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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 May 31, 2002
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 June 14, 2002 the registrant had outstanding 2,495,973 shares of its common
stock, $.03 par value.
The exhibit index is located on page 16.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3-5
Statements of Income 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Interim Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
Three Months Ended May 31,
2002 2001
REVENUES
Sales $ 2,950,802 $ 3,163,389
Franchise and royalty fees 1,021,537 1,069,385
Total revenues 3,972,339 4,232,774
COSTS AND EXPENSES
Cost of sales 1,736,942 1,885,997
Franchise costs 292,031 321,407
Sales and marketing 313,813 287,376
General and administrative 467,972 516,263
Retail operating 198,600 358,824
Depreciation and amortization 206,046 224,358
Total costs and expenses 3,215,404 3,594,225
INCOME FROM OPERATIONS 756,935 638,549
OTHER INCOME (EXPENSE)
Interest expense (85,548) (119,024)
Interest income 67,245 44,520
Other, net (18,303) (74,504)
INCOME BEFORE INCOME TAXES 738,632 564,045
PROVISION FOR INCOME TAXES 279,205 213,210
NET INCOME $ 459,427 $ 350,835
BASIC EARNINGS PER COMMON SHARE $ .18 $ .14
DILUTED EARNINGS PER COMMON SHARE $ .17 $ .14
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,484,194 2,504,115
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 283,209 72,130
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION
2,767,403 2,576,245
The accompanying notes are an integral part of these financial statements.
3
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
May 31, February 28,
2002 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 123,238 $ 165,472
Accounts receivable, less allowance for
doubtful accounts of $64,076 and $73,269 2,180,785 2,724,907
Notes receivable 490,998 561,829
Inventories 3,848,092 3,127,090
Deferred income taxes 138,591 138,591
Other 433,213 313,943
Total current assets 7,214,917 7,031,832
PROPERTY AND EQUIPMENT, NET 5,853,664 5,983,906
OTHER ASSETS
Notes receivable, less valuation allowance of $225,690 2,370,294 2,353,355
Goodwill 797,789 797,789
Other 623,317 628,509
Total other assets 3,791,400 3,779,653
Total assets $ 16,859,981 $ 16,795,391
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,151,700 $ 1,188,300
Accounts payable 871,617 667,419
Accrued salaries and wages 410,060 881,451
Other accrued expenses 454,121 354,912
Total current liabilities 2,887,498 3,092,082
LONG-TERM DEBT, LESS CURRENT MATURITIES 4,047,186 4,324,746
DEFERRED GAIN ON SALE OF ASSETS 343,687 389,302
DEFERRED INCOME TAXES 168,464 168,464
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.03 par value; 7,250,000 shares authorized; 2,495,973 and 2,474,640
issued and outstanding 74,879 74,239
Additional paid-in capital 2,636,634 2,544,351
Retained earnings 6,701,633 6,242,206
Less notes receivable from employees and directors -- (39,999)
Total stockholders' equity 9,413,146 8,820,797
Total liabilities and stockholders' equity $ 16,859,981 $ 16,795,391
The accompanying notes are an integral part of these financial statements.
4
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended
May 31,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 459,427 $ 350,835
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 206,046 224,358
Provision for doubtful accounts -- 62,046
Provision for inventory loss 10,000 62,000
Gain on sale of property and equipment -- (124,646)
Changes in operating assets and liabilities:
Accounts receivable 544,122 301,945
Refundable income taxes -- 37,574
Inventories (731,002) (209,675)
Other assets (119,270) (103,881)
Accounts payable 204,198 (273,598)
Accrued liabilities (417,797) (196,250)
Net cash provided by operating activities 155,724 130,708
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to notes receivable -- (451,283)
Proceeds received on notes receivable 53,892 92,903
Proceeds from sale of assets -- 181,100
Purchases of property and equipment (56,446) (342,291)
Increase in other assets (14,166) (28,728)
Net cash used in investing activities (16,720) (548,299)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 50,400
Payments on long-term debt (314,160) (496,397)
Proceeds from line of credit 100,000 2,430,000
Payments on line of credit (100,000) (1,235,000)
Repurchase of stock -- (422,703)
Costs of stock split (9,091) --
Reduction of loan from officer 39,999 48,750
Proceeds from exercise of stock options 102,014 16,000
Net cash provided by (used in) financing activities (181,238) 391,050
NET DECREASE IN CASH AND CASH EQUIVALENTS (42,234) (26,541)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,472 87,301
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 123,238 $ 60,760
The accompanying notes are an integral part of these financial statements.
5
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Rocky Mountain Chocolate Factory, Inc. is an international franchiser,
confectionery manufacturer and retail operator in the United States, Guam,
Canada, and the United Arab Emirates. The Company manufactures an extensive line
of premium chocolate candies and other confectionery products. The Company's
revenues are currently derived from three principal sources: sales to
franchisees and others of chocolates and other confectionery products
manufactured by the Company; the collection of initial franchise fees and
royalties from franchisees' sales; and sales at Company-owned stores of
chocolates and other confectionery products.
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 accounting principles generally
accepted in the United States of America for interim financial reporting and
Securities and Exchange Commission regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
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 May 31, 2002 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, 2002
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. For
the three months ended May 31, 2002 and 2001, 13,333 and 106,667 stock options
were excluded from the computation of earnings per share because their effect
would have been anti-dilutive.
NOTE 3 - INVENTORIES
Inventories consist of the following:
May 31, 2002 February 28, 2002
Ingredients and supplies $ 1,770,140 $ 1,538,107
Finished candy 2,077,952 1,588,983
$ 3,848,092 $ 3,127,090
6
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
May 31, 2002 February 28, 2002
Land $ 513,618 $ 513,618
Building 3,772,807 3,772,807
Machinery and equipment 6,563,187 6,512,836
Furniture and fixtures 592,677 592,677
Leasehold improvements 418,403 418,403
Transportation equipment 188,874 188,874
12,049,566 11,999,215
Less accumulated depreciation 6,195,902 6,015,309
Property and equipment, net $ 5,853,664 $ 5,983,906
NOTE 5 - STOCKHOLDERS' EQUITY
Stock Split
On January 28, 2002 the Board of Directors approved a four-for-three stock split
payable March 4, 2002 to shareholders of record at the close of business on
February 11, 2002. Shareholders received one additional share of Common Stock
for every three shares owned prior to the record date and $18,560 was
reclassified from additional paid-in capital to common stock for the par value
of the additional shares. Immediately prior to the split there were 1,855,918
shares outstanding. Subsequent to the split there were 2,474,640 shares
outstanding. All share and per share data have been restated in all periods
presented to give effect to the stock split.
Stock Repurchases
Between March 6, 2001 and September 28, 2001, the Company repurchased 123,355
Company shares at an average price of $5.07 per share. Of the shares repurchased
during this time period, 25,333 were repurchased from employees.
On May 15, 1998, the Company purchased 448,000 shares and certain of its
directors and executive officers purchased 138,667 shares of the Company's
issued and outstanding common stock at $3.8625 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 53,333 of the 138,667
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. The last of these
loans were paid in full in May, 2002.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended
May 31,
2002 2001
Cash paid for:
Interest $ 4,803 $ 125,903
Income taxes 146,351 --
Non-Cash Financing Activities
Company financed sales of retail store
assets $ -- $ 1,129,317
7
NOTE 7 - OPERATING SEGMENTS
The Company classifies its business interests into two reportable segments:
Franchising and Manufacturing. Previously the Company segregated Retail as a
third reportable segment. The Company has phased out its Company-owned store
program to four remaining stores. The remaining stores provide an environment
for testing new products and promotions, operating and training methods and
merchandising techniques. Company management evaluates these stores in relation
to their contribution to franchising efforts. The previously reported Retail
segment is now included in the Franchising segment and all previously reported
periods have been restated. 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, 2002. 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:
Three Months Ended
May 31, 2002 Franchising Manufacturing Other Total
Total revenues 1,343,287 2,810,220 -- 4,153,507
Intersegment revenues -- (181,168) -- (181,168)
Revenue from external
customers 1,343,287 2,629,052 -- 3,972,339
Segment profit (loss) 437,635 836,472 (535,475) 738,632
Total assets 1,835,262 9,522,648 5,502,071 16,859,981
Capital expenditures 32,739 11,000 12,707 56,446
Total depreciation &
amortization 50,631 106,215 49,200 206,046
Three Months Ended
May 31, 2001
Total revenues 1,647,227 2,867,067 -- 4,514,294
Intersegment revenues -- (281,520) -- (281,520)
Revenue from external
customers 1,647,227 2,585,547 -- 4,232,774
Segment profit (loss) 445,952 762,012 (643,919) 564,045
Total assets 2,019,210 8,815,812 4,874,705 15,709,727
Capital expenditures 45,331 63,864 233,096 342,291
Total depreciation &
amortization 67,426 107,831 49,101 224,358
NOTE 8 - STORE SALES
In connection with the Company's plans to phase out its Company-owned stores,
the Company sold ten Company-owned stores in fiscal 2002 resulting in sales
proceeds consisting of cash and notes receivable of approximately $1.2 million
and recognized and deferred gains of approximately $124,000 and $386,000,
respectively.
In connection with the Company's plans to phase out its Company-owned stores,
the Company sold eighteen Company-owned stores in fiscal 2001 resulting in sales
proceeds consisting of cash and notes receivable of approximately $2.3 million
and recognized and deferred gains of approximately $542,000 and $193,000,
respectively.
At May 31, 2002, the Company has $3,087,000 of notes receivable outstanding. The
notes require monthly payments and bear interest at rates ranging from 7.25% to
12.5%. The notes mature through February 2006 and are secured by the assets of
the sold stores.
Of the notes receivable outstanding at May 31, 2002, $2,480,000 are from a
single franchisee. These notes require variable monthly payments, bear interest
at rates ranging from 7.25% to 12.0% and mature in February 2005. During fiscal
2002 the Company adjusted the repayment schedule of these notes to correspond to
the franchisee's store operating cycles. The Company also financed an additional
$300,000 of inventory and wrote-off $189,000 of the notes receivable.
8
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
Effective March 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 141 (SFAS 141), Business Combinations, SFAS 142, Goodwill and
Intangible Assets and SFAS 144, Accounting for Impairment or Disposal of
Long-Lived Assets.
SFAS 142 revised the accounting for purchased goodwill and intangible assets.
Under SFAS 142, goodwill and intangible assets with indefinite lives will no
longer be amortized, will be tested for impairment annually and also in the
event of an impairment indicator, and must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company has historically amortized goodwill on the straight-line method over
ten to twenty-five years. Beginning March 1, 2002, quarterly and annual goodwill
amortization is no longer recognized. The Company will complete a transitional
fair value based impairment test of goodwill as of March 1, 2002 by August 31,
2002. Impairment losses, if any, resulting from the transitional testing will be
recognized as a cumulative effect of a change in accounting principle.
Intangible assets consist of the following:
May 31, 2002 February 28, 2002
Gross Carrying Accumulated Gross Carrying Accumulated
Value Amortization Value Amortization
Intangible assets subject to amortization
Store design $ 171,769 $ 10,851 $ 149,883 $ 7,234
Packaging licenses 95,831 36,705 95,831 28,383
Packaging design 377,683 17,619 366,932 8,427
Total $ 645,283 $ 65,175 $ 612,646 $ 44,044
Intangible assets not subject to amortization
Goodwill $ 1,530,000 $ 732,211 $ 1,530,000 $ 732,211
Amortization expense related to intangible assets totaled $21,131 and $5,135
during the three months ended May 31, 2002 and 2001. The aggregate estimated
amortization expense for intangible assets remaining as of May 31, 2002 is as
follows:
Remainder of fiscal 2003 $ 65,108
2004 85,000
2005 52,000
2006 52,000
2007 52,000
Thereafter 274,000
Total $580,108
9
Net income and earnings per share for the three months ended May 31, 2002 and
2001 adjusted to exclude goodwill amortization is as follows:
Three months ended May 31,
2002 2001
Reported net income $ 459,427 $ 350,835
Goodwill amortization -- 18,288
Adjusted net income $ 459,427 $ 369,123
Basic earnings per share: $ .18 $ .14
Reported net income -- .01
Goodwill amortization $ .18 $ .15
Adjusted net income
Diluted earnings per share:
Reported net income $ .17 $ .14
Goodwill amortization -- --
Adjusted net income $ .17 $ .14
SFAS 141 eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting
for intangible assets and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for business combinations completed after June
30, 2001. The implementation of this standard did not have an effect on the
Company's financial position, results of operations or cash flows.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The implementation of this standard did not have
an effect on the Company's financial position, results of operations or cash
flows.
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 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 MAY 31, 2002 COMPARED TO THE THREE MONTHS ENDED
MAY 31, 2001
Net income was $459,400 for the three months ended May 31, 2002, or $.18 per
basic share, versus $350,800, or $.14 per basic share, for the three months
ended May 31, 2001.
Revenues
Three Months Ended
May 31, %
($'s in thousands) 2002 2001 Change Change
Factory sales $ 2,629.1 $ 2,585.6 $ 43.5 1.7%
Retail sales 321.7 577.8 (256.1) (44.3)%
Franchise fees 156.0 287.1 (131.1) (45.7)%
Royalty and Marketing fees 865.5 782.3 83.2 10.6%
Total $ 3,972.3 $ 4,232.8 $ (260.5) (6.2)%
Factory Sales
Factory sales increased $43,500, or 1.7%, to $2.63 million in the first quarter
of fiscal 2003, compared to $2.59 million in the first quarter of fiscal 2002.
This increase was due primarily to an increase in the number of franchised
stores in operation in the first quarter of fiscal 2003 versus the comparable
period last year. This increase was partially offset by a decrease in same store
pounds purchased from the factory by franchised stores of 10.6% in the first
quarter of fiscal 2003 compared to the first quarter of fiscal 2002.
11
Retail Sales
Retail sales decreased $256,000, or 44.3%, to $322,000 in the first quarter of
fiscal 2003, compared to $578,000 in the first quarter of fiscal 2002. This
decrease resulted primarily from a decrease in the average number of stores in
operation in the first quarter of fiscal 2003 (4) versus the same period last
year (9).
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $83,000, or 10.6%, to $865,000 in the
first quarter of fiscal 2003, compared to $782,000 in the first quarter of
fiscal 2002. This increase resulted from growth in the average number of
franchised stores in operation in the first quarter of fiscal 2003 versus the
same period last year, offset by a decrease in same store sales at franchised
stores of approximately 1.1%. Franchise fee revenues decreased in the first
quarter of fiscal 2003 due to a decrease in the number of franchises sold versus
the first quarter of fiscal 2002.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 58.9% in the first quarter
of fiscal 2003 from 59.6% in the first quarter of fiscal 2002. The decrease
resulted from increases in both factory and Company-owned store margins. The
increase in factory margin, from 36.2% in fiscal 2002 to 38.7% in fiscal 2003,
is due primarily to increased production efficiencies. Improvement of
Company-owned store margin from 59% in fiscal 2002 to 61.4% in fiscal 2003 is
due to changes in mix of product sold.
Franchise Costs
Franchise costs decreased 9.1% from $321,000 in the first quarter of fiscal 2002
to $292,000 in the first quarter of fiscal 2003. The decrease is due to more
focused advertising and a planned decrease in franchise expenditures. As a
percentage of total royalty and marketing fees and franchise fee revenue,
franchise costs decreased to 28.6% in the first quarter of fiscal 2003 from
30.1% in the first quarter of fiscal 2002. This decrease as a percentage of
royalty, marketing and franchise fees is primarily a result of decreased
franchise costs.
Sales and Marketing
Sales and marketing increased 9.2% to $314,000 in the first quarter of fiscal
2003 from $287,000 in the first quarter of fiscal 2002. The increase is due
primarily to increased personnel costs as the Company expanded its marketing
capability in support of its frachisees.
General and Administrative
General and administrative expenses decreased 9.4% to $468,000 in the first
quarter of fiscal 2003 from $516,000 in the first quarter of fiscal 2002. The
decrease is primarily due to decreased personnel costs. As a percentage of total
revenues, general and administrative expenses decreased to 11.8% in fiscal 2003
compared to 12.2% in fiscal 2002. This decrease, as a percentage of total
revenues, resulted from the decrease in general and administrative costs
relative to the 6.2% decrease in total revenues.
12
Retail Operating Expenses
Retail operating expenses decreased from $359,000 in the first quarter of fiscal
2002 to $199,000 in the first quarter of fiscal 2003, a decrease of 44.7%. This
decrease was due primarily to a decrease in the average number of stores in
operation during the first quarter of fiscal 2003 (4) versus the first quarter
of fiscal 2002 (9). Retail operating expenses, as a percentage of retail sales,
decreased from 62.1% in the first quarter of fiscal 2002 to 61.7% in the first
quarter of fiscal 2003 due to a change in mix of stores in operation and related
seasonality.
Depreciation and Amortization
Depreciation and amortization decreased 8.2% to $206,000 in the first quarter of
fiscal 2003 from $224,000 in the first quarter of fiscal 2002. The decrease in
depreciation and amortization is due primarily to suspension of amortization
expense ($29,400 quarterly) for goodwill beginning March 1, 2002. Goodwill has
historically been amortized on the straight-line method over ten to twenty-five
years. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and
Intangible Assets, which revised the accounting for purchased goodwill and
intangible assets. Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized, but will be tested for impairment
annually, and also in the event of an impairment indicator. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS 142 on March 1, 2002.
Other Expense
Other expense of $18,000 incurred in the first quarter of fiscal 2003 represents
a 75.4% decline from the $75,000 incurred in the first quarter of fiscal 2002
due primarily to lower interest expense on lower average outstanding amounts of
and rates on long-term debt. The Company also earned increased interest income
on higher average outstanding balances of notes receivable.
Income Tax Expense
The Company's effective income tax rate in the first quarter of fiscal 2003 was
37.8% which is the same rate as the first quarter of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2002 working capital was $4.3 million, compared with $3.9 million
as of February 28, 2002, an increase of $400,000. The increase in working
capital was primarily due to increased inventories produced for future sale and
decreased current liabilities.
Cash and cash equivalent balances decreased from $165,000 as of February 28,
2002 to $123,000 as of May 31, 2002 as a result of cash flows used in financing
and investing activities in excess of cash flows provided by operating
activities. The Company's current ratio was 2.50 to 1 at May 31, 2002 in
comparison with 2.27 to 1 at February 28, 2002.
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
May 31, 2002 of $2.0 million), and chattel mortgage notes (unpaid balance as of
May 31, 2002 of $3.2 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 $2.0 million ($2.0 million available as of May 31, 2002)
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 2002.
13
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 2003.
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 May 31, 2002, none of the Company's long-term debt was subject to a
variable interest rate. The Company also has a $2.0 million bank line of credit
that bears interest at a variable rate. As of May 31, 2002, no amount 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.
14
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
10.1 Current form of Franchise Agreement used by the
Registrant.
B. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: July 12, 2002 /s/ Bryan J. Merryman
------------------------------------------------
Bryan J. Merryman, Chief Operating Officer,
Chief Financial Officer, Treasurer and Director
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Current form of Franchise Agreement used by the
Registrant.
16