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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001035704-01-500109.txt : 20010523
<SEC-HEADER>0001035704-01-500109.hdr.sgml : 20010523
ACCESSION NUMBER: 0001035704-01-500109
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20010228
FILED AS OF DATE: 20010522
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ROCKY MOUNTAIN CHOCOLATE FACTORY INC
CENTRAL INDEX KEY: 0000785815
STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060]
IRS NUMBER: 840910696
STATE OF INCORPORATION: CO
FISCAL YEAR END: 0228
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-14749
FILM NUMBER: 1645467
BUSINESS ADDRESS:
STREET 1: 265 TURNER DR
CITY: DURANGO
STATE: CO
ZIP: 81301
BUSINESS PHONE: 3032590554
MAIL ADDRESS:
STREET 1: 265 TURNER DRIVE
CITY: DURANGO
STATE: CO
ZIP: 81301
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d87609e10-k405.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END FEBRUARY 28, 2001
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the fiscal year ended February 28, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-14749
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-0910696
(State of Incorporation) (I.R.S. Employer Identification No.)
265 Turner Drive, Durango, CO 81301
(Address of principal executive offices)
(970) 259-0554
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.03 par value
Indicate by check mark 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 check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On May 15, 2001, there were 1,857,568 shares of Common Stock outstanding. The
aggregate market value of the Common Stock (based on the average of the closing
bid and ask prices as quoted on the Nasdaq National Market System on May 15,
2001 held by non-affiliates was $7,082,374.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2001 Annual Meeting of Stockholders (Part III)
1
<PAGE> 2
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I.
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II.
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk 24
Item 8 Financial Statements 25
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43
PART III.
Item 10 Directors and Executive Officers of the Registrant 43
Item 11 Executive Compensation 43
Item 12 Security Ownership of Certain Beneficial Owners and Management 43
Item 13 Certain Relationships and Related Transactions 43
PART IV.
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. BUSINESS
GENERAL
Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain Chocolate
Factory, Inc. (the "Company") is an international franchiser and confectionery
manufacturer. The Company is headquartered in Durango, Colorado and manufactures
an extensive line of premium chocolate candies and other confectionery products.
As of April 30, 2001 there were 8 Company-owned and 213 franchised Rocky
Mountain Chocolate Factory stores operating in 40 states, Canada, Guam and the
United Arab Emirates.
Approximately 40% of the products sold at Rocky Mountain Chocolate Factory
stores are prepared on the premises. The Company believes this in-store
preparation creates a special store ambiance and the aroma and sight of products
being made attracts foot traffic and assures customers that products are fresh.
The Company believes that its principal competitive strengths lie in its brand
name recognition, its reputation for the quality, variety and the taste of its
products; the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in the
manufacture of chocolate candy products and the merchandising and marketing of
chocolate and other candy products; and the control and training infrastructures
it has implemented to assure consistent customer service and execution of
successful practices and techniques at its stores.
The Company believes its manufacturing expertise and reputation for quality has
facilitated the sale of selected products through new distribution channels. The
Company is currently testing and evaluating a number of new distribution channel
programs including wholesaling, fundraising, corporate sales, mail order and
internet sales.
The Company's revenues are currently derived from three principal sources: (i)
sales to franchisees and others of chocolates and other confectionery products
manufactured by the Company (53-45-43%); (ii) sales at Company-owned stores of
chocolates and other confectionery products (including product manufactured by
the Company) (31-42-44%) and (iii) the collection of initial franchise fees and
royalties from franchisees (16-13-13%). The figures in parentheses show the
percentage of total revenues attributable to each source for fiscal years ended
February 28 (29), 2001, 2000 and 1999, respectively.
According to the National Confectionery Association, the total U.S. candy market
approximated $23.3 billion of sales in 1999. According to the Department of
Commerce, per capita consumption of chocolate exceeds 12 pounds per year
nationally, generating annual sales of approximately $13 billion. In 1999,
consumption of chocolate products increased 0.8% versus a 5.5% decrease in
non-chocolate candies.
In December 1997, the Company decided its Fuzziwig's Candy Factory store segment
did not meet its strategic long-term goals, and accordingly, adopted a plan to
divest itself of these operations. The Company completed the divestiture on July
31, 1998. Fuzziwig's Candy Factory stores sold hard conventional and nostalgic
candies purchased from third party suppliers.
In Fiscal 2001, the Company began phasing out its Rocky Mountain Chocolate
Factory Company-owned store program. In fiscal 2002, the Company has sold to new
or existing franchisees all Company-owned store locations with the exception of
four Company-owned stores located in key markets in Colorado (the "Colorado
Stores"). The Company intends to retain the Colorado Stores to test sales,
marketing, design and operational initiatives.
3
<PAGE> 4
BUSINESS STRATEGY
The Company's objective is to build on its position as a leading international
franchiser and manufacturer of high quality chocolate and other confectionery
products. The Company continually seeks opportunities to profitably expand its
business. To accomplish this objective, the Company employs a business strategy
that includes the following elements:
Product Quality and Variety
The Company maintains the unsurpassed taste and quality of its chocolate candies
by using only the finest chocolate and other wholesome ingredients. The Company
uses its own proprietary recipes, primarily developed by its master candy maker.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of the
Company's chocolate candies throughout the year and as many as 200, including
many packaged candies, during the holiday seasons. Individual stores also offer
numerous varieties of premium fudge and gourmet caramel apples, as well as other
products prepared in the store from Company recipes.
Store Atmosphere and Ambiance
The Company seeks to establish an enjoyable and inviting atmosphere in each
Rocky Mountain Chocolate Factory store. Each store prepares numerous products,
including fudge, brittles and caramel apples, in the store. In-store preparation
is designed both to be fun and entertaining for customers and to convey an image
of freshness and homemade quality. The Company's design staff has developed
easily replicable designs and specifications to ensure that the Rocky Mountain
Chocolate Factory concept is consistently implemented throughout the system.
In February 2000, the Company retained a nationally recognized design firm to
evaluate and update its existing store design. The objective of the store design
project is fourfold: (1) increase average revenue per unit thereby opening
untapped real estate environments; (2) further emphasize the entertainment and
freshness value of the Company's in-store confectionery factory; (3) improve the
presentation of the Company's Co-branded product offerings such as coffee and
ice-cream and (4) improve operational efficiency through optimal store layout.
The Company expects to complete the store redesign project and the testing of
the new design in fiscal 2002.
Site Selection
Careful selection of a site is critical to the success of a Rocky Mountain
Chocolate Factory store. Many factors are considered by the Company in
identifying suitable sites, including tenant mix, visibility, attractiveness,
accessibility, level of foot traffic and occupancy costs. Final site selection
occurs only after the Company's senior management has approved the site. The
Company believes that the experience of its management team in evaluating a
potential site is one of the Company's competitive strengths.
Customer Service Commitment
The Company emphasizes excellence in customer service and seeks to employ and to
sell franchises to motivated and energetic people. The Company also fosters
enthusiasm for its customer service philosophy and the Rocky Mountain Chocolate
Factory concept through its bi-annual franchisee convention, annual regional
meetings and other frequent contacts with its franchisees.
4
<PAGE> 5
Increase Same Store Retail Sales at Existing Locations
The Company seeks to increase profitability of its store system through
increasing sales at existing store locations. System wide same store retail
sales are as follows:
<TABLE>
<S> <C>
1997 (0.5%)
1998 7.4%
1999 6.7%
2000 (4.3%)
2001 (3.9%)
</TABLE>
The Company believes that its same store sales growth was positively impacted by
the sale of Beanie Babies(TM) (stuffed animals manufactured by Ty Inc.) and
related products in fiscal 1998 and 1999, because many of the Company's retail
stores capitalized on this extraordinary trend during this time period. In
fiscal 2000 and 2001, however, the demand for Beanie Babies decreased
significantly, and the Company believes this decreased demand is the primary
reason for negative comparable store sales in fiscal 2000 and 2001. The Company
expects this trend to reverse in fiscal 2002.
The Company feels that same store retail sales growth can be accelerated though
store redesign to provide a more attractive and effective retail sales
environment while retaining the Rocky Mountain Chocolate Factory store ambiance
and theme.
In February 2000, the Company retained a nationally recognized packaging design
firm to completely redesign the packaging featured in the Company's retail
stores. The goal of the packaging redesign project is to develop an updated,
coordinated line of packaged products that capture and convey the freshness, fun
and excitement of the Rocky Mountain Chocolate Factory retail store experience.
The Company expects to complete the packaging redesign project and the testing
of the new designs during 2002. The Company believes that a successful launch of
new packaging will have a positive impact on same store sales.
Increase Same Store Pounds Purchased by Existing Locations
In fiscal 2001, the Company experienced a same store pounds purchased decline of
1.1%. The decline in same store pounds purchased from the factory continued what
appears to be a trend of a shift in sales mix toward store-made and authorized
vendor products and away from factory made products. The Company is in the
process of designing new packaging, adding new products and focusing its
existing product lines in an effort to reverse this trend.
Enhanced Operating Efficiencies
The Company seeks to improve its profitability by controlling costs and
increasing the efficiency of its operations. Efforts in the last several years
include the purchase of additional automated factory equipment, implementation
of a comprehensive MRP II forecasting, planning, scheduling and reporting system
and the implementation of alternative manufacturing strategies. These measures
have significantly improved the Company's ability to deliver its products to its
stores safely, quickly and cost-effectively. Additionally, the divestiture of
substantially all of the Company-owned stores is expected to reduce the
Company's exposure to real estate risk, improve the Company's operating margins
and allow the Company to increase its focus on franchising.
5
<PAGE> 6
EXPANSION STRATEGY
Key elements of the Company's expansion strategy include:
Unit Growth
The cornerstone of the Company's growth strategy is to aggressively pursue unit
growth opportunities in locations where the Company has traditionally been
successful, to pursue new and developing real estate environments which appear
promising based on early sales results, and to improve and expand the retail
store concept, such that previously untapped and unviable environments (such as
most regional malls) generate sufficient revenue to support a successful Rocky
Mountain Chocolate Factory location.
High Traffic Environments
The Company currently establishes franchised stores in the following
environments: factory outlet malls, tourist environments and regional malls. The
Company, over the last several years, has had a particular focus on factory
outlet mall locations. Although each of these environments has a number of
attractive features, including a high level of foot traffic, the factory outlet
mall environment has historically offered the best combination of tenant mix,
customer spending characteristics and favorable occupancy costs. The Company has
established a business relationship with most of the major developers in the
United States and believes that these relationships provide it with the
opportunity to take advantage of attractive sites in new and existing real
estate environments.
Name Recognition and New Market Penetration
The Company believes the visibility of its stores and the high foot traffic at
its factory outlet mall and tourist locations has generated strong name
recognition of Rocky Mountain Chocolate Factory and demand for its franchises.
The Rocky Mountain Chocolate Factory system has historically been concentrated
in the western United States and the Rocky Mountains, but recent growth has
generated a gradual easterly momentum as new stores have been opened in the
eastern half of the country. This growth has further increased the Company's
name recognition and demand for its franchises. Distribution of Rocky Mountain
Chocolate Factory products through new channels also increases name recognition
and brand awareness in areas of the country in which the Company has not
previously had a significant presence. The Company believes that by distributing
selected Rocky Mountain Chocolate Factory products through new distribution
channels its name recognition will improve and benefit its entire store system.
STORE CONCEPT
The Company seeks to establish a fun and inviting atmosphere in its Rocky
Mountain Chocolate Factory store locations. Unlike most other confectionery
stores, each Rocky Mountain Chocolate Factory store prepares certain products,
including fudge and caramel apples, in the store. Customers can observe store
personnel making fudge from start to finish, including the mixing of ingredients
in old-fashioned copper kettles and the cooling of the fudge on large marble
tables, and are often invited to sample the store's products. The Company
believes that an average of approximately 40% of the revenues of franchised
stores are generated by sales of products prepared on the premises. The Company
believes the in-store preparation and aroma of its products enhance the ambiance
at Rocky Mountain Chocolate Factory stores, are fun and entertaining for its
customers and convey an image of freshness and homemade quality.
6
<PAGE> 7
Rocky Mountain Chocolate Factory stores have a distinctive country Victorian
decor, which further enhances their friendly and enjoyable atmosphere. Each
store includes finely-crafted wood cabinetry, copper and brass accents, etched
mirrors and large marble tables on which fudge and other products are made. To
ensure that all stores conform to the Rocky Mountain Chocolate Factory image,
the Company's design staff provides working drawings and specifications and
approves the construction plans for each new store. The Company also controls
the signage and building materials that may be used in the stores.
The average store size is approximately 1,000 square feet, approximately 650
square feet of which is selling space. Most stores are open seven days a week.
Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6
p.m. on Sundays. Store hours in tourist areas may vary depending upon the
tourist season.
PRODUCTS AND PACKAGING
The Company typically produces approximately 300 chocolate candies and other
confectionery products, using proprietary recipes developed primarily by the
Company's master candy maker. These products include many varieties of clusters,
caramels, creams, mints and truffles. The Company continues to engage in a major
effort to expand its product line by developing additional exciting and
attractive new products. During the Christmas, Easter and Valentine's Day
holiday seasons, the Company may make as many as 100 additional items, including
many candies offered in packages specially designed for the holidays. A typical
Rocky Mountain Chocolate Factory store offers up to 100 of these candies
throughout the year and up to an additional 100 during holiday seasons.
Individual stores also offer more than 15 premium fudges and other products
prepared in the store. The Company believes that approximately 50% of the
revenues of Rocky Mountain Chocolate Factory stores are generated by products
manufactured at the Company's factory, 40% by products made in the store using
Company recipes and ingredients purchased from the Company or approved suppliers
and the remaining 10% by products, such as ice cream, coffee and other sundries,
purchased from approved suppliers.
The Company uses only the finest chocolates, nut meats and other wholesome
ingredients in its candies. In February 1995, the Company's Valentine's Day
gift-boxed chocolates were awarded Money Magazine's top rating and were
described as having "superior flavor" which is "intense" and "natural." The
Company continually strives to offer new confectionery products in order to
maintain the excitement and appeal of its products.
Chocolate candies manufactured by the Company are sold at prices ranging from
$12.90 to $14.90 per pound, with an average price of $13.50 per pound.
Franchisees set their own retail prices, though the Company does recommend
prices for all of its products.
The Company develops special packaging for the Christmas, Valentine's Day and
Easter holidays, and customers can have their purchases packaged in decorative
boxes and fancy tins throughout the year. The Company's packaging for its Rocky
Mountain Mints in 1995 received the Award of Excellence from the National
Paperbox Association.
OPERATING ENVIRONMENT
The Company currently establishes Rocky Mountain Chocolate Factory stores in
three primary environments: factory outlet malls, tourist areas and regional
malls. Each of these environments has a number of attractive features, including
high levels of foot traffic.
7
<PAGE> 8
Factory Outlet Malls
There are approximately 280 factory outlet malls in the United States, and as of
February 28, 2001, there were Rocky Mountain Chocolate Factory stores in
approximately 100 of these malls in over 35 states. The Company has established
business relationships with most of the major outlet mall developers in the
United States. Although not all factory outlet malls provide desirable locations
for the Company's stores, management believes the Company's relationships with
these developers will provide it with the opportunity to take advantage of
attractive sites in new and existing outlet malls.
Tourist Areas
As of February 28, 2001, there were approximately 50 Rocky Mountain Chocolate
Factory stores in locations considered to be tourist areas, including
Fisherman's Wharf in San Francisco, California and the Riverwalk in San Antonio,
Texas. Tourist areas are very attractive locations because they offer high
levels of foot traffic and favorable customer spending characteristics, and
greatly increase the Company's visibility and name recognition. The Company
believes significant opportunities exist to expand into additional tourist areas
with high levels of foot traffic.
Regional Malls
There are approximately 1,800 regional malls in the United States, and as of
February 28, 2001, there were Rocky Mountain Chocolate Factory stores in
approximately 20 of these malls, including locations in the Mall of America in
Bloomington, Minnesota; Escondido, California; Fort Collins, Colorado; and West
Palm Beach, Florida. Although often providing favorable levels of foot traffic,
regional malls typically involve more expensive rent structures and more
competing food and beverage concepts.
The Company believes there are a number of other environments that have the
characteristics necessary for the successful operation of Rocky Mountain
Chocolate Factory stores such as airports and sports arenas. Three franchised
Rocky Mountain Chocolate Factory stores exist at airport locations: two at
Denver International Airport and one at Vancouver International Airport in
Canada.
FRANCHISING PROGRAM
General
The Company's franchising philosophy is one of service and commitment to its
franchise system, and the Company continuously seeks to improve its franchise
support services. The Company's concept has consistently been rated as an
outstanding franchise opportunity by publications and organizations rating such
opportunities. In February 2001, Rocky Mountain Chocolate Factory was rated the
number one franchise opportunity in the candy category by Entrepreneur Magazine.
As of April 30, 2001, there were 213 franchised stores in the Rocky Mountain
Chocolate Factory system.
Franchisee Sourcing and Selection
The majority of new franchises are awarded to persons referred by existing
franchisees, to interested consumers who have visited Rocky Mountain Chocolate
Factory stores and to existing franchisees. The Company also advertises for new
franchisees in national and regional newspapers as suitable potential store
locations come to the Company's attention. Franchisees are approved by the
Company on the basis of the applicant's net worth and liquidity, together with
an assessment of work ethic and personality compatibility with the Company's
operating philosophy.
8
<PAGE> 9
In fiscal 1992, the Company entered into a franchise development agreement
covering Canada with Immaculate Confections, Ltd. of Vancouver, British
Columbia. Pursuant to this agreement, Immaculate Confections purchased the
exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores
in Canada. Immaculate Confections, as of April 30, 2001, operated 27 stores
under the agreement.
In fiscal 2000, the Company entered into a franchise development agreement
covering the Gulf Cooperation Council States of United Arab Emirates, Qatar,
Bahrain, Saudi Arabia, Kuwait and Oman with Al Muhairy Group of United Arab
Emirates. Pursuant to this agreement, Al Muhairy Group purchased the exclusive
right to franchise and operate Rocky Mountain Chocolate Factory stores in the
Gulf Cooperation Council States. Al Muhairy Group, as of April 30, 2001,
operated 1 store under this agreement.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic
franchisee is required to complete a 7-day comprehensive training program in
store operations and management. The Company has established a training center
at its Durango headquarters in the form of a full-sized replica of a properly
configured and merchandised Rocky Mountain Chocolate Factory store. Topics
covered in the training course include the Company's philosophy of store
operation and management, customer service, merchandising, pricing, cooking,
inventory and cost control, quality standards, record keeping, labor scheduling
and personnel management. Training is based on standard operating policies and
procedures contained in an operations manual provided to all franchisees, which
the franchisee is required to follow by terms of the franchise agreement.
Additionally, and importantly, trainees are provided with a complete orientation
to Company operations by working in key factory operational areas and by meeting
with each member of the senior management of the Company. Training continues
through the opening of the store, where Company field consultants assist and
guide the franchisee in all areas of operation.
The Company's operating objectives include providing Company knowledge and
expertise in merchandising, marketing and customer service to all front-line
store level employees to maximize their skills and ensure that they are fully
versed in the Company's proven techniques.
The Company provides ongoing support to franchisees through its field
consultants, who maintain regular and frequent communication with the stores by
phone and by site visits. The field consultants also review and discuss with the
franchisee store operating results and provide advice and guidance in improving
store profitability and in developing and executing store marketing and
merchandising programs. The Company has developed a handbook containing a
"pre-packaged" local store marketing plan, which allows franchisees to implement
cost-effective promotional programs that have proven successful in other Rocky
Mountain Chocolate Factory stores.
Quality Standards and Control
The franchise agreement for Rocky Mountain Chocolate Factory franchisees
requires compliance with the Company's procedures of operation and food quality
specifications and permits audits and inspections by the Company.
Operating standards for Rocky Mountain Chocolate Factory stores are set forth in
operating manuals. These manuals cover general operations, factory ordering,
merchandising, advertising and accounting procedures. Through their regular
visits to franchised stores, Company field consultants audit performance and
adherence to Company standards. The Company has the right to terminate any
franchise agreement for non-compliance with the Company's operating standards.
Products sold at the stores and ingredients used in the preparation of products
approved for on-site preparation must be purchased from the Company or from
approved suppliers.
9
<PAGE> 10
The Franchise Agreement: Terms and Conditions
The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is
made pursuant to the Uniform Franchise Offering Circular prepared in accordance
with federal and state laws and regulations. States that regulate the sale and
operation of franchises require a franchiser to register or file certain notices
with the state authorities prior to offering and selling franchises in those
states.
Under the current form of domestic Rocky Mountain Chocolate Factory franchise
agreement, franchisees pay the Company (i) an initial franchise fee of $19,500
for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a
marketing fee equal to 1% of monthly gross sales. Franchisees are generally
granted exclusive territory with respect to the operation of Rocky Mountain
Chocolate Factory stores only in the immediate vicinity of their stores.
Chocolate products not made on the premises by franchisees must be purchased
from the Company or approved suppliers.
The franchise agreements require franchisees to comply with the Company's
procedures of operation and food quality specifications, to permit inspections
and audits by the Company and to remodel stores to conform with standards in
effect. The Company may terminate the franchise agreement upon the failure of
the franchisee to comply with the conditions of the agreement and upon the
occurrence of certain events, such as insolvency or bankruptcy of the franchisee
or the commission by the franchisee of any unlawful or deceptive practice, which
in the judgment of the Company is likely to adversely affect the Rocky Mountain
Chocolate Factory system. The Company's ability to terminate franchise
agreements pursuant to such provisions is subject to applicable bankruptcy and
state laws and regulations. See "Business - Regulation."
The agreements prohibit the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreements also
give the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.
The term of each Rocky Mountain Chocolate Factory franchise agreement is ten
years, and franchisees have the right to renew for one additional ten-year term.
Franchise Financing
The Company does not provide prospective franchisees with financing for their
stores, but has developed relationships with several sources of franchisee
financing to whom it will refer franchisees. Typically, franchisees have
obtained their own sources of such financing and have not required the Company's
assistance.
COMPANY STORE PROGRAM
As of May 1, 2001, there were 4 Company-owned Rocky Mountain Chocolate Factory
stores. Company-owned stores provide a training ground for Company-owned store
personnel and district managers and a controllable testing ground for new
products and promotions, operating and training methods and merchandising
techniques.
Managers of Company-owned stores are required to comply with all Company
operating standards and undergo training and receive support from the Company
similar to the training and support provided to franchisees. See "Franchising
Program-Training and Support" and "Franchising Program-Quality Standards and
Control."
10
<PAGE> 11
MANUFACTURING OPERATIONS
General
The Company manufactures its chocolate candies at its factory in Durango,
Colorado. All products are produced consistent with the Company's philosophy of
using only the finest, highest quality ingredients with no artificial
preservatives to achieve its marketing motto of "The Peak of Perfection in
Handmade Chocolates(R)."
It has always been the belief of management that the Company should control the
manufacturing of its own chocolate products. By controlling manufacturing, the
Company can better maintain its high product quality standards, offer unique,
proprietary products, manage costs, control production and shipment schedules
and potentially pursue new or under-utilized distribution channels.
Manufacturing Processes
The manufacturing process primarily involves cooking or preparing candy centers,
including nuts, caramel, peanut butter, creams and jellies, and then coating
them with chocolate or other toppings. All of these processes are conducted in
carefully controlled temperature ranges, and the Company employs strict quality
control procedures at every stage of the manufacturing process. The Company uses
a combination of manual and automated processes at its factory. Although the
Company believes that it is currently preferable to perform certain
manufacturing processes, such as dipping of some large pieces, by hand,
automation increases the speed and efficiency of the manufacturing process. The
Company has from time to time automated processes formerly performed by hand
where it has become cost-effective for the Company to do so without compromising
product quality or appearance.
The Company seeks to ensure the freshness of products sold in Rocky Mountain
Chocolate Factory stores with frequent shipments. Most Rocky Mountain Chocolate
Factory stores do not have significant space for the storage of inventory, and
the Company encourages franchisees and store managers to order only the
quantities that they can reasonably expect to sell within approximately two to
four weeks. For these reasons, the Company generally does not have a significant
backlog of orders.
Ingredients
The principal ingredients used by the Company are chocolate, nuts, sugar, corn
syrup, cream and butter. The factory receives shipments of ingredients daily. To
ensure the consistency of its products, the Company buys ingredients from a
limited number of reliable suppliers. In order to assure a continuous supply of
chocolate and certain nuts, the Company frequently enters into purchase
contracts of between six to eighteen months for these products. 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. The Company has one or more alternative sources for all
essential ingredients and therefore believes that the loss of any supplier would
not have a material adverse effect on the Company and its results of operations.
The Company currently also purchases small amounts of finished candy from third
parties on a private label basis for sale in Rocky Mountain Chocolate Factory
stores.
Trucking Operations
The Company operates eight trucks and ships a substantial portion of its
products from the factory on its own fleet. The Company's trucking operations
enable it to deliver its products to the stores quickly and cost-effectively. In
addition, the Company back-hauls its own ingredients and supplies, as well as
product from third parties, on return trips as a basis for increasing trucking
program economics.
11
<PAGE> 12
MARKETING
The Company relies primarily on in-store promotion and point-of-purchase
materials to promote the sale of its products. The monthly marketing fees
collected from franchisees are used by the Company to develop new packaging and
in-store promotion and point-of-purchase materials, and to create and update the
Company's local store marketing handbooks.
The Company focuses on local store marketing efforts by providing customizable
marketing materials, including advertisements, coupons, flyers and mail order
catalogs generated by its in-house Creative Services department. The department
works directly with franchisees to implement local store marketing programs.
The Company aggressively seeks low cost, high return publicity opportunities
through participation in local and regional events, sponsorships and charitable
causes. The Company has not historically and does not intend to engage in
national advertising in the near future.
COMPETITION
The retailing of confectionery products is highly competitive. The Company and
its franchisees compete with numerous businesses that offer confectionery
products. Many of these competitors have greater name recognition and financial,
marketing and other resources than the Company. In addition, there is intense
competition among retailers for real estate sites, store personnel and qualified
franchisees. Competitive market conditions could adversely affect the Company
and its results of operations and its ability to expand successfully.
The Company believes that its principal competitive strengths lie in its name
recognition and its reputation for the quality, value, variety and taste of its
products and the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in
merchandising and marketing of chocolate and other candy products; and the
control and training infrastructures it has implemented to assure execution of
successful practices and techniques at its store locations. In addition, by
controlling the manufacturing of its own chocolate products, the Company can
better maintain its high product quality standards for those products, offer
proprietary products, manage costs, control production and shipment schedules
and pursue new or under-utilized distribution channels.
TRADE NAME AND TRADEMARKS
The trade name "Rocky Mountain Chocolate Factory(R)," the phrases, "The Peak of
Perfection in Handmade Chocolates(R)", "America's Chocolatier(R)", "World's
Chocolatier(TM)" as well as all other trademarks, service marks, symbols,
slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory
system, are proprietary rights of the Company. All of the foregoing are believed
to be of material importance to the Company's business. The registration for the
trademark "Rocky Mountain Chocolate Factory" has been granted in the United
States and Canada. Applications have been filed to register the Rocky Mountain
Chocolate Factory trademark and/or obtained in certain foreign countries.
The Company has not attempted to obtain patent protection for the proprietary
recipes developed by the Company's master candy-maker and is relying upon its
ability to maintain the confidentiality of those recipes.
12
<PAGE> 13
EMPLOYEES
At February 28, 2001, the Company employed approximately 230 people. Most
employees, with the exception of store, factory and corporate management, are
paid on an hourly basis. The Company also employs some people on a temporary
basis during peak periods of store and factory operations. The Company seeks to
assure that participatory management processes, mutual respect and
professionalism and high performance expectations for the employee exist
throughout the organization.
The Company believes that it provides working conditions, wages and benefits
that compare favorably with those of its competitors. The Company's employees
are not covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages at May 15, 2001 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Franklin E. Crail ...................... 59 Chairman of the Board, President and
Director
Bryan J. Merryman ...................... 40 Chief Operating Officer, Chief Financial
Officer, Treasurer and Director
Edward L. Dudley ....................... 37 Vice President - Sales and Marketing
Jay B. Haws ............................ 51 Vice President - Creative Services
Virginia M. Perez ...................... 63 Corporate Secretary
</TABLE>
Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May
1981. Since the incorporation of the Company in November 1982, he has served as
its President and a Director. He was elected Chairman of the Board in March
1986. Prior to founding the Company, Mr. Crail was co-founder and president of
CNI Data Processing, Inc., a software firm which developed automated billing
systems for the cable television industry.
Mr. Merryman joined the Company in December 1997 as Vice President - Finance and
Chief Financial Officer. Since April 1999 Mr. Merryman has also served the
Company as the Chief Operating Officer and as a Director, and since January 2000
as its Treasurer. Prior to joining the Company, Mr. Merryman was a principal in
Knightsbridge Holdings, Inc. (a leveraged buyout firm) from January 1997 to
December 1997. Mr. Merryman also served as Chief Financial Officer of Super
Shops, Inc., a retailer and manufacturer of aftermarket auto parts from July
1996 to November 1997 and was employed for more than eleven years by Deloitte
and Touche LLP, most recently as a senior manager.
Mr. Dudley joined the Company in January 1997 to spearhead the Company's
newly-formed Product Sales Development function as Vice President - Sales and
Marketing, with the goal of increasing the Company's factory and retail sales.
During his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served
in a number of senior marketing and sales management capacities, including most
recently that of Director, Distribution Services from March 1996 to January
1997. Mr. Dudley holds B.S. degrees in Finance and Accounting from the
University of Colorado.
Mr. Haws joined the Company in August 1991 as Vice President of Creative
Services. Since 1981, Mr. Haws had been closely associated with the Company both
as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he
operated two Rocky Mountain Chocolate Factory franchises located in San
Francisco, California. From 1983 to 1989 he served as Vice President of
Marketing for Image Group, Inc., a marketing communications firm based in
Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky
Mountain Chocolate Factory franchises located in Sacramento, and Walnut Creek
California. From 1973 to 1983 he was principal of Jay Haws and Associates, an
advertising and graphic design agency. Mr. Haws holds a B.A. in graphics design
and communication from California State University.
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<PAGE> 14
Ms. Perez joined the Company in June 1996 and has served as the Company's
corporate secretary since February, 1997. From 1992 until joining the Company,
she was employed by Huettig & Schromm, Inc., a property management and
development firm in Palo Alto, California as executive assistant to the
president and owner. Huettig & Schromm developed, owned and managed over
1,000,000 square feet of office space in business parks and office buildings on
the San Francisco peninsula. Ms. Perez is a paralegal and has held various
administrative positions during her career including executive assistant to the
Chairman and owner of Sunset Magazine & Books, Inc.
SEASONAL FACTORS
The Company's sales and earnings are seasonal, with significantly higher sales
and earnings occurring during the Christmas holiday and summer vacation seasons
than at other times of the year, which causes fluctuations in the Company's
quarterly results of operations. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings and
the sale 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 the results that may be achieved in
other quarters or for a full fiscal year.
REGULATION
Each of the Company-owned and franchised stores is subject to licensing and
regulation by the health, sanitation, safety, building and fire agencies in the
state or municipality where located. Difficulties or failures in obtaining the
required licensing or approvals could delay or prevent the opening of new
stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration
and disclosure requirements in the offer and sale of franchises. The Company is
also subject to the Federal Trade Commission regulations relating to disclosure
requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and
regulations governing the termination or non-renewal of franchises and other
aspects of the franchise relationship that are intended to protect franchisees.
Although these laws and regulations, and related court decisions, may limit the
Company's ability to terminate franchises and alter franchise agreements, the
Company does not believe that such laws or decisions will have a material
adverse effect on its franchise operations. However, the laws applicable to
franchise operations and relationships continue to develop, and the Company is
unable to predict the effect on its intended operations of additional
requirements or restrictions that may be enacted or of court decisions that may
be adverse to franchisers.
Federal and state environmental regulations have not had a material impact on
the Company's operations but more stringent and varied requirements of local
governmental bodies with respect to zoning, land use and environmental factors
could delay construction of new stores.
Companies engaged in the manufacturing, packaging and distribution of food
products are subject to extensive regulation by various governmental agencies. A
finding of a failure to comply with one or more regulations could result in the
imposition of sanctions, including the closing of all or a portion of the
Company's facilities for an indeterminate period of time.
The Company's product labeling is subject to and complies with the Nutrition
Labeling and Education Act of 1990.
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<PAGE> 15
The Company provides a limited amount of trucking services to third parties, to
fill available space on the Company's trucks. The Company's trucking operations
are subject to various federal and state regulations, including regulations of
the Federal Highway Administration and other federal and state agencies
applicable to motor carriers, safety requirements of the Department of
Transportation relating to interstate transportation and federal, state and
Canadian provincial regulations governing matters such as vehicle weight and
dimensions.
The Company believes it is operating in substantial compliance with all
applicable laws and regulations.
ITEM 2. PROPERTIES
The Company's manufacturing operations and corporate headquarters are located at
its 58,000 square foot manufacturing facility, which it owns, in Durango,
Colorado. During fiscal 2001, the Company's factory produced approximately 2.03
million pounds of chocolate candies, a 1.0% increase over the approximately 2.01
million pounds produced in fiscal 2000. The factory has the capacity to produce
approximately 3.5 million pounds per year. In January 1998, the Company acquired
a two acre parcel adjacent to its factory to ensure the availability of adequate
space to expand the factory as volume demands.
As of April 30, 2001, all of the 8 Company-owned stores were occupied pursuant
to non-cancelable leases of five to ten years having varying expiration dates,
most of which contain optional five-year renewal rights. The Company does not
deem any individual store lease to be significant in relation to its overall
operations.
The Company acts as primary lessee of some franchised store premises, which it
then subleases to franchisees, but the majority of existing locations are leased
by the franchisee directly. Current Company policy is not to act as primary
lessee on any further franchised locations. At April 30, 2001, the Company was
the primary lessee at 46 of its 213 franchised stores. The subleases for such
stores are on the same terms as the Company's leases of the premises. For
information as to the amount of the Company's rental obligations under leases on
both Company-owned and franchised stores, see Note 5 of Notes to financial
statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that are material
to the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of the Shareholders of the Company was held in Durango,
Colorado 10:00 a.m., local time, on July 14, 2000.
Proxies were solicited by the Board of Directors of the Company pursuant to
Regulation 14A under the Securities and Exchange Act of 1934. There was no
solicitation in opposition to the Board of Directors nominees as listed in the
proxy statement and all of such nominees were duly elected.
Out of a total of 1,956,784 shares of the Company's common stock outstanding and
entitled to vote, 1,639,546 shares were present in person or by proxy,
representing approximately 83.6 percent of the outstanding shares. The matter
voted on by the stockholders, as fully described in the proxy statement for the
annual meeting, 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 83% of the shares voted.
15
<PAGE> 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock trades on the National Market System of The Nasdaq
Stock Market under the trading symbol "RMCF".
On May 18, 1998 the Company purchased 336,000 shares of its common stock at
$5.15 per share in a private transaction.
On various dates commencing on December 22, 1999 through February 7, 2000, the
Company purchased 203,500 shares of the Company's issued and outstanding common
stock at prices ranging from $5.25 to $5.56.
On March 21, 2000, the Company commenced a tender offer to acquire shares of its
common stock. Pursuant to the tender offer, which was completed on May 1, 2000,
the Company acquired 447,595 shares of its issued and outstanding common stock
at $6.25 per share.
On January 19, 2001 and January 26, 2001 the Company purchased 38,000 and 8,000
shares, respectively, of the Company's issued and outstanding common stock at
$5.0625 per share.
The Company made these purchases because the Company felt that its Common Stock
was undervalued and that such purchases would therefore be in the best interest
of the Company and its stockholders.
The table below sets forth high and low bid information for the Common Stock as
quoted on Nasdaq for each quarter of fiscal years 2001 and 2000. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 2001 HIGH LOW
<S> <C> <C>
First Quarter $5.750 $3.375
Second Quarter 5.125 3.813
Third Quarter 4.063 3.125
Fourth Quarter 5.250 3.125
FISCAL YEAR ENDED FEBRUARY 29, 2000 HIGH LOW
First Quarter $6.688 $3.000
Second Quarter 6.375 5.250
Third Quarter 6.125 3.625
Fourth Quarter 5.875 4.000
</TABLE>
On May 15, 2001 the closing bid price for the Common Stock as reported on the
Nasdaq Stock Market was $6.55.
(b) HOLDERS
On May 15, 2001 there were approximately 440 record holders of the Company's
Common Stock. The Company believes that there are more than 800 beneficial
owners of its Common Stock.
(c) DIVIDENDS
The Company has not paid cash dividends on its Common Stock since its inception
and does not intend to pay cash dividends for the foreseeable future. Any future
earnings will be retained for use in the Company's business.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended February
28 or 29, 1997 through 2001, are derived from the Financial Statements of the
Company, which have been audited by Grant Thornton LLP, independent certified
public accountants. The selected financial data should be read in conjunction
with the Financial Statements and related Notes thereto included elsewhere in
this Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(Amounts in thousands, except per share data)
YEARS ENDED FEBRUARY 28 or 29,
<TABLE>
<CAPTION>
SELECTED STATEMENT OF
OPERATIONS DATA 1997 1998 1999 2000 2001
<S> <C> <C> <C> <C> <C>
Total revenues $ 22,281 $ 23,764 $ 26,233 $ 24,647 $ 22,572
Operating income (loss) (1,026) 2,599 1,319 2,662 3,105
Income (loss) from continuing
operations (1,010) 1,260 421 1,057 1,556
Income (loss) from discontinued
operations (net of income taxes) (356) (1,020) -- -- --
Net income (loss) $ (1,366) $ 240 $ 421 $ 1,057 $ 1,556
BASIC EARNINGS (LOSS) PER
COMMON SHARE
Continuing Operations $ (.35) $ .43 $ .16 $ .41 $ .77
Discontinued Operations (.12) (.35) -- -- --
Net Income (loss) $ (.47) $ .08 $ .16 $ .41 $ .77
DILUTED EARNINGS (LOSS) PER
COMMON SHARE
Continuing Operations $ (.35) $ .43 $ .16 $ .41 $ .77
Discontinued Operations (.12) (.35) -- -- --
Net Income (loss) $ (.47) $ .08 $ .16 $ .41 $ .77
Weighted average common shares
outstanding 2,908 2,913 2,665 2,581 2,026
Weighted average common shares
outstanding, assuming dilution 2,908 2,930 2,677 2,597 2,031
SELECTED BALANCE SHEET DATA
Working capital $ 2,664 $ 3,949 $ 1,558 $ 1,589 $ 1,249
Total assets 18,666 19,868 18,652 16,440 15,042
Long-term debt 5,737 5,993 5,250 3,774 3,297
Stockholders' equity 9,779 10,019 8,509 8,433 7,062
SUPPLEMENTAL INFORMATION
Earnings Before Interest, Taxes,
Depreciation and Amortization
(EBITDA) $ 2,195 $ 3,934 $ 2,951 $ 4,225 $ 4,255
</TABLE>
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<PAGE> 18
ITEM 7. 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 audited
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 Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties.
The Company's ability to successfully achieve expansion of its Rocky Mountain
Chocolate Factory franchise system depends on many factors not within the
Company's control including the availability of suitable sites for new store
establishment and the availability of qualified franchisees to support such
expansion.
Efforts to reverse the decline in same store pounds purchased from the factory
by franchised stores and to increase total factory sales depends on many factors
not within the Company's control including the receptivity of its franchise
system of its product introductions and promotional programs.
As a result, the actual results realized by the Company could differ materially
from the results discussed in or contemplated by the forward-looking statements
made herein. Words or phrases such as "will," "anticipate," "expect," "believe,"
"intend," "estimate," "project," "plan" or similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on the forward-looking statements in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
Results Summary
The Company posted record earnings per share in fiscal 2001. Earnings per share
increased 88% from $.41 in fiscal 2000 to $.77 in fiscal 2001. Costs associated
with Whitman Candies, Inc.'s unsolicited tender offer negatively impacted
earnings per share by approximately $.10 in fiscal 2000. Revenues decreased 8.4%
from fiscal 2000 to fiscal 2001. Operating income increased 16.6% from $2.7
million in fiscal 2000 to $3.1 million in fiscal 2001. Net income increased
47.3% from $1.1 million in fiscal 2000 to $1.6 million in fiscal 2001. Net
income, as adjusted to exclude the costs associated with Whitman's tender offer,
increased 18.4% from $1.3 million in fiscal 2000 to $1.6 million in fiscal 2001.
Revenues
<TABLE>
<CAPTION>
($'s in thousands) 2001 2000 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $11,933.5 $11,036.9 $ 896.6 8.1%
Retail Sales 7,049.4 10,315.5 (3,266.1) (31.7%)
Royalty and Marketing Fees 3,141.9 2,963.0 178.9 6.0%
Franchise Fees 447.0 331.4 115.6 34.9%
Total $22,571.8 $24,646.8 $(2,075.0) (8.4%)
</TABLE>
Factory Sales
Factory sales increased 8.1%, or $897,000, to $11.9 million in fiscal 2001 from
$11.0 million in fiscal 2000. This increase was due primarily to an increase in
the number of franchised stores in operation during fiscal 2001 versus fiscal
2000. This increase was partially offset by a decrease in same store pounds
purchased from the factory by franchised stores of 2.0% in fiscal 2001 versus
fiscal 2000.
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<PAGE> 19
Retail Sales
Retail sales decreased $3.3 million, or 31.7%, to $7.0 million in fiscal 2001
compared to $10.3 million in fiscal 2000. This decrease resulted primarily from
a decrease in the number of Company-owned stores from 34 as of February 29, 2000
to 14 as of February 28, 2001 and a 4.3% decrease in same store sales.
In fiscal 2002, the Company plans to complete phasing out its Rocky Mountain
Chocolate Factory Company-owned store program. The Company plans to sell to new
or existing franchisees all viable Company-owned store locations with the
exception of four Company-owned stores located in key markets in Colorado. The
Colorado Stores are excluded because these stores will be used to test sales,
marketing, design and operational initiatives.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $179,000 or 6.0%, to $3.14 million in
fiscal 2001, compared to $2.96 million in fiscal 2000. This increase resulted
from an increase in the number of units in operation from 166 in fiscal 2000 to
180 in fiscal 2001 partially offset by a decrease in same store sales of 3.9%.
Franchise fee revenues increased $116,000 in fiscal 2001 compared to fiscal 2000
due to an increase in the number of new franchises sold.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 53.7% in fiscal 2001 versus
52.6% in fiscal 2000. This increase resulted from decreased retail sales, which
generate higher margins than factory sales, and a decrease in Company-owned
store margins from 58.7% in fiscal 2000 to 58.0% in fiscal 2001. Factory margins
increased to 39.4% in fiscal 2001 from 36.8% in fiscal 2000. This improvement
was due in part to certain changes to the Company's manufacturing processes and
cost structure.
Franchise Costs
Franchise costs increased $146,000, or 15.0%, in fiscal 2001 compared to fiscal
2000. As a percentage of total royalty and marketing fees and franchise fee
revenue, franchise costs increased to 31.3% in fiscal 2001 from 29.7% in fiscal
2000. This increase as a percentage of royalty, marketing and franchise fees is
primarily a result of increased franchise support costs partially offset by a
8.9% increase in income from franchise fees and royalty and marketing fees.
Sales & Marketing
Sales and Marketing costs decreased 12.5% to $1.2 million in fiscal 2001 from
$1.3 million in fiscal 2000. This decrease is due to the de-emphasizing of new
channel sales efforts and an overall planned decrease in sales and marketing
costs.
General and Administrative
General and administrative expenses increased 18.7% to $2.1 million in fiscal
2001 from $1.8 million in fiscal 2000, primarily as a result of increased bad
debt expense. As a percentage of total revenues, general and administrative
expense increased to 9.1% in fiscal 2001 from 7.1% in fiscal 2000.
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<PAGE> 20
Retail Operating Expenses
Retail operating expenses decreased to $3.7 million in fiscal 2001 from $5.1
million in fiscal 2000; a decrease of 26.8%. This decrease resulted primarily
from a decrease in the number of Company-owned stores from 34 at February 29,
2000 to 14 at February 28, 2001. Retail operating expenses, as a percentage of
retail sales, increased to 53.1% in fiscal 2001 compared to 49.5% in fiscal 2000
due to the decrease in same store sales of 4.3%.
Depreciation and Amortization
Depreciation and amortization decreased 26.4% to $1.15 million in fiscal 2001
from $1.56 million in fiscal 2000. The decrease in depreciation and amortization
is due primarily to lower depreciation expense as a result of fewer
Company-owned stores and fewer fixtures used in outside channels.
Other Expense
Other expense of $566,000 incurred in fiscal 2001 decreased 39.7% from the
$939,000 incurred in fiscal 2000. This decrease was due primarily to
non-recurring costs of approximately $420,000 related to the unsolicited tender
offer for 100% of the Company's outstanding common stock by Whitman's Candies,
Inc., which commenced in May 1999 and was withdrawn on November 4, 1999. These
non-recurring expenses reduced earnings per share by approximately $.10 in
fiscal 2000. This decline was partially offset by increased interest expense on
higher average amounts of outstanding short-term debt.
Income Tax Expense
The Company's effective income tax rate in fiscal 2001 and fiscal 2000 was
38.7%.
FISCAL 2000 COMPARED TO FISCAL 1999
Results Summary
The Company posted record earnings per share, as adjusted to exclude the costs
of Whitman's Candies, Inc. unsolicited tender offer, in fiscal 2000. Earnings
per share, as adjusted, increased 219% from $.16 in fiscal 1999 to $.51 in
fiscal 2000. Earnings per share increased 156% from $.16 in fiscal 1999 to $.41
in fiscal 2000. Revenues decreased 6.0% from fiscal 1999 to fiscal 2000.
Operating income increased 102% from $1.3 million in fiscal 1999 to $2.7 million
in fiscal 2000. Net income, as adjusted to exclude the costs associated with
Whitman's tender offer, increased 212% from $421,000 in fiscal 1999 to $1.3
million in fiscal 2000. Net income increased 151% from $421,000 in fiscal 1999
to $1.1 million in fiscal 2000.
Revenues
<TABLE>
<CAPTION>
($'s in thousands) 2000 1999 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $11,036.9 $11,433.3 $ (396.4) (3.5%)
Retail Sales 10,315.5 11,759.7 (1,444.2) (12.3%)
Royalty and Marketing Fees 2,963.0 2,919.6 43.4 1.5%
Franchise Fees 331.4 119.9 211.5 176.4%
Total $24,646.8 $26,232.5 $(1,585.7) (6.0%)
</TABLE>
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<PAGE> 21
Factory Sales
Factory sales decreased 3.5%, or $396,000, to $11.0 million in fiscal 2000 from
$11.4 million in fiscal 1999. This decrease was due to the Company shifting its
strategic focus from growing sales through new distribution channels to
concentrating on its core competency, franchising the Rocky Mountain Chocolate
Factory retail store concept. New distribution channel sales amounted to
approximately $1.4 million in fiscal 1999 and decreased 45% to approximately
$800,000 in fiscal 2000.
Core factory sales (i.e. excluding new distribution channels) grew at
approximately 2.6% in fiscal 2000 compared to fiscal 1999. The increase in core
factory sales was driven primarily by an increase in the number of retail
franchise units operating in fiscal 2000 compared to fiscal 1999. Same store
factory pounds purchased from the factory by franchised stores were flat in
fiscal 2000 versus fiscal 1999. Same store pounds purchased is a comparison of
pounds purchased from the factory by franchised stores open for 12 months in
each fiscal year.
Retail Sales
Retail sales decreased approximately $1.4 million, or 12.3%, to $10.3 million in
fiscal 2000, compared to $11.8 million in fiscal 1999. This decrease resulted
primarily from a decrease in the number of Company-owned stores from 42 as of
February 28, 1999 to 34 as of February 29, 2000 and a 5.4% decrease in same
store sales.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $43,000, or 1.5%, to $2.96 million in
fiscal 2000, compared to $2.92 million in fiscal 1999. This increase resulted
from an increase in the number of units in operation from 157 in fiscal 1999 to
166 in fiscal 2000 partially offset by a decrease in same store sales of 2.8%.
Franchise fee revenues increased $212,000 in fiscal 2000 compared to fiscal 1999
due to an increase in the number of new franchises sold.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 52.6% in fiscal 2000 versus
54.8% in fiscal 1999. This improvement resulted from increased factory margins.
Factory margins increased to 36.8% in fiscal 2000 from 30.7% in fiscal 1999.
This improvement was due in part to certain changes to the Company's
manufacturing processes and cost structure. Retail store margins decreased in
fiscal 2000 to 58.7% versus 59.3% in fiscal 1999.
Franchise Costs
Franchise costs decreased $124,000, or 11.3%, in fiscal 2000 compared to fiscal
1999 due to decreased support costs. As a percentage of total royalty and
marketing fees and franchise fee revenue, franchise costs decreased to 29.7% in
fiscal 2000 from 36.2% in fiscal 1999 due to decreased support costs and a 176%
increase in franchise fee revenue.
Sales & Marketing
Sales and Marketing costs decreased 18.6% to $1.3 million in fiscal 2000 from
$1.6 million in fiscal 1999. This decrease is due to the de-emphasizing of new
channel sales efforts and an overall planned decrease in sales and marketing
costs.
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<PAGE> 22
General and Administrative
General and administrative expenses decreased 3.3% to $1.76 million in fiscal
2000 from $1.82 million in fiscal 1999, primarily as a result of decreased bad
debt expense related to new distribution channel customers. As a percentage of
total revenues, general and administrative expense increased to 7.1% in fiscal
2000 from 6.9% in fiscal 1999.
Retail Operating Expenses
Retail operating expenses decreased to $5.1 million in fiscal 2000 from $6.0
million in fiscal 1999; a decrease of 15.0%. This decrease resulted primarily
from a decrease in the number of Company-owned stores from 42 at February 28,
1999 to 34 at February 29, 2000. Retail operating expenses, as a percentage of
retail sales, improved to 49.5% in fiscal 2000 compared to 51.1% in fiscal 1999
as a result of the implementation of certain cost control measures.
Depreciation and Amortization
Depreciation and amortization increased 3.6% to $1.56 million in fiscal 2000
from $1.51 million in fiscal 1999. The increase in depreciation and amortization
is due primarily to increased depreciation on certain fixtures used in outside
channels and increased goodwill amortization related to the acquisition of
several stores from a franchisee in August of 1998, partially offset by lower
depreciation expense as a result of fewer Company-owned stores.
Other Expense
Other expense of $939,000 incurred in fiscal 2000 increased 48.7% from the
$631,000 incurred in fiscal 1999. This increase was due to non-recurring costs
of approximately $420,000 related to the unsolicited tender offer for 100% of
the Company's outstanding common stock by Whitman's Candies, Inc., which
commenced in May 1999 and was withdrawn on November 4, 1999. These non-recurring
expenses reduced earnings per share by approximately $.10 in fiscal 2000. This
expense was partially offset by decreased interest expense on lower average
amounts of outstanding long-term debt and lower average balances outstanding on
the Company's revolving line of credit.
Income Tax Expense
The Company's effective income tax rate in fiscal 2000 and fiscal 1999 was
38.7%.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment
did not meet its long-term strategic goals, and accordingly, made the decision
to dispose of these operations. See "NOTE 11 - DISCONTINUED OPERATIONS" of notes
to financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 2001, working capital was $1.2 million compared with $1.6
million as of February 29, 2000, a $400,000 decrease. The decrease in working
capital was due primarily to increased short-term borrowings, the proceeds of
which were used to purchase shares of the Company's common stock.
Cash and cash equivalent balances decreased from $128,000 as of February 29,
2000 to $87,000 as of February 28, 2001 as a result of cash flows used in
financing activities in excess of cash flows generated by operating and
investing activities. The Company's current ratio was 1.29 to 1 at February 28,
2001 in comparison with 1.38 to 1 at February 29, 2000.
22
<PAGE> 23
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
February 28, 2001, $1.8 million), and chattel mortgage notes (unpaid balance as
of February 28, 2001, $3.0 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion and improve and automate the Company's factory
infrastructure.
The Company has a $3.0 million credit line, of which $2.45 million was
available, secured by substantially all of the Company's assets except retail
store assets and is subject to renewal in July, 2001.
During fiscal 2001, the Company financed the sale of eight Company-owned stores
for a single franchisee in the amount of approximately $870,000.
For fiscal 2002, the Company anticipates making capital expenditures of
approximately $675,000, which will be used to maintain and improve existing
factory and administrative infrastructure. The Company believes that cash flow
from operations and available bank lines of credit will be sufficient to fund
capital expenditures and working capital requirements for fiscal 2002.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and labor
directly affect the Company's operations. Most of the Company's leases provide
for cost-of-living adjustments and require it to pay taxes, insurance and
maintenance expenses, all of which are subject to inflation. Additionally the
Company's future lease cost 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.
23
<PAGE> 24
ITEM 7A. 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 February 28, 2001, $223,000 of the Company's long-term debt was subject to
a variable interest rate. Assuming that this principal amount did not change
during fiscal 2002, other than as a result of scheduled principal reductions,
and assuming that the average effective interest rate in effect on this debt for
2002 increased by one percent as compared to the average effective interest rate
in effect during 2001, the Company would incur an additional $1,200 in interest
expense in 2002, as compared to 2001, and would experience a corresponding
reduction in cash flow. A decrease in the average interest rate in effect on
this debt during 2002 would result in a corresponding decrease in interest
expense and an increase in cash flow.
The Company also has a $3.0 million bank line of credit that bears interest at a
variable rate. As of February 28, 2001, $550,000 was outstanding under the line
of credit. The Company does not believe that it is exposed to any material
interest rate risk related to 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 has
primary responsibility for determining the timing and duration of commodity
purchase contracts and negotiating the terms and conditions of those contracts.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 26
Statements of Income 27
Balance Sheets 28
Statements of Changes in Stockholders Equity 29
Statements of Cash Flows 30
Notes to Financial Statements 31
</TABLE>
25
<PAGE> 26
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
We have audited the accompanying balance sheets of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 2001 and February 29, 2000, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended February 28, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 2001 and February 29, 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended February 28, 2001, in conformity with accounting principles generally
accepted in the United States of America.
GRANT THORNTON LLP
Dallas, Texas
April 27, 2001
26
<PAGE> 27
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2001 2000 1999
<S> <C> <C> <C>
REVENUES
Sales $ 18,982,948 $ 21,352,411 $ 23,193,011
Franchise and royalty fees 3,588,889 3,294,403 3,039,517
Total revenues 22,571,837 24,646,814 26,232,528
COSTS AND EXPENSES
Cost of sales 10,190,091 11,235,252 12,706,474
Franchise costs 1,123,506 977,087 1,101,092
Sales & marketing 1,170,636 1,337,818 1,644,320
General and administrative 2,090,579 1,761,779 1,821,582
Retail operating 3,742,140 5,109,772 6,008,416
Provision for store closures -- -- 123,903
Depreciation and amortization 1,149,590 1,562,632 1,508,111
Total costs and expenses 19,466,542 21,984,340 24,913,898
OPERATING INCOME 3,105,295 2,662,474 1,318,630
OTHER INCOME (EXPENSE)
Interest expense (660,620) (573,379) (698,557)
Cost of unsolicited tender offer -- (419,954) --
Interest income 94,298 54,454 67,080
Other, net (566,322) (938,879) (631,477)
INCOME FROM OPERATIONS BEFORE
INCOME TAXES 2,538,973 1,723,595 687,153
INCOME TAX EXPENSE 982,585 667,030 265,725
NET INCOME $ 1,556,388 $ 1,056,565 $ 421,428
BASIC EARNINGS PER
COMMON SHARE $ .77 $ .41 $ .16
DILUTED EARNINGS PER
COMMON SHARE $ .77 $ .41 $ .16
WEIGHTED AVERAGE COMMON SHARE
OUTSTANDING 2,026,075 2,580,604 2,665,567
DILUTIVE EFFECT OF EMPLOYEE
STOCK OPTIONS 5,418 16,441 11,776
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, ASSUMING DILUTION 2,031,493 2,597,045 2,677,343
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 28
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF FEBRUARY 28 or 29,
2001 2000
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 87,301 $ 128,192
Accounts receivable, less allowance for doubtful
accounts of $59,342 and $139,912 2,161,457 1,931,187
Notes receivable 135,768 263,138
Refundable income taxes 37,574 76,689
Inventories 2,800,128 3,084,392
Deferred income taxes 113,906 188,999
Other 270,714 87,785
Total current assets 5,606,848 5,760,382
PROPERTY AND EQUIPMENT, NET 6,820,377 8,976,014
OTHER ASSETS
Notes receivable, less allowance for doubtful notes
of $143,202 and $0 1,212,572 55,343
Goodwill, less accumulated amortization of $614,603
and $584,397 915,397 1,277,603
Other 486,869 370,514
Total other assets 2,614,838 1,703,460
Total assets $ 15,042,063 $ 16,439,856
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,556,800 $ 1,930,700
Line of credit 550,000 75,000
Accounts payable 1,065,210 1,055,910
Accrued salaries and wages 1,006,630 653,209
Other accrued expenses 179,425 456,300
Total current liabilities 4,358,065 4,171,119
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,297,340 3,773,851
DEFERRED GAIN ON SALE OF ASSETS 192,246 --
DEFERRED INCOME TAXES 131,985 61,797
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.03 par value; 7,250,000 shares
authorized; 1,923,284 and 2,386,879 shares issued
and outstanding 57,698 71,606
Additional paid-in capital 2,926,612 5,879,753
Retained earnings 4,246,864 2,690,476
Less notes receivable from officers and directors (168,747) (208,746)
Total stockholders' equity 7,062,427 8,433,089
Total liabilities and stockholders' equity $ 15,042,063 $ 16,439,856
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 29
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2001 2000 1999
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 71,606 $ 77,988 $ 87,373
Repurchase and retirement of common stock (14,808) (6,404) (10,080)
Issuance of common stock 360 4 5
Exercise of stock options 540 18 690
Balance at end of year 57,698 71,606 77,988
NOTES RECEIVABLE FROM OFFICERS AND
DIRECTORS
Balance at beginning of year (208,746) (248,745) -
Issuance of note - - (248,745)
Reduction of notes 39,999 39,999 -
Balance at end of year (168,747) (208,746) (248,745)
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 5,879,753 7,046,032 8,719,604
Repurchase and retirement of common
stock (3,065,491) (1,169,805) (1,754,331)
Issuance of common stock 49,640 844 699
Exercise of stock options 62,710 2,682 80,060
Balance at end of year 2,926,612 5,879,753 7,046,032
RETAINED EARNINGS
Balance at beginning of year 2,690,476 1,633,911 1,212,483
Net income 1,556,388 1,056,565 421,428
Balance at end of year 4,246,864 2,690,476 1,633,911
TOTAL STOCKHOLDERS' EQUITY $7,062,427 $8,433,089 $8,509,186
COMMON SHARES
Balance at beginning of year 2,386,879 2,599,599 2,912,449
Repurchase and retirement of common
stock (493,595) (213,470) (336,000)
Issuance of common stock 12,000 150 150
Exercise of stock options 18,000 600 23,000
Balance at end of year 1,923,284 2,386,879 2,599,599
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE> 30
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2001 2000 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,556,388 $ 1,056,565 $ 421,428
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,149,590 1,562,632 1,508,111
Provision for doubtful accounts 125,202 11,589 120,000
Asset impairment and store closure
losses -- -- 123,903
(Gain) Loss on sale of assets (29,875) 77,148 (11,420)
Changes in operating assets and
liabilities:
Accounts and notes receivable (485,353) 45,767 117,806
Refundable income taxes 39,115 306,822 99,937
Inventories 284,264 192,158 (708,584)
Other assets (182,929) (13,958) 29,368
Accounts payable 9,300 (11,076) (229,783)
Income taxes payable (120,463) 120,463 --
Deferred income taxes 145,281 213,020 (461,318)
Accrued liabilities (8,649) (48,112) (223,533)
Net cash provided by operating
activities of continuing operations 2,481,871 3,513,018 785,915
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,495,670 503,644 39,300
Sale (purchase) of other assets (199,523) (785) 58,054
Purchase of property and equipment (466,448) (870,112) (1,383,718)
Net cash provided by (used in) investing
activities 829,699 (367,253) (1,286,364)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit 475,000 (825,000) 900,000
Proceeds from long-term debt 1,232,247 509,081 2,022,456
Payments on long-term debt (2,082,658) (1,885,299) (2,067,860)
Loans to officers and directors -- -- (248,745)
Reduction of loan from former officer 39,999 39,999 --
Proceeds from exercise of stock options 63,250 2,700 80,750
Repurchase and redemption of common
stock (3,080,299) (1,176,209) (1,764,410)
Net cash used in financing activities (3,352,461) (3,334,728) (1,077,809)
NET CASH PROVIDED BY DISCONTINUED
OPERATIONS -- -- 100,032
NET DECREASE IN CASH AND CASH
EQUIVALENTS (40,891) (188,963) (1,478,226)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 128,192 317,155 1,795,381
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 87,301 $ 128,192 $ 317,155
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 31
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method based upon the estimated useful life of
the asset. Leasehold improvements are amortized on the straight-line method over
the lives of the respective leases or the service lives of the improvements,
whichever is shorter.
The Company reviews its long-lived assets, including identifiable intangible
assets, whenever events or changes indicate the carrying amount of such assets
may not be recoverable. The Company's policy is to review the recoverability of
all assets, at a minimum, on an annual basis.
Amortization of Goodwill
Goodwill is amortized on the straight-line method over ten to twenty-five years.
Franchise and Royalty Fees
Franchise fee revenue is recognized upon completion of all significant initial
services provided to the franchisee and upon satisfaction of all material
conditions of the franchise agreement. In addition to the initial franchise fee,
the Company receives a royalty fee of five percent (5%) and a marketing and
promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory
franchised stores' gross sales.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, the disclosure of contingent assets and liabilities, at the date of
the financial statements, and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Additionally, estimates of losses anticipated to result from store closure and
impairment are based on the best information currently available to management.
Such estimates may differ materially from results actually produced by store
closure as a result of uncertainties in the amount of finally negotiated lease
settlements, the amount of operating losses sustained by the stores to their
dates of closure and in the amount recoverable by sale or redeployment of assets
of stores to be closed.
31
<PAGE> 32
Vulnerability Due to Certain Concentrations
The Company's stores are concentrated (45%) in the factory outlet mall
environment. At April 30, 2001, 4 Company-owned stores and 95 franchise stores
of 221 total stores are located in this environment. The Company is, therefore,
vulnerable to changes in consumer traffic in this market environment and to
changes in the level of construction of additional, new factory outlet mall
locations.
As of April 30, 2001, the Company had long-term notes receivable of
approximately $1.3 million due from a single franchisee resulting from the
Company financing the sale of thirteen Company-owned stores. The notes are
collateralized by the underlying store assets. The Company is, therefore,
vulnerable to change in the cash flow from these locations.
Cash Equivalents
Cash equivalents include cash in excess of daily requirements which is invested
in various financial instruments having an original maturity of three months or
less.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and provides the required
pro forma disclosures prescribed by SFAS 123.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted
average number of common shares outstanding during each year of 2,026,075,
2,580,604 and 2,665,567 for the fiscal years ended February 28 (29), 2001, 2000
and 1999. Diluted earnings per share reflects the potential dilution that could
occur from common shares issuable through stock options. Incremental shares
assumed issued on the exercise of common stock options during the fiscal years
ended February 28 (29), 2001, 2000 and 1999 were 5,418, 16,441 and 11,776.
During 2001, 2000 and 1999, 220,000, 211,000 and 129,000 stock options were
excluded from diluted shares as their affect was anti-dilutive.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments in money market funds, other liquid assets, trade
receivables, payables, notes receivable, and debt. The fair value of all
instruments approximates the carrying value.
Reclassifications
Certain reclassifications have been made to prior years' financial statements in
order to conform with the presentation of the February 28, 2001 financial
statements.
32
<PAGE> 33
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:
<TABLE>
<CAPTION>
2001 2000
<S> <C> <C>
Ingredients and supplies $1,312,014 $1,490,813
Finished candy 1,488,114 1,593,579
$2,800,128 $3,084,392
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:
<TABLE>
<CAPTION>
2001 2000
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,723,086 3,681,808
Machinery and equipment 6,493,850 7,590,205
Furniture and fixtures 1,127,023 2,127,282
Leasehold improvements 832,148 1,611,785
Transportation equipment 205,539 199,639
12,895,264 15,724,337
Less accumulated depreciation 6,074,887 6,748,323
Property and equipment, net $ 6,820,377 $ 8,976,014
</TABLE>
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2001 the Company had a $3,000,000 line of credit from a bank,
collateralized by substantially all of the Company's assets with the exception
of the Company's retail store assets. Draws may be made under the line at 75% of
eligible accounts receivable plus 50% of eligible inventory. Interest on
borrowings is at prime (8.5% at February 28, 2001). At February 28, 2001,
$2,450,000 was available for borrowings under the line of credit. Terms of the
line require that the line be rested (that is, that there be no outstanding
balance) for a period of 30 consecutive days during the term of the loan. The
credit line is subject to renewal in July, 2001.
Long-Term Debt
Long-term debt consists of the following at February 28 or 29:
<TABLE>
<CAPTION>
2001 2000
<S> <C> <C>
Real estate mortgage note payable in monthly installments of $17,490 through
April, 2016 including interest at 8.25% per annum, collateralized by land and
factory building. Interest adjusted to prime in May, 2001 and every five years
thereafter until maturity in April 2016 $1,806,468 $1,875,134
Chattel mortgage note payable in monthly installments of $10,500 through March,
2001 including interest at 8.25% per annum, collateralized by machinery,
equipment, furniture and fixtures -- 98,171
Chattel mortgage note payable in monthly installments of $12,359 through April,
2002 including interest at 8.25% per annum, collateralized by equipment 164,421 293,330
</TABLE>
33
<PAGE> 34
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
Long Term Debt - continued
<TABLE>
<S> <C> <C>
Chattel mortgage note payable in monthly installments of $25,268 through April,
2003 including interest at 8.94% per annum, collateralized by machinery,
equipment, furniture and fixtures. $596,015 $834,243
Chattel mortgage note payable in monthly installments of $5,472 through January,
2002 including interest at 10.36% per annum, collateralized by machinery,
equipment, furniture and fixtures. 57,188 113,707
Chattel mortgage note payable in monthly installments of $27,632 through April,
2001 including interest at 7.9% per annum, collateralized by machinery,
equipment, furniture and fixtures. 54,723 368,398
Chattel mortgage note payable in monthly installments of $10,177 through
October, 2001 including interest at 10.35% per annum, collateralized by
machinery, equipment, furniture and fixtures. 78,341 186,204
Chattel mortgage notes payable in monthly principal installments of $37,881
through April, 2002 plus interest at LIBOR plus 2.85% (8.42% at February 28,
2001), collateralized by equipment, furniture and fixtures. 223,283 760,803
Chattel mortgage note payable in monthly installments of $7,828 through
November, 2001 including interest at 7.95% per annum, collateralized by
equipment, furniture and fixtures. 68,177 153,000
Chattel mortgage note payable in monthly installments of $454 through October,
2003 including interest at 7.91% per annum, collateralized by equipment. 13,070 17,304
Chattel mortgage note payable in quarterly installments of $51,240 through
January, 2002, and a final installment of $34,160 April, 2002, including
interest at 6.73% per annum collateralized by equipment, furniture and fixtures. 227,975 495,176
Chattel mortgage note payable in monthly installments of $8,002 through
February, 2003 including interest at 8.75% per annum, collateralized by computer
equipment. 175,938 252,573
Chattel mortgage note payable in monthly installments of $5,294 through
February, 2005 including interest at 8.75% per annum, collateralized by
machinery and equipment. 214,100 256,508
Chattel mortgage note payable in monthly installments of $2,832 through January,
2006 including interest at 8.5% per annum, collateralized by machinery and
equipment. 136,920 --
</TABLE>
34
<PAGE> 35
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
Long Term Debt - continued
<TABLE>
<S> <C> <C>
Chattel mortgage note payable in monthly installments of interest only through
May, 2001 and $31,685 thereafter through April, 2002 including interest at 8.75%
per annum with the balance outstanding due May, 2002, collateralized by
substantially all business assets. $1,000,000 $ --
Note payable in monthly installments of $5,497 through September, 2001 including
interest at 7.59% per annum. 37,521 --
4,854,140 5,704,551
Less current maturities 1,556,800 1,930,700
$3,297,340 $3,773,851
</TABLE>
Maturities of long-term debt are as follows for the years ending February 28 or
29:
<TABLE>
<S> <C>
2002 $1,556,800
2003 1,363,080
2004 211,871
2005 171,648
2006 118,606
Thereafter 1,432,135
$4,854,140
</TABLE>
Additionally, the line of credit and certain term debt are subject to various
financial ratio and leverage covenants. At February 28, 2001 the Company was in
violation of the Tangible Net Worth covenant, for which it has received a
waiver.
NOTE 5 - OPERATING LEASES
The Company conducts its retail operations in facilities leased under five to
ten year noncancelable operating leases. Certain leases contain renewal options
for between two and ten additional years at increased monthly rentals. The
majority of the leases provide for contingent rentals based on sales in excess
of predetermined base levels.
The following is a schedule by year of future minimum rental payments required
under such leases for the years ending February 28 or 29:
<TABLE>
<S> <C>
2002 $ 343,237
2003 258,502
2004 178,351
2005 136,750
2006 86,037
Thereafter 34,500
$1,037,377
</TABLE>
35
<PAGE> 36
NOTE 5 - OPERATING LEASES - CONTINUED
In some instances, in order to retain the right to site selection or because of
requirements imposed by the lessor, the Company has leased space for its
proposed franchise outlets. When a franchise was sold, the store was subleased
to the franchisee who is responsible for the monthly rent and other obligations
under the lease. The Company's liability as primary lessee on sublet franchise
outlets, all of which is offset by sublease rentals, is as follows for the years
ending February 28 or 29:
<TABLE>
<S> <C>
2002 $ 971,938
2003 669,112
2004 426,407
2005 265,100
2006 183,273
Thereafter 83,024
$2,598,854
</TABLE>
The following is a schedule of lease expense for all operating leases for the
three years ended February 28 or 29:
<TABLE>
<CAPTION>
2001 2000 1999
<S> <C> <C> <C>
Minimum rentals $ 1,860,783 $ 2,237,464 $ 2,316,508
Less sublease rentals (1,186,307) (1,336,496) (1,239,663)
Contingent rentals 22,030 49,426 35,150
$ 696,506 $ 950,394 $ 1,111,995
</TABLE>
NOTE 6 - INCOME TAXES
Income tax expense (benefit) relating to continuing operations is comprised of
the following for the years ending February 28 or 29:
<TABLE>
<CAPTION>
2001 2000 1999
<S> <C> <C> <C>
Current
Federal $ 761,667 $ 374,704 $ 240,834
State 75,637 79,306 25,183
Total Current 837,304 454,010 266,017
Deferred
Federal 128,539 175,810 (264)
State 16,742 37,210 (28)
Total Deferred 145,281 213,020 (292)
Total $ 982,585 $ 667,030 $ 265,725
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective rate
as a percentage of pretax income is as follows for the years ending February 29
or 28:
<TABLE>
<CAPTION>
2001 2000 1999
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Goodwill amortization .3% .5% 1.2%
State income taxes, net of federal benefit 2.2% 3.0% 2.4%
Other 2.2% 1.2% 1.1%
Effective Rate 38.7% 38.7% 38.7%
</TABLE>
36
<PAGE> 37
NOTE 6 - INCOME TAXES - CONTINUED
The components of deferred income taxes at February 29 or 28 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred Tax Assets 2001 2000
Allowance for doubtful accounts and notes $ 78,385 $ 54,146
Inventories 36,620 4,010
Accrued compensation 54,320 73,201
Loss provisions 160,436 583,729
Tax credit carryforward - 7,433
Deferred lease rentals 2,821 13,786
Other 4,875 29,471
337,457 765,776
Deferred Tax Liability - Depreciation (355,536) (638,574)
Net deferred tax asset (liability) $ (18,079) $ 127,202
</TABLE>
NOTE 7 - STOCK REPURCHASE
Between March 6, 2001 and April 19, 2001, the Company repurchased 69,716 Company
shares at an average price of $6.06 per share. Of the shares repurchased during
this time period, 19,000 were repurchased from employees.
In January 2001 the Company repurchased 46,000 Company shares at an average
price of $5.06 per share.
On March 21, 2000, the Company commenced a tender offer to acquire shares of its
common stock. Pursuant to the tender offer, which was completed on May 1, 2000,
the Company acquired 447,595 shares of its issued and outstanding common stock
at $6.25 per share.
Between December 22, 1999 and February 7, 2000, the Company repurchased 213,470
Company shares on the open market at an average price of $5.48 per share.
On May 15, 1998, the Company purchased 336,000 shares and certain of its
directors and executive officers purchased 104,000 shares of the Company's
issued and outstanding common stock at $5.15 per share from La Salle National
Bank of Chicago, Illinois, which obtained these shares through foreclosure from
certain shareholders unrelated to any transactions of the Company. The Company
loaned certain officers and directors the funds to acquire 40,000 of the 104,000
shares purchased by them. The loans are secured by the related shares, bear
interest payable annually at 7.5% and are due May 15, 2003.
NOTE 8 - STOCK OPTION PLANS
Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan"), options
to purchase 215,000 shares of the Company's common stock were granted at prices
not less than market value at the date of grant. The 1985 Plan expired in
October 1995. Options granted under the 1985 Plan could not have a term
exceeding ten years. Options representing the right to purchase 46,000 shares of
the Company's common stock remained outstanding under the 1985 Plan at February
28, 2001.
Under the 1995 Stock Option Plan (the "1995 Plan"), the Nonqualified Stock
Option Plan for Nonemployee Directors (the "Director's Plan")and the 2000
Nonqualified Stock Option Plan for Nonemployee Directors (the "2000 Director's
Plan"), options to purchase up to 250,000, 90,000 and 60,000 shares,
respectively, of the Company's common stock may be granted at prices not less
than market value at the date of grant. Options granted may not have a term
exceeding ten years under the 1995 plan and the Director's Plan. Options granted
may not have a term exceeding five years under the 2000 Director's Plan. Options
representing the right to purchase 181,000, 20,000 and 40,000 shares of the
Company's common stock were outstanding under the 1995 Plan, the
37
<PAGE> 38
NOTE 8 - STOCK OPTION PLANS - CONTINUED
Director's Plan, and the 2000 Director's Plan, respectively, at February 28,
2001. Options become exercisable over a one to five year period from the date of
the grant. The options outstanding under these plans will expire, if not
exercised, in June 2002 through March 2010.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123). In accordance with those provisions, the Company applies APB opinion 25
and related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost if the exercise price is not
less than market. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant dates as prescribed by
SFAS 123, net income and diluted income per share would have been reduced to the
pro-forma amounts indicated in the table below for the years ending February 28
or 29(in 000's except per share amounts):
<TABLE>
<CAPTION>
2001 2000 1999
<S> <C> <C> <C>
Net Income - as reported $ 1,556 $ 1,057 $ 421
Net Income - pro forma 1,427 862 362
Basic Income per Share-as reported .77 .41 .16
Diluted Income per Share-as reported .77 .41 .16
Basic Income per Share-pro forma .70 .33 .14
Diluted Income per Share-pro forma .70 .33 .14
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the following assumptions:
<TABLE>
<CAPTION>
2001 2000 1999
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 50% 65% 65%
Risk-free interest rate 6.5% 6.5% 6.0%
Expected life of options 7 years 5 years 7 years
</TABLE>
Information with respect to options outstanding under the Plans at February 28,
2001, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
2001
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 296,000 $ 6.68
Granted 10,000 4.00
Exercised (18,000) 3.51
Forfeited (1,000) 7.75
Outstanding at end of year 287,000 $ 6.78
Options exercisable at February 28, 2001 185,800 $ 7.64
</TABLE>
<TABLE>
<CAPTION>
2000
Weighted Average
Exercise Price
Shares
<S> <C> <C>
Outstanding at beginning of year 241,000 $ 7.91
Granted 115,000 5.12
Exercised (600) 4.50
Forfeited (59,400) 8.66
Outstanding at end of year 296,000 $ 6.68
Options exercisable at February 29, 2000 174,200 $ 7.62
</TABLE>
38
<PAGE> 39
NOTE 8 - STOCK OPTION PLANS - CONTINUED
<TABLE>
<CAPTION>
1999
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 290,000 $ 7.81
Granted (23,000) 3.51
Forfeited (26,000) 10.63
Outstanding at end of year 241,000 $ 7.91
Options exercisable at February 28, 1999 141,800 $ 9.18
Weighted average fair value per share
of options granted during 2001 and
2000 were $1.87 and $2.89, respectively.
There were no options granted during 1999.
</TABLE>
Additional information about stock options outstanding at February 28, 2001 is
summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding
Weighted average
Number remaining contractual Weighted average
Range of exercise prices outstanding life exercise price
<S> <C> <C> <C>
$4.00 to 4.50 67,000 6.20 years $ 4.30
$5.12 to 5.875 140,000 6.51 years 5.27
$7.50 to 18.00 80,000 4.13 years 11.52
287,000
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Number Weighted average
Range of exercise prices Exercisable exercise price
<S> <C> <C>
$4.00 to 4.50 47,000 $ 4.26
$5.12 to 5.875 66,000 5.38
$7.50 to 18.00 72,800 11.88
185,800
</TABLE>
NOTE 9 - LOSS PROVISIONS
Loss provisions were provided as follows:
Store Closures
In February 1999, the Company adopted a plan to close two underperforming
Company-owned stores. The Company made a loss provision in February 1999 for
closure of these stores in the total amount of approximately $123,000 including
$86,000 for estimated operating losses to date of closure and $37,000 for
writedown of store assets to their estimated recoverable values.
Inventory Obsolescence
In February 1999, a loss provision was made in the amount of $398,000 to reduce
certain inventories to the lower of cost or market. This charge is included in
cost of sales in the accompanying statements of income.
39
<PAGE> 40
NOTE 10 - OPERATING SEGMENTS
The Company classifies its business interests into three reportable segments:
Franchising, Retail stores and Manufacturing. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance and allocates resources
based on operating contribution, which excludes unallocated corporate general
and administrative costs and income tax expense or benefit. The Company's
reportable segments are strategic businesses that utilize common merchandising,
distribution, and marketing functions, as well as common information systems and
corporate administration. All intersegment sales prices are market based. Each
segment is managed separately because of the differences in required
infrastructure and the difference in products and services:
<TABLE>
<CAPTION>
Franchising Manufacturing Retail Other Total
<S> <C> <C> <C> <C> <C>
FY 2001
Total revenues 3,588,889 14,284,080 7,049,421 -- 24,922,390
Intersegment revenues -- (2,350,553) -- -- (2,350,553)
Revenue from external
customers 3,588,889 11,933,527 7,049,421 -- 22,571,837
Segment profit (loss) 1,324,940 3,876,785 209,779 (2,872,531) 2,538,973
Total assets 1,853,333 8,547,291 2,597,870 2,043,569 15,042,063
Capital expenditures 44,128 134,740 167,539 120,041 466,448
Total depreciation &
amortization 86,844 457,629 420,661 184,456 1,149,590
FY 2000
Total revenues 3,294,403 13,716,134 10,315,509 -- 27,326,046
Intersegment revenues -- (2,679,232) -- -- (2,679,232)
Revenue from external
customers 3,294,403 11,036,902 10,315,509 -- 24,646,814
Segment profit (loss) 1,319,459 3,221,857 69,733 (2,887,454) 1,723,595
Total assets 773,664 8,850,408 5,004,654 1,811,130 16,439,856
Capital expenditures 51,173 416,398 93,515 309,026 870,112
Total depreciation &
amortization 172,969 519,938 682,929 186,796 1,562,632
FY 1999
Total revenues 3,039,517 14,737,115 11,759,655 -- 29,536,287
Intersegment revenues -- (3,303,759) -- -- (3,303,759)
Revenue from external
customers 3,039,517 11,433,356 11,759,655 -- 26,232,528
Segment profit (loss) 806,106 2,990,147 48,936 (3,158,036) 687,153
Total assets 889,713 8,947,006 6,507,865 2,307,516 18,652,100
Capital expenditures 38,666 720,670 529,172 95,210 1,383,718
Total depreciation &
amortization 178,575 447,140 666,056 216,340 1,508,111
</TABLE>
NOTE 11 - DISCONTINUED OPERATION
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations.
On June 5, 1998, the Company entered into a definitive agreement to sell
substantially all the assets of its Fuzziwig's segment for $1.6 million. This
transaction closed on July 31, 1998 (the "Closing Date"). The purchase price
included $180,000 cash, $100,000 of which was paid at the Closing Date and the
remaining $80,000 paid six months from the Closing Date. Pursuant to the
agreement, the Company also received four Rocky Mountain Chocolate Factory
stores previously operated as franchised stores by one of the purchasers and
valued at approximately $1.42 million.
Operating results of the discontinued operation have been reclassified from
amounts previously reported and have been reported separately in the statements
of income. For the year ended February 28, 1999, the discontinued operation
produced approximately $1.1 million of revenue.
40
<PAGE> 41
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28 or 29:
<TABLE>
<CAPTION>
2001 2000 1999
<S> <C> <C> <C>
Interest paid $666,055 $572,636 $703,953
Income taxes paid 918,653 26,725 165,788
Non-Cash Financing Activities:
Company financed sales of retail store assets $996,493 $ -- $ --
</TABLE>
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc.
401(k) Plan. Eligible participants are permitted to make contributions up to 15%
of compensation. The Company makes a matching contribution, which vests ratably
over a 3 year period, and is 25% of the employee's contribution up to a maximum
of 1.5% of the employee's compensation. For fiscal 2001 and 2000, the Company
made an additional discretionary contribution by doubling the normal matching.
During the years ended February 28 or 29, 2001, 2000, and 1999, the Company's
cash contribution was approximately $70,000, $0 and $36,000, respectively, to
the plan.
NOTE 14 - STORE SALES
In connection with the Company's plans to phase out its Company-owned stores,
the Company sold eighteen Company-owned stores 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 February 28, 2001, the Company has $1,452,000 notes receivable outstanding.
The notes require monthly payments and bear interest at rates ranging from 9.0%
to 12.5%. The notes mature from December 2001 to March 2003 and are secured by
the assets of the sold stores.
41
<PAGE> 42
NOTE 15 - SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the years
ended February 28 (29), 2001 and 2000:
<TABLE>
<CAPTION>
Fiscal Quarter
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
2001
Total revenue $ 5,237,673 $ 5,585,086 $ 6,339,802 $ 5,409,276 $22,571,837
Gross margin 2,169,166 2,394,544 2,361,831 1,867,316 8,792,857
Net income 218,944 504,936 554,123 278,385 1,556,388
Basic earnings per share 0.10 0.26 0.28 0.14 0.77
Diluted earnings per share 0.10 0.26 0.28 0.14 0.77
2000
Total revenue $ 5,589,530 $ 6,073,037 $ 7,056,655 $ 5,927,592 $24,646,814
Gross margin 2,257,182 2,691,405 2,925,075 2,243,497 10,117,159
Net income 98,433 336,751 435,778 185,603 1,056,565
Basic earnings per share 0.04 0.13 0.17 0.07 0.41
Diluted earnings per share 0.04 0.13 0.17 0.07 0.41
</TABLE>
42
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to the executive officers of the Company is set
forth in the section entitled "Executive Officers" in Part I of this report.
The information required by this item with respect to directors is incorporated
by reference from the information under the caption "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement for the Company's Annual Meeting of Shareholders to be
held on July 20, 2001 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information appearing under the caption "Certain Transactions" in the Proxy
Statement.
43
<PAGE> 44
PART IV.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Page
Report of Independent Certified Public Accountants 26
Statements of Income 27
Balance Sheets 28
Statements of Changes in Stockholders' Equity 29
Statements of Cash Flows 30
Notes to Financial Statements 31
2. Financial Statement Schedules
Page
Report of Independent Certified Public Accountants on Schedules 44
SCHEDULE II - Valuation and Qualifying Accounts 44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
In connection with our audit of the financial statements of Rocky Mountain
Chocolate Factory, Inc. referred to in our report dated April 27, 2001, which is
included in Part II of this form, we have also audited Schedule II for each of
the three years in the period ended February 28, 2001. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
GRANT THORNTON LLP
Dallas, Texas
April 27, 2001
SCHEDULE II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged to Balance at End
Period Costs & Exp. Deductions of Period
<S> <C> <C> <C> <C>
Year Ended February 28, 2001
Accounts and Notes Receivable
Allowance 139,912 125,202 62,570 202,544
Year Ended February 29, 2000
Accounts Receivable Allowance 259,408 11,589 131,085 139,912
Year Ended February 28, 1999
Accounts Receivable Allowance 214,152 120,000 74,744 259,408
</TABLE>
44
<PAGE> 45
3. Exhibits
The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of the annual report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth quarter of
the year ended February 28, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Bryan J. Merryman
---------------------
BRYAN J. MERRYMAN
Chief Operating Officer,Chief
Financial Officer, Treasurer and
Director
Date: May 18, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: May 18, 2001 /s/ Franklin E. Crail
--------------------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President, and
Director
(principal executive officer)
Date: May 18, 2001 /s/ Bryan J. Merryman
--------------------------------
BRYAN J. MERRYMAN
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Director
(principal financial and
accounting officer)
Date: May 18, 2001 /s/ Gerald A. Kien
--------------------------------
GERALD A. KIEN, Director
Date: May 18, 2001 /s/ Lee N. Mortenson
--------------------------------
LEE N. MORTENSON, Director
Date: May 18, 2001 /s/ Fred M. Trainor
--------------------------------
FRED M. TRAINOR, Director
Date: May 18, 2001 /s/ Clyde Wm. Engle
--------------------------------
CLYDE Wm. ENGLE, Director
45
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY
NUMBER DESCRIPTION REFERENCE TO
- ------- ----------- ---------------
<S> <C> <C>
3.1 Articles of Incorporation of the Exhibit 3.1 to Current Report on Form 8-K of the Registrant
Registrant, as amended filed on August 1, 1988.
3.2 By-laws of the Registrant, as amended on Exhibit 3.2 to the Annual Report on Form 10-K of the
November 25, 1997 Registrant for the fiscal year ended February 28, 1998.
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K of the Registrant
filed on August 1, 1988.
4.2 Term Loan and Credit Agreement dated Exhibit 4.18 to the Annual Report on Form 10-K of the
April 5, 1996 in the amount of $2,000,000 Registrant for the fiscal year ended February 29, 1996.
between Norwest Banks and the Registrant
4.3 Amendments dated February 5, 1997, May 2, Exhibit 4.12 to the Annual Report on Form 10-K of the
1997, and May 22, 1997 to Term Loan and Registrant for the fiscal year ended February 28, 1997.
Credit Agreement dated April 5, 1996 in
the amount of $2,000,000 between Norwest
Banks and the Registrant
4.4 Amendments dated December 23, 1997, March Exhibit 4.4 to the Annual Report on Form 10-K of the
9, 1998 & May 6, 1998 to Term Loan and Registrant for the fiscal year ended February 28, 1998.
Credit Agreement dated April 5, 1996 in
the amount of $2,000,000 between Norwest
Banks and the Registrant
4.5 Instruments with respect to long-term
debt not exceeding 10% of the total
assets of the Company have not been
filed. The Company agrees to furnish a
copy of such instruments to the
Securities and Exchange Commission upon
request.
10.1 Form of Stock Option Agreement for the Exhibit 10.3 to the Annual Report on Form 10-K of the
Registrant* Registrant for the fiscal year ended February 28, 1986.
10.2 Incentive Stock Option Plan of the Exhibit 10.2 to the Annual Report on Form 10-K of the
Registrant as amended July 27, 1990* Registrant for the fiscal year ended February 28, 1991.
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
INCORPORATED BY
DESCRIPTION REFERENCE TO
----------- ---------------
<S> <C> <C>
10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9 of the Registrant filed
Registrant and its officers* on May 21, 1999.
10.4 Current form of franchise agreement used Exhibit 10.4 to the Annual Report on form 10-K of the
by the Registrant Registrant for the fiscal year ended February 28, 1999.
10.5 Form of Real Estate Lease between the Exhibit 10.7 to Registration Statement on Form S-18
Registrant as Lessee and franchisee as (Registration No. 33-2016-D).
Sublessee
10.6 Form of Nonqualified Stock Option Exhibit 10.8 to the Annual Report on Form 10-K of the
Agreement for Nonemployee Directors for Registrant for the fiscal year ended February 28, 1991.
the Registrant*
10.7 Nonqualified Stock Option Plan for Exhibit 10.9 to the Annual Report on Form 10-K of the
Nonemployee Directors dated March 20, Registrant for the fiscal year ended February 28, 1991.
1990*
10.8 1995 Stock Option Plan of the Registrant* Exhibit 10.9 to Registration Statement on Form S-1
(Registration No. 33-62149) filed August 25, 1995.
10.9 Forms of Incentive Stock Option Agreement Exhibit 10.10 to Registration Statement on Form S-1
for 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995.
10.10 Forms of Nonqualified Stock Option Exhibit 10.11 to Registration Statement on Form S-1
Agreement for 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995.
10.11 Form of Indemnification Agreement between Exhibit 10.12 to the Annual Report on Form 10-K of the
the Registrant and its directors Registrant for the fiscal year ended February 28, 1998.
10.12 Form of Indemnification Agreement between Exhibit 10.13 to the Annual Report on Form 10-K of the
the Registrant and its officers Registrant for the fiscal year ended February 28, 1998.
10.13 Form of Promissory Note and Stock Pledge Exhibit 10.14 to the Annual Report on Form 10-K of the
Agreement between the Registrant and Registrant for the fiscal year ended February 28, 1998.
certain of its officers and directors
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
INCORPORATED BY
DESCRIPTION REFERENCE TO
----------- ---------------
<S> <C> <C>
10.14 Asset Purchase Agreement dated June 5, Exhibit 10.15 to the Annual Report on Form 10-K of the
1998 between the Registrant as seller and Registrant for the fiscal year ended February 28, 1998.
Resort Confections, Inc. et al., as
purchasers
11.1 Statement re: computation of per share Filed herewith.
earnings
23.1 Consent of Independent Public Accountants Filed herewith.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11.1
<SEQUENCE>2
<FILENAME>d87609ex11-1.txt
<DESCRIPTION>COMPUTATION OF EARNINGS
<TEXT>
<PAGE> 1
EXHIBIT 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For Years Ended February 28 (29),
2001 2000 1999
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income $1,556,388 $1,056,565 $ 421,428
Weighted average number of common shares
outstanding 2,026,075 2,580,604 2,665,567
Dilutive effect of employee stock options 5,418 16,441 11,776
Weighted average common shares outstanding,
assuming dilution 2,031,493 2,597,045 2,677,343
BASIC EARNINGS PER COMMON SHARE $ .77 $ .41 $ .16
DILUTED EARNINGS PER COMMON SHARE $ .77 $ .41 $ .16
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<FILENAME>d87609ex23-1.txt
<DESCRIPTION>CONSENT OF INDEP. CERTIFIED PUBLIC ACCOUNTANTS
<TEXT>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 27, 2001, accompanying the financial
statements included in the Annual Report of Rocky Mountain Chocolate Factory,
Inc. on Form 10-K for the year ended February 28, 2001. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Rocky Mountain Chocolate Factory, Inc. on Forms S-8 (File No. 33-79342,
effective May 25, 1994, File No. 33-62689, effective September 15, 1995, File
No. 33-63177, effective October 3, 1995, File No. 33-64651, effective November
30, 1995, File No. 33-64653, effective November 30, 1995, and File No. 333-8739,
effective July 24, 1996).
GRANT THORNTON LLP
Dallas, Texas
April 27, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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