<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, 2000
[ ] 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
(State of incorporation)
84-0910696
(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 6, 2000 the registrant had outstanding 1,956,784 shares of its common
stock, $.03 par value.
The exhibit index is located on page 16.
<PAGE> 2
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 16
</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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Sales $ 4,656,501 $ 5,227,319 $ 9,086,454 $ 10,020,995
Franchise and royalty fees 928,585 845,718 1,736,305 1,641,572
Total revenues 5,585,086 6,073,037 10,822,759 11,662,567
COSTS AND EXPENSES
Cost of sales 2,261,957 2,535,914 4,522,744 5,072,408
Franchise costs 268,476 235,106 527,975 460,802
Sales and marketing 281,472 355,400 569,212 693,186
General and administrative 404,785 431,544 857,752 848,342
Retail operating 1,048,434 1,245,642 2,201,699 2,608,460
Depreciation and amortization 312,293 385,159 639,559 788,364
Loss on sale of assets 2,971 48,841 3,061 45,693
Total costs and expenses 4,580,388 5,237,606 9,322,002 10,517,255
INCOME FROM OPERATIONS 1,004,698 835,431 1,500,757 1,145,312
OTHER INCOME (EXPENSE)
Cost of unsolicited tender offer -- (166,507) -- (173,363)
Interest expense (195,359) (139,025) (344,218) (293,715)
Interest income 14,377 19,447 24,346 31,695
Other, net (180,982) (286,085) (319,872) (435,383)
INCOME BEFORE INCOME TAXES 823,716 549,346 1,180,885 709,929
PROVISION FOR INCOME TAXES 318,780 212,595 457,005 274,745
NET INCOME $ 504,936 $ 336,751 $ 723,880 $ 435,184
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .26 $ .13 $ .34 $ .17
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,956,784 2,600,129 2,100,349 2,599,864
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 5,571 25,268 9,704 14,429
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 1,962,355 2,625,397 2,110,053 2,614,293
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, February 29,
2000 2000
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 128,828 $ 128,192
Accounts and notes receivable, less allowance for
doubtful accounts of $201,912 and $139,912 2,096,332 2,194,325
Refundable income taxes 36,129 76,689
Inventories 3,281,651 3,084,392
Deferred income taxes 438,999 188,999
Other 282,765 87,785
Total current assets 6,264,704 5,760,382
PROPERTY AND EQUIPMENT, NET 7,707,504 8,976,014
OTHER ASSETS
Accounts and notes receivable 656,121 55,343
Goodwill, less accumulated amortization of $661,750 and
$584,397 1,200,250 1,277,603
Other 646,099 370,514
Total other assets 2,502,470 1,703,460
Total assets $ 16,474,678 $ 16,439,856
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,758,000 $ 1,930,700
Line of credit 2,000,000 75,000
Accounts payable 842,615 1,055,910
Accrued salaries and wages 781,755 653,209
Other accrued expenses 452,418 456,300
Total current liabilities 5,834,788 4,171,119
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,971,957 3,773,851
DEFERRED GAIN ON SALE OF ASSETS 234,091 --
DEFERRED INCOME TAXES 61,797 61,797
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.03 par value, 7,250,000 shares
authorized, 1,956,784 and 2,599,599 issued and
outstanding 58,704 71,606
Additional paid-in capital 3,107,731 5,879,753
Retained earnings 3,414,356 2,690,476
Less notes receivable from employees and directors (208,746) (208,746)
Total stockholders' equity 6,372,045 8,433,089
Total liabilities and stockholders' equity $ 16,474,678 $ 16,439,856
</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,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 723,880 $ 435,184
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 639,559 788,364
Loss on sale of property and equipment 3,061 45,693
Changes in operating assets and liabilities:
Accounts and notes receivable 54,215 280,310
Refundable income taxes 40,560 339,860
Inventories (197,259) (26,023)
Deferred tax assets (250,000) --
Other assets (194,980) (169,841)
Accounts payable (213,295) 204,410
Accrued liabilities 66,870 (20,496)
Net cash provided by operating activities 672,611 1,877,461
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 775,170 503,640
Purchases of property and equipment (370,210) (500,945)
Increase in other assets (211,167) (37,785)
Net cash provided by investing activities 193,793 (35,090)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,093,240 --
Payments on long-term debt (1,067,834) (944,511)
Proceeds from line of credit 4,820,000 2,280,000
Payments on line of credit (2,895,000) (3,180,000)
Repurchase of stock (2,847,424) (8,644)
Proceeds from exercise of stock options 31,250 2,700
Net cash used in financing activities (865,768) (1,850,455)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 636 (8,084)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 128,192 317,155
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 128,828 $ 309,071
</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 retail operator and international franchiser. The Company is
also 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 and in Guam, Canada and the United Arab Emirates.
The majority of the Company's revenues are generated from wholesale and retail
sales of candy. The balance of the Company's revenues are generated from
royalties and marketing fees, based on a franchisee's monthly gross sales, and
from franchise fees, which consist of fees earned from the sale of franchises.
Basis of Presentation
The accompanying financial statements have been prepared by the Company, without
audit, and reflect all adjustments, which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods. The
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission regulations. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods. The results of operations for the three months ended August
31, 2000 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 29, 2000.
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, 2000 February 29, 2000
<S> <C> <C>
Ingredients and supplies $1,403,064 $1,490,813
Finished candy 1,878,587 1,593,579
$3,281,651 $3,084,392
</TABLE>
6
<PAGE> 7
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
August 31, 2000 February 29, 2000
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,708,027 3,681,808
Machinery and equipment 7,101,015 7,590,205
Furniture and fixtures 1,646,529 2,127,282
Leasehold improvements 1,247,882 1,611,785
Transportation equipment 205,539 199,639
14,422,610 15,724,337
Less accumulated depreciation 6,715,106 6,748,323
Property and equipment, net $ 7,707,504 $ 8,976,014
</TABLE>
NOTE 5 - STOCKHOLDERS' EQUITY
On March 21, 2000, the Company commenced a tender offer to acquire shares of its
common stock. Pursuant to the tender offer, which was completed on May 1, 2000,
the Company acquired 447,595 shares of its issued and outstanding common stock
at a purchase price of $6.25 per share.
Between December 22, 1999 and February 7, 2000, the Company repurchased 213,470
shares of its issued and outstanding common stock on the open market at an
average price of $5.48 per share.
On May 15, 1998, certain of the Company's 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 and payable on May 15, 2003.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended
August 31,
2000 1999
<S> <C> <C>
Cash paid during the period for:
Interest $351,364 $159,501
Income taxes $339,947 $ 1,753
Supplemental disclosure of non-cash
investing activity:
Notes receivable in partial payment
for asset sales $557,000 $ --
</TABLE>
7
<PAGE> 8
NOTE 7 - OPERATING SEGMENTS
The Company classifies its business interests into three reportable segments:
Franchising, Retail stores and Manufacturing. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in Note 1 to the Company's financial statements included in
the Company's annual report on Form 10-K for the year ended February 29, 2000.
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, 2000
<S> <C> <C> <C> <C> <C>
Total revenues 928,585 3,345,863 2,076,288 -- $ 6,350,736
Intersegment revenues -- (765,650) -- -- (765,650)
Revenue from external
customers 928,585 2,580,213 2,076,288 -- 5,585,086
Segment profit (loss) 440,388 977,435 43,460 (637,567) 823,716
Total assets 1,493,806 8,820,066 3,570,249 2,590,557 16,474,678
Capital expenditures 23,072 34,943 37,312 51,048 146,375
Total depreciation &
amortization 25,385 118,173 118,434 50,301 312,293
Three Months Ended
August 31, 1999
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
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Franchising Manufacturing Retail Other Total
August 31, 2000
<S> <C> <C> <C> <C> <C>
Total revenues 1,736,305 6,293,622 4,075,315 -- $ 12,105,242
Intersegment revenues -- (1,282,483) -- -- (1,282,483)
Revenue from external
customers 1,736,305 5,011,139 4,075,315 -- 10,822,759
Segment profit (loss) 782,004 1,803,496 (125,889) (1,278,726)) 1,180,885
Total assets 1,493,806 8,820,066 3,570,249 2,590,557 16,474,678
Capital expenditures 28,445 116,957 151,934 72,874 370,210
Total depreciation &
amortization 49,599 236,283 253,875 99,802 639,559
Six Months Ended
August 31, 1999
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
</TABLE>
8
<PAGE> 9
NOTE 8 - STORE SALES
In connection with the Company's plans to phase out its Company-owned stores,
the Company sold eight Company-owned stores resulting in sales proceeds
consisting of cash and notes receivable of approximately $1.2 million and
recognized and deferred gains of approximately $407,000 and $234,000,
respectively. Additionally, the Company recorded a write-down of the carrying
value of certain Company-owned store assets of approximately $407,000.
9
<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 depend 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.
Therefore, 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, 2000 COMPARED TO THE THREE MONTHS ENDED
AUGUST 31, 1999
Net income was $504,900 for the three months ended August 31, 2000, or $.26 per
share, versus $336,800, or $.13 per share, for the three months ended August 31,
1999. Earnings per share was negatively impacted approximately $.04 for the
three months ended August 31, 1999 by costs associated with Whitman's Candies,
Inc.'s unsolicited tender offer.
Revenues
<TABLE>
<CAPTION>
Three Months Ended
August 31, %
($'s in thousands) 2000 1999 Change Change
<S> <C> <C> <C> <C>
Factory sales $2,580.2 $2,392.2 $ 188.0 7.9%
Retail sales 2,076.3 2,835.1 (758.8) (26.8%)
Franchise fees 107.5 48.8 58.7 120.3%
Royalty and Marketing fees 821.1 797.0 24.1 3.0%
Total $5,585.1 $6,073.1 $(488.0) (8.0%)
</TABLE>
Factory Sales
Factory sales increased $188,000, or 7.9%, to $2.6 million in the second quarter
of fiscal 2001, compared to $2.4 million in the second quarter of fiscal 2000.
The increase in factory sales was due primarily to an increase in the number of
franchised stores in operation in the second quarter of fiscal 2001 versus the
second quarter of fiscal 2000. This increase was partially offset by a decrease
in same store pounds purchased from the factory by franchised stores of 3.5% in
the second quarter of fiscal 2001 compared to the second quarter of fiscal 2000.
10
<PAGE> 11
Retail Sales
Retail sales decreased $758,800 or 26.8%, to $2.1 million in the second quarter
of fiscal 2001, compared to $2.8 million in the second quarter of fiscal 2000.
This decrease resulted from a decrease in the average number of Company-owned
stores in operation in the second quarter of fiscal 2001 (28) versus the same
period last year (39) and a decrease in comparable store sales of 7.3%. Slower
sales of Beanie Babies and related products in the children's/novelty section of
the retail stores contributed significantly to the decrease in comparable store
sales.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $24,100, or 3.0%, to $821,100 in the
second quarter of fiscal 2001, compared to $797,000 in the second quarter of
fiscal 2000. This increase resulted from an increase in the average number of
franchised stores in operation in the second quarter of fiscal 2001 versus the
same period last year offset by a decrease in same store sales at franchised
stores of approximately 5.9%. Slower sales of Beanie Babies and related products
in the children's/novelty section of the retail stores contributed significantly
to the decrease in comparable store sales. Franchise fee revenues increased in
the second quarter of fiscal 2001 due to an increase in the number of franchises
sold versus the second quarter of fiscal 2000.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 48.6% in the second quarter
of fiscal 2001 from 48.5% in the second quarter of fiscal 2000. This increase
was due primarily to decreased retail sales, which generate higher margins than
factory sales. Factory margins increased to 44.7% in the second quarter of
fiscal 2001 from 42.0% in the second quarter of fiscal 2000. This improvement
was due to certain changes to the Company's manufacturing processes and cost
structure. Company-owned store margins for the second quarter of 2001 were
consistent with the second quarter of fiscal 2000.
Franchise Costs
Franchise costs increased 14.2% from $235,100 in the second quarter of fiscal
2000 to $268,500 in the second quarter of fiscal 2001. As a percentage of total
royalty and marketing fees and franchise fee revenue, franchise costs increased
to 28.9% in the second quarter of fiscal 2001 from 27.8% in the second quarter
of fiscal 2000. This increase as a percentage of royalty, marketing and
franchise fees is primarily a result of increased franchise support costs.
Sales and Marketing
Sales and Marketing expenses decreased 20.8% to $281,500 in the second quarter
of fiscal 2001 from $355,400 in the second quarter of fiscal 2000. This decrease
is due to more focused new channel sales efforts and a planned decrease in sales
and marketing costs.
General and Administrative
General and administrative expenses decreased 6.2% to $404,800 in the second
quarter of fiscal 2001 from $431,500 in the second quarter of fiscal 2000. As a
percentage of total revenues, general and administrative expenses increased to
7.2% in fiscal 2001 compared to 7.1% in fiscal 2000.
11
<PAGE> 12
Retail Operating Expenses
Retail operating expenses decreased 15.8% from $1.2 million in the second
quarter of fiscal 2000 to $1.0 million in the second quarter of fiscal 2001.
This decrease was due primarily to a decrease in the average number of stores
open during the second quarter of fiscal 2001 (28) versus the second quarter of
fiscal 2000 (39). Retail operating expenses, as a percentage of retail sales,
increased from 43.9% in the second quarter of fiscal 2000 to 50.5% in the second
quarter of fiscal 2001 due to a decrease in same store sales of 7.3%.
Depreciation and Amortization
Depreciation and amortization decreased 18.9% to $312,300 in the second quarter
of fiscal 2001 from $385,200 in the second quarter of fiscal 2000. The decrease
in depreciation and amortization is due primarily to lower depreciation expense
as a result of fewer Company-owned stores and fewer fixtures used in outside
channels.
Other Expense
Other expense of $184,000 incurred in the second quarter of fiscal 2001
decreased 45.1% from the $334,900 incurred in the second quarter of fiscal 2000
due primarily to non-recurring costs of approximately $166,500 in fiscal 2000
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 was
withdrawn on November 4, 1999, partially offset by increased interest expense on
higher average outstanding amounts of short-term debt.
Income Tax Expense
The Company's effective income tax rate in the second quarter of fiscal 2001 was
38.7%, which is approximately the same rate as the second quarter of fiscal
2000.
SIX MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE SIX MONTHS ENDED
AUGUST 31, 1999
Net income was $723,900 for the six months ended August 31, 2000, or $.34 per
share, versus $435,200, or $.17 per share, for the six months ended August 31,
1999. Earnings per share was negatively impacted approximately $.04 for the six
months ended August 31, 1999 by costs associated with Whitman's Candies, Inc.'s
unsolicited tender offer.
Revenues
<TABLE>
<CAPTION>
Six Months Ended
August 31, %
($'s in thousands) 2000 1999 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 5,011.2 $ 4,685.7 $ 325.5 6.9%
Retail sales 4,075.3 5,335.3 (1,260.0) (23.6%)
Franchise fees 197.9 117.8 80.1 68.0%
Royalty and Marketing fees 1,538.4 1,523.8 14.6 1.0%
Total $10,822.8 $11,662.6 $ (839.8) (7.2%)
</TABLE>
Factory Sales
Factory sales increased $325,500, or 6.9%, to $5.0 million in the first six
months of fiscal 2001, compared to $4.7 million in the first six months of
fiscal 2000. The increase in factory sales was due primarily to an increase in
the number of franchised stores in operation in the first six months of fiscal
2001 versus the first six months of fiscal 2000. This increase was partially
offset by a decrease in same store pounds purchased from the factory by
franchised stores of 2.5% in the first six months of fiscal 2001 compared to the
first six months of fiscal 2000.
12
<PAGE> 13
Retail Sales
Retail sales decreased $1.3 million, or 23.6%, to $4.1 million in the first six
months of fiscal 2001, compared to $5.3 million in the first six months of
fiscal 2000. This decrease resulted from a decrease in the average number of
stores in operation in the first six months of fiscal 2001 (30) versus the same
period last year (38) and a decrease in comparable store sales of 7.6%. Slower
sales of Beanie Babies and related products in the children's/novelty section of
the retail stores contributed significantly to the decrease in comparable store
sales.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $14,000, or 1.0% to $1.538 million in the
first six months of fiscal 2001, compared to $1.524 million in the first six
months of fiscal 2000 due to an increase in the average number of franchised
stores in operation in the first six months of fiscal 2001 versus the same
period last year offset by a decrease in same store sales at franchised stores
of approximately 6.1%. Slower sales of Beanie Babies and related products in the
children's/novelty section of the retail stores contributed significantly to the
decrease in comparable store sales. Franchise fee revenues increased in the
second quarter of fiscal 2001 due to an increase in the number of franchises
sold versus the second quarter of fiscal 2000.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 49.8% in the first six
months of fiscal 2001 from 50.6% in the first six months of fiscal 2000. This
improvement resulted from increased factory margins. Factory margins increased
to 43.3% in the first six months of fiscal 2001 from 38.7% in the first six
months of fiscal 2000 due to certain changes to the Company's manufacturing
processes and cost structure. Company-owned store margins for the first six
months of 2001 were consistent with the first six months of fiscal 2000.
Franchise Costs
Franchise costs increased 14.6% from $460,800 in the first six months of fiscal
2000 to $528,000 in the first six months of fiscal 2001. As a percentage of
total royalty and marketing fees and franchise fee revenue, franchise costs
increased to 30.4% in the first six months of fiscal 2001 from 28.1% in the
first six months of fiscal 2000. This increase as a percentage of royalty,
marketing and franchise fees is primarily a result of increased franchise
support costs partially offset by a 5.8% increase in income from franchise fees
and royalty and marketing fees.
Sales and Marketing
Sales and Marketing expenses decreased 17.9% to $569,200 in the first six months
of fiscal 2001 from $693,200 in the first six months of fiscal 2000. This
decrease is due to more focused new channel sales efforts and a planned decrease
in sales and marketing costs.
General and Administrative
General and administrative expenses increased 1.1% to $857,800 in the first six
months of fiscal 2001 from $848,300 in the first six months of fiscal 2000. As a
percentage of total revenues, general and administrative expenses increased to
7.9% in fiscal 2001 compared to 7.3% in fiscal 2000. This increase, as a
percentage of total revenues, resulted from increased general and administrative
costs and a 7.2% decrease in total revenues.
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Retail Operating Expenses
Retail operating expenses decreased from $2.6 million in the first six months of
fiscal 2000 to $2.2 million in the first six months of fiscal 2001, representing
a decrease of 15.6%. This decrease was due primarily to a decrease in the
average number of stores open during the first six months of fiscal 2001 (30)
versus the first six months of fiscal 2000 (38). Retail operating expenses, as a
percentage of retail sales, increased from 48.9% in the first six months of
fiscal 2000 to 54.0% in the first six months of fiscal 2001 due to the decrease
in same store sales of 7.6%.
Depreciation and Amortization
Depreciation and amortization decreased 18.9% to $639,600 in the first six
months of fiscal 2001 from $788,400 in the first six months of fiscal 2000. The
decrease in depreciation and amortization is due primarily to lower depreciation
expense as a result of fewer Company-owned stores and fewer fixtures used in
outside channels.
Other Expense
Other expense of $323,000 incurred in the first six months of fiscal 2001
decreased 32.9% from the $481,000 incurred in the first six months of fiscal
2000 due primarily to non-recurring costs of approximately $173,000 in fiscal
2000 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 was withdrawn on November 4, 1999, partially offset by increased interest
expense on higher average outstanding amounts of short-term debt.
Income Tax Expense
The Company's effective income tax rate in the first six months of fiscal 2001
was 38.7%, which is approximately the same rate as the first six months of
fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2000, working capital was $430,000, compared with $1.59 million
as of February 29, 2000, a decrease of $1.16 million. The decrease in working
capital was due to increased short-term borrowings, the proceeds of which were
used to purchase shares of the Company's common stock.
Cash and cash equivalent balances increased from $128,000 as of February 29,
2000 to $129,000 as of August 31, 2000 as a result of cash flows generated by
investing and operating activities in excess of cash flows used by financing
activities. The Company's current ratio was 1.03 to 1 at August 31, 2000 in
comparison with 1.38 to 1 at February 29, 2000.
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, 2000 of $1.8 million), and chattel mortgage notes (unpaid balance as
of August 31, 2000 of $3.9 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion and improve and automate the Company's factory
infrastructure.
The Company has a $3.0 million ($1.0 million available as of August 31, 2000)
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, 2001.
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 2001.
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<PAGE> 15
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 the Company to pay taxes, insurance
and maintenance expenses, all of which are subject to inflation. Additionally
the Company's future lease costs for new facilities may include potentially
escalating costs of real estate and construction. There is no assurance that the
Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed
assets, and is therefore potentially less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior years
will ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday and
summer vacation seasons. In addition, quarterly results have been, and in the
future are likely to be, affected by the timing of new store openings and sales
of franchises. Because of the seasonality of the Company's business and the
impact of new store openings and sales of franchises, results for any quarter
are not necessarily indicative of results that may be achieved in other quarters
or for a full fiscal year.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not engage in commodity futures trading or hedging activities
and does not enter into derivative financial instrument transactions for trading
or other speculative purposes. The Company also does not engage in transactions
in foreign currencies or in interest rate swap transactions that could expose
the Company to market risk. However, the Company is exposed to some commodity
price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen
months for chocolate and certain nuts. 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, 2000, approximately $448,000 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,
2000, $2.0 million was outstanding under the line of credit. The Company does
not believe that it is exposed to any material interest rate risk related to its
long-term debt or the line of credit.
The Chief Financial Officer and Chief Operating Officer of the Company has
primary responsibility over the Company's long-term and short-term debt and for
determining the timing and duration of commodity purchase contracts and
negotiating the terms and conditions of those contracts.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any legal proceedings that are
material to the Company's business or financial condition.
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 six months ended August 31, 2000.
B. Reports on Form 8-K
None
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 13, 2000 /s/ Bryan J. Merryman
-----------------------------------------------
Bryan J. Merryman, Chief Operating Officer,
Chief Financial Officer, Treasurer and Director
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule for the six months ended August 31, 2000.
</TABLE>
