<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 May 31, 1999
___ 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 July 6, 1999 the registrant had outstanding 2,599,599 shares of its common
stock, $.03 par value.
The exhibit index is located on page 16.
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3-8
Statements of Income 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Interim Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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 May 31,
1999 1998
<S> <C> <C>
REVENUES
Sales $ 4,793,676 $ 4,808,806
Franchise and royalty fees 795,854 764,742
Total revenues 5,589,530 5,573,548
COSTS AND EXPENSES
Cost of sales 2,647,494 2,559,119
Franchise costs 239,496 278,989
Sales and marketing 398,418 398,764
General and administrative 468,555 469,717
Retail operating 1,532,542 1,445,886
Total costs and expenses 5,286,505 5,152,475
INCOME FROM OPERATIONS 303,025 421,073
OTHER INCOME (EXPENSE)
Interest expense (154,690) (178,668)
Interest income 12,248 25,337
Other, net (142,442) (153,331)
INCOME BEFORE INCOME TAXES 160,583 267,742
PROVISION FOR INCOME TAXES 62,150 103,535
NET INCOME $ 98,433 $ 164,207
BASIC EARNINGS PER COMMON SHARE $ .04 $ .06
DILUTED EARNINGS PER COMMON SHARE $ .04 $ .06
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,599,599 2,908,644
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 3,590 17,431
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,603,189 2,926,075
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, February 28,
ASSETS 1999 1999
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 63,210 $ 317,155
Accounts and notes receivable, less allowance for
doubtful accounts of $262,736 and $259,408 1,589,057 1,874,286
Refundable income taxes 323,114 383,511
Inventories 2,829,374 3,276,550
Deferred income taxes 433,229 433,229
Other 168,286 73,827
Total current assets 5,406,270 6,358,558
PROPERTY AND EQUIPMENT, NET 9,791,089 10,238,671
OTHER ASSETS
Accounts and notes receivable 278,258 291,648
Goodwill, less accumulated amortization of $479,640 and
$441,246 1,382,360 1,420,754
Other 338,838 342,469
Total other assets 1,999,456 2,054,871
Total assets $17,196,815 $18,652,100
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,812,000 $ 1,831,000
Line of credit 100,000 900,000
Accounts payable 933,867 1,066,986
Accrued salaries and wages 524,917 548,745
Other accrued expenses 396,196 453,407
Total current liabilities 3,766,980 4,800,138
LONG-TERM DEBT, LESS CURRENT MATURITIES 4,737,853 5,249,769
DEFERRED INCOME TAXES 93,007 93,007
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.03 par value, 7,250,000 shares
authorized, 2,599,599 issued and outstanding 77,988 77,988
Additional paid-in capital 7,037,388 7,046,032
Retained earnings 1,732,344 1,633,911
Less notes receivable from employees and directors (248,745) (248,745)
Total stockholders' equity 8,598,975 8,509,186
Total liabilities and stockholders' equity $17,196,815 $18,652,100
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended
May 31,
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 98,433 $ 164,207
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 403,205 343,198
Gain on sale of property and equipment (8,367) -
Changes in operating assets and liabilities:
Accounts and notes receivable 298,619 (167,399)
Refundable income taxes 60,397 106,625
Inventories 447,176 (227,015)
Other assets (94,459) (93,567)
Accounts payable (133,119) (183,727)
Deferred income taxes - (21,663)
Accrued liabilities (81,039) 115,113
Net cash provided by operating activities of continuing
operations
990,846 35,772
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 231,500 -
Purchases of property and equipment (140,362) (482,413)
Decrease in other assets 3,631 7,938
Net cash provided by (used in) investing activities of
continuing operations
94,769 (474,475)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (530,916) (266,982)
Proceeds from line of credit 1,225,000 2,825,000
Payments on line of credit (2,025,000) (1,325,000)
Repurchase of stock (8,644) (1,767,764)
Proceeds from exercise of stock options - 48,750
Net cash used in financing activities of continuing
operations
(1,339,560) (485,996)
NET CASH USED IN DISCONTINUED OPERATIONS - (112,287)
NET DECREASE IN CASH AND CASH EQUIVALENTS (253,945) (1,036,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 317,155 1,795,381
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 63,210 $ 758,395
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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
The Company is a manufacturer of an extensive line of premium chocolate candy
for sale to its franchised and Company-owned Rocky Mountain Chocolate Factory
stores located throughout the United States, Guam and Canada. The Company is
also a retail operator and international franchiser. The majority of the
Company's revenues are generated from wholesale and retail sales of candy. The
balance of the Company's revenues are generated from royalties and marketing
fees, based on a franchisee's monthly gross sales, and from franchise fees,
which consist of fees earned from the sale of franchises.
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 months ended May
31, 1999 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, 1999.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share reflects the potential
dilution that could occur from common shares issuable through stock options.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
May 31, 1999 February 28, 1999
<S> <C> <C>
Ingredients and supplies $ 1,222,964 $ 1,594,579
Finished candy 1,606,410 1,681,971
$ 2,829,374 $ 3,276,550
</TABLE>
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NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
May 31, 1999 February 28, 1999
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,672,869 3,672,870
Machinery and equipment 7,210,815 7,147,833
Furniture and fixtures 2,276,428 2,408,807
Leasehold improvements 1,731,445 1,876,223
Transportation equipment 199,639 199,639
15,604,814 15,818,990
Less accumulated depreciation 5,813,725 5,580,319
Property and equipment, net $ 9,791,089 $10,238,671
</TABLE>
NOTE 5 - STOCKHOLDERS' EQUITY
On May 15, 1998, the Company purchased 336,000 shares and certain of its
directors and executive officers purchased 104,000 shares of the Company's
issued and outstanding common stock at $5.15 per share from La Salle National
Bank of Chicago, Illinois, which obtained these shares through foreclosure from
certain shareholders unrelated to any transactions of the Company. The Company
loaned certain officers and directors the funds to acquire 40,000 of the 104,000
shares purchased by them. The loans are secured by the related shares, bear
interest payable annually at 7.5% and are due May 15, 2003.
NOTE 6 - 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. On June 5, 1998, the
Company entered into a definitive agreement to sell substantially all the assets
of its Fuzziwig's segment for $1.6 million. This transaction closed on July 31,
1998.
Operating results of the discontinued operation have been segregated from
continuing operations and reported as separate line items net of applicable
income taxes in the statements of income. 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.
Summarized financial information for the discontinued operation for the three
months ended May 31, 1998 is as follows:
<TABLE>
<S> <C>
Sales $ 627,955
Loss before taxes (36,847)
Loss from discontinued operations,
net of income taxes (22,597)
</TABLE>
7
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NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
May 31,
1999 1998
<S> <C> <C>
Interest paid $ 159,501 $ 154,773
Income taxes paid (refunded) 1,753 (3,090)
</TABLE>
NOTE 8 - OPERATING SEGMENTS
Effective May 31, 1998 the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which changes the way the
Company reports information about its operating segments.
The Company classifies its business interests into three reportable segments:
Franchising, Retail stores and Manufacturing. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in Note 1 to the Company's financial statements included in
the Company's annual report on Form 10-K for the year ended February 28, 1999.
The Company evaluates performance and allocates resources based on operating
contribution, which excludes unallocated corporate general and administrative
costs and income tax expense or benefit. The Company's reportable segments are
strategic businesses that utilize common merchandising, distribution, and
marketing functions, as well as common information systems and corporate
administration. All intersegment sales prices are market based. Each segment is
managed separately because of the differences in required infrastructure and the
difference in products and services:
<TABLE>
<CAPTION>
Three Months Ended Franchising Manufacturing Retail Other Total
May 31, 1999
<S> <C> <C> <C> <C> <C>
Total revenues 795,854 2,814,849 2,500,173 - 6,110,876
Intersegment revenues - (521,346) - - (521,346)
Revenue from external
customers 795,854 2,293,503 2,500,173 - 5,589,530
Segment profit (loss) 316,628 593,275 (138,323) (610,997) 160,583
Total assets 871,502 8,310,487 5,696,892 2,317,934 17,196,815
Capital expenditures 25,508 47,266 4,116 63,472 140,362
Total depreciation &
amortization 46,732 131,084 177,486 47,903 403,205
Three Months Ended
May 31, 1998
Total revenues 764,742 3,116,604 2,343,838 - 6,225,184
Intersegment revenues - (651,636) - - (651,636)
Revenue from external
customers 764,742 2,464,968 2,343,838 - 5,573,548
Segment profit (loss) 233,881 770,425 (113,517) (623,047) 267,742
Total assets 956,567 8,612,957 5,278,759 4,621,168 19,469,451
Capital expenditures 21,485 99,731 342,812 18,385 482,413
Total depreciation &
amortization 28,248 120,272 142,967 51,711 343,198
</TABLE>
8
<PAGE>
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.
Efforts to reverse the decline in same store pounds purchased from the factory
by franchised stores and to increase total factory sales depends on many factors
not within the Company's control including the receptivity of its franchise
system and of customers in potential new distribution channels to its product
introductions and promotional programs.
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 MAY 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MAY 31, 1998
Net income was $98,400 for the three months ended May 31, 1999 or $.04 per share
versus $164,200 or $.06 per share for the three months ended May 31, 1998.
Revenues
<TABLE>
<CAPTION>
Three Months Ended
May 31, %
($'s in thousands) 1999 1998 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 2,293.5 $ 2,465.0 (171.5) (7.0%)
Retail sales 2,500.2 2,343.8 156.4 6.7%
Franchise fees 69.0 65.9 3.1 4.7%
Royalty and Marketing fees 726.8 698.8 28.0 4.0%
Total $ 5,589.5 $ 5,573.5 16.0 0.3%
</TABLE>
9
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Factory Sales
Factory sales decreased $172,000 or 7.0% to $2.3 million in the first quarter
of fiscal 2000, compared to $2.5 million in the first quarter of fiscal 1999.
This was due primarily to decreased sales to new distribution channels.
Decreased sales to new distribution channels was due to large initial orders
from a single new customer that were shipped in the first quarter of fiscal
1999 and not duplicated in the first quarter of fiscal 2000. Same store
pounds purchased from the factory by franchised stores increased by 0.8% in
the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999.
Retail Sales
Retail sales increased $156,000 or 6.7% to $2.5 million in the first quarter of
fiscal 2000, compared to $2.3 million in the first quarter of fiscal 1999. This
increase resulted from an increase in the average number of stores in operation
in the first quarter of fiscal 2000 (40) versus the same period last year (37),
partially offset by a decrease in comparable store sales of 3.1%.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $28,000 or 4.0% to $727,000 in the first
quarter of fiscal 2000, compared to $699,000 in the first quarter of fiscal
1999. This increase resulted from collection of certain conditional royalty fees
of approximately $33,000 offset by a decrease in same store sales at franchised
stores of approximately 2.0%. Franchise fee revenues increased in the first
quarter of fiscal 2000 due to an increase in the number of new franchises sold
versus the first quarter of fiscal 1999.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 55.2% in the first quarter
of fiscal 2000 versus 53.2% in the first quarter of fiscal 1999. This increase
resulted from lower retail and factory margins. Company-owned store margins for
the first quarter of 2000 declined to 57.9% from 59.3% in the first quarter of
fiscal 1999 as a result of increased sales of lower margin factory-made product
in fiscal 2000 versus fiscal 1999. Factory margins declined to 30.4% in the
first quarter of fiscal 2000 from 34.9% in the first quarter of fiscal 1999 as a
result of decreased sales of higher margin packaged product to new distribution
channels in fiscal 2000 versus fiscal 1999.
Franchise Costs
Franchise costs decreased 14.2% from $279,000 in the first quarter of fiscal
1999 to $239,000 in the first quarter of fiscal 2000. As a percentage of total
royalty and marketing fees and franchise fee revenue, franchise costs decreased
to 30.1% in the first quarter of fiscal 2000 from 36.5% in the first quarter of
fiscal 1999. This decrease as a percentage of royalty, marketing and franchise
fees is primarily a result of decreased franchise support costs and, to a lesser
extent, a 4.1% increase in income from franchise fees and royalty and marketing
fees.
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Sales and Marketing
Sales and Marketing costs remained constant at approximately $399,000 in the
first quarter of both fiscal 2000 and 1999.
General and Administrative
General and administrative expenses decreased 0.2% to $469,000 in the first
quarter of fiscal 2000 from $470,000 in the first quarter of fiscal 1999. As a
percentage of total revenues, general and administrative expenses remained
constant at 8.4% in both fiscal 2000 and fiscal 1999.
Retail Operating Expenses
Retail operating expenses increased from $1.45 million in the first quarter
of fiscal 1999 to $1.53 million in the first quarter of fiscal 2000; an
increase of 6.0%. This increase was due primarily to an increase, by 3, in
the average number of stores open during the first quarter of fiscal 2000
versus the first quarter of fiscal 1999. Retail operating expenses, as a
percentage of retail sales, decreased slightly from 61.7% in the first
quarter of fiscal 1999 to 61.3% in the first quarter of fiscal 2000.
Other Expense
Other expense of $142,000 incurred in the first quarter of fiscal 2000 declined
7.1% from the $153,000 incurred in the first quarter of fiscal 1999 due
primarily to decreased interest expense on lower average outstanding amounts of
long-term debt and lower average outstanding balances on the Company's revolving
line of credit.
Income Tax Expense
The Company's effective income tax rate in the first quarter of fiscal 2000 was
38.7%, which is approximately the same rate as the first quarter of fiscal 1999.
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, made the decision
to dispose of these operations. See "NOTE 6 - DISCONTINUED OPERATIONS" of notes
to interim financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1999 working capital was $1,639,000, compared with $1,558,000 as
of February 28, 1999, an increase of $81,000.
Cash and cash equivalent balances decreased from $317,000 as of February 28,
1999 to $63,000 as of May 31, 1999 as a result of cash flows used by financing
activities in excess of cash flows generated by investing and operating
activities. The Company's current ratio was 1.4 to 1 at May 31, 1999 in
comparison with 1.3 to 1 at February 28, 1999.
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The Company's long-term debt is comprised primarily of a real estate mortgage
facility used to finance the Company's factory expansion (unpaid balance as of
May 31, 1999 $1.9 million), and chattel mortgage notes (unpaid balance as of May
31, 1999 $4.6 million) used to fund the fiscal 1996 and 1997 Company-owned store
expansion.
The Company has a $3.0 million ($2,900,000 available as of May 31, 1999) working
capital line of credit collateralized by substantially all of the Company's
assets with the exception of the Company's retail store assets. The line is
subject to renewal in July, 2000.
The Company has secured a commitment for a $1.0 million fixed asset based
loan, the proceeds of which will be used primarily to improve and automate
the Company's factory infrastructure.
The Company believes cash flows generated by operating activities and available
financing will be sufficient to fund the Company's operations at least through
the end of fiscal 2000.
YEAR 2000 MATTERS
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of systems to recognize the date change from
December 31, 1999 to January 1, 2000. The year 2000 issue could result, at the
Company and elsewhere, in system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions or to engage in other normal business activities. The Company has
assessed its computer and business processes and is reprogramming and upgrading
its computer applications to provide for their continued functionality. An
assessment of the readiness of the external entities with which it interfaces is
ongoing.
The Company has developed a detailed year 2000 Conversion Project Plan ("Plan")
to address the methods to correct possible disruptions of operations due to the
year 2000 issue. The Plan takes into consideration the following items: (i)
identification and inventorying of hardware, application software, and equipment
utilizing programmable logic chips to control aspects of the Company's
operation, with potential year 2000 problems; (ii) assessment of scope of year
2000 issues for, and assigning priorities to, each item based on its importance
to the Company's operations; (iii) remediation of year 2000 issues in accordance
with assigned priorities, by correction, upgrade, replacement or retirement;
(iv) testing for and validation of year 2000 compliance; and (v) determination
of key vendor and customers and their year 2000 compliance. Because the Company
uses a variety of information technology systems, internally-developed and
third-party provided software and embedded chip equipment, depending upon
business function and location, various aspects of the Company's year 2000
efforts are in different phases and are proceeding in parallel. The task of
identifying and inventorying hardware and application software with year 2000
issues and developing specific strategies for compliance has been completed. The
Company is in the process of upgrading its main systems and hardware for year
2000 compliance. This critical remediation work is approximately 70% complete
and is scheduled to be tested and completed by the end of July 1999.
Non-critical system conversions have been identified and are scheduled for
completion by October 1999. This remediation process has commenced and
encompasses all areas of operations of the Company,
12
<PAGE>
from verification of the year 2000 compliance of email systems to telephone
systems.
The Company's operations are also dependent on the year 2000 readiness of
third parties who do business with the Company. In particular, the Company's
information technology systems interact with commercial electronic
transaction processing systems to handle customer credit card purchases and
other point of sale transactions, and the Company is also dependent on
third-party suppliers of such infrastructure elements as telephone services,
electric power, water, and banking facilities. The Plan includes identifying
and initiating formal communications with key third parties and suppliers and
with significant vendors to determine the extent to which the Company will be
vulnerable to such parties' failure to resolve their own year 2000 issues.
The Company has contacted its relevant third parties. Although the Company
has not been put on notice that any known third party problem will not be
resolved, the Company has limited information and no assurance of additional
information concerning the year 2000 readiness of third parties. The
resulting risks to the Company's business are very difficult to assess.
The estimated cost for implementing the Plan including all required remediation
and testing activities is between $100,000 and $150,000 and is being funded
through operating cash flows. The Company anticipates that approximately 15% of
these costs will relate to identification and assessment efforts, approximately
55% to the replacement of noncompliant software and equipment, approximately 5%
to the correction of existing systems and approximately 25% to the testing of
corrections implemented under the Plan. Costs incurred in connection with the
Plan are not expected to result in significant delays or revisions to any of the
Company's other pending or proposed information technology programs. Operating
costs related to year 2000 compliance projects will be incurred over several
quarters and will be expensed as incurred. To date, the Company has incurred
approximately $52,000 of expenses in connection with the Plan.
Based upon the testing and remediation completed to date, the Company believes
that, with modifications to existing software, conversions to new software, and
appropriate remediation of embedded chip equipment, the year 2000 issue is not
reasonably likely to pose significant operational problems for the Company's
information technology systems and embedded chip equipment as so modified and
converted.
The Company is presently unable to assess the likelihood that the Company will
experience operational problems due to unresolved year 2000 problems of third
parties who do business with the Company. There can be no assurance that other
entities will achieve timely year 2000 compliance; if they do not, year 2000
problems could have a material impact on the Company's operations. Where
commercially reasonable to do so, the Company intends to assess its risks with
respect to failure by third parties to be year 2000 compliant and to seek to
mitigate those risks. If such mitigation is not achievable, year 2000 problems
could have a material impact on the Company's operations.
The Company's estimates of the costs of achieving year 2000 compliance and the
date by which year 2000 compliance will be achieved are based on management's
best estimates, which were derived using numerous assumptions about future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
13
<PAGE>
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in year 2000 remediation work, the ability to locate and
correct all computer codes, the success achieved by the Company's suppliers
in reaching year 2000 readiness, the timely availability of necessary
replacement items and similar uncertainties.
The Company presently believes that the most reasonably likely worst-case
scenarios that the Company might confront with respect to year 2000 issues have
to do with third parties not being year 2000 compliant. The Company is presently
evaluating vendor and customer compliance and will develop contingency plans,
such as alternate vendor opportunities, after obtaining compliance evaluations,
if necessary, from the balance of vendors who have yet to respond (45%).
However, alternative vendors may not be available for certain services, such as
electrical power, water and local telephone services. The Company's timeline is
to finalize these contingency plans by October 1999.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not engage in commodity futures trading or hedging activities
and does not enter into derivative financial instrument transactions for trading
or other speculative purposes. The Company also does not engage in transactions
in foreign currencies or in interest rate swap transactions that could expose
the Company to market risk. However, the Company is exposed to some commodity
price risks.
14
<PAGE>
The Company frequently enters into purchase contracts for chocolate and, to a
lesser extent, certain nuts having durations ranging from six to eighteen
months. These contracts permit the Company to purchase the specified
commodity at a fixed price on an as-needed basis during the term of the
contract. Because prices for these products may fluctuate, the Company may
benefit if prices rise during the terms of these contracts, but it may be
required to pay above-market prices if prices fall and it is unable to
renegotiate the terms of the contract.
As of May 31, 1999, approximately $1.1 million of the Company's long-term debt
was subject to a variable interest rate. The Company also has a $3.0 million
bank line of credit that bears interest at a variable rate. As of May 31, 1999,
$100,000 was outstanding under the line of credit. The Company does not believe
that it is exposed to any material interest rate risk related to its long-term
debt or the line of credit.
The Chief Financial Officer and Chief Operating Officer of the Company has
primary responsibility over the Company's long-term and short-term debt and for
determining the timing and duration of commodity purchase contracts and
negotiating the terms and conditions of those contracts.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
HARBOR FINANCE PARTNERS, INDIVIDUALLY AND ON BEHALF OF ALL
OTHERS SIMILARLY SITUATED, V. FRANKLIN E. CRAIL, GARY S.
HAUER, GERALD A. KIEN, LEE MORTENSON, EVERETT A. SISSON, FRED
TRAINOR AND ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., Case No.
99 CV 349. On May 26, 1999, certain shareholders filed a class
action complaint against the Company, its directors and
certain former directors challenging certain actions that the
plaintiffs allege were taken in response to the unsolicited
tender offer for the Company's outstanding common stock
commenced by Whitman's Candies, Inc. on May 10, 1999. The
bidder withdrew the tender offer on June 7, 1999. The
plaintiffs filed an amended complaint on June 30, 1999. The
plaintiffs seek injunctive relief and unspecified compensatory
damages together with prejudgment interest, costs, attorneys'
fees and expert witness' fees. The action was filed in the
District Court for the City and County of Denver. It has been
moved to La Plata County, Colorado, the county in which the
Company's principal offices are located. The Company believes
the lawsuit is without merit and intends to vigorously defend
the action.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27.1 Financial Data Schedule for the three months ended May 31, 1999.
B. Reports on Form 8-K
During the quarter ended May 31, 1999, the Company filed one
report on Form 8-K dated May 18, 1999, announcing a
distribution of preferred stock purchase rights to holders of
the Company's Common Stock and the execution of a related
Rights Agreement. No financial statements were filed with that
report.
16
<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.
(Registrant)
Date: July 14,1999 /s/ Bryan J. Merryman
------------------------------------------------
Bryan J. Merryman, Vice President - Finance, Chief
Operating Officer, Chief Financial Officer and
Director
17
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