<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, 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 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 5, 2001 the registrant had outstanding 1,961,284 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> <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 Nine Months Ended
November 30, November 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Sales $ 5,490,053 $ 6,277,800 $ 14,576,507 $ 16,298,795
Franchise and royalty fees 849,749 778,855 2,586,054 2,420,427
Total revenues 6,339,802 7,056,655 17,162,561 18,719,222
COSTS AND EXPENSES
Cost of sales 3,128,222 3,352,725 7,650,966 8,425,133
Franchise costs 320,872 237,320 848,847 698,122
Sales and marketing 286,022 303,915 855,234 997,101
General and administrative 395,742 416,440 1,256,555 1,310,475
Retail operating 861,773 1,258,376 3,063,472 3,866,836
Depreciation and amortization 302,060 385,251 941,619 1,173,615
Total costs and expenses 5,294,691 5,954,027 14,616,693 16,471,282
INCOME FROM OPERATIONS 1,045,111 1,102,628 2,545,868 2,247,940
OTHER INCOME (EXPENSE)
Cost of unsolicited tender
offer -- (255,774) -- (429,137)
Interest expense (177,845) (145,251) (522,063) (438,966)
Interest income 36,682 9,285 61,028 40,980
Other, net (141,163) (391,740) (461,035) (827,123)
INCOME BEFORE INCOME TAXES 903,948 710,888 2,084,833 1,420,817
PROVISION FOR INCOME TAXES 349,825 275,110 806,830 549,855
NET INCOME $ 554,123 $ 435,778 $ 1,278,003 $ 870,962
BASIC EARNINGS PER COMMON
SHARE $ .28 $ .17 $ .62 $ .33
DILUTED EARNINGS PER COMMON
SHARE $ .28 $ .17 $ .62 $ .33
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,956,833 2,600,349 2,052,858 2,600,024
DILUTIVE EFFECT OF EMPLOYEE
STOCK OPTIONS -- 35,384 6,493 21,364
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, ASSUMING
DILUTION 1,956,833 2,635,733 2,059,351 2,621,388
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, February 29,
ASSETS 2000 2000
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 72,117 $ 128,192
Accounts and notes receivable, less allowance for
doubtful accounts of $153,647 and $139,912 3,033,355 2,194,325
Refundable income taxes -- 76,689
Inventories 2,806,648 3,084,392
Deferred income taxes 438,999 188,999
Other 293,290 87,785
Total current assets 6,644,409 5,760,382
PROPERTY AND EQUIPMENT, NET 7,246,919 8,976,014
OTHER ASSETS
Accounts and notes receivable 1,055,211 55,343
Goodwill, less accumulated amortization
of $700,427 and $584,397 1,161,573 1,277,603
Other 619,750 370,514
Total other assets 2,836,534 1,703,460
Total assets $ 16,727,862 $ 16,439,856
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,663,000 $ 1,930,700
Line of credit 2,200,000 75,000
Accounts payable 916,756 1,055,910
Accrued salaries and wages 594,088 653,209
Other accrued expenses 569,873 456,300
Total current liabilities 5,943,717 4,171,119
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,525,986 3,773,851
DEFERRED GAIN ON SALE OF ASSETS 251,444 --
DEFERRED INCOME TAXES 61,797 61,797
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.03 par value, 7,250,000 shares
authorized, 1,961,284 and 2,599,599 issued and
outstanding 58,839 71,606
Additional paid-in capital 3,126,346 5,879,753
Retained earnings 3,968,479 2,690,476
Less notes receivable from officers and directors (208,746) (208,746)
Total stockholders' equity 6,944,918 8,433,089
Total liabilities and stockholders' equity $ 16,727,862 $ 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>
Nine Months Ended
November 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,278,003 $ 870,962
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 941,619 1,173,615
Loss on sale of property and equipment 1,797 43,884
Changes in operating assets and liabilities:
Increase in accounts and notes receivable (1,064,405) (977,573)
Decrease in refundable income taxes 76,689 307,200
Decrease in inventories 277,744 146,039
Increase in other assets (205,505) (108,328)
(Decrease) increase in accounts payable (139,154) 593,366
Increase in deferred income taxes (250,000) --
Increase in accrued liabilities 896 206,551
Net cash provided by operating activities 917,684 2,255,716
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 787,370 511,267
Purchases of property and equipment (387,330) (640,164)
Collection of loan from former officer -- 39,999
Increase in other assets (167,060) (58,364)
Net cash provided by (used in) investing activities 232,980 (147,262)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,093,240 --
Payments on long-term debt (1,608,805) (1,437,107)
Proceeds from line of credit 6,435,000 3,699,000
Payments on line of credit (4,310,000) (4,320,000)
Repurchase of stock (2,847,424) (8,644)
Proceeds from exercise of stock options 31,250 2,700
Net cash used in financing activities (1,206,739) (2,064,051)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (56,075) 44,403
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 128,192 317,155
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 72,117 $ 361,558
</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
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. 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, 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>
November 30, 2000 February 29, 2000
<S> <C> <C>
Ingredients and supplies $ 1,341,220 $ 1,490,813
Finished candy 1,465,428 1,593,579
$ 2,806,648 $ 3,084,392
</TABLE>
6
<PAGE> 7
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
November 30, 2000 February 29, 2000
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,708,027 3,681,808
Machinery and equipment 6,993,175 7,590,205
Furniture and fixtures 1,448,074 2,127,282
Leasehold improvements 1,095,405 1,611,785
Transportation equipment 205,539 199,639
13,963,838 15,724,337
Less accumulated depreciation 6,716,919 6,748,323
Property and equipment, net $ 7,246,919 $ 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 LaSalle 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>
Nine Months Ended
November 30,
2000 1999
<S> <C> <C>
Cash paid (received) for:
Interest $ 526,260 $ 433,240
Income taxes 575,499 (115,067)
Supplemental schedule of non-cash investing and financing activities:
Notes receivable in partial payment of asset sales 774,493 --
</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
November 30, 2000
<S> <C> <C> <C> <C> <C>
Total revenues $ 849,749 $ 4,631,711 $ 1,546,398 $ -- $ 7,027,858
Intersegment revenues -- (688,056) -- -- (688,056)
Revenue from external
customers 849,749 3,943,655 1,546,398 -- 6,339,802
Segment profit (loss) 307,176 1,273,703 (84,860) (592,071) 903,948
Total assets 1,704,559 9,351,333 3,266,703 2,405,267 16,727,862
Capital expenditures 3,206 1,792 10,277 1,845 17,120
Total depreciation &
amortization 30,439 121,335 96,385 53,901 302,060
Three Months Ended
November 30, 1999
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
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Franchising Manufacturing Retail Other Total
November 30, 2000
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,586,054 $ 10,925,333 $ 5,621,713 $ -- $ 19,133,100
Intersegment revenues -- (1,970,539) -- -- (1,970,539)
Revenue from external
customers 2,586,054 8,954,794 5,621,713 -- 17,162,561
Segment profit loss) 1,089,180 3,077,199 (210,749) (1,870,797) 2,084,833
Total assets 1,704,559 9,351,333 3,266,703 2,405,267 16,727,862
Capital expenditures 31,651 118,749 162,211 74,719 387,330
Total depreciation &
amortization 80,038 357,618 350,260 153,703 941,619
Nine Months Ended
November 30, 1999
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
</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 twelve Company-owned stores resulting in sales proceeds
consisting of cash and notes receivable of approximately $1.4 million and
recognized and deferred gains of approximately $437,000 and $251,000,
respectively. Additionally, the Company recorded a write-down of the carrying
value of certain Company-owned store assets of approximately $441,000.
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 expand 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 and 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, 2000 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1999
Net income was $554,123 for the three months ended November 30, 2000, or $.28
per share, versus $435,778, or $.17 per share, for the three months ended
November 30, 1999. Costs associated with Whitman Candies, Inc.'s unsolicited
tender offer negatively impacted earnings per share by approximately $.06 for
the three months ended November 30, 1999.
Revenues
<TABLE>
<CAPTION>
Three Months Ended
November 30, %
($'s in thousands) 2000 1999 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 3,943.6 $ 3,741.6 $ 202.0 5.4%
Retail Sales 1,546.4 2,536.2 (989.8) (39.0%)
Franchise fees 92.7 121.7 (29.0) (23.8%)
Royalty and Marketing fees 757.1 657.1 100.0 15.2%
Total $ 6,339.8 $ 7,056.6 $ (716.8) (10.2%)
</TABLE>
Factory Sales
Factory sales increased $202,000, or 5.4%, to $3.9 million in the third quarter
of fiscal 2001, compared to $3.7 million in the third quarter of fiscal 2000.
This increase in factory sales was due primarily to an increase in the number of
franchised stores in operation in the third quarter of fiscal 2001 versus the
third quarter of fiscal 2000. This increase was partially offset by a decrease
in same store pounds purchased from the factory by franchised stores of 5.2% in
the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000.
10
<PAGE> 11
Retail Sales
Retail sales decreased $990,000, or 39.0%, to $1.5 million in the third quarter
of fiscal 2001, from $2.5 million in the third quarter of fiscal 2000. This
decrease resulted from a reduction in the average number of stores in operation
in the third quarter of fiscal 2001 (22) versus the same period last year (35)
and a decrease in comparable store sales of 5.7%.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $100,000, or 15.2%, to $760,000 in the
third quarter of fiscal 2001, compared to $660,000 in the third quarter of
fiscal 2000. This increase resulted from growth in the average number of
franchised stores in operation in the third quarter of fiscal 2001 versus the
same period last year, offset in part by a decrease in same store sales at
franchised stores of approximately 3.4%. 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 decreased in the third quarter of fiscal 2001 due to a decrease in
the number of franchises sold versus the third quarter of fiscal 2000.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 57.0% in the third quarter
of fiscal 2001 versus 53.4% in the third quarter of fiscal 2000. This increase
was due primarily to decreased retail sales, which generate higher margins than
factory sales. Factory margins declined to 37.1% in the third quarter of fiscal
2001 from 37.7% in the third quarter of fiscal 2000 as a result of increased
sales of packaged product in fiscal 2001 versus fiscal 2000.
Franchise Costs
Franchise costs increased 35.2% from $237,000 in the third quarter of fiscal
2000 to $321,000 in the third quarter of fiscal 2001. As a percentage of total
royalty and marketing fees and franchise fee revenue, franchise costs increased
to 37.8% in the third quarter of fiscal 2001 from 30.5% in the third quarter of
fiscal 2000. This increase as a percentage of royalty, marketing and franchise
fees is primarily a result of increased franchise support expenditures.
Sales and Marketing
Sales and Marketing expenses decreased 5.9% to $286,000 in the third quarter of
fiscal 2001 from $304,000 in fiscal 2000 due to more focused new channel sales
efforts and a planned decrease in sales and marketing expenditures.
General and Administrative
General and administrative expenses decreased 5.0% from $416,000 in the third
quarter of fiscal 2000 to $396,000 in the third quarter of fiscal 2001. As a
percentage of total revenue, general and administrative expenses increased to
6.2% in fiscal 2001 compared to 5.9% in fiscal 2000 primarily as a result of the
Company's efforts to phase out it's Company-owned store program.
11
<PAGE> 12
Retail Operating Expenses
Retail operating expenses decreased from $1.3 million in the third quarter of
fiscal 2000 to $862,000 in the third quarter of fiscal 2001, representing a
decrease of 31.5%. This decrease is due to a decline in the average number of
stores open during the third quarter of fiscal 2001 versus the third quarter of
fiscal 2000. Retail operating expenses, as a percentage of retail sales,
increased from 49.6% in the third quarter of fiscal 2000 to 55.7% in the third
quarter of fiscal 2000 due to the decrease in same store sales of 5.7%.
Depreciation and Amortization
Depreciation and amortization decreased 21.6% to $302,000 in the third quarter
of fiscal 2001 from $385,000 in the third 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 $141,000 incurred in the third quarter of fiscal 2001 decreased
64.0% from the $392,000 incurred in the third quarter of fiscal 2000 due
primarily to non-recurring costs of approximately $256,000 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 amounts outstanding of short-term debt.
Income Tax Expense
The Company's effective income tax rate in the third quarter of fiscal 2001 was
38.7%, which is approximately the same as the effective rate in the third
quarter of fiscal 2000.
NINE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
NOVEMBER 30, 1999
Net income was $1,278,003 for the nine months ended November 30, 2000 or $.62
per share versus $870,962 or $.33 per share for the nine months ended November
30, 1999. Costs associated with Whitman Candies, Inc.'s unsolicited tender offer
negatively impacted earning per share by approximately $.10 for the nine months
ending November 30, 1999.
Revenues
<TABLE>
<CAPTION>
Nine Months Ended
November 30, %
($'s in thousands) 2000 1999 Change Change
<S> <C> <C> <C> <C>
Factory sales $ 8,954.8 $ 8,427.3 $ 527.5 6.3%
Retail sales 5,621.7 7,871.5 (2,249.8) (28.6%)
Franchise fees 290.6 239.5 51.1 21.3%
Royalty and Marketing fees 2,295.5 2,180.9 114.6 5.3%
Total $ 17,162.6 $ 18,719.2 $ (1,556.6) (8.3%)
</TABLE>
Factory Sales
Factory sales increased $527,000, or 6.3%, to $8.9 million in the first nine
months of fiscal 2001, compared to $8.4 million in the first nine 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 nine months of fiscal
2001 versus the first nine months of fiscal 2000. This increase was partially
offset by a decrease in same store pounds purchased from the factory by
franchised stores of 4.8% in the first nine months of fiscal 2001 compared to
the first nine months of fiscal 2000.
12
<PAGE> 13
Retail Sales
Retail sales decreased $2.2 million, or 28.6%, to $5.6 million in the first nine
months of fiscal 2001, compared to $7.9 million in the first nine months of
fiscal 2000. This decrease resulted from a decline in the average number of
stores in operation in the first nine months of fiscal 2001 (28) versus the same
period last year (37) and a decrease in comparable store sales of 5.8%. 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 $115,000, or 5.3%, to $2.3 million in the
first nine months of fiscal 2001, compared to $2.2 million in the first nine
months of fiscal 2000. This increase is due to an increase in the average number
of franchised stores in operation in the first nine months of fiscal 2001 versus
the same period last year offset by a decrease in same store sales at franchised
stores of approximately 3.7%. 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 first nine months of fiscal 2001 due to an increase in the number of
franchises sold versus the first nine months of fiscal 2000.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales in the first nine months of fiscal 2001
was 52.5% versus 51.7% for the first nine months of fiscal 2000. 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 2001 to 58.6% versus 59.1% for the first nine months of fiscal 2000.
Factory margins increased to 40.5% in the first nine months of fiscal 2001 from
38.3% in the first nine months of fiscal 2000 due to certain changes to the
Company's manufacturing processes and cost structure.
Franchise Costs
Franchise costs increased 21.6% from $698,000 in the first nine months of fiscal
2000 to $849,000 in the first nine months of fiscal 2001. As a percentage of
total royalty and marketing fees and franchise fee revenue, franchise costs
increased to 32.8% in the first nine months of fiscal 2001 from 28.8% in the
first nine 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 6.8% increase in income from franchise fees
and royalty and marketing fees.
Sales and Marketing
Sales and Marketing costs decreased 14.2% to $855,000 in the first nine months
of fiscal 2001 from $997,000 million in 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 4.1% to $1.26 million in the first
nine months of fiscal 2001 from $1.31 million in the first nine months of fiscal
2000. As a percentage of total revenues, general and administrative expenses
increased to 7.3% in fiscal 2001 compared to 7.0% in fiscal 2000 primarily as a
result of the Company's efforts to phase out it's Company-owned store program.
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Retail Operating Expenses
Retail operating expenses decreased from $3.9 million in the first nine months
of fiscal 2000 to $3.1 million in the first nine months of fiscal 2001,
representing a decrease of 20.8%. This decrease was due primarily to a decline
in the average number of stores open during the first nine months of fiscal 2001
(28) versus the first nine months of fiscal 2000 (37). Retail operating
expenses, as a percentage of retail sales, increased from 49.1% in the first
nine months of fiscal 2000 to 54.5% in the first nine months of fiscal 2001 due
to the decrease in same store sales of 5.8%.
Depreciation and Amortization
Depreciation and amortization decreased 19.8% to $942,000 for the first nine
months of fiscal 2001 from $1.2 million for the first nine 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 $461,000 incurred in the first nine months of fiscal 2001
decreased 44.3% from the $827,000 incurred in the first nine months of fiscal
2000 due primarily 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, 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 nine months of fiscal 2001
was 38.7%, which is approximately the same as the effective rate in the first
nine months of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2000 working capital was $701,000, compared with $1.59
million as of February 29, 2000, a decrease of $889,000. 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 decreased from $128,000 as of February 29,
2000 to $72,000 as of November 30, 2000 as a result of cash flows used by
financing activities in excess of cash provided by operating and investing
activities. The Company's current ratio was 1.12 to 1 at November 30, 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
November 30, 2000 $1.8 million), and chattel mortgage notes (unpaid balance as
of November 30, 2000 $3.4 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 ($800,000 available as of November 30, 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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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
may 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 November 30, 2000, approximately $335,000 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, 2000, there was $2.2 million 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
None
B. Reports on Form 8-K
Subsequent to the end of the quarter but prior to the filing of this
report, the Company filed one report on Form 8-K dated December 29,
2000, announcing that it had received a Nasdaq notice regarding its
listing and the Company's appeal of the Nasdaq notice. No financial
statements were filed with that report.
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 9, 2001 /s/ Bryan J. Merryman
--------------------------------------------------
Bryan J. Merryman, Chief Operating Officer, Chief
Financial Officer, Treasurer and Director
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