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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 August 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 81303
(Address of principal executive offices)
(970) 259-0554
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
On October 11, 2002 the registrant had outstanding 2,498,790 shares of its
common stock, $.03 par value.
The exhibit index is located on page 17.
1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q
TABLE OF CONTENTS
Page No.
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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 17
CERTIFICATIONS 18-19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
Three Months Ended August 31, Six Months Ended August 31,
2002 2001 2002 2001
REVENUES
Sales $ 3,976,609 $ 3,648,005 $ 6,927,411 $ 6,811,394
Franchise and royalty fees 1,089,751 1,041,686 2,111,288 2,111,071
Total revenues 5,066,360 4,689,691 9,038,699 8,922,465
COSTS AND EXPENSES
Cost of sales 2,499,463 2,124,770 4,236,405 4,010,767
Franchise costs 306,852 362,722 598,883 684,129
Sales and marketing 323,159 323,385 636,972 610,761
General and administrative 498,127 408,472 966,099 924,735
Retail operating 213,997 218,751 412,597 577,575
Depreciation and amortization 205,939 229,325 411,985 453,683
Total costs and expenses 4,047,537 3,667,425 7,262,941 7,261,650
INCOME FROM OPERATIONS 1,018,823 1,022,266 1,775,758 1,660,815
OTHER INCOME (EXPENSE)
Interest expense (88,140) (125,003) (173,688) (244,027)
Interest income 59,412 80,185 126,657 124,705
Other, net (28,728) (44,818) (47,031) (119,322)
INCOME BEFORE INCOME TAXES 990,095 977,448 1,728,727 1,541,493
PROVISION FOR INCOME TAXES 374,255 369,475 653,460 582,685
NET INCOME $ 615,840 $ 607,973 $ 1,075,267 $ 958,808
BASIC EARNINGS PER COMMON SHARE $ .25 $ .25 $ .43 $ .39
DILUTED EARNINGS PER COMMON SHARE $ .23 $ .23 $ .39 $ .37
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,498,699 2,464,219 2,491,693 2,484,167
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 207,378 150,249 245,601 111,546
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,706,077 2,614,468 2,737,294 2,595,713
The accompanying notes are an integral part of these financial statements.
3
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
August 31, February 28,
2002 2002
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 108,082 $ 165,472
Accounts receivable, less allowance for doubtful accounts of $63,247 and $73,269 3,025,923 2,724,907
Notes receivable 700,522 561,829
Inventories 3,891,980 3,127,090
Deferred income taxes 138,591 138,591
Other 482,995 313,943
Total current assets 8,348,093 7,031,832
PROPERTY AND EQUIPMENT, NET 5,767,792 5,983,906
OTHER ASSETS
Notes receivable, less valuation allowance
of $275,690 and $225,689 2,283,542 2,353,355
Intangible Assets, net 1,380,457 1,366,391
Other 74,845 59,907
Total other assets 3,738,844 3,779,653
Total assets $ 17,854,729 $ 16,795,391
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,137,900 $ 1,188,300
Line of credit 560,000 --
Accounts payable 918,692 667,419
Accrued salaries and wages 600,199 881,451
Other accrued expenses 312,942 354,912
Total current liabilities 3,529,733 3,092,082
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,773,276 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, 2,498,790 and 2,474,640
issued and outstanding 74,964 74,239
Additional paid-in capital 2,647,132 2,544,351
Retained earnings 7,317,473 6,242,206
Less notes receivable from employees and directors -- (39,999)
Total stockholders' equity 10,039,569 8,820,797
Total liabilities and stockholders' equity $ 17,854,729 $ 16,795,391
The accompanying notes are an integral part of these financial statements.
4
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
August 31,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,075,267 $ 958,808
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 411,985 453,683
Provision for doubtful accounts 50,000 62,046
Provision for inventory loss -- 62,000
(Gain) Loss on sale of property and equipment (87) (124,646)
Changes in operating assets and liabilities:
Accounts receivable (209,392) (383,929)
Refundable income taxes -- 37,574
Inventories (764,890) (646,677)
Other assets (169,052) (178,753)
Accounts payable 251,273 (173,961)
Accrued liabilities (368,837) 37,276
Net cash provided by operating activities 276,267 103,421
CASH FLOWS FROM INVESTING ACTIVITIES
Addition to notes receivable (210,504) (355,053)
Proceeds from sale of assets 960 181,100
Purchases of property and equipment (154,326) (450,491)
Increase in other assets (71,422) (87,563)
Net cash used in investing activities (435,292) (712,007)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 6,027,429
Payments on long-term debt (601,870) (4,576,548)
Proceeds from line of credit 1,900,000 5,775,000
Payments on line of credit (1,340,000) (6,185,030)
Repurchase of stock -- (558,261)
Costs of stock split (14,010) --
Reduction of loan from officer 39,999 48,750
Proceeds from exercise of stock options 117,516 16,000
Net cash provided by financing activities 101,635 547,340
NET DECREASE IN CASH AND CASH EQUIVALENTS (57,390) (61,246)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,472 87,301
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 108,082 $ 26,055
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 six months ended August 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 six months ended August 31, 2002 and 2001, 35,666 and 66,500 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:
August 31, 2002 February 28, 2002
Ingredients and supplies $1,744,976 $1,538,107
Finished candy 2,147,004 1,588,983
$3,891,980 $3,127,090
6
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
August 31, 2002 February 28, 2002
Land $ 513,618 $ 513,618
Building 3,838,936 3,772,807
Machinery and equipment 6,588,738 6,512,836
Furniture and fixtures 594,042 592,677
Leasehold improvements 419,289 418,403
Transportation equipment 188,874 188,874
12,143,497 11,999,215
Less accumulated depreciation 6,375,705 6,015,309
Property and equipment, net $ 5,767,792 $ 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 were secured by the related shares, bore
interest payable annually at 7.5% and were due May 15, 2003. These loans were
paid in full in May, 2002.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended
August 31,
Cash paid for: 2002 2001
Interest $ 173,191 $ 255,153
Income taxes 671,730 $ 300,234
Non-Cash Financing Activities
Company financed sales of retail store
assets $ 230,317 $1,039,500
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
inter-segment 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 Franchising Manufacturing Other Total
August 31, 2002
Total revenues $ 1,476,774 $ 3,805,268 $ -- $ 5,282,042
Intersegment revenues -- (215,682) -- (215,682)
Revenue from external
customers 1,476,774 3,589,586 -- 5,066,360
Segment profit (loss) 516,979 1,049,171 (576,055) 990,095
Total assets 2,018,023 10,500,869 5,335,837 17,854,729
Capital expenditures 8,832 84,114 4,934 97,880
Total depreciation &
amortization 50,631 106,108 49,200 205,939
Three Months Ended
August 31, 2001
Total revenues $ 1,425,329 $ 3,570,164 $ -- $ 4,995,493
Intersegment revenues -- (305,802) -- (305,802)
Revenue from external
customers 1,425,329 3,264,362 -- 4,689,691
Segment profit (loss) 383,568 1,098,370 (504,490) 977,448
Total assets 2,073,784 9,784,662 4,955,457 16,813,903
Capital expenditures 8,605 55,743 43,853 108,201
Total depreciation &
amortization 66,010 112,114 51,201 229,325
Six Months Ended Franchising Manufacturing Other Total
August 31, 2002
Total revenues $ 2,820,061 $ 6,615,488 $ -- $ 9,435,549
Intersegment revenues -- (396,850) -- (396,850)
Revenue from external
customers 2,820,061 6,218,638 -- 9,038,699
Segment profit (loss) 954,614 1,885,643 (1,111,530) 1,728,727
Total assets 2,018,023 10,500,869 5,335,837 17,854,729
Capital expenditures 41,571 95,114 17,641 154,326
Total depreciation &
amortization 101,263 212,322 98,400 411,985
Six Months Ended
August 31, 2001
Total revenues $ 3,072,556 $ 6,437,231 $ -- $ 9,509,787
Intersegment revenues -- (587,322) -- (587,322)
Revenue from external
customers 3,072,556 5,849,909 -- 8,922,465
Segment profit (loss) 829,520 1,860,382 (1,148,409) 1,541,493
Total assets 2,073,784 9,784,662 4,955,457 16,813,903
Capital expenditures 53,936 119,606 276,949 450,491
Total depreciation &
amortization 133,436 219,945 100,302 453,683
8
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 August 31, 2002, the Company has $3,260,000 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 August 31, 2002, $2,478,000 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. During
fiscal 2003 the Company financed $230,000 for an additional store for the
franchisee.
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. In July 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting for
Costs Associated with Exit or Disposal Activities.
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 completed a transitional fair
value based impairment test of goodwill as of March 1, 2002. There were no
impairment losses resulting from the transitional testing. The Company has two
reports units with goodwill - Franchising and Manufacturing - which also are
reportable segments. There were no changes to carrying amounts of goodwill for
the six months ended August 31, 2002.
Intangible assets consist of the following:
August 31, 2002 February 28, 2002
(unaudited)
Amortization Gross Accumulated Gross Accumulated
Period Carrying Amortization Carrying Amortization
Value Value
Intangible assets subject to amortization
Store design 10 Years $ 173,391 $ 14,468 $ 149,883 $ 7,234
Packaging licenses 5 Years 95,831 45,027 95,831 28,383
Packaging design 10 Years 399,753 26,812 366,932 8,427
Total 668,975 86,307 612,646 44,044
Intangible assets not subject to amortization
Franchising segment-Goodwill 1,235,000 534,529 1,235,000 534,529
Manufacturing segment-Goodwill 295,000 197,682 295,000 197,682
Total Goodwill 1,530,000 732,211 1,530,000 732,211
Total intangible assets $2,198,975 $ 818,518 $2,142,646 $ 776,255
9
Amortization expense related to intangible assets totaled $42,263 and $12,837
during the six months ended August 31, 2002 and 2001. The aggregate estimated
amortization expense for intangible assets remaining as of August 31, 2002 is as
follows:
Remainder of fiscal 2003 $ 45,668
2004 87,200
2005 52,200
2006 52,200
2007 52,200
Thereafter 293,200
Total $582,668
Net income and earnings per share for the six months ended August 31, 2002 and
2001 adjusted to exclude goodwill amortization is as follows:
Three months ended Six Months ended
August 31, August 31,
2002 2001 2002 2001
Reported net income $615,840 $607,973 $1,075,267 $958,808
Goodwill amortization, net of tax -- 18,288 -- 36,576
Adjusted net income $615,840 $626,261 $1,075,267 $995,384
Basic earnings per share:
Reported net income $ .25 $ .25 $ .43 $ .39
Goodwill amortization, net of tax -- -- -- .01
Adjusted net income $ .25 $ .25 $ .43 $ .40
Diluted earnings per share:
Reported net income $ .23 $ .23 $ .39 $ .37
Goodwill amortization, net of tax -- .01 -- .01
Adjusted net income $ .23 $ .24 $ .39 $ .38
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.
SFAS 146 nullifies FASB Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). It
requires that a liability be recognized for those costs only when the liability
is incurred, that is, when it meets the definition of a liability in the
Financial Accounting Standards Board's conceptual framework. SFAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities
related to exit or disposal activities. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
adoption encouraged. The Company does not expect SFAS 146 to have a material
effect on the Company's financial position or results of operations.
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 of August 31, 2002, the Company has notes receivable of approximately $2.5
million outstanding from a single franchisee. The franchisee is delinquent in
payment of principal and interest but is working with the Company to make
payment. The notes are collateralized by the franchisee's underlying store
assets, certain of which are now under Company control and which are being
offered for sale to satisfy the debt. Recovery of the net carrying value of
these notes is dependent upon, among other factors, the ability of the Company
and the franchisee to sell certain of these assets at prices equivalent to those
historically received by the Company and franchisees in comparable sales, the
proceeds of which will be applied to amounts due under the notes. Whether these
assets can be sold at these estimated fair market values depends on factors not
within the control of the franchisee or the Company. Although there is no
assurance that these stores will be sold, based on internal analysis by the
Company, it believes that they will be sold at such prices within the next six
to twelve months.
As a result, the actual results realized by the Company could differ materially
from results discussed in or contemplated by the forward-looking statements made
herein including seasonality, consumer interest in the Company's products,
general economic conditions, consumer trends, costs and availability of raw
materials, competition and the effect of government regulation. Words or phrases
such as "will," "anticipate," "expect," "believe," "intend," "estimate,"
"project," "plan" or similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
the forward-looking statements made in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2002 COMPARED TO THE THREE MONTHS ENDED
AUGUST 31, 2001
Net income was $616,000 for the three months ended August 31, 2002, or $.25 per
basic share, versus $608,000, or $.25 per basic share, for the three months
ended August 31, 2001.
Three Months Ended
August 31, %
($'s in thousands) 2002 2001 Change Change
Factory sales $3,589.5 $3,264.3 $325.2 10.0%
Retail sales 387.1 383.7 3.4 0.9%
Franchise fees 80.5 116.1 (35.6) (30.7%)
Royalty and Marketing fees 1,009.3 925.6 83.7 9.0%
Total $5,066.4 $4,689.7 $376.7 8.0%
11
Factory Sales
Factory sales increased $325,000 or 10.0%, to $3.6 million in the second quarter
of fiscal 2003, compared to $3.3 million in the second quarter of fiscal 2002.
The increase in factory sales was due primarily to an increase of 103% in
factory sales to customers outside the Company's system of franchised retail
stores and an increase in the number of franchised stores in operation in the
second quarter of fiscal 2003 versus the second quarter of 2002. These increases
were partially offset by a decrease of 4.6% in same store pounds purchased by
the franchise system.
Retail Sales
Retail sales increased $3,400 or 0.9%, to $387,000 in the second quarter of
fiscal 2003 compared to $384,000 in the second quarter of fiscal 2002.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $84,000, or 9.0%, to $1.0 million in the
second quarter of fiscal 2003, compared to $926,000 in the second quarter of
fiscal 2002. This increase resulted from growth in the average number of
franchised stores in operation in the second quarter of fiscal 2003 versus the
same period last year. Same store sales were down at franchised stores by 3.8%.
Franchise fee revenues decreased in the second quarter of fiscal 2003 due to a
decrease in the number of franchises sold versus the second quarter of fiscal
2002.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 62.9% in the second quarter
of fiscal 2003 from 58.2% in the second quarter of fiscal 2002. The increase
resulted from increased factory sales, which generate lower margins than retail
sales, and a decrease in factory margins to 34.3% in fiscal 2003 from 39.7% in
the second quarter of fiscal 2002. The decrease in factory margins is due
primarily to decreased production efficiencies due to lower than planned
production levels, decreased trucking contribution due to lower than planned
shipping volume and increased commodity costs. Company-owned store margins for
the second quarter of 2003 increased to 63.4% compared to 59.7% in the second
quarter of fiscal 2002 due to changes in mix of product sold.
Franchise Costs
Franchise costs decreased 15.4% from $363,000 in the second quarter of fiscal
2002 to $307,000 in the second quarter of fiscal 2003. The decrease is due
primarily to more focused advertising. As a percentage of total royalty and
marketing fees and franchise fee revenue, franchise costs decreased to 28.2% in
the second quarter of fiscal 2003 from 34.8% in the second quarter of fiscal
2002. This decrease as a percentage of royalty, marketing and franchise fees is
the combined result of decreased franchise costs and increased revenue.
Sales and Marketing
Sales and Marketing expenses of 323,000 in the second quarter of fiscal 2003
were comparable to the second quarter of fiscal 2002.
General and Administrative
General and administrative expenses increased 21.9% to $498,000 in the second
quarter of fiscal 2003 from $408,000 in the second quarter of fiscal 2002
primarily due to increased professional fees and personnel costs. As a
percentage of total revenues, general and administrative expenses increased to
9.8% in fiscal 2003 compared to 8.7% in fiscal 2002.
12
Retail Operating Expenses
Retail operating expenses decreased 2.2% from $219,000 in the second quarter of
fiscal 2002 to $214,000 in the second quarter of fiscal 2003. This decrease was
due primarily to a decrease in administration costs for Company-owned stores.
Retail operating expenses, as a percentage of retail sales, decreased from 57.0%
in the second quarter of fiscal 2002 to 55.3% in the second quarter of fiscal
2003 due to more efficient operations.
Depreciation and Amortization
Depreciation and amortization decreased 10.2% to $206,000 in the second quarter
of fiscal 2003 from $229,000 in the second quarter of fiscal 2002. The decrease
in depreciation and amortization is due primarily to suspension of amortization
expense ($29,000 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 $29,000 incurred in the second quarter of fiscal 2003 decreased
35.9% from the $45,000 incurred in the second quarter of fiscal 2002 due
primarily to lower interest expense on lower average outstanding amounts of and
rates on debt.
Income Tax Expense
The Company's effective income tax rate in the second quarter of fiscal 2003 was
37.8%, which is approximately the same rate as the second quarter of fiscal
2002.
SIX MONTHS ENDED AUGUST 31, 2002 COMPARED TO THE SIX MONTHS ENDED
AUGUST 31, 2001
Net income was $1,075,000 for the six months ended August 31, 2002, or $.43 per
basic share, versus $959,000, or $.39 per basic share, for the six months ended
August 31, 2001.
Revenues
Six Months Ended
August 31, %
($'s in thousands) 2002 2001 Change Change
Factory sales $6,218.6 $5,849.9 $368.7 6.3%
Retail sales 708.8 961.5 (252.7) (26.3%)
Franchise fees 236.5 403.2 (166.7) (41.3%)
Royalty and Marketing fees 1,874.8 1,707.9 166.9 9.8%
Total $9,038.7 $8,922.5 $116.2 1.3%
Factory Sales
Factory sales increased $369,000, or 6.3%, to $6.2 million in the first six
months of fiscal 2003, compared to $5.8 million in the first six months of
fiscal 2002. The increase in factory sales was due primarily to an increase of
85% in factory sales to customers outside the Company's system of franchised
retail stores and an increase in the number of franchised stores in operation in
the second quarter of fiscal 2003 versus the second quarter of 2002. These
increases were partially offset by a decrease of 7.2% in same store pounds
purchased by the franchise system.
13
Retail Sales
Retail sales decreased $253,000, or 26.3%, to $709,000 in the first six months
of fiscal 2003 compared to $962,000 in the first six months of fiscal 2002. This
decrease resulted from a decrease in the average number of stores in operation
in the first six months of fiscal 2003 (4) versus the same period last year (6).
The decrease in the average number of stores in operation is due to completion
of the Company's plan to convert its Company-owned stores to franchise-owned
stores.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $167,000, or 9.8% to $1.9 million in the
first six months of fiscal 2003, compared to $1.7 million in the first six
months of fiscal 2002. This increase resulted from growth in the average number
of franchised stores in operation in the first six months of fiscal 2003 versus
the same period last year. Same store sales decreased minimally at franchised
stores by 2.3%. Franchise fee revenues decreased in the first six months of
fiscal 2003 due to a decrease in the number of franchises sold versus the first
six months of fiscal 2002.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 61.2% in the first six
months of fiscal 2003 from 58.9% in the first six months of fiscal 2002. This
increase resulted from increased factory sales, which generate lower margins
than retail sales, and a decrease in factory margins to 36.1% in fiscal 2003
from 38.1% in fiscal 2002. The decrease in factory margins is due primarily to
decreased production efficiencies due to lower than planned production levels,
decreased trucking contribution due to lower than planned shipping volumes and
increased commodity costs. Company-owned store margins for the first six months
of 2003 improved to 62.5% compared to 59.3% in the first six months of fiscal
2002 due to changes in mix of product sold.
Franchise Costs
Franchise costs decreased 12.5% from $684,000 in the first six months of fiscal
2002 to $599,000 in the first six months of fiscal 2003. The decrease is due
primarily to more focused advertising and lower personnel costs. As a percentage
of total royalty and marketing fees and franchise fee revenue, franchise costs
decreased to 28.4% in the first six months of fiscal 2003 from 32.4% in the
first six months 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 4.3% to $637,000 in the first six months of fiscal
2003 from $611,000 in the first six months of fiscal 2002. The increase is due
primarily to increased personnel costs in support of franchisee marketing
efforts.
General and Administrative
General and administrative expenses increased 4.5% to $966,000 in the first six
months of fiscal 2002 from $925,000 in the first six months of fiscal 2002. The
increase is due primarily to increased professional fees. As a percentage of
total revenues, general and administrative expenses increased to 10.7% in fiscal
2003 compared to 10.4% in fiscal 2002. This increase, as a percentage of total
revenues, resulted from increased general and administrative costs and a 1.3%
increase in total revenues.
14
Retail Operating Expenses
Retail operating expenses decreased from $578,000 in the first six months of
fiscal 2002 to $413,000 in the first six months of fiscal 2003, representing a
decrease of 28.6%. This decrease was due primarily to a decrease in the average
number of stores in operation during the first six months of fiscal 2003 (4)
versus the first six months of fiscal 2002(6). Retail operating expenses, as a
percentage of retail sales, decreased from 60.0% in the first six months of
fiscal 2002 to 58.2% in the first six months of fiscal 2003 due to a change in
mix of stores in operation and related seasonality.
Depreciation and Amortization
Depreciation and amortization decreased 9.2% to $412,000 in the first six months
of fiscal 2003 from $454,000 in the first six months of fiscal 2002. The
decrease in depreciation and amortization is due primarily to suspension of
amortization expense ($29,000 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 $47,000 incurred in the first six months of fiscal 2003
represents a 60.6% decline from the $119,000 incurred in the first six months of
fiscal 2002 due primarily to lower interest expense on lower average outstanding
amounts of and rates on debt.
Income Tax Expense
The Company's effective income tax rate in the first six months of fiscal 2003
was 37.8%, which is approximately the same rate as the first six months of
fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2002, working capital was $4.8 million, compared with $3.9
million as of February 28, 2002, an increase of $0.9 million. The increase in
working capital was primarily due to operating results.
Cash and cash equivalent balances decreased from $165,000 as of February 28,
2002 to $108,000 as of August 31, 2002 as a result of cash flows used by
investing activities in excess of cash flows provided by financing and operating
activities. The Company's current ratio was 2.37 to 1 at August 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
August 31, 2002 of $2.0 million), and chattel mortgage notes (unpaid balance as
of August 31, 2002 of $2.9 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion and improve and automate the Company's factory
infrastructure.
The Company has a $2.5 million ($1.9 million available as of August 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, 2003.
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.
15
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and labor
directly affect the Company's operations. Most of the Company's leases provide
for cost-of-living adjustments and require the Company to pay taxes, insurance
and maintenance expenses, all of which are subject to inflation. Additionally
the Company's future lease costs for new facilities may include potentially
escalating costs of real estate and construction. There is no assurance that the
Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed
assets, and is therefore potentially less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior years
will ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday and
summer vacation seasons. In addition, quarterly results have been, and in the
future are likely to be, affected by the timing of new store openings and sales
of franchises. Because of the seasonality of the Company's business and the
impact of new store openings and sales of franchises, results for any quarter
are not necessarily indicative of results that may be achieved in other quarters
or for a full fiscal year.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not engage in commodity futures trading or hedging activities
and does not enter into derivative financial instrument transactions for trading
or other speculative purposes. The Company also does not engage in transactions
in foreign currencies or in interest rate swap transactions that could expose
the Company to market risk. However, the Company is exposed to some commodity
price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen
months for chocolate and certain nuts. These contracts permit the Company to
purchase the specified commodity at a fixed price on an as-needed basis during
the term of the contract. Because prices for these products may fluctuate, the
Company may benefit if prices rise during the terms of these contracts, but it
may be required to pay above-market prices if prices fall and it is unable to
renegotiate the terms of the contract.
As of August 31, 2002, none of the Company's long-term debt was subject to a
variable interest rate. The Company also has a $2.5 million bank line of credit
that bears interest at a variable rate. As of August 31, 2002, $560,000 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.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect
16
these controls subsequent to the date of their evaluation. Disclosure controls
and procedures are our controls and other procedures that are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
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 and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of the Shareholders of the Company was
held in Durango, Colorado on July 19, 2002.
The matter voted on by the stockholders was the election of Franklin
E. Crail, Bryan J. Merryman, Gerald A. Kien, Lee N. Mortenson,
Fred M. Trainor and Clyde Wm. Engle as directors of the Company. No
nominee received less than 98.8% of the shares voted.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
99.1 Certification Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002, Chief Executive Officer
99.2 Certification Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002, Chief Financial Officer
B. Reports on Form 8-K
None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: October 14, 2002 /s/ Bryan J. Merryman
-----------------------------------------------
Bryan J. Merryman, Chief Operating Officer,
Chief Financial Officer, Treasurer and Director
17
Certifications:
I, Franklin E. Crail, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rocky Mountain
Chocolate Factory, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 14, 2002 /s/ Franklin E. Crail
-----------------------------------------------------
Franklin E. Crail, President, Chief Executive Officer
and Chairman of the Board of Directors
18
Certifications:
I, Bryan J. Merryman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rocky Mountain
Chocolate Factory, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
d) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
c) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 14, 2002 /s/ Bryan J. Merryman
-----------------------------------------------
Bryan J. Merryman, Chief Operating Officer
Chief Financial Officer, Treasurer and Director
19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Certification Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002, Chief Executive Officer
99.2 Certification Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002, Chief Financial Officer