-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QlwNckUeluDD//675EP1vO+m2oZ0jACTj9c7ffKBEUBkiO18nStWHEjior0hnefh 9AH9SulUuZXjwJnn+LH7GQ== 0000950134-02-006123.txt : 20020524 0000950134-02-006123.hdr.sgml : 20020524 20020524123834 ACCESSION NUMBER: 0000950134-02-006123 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020524 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14749 FILM NUMBER: 02661879 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 10-K 1 d97273e10vk.txt FORM 10-K FOR FISCAL YEAR END FEBRUARY 28, 2002 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, 2002 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, $.0225 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 April 15, 2002, there were 2,476,973 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 April 15, 2002 held by non-affiliates was $20,575,284. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement furnished to stockholders in connection with the 2002 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference in Part III of this Report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant's fiscal year. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FORM 10-K TABLE OF CONTENTS
Page No. PART I. Item 1 Business 3 Item 2 Properties 15 Item 3 Legal Proceedings 16 Item 4 Submission of Matters to a Vote of Security Holders 16 PART II. Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6 Selected Financial Data 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A Quantitative and Qualitative Disclosures About Market Risk 26 Item 8 Financial Statements 27 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45 PART III. Item 10 Directors and Executive Officers of the Registrant 45 Item 11 Executive Compensation 45 Item 12 Security Ownership of Certain Beneficial Owners and Management 45 Item 13 Certain Relationships and Related Transactions 45 PART IV. Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
2 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 March 31, 2002 there were 4 Company-owned and 227 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 selling its products in 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 (70-53-45%); (ii) sales at Company-owned stores of chocolates and other confectionery products (including product manufactured by the Company) (8-31-42%) and (iii) the collection of initial franchise fees and royalties from franchisees (22-16-13%). The figures in parentheses show the percentage of total revenues attributable to each source for fiscal years ended February 28 (29), 2002, 2001 and 2000, respectively. According to the National Confectionery Association, the total U.S. candy market approximated $23.8 billion of retail sales in 2000. According to the Department of Commerce, per capita consumption of chocolate exceeds 13 pounds per year nationally, generating annual sales of approximately $13 billion. In 2000, consumption of chocolate products was approximately the same as 1999. 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. 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: 3 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 threefold: (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; and (3) improve operational efficiency through optimal store layout. The Company completed the store redesign project and the testing of the new design in fiscal 2002. Through March 31, 2002, 9 stores incorporating the new design have been opened. Initial results are encouraging. 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 annual franchisee convention, regional meetings and other frequent contacts with its franchisees. 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: 1998 7.4% 1999 6.7% 2000 (4.3)% 2001 (3.9)% 2002 0.0%
4 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. As expected, this trend reversed 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 Company has designed a contemporary and 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 completed the packaging redesign project during 2002. Testing of the new designs has yielded positive results. The Company believes that the successful launch of new packaging will have a positive future impact on same store sales. Increase Same Store Pounds Purchased by Existing Locations In fiscal 2002, the Company experienced a same store pounds purchased decline of 7.6%. 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 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 control 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, implementation of alternative manufacturing strategies and installation of enhanced Point-of-Sale (POS) systems in all of it's Company-owned and thirty of its franchised stores through March 31, 2002. These measures have significantly improved the Company's ability to deliver its products to its stores safely, quickly and cost-effectively and impact store operations. Additionally, the divestiture of substantially all of the Company-owned stores has reduced the Company's exposure to real estate risk, improved the Company's operating margins and allowed the Company to increase its focus on franchising. 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. 5 High Traffic Environments The Company currently establishes franchised stores in the following environments: factory outlet malls, tourist environments, regional malls, street fronts and other entertainment oriented environments. 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 is optimistic that its exciting new store design will allow it to target untapped potential of the over 1,200 regional malls in the United States. 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 most of its 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. The majority of existing 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. In fiscal 2002, the Company launched its new store design concept intended specifically for high foot traffic regional shopping malls. The new store design concept is modern with crisp and clean site lines and an even stronger emphasis on the Company's unique upscale kitchen. Based on encouraging initial results, the Company is requiring that all new Rocky Mountain Chocolate Factory stores incorporate the new design concept. 6 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. KIOSK CONCEPT In fiscal 2002, the Company opened its first full service retail kiosk concept. The kiosk is a vehicle for retail environments where in-line real estate is unavailable or build-out costs and/or rent factors do not meet the Company's financial criteria. The kiosk, which is approximately 250 square feet, incorporates the Company's trademark cooking area where caramel apples, fudge and other popular confections are prepared in front of customers using traditional cooking utensils. The kiosk also includes the Company's core product and gifting lines in order to provide the customer with a full Rocky Mountain Chocolate Factory experience. The Company believes the kiosk concept enhances its franchise opportunity by providing more flexibility in support of existing franchisees' expansion programs and allows new franchisees that otherwise would not qualify for an in-line location an opportunity to join the Rocky Mountain Chocolate Factory system. 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 and continually strives to offer new confectionery products in order to maintain the excitement and appeal 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. Chocolate candies manufactured by the Company are sold at prices ranging from $12.90 to $15.90 per pound, with an average price of $14.90 per pound. Franchisees set their own retail prices, though the Company does recommend prices for all of its products. OPERATING ENVIRONMENT The Company currently establishes Rocky Mountain Chocolate Factory stores in four primary environments: factory outlet malls, tourist areas, regional malls and street fronts. Each of these environments has a number of attractive features, including high levels of foot traffic. 7 Factory Outlet Malls There are approximately 260 factory outlet malls in the United States, and as of February 28, 2002, there were Rocky Mountain Chocolate Factory stores in approximately 90 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 and Street Fronts As of February 28, 2002, there were approximately 60 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 1,200 regional malls in the United States, and as of February 28, 2002, 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's new store concept is designed to unlock the potential of the regional mall environment. 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 March 31, 2002, there were 223 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 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 March 31, 2002, operated 23 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 March 31, 2002, operated 2 stores 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 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 April 1, 2002, 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 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 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 retailer's 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 EMPLOYEES At February 28, 2002, the Company employed approximately 180 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 April 15, 2002 are as follows:
NAME AGE POSITION Franklin E. Crail............. 60 Chairman of the Board, President and Director Bryan J. Merryman............. 41 Chief Operating Officer, Chief Financial Officer, Treasurer and Director Edward L. Dudley.............. 38 Sr. Vice President - Sales and Marketing Jay B. Haws................... 52 Vice President - Creative Services Gregory L. Pope............... 35 Vice-President - Franchise Support and Development William K. Jobson............. 46 Chief Information Officer Virginia M. Perez............. 64 Corporate Secretary
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. He was promoted to Senior Vice President in June 2001. 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. 13 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. Mr. Pope became Vice President of Franchise Development in June 2001. Since joining the Company in October 1990, he has served in various positions including store manager, new store opener and franchise field consultant. In March 1996 he became Director of Franchise Development and Support, a position he held until he was promoted to his present position. Mr. Jobson joined the Company in July 1998 as Director of Information Technology. In June 2001, he was promoted to Chief Information Officer, a position created to enhance the Company's strategic focus on information and information technology. From July 1995 to July 1998, Mr. Jobson worked for ADAC Laboratories in Durango, Colorado, a leading provider of diagnostic imaging and information systems solutions in the healthcare industry, as Manager of Technical Services and before that, Regional Manager. 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. 14 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. 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 2002, the Company's factory produced approximately 2.04 million pounds of chocolate candies, a 0.5% increase over the approximately 2.03 million pounds produced in fiscal 2001. 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 March 31, 2002, all of the 4 Company-owned stores were occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates from July 2002 to December 2005, 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 March 31, 2002, the Company was the primary lessee at 32 of its 223 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. 15 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 2001 Annual Meeting of the Shareholders of the Company was held in Durango, Colorado 10:00 a.m., local time, on July 20, 2001. Proxies were solicited by the Board of Directors of the Company pursuant to Regulation 14A under the Securities 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 2,470,091 shares of the Company's common stock outstanding and entitled to vote, 2,381,244 shares were present in person or by proxy, representing approximately 96.4 percent of the outstanding shares. The first 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 94.9% of the shares voted. The second matter voted on by the stockholders was a resolution to consider and vote upon a proposal to amend the Company's 1995 Stock Option Plan to increase from 266,667 to 400,000 the aggregate number of shares of Common Stock authorized for issuance under such plan. The resolution was adopted with the holders of 1,544,357 shares voting in favor of the resolution and 250,532 voting against the resolution. Holders of 4,560 shares abstained from voting on the resolution and 581,795 holders did not vote on the resolution. 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 January 28, 2002 the Board of Directors declared a four-for-three stock split payable on March 4, 2002 to shareholders of record on February 11, 2002. The Company declared this stock split because the Company felt that its Common Stock lacked sufficient shares and related liquidity to satisfy an increasing number of investors interested in purchasing the Company's Common Stock. All of the following items in Item 5. have been adjusted, where necessary, for the effects of the split. On May 18, 1998 the Company purchased 448,000 shares of its common stock at $3.8625 per share in a private transaction. On various dates commencing on December 22, 1999 through February 7, 2000, the Company purchased 284,627 shares of the Company's issued and outstanding common stock at prices ranging from $3.9375 to $4.1719. 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 596,793 shares of its issued and outstanding common stock at $4.6875 per share. On January 19, 2001 and January 26, 2001 the Company purchased 50,667 and 10,666 shares, respectively, of the Company's issued and outstanding common stock at $3.7969 per share. Between March 6, 2001 and September 28, 2001, the Company repurchased 123,355 Company shares at an average price of $5.07 per share. Of the shares repurchased during this period, 25,333 were repurchased from employees. 16 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 2002 and 2001. The quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not necessarily represent actual transactions.
FISCAL YEAR ENDED FEBRUARY 28, 2002 HIGH LOW First Quarter $ 5.4375 $ 3.7031 Second Quarter 7.8000 5.3625 Third Quarter 11.2500 6.0375 Fourth Quarter 14.2125 8.25
FISCAL YEAR ENDED FEBRUARY 28, 2001 HIGH LOW First Quarter $ 4.3125 $ 2.5313 Second Quarter 4.8438 2.8598 Third Quarter 3.0473 2.3438 Fourth Quarter 3.9375 2.3438
On April 15, 2002 the closing bid price for the Common Stock as reported on the Nasdaq Stock Market was $13.52. (b) HOLDERS On April 15, 2002 there were approximately 430 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. 17 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below for the fiscal years ended February 28 or 29, 1998 through 2002, 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, SELECTED STATEMENT OF OPERATIONS DATA 2002 2001 2000 1999 1998 Total revenues $ 19,439 $ 22,572 $ 24,647 $ 26,233 $ 23,764 Operating income 3,370 3,105 2,662 1,319 2,599 Income from continuing operations 1,995 1,556 1,057 421 1,260 Loss from discontinued operations (net of income taxes) -- -- -- -- (1,020) Net income $ 1,995 $ 1,556 $ 1,057 $ 421 $ 240 BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .81 $ .58 $ .31 $ .12 $ .32 Discontinued Operations -- -- -- -- (.26) Net Income $ .81 $ .58 $ .31 $ .12 $ .06 DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .76 $ .57 $ .31 $ .12 $ .32 Discontinued Operations -- -- -- -- (.26) Net Income $ .76 $ .57 $ .31 $ .12 $ .06 Weighted average common shares outstanding 2,473 2,701 3,441 3,554 3,883 Weighted average common shares outstanding, assuming dilution 2,636 2,709 3,463 3,570 3,906 SELECTED BALANCE SHEET DATA Working capital $ 3,940 $ 1,249 $ 1,589 $ 1,558 $ 3,949 Total assets 16,795 15,042 16,440 18,652 19,868 Long-term debt 4,325 3,297 3,774 5,250 5,993 Stockholders' equity 8,821 7,062 8,433 8,509 10,019
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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and assumptions include, but are not limited to, the carrying value of notes receivable from franchisees, inventory, the useful lives of fixed assets, goodwill, and other intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on analyses, of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following represent our more critical estimates and assumptions used in the preparation of our financial statements, although not all inclusive. Accounts and Notes Receivable - The Company records an allowance for credit losses based on estimates of customers' ability to pay and collateral value, as applicable. If the financial condition of our customers or collateral were to deteriorate, additional allowances may be required. Revenue Recognition - The Company recognizes revenue on sales of products to franchisees and other customers at the time of shipment. 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. The Company also recognizes 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 retail sales. Sales of products at retail stores are recognized at the time of sale. 19 Inventories - The Company will write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Other accounting estimates inherent in the preparation of the Company's financial statements include estimates associated with its evaluation of the recoverability of goodwill, deferred tax assets, as well as those used in the determination of liabilities related to litigation and taxation. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. As discussed in Note 5 to the financial statements, the Company is involved in litigation incidental to its business, the disposition of which is expected to have no material effect on the Company's financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions related to these proceedings. RESULTS OF OPERATIONS FISCAL 2002 COMPARED TO FISCAL 2001 Results Summary The Company posted record earnings per share in fiscal 2002. Basic earnings per share increased 39.7% from $.58 in fiscal 2001 to $.81 in fiscal 2002. Revenues decreased 13.9% from fiscal 2001 to fiscal 2002. Operating income increased 8.5% from $3.1 million in fiscal 2001 to $3.4 million in fiscal 2002. Net income increased 28.2% from $1.6 million in fiscal 2001 to $2.0 million in fiscal 2002. Revenues
($'s in thousands) 2002 2001 Change % Change Factory Sales $13,619.4 $11,933.5 $ 1,685.9 14.1% Retail Sales 1,604.7 7,049.4 (5,444.7) (77.2)% Royalty and Marketing Fees 3,544.9 3,141.9 403.0 12.8% Franchise Fees 670.1 447.0 223.1 49.9% Total $19,439.1 $22,571.8 $(3,132.7) (13.9)%
Factory Sales Factory sales increased 14.1%, or $1.7 million, to $13.6 million in fiscal 2002 from $11.9 million in fiscal 2001. This increase was due primarily to an increase in the number of franchised stores in operation during fiscal 2002 versus fiscal 2001. This increase was partially offset by a decrease in same store pounds purchased from the factory by franchised stores of 8.1% in fiscal 2002 versus fiscal 2001. The Company believes the decrease in same store pounds purchased is due to a continued product mix shift from factory-made products to store-made products. 20 Retail Sales Retail sales decreased $5.4 million, or 77.2%, to $1.6 million in fiscal 2002 compared to $7.0 million in fiscal 2001. This decrease resulted primarily from a decrease in the number of Company-owned stores from 14 as of February 28, 2001 to 4 as of February 28, 2002 and a 4.9% decrease in same store sales. In fiscal 2002, the Company completed phasing out its Rocky Mountain Chocolate Factory Company-owned store program. The Company sold 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 were excluded because these stores are used to test sales, marketing, design and operational initiatives. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $403,000 or 12.8%, to $3.5 million in fiscal 2002, compared to $3.1 million in fiscal 2001. This increase resulted from expansion in the number of units in operation from 180 in fiscal 2001 to 199 in fiscal 2002 plus growth in same store sales of 0.1%. Franchise fee revenues increased $223,000 in fiscal 2002 compared to fiscal 2001 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 63.1% in fiscal 2002 versus 53.7% in fiscal 2001. This increase resulted from decreased retail sales, which generate higher margins than factory sales, offset by an increase in Company-owned store margins from 58.0% in fiscal 2001 to 59.0% in fiscal 2002. Factory margins decreased to 34.2% in fiscal 2002 from 39.4% in fiscal 2001. This decrease in factory margins is due primarily to decreased production efficiencies and increased inventory reserves due to packaging changes. Franchise Costs Franchise costs increased $163,000, or 14.5%, in fiscal 2002 compared to fiscal 2001. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 30.5% in fiscal 2002 from 31.3% in fiscal 2001. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of increased franchise support costs offset by a 17.4% increase in income from franchise fees and royalty and marketing fees. Sales & Marketing Sales and marketing costs increased 10.5% to $1.3 million in fiscal 2002 from $1.2 million in fiscal 2001. This increase is due to higher spending levels, primarily for franchise services and advertising and promotion. General and Administrative General and administrative expenses increased 0.3% to $2.096 million in fiscal 2002 from $2.091 million in fiscal 2001. As a percentage of total revenues, general and administrative expense increased to 10.8% in fiscal 2002 from 9.3% in fiscal 2001. 21 Retail Operating Expenses Retail operating expenses decreased to $875,000 in fiscal 2002 from $3.7 million in fiscal 2001; a decrease of 76.6%. This decrease resulted primarily from a decrease in the number of Company-owned stores from 14 at February 28, 2001 to 4 at February 28, 2002. Retail operating expenses, as a percentage of retail sales, increased to 54.5% in fiscal 2002 compared to 53.1% in fiscal 2001 due to the decrease in same store sales of 4.9%. Depreciation and Amortization Depreciation and amortization decreased 21.3% to $905,000 in fiscal 2002 from $1.1 million in fiscal 2001. The decrease in depreciation and amortization is due primarily to lower depreciation expense as a result of fewer Company-owned stores. Other Expense Other expense of $162,000 incurred in fiscal 2002 decreased 71.4% from the $566,000 incurred in fiscal 2001 due primarily to lower interest expense on lower average outstanding amounts of and rates on both short-term and long-term debt. The Company also earned increased interest income on higher average outstanding balances of notes receivable. Income Tax Expense The Company's effective income tax rate in fiscal 2002 was 37.8%, which is approximately the same as the effective rate in fiscal 2001. FISCAL 2001 COMPARED TO FISCAL 2000 Results Summary Through February 28, 2001 the Company posted record earnings per share. Basic earnings per share increased 87.1% from $.31 in fiscal 2000 to $.58 in fiscal 2001. Costs associated with Whitman Candies, Inc.'s unsolicited tender offer negatively impacted basic and diluted earnings per share by approximately $.07 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 $1.6 million in fiscal 2001. Revenues
($'s in thousands) 2001 2000 Change % Change 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)%
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. 22 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 completed phasing out its Rocky Mountain Chocolate Factory Company-owned store program. The Company sold 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 are 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 9.3% in fiscal 2001 from 7.1% in fiscal 2000. 23 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 basic and diluted earnings per share by approximately $.07 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%. LIQUIDITY AND CAPITAL RESOURCES As of February 28, 2002, working capital was $3.9 million compared with $1.2 million as of February 28, 2001, a $2.7 million increase. The increase in working capital was due primarily to operating results, refinancing of long-term debt and sales of Company-owned stores to franchisees. Cash and cash equivalent balances increased from $87,000 as of February 28, 2001 to $165,000 as of February 28, 2002 as a result of cash flows generated by operating activities in excess of cash flows used in financing and investing activities. The Company's current ratio was 2.27 to 1 at February 28, 2002 in comparison with 1.29 to 1 at February 28, 2001. 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, 2002, $2.0 million), and chattel mortgage notes (unpaid balance as of February 28, 2002, $3.5 million) used to fund the fiscal 1996 and 1997 Company-owned store expansion and improve and automate the Company's factory infrastructure. The Company has a $2.0 million credit line, of which $2.0 million was available, secured by substantially all of the Company's assets except retail store assets and is subject to renewal in July, 2002. 24 The table below presents significant contractual obligations of the Company at February 28, 2002.
(Amounts in thousands) Contractual Obligations Less than After 5 1 year 1-3 Years 4-5 years years Total Line of credit $ -- $ -- $ -- $ -- $ -- Notes payable 1,188 2,154 625 1,546 5,513 Operating leases 481 680 133 -- 1,294 Other long-term obligations 785 949 483 84 2,301 Total Contractual cash obligations $ 2,454 $ 3,783 $ 1,241 $ 1,630 $ 9,108
During fiscal 2002, the Company financed the sale of nine Company-owned stores to a single franchisee in the amount of approximately $1.3 million. For fiscal 2003, 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 2003. IMPACT OF INFLATION Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require 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. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS 141 to have a material effect on the Company's financial position or results of operations. 25 In June 2001, the FASB issued SFAS 142, Goodwill and Intangible Assets, which revises the accounting for purchased goodwill and intangible assets. As discussed in Note 1 to the financial statements, goodwill has historically been amortized on the straight-line method over ten to twenty-five years. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually, and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company expects that adoption of SFAS 142 will increase annual operating income by approximately $118,000, which approximates the annual amortization. The Company adopted SFAS 142 on March 1, 2002. In August 2001, the FASB issued SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The company does not believe that the implementation of this standard will have any material effect on its financial position, results of operations or cash flows. 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, 2002, approximately $4,800 of the Company's long-term debt was subject to a variable interest rate. The Company also has a $2.0 million bank line of credit that bears interest at a variable rate. As of February 28, 2002, no amount was outstanding under the line of credit. The Company does not believe that it is exposed to any material interest rate risk related to 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. 26 ITEM 8. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
Page Report of Independent Certified Public Accountants 28 Statements of Income 29 Balance Sheets 30 Statements of Changes in Stockholders' Equity 31 Statements of Cash Flows 32 Notes to Financial Statements 33
27 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, 2002 and 2001, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended February 28, 2002. 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 that 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2002, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Dallas, Texas April 12, 2002 28 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2002 2001 2000 REVENUES Sales $ 15,224,065 $ 18,982,948 $ 21,352,411 Franchise and royalty fees 4,215,012 3,588,889 3,294,403 Total revenues 19,439,077 22,571,837 24,646,814 COSTS AND EXPENSES Cost of sales 9,612,712 10,190,091 11,235,252 Franchise costs 1,286,595 1,123,506 977,087 Sales & marketing 1,293,309 1,170,636 1,337,818 General and administrative 2,096,356 2,090,579 1,761,779 Retail operating 875,190 3,742,140 5,109,772 Depreciation and amortization 905,227 1,149,590 1,562,632 Total costs and expenses 16,069,389 19,466,542 21,984,340 OPERATING INCOME 3,369,688 3,105,295 2,662,474 OTHER INCOME (EXPENSE) Interest expense (437,339) (660,620) (573,379) Cost of unsolicited tender offer -- -- (419,954) Interest income 275,593 94,298 54,454 Other, net (161,746) (566,322) (938,879) INCOME BEFORE INCOME TAXES 3,207,942 2,538,973 1,723,595 INCOME TAX EXPENSE 1,212,600 982,585 667,030 NET INCOME $ 1,995,342 $ 1,556,388 $ 1,056,565 BASIC EARNINGS PER COMMON SHARE $ .81 $ .58 $ .31 DILUTED EARNINGS PER COMMON SHARE $ .76 $ .57 $ .31 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,473,268 2,701,433 3,440,805 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 163,120 7,224 21,922 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 2,636,388 2,708,657 3,462,727
The accompanying notes are an integral part of these statements. 29 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
AS OF FEBRUARY 28 2002 2001 ASSETS CURRENT ASSETS Cash and cash equivalents $ 165,472 $ 87,301 Accounts receivable, less allowance for doubtful accounts of $73,269 and $59,342 2,724,907 2,161,457 Notes receivable 561,829 135,768 Refundable income taxes -- 37,574 Inventories 3,127,090 2,800,128 Deferred income taxes 138,591 113,906 Other 313,943 270,714 Total current assets 7,031,832 5,606,848 PROPERTY AND EQUIPMENT, NET 5,983,906 6,820,377 OTHER ASSETS Notes receivable, less valuation allowance of $225,690 and $143,202 2,353,355 1,212,572 Goodwill, less accumulated amortization of $732,211 and $614,603 797,789 915,397 Other 628,509 486,869 Total other assets 3,779,653 2,614,838 Total assets $ 16,795,391 $ 15,042,063 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,188,300 $ 1,556,800 Line of credit -- 550,000 Accounts payable 667,419 1,065,210 Accrued salaries and wages 881,451 1,006,630 Other accrued expenses 354,912 179,425 Total current liabilities 3,092,082 4,358,065 LONG-TERM DEBT, LESS CURRENT MATURITIES 4,324,746 3,297,340 DEFERRED GAIN ON SALE OF ASSETS 389,302 192,246 DEFERRED INCOME TAXES 168,464 131,985 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Common stock, $.0225 par value; 7,250,000 shares authorized; 2,474,640 and 2,564,379 shares issued and outstanding 55,679 57,698 Additional paid-in capital 2,562,911 2,926,612 Retained earnings 6,242,206 4,246,864 Less notes receivable from officers and directors (39,999) (168,747) Total stockholders' equity 8,820,797 7,062,427 Total liabilities and stockholders' equity $ 16,795,391 $ 15,042,063
The accompanying notes are an integral part of these statements. 30 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2002 2001 2000 COMMON STOCK Balance at beginning of year $ 57,698 $ 71,606 $ 77,988 Repurchase and retirement of common stock (2,774) (14,808) (6,404) Issuance of common stock 5 360 4 Exercise of stock options 750 540 18 Balance at end of year 55,679 57,698 71,606 NOTES RECEIVABLE FROM OFFICERS AND DIRECTORS Balance at beginning of year (168,747) (208,746) (248,745) Reduction of notes 128,748 39,999 39,999 Balance at end of year (39,999) (168,747) (208,746) ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 2,926,612 5,879,753 7,046,032 Repurchase and retirement of common stock (622,767) (3,065,491) (1,169,805) Issuance of common stock 1,079 49,640 844 Exercise of stock options 235,500 62,710 2,682 Tax benefit from employee stock transactions 22,487 -- -- Balance at end of year 2,562,911 2,926,612 5,879,753 RETAINED EARNINGS Balance at beginning of year 4,246,864 2,690,476 1,633,911 Net income 1,995,342 1,556,388 1,056,565 Balance at end of year 6,242,206 4,246,864 2,690,476 TOTAL STOCKHOLDERS' EQUITY $ 8,820,797 $ 7,062,427 $ 8,433,089 COMMON SHARES Balance at beginning of year 2,564,379 3,182,505 3,466,132 Repurchase and retirement of common stock (123,355) (658,126) (284,627) Issuance of common stock 200 16,000 200 Exercise of stock options and other 33,416 24,000 800 Balance at end of year 2,474,640 2,564,379 3,182,505
The accompanying notes are an integral part of these statements. 31 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2002 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,995,342 $ 1,556,388 $ 1,056,565 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 905,227 1,149,590 1,562,632 Provision for doubtful accounts 162,046 125,202 11,589 Provision for inventory loss 162,000 268,500 -- (Gain) loss on sale of assets (138,824) (29,875) 77,148 Changes in operating assets and liabilities: Accounts receivable (887,947) (308,785) 13,686 Refundable income taxes 37,574 39,115 306,822 Inventories (603,779) (116,386) 192,158 Other assets (43,229) (182,929) (13,958) Accounts payable (397,791) 9,300 (11,076) Income taxes payable 139,023 (120,463) 120,463 Deferred income taxes 11,794 145,281 213,020 Accrued liabilities (75,608) (8,649) (48,112) Net cash provided by operating activities 1,265,828 2,526,289 3,480,937 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to notes receivable (659,258) (173,581) (98,645) Proceeds received on notes receivable 195,494 129,163 130,726 Proceeds from sale of assets 382,018 1,495,670 503,644 Purchase of other assets (231,228) (199,523) (785) Purchase of property and equipment (724,130) (466,448) (870,112) Net cash provided by (used in) investing activities (1,037,104) 785,281 (335,172) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in line of credit (550,000) 475,000 (825,000) Proceeds from long-term debt 6,077,827 1,232,247 509,081 Payments on long-term debt (5,418,921) (2,082,658) (1,885,299) Repayment of loans by director, officers and former officers 128,748 39,999 39,999 Issuance of common stock 237,334 63,250 2,700 Repurchase and redemption of common stock (625,541) (3,080,299) (1,176,209) Net cash used in financing activities (150,553) (3,352,461) (3,334,728) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 78,171 (40,891) (188,963) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 87,301 128,192 317,155 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 165,472 $ 87,301 $ 128,192
The accompanying notes are an integral part of these statements. 32 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. 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. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment and Other Assets 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, which range from five to thirty-nine years. 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. Other intangible assets at February 28, 2002 and 2001 were approximately $586,000 and $382,000, respectively. The Company reviews its long-lived assets through analysis of undiscounted cash flows, 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 has historically been amortized on the straight-line method over ten to twenty-five years. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible Assets, which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually, and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company expects that adoption of SFAS 142 will increase annual operating income by approximately $118,000, which approximates the annual amortization. The Company adopted SFAS 142 on March 1, 2002. Sales Sales of products to franchisees and other customers are recognized at the time of shipment. Sales of products at retail stores are recognized at the time of sale. Shipping Fees Shipping fees charged to customers by the Company's Trucking department are reported as sales. Shipping costs incurred by the Company's trucking department are reported as cost of sales. 33 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. Vulnerability Due to Certain Concentrations Franchised stores are concentrated (40%) in the factory outlet mall environment. At February 28, 2002, no Company-owned stores and 91 franchise stores of 228 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 February 28, 2002, the Company had long-term notes receivable of approximately $2.5 million due from a single franchisee resulting from the Company financing the sale of seventeen 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. 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. Advertising and Promotional Expenses The Company expenses advertising costs as incurred. Total advertising expense amounted to approximately $420,000, $320,000 and $296,000 for the fiscal years ended February 28(29), 2002, 2001 and 2000, respectively. 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 2,473,268, 2,701,433 and 3,440,805 for the fiscal years ended February 28 (29), 2002, 2001 and 2000. 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), 2002, 2001 and 2000 were 163,120, 7,224 and 21,922. During 2002, 2001 and 2000, 62,495, 293,333 and 281,333 stock options were excluded from diluted shares as their affect was anti-dilutive. 34 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, 2002 financial statements. NOTE 2 - INVENTORIES Inventories consist of the following at February 28:
2002 2001 Ingredients and supplies $ 1,538,107 $ 1,312,014 Finished candy 1,588,983 1,488,114 $ 3,127,090 $ 2,800,128
NOTE 3 - PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following at February 28:
2002 2001 Land $ 513,618 $ 513,618 Building 3,772,807 3,723,086 Machinery and equipment 6,512,836 6,493,850 Furniture and fixtures 592,677 1,127,023 Leasehold improvements 418,403 832,148 Transportation equipment 188,874 205,539 11,999,215 12,895,264 Less accumulated depreciation 6,015,309 6,074,887 Property and equipment, net $ 5,983,906 $ 6,820,377
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT Line of Credit At February 28, 2002 the Company had a $2,000,000 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 inventories. Interest on borrowings is at prime less 50 basis points (4.25% at February 28, 2002). At February 28, 2002, $2,000,000 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, 2002. 35 NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED Long-term debt Long-term debt consists of the following at February 28:
2002 2001 Mortgage note payable in monthly installments of $17,600 through August, 2016 including interest at 6.0% per annum, collateralized by land and factory building. Interest subject to adjustment every 60 months until maturity in August, 2016 $2,049,494 $ -- Notes payable in monthly installments of between $2,832 and $31,685. Repaid in fiscal 2002 -- 4,213,874 Chattel mortgage note payable in monthly installments of $65,500 through August, 2005 including interest at 6.00% per annum, collateralized by substantially all business assets 2,487,597 -- Chattel mortgage note payable in monthly installments of $30,300 through August, 2004 including interest at 6.00% per annum, collateralized by inventory, accounts, equipment and general intangibles 846,468 -- Chattel mortgage notes payable in monthly principal installments of $37,881 through April, 2002 plus interest at LIBOR plus 2.85% (4.7% at February 28, 2002), collateralized by equipment, furniture and fixtures 4,829 223,283 Chattel mortgage note payable in monthly installments of $454 through October, 2003 including interest at 7.91% per annum, collateralized by equipment 8,487 13,070 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 25,501 227,975 Chattel mortgage note payable in monthly installments of $8,002 through February, 2003 including interest at 6.0% and 8.75% per annum, collateralized by computer equipment 90,670 175,938 5,513,046 4,854,140 Less current maturities 1,188,300 1,556,800 $4,324,746 $3,297,340
Maturities of long-term debt are as follows for the years ending February 28 or 29: 2003 $ 1,188,300 2004 1,131,800 2005 1,021,754 2006 511,892 2007 113,349 Thereafter 1,545,951 $ 5,513,046
36 NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED Long Term Debt - continued Additionally, the line of credit and certain term debt are subject to various financial ratio and leverage covenants. At February 28, 2002 the Company was in violation of the Capital Expenditures covenant, for which it has received a waiver. NOTE 5 - COMMITMENTS AND CONTINGENCIES 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: 2003 $ 187,615 2004 114,544 2005 90,241 2006 41,100 $ 433,500
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: 2003 $ 785,219 2004 561,420 2005 387,282 2006 311,190 2007 171,947 Thereafter 83,632 $ 2,300,690
The following is a schedule of lease expense for all retail space operating leases for the three years ended February 28 or 29:
2002 2001 2000 Minimum rentals $ 1,206,337 $ 1,860,783 $ 2,237,464 Less sublease rentals (971,938) (1,186,307) (1,336,496) Contingent rentals 8,999 22,030 49,426 $ 243,398 $ 696,506 $ 950,394
The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29: 2003 $ 293,739 2004 273,893 2005 200,917 2006 92,111 $ 860,660
37 NOTE 5 - COMMITMENTS AND CONTINGENCIES - CONTINUED Operating leases - Continued The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29:
2002 2001 2000 $ 260,988 $ 313,574 $ 314,811
Contingencies The Company is party to various legal proceedings arising in the ordinary course of business. Management believes that the resolution of these matters will not have a significant adverse effect on the Company's financial position, results of operations or cash flows. NOTE 6 - INCOME TAXES Income tax expense (benefit) is comprised of the following for the years ending February 28 or 29:
2002 2001 2000 Current Federal $1,033,009 $ 761,667 $ 374,704 State 167,797 75,637 79,306 Total Current 1,200,806 837,304 454,010 Deferred Federal 10,608 128,539 175,810 State 1,186 16,742 37,210 Total Deferred 11,794 145,281 213,020 Total $1,212,600 $ 982,585 $ 667,030
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:
2002 2001 2000 Statutory rate 34.0% 34.0% 34.0% Goodwill amortization .3% .3% .5% State income taxes, net of federal benefit 3.5% 2.2% 3.0% Other -- 2.2% 1.2% Effective Rate 37.8% 38.7% 38.7%
The components of deferred income taxes at February 28 are as follows:
Deferred Tax Assets 2002 2001 Allowance for doubtful accounts and notes $ 113,006 $ 78,385 Inventories 45,897 36,620 Accrued compensation 64,999 54,320 Loss provisions 114,516 160,436 Deferred lease rentals -- 2,821 Goodwill amortization 42,219 31,329 380,637 363,911 Deferred Tax Liabilities Depreciation (327,493) (355,536) Deferred gain on sale (83,017) (26,454) (410,510) (381,990) Net deferred tax liability $ (29,873) $ (18,079) Current deferred tax assets $ 138,591 $ 113,906 Non-current deferred tax liabilities (168,464) (131,985) Net deferred tax liability $ (29,873) $ (18,079)
38 NOTE 7 - STOCKHOLDERS' EQUITY Stock Split On January 28, 2002 the Board of Directors approved a four-for-three stock split payable March 4, 2002 to shareholders of record at the close of business on February 11, 2002. Shareholders received one additional share of Common Stock for every three shares owned prior to the record date and par value changed from $.03 to $.0225 per share. Immediately prior to the split there were 1,855,918 shares outstanding. Subsequent to the split there were 2,474,640 shares outstanding. All share and per share data have been restated in all years presented to give effect to the stock split. Stock Repurchases Between March 6, 2001 and September 28, 2001, the Company repurchased 123,355 Company shares at an average price of $5.07 per share. Of the shares repurchased during this time period, 25,333 were repurchased from employees. In January 2001 the Company repurchased 61,333 Company shares at an average price of $3.80 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 596,793 shares of its issued and outstanding common stock at $4.6875 per share. Between December 22, 1999 and February 7, 2000, the Company repurchased 284,627 Company shares on the open market at an average price of $4.13 per share. On May 15, 1998, the Company purchased 448,000 shares and certain of its directors and executive officers purchased 138,667 shares of the Company's issued and outstanding common stock at $3.8625 per share from La Salle National Bank of Chicago, Illinois, which obtained these shares through foreclosure from certain shareholders unrelated to any transactions of the Company. The Company loaned certain officers and directors the funds to acquire 53,333 of the 138,667 shares purchased by them. The loans are secured by the related shares, bear interest payable annually at 7.5% and are due May 15, 2003. NOTE 8 - STOCK OPTION PLANS Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan"), options to purchase 286,667 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 36,000 shares of the Company's common stock remained outstanding under the 1985 Plan at February 28, 2002. 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 400,000, 120,000 and 80,000 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 312,664, 26,666 and 58,664 shares of the Company's common stock were outstanding under the 1995 Plan, the Director's Plan, and the 2000 Director's Plan, respectively, at February 28, 2002. 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. 39 NOTE 8 - STOCK OPTION PLANS - CONTINUED The Company has adopted the disclosure-only provisions of SFAS 123. In accordance with those provisions, the Company applies APB 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 earnings 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):
2002 2001 2000 Net Income - as reported $ 1,995 $ 1,556 $ 1,057 Net Income - pro forma 1,843 1,427 862 Basic Earnings per Share-as reported .81 .58 .31 Diluted Earnings per Share-as reported .76 .57 .31 Basic Earnings per Share-pro forma .75 .53 .25 Diluted Earnings per Share-pro forma .71 .53 .25
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:
2002 2001 2000 Expected dividend yield 0% 0% 0% Expected stock price volatility 40% 50% 65% Risk-free interest rate 4.8% 6.5% 6.5% Expected life of options 5 years 7 years 5 years
Information with respect to options outstanding under the Plans at February 28, 2002, and changes for the three years then ended was as follows:
2002 Weighted Average Shares Exercise Price Outstanding at beginning of year 382,661 $ 5.09 Granted 104,665 4.75 Exercised (33,332) 7.09 Forfeited (20,000) 5.94 Outstanding at end of year 433,994 $ 4.82 Options exercisable at February 28, 2002 309,328 $ 4.97
2001 Weighted Average Shares Exercise Price Outstanding at beginning of year 394,661 $ 5.01 Granted 13,333 3.00 Exercised (24,000) 2.63 Forfeited (1,333) 5.81 Outstanding at end of year 382,661 $ 5.09 Options exercisable at February 28, 2001 247,733 $ 5.73
40 NOTE 8 - STOCK OPTION PLANS - CONTINUED
2000 Weighted Average Shares Exercise Price Outstanding at beginning of year 321,328 $ 5.93 Granted 153,333 3.84 Forfeited (800) 3.38 Forfeited (79,200) 6.50 Outstanding at end of year 394,661 $ 5.01 Options exercisable at February 29, 2000 232,267 $ 5.72 Weighted average fair value per share of options granted during 2002, 2001 and 2000 were $1.98, $1.40 and $2.17, respectively.
Additional information about stock options outstanding at February 28, 2002 is summarized as follows:
Options Outstanding Number Weighted average Weighted average outstanding remaining exercise price Range of exercise prices contractual life $3.00 to 3.7035 146,666 7.01 years $ 3.44 $3.84 to 4.40625 186,665 5.60 years 3.99 $5.625 to 13.50 100,663 4.98 years 8.38
Options Exercisable Weighted Number average Range of exercise prices Exercisable exercise price $3.00 to 3.7035 63,999 $ 3.31 $3.84 to 4.40625 173,332 3.99 $5.625 to 13.50 71,997 8.80
41 NOTE 9 - 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:
Franchising Manufacturing Retail Other Total FY 2002 Total revenues $ 4,215,012 $ 14,692,696 $ 1,604,730 $ -- $ 20,512,438 Intersegment revenues -- (1,073,361) -- -- (1,073,361) Revenue from external customers 4,215,012 13,619,335 1,604,730 -- 19,439,077 Segment profit (loss) 1,894,600 3,898,178 (144,544) (2,440,292) 3,207,942 Total assets 553,745 9,213,664 1,357,946 5,670,036 16,795,391 Capital expenditures 60,316 216,822 79,632 367,360 724,130 Total depreciation & amortization 80,569 432,714 191,790 200,154 905,227 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 545,043 8,547,291 2,597,870 3,351,859 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 482,506 8,850,408 5,004,654 2,102,288 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
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION For the three years ended February 28 or 29:
2002 2001 2000 Interest paid $ 448,384 $ 666,055 $ 572,636 Income taxes paid 1,024,208 918,653 26,725 Non-Cash Investing Activities: Company financed sales of retail store assets $ 1,429,317 $ 1,128,643 $ --
42 NOTE 11 - 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, 2002, 2001 and 2000, the Company's contribution was approximately $33,000, $68,000 and $70,000, respectively, to the plan. NOTE 12 - STORE SALES In connection with the Company's plans to phase out its Company-owned stores, the Company sold ten Company-owned stores in 2002 resulting in sales proceeds consisting of cash and notes receivable of approximately $1.2 million and recognized and deferred gains of approximately $124,000 and $386,000, respectively. In connection with the Company's plans to phase out its Company-owned stores, the Company sold eighteen Company-owned stores in 2001 resulting in sales proceeds consisting of cash and notes receivable of approximately $2.3 million and recognized and deferred gains of approximately $542,000 and $193,000, respectively. At February 28, 2002, the Company has $3,141,000 of notes receivable outstanding. The notes require monthly payments and bear interest at rates ranging from 7.25% to 12.5%. The notes mature through February 2006 and are secured by the assets of the sold stores. Of the notes receivable outstanding at February 28, 2002, $2,482,000 are from a single franchisee. These notes require variable monthly payments, bear interest at rates ranging from 7.25% to 12.0% and mature in February 2005. During fiscal 2002 the Company adjusted the repayment schedule of these notes to correspond to the franchisee's store operating cycles. The Company also financed an additional $300,000 of inventory and wrote-off $189,000 of the notes receivable. NOTE 13 - SUMMARIZED QUARTERLY DATA (UNAUDITED) Following is a summary of the quarterly results of operations for the years ended February 28, 2002 and 2001:
Fiscal Quarter First Second Third Fourth Total 2002 Total revenue $ 4,232,774 $ 4,689,691 $ 5,608,251 $ 4,908,361 $ 19,439,077 Gross margin 1,277,392 1,523,235 1,357,650 1,453,076 5,611,353 Net income 350,835 607,973 612,577 423,957 1,995,342 Basic earnings per share .14 .25 .25 .17 .81 Diluted earnings per share .14 .23 .23 .16 .76 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 .07 .19 .21 .11 .58 Diluted earnings per share .07 .19 .21 .11 .57
43 NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS 141 to have a material effect on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS 142, Goodwill and Intangible Assets, which revises the accounting for purchased goodwill and intangible assets. See Note 1. In August 2001, the FASB issued SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The company does not believe that the implementation of this standard will have any material effect on its financial position, results of operations or cash flows. 44 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 19, 2002 (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. 45 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 28 Statements of Income 29 Balance Sheets 30 Statements of Changes in Stockholders' Equity 31 Statements of Cash Flows 32 Notes to Financial Statements 33
2. Financial Statement Schedules
Page Report of Independent Certified Public Accountants on Schedules 46 SCHEDULE II - Valuation and Qualifying Accounts 46
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 12, 2002, which is included in Part II of this Form 10-K, we have also audited Schedule II for each of the three years in the period ended February 28, 2002. 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 12, 2002 SCHEDULE II - Valuation and Qualifying Accounts
Balance at Additions Charged Beginning of Period to Costs & Exp. Balance at End of Deductions Period Year Ended February 28, 2002 Valuation Allowance for Accounts and Notes Receivable 202,544 162,046 65,631 298,959 Year Ended February 28, 2001 Valuation Allowance for Accounts and Notes Receivable 139,912 125,202 62,570 202,544 Year Ended February 29, 2000 Valuation Allowance for Accounts and Notes Receivable 259,408 11,589 131,085 139,912
46 3. Exhibits
Exhibit Incorporated by Number Description Reference to 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 Credit Agreement dated August 31, 2001 Exhibit 4.1 to the Quarterly Report on Form 10-Q of the between Wells Fargo Bank and the Registrant for the quarter ended August 31, 2001. Registrant 4.3 Change in Terms Agreement dated August Exhibit 4.2 to the Quarterly Report on Form 10-Q of the 31, 2001 in the amount of $2,800,000 Registrant for the quarter ended August 31, 2001. between Wells Fargo Bank and the Registrant 4.4 Change in Terms Agreement dated August Exhibit 4.3 to the Quarterly Report on Form 10-Q of the 31, 2001 in the amount of $2,092,500 Registrant for the quarter ended August 31, 2001. between Wells Fargo Bank and the Registrant 4.5 Promissory Note dated August 31, 2001 in Exhibit 4.4 to the Quarterly Report on Form 10-Q of the the amount of $2,000,000 between Wells Registrant for the quarter ended August 31, 2001. Fargo Bank and the Registrant 4.6 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.
47
Incorporated by Description Reference to 10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9 of the Registrant Registrant and its officers * filed 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
48
Incorporated by Description Reference to 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 Certified Public Filed herewith. Accountants
(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, 2002. 49 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 23 2002 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 23, 2002 /S/ Franklin E. Crail --------------------------------------- FRANKLIN E. CRAIL Chairman of the Board of Directors, President, and Director (principal executive officer) Date: May 23, 2002 /S/ Bryan J. Merryman --------------------------------------- BRYAN J. MERRYMAN Chief Operating Officer, Chief Financial Officer, Treasurer and Director (principal financial and accounting officer) Date: May 23, 2002 /S/ Gerald A. Kien --------------------------------------- GERALD A. KIEN, Director Date: May 23, 2002 /S/ Lee N. Mortenson --------------------------------------- LEE N. MORTENSON, Director Date: May 23, 2002 /S/ Fred M. Trainor --------------------------------------- FRED M. TRAINOR, Director Date: May 23, 2002 /S/ Clyde Wm. Engle --------------------------------------- CLYDE Wm. ENGLE, Director 50 EXHIBIT INDEX
EXHIBIT INCORPORATED BY NUMBER DESCRIPTION REFERENCE TO - ------ ----------- --------------- 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 Credit Agreement dated August 31, 2001 Exhibit 4.1 to the Quarterly Report on Form 10-Q of the between Wells Fargo Bank and the Registrant for the quarter ended August 31, 2001. Registrant 4.3 Change in Terms Agreement dated August Exhibit 4.2 to the Quarterly Report on Form 10-Q of the 31, 2001 in the amount of $2,800,000 Registrant for the quarter ended August 31, 2001. between Wells Fargo Bank and the Registrant 4.4 Change in Terms Agreement dated August Exhibit 4.3 to the Quarterly Report on Form 10-Q of the 31, 2001 in the amount of $2,092,500 Registrant for the quarter ended August 31, 2001. between Wells Fargo Bank and the Registrant 4.5 Promissory Note dated August 31, 2001 in Exhibit 4.4 to the Quarterly Report on Form 10-Q of the the amount of $2,000,000 between Wells Registrant for the quarter ended August 31, 2001. Fargo Bank and the Registrant 4.6 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.
EXHIBIT INCORPORATED BY NUMBER DESCRIPTION REFERENCE TO - ------ ----------- --------------- 10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9 of the Registrant Registrant and its officers * filed 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
EXHIBIT INCORPORATED BY NUMBER DESCRIPTION REFERENCE TO - ------ ----------- --------------- 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 Certified Public Filed herewith. Accountants
EX-11.1 3 d97273exv11w1.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
For Years Ended February 28 (29), 2002 2001 2000 BASIC EARNINGS PER SHARE Net income $ 1,995,342 $ 1,556,388 $ 1,056,565 Weighted average number of common shares outstanding 2,473,268 2,701,433 3,440,805 Dilutive effect of employee stock options 163,120 7,224 21,922 Weighted average common shares outstanding, assuming dilution 2,636,388 2,708,657 3,462,727 BASIC EARNINGS PER COMMON SHARE $ .81 $ .58 $ .31 DILUTED EARNINGS PER COMMON SHARE $ .76 $ .57 $ .31
EX-23.1 4 d97273exv23w1.txt CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 12, 2002, 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, 2002. 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 May 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----