share $ .05 $ .09
18
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 1,800,242
<SECURITIES> 0
<RECEIVABLES> 2,500,622
<ALLOWANCES> 215,235
<INVENTORY> 2,514,212
<CURRENT-ASSETS> 8,006,894
<PP&E> 13,207,906
<DEPRECIATION> 4,055,012
<TOTAL-ASSETS> 20,386,326
<CURRENT-LIABILITIES> 3,974,628
<BONDS> 5,897,420
0
0
<COMMON> 91,239
<OTHER-SE> 9,731,307
<TOTAL-LIABILITY-AND-EQUITY> 20,386,326
<SALES> 15,156,068
<TOTAL-REVENUES> 17,425,543
<CGS> 7,593,509
<TOTAL-COSTS> 15,198,812
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 503,168
<INCOME-PRETAX> 1,795,575
<INCOME-TAX> 693,990
<INCOME-CONTINUING> 1,101,585
<DISCONTINUED> 366,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 734,736
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
</TABLE>
