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, 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 84-0910696
(State of incorporation) (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 [ ]. Indicate by checkmark whether
the registrant is an accelerated filer as defined in Rule 12b-2 of Exchange Act.
Yes [ ] No [X].
On December 28, 2002 the registrant had outstanding 2,498,790 shares of its
common stock, $.03 par value.
The exhibit index is located on page 20.
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 Operations 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
SIGNATURES 17
CERTIFICATIONS 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
November 30, November 30,
2002 2001 2002 2001
REVENUES
Sales $ 4,694,651 $ 4,579,714 $ 11,622,062 $ 11,391,108
Franchise and royalty fees 937,926 1,028,537 3,049,214 3,139,608
Total revenues 5,632,577 5,608,251 14,671,276 14,530,716
COSTS AND EXPENSES
Cost of sales 3,188,885 3,222,064 7,425,290 7,232,831
Franchise costs 324,991 293,370 923,874 977,499
Sales and marketing 348,567 301,658 985,539 912,419
General and administrative 426,151 378,952 1,392,250 1,303,687
Retail operating 171,989 177,137 584,586 754,712
Depreciation and amortization 201,458 220,182 613,443 673,865
Provision for loss on accounts and notes
receivable and related foreclosure costs 1,666,524 -- 1,666,524 --
Total costs and expenses 6,328,565 4,593,363 13,591,506 11,855,013
INCOME (LOSS) FROM OPERATIONS (695,988) 1,014,888 1,079,770 2,675,703
OTHER INCOME (EXPENSE)
Interest expense (81,427) (101,698) (255,115) (345,725)
Interest income 17,522 71,657 144,179 196,362
Other, net (63,905) (30,041) (110,936) (149,363)
INCOME (LOSS) BEFORE INCOME TAXES (759,893) 984,847 968,834 2,526,340
INCOME TAX PROVISION (BENEFIT) (287,240) 372,270 366,220 954,955
NET INCOME (LOSS) $ (472,653) $ 612,577 $ 602,614 $ 1,571,385
BASIC EARNINGS PER COMMON SHARE $ (.19) $ .25 $ .24 $ .64
DILUTED EARNINGS PER COMMON SHARE $ (.19) $ .23 $ .22 $ .60
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,498,790 2,449,932 2,494,041 2,472,837
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS -- 188,007 225,722 136,848
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,498,790 2,637,939 2,719,763 2,609,685
The accompanying notes are an integral part of these financial statements.
3
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
November 30, February 28,
2002 2002
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 64,126 $ 165,472
Accounts receivable, less allowance for
doubtful accounts of $450,632 and $73,269 2,931,263 2,724,907
Notes receivable 251,491 561,829
Inventories 3,088,603 3,127,090
Refundable income taxes 551,470 --
Deferred income taxes 138,591 138,591
Other 396,059 313,943
Total current assets 7,421,603 7,031,832
PROPERTY AND EQUIPMENT, NET 5,619,984 5,983,906
OTHER ASSETS
Notes receivable, less valuation allowance
of $1,701,351 and $225,689 1,504,429 2,353,355
Intangible assets, net 1,360,175 1,366,391
Other 67,796 59,907
Total other assets 2,932,400 3,779,653
Total assets $ 15,973,987 $ 16,795,391
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,207,200 $ 1,188,300
Accounts payable 737,373 667,419
Accrued salaries and wages 412,565 881,451
Other accrued expenses 452,350 354,912
Total current liabilities 2,809,488 3,092,082
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,412,712 4,324,746
DEFERRED GAIN ON SALE OF ASSETS 16,407 389,302
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 6,844,820 6,242,206
Less notes receivable from officers and directors -- (39,999)
Total stockholders' equity 9,566,916 8,820,797
Total liabilities and stockholders' equity $ 15,973,987 $ 16,795,391
The accompanying notes are an integral part of these financial statements.
4
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
November 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 602,614 $ 1,571,385
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 613,442 673,865
Provision for doubtful accounts 1,754,524 62,046
Provision for inventory loss -- 62,000
(Gain) loss on sale of property and equipment (826) (124,646)
Changes in operating assets and liabilities:
Accounts receivable (60,577) (1,844,868)
Refundable income taxes (551,470) 37,574
Inventories 38,487 149,894
Other assets (82,116) (131,165)
Accounts payable 69,954 (142,572)
Accrued liabilities (627,383) (98,037)
Net cash provided by operating activities 1,756,649 215,476
CASH FLOWS FROM INVESTING ACTIVITIES
Addition to notes receivable (857,053) (638,582)
Proceeds from sale of assets 5,205 181,800
Purchases of property and equipment (187,748) (673,132)
Increase in other assets (68,770) (142,607)
Net cash used in investing activities (1,108,366) (1,272,521)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 6,027,429
Payments on long-term debt (893,134) (4,997,919)
Proceeds from line of credit 3,185,000 6,455,000
Payments on line of credit (3,185,000) (6,105,000)
Repurchase of stock -- (625,541)
Costs of stock split (14,010) --
Reduction of loan from officer 39,999 48,750
Proceeds from exercise of stock options 117,516 228,500
Net cash provided by (used in) financing activities (749,629) 1,031,219
NET DECREASE IN CASH AND CASH EQUIVALENTS (101,346) (25,826)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,472 87,301
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 64,126 $ 61,475
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 nine months ended November 30, 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 November 30, 2002 and 2001, 456,326 and 30,000 stock
options were excluded from the computation of earnings per share because their
effect would have been anti-dilutive. For the nine months ended November 30,
2002 and 2001, 43,967 and 58,938 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:
November 30, 2002 February 28, 2002
Ingredients and supplies $ 1,498,687 $ 1,538,107
Finished candy 1,589,916 1,588,983
$ 3,088,603 $ 3,127,090
6
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
November 30, 2002 February 28, 2002
Land $ 513,618 $ 513,618
Building 3,838,936 3,772,807
Machinery and equipment 6,615,948 6,512,836
Furniture and fixtures 594,042 592,677
Leasehold improvements 419,289 418,403
Transportation equipment 188,874 188,874
12,170,707 11,999,215
Less accumulated depreciation 6,550,723 6,015,309
Property and equipment, net $5,619,984 $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
Nine Months Ended
November 30,
2002 2001
Cash paid for:
Interest $ 255,922 $ 356,049
Income taxes 1,034,226 674,019
Supplemental schedule of non-cash investing and financing activities:
Company financed sale 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, provision for
loss on accounts and notes receivable and related foreclosure costs (for the
three and nine months ending November 30, 2002) 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
November 30, 2002 Franchising Manufacturing Other Total
Total revenues $ 1,138,984 $ 4,681,416 $ -- $ 5,820,400
Intersegment revenues -- (187,823) -- (187,823)
Revenue from external
customers 1,138,984 4,493,593 -- 5,632,577
Segment profit (loss) 235,077 1,213,160 (2,208,130) (759,893)
Total assets 1,881,340 9,527,538 4,565,109 15,973,987
Capital expenditures 2,789 1,763 28,870 33,422
Total depreciation &
amortization 53,371 98,887 49,200 201,458
Three Months Ended
November 30, 2001
Total revenues $ 1,231,019 $ 4,609,510 $ -- $ 5,840,529
Intersegment revenues -- (232,278) -- (232,278)
Revenue from external
customers 1,231,019 4,377,232 -- 5,608,251
Segment profit (loss) 384,577 1,056,464 (456,194) 984,847
Total assets 2,013,532 10,171,319 5,614,834 17,799,685
Capital expenditures 58,503 89,063 75,075 222,641
Total depreciation &
amortization 63,616 109,365 47,201 220,182
Nine Months Ended
November 30, 2002 Franchising Manufacturing Other Total
Total revenues $ 3,959,045 $ 11,296,904 $ -- $ 15,255,949
Intersegment revenues -- (584,673) -- (584,673)
Revenue from external
customers 3,959,045 10,712,231 -- 14,671,276
Segment profit (loss) 1,189,691 3,098,803 (3,319,660) 968,834
Total assets 1,881,340 9,527,538 4,565,109 15,973,987
Capital expenditures 44,360 96,877 46,511 187,748
Total depreciation &
amortization 154,634 311,209 147,600 613,443
Nine Months Ended
November 30, 2001
Total revenues $ 4,303,575 $ 11,046,741 $ -- $ 15,350,316
Intersegment revenues -- (819,600) -- (819,600)
Revenue from external
customers 4,303,575 10,227,141 -- 14,530,716
Segment profit (loss) 1,214,097 2,916,846 (1,604,603) 2,526,340
Total assets 2,013,532 10,171,319 5,614,834 17,799,685
Capital expenditures 112,439 208,669 352,024 673,132
Total depreciation &
amortization 197,052 329,310 147,503 673,865
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 November 30, 2002, the Company has $3,457,000 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 October 2006 and are
secured by the assets of the sold stores.
Of the notes receivable outstanding at November 30, 2002, $2,462,000 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 August 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 $243,750 of the notes receivable. During
fiscal 2003 the Company financed $230,000 for an additional store for the
franchisee. During the third quarter of fiscal 2003 the Company recorded an
additional $1,667,000 provision for potential loss on accounts and notes
receivable and foreclosure costs related to the insolvency of this franchisee.
The Company believes that the overall weak economy and retail environment which
resulted in the worst holiday selling season in the Company's history was
primarily responsible for this franchisee's insolvency.
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
reporting units with goodwill - Franchising and Manufacturing - which also are
reportable segments. There were no changes to carrying amounts of goodwill for
the nine months ended November 30, 2002.
Intangible assets consist of the following:
November 30, 2002 February 28, 2002
(unaudited)
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Value Amortization Value Amortization
Intangible assets subject to amortization
Store design 10 Years $ 173,391 $ 18,751 $ 149,883 $ 7,234
Packaging licenses 3-5 Years 95,831 53,348 95,831 28,383
Packaging design 10 Years 402,088 36,825 366,932 8,427
Total 671,310 108,924 612,646 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 $ 2,201,310 $ 841,135 $ 2,142,646 $ 776,255
9
Amortization expense related to intangible assets totaled $64,880 and $20,596
during the nine months ended November 30, 2002 and 2001. The aggregate estimated
amortization expense for intangible assets remaining as of November 30, 2002 is
as follows:
Remainder of fiscal 2003 $ 22,620
2004 90,500
2005 57,500
2006 57,500
2007 57,500
Thereafter 276,766
Total $562,386
Net income and earnings per share for the nine months ended November 30, 2002
and 2001 adjusted to exclude goodwill amortization is as follows:
Three months ended Nine Months ended
November 30, November 30,
2002 2001 2002 2001
Reported net income (loss) $ (472,653) $ 612,577 $ 602,614 $ 1,571,385
Goodwill amortization, net of tax -- 18,288 -- 54,864
Adjusted net income (loss) $ (472,653) $ 630,865 $ 602,614 $ 1,626,249
Basic earnings (loss) per share:
Reported net income (loss) $ (.19) $ .25 $ .24 $ .64
Goodwill amortization, net of tax -- .01 -- .02
Adjusted net income (loss) $ (.19) $ .26 $ .24 $ .66
Diluted earnings per share:
Reported net income (loss) $ (.19) $ .23 $ .22 $ .60
Goodwill amortization, net of tax -- .01 -- .02
Adjusted net income (loss) $ (.19) $ .24 $ .22 $ .62
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.
NOTE 10 - LONG-TERM DEBT
Effective November 15, 2002, the Company renegotiated the interest rate on its
long-term debt at its bank. Interest will float at prime less fifty basis
points. On November 30, 2002 the balance of such debt was $4.6 million bearing
interest at 3.75%.
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 to its product introductions and promotional programs.
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 NOVEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 2001
Net loss was $473,000 for the three months ended November 30, 2002, or $.19 per
basic share, versus net income of $613,000, or $.25 per basic share, for the
three months ended November 30, 2001.
Revenues
Three Months Ended
November 30, %
($'s in thousands) 2002 2001 Change Change
Factory sales $ 4,493.6 $ 4,377.2 $ 116.4 2.7%
Retail sales 201.1 202.5 (1.4) (0.7)%
Franchise fees 64.0 203.7 (139.7) (68.6)%
Royalty and Marketing fees 873.9 824.8 49.1 6.0%
Total $ 5,632.6 $ 5,608.2 $ 24.4 0.4%
Factory Sales
Factory sales increased $116,000, or 2.7%, to $4.5 million in the third quarter
of fiscal 2003, compared to $4.4 million in the third quarter of fiscal 2002.
This increase in factory sales was due primarily to an increase of 81% 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
third quarter of fiscal 2003 versus the third quarter of fiscal 2002. These
increases were partially offset by a decrease of 17.9% in same store pounds
purchased by the franchise system.
Retail Sales
Retail sales decreased $1,400, or 0.7%, to $201,000 in the third quarter of
fiscal 2003, from $202,000 in the third quarter of fiscal 2002.
11
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $49,000 or 6.0%, to $874,000 in the third
quarter of fiscal 2003, compared to $825,000 in the third quarter of fiscal
2002. This increase resulted from growth in the average number of franchised
stores in operation in the third quarter of fiscal 2003 versus the same period
last year, partially offset by a decrease in same store sales at franchised
stores of approximately 6%. Franchise fee revenues decreased in the third
quarter of fiscal 2003 primarily due to a decrease in the number of franchises
sold versus the comparable period in fiscal 2002.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 67.9% in the third quarter
of fiscal 2003 versus 70.4% in the third quarter of fiscal 2002. This decrease
resulted from increases in both factory and Company-owned store margins. The
increase in factory margin, from 28.4% in fiscal 2002 to 30.9% in fiscal 2003,
is due primarily to increased production efficiencies. Improvement of
Company-owned store margin from 56.8% to 57.3% is due to changes in mix of
product sold.
Franchise Costs
Franchise costs increased 10.8% to $325,000 in the third quarter of fiscal 2003
compared to $293,400 in the third quarter of fiscal 2002. The increase is
primarily due to costs associated with periodic franchise meetings. As a
percentage of total royalty and marketing fees and franchise fee revenue,
franchise costs increased to 34.6% in the third quarter of fiscal 2003 from
28.5% in the third quarter of fiscal 2002. This increase as a percentage of
royalty, marketing and franchise fees is a result of increased franchise support
expenditures and decreased royalty, marketing and franchise fees.
Sales and Marketing
Sales and Marketing expenses increased 15.6% to $349,000 the third quarter of
fiscal 2003 from $301,700 in fiscal 2002 due to a higher level of promotional
and commission expenses incurred to increase sales and visibility of the
Company's products.
General and Administrative
General and administrative expenses increased 12.5% from $379,000 in the third
quarter of fiscal 2002 to $426,000 in the third quarter of fiscal 2003 primarily
due to increased professional fees and provision for bad debts. As a percentage
of total revenue, general and administrative expenses increased to 7.6% in
fiscal 2003 compared to 6.8% in fiscal 2002. This increase as a percentage of
total revenues primarily resulted from increased costs.
Retail Operating
Retail operating expenses decreased 2.9% from $177,100, in the third quarter of
fiscal 2002 to $172,000 in the third quarter of fiscal 2003. This decrease was
due to a general decline in expenses. Retail operating expenses, as a percentage
of retail sales, decreased from 87.5% in the third quarter of fiscal 2002 to
85.5% in the third quarter of fiscal 2003 due to the decrease in expenses.
Depreciation and Amortization
Depreciation and amortization decreased 8.5% to $201,000 in the third quarter of
fiscal 2003 from $220,000 in the third 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.
12
Provision for Loss
The provision for loss resulted from the insolvency of a single franchisee and
includes provision for loss on accounts and notes receivable and related
foreclosure costs. The provision is comprised of the following amounts:
Notes receivable $1,099,328
Accounts receivable 356,876
Other accrued expenses (Foreclosure costs) 210,320
Total $1,666,524
Other Expense
Other expense of $64,000 incurred in the third quarter of fiscal 2003 increased
112.7% from the $30,000 incurred in the third quarter of fiscal 2002 due
primarily to non-accrual of interest income on certain notes receivable from a
single debtor.
Income Tax Expense (Benefit)
The Company's effective income tax rate in the third quarter of fiscal 2003 was
37.8%, which is the same as the effective rate in the third quarter of fiscal
2002.
NINE MONTHS ENDED NOVEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
NOVEMBER 30, 2001
Net income was $603,000 for the nine months ended November 30, 2002 or $.24 per
basic share versus $1,571,000 or $.64 per basic share for the nine months ended
November 30, 2001.
Revenues
Nine Months Ended
November 30, %
($'s in thousands) 2002 2001 Change Change
Factory sales $ 10,712.2 $ 10,227.1 $ 485.1 4.7%
Retail sales 909.9 1,164.0 (254.1) (21.8)%
Franchise fees 300.5 606.9 (306.4) (50.5)%
Royalty and Marketing fees 2,748.7 2,532.7 216.0 8.5%
Total $ 14,671.3 $ 14,530.7 $ 140.6 1.0%
Factory Sales
Factory sales increased $485,000, or 4.7%, to $10.7 million in the first nine
months of fiscal 2003, compared to $10.2 million in the first nine months of
fiscal 2002. The increase in factory sales was due primarily to an increase of
83% 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 first nine months 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 11.9% in the first nine months of
fiscal 2003 compared to the first nine months of fiscal 2002.
Retail Sales
Retail sales decreased $254,000, or 21.8%, to $910,000 in the first nine months
of fiscal 2003, compared to $1.2 million in the first nine months of fiscal
2002. This decrease resulted from a decrease in the average number of
Company-owned stores in operation in the first nine months of fiscal 2003 (4)
versus the same period last year (6). The decrease in 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.
13
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $216,000, or 8.5%, to $2.7 million in the
first nine months of fiscal 2003, compared to $2.5 million in the first nine
months of fiscal 2002. This increase resulted from growth in the average number
of franchised stores in operation in the first nine months of fiscal 2003 versus
the same period last year, partially offset by a decrease in same store sales at
franchised stores of approximately 2.9%. Franchise fee revenues decreased in the
first nine months of fiscal 2003 due to a decrease in the number of franchises
sold versus the first nine months of fiscal 2002.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 63.9% in the first nine
months of fiscal 2003 from 63.5% in the first nine months of fiscal 2002. This
increase resulted from increased factory sales, which generate lower margins
than retail sales. Factory margins remained constant at 34.0% in both fiscal
2003 and fiscal 2002. Company-owned store margins for the first nine months of
fiscal 2003 improved to 61.4% compared to 58.8% in the comparable period of
fiscal 2002 due to changes in mix of products sold.
Franchise Costs
Franchise costs decreased 5.5% from $977,500 in the first nine months of fiscal
2002 to $924,000 in the first nine months of fiscal 2003. The decrease is due
primarily to more focused advertising and lower personnel costs offset by costs
associated with periodic franchise meetings. As a percentage of total royalty
and marketing fees and franchise fee revenue, franchise costs decreased to 30.3%
in the first nine months of fiscal 2003 from 31.1% in the first nine months of
fiscal 2002. This decrease as a percentage of royalty, marketing and franchise
fees is primarily a result of decreased franchise support costs.
Sales and Marketing
Sales and Marketing costs increased 8.0% to $986,000 in the first nine months of
fiscal 2003 from $912,000 in the first nine months of fiscal 2002 due to a
higher level of promotional and commission expenses incurred to increase sales
and visibility of the Company's products.
General and Administrative
General and administrative expenses increased 6.8% to $1.4 million in the first
nine months of fiscal 2003 from $1.3 million in the first nine months of fiscal
2002. The increase is primarily due to increased professional fees and provision
for bad debts. As a percentage of total revenues, general and administrative
expenses increased to 9.5% in fiscal 2003 compared to 9.0% in fiscal 2002. This
increase, as a percentage of total revenues, primarily resulted from increased
costs.
Retail Operating
Retail operating expenses decreased 22.5% from $755,000 in the first nine months
of fiscal 2002 to $585,000 in the first nine months of fiscal 2003. This
decrease was due primarily to a decrease in the average number of stores open
during the first nine months of fiscal 2003 (4) versus the first nine months of
fiscal 2002 (6). Retail operating expenses, as a percentage of retail sales,
decreased from 64.8% in the first nine months of fiscal 2002 to 64.2% in the
first nine months of fiscal 2003 due to the decrease in expenses relative to
revenue.
Depreciation and Amortization
Depreciation and amortization decreased 9.0% to $613,000 for the first nine
months of fiscal 2003 from $674,000 for the first nine 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
14
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.
Provision for Loss
The provision for loss resulted from the insolvency of a single franchisee and
includes provision for loss on accounts and notes receivable and related
foreclosure costs. The provision is comprised of the following amounts:
Notes receivable $1,099,328
Accounts receivable 356,876
Other accrued expenses (Foreclosure costs) 210,320
Total $1,666,524
Other Expense
Other expense of $111,000 incurred in the first nine months of fiscal 2003
decreased 25.7% from the $149,000 incurred in the first nine months of fiscal
2002 due primarily to lower interest expense on lower average outstanding
amounts of and rates on long-term debt. Interest income also declined due to
non-accrual, in the third quarter, of interest income on certain notes
receivable from a single debtor.
Income Tax Expense
The Company's effective income tax rate in the first nine months of fiscal 2003
was 37.8%, which is the same as the effective rate in the first nine months of
fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2002 working capital was $4.6 million, compared with $3.9
million as of February 28, 2002, an increase of $700,000. 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 $64,000 as of November 30, 2002 as a result of cash used by financing
and investing activities in excess of cash flows provided by operating
activities. The Company's current ratio was 2.64 to 1 at November 30, 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
November 30, 2002 $2.0 million), and chattel mortgage notes (unpaid balance as
of November 30, 2002 $2.6 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 ($2.5 million available as of November 30, 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.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients, insurance
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.
15
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, 2002, approximately $4.6 million 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 under which borrowings bear interest at a variable
rate. As of November 30, 2002, there was no balance 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 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.
16
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
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
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 14, 2003 /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: January 14, 2003 /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: January 14, 2003 /s/ Bryan J. Merryman
------------------------------------------------
Bryan J. Merryman, Chief Operating Officer
Chief Financial Officer, Treasurer and Director
19
INDEX TO EXHIBITS
EXHIBIT
NUMBER 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
20