<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended November 30, 1998
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)
<TABLE>
<S> <C>
Colorado 84-0910696
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
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 5, 1999 the registrant had outstanding 2,599,599 shares of its
common stock, $.03 par value.
The exhibit index is located on page 20.
1
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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 5
Statements of Cash Flows 6
Notes to Interim Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Sales $ 6,610,395 $ 5,764,294 $17,102,197 $15,156,068
Franchise and royalty fees 701,051 680,364 2,400,695 2,269,475
Total revenues 7,311,446 6,444,658 19,502,892 17,425,543
COSTS AND EXPENSES
Cost of sales 3,407,080 3,014,166 8,749,882 7,787,368
Franchise costs 316,912 284,471 885,082 827,458
Sales and marketing 393,414 301,187 1,220,985 860,546
General and administrative 456,147 439,151 1,389,092 1,349,941
Retail operating 1,733,758 1,455,702 4,841,030 4,373,499
Total costs and expenses 6,307,311 5,494,677 17,086,071 15,198,812
INCOME FROM OPERATIONS 1,004,135 949,981 2,416,821 2,226,731
OTHER INCOME (EXPENSE)
Interest expense (173,496) (165,695) (529,110) (503,168)
Interest income 12,454 26,488 54,743 72,012
Other, net (161,042) (139,207) (474,367) (431,156)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 843,093 810,774 1,942,454 1,795,575
PROVISION FOR INCOME TAXES 326,020 313,365 751,145 693,990
INCOME FROM CONTINUING OPERATIONS 517,073 497,409 1,191,309 1,101,585
LOSS FROM DISCONTINUED OPERATIONS -
NET OF INCOME TAXES - (344,600) - (366,849)
NET INCOME $ 517,073 $ 152,809 $ 1,191,309 $ 734,736
</TABLE>
(CONTINUED)
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ .20 $ .17 $ .44 $ .38
Discontinued operations - (.12) - (.13)
Net income $ .20 $ .05 $ .44 $ .25
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ .20 $ .17 $ .44 $ .38
Discontinued operations - (.12) - (.13)
Net income $ .20 $ .05 $ .44 $ .25
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,599,599 2,912,449 2,687,156 2,912,367
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 9,054 21,010 13,433 14,643
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,608,653 2,933,459 2,700,589 2,927,010
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, February 28,
1998 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,106,548 $ 1,795,381
Accounts and notes receivable, less allowance for doubtful accounts of $198,834 and
$214,152 3,150,313 2,174,618
Refundable income taxes - 483,448
Inventories 4,373,350 2,567,966
Deferred income taxes 360,849 257,176
Other 184,258 103,195
Net current assets of discontinued operations - 44,351
Total current assets 9,175,318 7,426,135
PROPERTY AND EQUIPMENT, NET 10,531,271 9,672,443
OTHER ASSETS
Net noncurrent assets of discontinued operations - 1,555,681
Accounts and notes receivable 259,291 279,122
Goodwill, less accumulated amortization
of $401,765 and $325,848 1,460,235 596,152
Other 373,339 338,359
Total other assets 2,092,865 2,769,314
Total assets $ 21,799,454 $ 19,867,892
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,688,000 $ 1,132,900
Line of credit 1,000,000 -
Accounts payable 2,897,088 1,296,769
Accrued salaries and wages 954,777 707,737
Other accrued expenses 446,897 339,481
Total current liabilities 6,986,762 3,476,887
LONG-TERM DEBT, LESS CURRENT MATURITIES 5,523,300 5,993,273
DEFERRED INCOME TAXES 20,627 378,272
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.03 par value, 7,250,000 shares authorized, 2,599,599 and 2,912,449
issued and outstanding 77,988 87,373
Additional paid-in capital 7,035,730 8,719,604
Retained earnings 2,403,792 1,212,483
Less notes receivable from officers and directors (248,745) -
Total stockholders' equity 9,268,765 10,019,460
Total liabilities and stockholders' equity $ 21,799,454 $ 19,867,892
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,191,309 $ 734,736
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operations - 90,849
Provision for estimated loss on disposition of discontinued business segment - 276,000
Depreciation and amortization 1,073,616 998,527
Gain on sale of property and equipment (15,696) (53,164)
Increase in accounts and notes receivable (1,005,864) (546,746)
Decrease in refundable income taxes 483,448 159,099
Increase in inventories (1,805,384) (431,646)
Increase in other assets (81,063) (71,887)
Increase in deferred income taxes (461,318) -
Increase in accounts payable 1,600,319 212,040
Increase in income taxes payable - 408,926
Increase in accrued liabilities 262,453 127,862
Decrease in deferred income - (93,000)
Net cash provided by operating activities of continuing operations 1,241,820 1,811,596
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 37,500 -
Purchases of property and equipment (1,209,762) (1,084,120)
Loans to officers and directors (248,750) -
Increase in other assets (843) (226,615)
Net cash used in investing activities of continuing operations (1,421,855) (1,310,735)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,774,941 1,132,043
Payments on long-term debt (1,689,814) (718,516)
Proceeds from line of credit 8,025,000 -
Payments on line of credit (7,025,000) -
Repurchase of stock (1,773,266) -
Proceeds from exercise of stock options 79,309 -
Net cash provided by (used in) financing activities of continuing operations (608,830) 413,527
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 100,032 93,248
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (688,833) 1,007,636
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,795,381 792,606
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,106,548 $ 1,800,242
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
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,
international franchiser and retail operator. The Company manufactures an
extensive line of gourmet chocolates and other confectionery items. The
Company sells its candies in over 220 Rocky Mountain Chocolate Factory stores
(Company-owned and franchised) as well as through a variety of third party
retail and non-retail programs, including national and international retail,
fundraising, corporate sales and internet programs.
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 period March 1, 1998 to November 30, 1998 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, 1998.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options using the treasury stock method.
7
<PAGE>
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
November 30, 1998 February 28, 1998
<S> <C> <C>
Ingredients and supplies $ 1,497,599 $ 1,153,433
Finished candy 2,875,751 1,414,533
$ 4,373,350 $ 2,567,966
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
November 30, 1998 February 28, 1998
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,679,200 3,665,581
Machinery and equipment 7,009,605 6,023,347
Furniture and fixtures 2,510,121 2,072,208
Leasehold improvements 1,808,625 1,389,608
Transportation equipment 216,810 293,357
15,737,979 13,957,719
Less accumulated depreciation 5,206,708 4,285,276
Property and equipment, net $ 10,531,271 $ 9,672,443
</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
unrelated to any Company transactions from certain shareholders. The Company
loaned certain officers and directors the funds to pay a portion of the
purchase price for 40,000 of the 104,000 shares purchased by them.
Additionally, on June 1, 1998 the Company loaned an officer approximately
$49,000 to fund the exercise of options. These 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 divestiture of
Fuzziwig's was completed as planned as of the close of business on July 31,
1998.
8
<PAGE>
The operating results of Fuzziwig's have been segregated from continuing
operations and reported as separate line items net of applicable income taxes
in the accompanying 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 accompanying 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:
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
1998 1997
<S> <C> <C>
Sales $ 1,095,431 $ 2,351,670
Loss before taxes (51,562) (148,084)
Loss from discontinued operations, net of income taxes (31,622) (90,849)
</TABLE>
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
1998 1997
<S> <C> <C>
Cash paid for:
Interest $ 550,015 $ 493,259
Income taxes 176,352 2,306
Supplemental schedule of non-cash investing
and financing activities:
Property and equipment acquired in settlement of note receivable 130,000 -
Notes receivable from sale of property and equipment - 589,108
</TABLE>
The statement of cash flows for the nine months ending November 30, 1998
excludes the effects of certain non-cash investing and financing activities
relating to the divestiture of Fuzziwig's (Note 6). The following is a
summary of the non-cash effects of this transaction.
<TABLE>
<S> <C>
Decrease in:
Net current assets of discontinued operations $ 44,351
Net noncurrent assets of discontinued operations 1,555,681
Increase in:
Short-term note receivable (80,000)
Property and equipment (480,000)
Excess purchase price over identifiable tangible assets (Goodwill) (940,000)
Net increase in cash and cash equivalents $ 100,032
</TABLE>
9
<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 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. Other factors that could affect the
Company's ability to achieve the financial performance contemplated by the
forward-looking statements include changing market conditions in the overall
economy and retail industry, changes in consumer demand or competitive
conditions and the success of the Company's strategy of expanding into new
and previously untested distribution channels.
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, 1998 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1997
Income from continuing operations for the three months ended November 30,
1998 was $517,073 or $.20 per share versus $497,409 or $.17 per share for the
three months ended November 30, 1997. Loss from discontinued operations was
$344,600 or $.12 per share for the three months ended November 30, 1997. Net
income was $517,073 for the three months ended November 30, 1998 or $.20 per
share versus $152,809 or $.05 per share for the three months ended November
30, 1997.
10
<PAGE>
<TABLE>
<CAPTION>
Revenues
Three Months Ended
November 30, %
($'s in thousands) 1998 1997 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 3,600.3 $ 3,055.1 $ 545.2 17.8%
Retail sales 3,010.1 2,709.1 301.0 11.1
Franchise fees 21.6 26.0 (4.4) (16.9)
Royalty and Marketing fees 679.5 654.4 25.1 3.8
Total $ 7,311.5 $ 6,444.6 $ 866.9 13.5%
</TABLE>
Factory Sales
Factory sales increased $545,000 or 17.8% to $3.6 million in the third
quarter of fiscal 1999, compared to $3.1 million in the third quarter of
fiscal 1998. This increase was achieved despite a 9.2% decrease in same store
pounds purchased by franchised stores in the third quarter of fiscal 1999.
Sales of packaged product to new distribution channels accounted for
approximately 18% of factory sales in the third quarter of fiscal 1999 or
approximately $648,000. The increase in sales of packaged product to new
distribution channels accounted for approximately 119% of the total increase
in factory sales offsetting a decrease in sales to franchised stores of
approximately $103,000.
The decline in same store pounds purchased from the factory resulted from
increased sales at franchised stores of store-made product and product
purchased from outside vendors relative to factory-made products.
Retail Sales
Retail sales increased $301,000 or 11.1% to $3.0 million in the third quarter
of fiscal 1999, compared to $2.7 million in the third quarter of fiscal 1998.
This resulted from an increase in the average number of stores in operation
in the third quarter of fiscal 1999 (43) versus the same period last year
(36) and, to a lesser extent, an increase in comparable store sales of 0.1%.
Four Rocky Mountain Chocolate Factory stores were acquired on August 1, 1998
in connection with the divestiture of Fuzziwig's.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $25,000 or 3.8% to $680,000 in the
third quarter of fiscal 1999, compared to $654,000 in the third quarter of
fiscal 1998. This resulted from an increase in same store sales at franchised
stores of approximately 4.7% partially offset by a decrease in the average
number of franchised stores operated to 181 in the third quarter of fiscal
1999 compared to 183 in the third quarter of fiscal 1998. Franchise fee
revenues in the third quarter of fiscal 1999 was approximately the same as
the third quarter of fiscal 1998. The Company expects its strategy of
diversifying into new distribution channels to continue to reduce the
percentage of the Company's revenues derived from the sale of new franchises
to operate Rocky Mountain Chocolate Factory stores.
11
<PAGE>
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 51.5% in the third
quarter of fiscal 1999 versus 52.3% in the third quarter of fiscal 1998. This
decrease resulted from increased retail sales (due to a greater number of
Company-owned stores), which generate higher margins than factory sales, and
from increased margins on factory sales. Company-owned store margins for the
third quarter of 1999 were 60.2% versus 61.3% in the third quarter of fiscal
1998. Factory margins improved to 38.7% in the third quarter of fiscal 1999
from 35.7% in the third quarter of fiscal 1998 primarily as a result of a
shift in product mix from lower margin bulk products to higher margin packaged
products driven by increased sales to new distribution channels.
Franchise Costs
Franchise costs increased 11.4% from $284,000 in the third quarter of fiscal
1998 to $317,000 in the third quarter of fiscal 1999. As a percentage of
total royalty and marketing fees and franchise fee revenue, franchise costs
increased to 45.2% in the third quarter of fiscal 1999 from 41.8% in the
third quarter of fiscal 1998. This increase as a percentage of royalty,
marketing and franchise fees is primarily a result of an increase in certain
franchise support expenditures.
Sales and Marketing
Sales and Marketing costs increased 30.6% to $393,000 in the third quarter of
fiscal 1999 from $301,000 in fiscal 1998. This increase is due to: (1)
expansion of the Company's sales and marketing group to support our base of
franchised and Company-owned stores; (2) expansion of promotional programs
and marketing materials made available to franchised and Company-owned
stores; (3) establishment of a sales force focused on new distribution
opportunities and related new distribution channel start-up costs; and (4)
enhanced customer service and new product marketing programs.
General and Administrative
General and administrative expenses increased 3.9% from $439,000 in the third
quarter of fiscal 1998 to $456,000 in the third quarter of fiscal 1999. As a
percentage of total revenues, general and administrative expenses declined
from 6.8% in fiscal 1998 to 6.2% in fiscal 1999. The Company expects the
trend of decreasing general and administrative expenses as a percentage of
sales to continue due to its policy of controlling its current cost structure.
12
<PAGE>
Retail Operating Expenses
Retail operating expenses increased from $1.5 million in the third quarter of
fiscal 1998 to $1.7 million in the third quarter of fiscal 1999; an increase
of 19.1%. This increase is due primarily to an increase in the average
number of stores open during the third quarter of fiscal 1999 versus the
third quarter of fiscal 1998. Start-up costs and seasonality associated
with several new or recently acquired stores also contributed to the
increase in retail operating expenses. Retail operating expenses, as a
percentage of retail sales, increased to 57.6% in the third quarter of fiscal
1999 from 53.7% in the third quarter of fiscal 1998.
Other Expense
Other expense of $161,000 incurred in the third quarter of fiscal 1999
increased 15.7% from the $139,000 incurred in the third quarter of fiscal
1998. This resulted from interest expense related to borrowings in support of
the Company's fiscal 1996 and 1997 Company-owned store expansion and
increased borrowing on the Company's line of credit facility to support
seasonal working capital needs.
Income Tax Expense
The Company's effective income tax rate in the third quarter of fiscal 1998
was 38.7%, which is approximately the same rate as the third 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.
NINE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
NOVEMBER 30, 1997
Income from continuing operations for the nine months ended November 30, 1998
was $1,191,309 or $.44 per share versus $1,101,585 or $.38 per share for the
nine months ended November 30, 1997. Loss from discontinued operations was
$366,849 or $.13 per share for the nine months ended November 30, 1997. Net
income was $1,191,309 for the nine months ended November 30, 1998 or $.44 per
share versus $734,736 or $.25 per share for the nine months ended November
30, 1997.
13
<PAGE>
<TABLE>
<CAPTION>
Revenues Nine Months Ended
November 30, %
($'s in thousands) 1998 1997 Change Change
<S> <C> <C> <C> <C>
Factory sales 8,500.0 7,170.6 1,329.4 18.5%
Retail sales 8,602.2 7,985.4 616.8 7.7
Franchise fees 131.3 316.5 (185.2) (58.5)
Royalty and Marketing fees 2,269.4 1,953.0 316.4 16.2
Total 19,502.9 17,425.5 2,077.4 11.9%
</TABLE>
Factory Sales
Factory sales increased $1.3 million or 18.5% to $8.5 million in the first
nine months of fiscal 1999, compared to $7.2 million in the first nine months
of fiscal 1998. This was due to a shift in product mix from lower price point
bulk products to higher price point packaged products driven by sales to new
distribution channels. Total pounds shipped by the factory increased 10.2% to
1,515,000 in the first nine months of fiscal 1999 from 1,374,000 in the first
nine months of fiscal 1998. The increase in pounds shipped was due to a 31.5%
and 2.9% increase in pounds shipped in the first nine months of fiscal 1999
related to packaged and bulk products, respectively, versus the first nine
months of fiscal 1998. Same store pounds purchased from the factory by
franchised stores declined by 3.7% in the first nine months of fiscal 1999
compared to the first nine months of fiscal 1998, partially offsetting
increased factory sales.
The decline in same store pounds purchased from the factory resulted from
increased sales at franchised stores of store-made product and product
purchased from outside vendors relative to factory-made products.
Retail Sales
Retail sales increased $617,000 or 7.7% to $8.6 million in the first nine
months of fiscal 1999, compared to $8.0 million in the first nine months of
fiscal 1998. This resulted from the increased revenue associated with the
Rocky Mountain Chocolate Factory stores acquired from a franchisee on August
1, 1998 in connection with the divestiture of Fuzziwig's and an increase in
comparable store sales of 2.6%.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $316,000 or 16.2% to $2.3 million in
the first nine months of fiscal 1999, compared to $2.0 million in the first
nine months of fiscal 1998. This increase resulted from an increase in the
average number of franchised stores operating to 183 in the first nine months
of fiscal 1999 compared to 177 in the first nine months of fiscal 1998 and an
increase in same store sales at franchised stores of approximately 7.8%.
Franchise fee revenues decreased in the first nine months of fiscal 1999 due
to a reduction in the number of new franchises sold versus the first nine
months of fiscal 1998. While franchise interest remains strong, continued
lack of premium locations in proven environments
14
<PAGE>
has constrained sales of new franchises to interested parties. The Company
expects its strategy of diversifying into new distribution channels to
continue to reduce the percentage of the Company's revenues derived from the
sale of new franchises to operate Rocky Mountain Chocolate Factory stores.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales in the first nine months of fiscal
1999 was 51.2%, which is approximately the same percentage as the first nine
months of fiscal 1998. Company-owned store margins for the first nine months
of 1999 were 60.7% versus 61.1% in the first nine months of fiscal 1998.
Factory margins improved to 36.9% in the first nine months of fiscal 1999 from
34.7% in the first nine months of fiscal 1998 primarily as a result of a
shift in product mix from lower margin bulk products to higher margin
packaged products driven by increased sales to new distribution channels.
Franchise Costs
Franchise costs increased 7.0% from $827,000 in the first nine months of
fiscal 1998 to $885,000 in the first nine months of fiscal 1999. As a
percentage of total royalty and marketing fees and franchise fee revenue,
franchise costs increased slightly to 36.9% in the first nine months of
fiscal 1999 from 36.5% in the first nine months of fiscal 1998. This increase
as a percentage of royalty, marketing and franchise fees is primarily a
result of a 58.5% decrease in revenues from franchise fees and to a lesser
extent increased franchise support costs.
Sales and Marketing
Sales and Marketing costs increased 41.9% to $1,221,000 in the first nine
months of fiscal 1999 from $861,000 in fiscal 1998. This increase is due to:
(1) expansion of the Company's sales and marketing group to support our base
of franchised and Company-owned stores; (2) expansion of promotional programs
and marketing materials made available to franchised and Company-owned
stores; (3) establishment of a sales force focused on new distribution
opportunities and related new distribution channel start-up costs; and (4)
enhanced customer service and new product marketing programs.
General and Administrative
General and administrative expenses increased 2.9% from $1,350,000 in the
first nine months of fiscal 1998 to $1,389,000 in the first nine months of
fiscal 1999. As a percentage of total revenues, general and administrative
expenses declined from 7.7% in fiscal 1998 to 7.1% in fiscal 1999. The
Company expects the trend of decreasing general and administrative expenses
as a percentage of sales to continue due to its policy of controlling its
current cost structure.
15
<PAGE>
Retail Operating Expenses
Retail operating expenses increased from $4.4 million in the first nine
months of fiscal 1998 to $4.8 million in the first nine months of fiscal
1999; an increase of 10.7%. This increase is higher than the attendant
increase in retail sales as a result of start-up costs and seasonality
associated with several of the Company's new or recently purchased stores.
Retail operating expenses, as a percentage of retail sales, increased from
54.8% in the first nine months of fiscal 1998 to 56.3% in the first nine
months of fiscal 1999.
Other Expense
Other expense of $474,000 incurred in the first nine months of fiscal 1999
increased 10.0% from the $431,000 incurred in the first nine months of fiscal
1998. This resulted from interest expense related to borrowings in support of
the Company's fiscal 1996 and 1997 Company-owned store expansion and
increased borrowings on the Company's line of credit facility.
Income Tax Expense
The Company's effective income tax rate in the first nine months of fiscal
1998 was 38.7%, which is approximately the same rate as the first nine
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.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1998 working capital was $2,189,000, compared with
$3,949,000 as of February 28, 1998, a $1,760,000 decrease. This decrease is
primarily the result of the use of $1,773,000 of working capital to
repurchase 336,000 shares of the Company's common stock at $5.15 per share,
related transaction expenses and loans to officers and directors of $249,000
to acquire an additional 55,000 shares of the Company's common stock.
Cash and cash equivalent balances decreased from $1,795,000 as of February
28, 1998 to $1,107,000 as of November 30, 1998 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 1.3 to 1 at November 30,
1998 in comparison with 2.1 to 1 at February 28, 1998.
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 November 30, 1998 $1.9 million), and chattel mortgage notes (unpaid
balance as of
16
<PAGE>
November 30, 1998 $5.3 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion.
The Company has a $3.0 million ($2,000,000 available as of November 30, 1998)
working capital line of credit collateralized by certain of the Company's
inventories and accounts receivable. The line is subject to renewal in July,
1999.
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 in process and is scheduled to be tested and installed by
March 1999. Non-critical system conversions have been identified and are
scheduled for completion by July 1999. This remediation process will commence
in May of 1999 and encompasses all areas of operations of the Company, from
verification of the year 2000 compliance of email systems to telephone
systems.
17
<PAGE>
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 $39,000 of expenses
in connection with the Plan.
Based upon the planning 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
18
<PAGE>
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 (56%). 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. The Company anticipates that sales to new
distribution channels will also be subject to seasonal fluctuation with
stronger sales during the Christmas holiday season. Because of the
seasonality of the Company's business results for any quarter are not
necessarily indicative of results that may be achieved in other quarters or
for a full fiscal year.
19
<PAGE>
<TABLE>
<S> <C>
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27.1 Financial Data Schedule for the nine months ended
November 30, 1998.
27.2 Restated Financial Data Schedule for the nine months
ended November 30, 1997.
B. Reports on Form 8-K
None
</TABLE>
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: January 14, 1999 /s/ Bryan J. Merryman
---------------------------------------
Bryan J. Merryman, Vice President -
Finance Chief Financial Officer and
authorized officer
20
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 1,106,548
<SECURITIES> 0
<RECEIVABLES> 3,349,147
<ALLOWANCES> 198,834
<INVENTORY> 4,373,350
<CURRENT-ASSETS> 9,175,318
<PP&E> 15,737,979
<DEPRECIATION> 5,206,708
<TOTAL-ASSETS> 21,799,454
<CURRENT-LIABILITIES> 6,986,762
<BONDS> 5,523,300
0
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<PERIOD-START> MAR-01-1997
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