<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 November 30, 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 January 7, 2000 the registrant had outstanding 2,534,979 shares of its common
stock, $.03 par value.
The exhibit index is located on page 19.
<PAGE> 2
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 20
</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 Nine Months Ended
November 30, November 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Sales $ 6,277,800 $ 6,610,395 $ 16,298,795 $ 17,102,197
Franchise and royalty fees 778,855 701,051 2,420,427 2,400,695
Total revenues 7,056,655 7,311,446 18,719,222 19,502,892
COSTS AND EXPENSES
Cost of sales (excluding depreciation and
amortization) 3,352,725 3,289,660 8,425,133 8,405,525
Franchise costs 236,430 304,612 697,232 848,492
Sales and marketing 304,609 367,914 1,000,102 1,161,030
General and administrative 418,249 404,646 1,266,591 1,238,810
Retail operating 1,256,763 1,550,504 3,908,609 4,358,598
Depreciation and amortization 385,251 389,975 1,173,615 1,073,616
Total costs and expenses 5,954,027 6,307,311 16,471,282 17,086,071
INCOME FROM OPERATIONS 1,102,628 1,004,135 2,247,940 2,416,821
OTHER INCOME (EXPENSE)
Cost of unsolicited tender offer (255,774) - (429,137) -
Interest expense (145,251) (173,496) (438,966) (529,110)
Interest income 9,285 12,454 40,980 54,743
Other, net (391,740) (161,042) (827,123) (474,367)
INCOME BEFORE INCOME TAXES 710,888 843,093 1,420,817 1,942,454
PROVISION FOR INCOME TAXES 275,110 326,020 549,855 751,145
NET INCOME $ 435,778 $ 517,073 $ 870,962 $ 1,191,309
BASIC EARNINGS PER COMMON SHARE $ .17 $ .20 $ .33 $ .44
DILUTED EARNINGS PER COMMON SHARE $ .17 $ .20 $ .33 $ .44
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,600,349 2,599,599 2,600,024 2,687,156
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 35,384 9,054 21,364 13,433
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,635,733 2,608,653 2,621,388 2,700,589
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
November 30, February 28,
ASSETS 1999 1999
CURRENT ASSETS
Cash and cash equivalents $ 361,558 $ 317,155
Accounts and notes receivable, less allowance for
doubtful accounts of $142,701 and $259,408 3,224,875 1,874,286
Refundable income taxes 76,311 383,511
Inventories 3,130,511 3,276,550
Deferred income taxes 433,229 433,229
Other 182,155 73,827
Total current assets 7,408,639 6,358,558
PROPERTY AND EQUIPMENT, NET 9,207,594 10,238,671
OTHER ASSETS
Accounts and notes receivable 59,722 291,648
Goodwill, less accumulated amortization
of $549,478 and $441,246 1,312,522 1,420,754
Other 344,767 342,469
Total other assets 1,717,011 2,054,871
Total assets $ 18,333,244 $ 18,652,100
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,837,000 $ 1,831,000
Line of credit 279,000 900,000
Accounts payable 1,660,352 1,066,986
Accrued salaries and wages 444,309 548,745
Accrued income taxes 357,722 -
Other accrued expenses 440,141 453,407
Total current liabilities 5,018,524 4,800,138
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,806,662 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 2,504,873 1,633,911
Less notes receivable from officers and directors (208,746) (248,745)
Total stockholders' equity 9,415,051 8,509,186
Total liabilities and stockholders' equity $ 18,333,244 $ 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>
Nine Months Ended
November 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 870,962 $ 1,191,309
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 1,173,615 1,073,616
(Gain) loss on sale of property and equipment 43,884 (15,696)
Increase in accounts and notes receivable (977,573) (1,005,864)
Decrease in refundable income taxes 307,200 483,448
Decrease (increase) in inventories 146,039 (1,805,384)
Increase in other assets (108,328) (81,063)
Increase in accounts payable 593,366 1,600,319
Increase in income taxes payable 357,722 -
Increase in deferred income taxes - (461,318)
Increase (decrease) in accrued liabilities (151,171) 262,453
Net cash provided by operating activities of continuing operations 2,255,716 1,241,820
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 511,267 37,500
Purchases of property and equipment (640,164) (1,209,762)
Loans to officers and shareholders - (248,750)
Collection of loan from former officer 39,999 -
Increase in other assets (58,364) (843)
Net cash used in investing activities of continuing operations (147,262) (1,421,855)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt - 1,774,941
Payments on long-term debt (1,437,107) (1,689,814)
Proceeds from line of credit 3,699,000 8,025,000
Payments on line of credit (4,320,000) (7,025,000)
Repurchase of stock (8,644) (1,773,266)
Proceeds from exercise of stock options 2,700 79,309
Net cash used in financing activities of
continuing operations (2,064,051) (608,830)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 100,032
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44,403 (688,833)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 317,155 1,795,381
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 361,558 $ 1,106,548
</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, and in 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 nine months ended
November 30, 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>
November 30, 1999 February 28, 1999
<S> <C> <C>
Ingredients and supplies $ 1,483,353 $ 1,594,579
Finished candy 1,647,158 1,681,971
$ 3,130,511 $ 3,276,550
</TABLE>
6
<PAGE> 7
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
November 30, 1999 February 28, 1999
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,681,808 3,672,870
Machinery and equipment 7,497,601 7,147,833
Furniture and fixtures 2,153,980 2,408,807
Leasehold improvements 1,620,230 1,876,223
Transportation equipment 199,639 199,639
15,666,876 15,818,990
Less accumulated depreciation 6,459,282 5,580,319
Property and equipment, net $ 9,207,594 $ 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 and provisions relating to
assets of the discontinued operation were previously reported in the Company's
February 28, 1998 financial statements.
Summarized financial information for the discontinued operation for the nine
months ended November 30, 1998 is as follows:
Sales $ 1,095,431
Loss before taxes (51,562)
Loss from discontinued operations, net of income taxes (31,622)
7
<PAGE> 8
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
1999 1998
<S> <C> <C>
Cash paid (received) for:
Interest $ 433,240 $ 550,015
Income taxes (115,067) 176,352
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
November 30, 1999
<S> <C> <C> <C> <C> <C>
Total revenues $ 778,856 $ 4,618,420 $ 2,536,193 $ - $ 7,933,469
Intersegment revenues - (876,814) - - (876,814)
Revenue from external
customers 778,856 3,741,606 2,536,193 - 7,056,655
Segment profit (loss) 300,165 1,214,701 53,152 (857,130) 710,888
Total assets 850,328 9,695,389 5,578,931 2,208,596 18,333,244
Capital expenditures 17,014 55,377 38,069 28,759 139,219
Total depreciation &
amortization 46,383 131,782 159,185 47,901 385,251
Three Months Ended
November 30, 1998
Total revenues $ 701,051 $ 4,752,789 $ 3,010,101 $ - $ 8,463,941
Intersegment revenues - (1,152,495) - - (1,152,495)
Revenue from external
customers 701,051 3,600,294 3,010,101 - 7,311,446
Segment profit (loss) 145,719 1,292,336 22,126 (617,088) 843,093
Total assets 1,078,872 10,731,607 7,457,766 2,531,209 21,799,454
Capital expenditures 1,847 369,362 81,436 55,165 507,810
Total depreciation &
amortization 28,345 124,004 186,961 50,665 389,975
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Nine Months Ended Franchising Manufacturing Retail Other Total
November 30, 1999
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,420,428 $10,523,017 $ 7,871,454 $ - $20,814,899
Intersegment revenues - (2,095,677) - - (2,095,677)
Revenue from external
customers 2,420,428 8,427,340 7,871,454 - 18,719,222
Segment profit (loss) 955,643 2,599,909 97,682 (2,232,417) 1,420,817
Total assets 850,328 9,695,389 5,578,931 2,208,596 18,333,244
Capital expenditures 46,545 316,867 50,169 226,583 640,164
Total depreciation &
amortization 140,055 395,085 499,772 138,703 1,173,615
Nine Months Ended
November 30, 1998
Total revenues $ 2,400,695 $11,150,694 $ 8,602,193 $ - $22,153,582
Intersegment revenues - (2,650,690) - - (2,650,690)
Revenue from external
customers 2,400,695 8,500,004 8,602,193 - 19,502,892
Segment profit (loss) 769,182 2,830,905 205,725 (1,863,358) 1,942,454
Total assets 1,078,872 10,731,607 7,457,766 2,531,209 21,799,454
Capital expenditures 27,978 622,977 469,728 89,079 1,209,762
Total depreciation &
amortization 75,582 356,303 491,448 150,283 1,073,616
</TABLE>
NOTE 9 - STOCK REPURCHASES
On December 22, 1999 and January 5, 2000, the Company purchased 15,000 and
50,370 shares of the Company's issued and outstanding common stock at $5.25 and
$5.44 per share, respectively.
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 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 NOVEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1998
Net income was $435,778 for the three months ended November 30, 1999 or $.17 per
share versus $517,073 or $.20 per share for the three months ended November 30,
1998. Earnings per share was negatively impacted approximately $.06 for the
three months ended November 30, 1999 by certain non-recurring general and
administrative expenses and other expenses.
Revenues
<TABLE>
<CAPTION>
Three Months Ended
November 30, %
($'s in thousands) 1999 1998 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 3,741.6 $ 3,600.3 141.3 3.9%
Retail Sales 2,536.2 3,010.1 (473.9) (15.7%)
Franchise fees 121.7 21.6 100.1 463.4%
Royalty and Marketing fees 657.1 679.5 (22.4) (3.3%)
Total $ 7,056.6 $ 7,311.5 (254.9) (3.5%)
</TABLE>
10
<PAGE> 11
Factory Sales
Factory sales increased $141,000 or 3.9% to $3.7 million in the third quarter of
fiscal 2000, compared to $3.6 million in the third quarter of fiscal 1999. This
was due primarily to increased same store pounds purchased from the factory by
franchised stores of 12.0% in the third quarter of fiscal 2000 compared to the
third quarter of fiscal 1999 and an increase in the total number of franchised
stores in operation. The increase in revenues was partially offset by a decrease
in sales to new distribution channels of 30.8% during the third quarter of
fiscal 2000 compared to the same period last fiscal year. Decreased sales to new
distribution channels was due to large initial orders from a single new customer
that were shipped in the third quarter of fiscal 1999 and not duplicated in the
third quarter of fiscal 2000.
Retail Sales
Retail sales decreased $474,000 or 15.7% to $2.5 million in the third quarter of
fiscal 2000, compared to $3.0 million in the third quarter of fiscal 1999. This
decrease resulted from a decrease in the average number of stores in operation
in the third quarter of fiscal 2000 (35) versus the same period last year (43)
and a decrease in comparable store sales of 3.7%.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees decreased $22,000 or 3.3% to $657,000 in the third
quarter of fiscal 2000, compared to $679,000 in the third quarter of fiscal
1999. This decrease resulted primarily from a decrease in same store sales at
franchised stores of approximately 0.8%. Franchise fee revenue in the third
quarter of fiscal 2000 increased $100,000 or 463.4% to $122,000 from $22,000 in
the third quarter of fiscal 1999. This increase is due to an increase in the
number of new franchises sold in the third quarter of fiscal 2000 versus the
third quarter of fiscal 1999.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 53.4% in the third quarter
of fiscal 2000 versus 49.8% in the third 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 third
quarter of fiscal 2000 to 59.7% from 60.2% in the third quarter of fiscal 1999.
Factory margins declined to 34.7% in the third quarter of fiscal 2000 from 38.7%
in the third quarter of fiscal 1999 as a result of decreased sales of higher
margin packaged product to new distribution channels in fiscal 2000 versus
fiscal 1999.
Franchise Costs
Franchise costs decreased 22.4% from $305,000 in the third quarter of fiscal
1999 to $236,000 in the third quarter of fiscal 2000. As a percentage of total
royalty and marketing fees and franchise fee revenue, franchise costs decreased
to 30.4% in the third quarter of fiscal 2000 from 43.5% in the third 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 as well
as higher franchise fees due to increased franchise sales in the third quarter
of fiscal 2000 relative to the third quarter of fiscal 1999.
11
<PAGE> 12
Sales and Marketing
Sales and Marketing expenses decreased 17.2% to $305,000 in the third quarter of
fiscal 2000 from $368,000 in fiscal 1999 due to a planned decrease in sales and
marketing expenditures.
General and Administrative
General and administrative expenses increased 3.4% from $405,000 in the third
quarter of fiscal 1999 to $418,000 in the third quarter of fiscal 2000. The
increase in general and administrative expenses is due to non-recurring costs of
approximately $19,000 related to costs associated with mitigating potential Year
2000 issues (see Year 2000 Matters).
Retail Operating Expenses
Retail operating expenses decreased from $1.6 million in the third quarter of
fiscal 1999 to $1.3 million in the third quarter of fiscal 2000; a decrease of
18.9%. This decrease is due to a decrease in the average number of stores open
during the third quarter of fiscal 2000 versus the third quarter of fiscal 1999.
Retail operating expenses, as a percentage of retail sales, decreased from 51.5%
in the third quarter of fiscal 1999 to 49.6% in the third quarter of fiscal
2000.
Other Expense
Other expense of $392,000 incurred in the third quarter of fiscal 2000 increased
143.3% from the $161,000 incurred in the third quarter of fiscal 1999. This
increase was due to non-recurring costs of approximately $256,000 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 was withdrawn on
November 4, 1999. These non-recurring expenses reduced earnings per share by
approximately $.06 in the third quarter of fiscal 2000. This expense was
partially offset by decreased interest expense on lower average amounts
outstanding of long-term debt and lower average balances outstanding on the
Company's revolving line of credit.
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.
12
<PAGE> 13
NINE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
NOVEMBER 30, 1998
Net income was $870,962 for the nine months ended November 30, 1999 or $.33 per
share versus $1,191,309 or $.44 per share for the nine months ended November 30,
1998. Earnings per share was negatively impacted approximately $.11 for the nine
months ending November 30, 1999 by certain non-recurring general and
administrative expenses and other expenses.
Revenues
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
($'s in thousands) 1999 1998 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 8,427.3 $ 8,500.0 (72.7) (0.9%)
Retail sales 7,871.5 8,602.2 (730.7) (8.5%)
Franchise fees 239.5 131.3 108.2 82.4%
Royalty and Marketing fees 2,180.9 2,269.4 (88.5) (3.9%)
Total 18,719.2 19,502.9 (783.7) (4.0%)
</TABLE>
Factory Sales
Factory sales decreased $73,000 or 0.9% to $8.4 million in the first nine months
of fiscal 2000, compared to $8.5 million in the first nine months of fiscal
1999. This was due 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 and third quarters of fiscal 1999
and not duplicated in the first and third quarters of 2000. Same store pounds
purchased from the factory by franchised stores increased by 3.5% in the first
nine months of fiscal 2000 compared to the first nine months of fiscal 1999
partially offsetting the decreased sales to new distribution channels.
Retail Sales
Retail sales decreased $731,000 or 8.5% to $7.9 million in the first nine months
of fiscal 2000, compared to $8.6 million in the first nine months of fiscal
1999. This decrease resulted from a decrease in comparable store sales of 5.6%
in the first nine months of fiscal 2000 compared to fiscal 1999 as well as a
decrease in the average number of Company-owned stores from approximately 39 to
37 in the comparable nine month periods.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees decreased $88,000 or 3.9% to $2.2 million in the
first nine months of fiscal 2000, compared to $2.3 million in the first nine
months of fiscal 1999. This decrease resulted from a decrease in same store
sales at franchised stores of approximately 2.4%. Franchise fee revenues in the
first nine months of fiscal 2000 increased $108,000 or 82.4% to $239,000 from
$131,000 in the first nine months of fiscal 1999. This increase is due to an
increase in the number of new franchises sold in the first nine months of fiscal
2000 versus the same period in fiscal 1999.
13
<PAGE> 14
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales in the first nine months of fiscal 2000
was 51.7% versus 49.1% for the first nine 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 nine months
of fiscal 2000 to 59.1% versus 60.7% for the first nine months of fiscal 1999.
Factory margins declined to 34.3% in the first nine months of fiscal 2000 from
36.9% in the first nine 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.
Franchise Costs
Franchise costs decreased 17.8% from $848,000 in the first nine months of fiscal
1999 to $697,000 in the first nine months of fiscal 2000. As a percentage of
total royalty and marketing fees and franchise fee revenue, franchise costs
decreased to 28.8% in the first nine months of fiscal 2000 from 35.3% in the
first nine 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 as well as higher franchise fees due to increased
franchise sales in the first nine months of fiscal 2000 relative to the same
period in fiscal 1999.
Sales and Marketing
Sales and Marketing costs decreased 13.9% to $1.0 million in the first nine
months of fiscal 2000 from $1.2 million in fiscal 1999 due to a planned decrease
in sales and marketing expenditures.
General and Administrative
General and administrative expenses increased 2.2% from $1.24 million in the
first nine months of fiscal 1999 to $1.27 million in the first nine months of
fiscal 2000. The increase in general and administrative expense is due to
non-recurring costs of approximately $56,000 related to costs associated with
mitigating potential Year 2000 issues (see Year 2000 Matters).
Retail Operating Expenses
Retail operating expenses declined from $4.3 million in the first nine months of
fiscal 1999 to $3.9 million in the first nine months of fiscal 2000; a decrease
of 10.3%. Retail operating expenses, as a percentage of retail sales, decreased
slightly from 50.7% in the first nine months of fiscal 1999 to 49.7% in the
first nine months of fiscal 2000.
Depreciation and Amortization
Depreciation and amortization increased 9.3% to $1.2 million for the first nine
months of fiscal 2000 from $1.1 million for the first nine months of fiscal
1999. The increase in depreciation and amortization is due primarily to
increased depreciation on certain fixtures used in outside channels and
increased goodwill amortization related to the acquisition of several stores
from a franchisee in August of 1998.
14
<PAGE> 15
Other Expense
Other expense of $827,000 incurred in the first nine months of fiscal 2000
increased 74.4% from the $474,000 incurred in the first nine months of fiscal
1999. This increase was due to non-recurring costs of approximately $429,000
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 was
withdrawn on November 4, 1999. These non-recurring expenses reduced earnings per
share by approximately $.10 in the first nine months of fiscal 2000. This
expense was partially offset by decreased interest expense on lower average
amounts outstanding of long-term debt and lower average balances outstanding on
the Company's revolving line of credit.
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, 1999 working capital was $2,390,000, compared with $1,558,000
as of February 28, 1999, an increase of $832,000.
Cash and cash equivalent balances increased from $317,000 as of February 28,
1999 to $362,000 as of November 30, 1999 as a result of cash flows generated by
operating activities in excess of cash flows used by investing and financing
activities. The Company's current ratio was 1.5 to 1 at November 30, 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
November 30, 1999 $1.9 million), and chattel mortgage notes (unpaid balance as
of November 30, 1999 $3.7 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion.
The Company has a $3.0 million ($2.7 million available as of November 30, 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 of between 36 and 60
months. As of November 30, 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.
15
<PAGE> 16
YEAR 2000 MATTERS
The Company recognized that the arrival of the year 2000 posed 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 have resulted,
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 assessed its computer and business processes and reprogrammed and
upgraded its computer applications to provide for their continued functionality.
The Company developed and implemented 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 considered 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. 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 both its main and
non-critical systems and hardware for year 2000 compliance.
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. As of November 30, 1999, the Company
had incurred approximately $80,000 of expenses in connection with the Plan.
16
<PAGE> 17
Based upon the testing and remediation completed prior to January 1, 2000, the
Company believes that, with modifications to existing software, conversions to
new software, and appropriate remediation of embedded chip equipment, it has
adequately addressed its potential year 2000 problems. The arrival of the year
2000 has not interfered with the ordinary conduct of the Company's business or
caused any of its principal systems to fail. As of the date of this report, the
Company is not aware that any of its systems have experienced any disruptions as
a result of the arrival of the year 2000. However, the Company is continuing to
monitor its systems to identify any year 2000 issues that it may not have
identified previously or that have not yet become evident.
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 have achieved timely year 2000 compliance; if they have not, 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 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 has
evaluated vendor and customer compliance and developed contingency plans, such
as alternate vendor opportunities, after obtaining compliance evaluations from
vendors.
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
may ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.
17
<PAGE> 18
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.
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 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 November 30, 1999, approximately $912,000 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 under which borrowings bear interest at a variable rate. As
of November 30, 1999, there was $279,000 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
18
<PAGE> 19
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. On December 15, 1999, the court
dismissed the case on the grounds that the plaintiffs' claims were
derivative in nature, the plaintiffs failed to satisfy certain
requirements for bringing a derivative action and the plaintiffs could
not bring a direct action. The plaintiffs have until January 29, 2000
to appeal the order of dismissal. The Company believes the plaintiffs'
claims are without merit and intends to vigorously defend any claims
asserted by them if the dismissal is appealed.
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
As previously reported, the Company entered into a non-binding letter
of intent dated August 5, 1999 with Whitman's Candies, Inc. relating to
the proposed acquisition by Whitman's of 100% of the Company's issued
and outstanding common stock for $6.25 per share. Based primarily on
improving operating results, the Company announced on October 28, 1999
that its Board of Directors had decided not to accept Whitman's $6.25
per share offer. On November 4, 1999 Whitman's announced it was no
longer interested in acquiring the Company.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27.1 Financial Data Schedule for the nine months ended November 30,
1999.
B. Reports on Form 8-K
None
19
<PAGE> 20
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 13, 2000 /s/ Bryan J. Merryman
--------------------------------------------
Bryan J. Merryman, Chief Operating Officer,
Chief Financial Officer and Director
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 361,558
<SECURITIES> 0
<RECEIVABLES> 3,367,576
<ALLOWANCES> 142,701
<INVENTORY> 3,130,511
<CURRENT-ASSETS> 7,408,639
<PP&E> 15,666,876
<DEPRECIATION> 6,459,282
<TOTAL-ASSETS> 18,333,244
<CURRENT-LIABILITIES> 5,018,524
<BONDS> 3,806,662
0
0
<COMMON> 78,010
<OTHER-SE> 9,337,041
<TOTAL-LIABILITY-AND-EQUITY> 18,333,244
<SALES> 16,298,795
<TOTAL-REVENUES> 18,719,222
<CGS> 8,425,133
<TOTAL-COSTS> 16,471,282
<OTHER-EXPENSES> 429,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 438,966
<INCOME-PRETAX> 1,420,817
<INCOME-TAX> 549,855
<INCOME-CONTINUING> 870,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 870,962
<EPS-BASIC> .33
<EPS-DILUTED> .33
</TABLE>
