-----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, KOAuELzwjsIHOoGdSTcocJKHtx7htYgk2BdByaqx56jGY6bQu8OQUlOjMijj8JXx HrzrWCi88WXQ9fI3h0ld6A== /in/edgar/work/20000530/0001035704-00-000388/0001035704-00-000388.txt : 20000919 0001035704-00-000388.hdr.sgml : 20000919 ACCESSION NUMBER: 0001035704-00-000388 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKY MOUNTAIN CHOCOLATE FACTORY INC CENTRAL INDEX KEY: 0000785815 STANDARD INDUSTRIAL CLASSIFICATION: [2060 ] IRS NUMBER: 840910696 STATE OF INCORPORATION: CO FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14749 FILM NUMBER: 646095 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-K405 1 0001.txt FORM 10-K DATED FEBRUARY 29, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the fiscal year ended February 29, 2000 OR - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission file number 0-14749 Rocky Mountain Chocolate Factory, Inc. (Exact name of registrant as specified in its charter) Colorado 84-0910696 (State of Incorporation) (I.R.S. Employer Identification No.) 265 Turner Drive, Durango, CO 81301 (Address of principal executive offices) (970) 259-0554 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common Stock, $.03 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On May 23, 2000, there were 1,956,784 shares of Common Stock outstanding. The aggregate market value of the Common Stock (based on the average of the closing bid and ask prices as quoted on the Nasdaq National Market System on May 23, 2000) held by non-affiliates was $5,587,206. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 2000 Annual Meeting of Stockholders (Part III) 1 2 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 17 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 25 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 3 PART I. ITEM 1. BUSINESS GENERAL Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain Chocolate Factory, Inc. (the "Company") is an international franchiser and confectionery manufacturer. The Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. As of April 30, 2000 there were 30 Company-owned and 196 franchised Rocky Mountain Chocolate Factory stores operating in 41 states, Canada and Guam. 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 name recognition, its reputation for the quality, variety and the taste of its products; the special ambiance of its stores; its knowledge and experience in applying criteria for selection of new store locations; its expertise in the manufacture of chocolate candy products and the merchandising and marketing of chocolate and other candy products; and the control and training infrastructures it has implemented to assure consistent customer service and execution of successful practices and techniques at its stores. The Company believes its manufacturing expertise and reputation for quality has facilitated the sale of selected products through new distribution channels. The Company is currently testing and evaluating a number of new distribution channel programs including wholesaling, fundraising, corporate sales, mail order and internet sales. The Company's revenues are currently derived from three principal sources: (i) sales to franchisees and others of chocolates and other confectionery products manufactured by the Company (45-43-43%); (ii) sales at Company-owned stores of chocolates and other confectionery products (including product manufactured by the Company) (42-45-44%) and (iii) the collection of initial franchise fees and royalties from franchisees (13-12-13%). The figures in parentheses show the percentage of total revenues attributable to each source for fiscal years ended February 28 (29), 2000, 1999 and 1998, respectively. According to the National Confectionery Association, the total U.S. candy market approximated $23.5 billion of sales in 1998. According to the Department of Commerce, per capita consumption of chocolate exceeds 12 pounds per year nationally, generating annual sales of approximately $13 billion. In 1998, consumption of chocolate products increased 4.3% versus a .8% decrease in non-chocolate candies. In December 1997, the Company decided its Fuzziwig's Candy Factory store segment did not meet its strategic long-term goals, and accordingly, adopted a plan to divest itself of these operations. The Company completed the divestiture on July 31, 1998. Fuzziwig's Candy Factory stores sold hard conventional and nostalgic candies purchased from third party suppliers. In Fiscal 2001, the Company plans to begin phasing out its Rocky Mountain Chocolate Factory Company-owned store program. The Company plans to sell to new or existing franchisees all viable Company-owned store locations with the exception of five Company-owned stores located in key markets in Colorado (the "Colorado Stores"). The Company intends to retain the Colorado Stores to test sales, marketing, design and operational initiatives. 3 4 BUSINESS STRATEGY The Company's objective is to build on its position as a leading international franchiser and manufacturer of high quality chocolate and other confectionery products. The Company continually seeks opportunities to profitably expand its business. To accomplish this objective, the Company employs a business strategy that includes the following elements: Product Quality and Variety The Company maintains the unsurpassed taste and quality of its chocolate candies by using only the finest chocolate and other wholesome ingredients. The Company uses its own proprietary recipes, primarily developed by its master candy maker. A typical Rocky Mountain Chocolate Factory store offers up to 100 of the Company's chocolate candies throughout the year and as many as 200, including many packaged candies, during the holiday seasons. Individual stores also offer numerous varieties of premium fudge and gourmet caramel apples, as well as other products prepared in the store from Company recipes. The Company, in fiscal 1998, implemented a major program to improve factory sales through development and sale of an expanded line of new products, including its own sugar-free line and themed, branded and novelty chocolate candies. Store Atmosphere and Ambiance The Company seeks to establish an enjoyable and inviting atmosphere in each Rocky Mountain Chocolate Factory store. Each store prepares numerous products, including fudge, brittles and caramel apples, in the store. In-store preparation is designed both to be fun and entertaining for customers and to convey an image of freshness and homemade quality. The Company's design staff has developed easily replicable designs and specifications to ensure that the Rocky Mountain Chocolate Factory concept is consistently implemented throughout the system. In February 2000, the Company retained a nationally recognized design firm to evaluate and update its existing store design. The objective of the store design project is fourfold: (1) increase average revenue per unit thereby opening untapped real estate environments; (2) further emphasize the entertainment and freshness value of the Company's in-store confectionery factory; (3) improve the presentation of the Company's Co-branded product offerings such as coffee and ice-cream and (4) improve operational efficiency through optimal store layout. The Company expects to complete the store redesign project and the testing of the new design by the end of fiscal 2001. 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, annual regional meetings and other frequent contacts with its franchisees. 4 5 Increase Same Store Retail Sales at Existing Locations The Company seeks to increase profitability of its store system through increasing sales at existing store locations. System wide same store retail sales have grown for 3 of the last 5 fiscal years: 1996 2.9% 1997 (0.5%) 1998 7.4% 1999 6.7% 2000 (4.3%) 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, 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. The Company expects lower demand for Beanie Babies and related products to negatively impact same store sales through the end of fiscal 2001. 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. The Company believes that development and sale of superior new products, such as its new line of sugar-free products, will also enhance same store retail sales growth. In February 2000, the Company retained a nationally recognized packaging design firm to completely redesign the packaging featured in the Company's retail stores. The goal of the packaging redesign project is to develop an updated, coordinated line of packaged products that capture and convey the freshness, fun and excitement of the Rocky Mountain Chocolate Factory retail store experience. The Company expects to complete the packaging redesign project and the testing of the new designs by the end of fiscal 2001. The Company believes that a successful launch of new packaging will have a positive impact on same store sales. Increase Same Store Pounds Purchased by Existing Locations In fiscal 2000, the Company experienced a same store pounds purchased decline of 2.6%. 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 and authorized vendor products and away from factory made products. The Company is in the process of designing new packaging, adding new products and focusing its existing product lines in an effort to reverse this trend. Enhanced Operating Efficiencies The Company seeks to improve its profitability by controlling costs and increasing the efficiency of its operations. Efforts in the last several years include the purchase of additional automated factory equipment, implementation of a comprehensive MRP II forecasting, planning, scheduling and reporting system and the implementation of a flat-lined manufacturing strategy. These measures have significantly improved the Company's ability to deliver its products to its stores safely, quickly and cost-effectively. Additionally, the planned divestiture of substantially all of the Company-owned stores is expected to reduce the Company's exposure to real estate risk, improve the Company's operating margins and allow the Company to increase its focus on franchising. 5 6 EXPANSION STRATEGY Key elements of the Company's expansion strategy include: Unit Growth The cornerstone of the Company's growth strategy is to aggressively pursue unit growth opportunities in locations where the Company has traditionally been successful, to pursue new and developing real estate environments which appear promising based on early sales results, and to improve and expand the retail store concept, such that previously untapped and unviable environments (such as most regional malls) generate sufficient revenue to support a successful Rocky Mountain Chocolate Factory location. High Traffic Environments The Company currently establishes franchised stores in the following environments: factory outlet malls, tourist environments and regional malls. The Company, over the last several years, has had a particular focus on factory outlet mall locations. Although each of these environments has a number of attractive features, including a high level of foot traffic, the factory outlet mall environment has historically offered the best combination of tenant mix, customer spending characteristics and favorable occupancy costs. The Company has established a business relationship with the major developers in the United States and believes that these relationships provide it with the opportunity to take advantage of attractive sites in new and existing real estate environments. Name Recognition and New Market Penetration The Company believes the visibility of its stores and the high foot traffic at its factory outlet mall and tourist locations has generated strong name recognition of Rocky Mountain Chocolate Factory and demand for its franchises. The Rocky Mountain Chocolate Factory system has historically been concentrated in the western United States and the Rocky Mountains, but recent growth has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. This growth has further increased the Company's name recognition and demand for its franchises. Distribution of Rocky Mountain Chocolate Factory products through new channels, such as major national retail chains, 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 Company-owned and franchised stores are generated by sales of products prepared on the premises. The Company believes the in-store preparation and aroma of its products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for its customers and convey an image of freshness and homemade quality. 6 7 Rocky Mountain Chocolate Factory stores have a distinctive country Victorian decor, which further enhances their friendly and enjoyable atmosphere. Each store includes finely-crafted wood cabinetry, copper and brass accents, etched mirrors and large marble tables on which fudge and other products are made. To ensure that all stores conform to the Rocky Mountain Chocolate Factory image, the Company's design staff provides working drawings and specifications and approves the construction plans for each new store. The Company also controls the signage and building materials that may be used in the stores. The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week. Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays. Store hours in tourist areas may vary depending upon the tourist season. PRODUCTS AND PACKAGING The Company typically produces approximately 300 chocolate candies and other confectionery products, using proprietary recipes developed primarily by the Company's master candy maker. These products include many varieties of clusters, caramels, creams, mints and truffles. The Company continues to engage in a major effort to expand its product line by developing additional exciting and attractive new products. During the Christmas, Easter and Valentine's Day holiday seasons, the Company may make as many as 200 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 200 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, soft drinks and other sundries, purchased from approved suppliers. The Company uses only the finest chocolates, nut meats and other wholesome ingredients in its candies. In February 1995, the Company's Valentine's Day gift-boxed chocolates were awarded Money Magazine's top rating and were described as having "superior flavor" which is "intense" and "natural." The Company continually strives to offer new confectionery products in order to maintain the excitement and appeal of its products. Chocolate candies manufactured by the Company are sold at prices ranging from $12.90 to $14.90 per pound, with an average price of $13.50 per pound. Franchisees set their own retail prices, though the Company does recommend prices for all of its products. The Company develops special packaging for the Christmas, Valentine's Day and Easter holidays, and customers can have their purchases packaged in decorative boxes and fancy tins throughout the year. The Company's packaging for its Rocky Mountain Mints in 1995 received the Award of Excellence from the National Paperbox Association. OPERATING ENVIRONMENT The Company currently establishes Rocky Mountain Chocolate Factory stores in three primary environments: factory outlet malls, tourist areas and regional malls. Each of these environments has a number of attractive features, including high levels of foot traffic. 7 8 Factory Outlet Malls There are approximately 414 factory outlet malls in the United States, and as of February 29, 2000, there were Rocky Mountain Chocolate Factory stores in approximately 100 of these malls in over 35 states. The Company has established business relationships with the major outlet mall developers in the United States. Although not all factory outlet malls provide desirable locations for the Company's stores, management believes the Company's relationships with these developers will provide it with the opportunity to take advantage of attractive sites in new and existing outlet malls. Tourist Areas As of February 29, 2000, there were approximately 50 Rocky Mountain Chocolate Factory stores in locations considered to be tourist areas, including Fisherman's Wharf in San Francisco, California and the Riverwalk in San Antonio, Texas. Tourist areas are very attractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increase the Company's visibility and name recognition. The Company believes significant opportunities exist to expand into additional tourist areas with high levels of foot traffic. Regional Malls There are approximately 2,500 regional malls in the United States, and as of February 29, 2000, there were Rocky Mountain Chocolate Factory stores in approximately 20 of these malls, including locations in the Mall of America in Bloomington, Minnesota; Escondido, California; Fort Collins, Colorado; and West Palm Beach, Florida. Although often providing favorable levels of foot traffic, regional malls typically involve more expensive rent structures and more competing food and beverage concepts. The Company believes there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory stores such as airports and sports arenas. Three franchised Rocky Mountain Chocolate Factory stores exist at airport locations: two at Denver International Airport and one at Vancouver International Airport in Canada. FRANCHISING PROGRAM General The Company's franchising philosophy is one of service and commitment to its franchise system, and it 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 1995, Rocky Mountain Chocolate Factory was rated seventh in Success Magazine's "Franchise Gold 100" most desirable franchises. As of April 30, 2000, there were 196 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 9 In fiscal 1992, the Company entered into a franchise development agreement covering Canada with Immaculate Confections, Ltd. of Vancouver, British Columbia. Pursuant to this agreement, Immaculate Confections purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in Canada. Immaculate Confections, as of April 30, 2000, operated 28 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. The first store under this agreement opened in May 2000. 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 10 The Franchise Agreement: Terms and Conditions The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is made pursuant to the Uniform Franchise Offering Circular prepared in accordance with federal and state laws and regulations. States that regulate the sale and operation of franchises require a franchiser to register or file certain notices with the state authorities prior to offering and selling franchises in those states. Under the current form of domestic Rocky Mountain Chocolate Factory franchise agreement, franchisees pay the Company (i) an initial franchise fee of $19,500 for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a marketing fee equal to 1% of monthly gross sales. Franchisees are generally granted exclusive territory with respect to the operation of Rocky Mountain Chocolate Factory stores only in the immediate vicinity of their stores. Chocolate products not made on the premises by franchisees must be purchased from the Company or approved suppliers. The franchise agreements require franchisees to comply with the Company's procedures of operation and food quality specifications, to permit inspections and audits by the Company and to remodel stores to conform with standards in effect. The Company may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in the judgment of the Company is likely to adversely affect the Rocky Mountain Chocolate Factory system. The Company's ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See "Business - Regulation." The agreements prohibit the transfer or assignment of any interest in a franchise without the prior written consent of the Company. The agreements also give the Company a right of first refusal to purchase any interest in a franchise if a proposed transfer would result in a change of control of that franchise. The refusal right, if exercised, would allow the Company to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee. The term of each Rocky Mountain Chocolate Factory franchise agreement is five years, and franchisees have the right to renew for two successive five-year terms. Franchise Financing The Company does not provide prospective franchisees with financing for their stores, but has developed relationships with two national 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 30, 2000, there were 30 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 11 MANUFACTURING OPERATIONS General The Company manufactures its chocolate candies at its factory in Durango, Colorado. All products are produced consistent with the Company's philosophy of using only the finest, highest quality ingredients with no artificial preservatives to achieve its marketing motto of "the Peak of Perfection in Handmade Chocolates(R)." It has always been the belief of management that the Company should control the manufacturing of its own chocolate products. By controlling manufacturing, the Company can better maintain its high product quality standards, offer unique, proprietary products, manage costs, control production and shipment schedules and potentially pursue new or under-utilized distribution channels. Manufacturing Processes The manufacturing process primarily involves cooking or preparing candy centers, including nuts, caramel, peanut butter, creams and jellies, and then coating them with chocolate or other toppings. All of these processes are conducted in carefully controlled temperature ranges, and the Company employs strict quality control procedures at every stage of the manufacturing process. The Company uses a combination of manual and automated processes at its factory. Although the Company believes that it is currently preferable to perform certain manufacturing processes, such as dipping of some large pieces, by hand, automation increases the speed and efficiency of the manufacturing process. The Company has from time to time automated processes formerly performed by hand where it has become cost-effective for the Company to do so without compromising product quality or appearance. The Company seeks to ensure the freshness of products sold in Rocky Mountain Chocolate Factory stores with frequent shipments and production schedules that are closely coordinated with projected and actual orders. 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 11 12 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. MARKETING The Company relies primarily on in-store promotion and point-of-purchase materials to promote the sale of its products. The monthly marketing fees collected from franchisees are used by the Company to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update the Company's local store marketing handbooks. The Company focuses on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and mail order catalogs generated by its in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs. The Company aggressively seeks low cost, high return publicity opportunities through participation in local and regional events, sponsorships and charitable causes. The Company has not historically and does not intend to engage in national advertising in the near future. COMPETITION The retailing of confectionery products is highly competitive. The Company and its franchisees compete with numerous businesses that offer confectionery products. Many of these competitors have greater name recognition and financial, marketing and other resources than the Company. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could adversely affect the Company and its results of operations and its ability to expand successfully. The Company believes that its principal competitive strengths lie in its name recognition and its reputation for the quality, value, variety and taste of its products and the special ambiance of its stores; its knowledge and experience in applying criteria for selection of new store locations; its expertise in merchandising and marketing of chocolate and other candy products; and the control and training infrastructures it has implemented to assure execution of successful practices and techniques at its store locations. In addition, by controlling the manufacturing of its own chocolate products, the Company can better maintain its high product quality standards for those products, offer proprietary products, manage costs, control production and shipment schedules and pursue new or under-utilized distribution channels. TRADE NAME AND TRADEMARKS The trade name "Rocky Mountain Chocolate Factory(R)," the phrases, "The Peak of Perfection in Handmade Chocolates(R)", "America's Chocolatier(R)", "World's Chocolatier(TM)" as well as all other trademarks, service marks, symbols, slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory system, are proprietary rights of the Company. All of the foregoing are believed to be of material importance to the Company's business. The registration for the trademark "Rocky Mountain Chocolate Factory" has been granted in the United States and Canada. Applications have been filed to register the Rocky Mountain Chocolate Factory trademark 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 13 EMPLOYEES At February 29, 2000, the Company employed approximately 330 people. Most employees, with the exception of store, factory and corporate management, are paid on an hourly basis. The Company also employs some people on a temporary basis during peak periods of store and factory operations. The Company seeks to assure that participatory management processes, mutual respect and professionalism and high performance expectations for the employee exist throughout the organization. The Company believes that it provides working conditions, wages and benefits that compare favorably with those of its competitors. The Company's employees are not covered by a collective bargaining agreement. The Company considers its employee relations to be good. EXECUTIVE OFFICERS The executive officers of the Company and their ages at May 15, 2000 are as follows:
NAME AGE POSITION Franklin E. Crail............. 58 Chairman of the Board, President and Director Bryan J. Merryman............. 39 Chief Operating Officer, Chief Financial Officer, Treasurer and Director Edward L. Dudley.............. 36 Vice President - Sales and Marketing Clifton W. Folsom............. 46 Vice President - Franchise Development Jay B. Haws................... 49 Vice President - Creative Services Virginia M. Perez............. 62 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. During his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served in a number of senior marketing and sales management capacities, including most recently that of Director, Distribution Services from March 1996 to January 1997. Mr. Dudley holds B.S. degrees in Finance and Accounting from the University of Colorado. Mr. Folsom has served as Vice President of Franchise Development of the Company since June 1989. He joined the Company in May 1983 as Director of Franchise Sales and Support, and was promoted in March 1985 to Vice President of Franchise Sales, a position he held until he began serving in his current capacity in June 1989. From March 1978 until joining the Company, Mr. Folsom was employed as a sales representative by Sears Roebuck & Company. 13 14 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. Ms. Perez joined the Company in June 1996 and has served as the Company's corporate secretary since February, 1997. From 1992 until joining the Company, she was employed by Huettig & Schromm, Inc., a property management and development firm in Palo Alto, California as executive assistant to the president and owner. Huettig & Schromm developed, owned and managed over 1,000,000 square feet of office space in business parks and office buildings on the San Francisco peninsula. Ms. Perez is a paralegal and has held various administrative positions during her career including executive assistant to the Chairman and owner of Sunset Magazine & Books, Inc. SEASONAL FACTORS The Company's sales and earnings are seasonal, with significantly higher sales and earnings occurring during the Christmas holiday and summer vacation seasons than at other times of the year, which causes fluctuations in the Company's quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale of franchises. Because of the seasonality of the Company's business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. REGULATION Each of the Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining the required licensing or approvals could delay or prevent the opening of new stores. New stores must also comply with landlord and developer criteria. Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. The Company is also subject to the Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations. Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of the franchise relationship that are intended to protect franchisees. Although these laws and regulations, and related court decisions, may limit the Company's ability to terminate franchises and alter franchise agreements, the Company does not believe that such laws or decisions will have a material adverse effect on its franchise operations. However, the laws applicable to franchise operations and relationships continue to develop, and the Company is unable to predict the effect on its intended operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisers. 14 15 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 2000, the Company's factory produced approximately 2.0 million pounds of chocolate candies, down from 2.2 million pounds in fiscal 1999. The factory has the capacity to produce approximately 3.5 million pounds per year. In January 1998, the Company acquired a two acre parcel adjacent to its factory to ensure the availability of adequate space to expand the factory as volume demands. As of April 30, 2000, 29 of the 30 Company-owned stores were occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, most of which contain optional five-year renewal rights. The Company does not deem any individual store lease to be significant in relation to its overall operations. The Company acts as primary lessee of some franchised store premises, which it then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. Current Company policy is not to act as primary lessee on any further franchised locations. At April 30, 2000, the Company was the primary lessee at 45 of its 196 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 16 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 1999 Annual Meeting of the Shareholders of the Company was held in Irving, Texas at 10:00 a.m., local time, on February 29, 2000. Proxies were solicited by the Board of Directors of the Company pursuant to Regulation 14A under the Securities and Exchange Act of 1934. There was no solicitation in opposition to the Board of Directors nominees as listed in the proxy statement and all of such nominees were duly elected. Out of a total of 2,534,979 shares of the Company's common stock outstanding and entitled to vote, 2,072,271 shares were present in person or by proxy, representing approximately 82 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 98% of the shares voted. The second matter voted on by the stockholders was a resolution to consider and vote upon a proposal to approve the Company's 2000 Stock Option Plan for Non-employee Directors. The resolution was adopted with the holders of 1,905,428 shares voting in favor of the resolution and 164,776 voting against the resolution. Holders of 2,067 abstained from voting on the resolution. 16 17 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's Common Stock trades on the National Market System of The Nasdaq Stock Market under the trading symbol "RMCF". On May 18, 1998 the Company purchased 336,000 shares of its common stock at $5.15 per share in a private transaction. On various dates commencing on December 22, 1999 through February 7, 2000, the Company purchased 203,500 shares of the Company's issued and outstanding common stock at prices ranging from $5.25 to $5.56. On March 21, 2000, the Company commenced a tender offer to acquire shares of its common stock. Pursuant to the tender offer, which was completed on May 1, 2000, the Company acquired 447,595 shares of its issued and outstanding common stock at $6.25 per share. 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 2000 and 1999. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
FISCAL YEAR ENDED FEBRUARY 29, 2000 HIGH LOW First Quarter $ 6.688 $ 3.000 Second Quarter 6.375 5.250 Third Quarter 6.125 3.625 Fourth Quarter 5.875 4.000 FISCAL YEAR ENDED FEBRUARY 28, 1999 HIGH LOW First Quarter $ 7.750 $ 4.750 Second Quarter 7.125 4.250 Third Quarter 6.500 4.000 Fourth Quarter 5.625 3.938
On May 23, 2000 the closing bid price for the Common Stock as reported on the Nasdaq Stock Market was $4.875. (b) HOLDERS On May 23, 2000 there were approximately 440 record holders of the Company's Common Stock. The Company believes that there are more than 800 beneficial owners of its Common Stock. (c) DIVIDENDS The Company has not paid cash dividends on its Common Stock since its inception and does not intend to pay cash dividends for the foreseeable future. Any future earnings will be retained for use in the Company's business. 17 18 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below for the fiscal years ended February 28 or 29, 1996 through 2000, 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 1996 1997 1998 1999 2000 Total revenues $ 18,552 $ 22,281 $ 23,764 $ 26,233 $ 24,647 Operating income (loss) 2,157 (1,026) 2,599 1,319 2,662 Income (loss) from continuing operations 1,207 (1,010) 1,260 421 1,057 Income (loss) from discontinued operations (net of income taxes) 1 (356) (1,020) -- -- Net income (loss) $ 1,208 $ (1,366) $ 240 $ 421 $ 1,057 BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .43 $ (.35) $ .43 $ .16 $ .41 Discontinued Operations -- (.12) (.35) -- -- Net Income (loss) $ .43 $ (.47) $ .08 $ .16 $ .41 DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .42 $ (.35) $ .43 $ .16 $ .41 Discontinued Operations -- (.12) (.35) -- -- Net Income (loss) $ .42 $ (.47) $ .08 $ .16 $ .41 Weighted average common shares outstanding 2,797 2,908 2,913 2,665 2,581 Weighted average common shares outstanding, assuming dilution 2,887 2,908 2,930 2,677 2,597 SELECTED BALANCE SHEET DATA Working capital $ 2,043 $ 2,664 $ 3,949 $ 1,558 $ 1,589 Total assets 16,308 18,666 19,868 18,652 16,440 Long-term debt 2,184 5,737 5,993 5,250 3,774 Stockholders' equity 11,117 9,779 10,019 8,509 8,433 SUPPLEMENTAL INFORMATION Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) $ 2,945 $ 2,195 $ 3,934 $ 2,951 $ 4,225
18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the audited financial statements and related Notes of the Company included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. The Company's ability to successfully achieve expansion of its Rocky Mountain Chocolate Factory franchise system depends on many factors not within the Company's control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion. Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depends on many factors not within the Company's control including the receptivity of its franchise system of its product introductions and promotional programs. As a result, the actual results realized by the Company could differ materially from the results discussed in or contemplated by the forward-looking statements made herein. Words or phrases such as "will," "anticipate," "expect," "believe," "intend," "estimate," "project," "plan" or similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements in this Annual Report on Form 10-K. RESULTS OF OPERATIONS FISCAL 2000 COMPARED TO FISCAL 1999 Results Summary The Company posted record earnings per share, as adjusted to exclude the costs of Whitman's Candies, Inc. unsolicited tender offer, in fiscal 2000. Earnings per share, as adjusted, increased 219% from $.16 in fiscal 1999 to $.51 in fiscal 2000. Earnings per share increased 156% from $.16 in fiscal 1999 to $.41 in fiscal 2000. Revenues decreased 6.0% from fiscal 1999 to fiscal 2000. Operating income increased 102% from $1.3 million in fiscal 1999 to $2.7 million in fiscal 2000. Net income, as adjusted to exclude the costs associated with Whitman's tender offer, increased 212% from $421,000 in fiscal 1999 to $1.3 million in fiscal 2000. Net income increased 151% from $421,000 in fiscal 1999 to $1.1 million in fiscal 2000.
Revenues ($'s in thousands) 2000 1999 Change % Change Factory Sales $11,036.9 $11,433.3 $ (396.4) (3.5)% Retail Sales 10,315.5 11,759.7 (1,444.2) (12.3)% Royalty and Marketing Fees 2,963.0 2,919.6 43.4 1.5% Franchise Fees 331.4 119.9 211.5 176.4% Total $24,646.8 $26,232.5 $(1,585.7) (6.0)%
19 20 Factory Sales Factory sales decreased 3.5%, or $396,000, to $11.0 million in fiscal 2000 from $11.4 million in fiscal 1999. This decrease was due to the Company shifting its strategic focus from growing sales through new distribution channels to concentrating on its core competency, franchising the Rocky Mountain Chocolate Factory retail store concept. New distribution channel sales amounted to approximately $1.4 million in fiscal 1999 and decreased 45% to approximately $800,000 in fiscal 2000. Core factory sales (i.e. excluding new distribution channels) grew at approximately 2.6% in fiscal 2000 compared to fiscal 1999. The increase in core factory sales was driven primarily by an increase in the number of retail franchise units operating in fiscal 2000 compared to fiscal 1999. Same store factory pounds purchased from the factory by franchised stores were flat in fiscal 2000 versus fiscal 1999. Same store pounds purchased is a comparison of pounds purchased from the factory by franchised stores open for 12 months in each fiscal year. Retail Sales Retail sales decreased $1.4 million, or 12.3%, to $10.3 million in fiscal 2000, compared to $11.8 million in fiscal 1999. This decrease resulted primarily from a decrease in the number of Company-owned stores from 42 as of February 28, 1999 to 34 as of February 29, 2000 and a 5.4% decrease in same store sales. In fiscal 2001, the Company plans to begin phasing out its Rocky Mountain Chocolate Factory Company-owned store program. The Company plans to sell to new or existing franchisees all viable Company-owned store locations with the exception of five Company-owned stores located in key markets in Colorado. The Colorado Stores are excluded because these stores will be used to test sales, marketing, design and operational initiatives. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $43,000, or 1.5%, to $2.96 million in fiscal 2000, compared to $2.92 million in fiscal 1999. This increase resulted from an increase in the number of units in operation from 157 in fiscal 1999 to 166 in fiscal 2000 partially offset by a decrease in same store sales of 2.8%. Franchise fee revenues increased $212,000 in fiscal 2000 compared to fiscal 1999 due to an increase in the number of new franchises sold. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales decreased to 52.6% in fiscal 2000 versus 54.8% in fiscal 1999. This improvement resulted from increased factory margins. Factory margins increased to 36.8% in fiscal 2000 from 30.7% in fiscal 1999. This improvement was due in part to certain changes to the Company's manufacturing processes and cost structure. Retail store margins decreased in fiscal 2000 to 58.7% versus 59.3% in fiscal 1999. Franchise Costs Franchise costs decreased $124,000, or 11.3%, in fiscal 2000 compared to fiscal 1999 due to decreased support costs. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.7% in fiscal 2000 from 36.2% in fiscal 1999 due to decreased support costs and a 176% increase in franchise fee revenue. 20 21 Sales & Marketing Sales and Marketing costs decreased 18.6% to $1.3 million in fiscal 2000 from $1.6 million in fiscal 1999. This decrease is due to the de-emphasizing of new channel sales efforts and an overall planned decrease in sales and marketing costs. General and Administrative General and administrative expenses decreased 3.3% to $1.76 million in fiscal 2000 from $1.82 million in fiscal 1999, primarily as a result of decreased bad debt expense related to new distribution channel customers. As a percentage of total revenues, general and administrative expense increased to 7.1% in fiscal 2000 from 6.9% in fiscal 1999. Retail Operating Expenses Retail operating expenses decreased to $5.1 million in fiscal 2000 from $6.0 million in fiscal 1999; a decrease of 15.0%. This decrease resulted primarily from a decrease in the number of Company-owned stores from 42 at February 28, 1999 to 34 at February 29, 2000. Retail operating expenses, as a percentage of retail sales, improved to 49.5% in fiscal 2000 compared to 51.1% in fiscal 1999 as a result of the implementation of certain cost control measures. Depreciation and Amortization Depreciation and amortization increased 3.6% to $1.56 million in fiscal 2000 from $1.51 million in fiscal 1999. The increase in depreciation and amortization is due primarily to increased depreciation on certain fixtures used in outside channels and increased goodwill amortization related to the acquisition of several stores from a franchisee in August of 1998, partially offset by lower depreciation expense as a result of fewer Company-owned stores. Other Expense Other expense of $939,000 incurred in fiscal 2000 increased 48.7% from the $631,000 incurred in fiscal 1999. This increase was due to non-recurring costs of approximately $420,000 related to the unsolicited tender offer for 100% of the Company's outstanding common stock by Whitman's Candies, Inc., which commenced in May 1999 and was withdrawn on November 4, 1999. These non-recurring expenses reduced earnings per share by approximately $.10 in fiscal 2000. This expense was partially offset by decreased interest expense on lower average amounts of outstanding long-term debt and lower average balances outstanding on the Company's revolving line of credit. Income Tax Expense The Company's effective income tax rate in fiscal 2000 and fiscal 1999 was 38.7%. Discontinued Operations In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment did not meet its long-term strategic goals, and accordingly, made the decision to dispose of these operations. See "NOTE 11 - DISCONTINUED OPERATIONS" of notes to financial statements. 21 22 FISCAL 1999 COMPARED TO FISCAL 1998 Continuing Operations Results Summary The Company posted record revenues in fiscal 1999. Revenues rose 10.4% from 1998 to 1999, operating income decreased $1.3 million from $2.6 million in 1998 to $1.3 million in 1999 and income from continuing operations decreased $0.9 million from $1.3 million in 1998 to $0.4 million in 1999. Diluted earnings per share from continuing operations decreased from $.43 per share in 1998 to $.16 per share in 1999.
Revenues ($'s in thousands) 1999 1998 Change % Change Factory Sales $ 11,433.3 $ 10,198.6 $ 1,234.7 12.1% Retail Sales 11,759.7 10,460.5 1,299.2 12.4% Royalty and Marketing Fees 2,919.6 2,747.6 172.0 6.3% Franchise Fees 119.9 357.3 (237.4) (66.4)% Total $ 26,232.5 $ 23,764.0 $ 2,468.5 10.4%
Factory Sales Factory sales increased $1.2 million, or 12.1%, to $11.4 million in fiscal 1999, compared to $10.2 million in 1998. This increase was due primarily to wholesale sales of product to distribution channels outside of the Company's retail store system. Same store pounds purchased from the factory by franchised stores declined 2.9% in fiscal 1999 versus fiscal 1998 partially offsetting the increase in wholesale sales. The Company believes the decline in same store pounds purchased from the factory resulted primarily from increased retail sales of store-made product and product purchased from authorized vendors relative to factory-made products. Same store pounds purchased is a comparison of pounds purchased from the factory by franchised stores open for 12 months in each fiscal year. Retail Sales Retail sales increased $1.3 million, or 12.4%, to $11.8 million in fiscal 1999, compared to $10.5 million in fiscal 1998. This increase resulted primarily from an increase in the number of Company-owned stores from 37 as of February 28, 1998 to 42 as of February 28, 1999 and a 2.4% increase in same store sales. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $172,000, or 6.3%, to $2.9 million in fiscal 1999, compared to $2.7 million in fiscal 1998. This increase resulted from an increase in same store sales at franchised stores of 7.7%. Franchise fee revenues decreased $237,000 in fiscal 1999 compared to fiscal 1998 due to a decrease in the number of new franchises sold. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 54.8% in fiscal 1999 versus 51.0% in fiscal 1998. This deterioration resulted from decreased factory and Company-owned store margins. Factory margins decreased to 30.7% in fiscal 1999 from 36.7% in fiscal 1998. Company-owned store margins for fiscal 1999 decreased to 59.3% from 61.0% in fiscal 1998. Factors contributing to the decrease in factory margins include: (1) incremental costs associated with the start-up (due to labor shortages and facility 22 23 space constraints) and ultimate closure (due to less than anticipated demand) of a remote packaging facility; (2) production inefficiencies caused by facility space constraints and the lack of a sufficient seasonal workforce; (3) higher than expected third party shipping costs; (4) provisions for returns and allowances relating to products sold to outside distribution channels and (5) a non-recurring charge to factory cost of sales of approximately $398,000 representing write-down provisions for spoiled, excess and obsolete inventory resulting primarily from product over-production. The reduction in Company-owned store margins was due primarily to a product mix shift from store made product to product produced by the factory. Franchise Costs Franchise costs increased $41,000, or 3.9%, in fiscal 1999 compared to fiscal 1998 due to increased support costs. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 36.2% in fiscal 1999 from 34.1% in fiscal 1998 due to increased support costs and a 66.4% decrease in franchise fee revenue. Sales & Marketing Sales and Marketing costs increased 32.2% to $1.6 million in fiscal 1999 from $1.2 million in fiscal 1998. This increase is due to: (1) expansion of the Company's sales and marketing group to support a larger base of franchised and Company-owned stores; (2) expansion of promotional programs and marketing materials available to franchised and Company-owned stores; (3) establishment of a sales force focused on new distribution opportunities; (4) enhanced customer service and new product marketing programs and (5) costs associated with certain new distribution channel customers. General and Administrative General and administrative expenses increased 7.7% from $1.7 million in fiscal 1998 to $1.8 million in fiscal 1999, primarily as a result of increased bad debt expense related to new distribution channel customers. As a percentage of total revenues, general and administrative expense declined from 7.1% in fiscal 1998 to 6.9% in fiscal 1999. Retail Operating Expenses Retail operating expenses increased from $5.3 million in fiscal 1998 to $6.0 million in fiscal 1999; an increase of 13.4%. This increase resulted primarily from an increase in the number of Company-owned stores from 37 at February 28, 1998 to 42 at February 28, 1999. Retail operating expenses, as a percentage of retail sales, remained relatively constant at 51.1% in fiscal 1998 compared to 50.7% in fiscal 1999. Provision for Store Closures, Impairment Loss and Loss on Write-down of Assets In the fourth quarter of fiscal 1999, a non-recurring charge of approximately $124,000 was recorded representing the loss expected to result from the closure of two Company-owned stores. Depreciation and Amortization Depreciation and Amortization increased 12.9% to $1.5 million in fiscal 1999 from $1.3 million in fiscal 1998. The increase is due primarily to depreciation on certain fixtures used in outside channels and depreciation related to an increase in the number of Company-owned retail stores. 23 24 Other Expense Other expense of $631,000 incurred in fiscal 1999 increased 14.8% from the $550,000 incurred in fiscal 1998. This increase resulted from decreased interest income on excess cash balances in fiscal 1999 and increased interest expense related to borrowings on the Company's line of credit facility. Income Tax Expense The Company's effective income tax rate in fiscal 1999 was 38.7% in comparison with 38.5% in 1998. Discontinued Operations In December 1997, the Company decided its Fuzziwig's Candy Factory Store ("Fuzziwig's") segment did not meet its long-term strategic goals, and accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the Company entered into a definitive agreement to sell substantially all the assets of its Fuzziwig's segment for $1.6 million. This transaction closed on July 31, 1998. The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of estimated losses during the phase out period of $250,000), net of applicable income tax benefit of $587,000, has been recorded in the accompanying statement of operations for the year ending February 28, 1998. The operating results of Fuzziwig's, including disposition costs, and operating losses during the phase-out period totaling $1.5 million have been segregated from continuing operations and reported as separate line items net of applicable income taxes in the statements of income for all applicable periods reported. Loss from discontinued operations was $.35 per diluted share in fiscal 1998 versus nil in fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES As of February 29, 2000, working capital was $1.59 million, approximately the same as February 28, 1999. Cash and cash equivalent balances decreased from $317,000 as of February 28, 1999 to $128,000 as of February 29, 2000 as a result of cash flows used in investing and financing activities in excess of cash flows generated by operating activities. The Company's current ratio was 1.4 to 1 at February 29, 2000 in comparison with 1.3 to 1 at February 28, 1999. 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 29, 2000, $1.9 million), and chattel mortgage notes (unpaid balance as of February 29, 2000, $3.8 million) used to fund the fiscal 1996 and 1997 Company-owned store expansion. The Company has a $3.0 million credit line, of which $2.9 million was available, secured by substantially all of the Company's assets except retail store assets and is subject to renewal in July, 2000. For fiscal 2001, the Company anticipates making capital expenditures of approximately $750,000, 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 2001. 24 25 YEAR 2000 MATTERS In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed remediation and testing of its technology systems. As a result of those planning and implementation efforts, the Company has experienced no significant disruptions in mission critical information technology and non-information technology systems as of May 15, 2000 and believes those systems successfully responded to the Year 2000 date change. The Company expensed less than $50,000 during fiscal 2000 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. 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. 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. 25 26 As of February 29, 2000, $761,000 of the Company's long-term debt was subject to a variable interest rate. Assuming that this principal amount did not change during fiscal 2001, other than as a result of scheduled principal reductions, and assuming that the average effective interest rate in effect on this debt for 2001 increased by one percent as compared to the average effective interest rate in effect during 2000, the Company would incur an additional $5,300 in interest expense in 2001, as compared to 2000, and would experience a corresponding reduction in cash flow. A decrease in the average interest rate in effect on this debt during 2001 would result in a corresponding decrease in interest expense and an increase in cash flow. The Company also has a $3.0 million bank line of credit that bears interest at a variable rate. As of February 29, 2000, $75,000 was outstanding under the line of credit. The Company does not believe that it is exposed to any material interest rate risk related to the line of credit. The Chief Financial Officer and Chief Operating Officer of the Company has primary responsibility over the Company's long-term and short-term debt and has primary responsibility for determining the timing and duration of commodity purchase contracts and negotiating the terms and conditions of those contracts. 26 27 ITEM 8. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Page Report of Independent Certified Public Accountants 28 Statements of Income 29 Balance Sheets 31 Statements of Changes in Stockholders Equity 32 Statements of Cash Flows 33 Notes to Financial Statements 34
27 28 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 29, 2000 and February 28, 1999, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended February 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. as of February 29, 2000 and February 28, 1999, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2000, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Dallas, Texas May 5, 2000 28 29 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2000 1999 1998 REVENUES Sales $ 21,352,411 $ 23,193,011 $ 20,659,076 Franchise and royalty fees 3,294,403 3,039,517 3,104,906 Total revenues 24,646,814 26,232,528 23,763,982 COSTS AND EXPENSES Cost of sales 11,235,252 12,706,474 10,534,195 Franchise costs 977,087 1,101,092 1,060,072 Sales & marketing 1,337,818 1,644,320 1,244,266 General and administrative 1,761,779 1,821,582 1,692,054 Retail operating 5,109,772 6,008,416 5,298,919 Provision for store closures -- 123,903 -- Depreciation and amortization 1,562,632 1,508,111 1,335,715 Total costs and expenses 21,984,340 24,913,898 21,165,221 OPERATING INCOME 2,662,474 1,318,630 2,598,761 OTHER INCOME (EXPENSE) Interest expense (573,379) (698,557) (664,852) Cost of unsolicited tender offer (419,954) -- -- Interest income 54,454 67,080 114,732 Other, net (938,879) (631,477) (550,120) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,723,595 687,153 2,048,641 INCOME TAX EXPENSE 667,030 265,725 788,640 INCOME FROM CONTINUING OPERATIONS 1,056,565 421,428 1,260,001 DISCONTINUED OPERATIONS Loss from discontinued operations (net of income taxes) -- -- (90,849) Provision for estimated loss on disposition, including provision for operating losses during phase out period of $153,250 (net of income taxes) -- -- (929,234) Total -- -- (1,020,083) NET INCOME $ 1,056,565 $ 421,428 $ 239,918
(CONTINUED) The accompanying notes are an integral part of these statements. 29 30 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2000 1999 1998 BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .41 $ .16 $ .43 Discontinued Operations -- -- (.35) Net Income $ .41 $ .16 $ .08 DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .41 $ .16 $ .43 Discontinued Operations -- -- (.35) Net Income $ .41 $ .16 $ .08 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,580,604 2,665,567 2,912,387 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 16,441 11,776 17,158 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 2,597,045 2,677,343 2,929,545
The accompanying notes are an integral part of these statements. 30 31 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
AS OF FEBRUARY 28 or 29, 2000 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 128,192 $ 317,155 Accounts and notes receivable, less allowance for doubtful accounts of $139,912 and $259,408 2,194,325 1,874,286 Refundable income taxes 76,689 383,511 Inventories 3,084,392 3,276,550 Deferred income taxes 188,999 433,229 Other 87,785 73,827 Total current assets 5,760,382 6,358,558 PROPERTY AND EQUIPMENT, NET 8,976,014 10,238,671 OTHER ASSETS Accounts and notes receivable 55,343 291,648 Goodwill, less accumulated amortization of $584,397 and $441,246 1,277,603 1,420,754 Other 370,514 342,469 Total other assets 1,703,460 2,054,871 Total assets $ 16,439,856 $ 18,652,100 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,930,700 $ 1,831,000 Line of credit 75,000 900,000 Accounts payable 1,055,910 1,066,986 Accrued salaries and wages 653,209 548,745 Other accrued expenses 456,300 453,407 Total current liabilities 4,171,119 4,800,138 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,773,851 5,249,769 DEFERRED INCOME TAXES 61,797 93,007 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Common stock, $.03 par value; 7,250,000 shares authorized; 2,386,879 and 2,599,599 shares issued and outstanding 71,606 77,988 Additional paid-in capital 5,879,753 7,046,032 Retained earnings 2,690,476 1,633,911 Less notes receivable from officers and directors (208,746) (248,745) Total stockholders' equity 8,433,089 8,509,186 Total liabilities and stockholders' equity $ 16,439,856 $ 18,652,100
The accompanying notes are an integral part of these statements. 31 32 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2000 1999 1998 COMMON STOCK Balance at beginning of year $ 77,988 $ 87,373 $ 87,369 Repurchase and retirement of common stock (6,404) (10,080) -- Issuance of common stock 4 5 4 Exercise of stock options 18 690 -- Balance at end of year 71,606 77,988 87,373 NOTES RECEIVABLE FROM OFFICERS AND DIRECTORS Balance at beginning of year (248,745) -- -- Issuance of notes -- (248,745) -- Redemption of Notes 39,999 -- -- Balance at end of year (208,746) (248,745) -- ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 7,046,032 8,719,604 8,719,008 Repurchase and retirement of common stock (1,169,805) (1,754,331) -- Issuance of common stock 844 699 596 Exercise of stock options 2,682 80,060 -- Balance at end of year 5,879,753 7,046,032 8,719,604 RETAINED EARNINGS Balance at beginning of year 1,633,911 1,212,483 972,565 Net income 1,056,565 421,428 239,918 Balance at end of year 2,690,476 1,633,911 1,212,483 TOTAL STOCKHOLDERS' EQUITY $ 8,433,089 $ 8,509,186 $10,019,460 COMMON SHARES Balance at beginning of year 2,599,599 2,912,449 2,912,299 Repurchase and retirement of common stock (213,470) (336,000) -- Issuance of common stock 150 150 150 Exercise of stock options 600 23,000 -- Balance at end of year 2,386,879 2,599,599 2,912,449
The accompanying notes are an integral part of these statements. 32 33 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,056,565 $ 421,428 $ 239,918 Adjustments to reconcile net income to net cash provided by operating activities: Loss from discontinued operations -- -- 90,849 Provision for estimated loss on disposition of business segment -- -- 929,234 Depreciation and amortization 1,562,632 1,508,111 1,335,715 Asset impairment and store closure losses -- 123,903 -- (Gain) Loss on sale of assets 77,148 (11,420) (76,474) Changes in operating assets and liabilities: Accounts and notes receivable 57,356 237,806 (158,353) Refundable income taxes 306,822 99,937 (250,159) Inventories 192,158 (708,584) (485,400) Other assets (13,958) 29,368 74,872 Accounts payable (11,076) (229,783) 497,098 Income taxes payable 120,463 -- -- Deferred income taxes 213,020 (461,318) 767,666 Accrued liabilities (48,112) (223,533) (286,081) Deferred income -- -- (93,000) Net cash provided by operating activities of continuing operations 3,513,018 785,915 2,585,885 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 503,644 39,300 8,602 Sale (purchase) of other assets (785) 58,054 (233,380) Purchase of property and equipment (870,112) (1,383,718) (1,984,940) Net cash used in investing activities (367,253) (1,286,364) (2,209,718) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in line of credit (825,000) 900,000 -- Proceeds from long-term debt 509,081 2,022,456 1,522,043 Payments on long-term debt (1,885,299) (2,067,860) (981,063) Loans to officers and directors -- (248,745) -- Collection of loan from former officer 39,999 -- -- Proceeds from issuance of common stock -- -- 600 Proceeds from exercise of stock options 2,700 80,750 -- Repurchase and redemption of common stock (1,176,209) (1,764,410) -- Net cash provided by (used in) financing activities (3,334,728) (1,077,809) 541,580 NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 100,032 85,028 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (188,963) (1,478,226) 1,002,775 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 317,155 1,795,381 792,606 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 128,192 $ 317,155 $ 1,795,381
The accompanying notes are an integral part of these statements. 33 34 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company is a manufacturer of an extensive line of premium chocolate candy for sale to its franchised and Company-owned Rocky Mountain Chocolate Factory stores located throughout the United States and in Guam, Canada and United Arab Emirates. The Company is also a retail operator and international franchiser. The majority of the Company's revenues are generated from wholesale and retail sales of candy. The balance of the Company's revenues are generated from royalties and marketing fees, based on a franchisee's monthly gross sales, and from franchise fees, which consist of fees earned from the sale of franchises. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. The Company reviews its long-lived assets, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company's policy is to review the recoverability of all assets, at a minimum, on an annual basis. Amortization of Goodwill Goodwill is amortized on the straight-line method over ten to twenty-five years. Franchise and Royalty Fees Franchise fee revenue is recognized upon completion of all significant initial services provided to the franchisee and upon satisfaction of all material conditions of the franchise agreement. In addition to the initial franchise fee, the Company receives a royalty fee of five percent (5%) and a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory franchised stores' gross sales. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Additionally, estimates of losses anticipated to result from store closure and impairment are based on the best information currently available to management. Such estimates may differ materially from results actually produced by store closure as a result of uncertainties in the amount of finally negotiated lease settlements, the amount of operating losses sustained by the stores to their dates of closure and in the amount recoverable by sale or redeployment of assets of stores to be closed. 34 35 Vulnerability Due to Certain Concentrations The Company's stores are concentrated (46%) in the factory outlet mall environment. At April 30, 2000, 25 Company-owned stores and 79 franchise stores of 226 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. Cash Equivalents Cash equivalents include cash in excess of daily requirements which is invested in various financial instruments having an original maturity of three months or less. Stock-Based Compensation Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and provides the required pro forma disclosures prescribed by SFAS 123. Earnings Per Share Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year of 2,580,604, 2,665,567 and 2,912,387 for the fiscal years ended February 28 (29), 2000, 1999 and 1998. 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), 2000, 1999 and 1998 were 16,441, 11,776 and 17,158. 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 29, 2000 financial statements. NOTE 2 - INVENTORIES Inventories consist of the following at February 28 or 29:
2000 1999 Ingredients and supplies $1,490,813 $1,594,579 Finished candy 1,593,579 1,681,971 $3,084,392 $3,276,550
35 36 NOTE 3 - PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following at February 28 or 29:
2000 1999 Land $ 513,618 $ 513,618 Building 3,681,808 3,672,870 Machinery and equipment 7,590,205 7,147,833 Furniture and fixtures 2,127,282 2,408,807 Leasehold improvements 1,611,785 1,876,223 Transportation equipment 199,639 199,639 15,724,337 15,818,990 Less accumulated depreciation 6,748,323 5,580,319 Property and equipment, net $ 8,976,014 $10,238,671
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT Line of Credit At February 29, 2000 the Company had a $3,000,000 line of credit from a bank, collateralized by substantially all of the Company's assets with the exception of the Company's retail store assets. Draws may be made under the line at 75% of eligible accounts receivable plus 50% of eligible inventory. Interest on borrowings is at prime (8.75% at February 29, 2000). 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, 2000. Long-Term Debt Long-term debt consists of the following at February 28 or 29:
2000 1999 Chattel mortgage note payable in monthly installments of $10,500 through March 2001 including interest at 8.25% per annum, collateralized by machinery, equipment, furniture and fixtures $ 98,171 $ 210,731 Real estate mortgage note payable in monthly installments of $17,490 through April, 2016 including interest at 8.25% per annum, collateralized by land and factory building. Interest adjusted to prime in May, 2001 and every five years thereafter until maturity in April 2016 1,875,134 1,925,405 Chattel mortgage note payable in monthly installments of $12,359 through April, 2002 including interest at 8.25% per annum, collateralized by equipment 293,330 412,064 Chattel mortgage note payable in monthly installments of $24,613 through April, 2003 including interest at 8.94% per annum, collateralized by machinery, equipment, furniture and fixtures 834,243 1,052,241
36 37 NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED Long Term Debt - continued Chattel mortgage note payable in monthly installments of $5,472 through January, 2002 including interest at 10.36% per annum, collateralized by machinery, equipment, furniture and fixtures 113,707 164,686 Chattel mortgage note payable in monthly installments of $27,632 through April, 2001 including interest at 7.9% per annum, collateralized by machinery, equipment, furniture and fixtures 368,398 658,322 Chattel mortgage note payable in monthly installments of $10,177 through October, 2001 including interest at 10.35% per annum, collateralized by machinery, equipment, furniture and fixtures 186,204 283,500 Chattel mortgage notes payable in monthly principal installments of $37,881 through April, 2002 plus interest at LIBOR plus 2.85% (8.74% at February 29, 2000), collateralized by equipment, furniture and fixtures 760,803 1,215,375 Chattel mortgage note payable in monthly installments of $7,828 through November, 2001 including interest at 7.95% per annum, collateralized by equipment, furniture and fixtures 153,000 231,361 Chattel mortgage note payable in monthly installments of $454 through October, 2003 including interest at 7.91% per annum, collateralized by equipment 17,304 21,219 Chattel mortgage note payable in quarterly installments of $90,000 through October, 2000, $57,150 through January, 2002, and a final installment of $38,100 in April, 2002, including interest at 6.73% per annum collateralized by equipment, furniture and fixtures 495,176 905,865 Chattel mortgage note payable in monthly installments of $8,002 through February, 2003 including interest at 8.75% per annum, collateralized by computer equipment 252,573 -- Chattel mortgage note payable in monthly installments of $5,294 through February, 2005 including interest at 8.75% per annum, collateralized by machinery and equipment 256,508 -- $5,704,551 $7,080,769 Less current maturities 1,930,700 1,831,000 $3,773,851 $5,249,769
37 38 NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED Long Term Debt - continued Maturities of long-term debt are as follows for the years ending February 28 or 29: 2001 $1,930,700 2002 1,348,064 2003 567,116 2004 183,364 2005 140,242 Thereafter 1,535,065 $5,704,551
NOTE 5 - OPERATING LEASES The Company conducts its retail operations in facilities leased under five to ten year noncancelable operating leases. Certain leases contain renewal options for between two and ten additional years at increased monthly rentals. The majority of the leases provide for contingent rentals based on sales in excess of predetermined base levels. The following is a schedule by year of future minimum rental payments required under such leases for the year ending February 28 or 29: 2001 $ 760,075 2002 485,694 2003 323,455 2004 181,284 2005 119,748 Thereafter 70,925 $1,941,181
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: 2001 $1,186,307 2002 789,389 2003 532,935 2004 343,080 2005 274,484 Thereafter 312,371 $3,438,566
The following is a schedule of lease expense for all operating leases for the three years ended February 28 or 29:
2000 1999 1998 Minimum rentals $ 2,237,464 $ 2,316,508 $ 2,454,744 Less sublease rentals (1,336,496) (1,239,663) (1,294,202) Contingent rentals 49,426 35,150 100,771 $ 950,394 $ 1,111,995 $ 1,261,313
38 39 NOTE 6 - INCOME TAXES Income tax expense (benefit) relating to continuing operations is comprised of the following for the years ending February 28 or 29:
2000 1999 1998 Current Federal $ 374,704 $ 240,834 $ 18,520 State 79,306 25,183 2,454 Total Current 454,010 266,017 20,974 Deferred Federal 175,810 (264) 677,849 State 37,210 (28) 89,817 Total Deferred 213,020 (292) 767,666 Total $ 667,030 $ 265,725 $ 788,640
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:
2000 1999 1998 Statutory rate 34.0% 34.0% 34.0% Goodwill amortization .5% 1.2% .4% State income taxes, net of federal benefit 3.0% 2.4% 3.1% Other 1.2% 1.1% 1.0% Effective Rate 38.7% 38.7% 38.5%
The components of deferred income taxes at February 29 or 28 are as follows:
Deferred Tax Assets 2000 1999 Allowance for doubtful accounts $ 54,146 $ 100,313 Inventories 4,010 28,742 Accrued compensation 73,201 67,279 Contribution carryover -- 37,249 Loss provisions 583,729 597,422 Tax credit carryforward 7,433 150,402 Deferred lease rentals 13,786 18,333 Other 29,471 7,781 765,776 1,007,521 Deferred Tax Liability - Depreciation (638,574) (667,299) Net deferred tax asset $ 127,202 $ 340,222
NOTE 7 - STOCK REPURCHASE Between December 22, 1999 and February 7, 2000, the Company repurchased 213,470 Company shares on the open market at an average price of $5.48 per share. On May 15, 1998, the Company purchased 336,000 shares and certain of its directors and executive officers purchased 104,000 shares of the Company's issued and outstanding common stock at $5.15 per share from La Salle National Bank of Chicago, Illinois, which obtained these shares through foreclosure from certain shareholders unrelated to any transactions of the Company. The Company loaned certain officers and directors the funds to acquire 40,000 of the 104,000 shares purchased by them. The loans are secured by the related shares, bear interest payable annually at 7.5% and are due May 15, 2003. On March 21, 2000, the Company commenced a tender offer to acquire shares of its common stock. Pursuant to the tender offer, which was completed on May 1, 2000, the Company acquired 447,595 shares of its issued and outstanding common stock at $6.25 per share. 39 40 NOTE 8 - STOCK OPTION PLANS Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan"), options to purchase 215,000 shares of the Company's common stock were granted at prices not less than market value at the date of grant. The 1985 Plan expired in October 1995. Options granted under the 1985 Plan could not have a term exceeding ten years. Options representing the right to purchase 54,000 shares of the Company's common stock remained outstanding under the 1985 Plan at February 29, 2000. Under the 1995 Stock Option Plan (the "1995 Plan"), the Nonqualified Stock Option Plan for Nonemployee Directors (the "Director's Plan")and the 2000 Nonqualified Stock Option Plan for Nonemployee Directors (the "2000 Director's Plan"), options to purchase up to 250,000, 90,000 and 60,000 shares, respectively, of the Company's common stock may be granted at prices not less than market value at the date of grant. Options granted may not have a term exceeding ten years under the 1995 plan and the Director's Plan. Options granted may not have a term exceeding five years under the 2000 Director's Plan. Options representing the right to purchase 172,000, 30,000 and 40,000 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 29, 2000. 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 May 2000 through December 2009. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with those provisions, the Company applies APB opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost if the exercise price is not less than market. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net income and diluted income per share would have been reduced to the pro-forma amounts indicated in the table below for the years ending February 28 or 29(in 000's except per share amounts):
2000 1999 1998 Net Income - as reported $ 1,057 $ 421 $ 240 Net Income - pro forma 862 362 177 Basic Income per Share-as reported .41 .16 .08 Diluted Income per Share-as reported .41 .16 .08 Basic Income per Share-pro forma .33 .14 .06 Diluted Income per Share-pro forma .33 .14 .06
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following assumptions:
2000 1999 1998 Expected dividend yield 0% 0% 0% Expected stock price volatility 65% 65% 65% Risk-free interest rate 6.5% 6.0% 6.0% Expected life of options 5 years 7 years 7 years
40 41 NOTE 8 - STOCK OPTION PLANS - CONTINUED Additional information with respect to options outstanding under the Plans at February 29, 2000, and changes for the three years then ended was as follows:
2000 Weighted Average Shares Exercise Price Outstanding at beginning of year 241,000 $ 7.91 Granted 115,000 5.12 Exercised (600) 4.50 Forfeited (59,400) 8.66 Outstanding at end of year 296,000 $ 6.68 Options exercisable at February 29, 2000 174,200 $ 7.62
1999 Weighted Average Shares Exercise Price Outstanding at beginning of year 290,000 $ 7.81 Exercised (23,000) 3.51 Forfeited (26,000) 10.63 Outstanding at end of year 241,000 $ 7.91 Options exercisable at February 28, 1999 141,800 $ 9.18
1998 Weighted Average Shares Exercise Price Outstanding at beginning of year 272,000 $ 9.01 Granted 55,000 4.55 Forfeited (37,000) 11.80 Outstanding at end of year 290,000 $ 7.81 Options exercisable at February 28, 1998 151,000 $ 9.22 Weighted average fair value per share of options granted during 2000 and 1998 were $2.89 and $3.44, respectively. There were no options granted during 1999
41 42 NOTE 8 - STOCK OPTION PLANS - CONTINUED Information about stock options outstanding at February 29, 2000 is summarized as follows:
Options Outstanding Weighted average Number remaining Weighted average Range of exercise prices outstanding contractual life exercise price $3.125 to 4.50 75,000 5.37 years $ 4.15 $5.12 to 5.875 140,000 7.51 years 5.27 $7.50 to 18.00 81,000 5.14 years 11.47 296,000
Options Exercisable Number Weighted average Range of exercise prices Exercisable exercise price $3.125 to 4.50 46,000 $ 3.98 $5.12 to 5.875 62,000 5.35 $7.50 to 18.00 66,200 12.28 174,200
NOTE 9 - LOSS PROVISIONS Loss provisions were provided as follows: Store Closures In February 1999, the Company adopted a plan to close two underperforming Company-owned stores. The Company made a loss provision in February 1999 for closure of these stores in the total amount of approximately $123,000 including $86,000 for estimated operating losses to date of closure and $37,000 for writedown of store assets to their estimated recoverable values. Inventory Obsolescence In February 1999, a loss provision was made in the amount of $398,000 to reduce certain inventories to the lower of cost or market. This charge is included in cost of sales in the accompanying statement of income. NOTE 10 - OPERATING SEGMENTS The Company classifies its business interests into three reportable segments: Franchising, Retail stores and Manufacturing. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company's reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All intersegment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services: 42 43 NOTE 10 - OPERATING SEGMENTS - CONTINUED Franchising Manufacturing Retail Other Total FY 2000 Total revenues 3,294,403 13,716,134 10,315,509 -- 27,326,046 Intersegment revenues -- (2,679,232) -- -- (2,679,232) Revenue from external customers 3,294,403 11,036,902 10,315,509 -- 24,646,814 Segment profit (loss) 1,319,459 3,221,857 69,733 (2,887,454) 1,723,595 Total assets 773,664 8,850,408 5,004,654 1,811,130 16,439,856 Capital expenditures 51,173 416,398 93,515 309,026 870,112 Total depreciation & amortization 172,969 519,938 682,929 186,796 1,562,632 FY 1999 Total revenues 3,039,517 14,737,115 11,759,655 -- 29,536,287 Intersegment revenues -- (3,303,759) -- -- (3,303,759) Revenue from external customers 3,039,517 11,433,356 11,759,655 -- 26,232,528 Segment profit (loss) 806,106 2,990,147 48,936 (3,158,036) 687,153 Total assets 889,713 8,947,006 6,507,865 2,307,516 18,652,100 Capital expenditures 38,666 720,670 529,172 95,210 1,383,718 Total depreciation & amortization 178,575 447,140 666,056 216,340 1,508,111 FY 1998 Total revenues 3,104,906 13,276,949 10,460,518 -- 26,842,373 Intersegment revenues -- (3,078,391) -- -- (3,078,391) Revenue from external customers 3,104,906 10,198,558 10,460,518 -- 23,763,982 Segment profit (loss) 1,148,989 3,074,658 252,642 (2,427,648) 2,048,641 Total assets 1,217,689 8,388,569 4,864,567 5,397,067 19,867,892 Capital expenditures 38,749 565,711 857,974 522,506 1,984,940 Total depreciation & amortization 83,100 426,770 631,121 194,724 1,335,715
NOTE 11 - DISCONTINUED OPERATION In December 1997, the Company decided its Fuzziwig's Candy Factory Store ("Fuzziwig's") segment did not meet its long-term strategic goals, and accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the Company entered into a definitive agreement to sell substantially all the assets of its Fuzziwig's segment for $1.6 million. This transaction closed on July 31, 1998 (the "Closing Date"). The purchase price included $180,000 cash, $100,000 of which was paid at the Closing Date and the remaining $80,000 paid six months from the Closing Date. Pursuant to the agreement, the Company also received four Rocky Mountain Chocolate Factory stores previously operated as franchised stores by one of the purchasers and valued at approximately $1.42 million. The estimated loss on disposition of Fuzziwig's of approximately $929,000 (inclusive of estimated losses during the phase out period of $250,000), net of applicable income tax benefit of $587,000, has been recorded in the accompanying statement of income for the year ending February 28, 1998. Operating results of the discontinued operation have been reclassified from amounts previously reported and have been reported separately in the statements of income. 43 44 NOTE 11 - DISCONTINUED OPERATIONS - CONTINUED Summarized financial information for the discontinued operation for the years ended February 28 or 29 follow:
2000 1999 1998 Revenues $ -- $ 1,095,431 $ 2,928,403 Loss from the discontinued operation, net of income tax benefit of $57,235 -- -- (90,849) Provision for loss on disposal, net of income tax benefit of $586,766 -- -- (929,234)
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION For the three years ended February 28 or 29:
2000 1999 1998 Interest paid $ 572,636 $ 703,953 $ 658,700 Income taxes paid (received) 26,725 165,788 (30,619) Non-Cash Financing Activities: Company financed sales of retail store assets $ -- $ -- $ 715,931
NOTE 13 - EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to 15% of compensation. The Company makes a matching contribution, which vests ratably over a 5 year period, and is 50% of the employee's contribution up to a maximum of 1.5% of the employee's compensation. During the years ended February 28 or 29, 2000, 1999, and 1998, the Company contribution was approximately $0, $36,000 and $33,000, respectively, to the plan. 44 45 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 14, 2000 (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 46 PART IV. ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:
1. Financial Statements Page Report of Independent Certified Public Accountants 28 Statements of Income 29 Balance Sheets 31 Statements of Changes in Stockholders' Equity 32 Statements of Cash Flows 33 Notes to Financial Statements 34 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 May 5, 2000, which is included in Part II of this form, we have also audited Schedule II for each of the three years in the period ended February 29, 2000. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Dallas, Texas May 5, 2000 SCHEDULE II - Valuation and Qualifying Accounts
Balance at Additions Beginning of Charged to Balance at End Period Costs & Exp. Deductions of Period Year Ended February 29, 2000 Accounts Receivable Allowance 259,408 11,589 131,085 139,912 Year Ended February 28, 1999 Accounts Receivable Allowance 214,152 120,000 74,744 259,408 Year Ended February 28, 1998 Accounts Receivable Allowance 202,029 49,525 37,402 214,152
46 47 3. Exhibits
Exhibit Incorporated by Number Description Reference to 3.1 Articles of Incorporation of the Registrant, as Exhibit 3.1 to Current Report on Form 8-K of the amended Registrant filed on August 1, 1988. 3.2 By-laws of the Registrant, as amended on November Exhibit 3.2 to the Annual Report on Form 10-K of the 25, 1997 Registrant for the fiscal year ended February 28, 1998. 4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K of the Registrant filed on August 1, 1988. 4.2 Term Loan and Credit Agreement dated April 5, 1996 Exhibit 4.18 to the Annual Report on Form 10-K of the in the amount of $2,000,000 between Norwest Banks Registrant for the fiscal year ended February 29, 1996. and the Registrant 4.3 Amendments dated February 5, 1997, May 2, 1997, Exhibit 4.12 to the Annual Report on Form 10-K of the and May 22, 1997 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1997. dated April 5, 1996 in the amount of $2,000,000 between Norwest Banks and the Registrant 4.4 Amendments dated December 23, 1997, March 9, 1998 Exhibit 4.4 to the Annual Report on Form 10-K of the & May 6, 1998 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1998. dated April 5, 1996 in the amount of $2,000,000 between Norwest Banks and the Registrant 4.5 Instruments with respect to long-term debt not exceeding 10% of the total assets of the Company have not been filed. The Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 10.1 Form of Stock Option Agreement for Incentive Stock Exhibit 10.3 to the Annual Report on Form 10-K of the Option Plan of the Registrant* Registrant for the fiscal year ended February 28, 1986. 10.2 Incentive Stock Option Plan of the Registrant as Exhibit 10.2 to the Annual Report on Form 10-K of the amended July 27, 1990* Registrant for the fiscal year ended February 28, 1991.
47 48
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 and its officers* Registrant filed on May 21, 1999. 10.4 Current form of franchise agreement used by the Exhibit 10.4 to the Annual Report on Form 10-K of the Registrant Registrant for the fiscal year ended February 28, 1999. 10.5 Form of Real Estate Lease between the Registrant Exhibit 10.7 to Registration Statement on Form S-18 as Lessee and franchisee as Sublessee (Registration No. 33-2016-D). 10.6 Form of Nonqualified Stock Option Agreement for Exhibit 10.8 to the Annual Report on Form 10-K of the Nonemployee Directors of the Registrant* Registrant for the fiscal year ended February 28, 1991. 10.7 Nonqualified Stock Option Plan for Nonemployee Exhibit 10.9 to the Annual Report on Form 10-K of the Directors dated March 20, 1990* Registrant for the fiscal year ended February 28, 1991. 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 for 1995 Exhibit 10.10 to Registration Statement on Form S-1 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995. 10.10 Forms of Nonqualified Stock Option Agreement for Exhibit 10.11 to Registration Statement on Form S-1 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995. 10.11 Form of Indemnification Agreement Registrant and Exhibit 10.12 to the Annual Report on between the its directors Form 10-K of the Registrant for the fiscal year ended February 28, 1998. 10.12 Form of Indemnification Agreement between the Exhibit 10.13 to the Annual Report on Form 10-K of the Registrant and its officers Registrant for the fiscal year ended February 28, 1998. 10.13 Form of Promissory Note and Stock Pledge Agreement Exhibit 10.14 to the Annual Report on Form 10-K of the between the Registrant and certain of its officers Registrant for the fiscal year ended February 28, 1998. and directors
48 49
Exhibit Incorporated by Number Description Reference to 10.14 Asset Purchase Agreement dated June 5, 1998 Exhibit 10.15 to the Annual Report on Form 10-K of the between the Registrant as seller and Resort Registrant for the fiscal year ended February 28, 1998. Confections, Inc. et al., as purchasers 11.1 Statement re: computation of per share earnings Filed herewith. 23.1 Consent of Independent Public Accountants Filed herewith. 27.1 Fiscal 2000 Financial Data Schedule Filed herewith.
* Management contract or compensatory plan (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 29, 2000. 49 50 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 26, 2000 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 26, 2000 /s/ Franklin E. Crail --------------------------------------- FRANKLIN E. CRAIL Chairman of the Board of Directors, President, and Director (principal executive officer) Date: May 26, 2000 /s/ Bryan J. Merryman --------------------------------------- BRYAN J. MERRYMAN Chief Operating Officer, Chief Financial Officer, Treasurer and Director (principal financial and accounting officer) Date: May 26, 2000 /s/ Gerald A. Kien --------------------------------------- GERALD A. KIEN, Director Date: May 26, 2000 /s/ Lee N. Mortenson --------------------------------------- LEE N. MORTENSON, Director Date: May 26, 2000 /s/ Fred M. Trainor --------------------------------------- FRED M. TRAINOR, Director Date: May 26, 2000 /s/ Clyde Wm. Engle --------------------------------------- CLYDE Wm. ENGLE, DIRECTOR 50 51 EXHIBIT INDEX
Exhibit Incorporated by Number Description Reference to 3.1 Articles of Incorporation of the Registrant, as Exhibit 3.1 to Current Report on Form 8-K of the amended Registrant filed on August 1, 1988. 3.2 By-laws of the Registrant, as amended on November Exhibit 3.2 to the Annual Report on Form 10-K of the 25, 1997 Registrant for the fiscal year ended February 28, 1998. 4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K of the Registrant filed on August 1, 1988. 4.2 Term Loan and Credit Agreement dated April 5, 1996 Exhibit 4.18 to the Annual Report on Form 10-K of the in the amount of $2,000,000 between Norwest Banks Registrant for the fiscal year ended February 29, 1996. and the Registrant 4.3 Amendments dated February 5, 1997, May 2, 1997, Exhibit 4.12 to the Annual Report on Form 10-K of the and May 22, 1997 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1997. dated April 5, 1996 in the amount of $2,000,000 between Norwest Banks and the Registrant 4.4 Amendments dated December 23, 1997, March 9, 1998 Exhibit 4.4 to the Annual Report on Form 10-K of the & May 6, 1998 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1998. dated April 5, 1996 in the amount of $2,000,000 between Norwest Banks and the Registrant 4.5 Instruments with respect to long-term debt not exceeding 10% of the total assets of the Company have not been filed. The Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 10.1 Form of Stock Option Agreement for Incentive Stock Exhibit 10.3 to the Annual Report on Form 10-K of the Option Plan of the Registrant* Registrant for the fiscal year ended February 28, 1986. 10.2 Incentive Stock Option Plan of the Registrant as Exhibit 10.2 to the Annual Report on Form 10-K of the amended July 27, 1990* Registrant for the fiscal year ended February 28, 1991.
52
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 and its officers* Registrant filed on May 21, 1999. 10.4 Current form of franchise agreement used by the Exhibit 10.4 to the Annual Report on Form 10-K of the Registrant Registrant for the fiscal year ended February 28, 1999. 10.5 Form of Real Estate Lease between the Registrant Exhibit 10.7 to Registration Statement on Form S-18 as Lessee and franchisee as Sublessee (Registration No. 33-2016-D). 10.6 Form of Nonqualified Stock Option Agreement for Exhibit 10.8 to the Annual Report on Form 10-K of the Nonemployee Directors of the Registrant* Registrant for the fiscal year ended February 28, 1991. 10.7 Nonqualified Stock Option Plan for Nonemployee Exhibit 10.9 to the Annual Report on Form 10-K of the Directors dated March 20, 1990* Registrant for the fiscal year ended February 28, 1991. 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 for 1995 Exhibit 10.10 to Registration Statement on Form S-1 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995. 10.10 Forms of Nonqualified Stock Option Agreement for Exhibit 10.11 to Registration Statement on Form S-1 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995. 10.11 Form of Indemnification Agreement Registrant and Exhibit 10.12 to the Annual Report on between the its directors Form 10-K of the Registrant for the fiscal year ended February 28, 1998. 10.12 Form of Indemnification Agreement between the Exhibit 10.13 to the Annual Report on Form 10-K of the Registrant and its officers Registrant for the fiscal year ended February 28, 1998. 10.13 Form of Promissory Note and Stock Pledge Agreement Exhibit 10.14 to the Annual Report on Form 10-K of the between the Registrant and certain of its officers Registrant for the fiscal year ended February 28, 1998. and directors
53
Exhibit Incorporated by Number Description Reference to 10.14 Asset Purchase Agreement dated June 5, 1998 Exhibit 10.15 to the Annual Report on Form 10-K of the between the Registrant as seller and Resort Registrant for the fiscal year ended February 28, 1998. Confections, Inc. et al., as purchasers 11.1 Statement re: computation of per share earnings Filed herewith. 23.1 Consent of Independent Public Accountants Filed herewith. 27.1 Fiscal 2000 Financial Data Schedule Filed herewith.
EX-11.1 2 0002.txt COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
For Years Ended February 28 (29), 2000 1999 1998 BASIC EARNINGS (LOSS) PER SHARE Income from continuing operations $ 1,056,565 $ 421,428 $ 1,260,001 Loss from discontinued operations -- -- (1,020,083) Net income $ 1,056,565 $ 421,428 $ 239,918 Weighted average number of common shares outstanding 2,580,604 2,665,567 2,912,387 Dilutive effect of employee stock options 16,441 11,776 17,158 Weighted average common shares outstanding, assuming dilution 2,597,045 2,677,343 2,929,545 BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .41 $ .16 $ .43 Discontinued Operations -- -- (.35) Net Income (Loss) $ .41 $ .16 $ .08 DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .41 $ .16 $ .43 Discontinued Operations -- -- (.35) Net Income (Loss) $ .41 $ .16 $ .08
EX-23.1 3 0003.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated May 5, 2000, accompanying the financial statements included in the Annual Report of Rocky Mountain Chocolate Factory, Inc. on Form 10-K for the year ended February 29, 2000. 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 5, 2000 EX-27.1 4 0004.txt FINANCIAL DATA SCHEDULE
5 YEAR FEB-29-2000 MAR-01-1999 FEB-29-2000 128,192 0 2,334,237 139,912 3,084,392 5,760,382 15,724,337 6,748,323 16,439,856 4,171,119 3,773,851 0 0 71,606 8,361,483 16,439,856 21,352,411 24,646,814 11,235,252 21,984,340 419,954 0 573,379 1,723,595 667,030 1,056,565 0 0 0 1,056,565 .41 .41
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