<PAGE> 1
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, 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 October 8, 1999 the registrant had outstanding 2,600,349 shares of its common
stock, $.03 par value.
The exhibit index is located on page 19.
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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 3-9
Statements of Income 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended August 31, Six Months Ended August 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Sales $ 5,227,319 $ 5,682,996 $ 10,020,995 $ 10,491,802
Franchise and royalty fees 845,718 934,902 1,641,572 1,699,644
Total revenues 6,073,037 6,617,898 11,662,567 12,191,446
COSTS AND EXPENSES
Cost of sales 2,648,135 2,783,683 5,295,629 5,342,802
Franchise costs 248,906 289,181 488,402 568,170
Sales and marketing 418,508 428,807 816,926 827,571
General and administrative 643,952 463,228 1,112,507 932,945
Retail operating 1,444,612 1,661,386 2,977,154 3,107,272
Total costs and expenses 5,404,113 5,626,285 10,690,618 10,778,760
INCOME FROM OPERATIONS 668,924 991,613 971,949 1,412,686
OTHER INCOME (EXPENSE)
Interest expense (139,025) (176,946) (293,715) (355,614)
Interest income 19,447 16,952 31,695 42,289
Other, net (119,578) (159,994) (262,020) (313,325)
INCOME BEFORE INCOME TAXES 549,346 831,619 709,929 1,099,361
PROVISION FOR INCOME TAXES 212,595 321,590 274,745 425,125
NET INCOME $ 336,751 $ 510,029 $ 435,184 $ 674,236
BASIC EARNINGS PER COMMON SHARE $ .13 $ .20 $ .17 $ .25
DILUTED EARNINGS PER COMMON SHARE $ .13 $ .20 $ .17 $ .25
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,600,129 2,595,981 2,599,864 2,730,459
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 25,268 13,766 14,429 15,599
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,625,397 2,609,747 2,614,293 2,746,058
</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>
August 31, February 28,
1999 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 309,071 $ 317,155
Accounts and notes receivable, less allowance for
doubtful accounts of $154,469 and $259,408 1,765,888 1,874,286
Refundable income taxes 43,651 383,511
Inventories 3,302,573 3,276,550
Deferred income taxes 433,229 433,229
Other 243,668 73,827
Total current assets 6,098,080 6,358,558
PROPERTY AND EQUIPMENT, NET 9,423,001 10,238,671
OTHER ASSETS
Accounts and notes receivable 260,826 291,648
Goodwill, less accumulated amortization
of $514,559 and $441,246 1,347,441 1,420,754
Other 327,325 342,469
Total other assets 1,935,592 2,054,871
Total assets $ 17,456,673 $ 18,652,100
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,823,000 $ 1,831,000
Line of credit -- 900,000
Accounts payable 1,271,396 1,066,986
Accrued salaries and wages 488,529 548,745
Accrued income taxes 124,021 --
Other accrued expenses 404,188 453,407
Total current liabilities 4,111,134 4,800,138
LONG-TERM DEBT, LESS CURRENT MATURITIES 4,313,258 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,
2,600,349 and 2,599,599 issued and outstanding 78,010 77,988
Additional paid-in capital 7,040,914 7,046,032
Retained earnings 2,069,095 1,633,911
Less notes receivable from officers and directors (248,745) (248,745)
Total stockholders' equity 8,939,274 8,509,186
Total liabilities and stockholders' equity $ 17,456,673 $ 18,652,100
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
August 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 435,184 $ 674,236
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 788,364 683,641
(Gain) loss on sale of property and equipment 45,693 (15,696)
Decrease in accounts and notes receivable 280,310 178,557
Decrease in refundable income taxes 339,860 456,460
Increase in inventories (26,023) (679,642)
Increase in other assets (169,841) (99,163)
Increase in accounts payable 204,410 39,920
Increase in income taxes payable 124,021 --
Decrease in deferred income taxes -- 2,837
Decrease in accrued liabilities (144,517) (33,536)
Net cash provided by operating activities of
continuing operations 1,877,461 1,207,614
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 503,640 37,500
Purchases of property and equipment (500,945) (701,952)
Loans to officers and shareholders -- (248,750)
Decrease (increase) in other assets (37,785) 10,887
Net cash used in investing activities of
continuing operations (35,090) (902,315)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (944,511) (893,099)
Proceeds from line of credit 2,280,000 4,925,000
Payments on line of credit (3,180,000) (4,175,000)
Repurchase of stock (8,644) (1,773,266)
Proceeds from exercise of stock options 2,700 80,751
Net cash used in financing activities of
continuing operations (1,850,455) (1,835,614)
NET CASH USED IN DISCONTINUED OPERATIONS -- (88,692)
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,084) (1,619,007)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 317,155 1,795,381
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 309,071 $ 176,374
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
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 that 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 six months ended August
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>
August 31, 1999 February 28, 1999
<S> <C> <C>
Ingredients and supplies $ 1,395,199 $ 1,594,579
Finished candy 1,907,374 1,681,971
$ 3,302,573 $ 3,276,550
</TABLE>
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<PAGE> 7
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
August 31, 1999 February 28, 1999
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,677,394 3,672,870
Machinery and equipment 7,406,324 7,147,833
Furniture and fixtures 2,123,622 2,408,807
Leasehold improvements 1,614,006 1,876,223
Transportation equipment 199,639 199,639
15,534,603 15,818,990
Less accumulated depreciation 6,111,602 5,580,319
Property and equipment, net $ 9,423,001 $ 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. The 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 six
months ended August 31, 1998 is as follows:
<TABLE>
<S> <C>
Sales $ 1,095,431
Loss before taxes (51,562)
Loss from discontinued operations, net of
income taxes (31,622)
</TABLE>
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<PAGE> 8
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended
August 31,
1999 1998
<S> <C> <C>
Cash paid (received) for:
Interest $ 289,119 $ 370,060
Income taxes (189,136) (88,029)
Supplemental schedule of non-cash investing and financing activities:
Property and equipment acquired in settlement of note receivable -- 130,000
</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, Manufacturing and Retail stores. 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
August 31, 1999
<S> <C> <C> <C> <C> <C>
Total revenues $ 845,718 $ 3,089,748 $ 2,835,088 $ -- $ 6,770,554
Intersegment revenues -- (697,517) -- -- (697,517)
Revenue from external
customers 845,718 2,392,231 2,835,088 -- 6,073,037
Segment profit (loss) 338,849 791,934 182,853 (764,290) 549,346
Total assets 919,937 8,873,566 5,279,436 2,383,734 17,456,673
Capital expenditures 4,023 214,224 7,984 134,352 360,583
Total depreciation &
amortization 46,941 132,218 163,101 42,899 385,159
Three Months Ended
August 31, 1998
Total revenues $ 934,902 $ 3,281,301 $ 3,248,254 $ -- $ 7,464,457
Intersegment revenues -- (846,559) -- -- (846,559)
Revenue from external
customers 934,902 2,434,742 3,248,254 -- 6,617,898
Segment profit (loss) 389,582 768,145 297,115 (623,223) 831,619
Total assets 1,133,849 8,509,658 6,856,179 1,882,248 18,381,934
Capital expenditures 4,646 153,884 45,480 15,529 219,539
Total depreciation &
amortization 18,990 112,026 161,520 47,907 340,443
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Six Months Ended Franchising Manufacturing Retail Other Total
August 31, 1999
<S> <C> <C> <C> <C> <C>
Total revenues $ 1,641,572 $ 5,904,597 $ 5,335,261 $ -- $ 12,881,430
Intersegment revenues -- (1,218,863) -- -- (1,218,863)
Revenue from external
customers 1,641,572 4,685,734 5,335,261 -- 11,662,567
Segment profit (loss) 655,478 1,385,208 44,530 (1,375,287) 709,929
Total assets 919,937 8,873,566 5,279,436 2,383,734 17,456,673
Capital expenditures 29,531 261,490 12,100 197,824 500,945
Total depreciation &
amortization 93,673 263,302 340,587 90,802 788,364
Six Months Ended
August 31, 1998
Total revenues $ 1,699,644 $ 6,397,905 $ 5,592,092 $ -- $ 13,689,641
Intersegment revenues -- (1,498,195) -- -- (1,498,195)
Revenue from external
customers 1,699,644 4,899,710 5,592,092 -- 12,191,446
Segment profit (loss) 623,463 1,538,569 183,599 (1,246,270) 1,099,361
Total assets 1,133,849 8,509,658 6,856,179 1,882,248 18,381,934
Capital expenditures 26,131 253,615 388,292 33,914 701,952
Total depreciation &
amortization 47,238 232,298 304,487 99,618 683,641
</TABLE>
NOTE 9 - POTENTIAL CHANGE OF CONTROL
The Company entered into a letter of intent dated August 5, 1999 with Whitman's
Candies, Inc. ("Whitman's") relating to the proposed acquisition by Whitman's of
100% of the Company's issued and outstanding common stock for $6.25 per share.
The letter of intent is non-binding and the proposed acquisition is subject to
shareholder approval, the negotiation of a definitive agreement, due diligence
and other customary contingencies.
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<PAGE> 10
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 AUGUST 31, 1999 COMPARED TO THE THREE MONTHS ENDED
AUGUST 31, 1998
Net income was $336,751 for the three months ended August 31, 1999 or $.13 per
share versus $510,029 or $.20 per share for the three months ended August 31,
1998. Earnings per share was negatively impacted approximately $.04 for the
three months ended August 31, 1999 by certain non-recurring general and
administrative expenses.
Revenues
<TABLE>
<CAPTION>
Three Months Ended
August 31, %
($'s in thousands) 1999 1998 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 2,392.2 $ 2,434.7 $ (42.5) (1.7%)
Retail Sales 2,835.1 3,248.3 (413.2) (12.7%)
Franchise fees 48.8 43.8 5.0 11.4%
Royalty and Marketing fees 797.0 891.1 (94.1) (10.6%)
Total $ 6,073.1 $ 6,617.9 $ (544.8) (8.2%)
</TABLE>
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<PAGE> 11
Factory Sales
Factory sales decreased $43,000 or 1.7% to $2.39 million in the second quarter
of fiscal 2000, compared to $2.43 million in the second quarter of fiscal 1999.
This was due primarily to decreased sales to new distribution channels. Same
store pounds purchased from the factory by franchised stores declined by 3.2% in
the second quarter of fiscal 2000 compared to the second quarter of fiscal 1999.
The decrease in same store pounds purchased from the factory by franchised
stores was offset by an increase in the average number of franchised stores
operating during the second quarter of fiscal 2000 compared to the same period
last fiscal year.
Retail Sales
Retail sales decreased $413,000 or 12.7% to $2.8 million in the second quarter
of fiscal 2000, compared to $3.2 million in the second quarter of fiscal 1999.
This decrease resulted from a decrease in the average number of stores in
operation in the second quarter of fiscal 2000 (37) versus the same period last
year (39) and a decrease in comparable store sales of 7.9%.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees decreased $94,000 or 10.6% to $797,000 in the
second quarter of fiscal 2000, compared to $891,000 in the second quarter of
fiscal 1999. This decrease resulted primarily from a decrease in same store
sales at franchised stores of approximately 7.2%. Franchise fee revenue in the
second quarter of fiscal 2000 approximated the second quarter of fiscal 1999.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 50.7% in the second quarter
of fiscal 2000 versus 49.0% in the second quarter of fiscal 1999. This increase
was due primarily to decreased retail sales, which generate higher margins than
factory sales, and a decrease in Company-owned store margins for the second
quarter of fiscal 2000 to 59.5% from 62.1% in the second quarter of fiscal 1999.
Increased factory margins partially offset decreased retail sales and decreased
retail gross margins. Factory margins improved to 37.3% in the second quarter of
fiscal 2000 from 36.2% in the second quarter of fiscal 1999 as a result of
improved manufacturing efficiencies.
Franchise Costs
Franchise costs decreased 13.9% from $289,000 in the second quarter of fiscal
1999 to $249,000 in the second quarter of fiscal 2000. As a percentage of total
royalty and marketing fees and franchise fee revenue, franchise costs decreased
to 29.4% in the second quarter of fiscal 2000 from 30.9% in the second quarter
of fiscal 1999. This decrease as a percentage of royalty, marketing and
franchise fees is a result of a planned decrease in franchise support
expenditures.
Sales and Marketing
Sales and Marketing expenses decreased 2.4% to $419,000 in the second quarter of
fiscal 2000 from $429,000 in fiscal 1999 due to a planned decrease in sales and
marketing expenditures.
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<PAGE> 12
General and Administrative
General and administrative expenses increased 39.0% from $463,000 in the second
quarter of fiscal 1999 to $644,000 in the second quarter of fiscal 2000. The
increase in general and administrative expenses is due primarily to
non-recurring costs of approximately $173,000 related to the unsolicited tender
offer for 100% of the Company's outstanding common stock by Whitman's Candies,
Inc., which commenced in May 1999. These non-recurring expenses reduced earnings
per share by approximately $.04 in the second quarter of fiscal 2000.
Retail Operating Expenses
Retail operating expenses decreased from $1.7 million in the second quarter of
fiscal 1999 to $1.4 million in the second quarter of fiscal 2000; a decrease of
13.0%. This decrease is due to a decrease in the average number of stores open
during the second quarter of fiscal 2000 versus the second quarter of fiscal
1999. Retail operating expenses, as a percentage of retail sales, decreased
slightly from 51.1% in the second quarter of fiscal 1999 to 51.0% in the second
quarter of fiscal 2000.
Other Expense
Other expense of $120,000 incurred in the second quarter of fiscal 2000 declined
25.3% from the $160,000 incurred in the second 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 second quarter of fiscal 2000 was
38.7%, which is approximately the same rate as the second 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.
SIX MONTHS ENDED AUGUST 31, 1999 COMPARED TO THE SIX MONTHS ENDED
AUGUST 31, 1998
Net income was $435,184 for the six months ended August 31, 1999 or $.17 per
share versus $674,236 or $.25 per share for the six months ended August 31,
1998. Earnings per share was negatively impacted approximately $.05 for the six
months ending August 31, 1999 by certain non-recurring general and
administrative expenses.
12
<PAGE> 13
Revenues
<TABLE>
<CAPTION>
Six Months Ended
August 31, %
($'s in thousands) 1999 1998 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 4,685.7 $ 4,899.7 $ (214.0) (4.4%)
Retail sales 5,335.3 5,592.1 (256.8) (4.6%)
Franchise fees 117.8 109.7 8.1 7.4%
Royalty and Marketing fees 1,523.8 1,589.9 (66.1) (4.2%)
Total $ 11,662.6 $ 12,191.4 $ (528.8) (4.3%)
</TABLE>
Factory Sales
Factory sales decreased $214,000 or 4.4% to $4.7 million in the first six months
of fiscal 2000, compared to $4.9 million in the first six months 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 2000. Same store pounds purchased
from the factory by franchised stores decreased by 1.7% in the first six months
of fiscal 2000 compared to the first six months of fiscal 1999. The decrease in
same store pounds purchased from the factory by franchised stores was offset by
an increase in the average number of franchised stores operating during the
first six months of fiscal 2000 compared to the same period last year.
Retail Sales
Retail sales decreased $257,000 or 4.6% to $5.3 million in the first six months
of fiscal 2000, compared to $5.6 million in the first six months of fiscal 1999.
This decrease resulted from a decrease in comparable store sales of 6.3% in the
first six months of fiscal 2000 compared to fiscal 1999.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees decreased $66,000 or 4.2% to $1.5 million in the
first six months of fiscal 2000, compared to $1.6 million in the first six
months of fiscal 1999. This decrease resulted from a decrease in same store
sales at franchised stores of approximately 4.3%. Franchise fee revenues in the
first six months of fiscal 2000 approximated those in the first six months of
fiscal 1999.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales in the first six months of fiscal 2000
was 52.8% versus 50.9% for the first six months of fiscal 1999. This increase
resulted from decreased retail sales, which generate higher margins than factory
sales, and a decrease in Company-owned store margins for the first six months of
fiscal 2000 to 58.8% versus 61.0% for the first six months of fiscal 1999.
Factory margins declined to 33.9% in the first six months of fiscal 2000 from
35.5% in the first six months of fiscal 1999 as a result of decreased sales of
higher margin packaged product to new distribution channels in fiscal 2000
versus fiscal 1999.
13
<PAGE> 14
Franchise Costs
Franchise costs decreased 14.0% from $568,000 in the first six months of fiscal
1999 to $488,000 in the first six months of fiscal 2000. As a percentage of
total royalty and marketing fees and franchise fee revenue, franchise costs
decreased to 29.8% in the first six months of fiscal 2000 from 33.4% in the
first six months of fiscal 1999. This decrease as a percentage of royalty,
marketing and franchise fees is primarily a result of a planned decrease in
franchise support expenditures.
Sales and Marketing
Sales and Marketing costs decreased 1.3% to $817,000 in the first six months of
fiscal 2000 from $828,000 in fiscal 1999 due to a planned decrease in sales and
marketing expenditures.
General and Administrative
General and administrative expenses increased 19% from $933,000 in the first six
months of fiscal 1999 to $1,113,000 in the first six months of fiscal 2000. The
increase in general and administrative expense is due primarily to non-recurring
costs of approximately $173,000 related to the unsolicited tender offer for 100%
of the Company's outstanding common stock by Whitman's Candies, Inc., which
commenced in May 1999, and approximately $37,000 related to addressing year 2000
issues. These non-recurring expenses reduced earnings per share by approximately
$.05 in the first six months of fiscal 2000.
Retail Operating Expenses
Retail operating expenses declined from $3.1 million in the first six months of
fiscal 1999 to $3.0 million in the first six months of fiscal 2000; a decrease
of 4.2%. Retail operating expenses, as a percentage of retail sales, increased
slightly from 55.6% in the first six months of fiscal 1999 to 55.8% in the first
six months of fiscal 2000.
Other Expense
Other expense of $262,000 incurred in the first six months of fiscal 2000
decreased 16.4% from the $313,000 incurred in the first six months 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 six months of fiscal 2000
was 38.7%, which is approximately the same rate as the first six months 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.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1999 working capital was $1,987,000, compared with $1,558,000
as of February 28, 1999, a $429,000 increase.
Cash and cash equivalent balances decreased from $317,000 as of February 28,
1999 to $309,000 as of August 31, 1999 as a result of cash flows used by
investing and financing activities in excess of cash flows generated by
operating activities. The Company's current ratio was 1.5 to 1 at August 31,
1999 in comparison with 1.3 to 1 at February 28, 1999.
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
August 31, 1999 $1.9 million), and chattel mortgage notes (unpaid balance as of
August 31, 1999 $4.2 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion.
The Company has a $3.0 million ($3.0 million available as of August 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 $1.0 million equipment loan, the proceeds of which
will be used primarily to improve and automate the Company's factory and
information system infrastructure. Fundings under the facility bear interest at
the bank's prime rate and are due in monthly installments for between 36 and 60
months. As of August 31, 1999 $1.0 million was available to fund equipment
purchases.
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)
15
<PAGE> 16
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
has also completed the process of upgrading its main systems and hardware for
year 2000 compliance. Non-critical system conversions have been identified and
are scheduled for completion by October 1999.
The Company's operations are also dependent on the year 2000 readiness of third
parties that 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 $80,000 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
16
<PAGE> 17
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
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 November 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 or stores
closings and sales of franchises. Because of the seasonality of the Company's
business and the impact of new store openings, store closings 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.
17
<PAGE> 18
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.
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 August 31, 1999, approximately $1.0 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 August
31, 1999, there was no balance 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.
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. On July 20, 1999, the
Company filed a motion to dismiss the case. The motion has
been fully briefed, but the court has not yet ruled. The
Company believes the lawsuit is without merit and intends to
vigorously defend the action.
18
<PAGE> 19
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
The Company entered into a letter of intent dated August 5,
1999 with Whitman's Candies, Inc. ("Whitman's") relating to
the proposed acquisition by Whitman's of 100% of the Company's
issued and outstanding common stock for $6.25 per share. The
letter of intent contemplates that the acquisition would
involve the merger of a newly-formed subsidiary of Whitman's
with and into the Company, as a result of which the Company's
existing stockholders would receive cash for their shares and
the Company would survive as a wholly-owned subsidiary of
Whitman's. The letter of intent is non-binding and the
proposed acquisition is subject to shareholder approval, the
negotiation of a definitive agreement, due diligence and other
customary contingencies.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2.1 Letter of Intent dated August 5, 1999 between the
registrant and Whitman's Candies, Inc.
27.1 Financial Data Schedule for the six months ended August
31, 1999.
B. Reports on Form 8-K
None
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: October 14,1999 /s/ Bryan J. Merryman
------------------------------------------------
Bryan J. Merryman, Vice President - Finance,
Chief Operating Officer, Chief Financial Officer
and Director
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Letter of Intent dated August 5, 1999 between the registrant
and Whitman's Candies, Inc.
27.1 Financial Data Schedule for the six months ended August 31, 1999
</TABLE>
<PAGE> 1
EXHIBIT 2.1
[WHITMAN'S CANDIES, INC. LETTERHEAD]
August 5, 1999
Board of Directors
Rocky Mountain Chocolate Factory, Inc.
265 Turner Drive
Durango, CO 81301
VIA: FACSIMILE (970) 382-2218 AND
FEDERAL EXPRESS - PRIORITY OVERNIGHT
Re: Proposed Acquisition of the Stock of Rocky Mountain Chocolate
Factory, Inc.
Dear Sirs:
The undersigned (the "Purchaser") is pleased to submit this letter of intent to
acquire up to 100% of the stock of Rocky Mountain Chocolate Factory, Inc.
("Rocky Mountain" or the "Company").
Except as otherwise provided herein, this letter does not constitute a legally
binding and enforceable agreement. Moreover, this letter is not a complete
statement of the parties' intentions and agreements with respect to the matters
addressed herein. Nevertheless, upon acceptance by the Company in the manner
provided, it will serve as an expression of the parties' mutual intent to
proceed in good faith with the negotiation and execution of a definitive merger
or similar agreement (an "Agreement") providing for the transaction described
herein and with the other steps necessary to consummate the transaction.
1. Structure of the Transaction. The Purchaser intends to seek to have
the Company consummate a merger or similar business combination with
the Purchaser, or another direct or indirect subsidiary of the
Purchaser, conditioned upon the tender of shares of the Company
representing two-thirds of the outstanding shares of the Company (the
"Minimum Tender Condition"), and pursuant to which each outstanding
share of the Company would be converted into the right to receive in
cash the price per share paid by the Purchaser. The transaction must
be approved and supported by a unanimous vote of the Company's board
of directors and by senior management.
2. Price. In consideration of the transfer of the stock, Purchaser shall
pay to each shareholder that tenders it shares $6.25 per share, in
cash at Closing.
3. Definitive Agreement and Conditions to Closing. The proposed
transaction will be accomplished pursuant to the terms and subject to
the conditions set forth in the
<PAGE> 2
Agreement. The Agreement will contain such representations, warranties,
covenants and conditions usual and customary in transactions of this kind
as are mutually agreeable to the parties.
The consummation of the Purchaser's transaction with Rocky Mountain is
contingent on the following conditions:
(a) satisfactory negotiations with the management of the Company to insure that
key managers remain incented and are retained after Closing together with
satisfactory resolution of the terms of severance agreements with members
of senior management. Key managers to be retained would include but not
be limited to Mr. Franklin Crail and Mr. Bryan Merryman;
(b) successful completion of due diligence by the Purchaser;
(c) execution of a mutually-satisfactory Agreement;
(d) no material adverse change;
(e) the receipt of all the necessary consents and approvals of third parties
whose consent or approval is required for execution of the Agreement or
consummation of the transaction;
(f) withdrawal by the company of the Company's Share Rights Plan; and
(g) satisfaction of the Minimum Tender Condition.
4. Access Confidentiality. The Purchaser acknowledges that it has entered
into and is subject to the terms of a confidentiality agreement providing
for access to and the confidential treatment of information concerning the
Company (the "Confidentiality Agreement").
5. Interim Operations of the Company. Until the termination of this letter of
intent, the Company shall continue the operation of its business in the
ordinary course, consistent with past practice, including without
limitation the funding of the normal operations of the Company.
6. Exclusivity. Execution of this letter will acknowledge the Company's
agreement that Purchaser will have a thirty (30) day period to negotiate a
purchase agreement with the Company. During this period, the seller agrees
not to have contact, either directly or through advisors with any other
parties regarding the sale, merger, reorganization or recapitalization of
Rocky Mountain.
7. Expenses. Each corporate party shall pay its own fees and expenses
incurred in connection with the transaction, including without limitation,
investment banking, legal and other professional fees and expenses.
<PAGE> 3
8. Timing. Upon acceptance of this letter, the Purchaser would
intend to immediately begin due diligence on Rocky Mountain,
which Purchaser will endeavor in good faith to complete
forthwith. We will also begin drafting a merger agreement based
on this letter. We will work expeditiously with the seller to
close the transaction in a timely manner, and in no event later
than September 30, 1999.
If the foregoing terms are acceptable to the Company, please sign one copy of
the letter of intent in the space provided and return it to the undersigned
prior to 5:00 p.m. on Monday, August 9, 1999, at which time the proposal set
forth in this letter will expire. If this letter is not so executed and returned
by such time, this letter shall have no force and effect and the parties shall
have no further obligation to the other, except with respect to the
Confidentiality Agreement, which shall survive the expiration hereof.
Sincerely,
WHITMAN'S CANDIES, INC.
By /s/ RICHARD S. MASINTON
----------------------------------------
Richard S. Masinton
Chief Administrative Officer
ACCEPTED this 10th day of August, 1999.
By: /s/ Franklin Crail
-------------------------------------
Printed: Franklin Crail
-------------------------------------
Title: President
-------------------------------------
cc: Mr. Jonathan Baum
via: Facsimile (816) 283-5325
George K. Baum & Company
120 W. 12th Street
Kansas City, MO 64105
Mr. Franklin E. Crail
via: Facsimile (970) 382-2218
Rocky Mountain Chocolate Factory, Inc.
265 Turner Drive
Durango, CO 81201
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<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 309,071
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<RECEIVABLES> 1,920,357
<ALLOWANCES> 154,469
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0
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<SALES> 10,020,995
<TOTAL-REVENUES> 11,662,567
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<TOTAL-COSTS> 10,690,618
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<INTEREST-EXPENSE> 293,715
<INCOME-PRETAX> 709,929
<INCOME-TAX> 274,745
<INCOME-CONTINUING> 435,184
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