-----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, HO2MxzxLhHsiZ6Ka5L9ElAbV+yFhWfO2zRregZML8eYaIDeoi5gvrbabF2iq1m1U vO4B2X46gZnRZQmJ0uUmfw== 0001035704-01-500109.txt : 20010523 0001035704-01-500109.hdr.sgml : 20010523 ACCESSION NUMBER: 0001035704-01-500109 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKY MOUNTAIN CHOCOLATE FACTORY INC CENTRAL INDEX KEY: 0000785815 STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060] IRS NUMBER: 840910696 STATE OF INCORPORATION: CO FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14749 FILM NUMBER: 1645467 BUSINESS ADDRESS: STREET 1: 265 TURNER DR CITY: DURANGO STATE: CO ZIP: 81301 BUSINESS PHONE: 3032590554 MAIL ADDRESS: STREET 1: 265 TURNER DRIVE CITY: DURANGO STATE: CO ZIP: 81301 10-K405 1 d87609e10-k405.txt FORM 10-K FOR FISCAL YEAR END FEBRUARY 28, 2001 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ---- ACT OF 1934 For the fiscal year ended February 28, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-14749 Rocky Mountain Chocolate Factory, Inc. (Exact name of registrant as specified in its charter) Colorado 84-0910696 (State of Incorporation) (I.R.S. Employer Identification No.) 265 Turner Drive, Durango, CO 81301 (Address of principal executive offices) (970) 259-0554 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common Stock, $.03 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On May 15, 2001, there were 1,857,568 shares of Common Stock outstanding. The aggregate market value of the Common Stock (based on the average of the closing bid and ask prices as quoted on the Nasdaq National Market System on May 15, 2001 held by non-affiliates was $7,082,374. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 2001 Annual Meeting of Stockholders (Part III) 1 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 15 Item 4 Submission of Matters to a Vote of Security Holders 15 PART II. Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6 Selected Financial Data 17 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A Quantitative and Qualitative Disclosures About Market Risk 24 Item 8 Financial Statements 25 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43 PART III. Item 10 Directors and Executive Officers of the Registrant 43 Item 11 Executive Compensation 43 Item 12 Security Ownership of Certain Beneficial Owners and Management 43 Item 13 Certain Relationships and Related Transactions 43 PART IV. Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
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, 2001 there were 8 Company-owned and 213 franchised Rocky Mountain Chocolate Factory stores operating in 40 states, Canada, Guam and the United Arab Emirates. Approximately 40% of the products sold at Rocky Mountain Chocolate Factory stores are prepared on the premises. The Company believes this in-store preparation creates a special store ambiance and the aroma and sight of products being made attracts foot traffic and assures customers that products are fresh. The Company believes that its principal competitive strengths lie in its brand name recognition, its reputation for the quality, variety and the taste of its products; the special ambiance of its stores; its knowledge and experience in applying criteria for selection of new store locations; its expertise in the manufacture of chocolate candy products and the merchandising and marketing of chocolate and other candy products; and the control and training infrastructures it has implemented to assure consistent customer service and execution of successful practices and techniques at its stores. The Company believes its manufacturing expertise and reputation for quality has facilitated the sale of selected products through new distribution channels. The Company is currently testing and evaluating a number of new distribution channel programs including wholesaling, fundraising, corporate sales, mail order and internet sales. The Company's revenues are currently derived from three principal sources: (i) sales to franchisees and others of chocolates and other confectionery products manufactured by the Company (53-45-43%); (ii) sales at Company-owned stores of chocolates and other confectionery products (including product manufactured by the Company) (31-42-44%) and (iii) the collection of initial franchise fees and royalties from franchisees (16-13-13%). The figures in parentheses show the percentage of total revenues attributable to each source for fiscal years ended February 28 (29), 2001, 2000 and 1999, respectively. According to the National Confectionery Association, the total U.S. candy market approximated $23.3 billion of sales in 1999. According to the Department of Commerce, per capita consumption of chocolate exceeds 12 pounds per year nationally, generating annual sales of approximately $13 billion. In 1999, consumption of chocolate products increased 0.8% versus a 5.5% decrease in non-chocolate candies. In December 1997, the Company decided its Fuzziwig's Candy Factory store segment did not meet its strategic long-term goals, and accordingly, adopted a plan to divest itself of these operations. The Company completed the divestiture on July 31, 1998. Fuzziwig's Candy Factory stores sold hard conventional and nostalgic candies purchased from third party suppliers. In Fiscal 2001, the Company began phasing out its Rocky Mountain Chocolate Factory Company-owned store program. In fiscal 2002, the Company has sold to new or existing franchisees all Company-owned store locations with the exception of four Company-owned stores located in key markets in Colorado (the "Colorado Stores"). The Company intends to retain the Colorado Stores to test sales, marketing, design and operational initiatives. 3 4 BUSINESS STRATEGY The Company's objective is to build on its position as a leading international franchiser and manufacturer of high quality chocolate and other confectionery products. The Company continually seeks opportunities to profitably expand its business. To accomplish this objective, the Company employs a business strategy that includes the following elements: Product Quality and Variety The Company maintains the unsurpassed taste and quality of its chocolate candies by using only the finest chocolate and other wholesome ingredients. The Company uses its own proprietary recipes, primarily developed by its master candy maker. A typical Rocky Mountain Chocolate Factory store offers up to 100 of the Company's chocolate candies throughout the year and as many as 200, including many packaged candies, during the holiday seasons. Individual stores also offer numerous varieties of premium fudge and gourmet caramel apples, as well as other products prepared in the store from Company recipes. Store Atmosphere and Ambiance The Company seeks to establish an enjoyable and inviting atmosphere in each Rocky Mountain Chocolate Factory store. Each store prepares numerous products, including fudge, brittles and caramel apples, in the store. In-store preparation is designed both to be fun and entertaining for customers and to convey an image of freshness and homemade quality. The Company's design staff has developed easily replicable designs and specifications to ensure that the Rocky Mountain Chocolate Factory concept is consistently implemented throughout the system. In February 2000, the Company retained a nationally recognized design firm to evaluate and update its existing store design. The objective of the store design project is fourfold: (1) increase average revenue per unit thereby opening untapped real estate environments; (2) further emphasize the entertainment and freshness value of the Company's in-store confectionery factory; (3) improve the presentation of the Company's Co-branded product offerings such as coffee and ice-cream and (4) improve operational efficiency through optimal store layout. The Company expects to complete the store redesign project and the testing of the new design in fiscal 2002. Site Selection Careful selection of a site is critical to the success of a Rocky Mountain Chocolate Factory store. Many factors are considered by the Company in identifying suitable sites, including tenant mix, visibility, attractiveness, accessibility, level of foot traffic and occupancy costs. Final site selection occurs only after the Company's senior management has approved the site. The Company believes that the experience of its management team in evaluating a potential site is one of the Company's competitive strengths. Customer Service Commitment The Company emphasizes excellence in customer service and seeks to employ and to sell franchises to motivated and energetic people. The Company also fosters enthusiasm for its customer service philosophy and the Rocky Mountain Chocolate Factory concept through its bi-annual franchisee convention, annual regional meetings and other frequent contacts with its franchisees. 4 5 Increase Same Store Retail Sales at Existing Locations The Company seeks to increase profitability of its store system through increasing sales at existing store locations. System wide same store retail sales are as follows: 1997 (0.5%) 1998 7.4% 1999 6.7% 2000 (4.3%) 2001 (3.9%)
The Company believes that its same store sales growth was positively impacted by the sale of Beanie Babies(TM) (stuffed animals manufactured by Ty Inc.) and related products in fiscal 1998 and 1999, because many of the Company's retail stores capitalized on this extraordinary trend during this time period. In fiscal 2000 and 2001, however, the demand for Beanie Babies decreased significantly, and the Company believes this decreased demand is the primary reason for negative comparable store sales in fiscal 2000 and 2001. The Company expects this trend to reverse in fiscal 2002. The Company feels that same store retail sales growth can be accelerated though store redesign to provide a more attractive and effective retail sales environment while retaining the Rocky Mountain Chocolate Factory store ambiance and theme. In February 2000, the Company retained a nationally recognized packaging design firm to completely redesign the packaging featured in the Company's retail stores. The goal of the packaging redesign project is to develop an updated, coordinated line of packaged products that capture and convey the freshness, fun and excitement of the Rocky Mountain Chocolate Factory retail store experience. The Company expects to complete the packaging redesign project and the testing of the new designs during 2002. The Company believes that a successful launch of new packaging will have a positive impact on same store sales. Increase Same Store Pounds Purchased by Existing Locations In fiscal 2001, the Company experienced a same store pounds purchased decline of 1.1%. The decline in same store pounds purchased from the factory continued what appears to be a trend of a shift in sales mix toward store-made and authorized vendor products and away from factory made products. The Company is in the process of designing new packaging, adding new products and focusing its existing product lines in an effort to reverse this trend. Enhanced Operating Efficiencies The Company seeks to improve its profitability by controlling costs and increasing the efficiency of its operations. Efforts in the last several years include the purchase of additional automated factory equipment, implementation of a comprehensive MRP II forecasting, planning, scheduling and reporting system and the implementation of alternative manufacturing strategies. These measures have significantly improved the Company's ability to deliver its products to its stores safely, quickly and cost-effectively. Additionally, the divestiture of substantially all of the Company-owned stores is expected to reduce the Company's exposure to real estate risk, improve the Company's operating margins and allow the Company to increase its focus on franchising. 5 6 EXPANSION STRATEGY Key elements of the Company's expansion strategy include: Unit Growth The cornerstone of the Company's growth strategy is to aggressively pursue unit growth opportunities in locations where the Company has traditionally been successful, to pursue new and developing real estate environments which appear promising based on early sales results, and to improve and expand the retail store concept, such that previously untapped and unviable environments (such as most regional malls) generate sufficient revenue to support a successful Rocky Mountain Chocolate Factory location. High Traffic Environments The Company currently establishes franchised stores in the following environments: factory outlet malls, tourist environments and regional malls. The Company, over the last several years, has had a particular focus on factory outlet mall locations. Although each of these environments has a number of attractive features, including a high level of foot traffic, the factory outlet mall environment has historically offered the best combination of tenant mix, customer spending characteristics and favorable occupancy costs. The Company has established a business relationship with most of the major developers in the United States and believes that these relationships provide it with the opportunity to take advantage of attractive sites in new and existing real estate environments. Name Recognition and New Market Penetration The Company believes the visibility of its stores and the high foot traffic at its factory outlet mall and tourist locations has generated strong name recognition of Rocky Mountain Chocolate Factory and demand for its franchises. The Rocky Mountain Chocolate Factory system has historically been concentrated in the western United States and the Rocky Mountains, but recent growth has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. This growth has further increased the Company's name recognition and demand for its franchises. Distribution of Rocky Mountain Chocolate Factory products through new channels also increases name recognition and brand awareness in areas of the country in which the Company has not previously had a significant presence. The Company believes that by distributing selected Rocky Mountain Chocolate Factory products through new distribution channels its name recognition will improve and benefit its entire store system. STORE CONCEPT The Company seeks to establish a fun and inviting atmosphere in its Rocky Mountain Chocolate Factory store locations. Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares certain products, including fudge and caramel apples, in the store. Customers can observe store personnel making fudge from start to finish, including the mixing of ingredients in old-fashioned copper kettles and the cooling of the fudge on large marble tables, and are often invited to sample the store's products. The Company believes that an average of approximately 40% of the revenues of franchised stores are generated by sales of products prepared on the premises. The Company believes the in-store preparation and aroma of its products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for its customers and convey an image of freshness and homemade quality. 6 7 Rocky Mountain Chocolate Factory stores have a distinctive country Victorian decor, which further enhances their friendly and enjoyable atmosphere. Each store includes finely-crafted wood cabinetry, copper and brass accents, etched mirrors and large marble tables on which fudge and other products are made. To ensure that all stores conform to the Rocky Mountain Chocolate Factory image, the Company's design staff provides working drawings and specifications and approves the construction plans for each new store. The Company also controls the signage and building materials that may be used in the stores. The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week. Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays. Store hours in tourist areas may vary depending upon the tourist season. PRODUCTS AND PACKAGING The Company typically produces approximately 300 chocolate candies and other confectionery products, using proprietary recipes developed primarily by the Company's master candy maker. These products include many varieties of clusters, caramels, creams, mints and truffles. The Company continues to engage in a major effort to expand its product line by developing additional exciting and attractive new products. During the Christmas, Easter and Valentine's Day holiday seasons, the Company may make as many as 100 additional items, including many candies offered in packages specially designed for the holidays. A typical Rocky Mountain Chocolate Factory store offers up to 100 of these candies throughout the year and up to an additional 100 during holiday seasons. Individual stores also offer more than 15 premium fudges and other products prepared in the store. The Company believes that approximately 50% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufactured at the Company's factory, 40% by products made in the store using Company recipes and ingredients purchased from the Company or approved suppliers and the remaining 10% by products, such as ice cream, coffee and other sundries, purchased from approved suppliers. The Company uses only the finest chocolates, nut meats and other wholesome ingredients in its candies. In February 1995, the Company's Valentine's Day gift-boxed chocolates were awarded Money Magazine's top rating and were described as having "superior flavor" which is "intense" and "natural." The Company continually strives to offer new confectionery products in order to maintain the excitement and appeal of its products. Chocolate candies manufactured by the Company are sold at prices ranging from $12.90 to $14.90 per pound, with an average price of $13.50 per pound. Franchisees set their own retail prices, though the Company does recommend prices for all of its products. The Company develops special packaging for the Christmas, Valentine's Day and Easter holidays, and customers can have their purchases packaged in decorative boxes and fancy tins throughout the year. The Company's packaging for its Rocky Mountain Mints in 1995 received the Award of Excellence from the National Paperbox Association. OPERATING ENVIRONMENT The Company currently establishes Rocky Mountain Chocolate Factory stores in three primary environments: factory outlet malls, tourist areas and regional malls. Each of these environments has a number of attractive features, including high levels of foot traffic. 7 8 Factory Outlet Malls There are approximately 280 factory outlet malls in the United States, and as of February 28, 2001, there were Rocky Mountain Chocolate Factory stores in approximately 100 of these malls in over 35 states. The Company has established business relationships with most of the major outlet mall developers in the United States. Although not all factory outlet malls provide desirable locations for the Company's stores, management believes the Company's relationships with these developers will provide it with the opportunity to take advantage of attractive sites in new and existing outlet malls. Tourist Areas As of February 28, 2001, there were approximately 50 Rocky Mountain Chocolate Factory stores in locations considered to be tourist areas, including Fisherman's Wharf in San Francisco, California and the Riverwalk in San Antonio, Texas. Tourist areas are very attractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increase the Company's visibility and name recognition. The Company believes significant opportunities exist to expand into additional tourist areas with high levels of foot traffic. Regional Malls There are approximately 1,800 regional malls in the United States, and as of February 28, 2001, there were Rocky Mountain Chocolate Factory stores in approximately 20 of these malls, including locations in the Mall of America in Bloomington, Minnesota; Escondido, California; Fort Collins, Colorado; and West Palm Beach, Florida. Although often providing favorable levels of foot traffic, regional malls typically involve more expensive rent structures and more competing food and beverage concepts. The Company believes there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory stores such as airports and sports arenas. Three franchised Rocky Mountain Chocolate Factory stores exist at airport locations: two at Denver International Airport and one at Vancouver International Airport in Canada. FRANCHISING PROGRAM General The Company's franchising philosophy is one of service and commitment to its franchise system, and the Company continuously seeks to improve its franchise support services. The Company's concept has consistently been rated as an outstanding franchise opportunity by publications and organizations rating such opportunities. In February 2001, Rocky Mountain Chocolate Factory was rated the number one franchise opportunity in the candy category by Entrepreneur Magazine. As of April 30, 2001, there were 213 franchised stores in the Rocky Mountain Chocolate Factory system. Franchisee Sourcing and Selection The majority of new franchises are awarded to persons referred by existing franchisees, to interested consumers who have visited Rocky Mountain Chocolate Factory stores and to existing franchisees. The Company also advertises for new franchisees in national and regional newspapers as suitable potential store locations come to the Company's attention. Franchisees are approved by the Company on the basis of the applicant's net worth and liquidity, together with an assessment of work ethic and personality compatibility with the Company's operating philosophy. 8 9 In fiscal 1992, the Company entered into a franchise development agreement covering Canada with Immaculate Confections, Ltd. of Vancouver, British Columbia. Pursuant to this agreement, Immaculate Confections purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in Canada. Immaculate Confections, as of April 30, 2001, operated 27 stores under the agreement. In fiscal 2000, the Company entered into a franchise development agreement covering the Gulf Cooperation Council States of United Arab Emirates, Qatar, Bahrain, Saudi Arabia, Kuwait and Oman with Al Muhairy Group of United Arab Emirates. Pursuant to this agreement, Al Muhairy Group purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in the Gulf Cooperation Council States. Al Muhairy Group, as of April 30, 2001, operated 1 store under this agreement. Training and Support Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a 7-day comprehensive training program in store operations and management. The Company has established a training center at its Durango headquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store. Topics covered in the training course include the Company's philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnel management. Training is based on standard operating policies and procedures contained in an operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement. Additionally, and importantly, trainees are provided with a complete orientation to Company operations by working in key factory operational areas and by meeting with each member of the senior management of the Company. Training continues through the opening of the store, where Company field consultants assist and guide the franchisee in all areas of operation. The Company's operating objectives include providing Company knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to maximize their skills and ensure that they are fully versed in the Company's proven techniques. The Company provides ongoing support to franchisees through its field consultants, who maintain regular and frequent communication with the stores by phone and by site visits. The field consultants also review and discuss with the franchisee store operating results and provide advice and guidance in improving store profitability and in developing and executing store marketing and merchandising programs. The Company has developed a handbook containing a "pre-packaged" local store marketing plan, which allows franchisees to implement cost-effective promotional programs that have proven successful in other Rocky Mountain Chocolate Factory stores. Quality Standards and Control The franchise agreement for Rocky Mountain Chocolate Factory franchisees requires compliance with the Company's procedures of operation and food quality specifications and permits audits and inspections by the Company. Operating standards for Rocky Mountain Chocolate Factory stores are set forth in operating manuals. These manuals cover general operations, factory ordering, merchandising, advertising and accounting procedures. Through their regular visits to franchised stores, Company field consultants audit performance and adherence to Company standards. The Company has the right to terminate any franchise agreement for non-compliance with the Company's operating standards. Products sold at the stores and ingredients used in the preparation of products approved for on-site preparation must be purchased from the Company or from approved suppliers. 9 10 The Franchise Agreement: Terms and Conditions The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is made pursuant to the Uniform Franchise Offering Circular prepared in accordance with federal and state laws and regulations. States that regulate the sale and operation of franchises require a franchiser to register or file certain notices with the state authorities prior to offering and selling franchises in those states. Under the current form of domestic Rocky Mountain Chocolate Factory franchise agreement, franchisees pay the Company (i) an initial franchise fee of $19,500 for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a marketing fee equal to 1% of monthly gross sales. Franchisees are generally granted exclusive territory with respect to the operation of Rocky Mountain Chocolate Factory stores only in the immediate vicinity of their stores. Chocolate products not made on the premises by franchisees must be purchased from the Company or approved suppliers. The franchise agreements require franchisees to comply with the Company's procedures of operation and food quality specifications, to permit inspections and audits by the Company and to remodel stores to conform with standards in effect. The Company may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in the judgment of the Company is likely to adversely affect the Rocky Mountain Chocolate Factory system. The Company's ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See "Business - Regulation." The agreements prohibit the transfer or assignment of any interest in a franchise without the prior written consent of the Company. The agreements also give the Company a right of first refusal to purchase any interest in a franchise if a proposed transfer would result in a change of control of that franchise. The refusal right, if exercised, would allow the Company to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee. The term of each Rocky Mountain Chocolate Factory franchise agreement is ten years, and franchisees have the right to renew for one additional ten-year term. Franchise Financing The Company does not provide prospective franchisees with financing for their stores, but has developed relationships with several sources of franchisee financing to whom it will refer franchisees. Typically, franchisees have obtained their own sources of such financing and have not required the Company's assistance. COMPANY STORE PROGRAM As of May 1, 2001, there were 4 Company-owned Rocky Mountain Chocolate Factory stores. Company-owned stores provide a training ground for Company-owned store personnel and district managers and a controllable testing ground for new products and promotions, operating and training methods and merchandising techniques. Managers of Company-owned stores are required to comply with all Company operating standards and undergo training and receive support from the Company similar to the training and support provided to franchisees. See "Franchising Program-Training and Support" and "Franchising Program-Quality Standards and Control." 10 11 MANUFACTURING OPERATIONS General The Company manufactures its chocolate candies at its factory in Durango, Colorado. All products are produced consistent with the Company's philosophy of using only the finest, highest quality ingredients with no artificial preservatives to achieve its marketing motto of "The Peak of Perfection in Handmade Chocolates(R)." It has always been the belief of management that the Company should control the manufacturing of its own chocolate products. By controlling manufacturing, the Company can better maintain its high product quality standards, offer unique, proprietary products, manage costs, control production and shipment schedules and potentially pursue new or under-utilized distribution channels. Manufacturing Processes The manufacturing process primarily involves cooking or preparing candy centers, including nuts, caramel, peanut butter, creams and jellies, and then coating them with chocolate or other toppings. All of these processes are conducted in carefully controlled temperature ranges, and the Company employs strict quality control procedures at every stage of the manufacturing process. The Company uses a combination of manual and automated processes at its factory. Although the Company believes that it is currently preferable to perform certain manufacturing processes, such as dipping of some large pieces, by hand, automation increases the speed and efficiency of the manufacturing process. The Company has from time to time automated processes formerly performed by hand where it has become cost-effective for the Company to do so without compromising product quality or appearance. The Company seeks to ensure the freshness of products sold in Rocky Mountain Chocolate Factory stores with frequent shipments. Most Rocky Mountain Chocolate Factory stores do not have significant space for the storage of inventory, and the Company encourages franchisees and store managers to order only the quantities that they can reasonably expect to sell within approximately two to four weeks. For these reasons, the Company generally does not have a significant backlog of orders. Ingredients The principal ingredients used by the Company are chocolate, nuts, sugar, corn syrup, cream and butter. The factory receives shipments of ingredients daily. To ensure the consistency of its products, the Company buys ingredients from a limited number of reliable suppliers. In order to assure a continuous supply of chocolate and certain nuts, the Company frequently enters into purchase contracts of between six to eighteen months for these products. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall. The Company has one or more alternative sources for all essential ingredients and therefore believes that the loss of any supplier would not have a material adverse effect on the Company and its results of operations. The Company currently also purchases small amounts of finished candy from third parties on a private label basis for sale in Rocky Mountain Chocolate Factory stores. Trucking Operations The Company operates eight trucks and ships a substantial portion of its products from the factory on its own fleet. The Company's trucking operations enable it to deliver its products to the stores quickly and cost-effectively. In addition, the Company back-hauls its own ingredients and supplies, as well as product from third parties, on return trips as a basis for increasing trucking program economics. 11 12 MARKETING The Company relies primarily on in-store promotion and point-of-purchase materials to promote the sale of its products. The monthly marketing fees collected from franchisees are used by the Company to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update the Company's local store marketing handbooks. The Company focuses on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and mail order catalogs generated by its in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs. The Company aggressively seeks low cost, high return publicity opportunities through participation in local and regional events, sponsorships and charitable causes. The Company has not historically and does not intend to engage in national advertising in the near future. COMPETITION The retailing of confectionery products is highly competitive. The Company and its franchisees compete with numerous businesses that offer confectionery products. Many of these competitors have greater name recognition and financial, marketing and other resources than the Company. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could adversely affect the Company and its results of operations and its ability to expand successfully. The Company believes that its principal competitive strengths lie in its name recognition and its reputation for the quality, value, variety and taste of its products and the special ambiance of its stores; its knowledge and experience in applying criteria for selection of new store locations; its expertise in merchandising and marketing of chocolate and other candy products; and the control and training infrastructures it has implemented to assure execution of successful practices and techniques at its store locations. In addition, by controlling the manufacturing of its own chocolate products, the Company can better maintain its high product quality standards for those products, offer proprietary products, manage costs, control production and shipment schedules and pursue new or under-utilized distribution channels. TRADE NAME AND TRADEMARKS The trade name "Rocky Mountain Chocolate Factory(R)," the phrases, "The Peak of Perfection in Handmade Chocolates(R)", "America's Chocolatier(R)", "World's Chocolatier(TM)" as well as all other trademarks, service marks, symbols, slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory system, are proprietary rights of the Company. All of the foregoing are believed to be of material importance to the Company's business. The registration for the trademark "Rocky Mountain Chocolate Factory" has been granted in the United States and Canada. Applications have been filed to register the Rocky Mountain Chocolate Factory trademark and/or obtained in certain foreign countries. The Company has not attempted to obtain patent protection for the proprietary recipes developed by the Company's master candy-maker and is relying upon its ability to maintain the confidentiality of those recipes. 12 13 EMPLOYEES At February 28, 2001, the Company employed approximately 230 people. Most employees, with the exception of store, factory and corporate management, are paid on an hourly basis. The Company also employs some people on a temporary basis during peak periods of store and factory operations. The Company seeks to assure that participatory management processes, mutual respect and professionalism and high performance expectations for the employee exist throughout the organization. The Company believes that it provides working conditions, wages and benefits that compare favorably with those of its competitors. The Company's employees are not covered by a collective bargaining agreement. The Company considers its employee relations to be good. EXECUTIVE OFFICERS The executive officers of the Company and their ages at May 15, 2001 are as follows:
NAME AGE POSITION Franklin E. Crail ...................... 59 Chairman of the Board, President and Director Bryan J. Merryman ...................... 40 Chief Operating Officer, Chief Financial Officer, Treasurer and Director Edward L. Dudley ....................... 37 Vice President - Sales and Marketing Jay B. Haws ............................ 51 Vice President - Creative Services Virginia M. Perez ...................... 63 Corporate Secretary
Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. Since the incorporation of the Company in November 1982, he has served as its President and a Director. He was elected Chairman of the Board in March 1986. Prior to founding the Company, Mr. Crail was co-founder and president of CNI Data Processing, Inc., a software firm which developed automated billing systems for the cable television industry. Mr. Merryman joined the Company in December 1997 as Vice President - Finance and Chief Financial Officer. Since April 1999 Mr. Merryman has also served the Company as the Chief Operating Officer and as a Director, and since January 2000 as its Treasurer. Prior to joining the Company, Mr. Merryman was a principal in Knightsbridge Holdings, Inc. (a leveraged buyout firm) from January 1997 to December 1997. Mr. Merryman also served as Chief Financial Officer of Super Shops, Inc., a retailer and manufacturer of aftermarket auto parts from July 1996 to November 1997 and was employed for more than eleven years by Deloitte and Touche LLP, most recently as a senior manager. Mr. Dudley joined the Company in January 1997 to spearhead the Company's newly-formed Product Sales Development function as Vice President - Sales and Marketing, with the goal of increasing the Company's factory and retail sales. During his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served in a number of senior marketing and sales management capacities, including most recently that of Director, Distribution Services from March 1996 to January 1997. Mr. Dudley holds B.S. degrees in Finance and Accounting from the University of Colorado. Mr. Haws joined the Company in August 1991 as Vice President of Creative Services. Since 1981, Mr. Haws had been closely associated with the Company both as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he operated two Rocky Mountain Chocolate Factory franchises located in San Francisco, California. From 1983 to 1989 he served as Vice President of Marketing for Image Group, Inc., a marketing communications firm based in Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky Mountain Chocolate Factory franchises located in Sacramento, and Walnut Creek California. From 1973 to 1983 he was principal of Jay Haws and Associates, an advertising and graphic design agency. Mr. Haws holds a B.A. in graphics design and communication from California State University. 13 14 Ms. Perez joined the Company in June 1996 and has served as the Company's corporate secretary since February, 1997. From 1992 until joining the Company, she was employed by Huettig & Schromm, Inc., a property management and development firm in Palo Alto, California as executive assistant to the president and owner. Huettig & Schromm developed, owned and managed over 1,000,000 square feet of office space in business parks and office buildings on the San Francisco peninsula. Ms. Perez is a paralegal and has held various administrative positions during her career including executive assistant to the Chairman and owner of Sunset Magazine & Books, Inc. SEASONAL FACTORS The Company's sales and earnings are seasonal, with significantly higher sales and earnings occurring during the Christmas holiday and summer vacation seasons than at other times of the year, which causes fluctuations in the Company's quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale of franchises. Because of the seasonality of the Company's business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. REGULATION Each of the Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining the required licensing or approvals could delay or prevent the opening of new stores. New stores must also comply with landlord and developer criteria. Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. The Company is also subject to the Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations. Additionally, certain states have enacted and others may enact laws and regulations governing the termination or non-renewal of franchises and other aspects of the franchise relationship that are intended to protect franchisees. Although these laws and regulations, and related court decisions, may limit the Company's ability to terminate franchises and alter franchise agreements, the Company does not believe that such laws or decisions will have a material adverse effect on its franchise operations. However, the laws applicable to franchise operations and relationships continue to develop, and the Company is unable to predict the effect on its intended operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisers. Federal and state environmental regulations have not had a material impact on the Company's operations but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of new stores. Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of the Company's facilities for an indeterminate period of time. The Company's product labeling is subject to and complies with the Nutrition Labeling and Education Act of 1990. 14 15 The Company provides a limited amount of trucking services to third parties, to fill available space on the Company's trucks. The Company's trucking operations are subject to various federal and state regulations, including regulations of the Federal Highway Administration and other federal and state agencies applicable to motor carriers, safety requirements of the Department of Transportation relating to interstate transportation and federal, state and Canadian provincial regulations governing matters such as vehicle weight and dimensions. The Company believes it is operating in substantial compliance with all applicable laws and regulations. ITEM 2. PROPERTIES The Company's manufacturing operations and corporate headquarters are located at its 58,000 square foot manufacturing facility, which it owns, in Durango, Colorado. During fiscal 2001, the Company's factory produced approximately 2.03 million pounds of chocolate candies, a 1.0% increase over the approximately 2.01 million pounds produced in fiscal 2000. The factory has the capacity to produce approximately 3.5 million pounds per year. In January 1998, the Company acquired a two acre parcel adjacent to its factory to ensure the availability of adequate space to expand the factory as volume demands. As of April 30, 2001, all of the 8 Company-owned stores were occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, most of which contain optional five-year renewal rights. The Company does not deem any individual store lease to be significant in relation to its overall operations. The Company acts as primary lessee of some franchised store premises, which it then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. Current Company policy is not to act as primary lessee on any further franchised locations. At April 30, 2001, the Company was the primary lessee at 46 of its 213 franchised stores. The subleases for such stores are on the same terms as the Company's leases of the premises. For information as to the amount of the Company's rental obligations under leases on both Company-owned and franchised stores, see Note 5 of Notes to financial statements. ITEM 3. LEGAL PROCEEDINGS The Company is not currently involved in any legal proceedings that are material to the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2000 Annual Meeting of the Shareholders of the Company was held in Durango, Colorado 10:00 a.m., local time, on July 14, 2000. Proxies were solicited by the Board of Directors of the Company pursuant to Regulation 14A under the Securities and Exchange Act of 1934. There was no solicitation in opposition to the Board of Directors nominees as listed in the proxy statement and all of such nominees were duly elected. Out of a total of 1,956,784 shares of the Company's common stock outstanding and entitled to vote, 1,639,546 shares were present in person or by proxy, representing approximately 83.6 percent of the outstanding shares. The matter voted on by the stockholders, as fully described in the proxy statement for the annual meeting, was the election of Franklin E. Crail, Bryan J. Merryman, Gerald A. Kien, Lee N. Mortenson, Fred M. Trainor and Clyde Wm. Engle as directors of the Company. No nominee received less than 83% of the shares voted. 15 16 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's Common Stock trades on the National Market System of The Nasdaq Stock Market under the trading symbol "RMCF". On May 18, 1998 the Company purchased 336,000 shares of its common stock at $5.15 per share in a private transaction. On various dates commencing on December 22, 1999 through February 7, 2000, the Company purchased 203,500 shares of the Company's issued and outstanding common stock at prices ranging from $5.25 to $5.56. On March 21, 2000, the Company commenced a tender offer to acquire shares of its common stock. Pursuant to the tender offer, which was completed on May 1, 2000, the Company acquired 447,595 shares of its issued and outstanding common stock at $6.25 per share. On January 19, 2001 and January 26, 2001 the Company purchased 38,000 and 8,000 shares, respectively, of the Company's issued and outstanding common stock at $5.0625 per share. The Company made these purchases because the Company felt that its Common Stock was undervalued and that such purchases would therefore be in the best interest of the Company and its stockholders. The table below sets forth high and low bid information for the Common Stock as quoted on Nasdaq for each quarter of fiscal years 2001 and 2000. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
FISCAL YEAR ENDED FEBRUARY 28, 2001 HIGH LOW First Quarter $5.750 $3.375 Second Quarter 5.125 3.813 Third Quarter 4.063 3.125 Fourth Quarter 5.250 3.125 FISCAL YEAR ENDED FEBRUARY 29, 2000 HIGH LOW First Quarter $6.688 $3.000 Second Quarter 6.375 5.250 Third Quarter 6.125 3.625 Fourth Quarter 5.875 4.000
On May 15, 2001 the closing bid price for the Common Stock as reported on the Nasdaq Stock Market was $6.55. (b) HOLDERS On May 15, 2001 there were approximately 440 record holders of the Company's Common Stock. The Company believes that there are more than 800 beneficial owners of its Common Stock. (c) DIVIDENDS The Company has not paid cash dividends on its Common Stock since its inception and does not intend to pay cash dividends for the foreseeable future. Any future earnings will be retained for use in the Company's business. 16 17 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below for the fiscal years ended February 28 or 29, 1997 through 2001, are derived from the Financial Statements of the Company, which have been audited by Grant Thornton LLP, independent certified public accountants. The selected financial data should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (Amounts in thousands, except per share data) YEARS ENDED FEBRUARY 28 or 29,
SELECTED STATEMENT OF OPERATIONS DATA 1997 1998 1999 2000 2001 Total revenues $ 22,281 $ 23,764 $ 26,233 $ 24,647 $ 22,572 Operating income (loss) (1,026) 2,599 1,319 2,662 3,105 Income (loss) from continuing operations (1,010) 1,260 421 1,057 1,556 Income (loss) from discontinued operations (net of income taxes) (356) (1,020) -- -- -- Net income (loss) $ (1,366) $ 240 $ 421 $ 1,057 $ 1,556 BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ (.35) $ .43 $ .16 $ .41 $ .77 Discontinued Operations (.12) (.35) -- -- -- Net Income (loss) $ (.47) $ .08 $ .16 $ .41 $ .77 DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ (.35) $ .43 $ .16 $ .41 $ .77 Discontinued Operations (.12) (.35) -- -- -- Net Income (loss) $ (.47) $ .08 $ .16 $ .41 $ .77 Weighted average common shares outstanding 2,908 2,913 2,665 2,581 2,026 Weighted average common shares outstanding, assuming dilution 2,908 2,930 2,677 2,597 2,031 SELECTED BALANCE SHEET DATA Working capital $ 2,664 $ 3,949 $ 1,558 $ 1,589 $ 1,249 Total assets 18,666 19,868 18,652 16,440 15,042 Long-term debt 5,737 5,993 5,250 3,774 3,297 Stockholders' equity 9,779 10,019 8,509 8,433 7,062 SUPPLEMENTAL INFORMATION Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) $ 2,195 $ 3,934 $ 2,951 $ 4,225 $ 4,255
17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the audited financial statements and related Notes of the Company included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. The Company's ability to successfully achieve expansion of its Rocky Mountain Chocolate Factory franchise system depends on many factors not within the Company's control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion. Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depends on many factors not within the Company's control including the receptivity of its franchise system of its product introductions and promotional programs. As a result, the actual results realized by the Company could differ materially from the results discussed in or contemplated by the forward-looking statements made herein. Words or phrases such as "will," "anticipate," "expect," "believe," "intend," "estimate," "project," "plan" or similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements in this Annual Report on Form 10-K. RESULTS OF OPERATIONS FISCAL 2001 COMPARED TO FISCAL 2000 Results Summary The Company posted record earnings per share in fiscal 2001. Earnings per share increased 88% from $.41 in fiscal 2000 to $.77 in fiscal 2001. Costs associated with Whitman Candies, Inc.'s unsolicited tender offer negatively impacted earnings per share by approximately $.10 in fiscal 2000. Revenues decreased 8.4% from fiscal 2000 to fiscal 2001. Operating income increased 16.6% from $2.7 million in fiscal 2000 to $3.1 million in fiscal 2001. Net income increased 47.3% from $1.1 million in fiscal 2000 to $1.6 million in fiscal 2001. Net income, as adjusted to exclude the costs associated with Whitman's tender offer, increased 18.4% from $1.3 million in fiscal 2000 to $1.6 million in fiscal 2001. Revenues
($'s in thousands) 2001 2000 Change % Change Factory Sales $11,933.5 $11,036.9 $ 896.6 8.1% Retail Sales 7,049.4 10,315.5 (3,266.1) (31.7%) Royalty and Marketing Fees 3,141.9 2,963.0 178.9 6.0% Franchise Fees 447.0 331.4 115.6 34.9% Total $22,571.8 $24,646.8 $(2,075.0) (8.4%)
Factory Sales Factory sales increased 8.1%, or $897,000, to $11.9 million in fiscal 2001 from $11.0 million in fiscal 2000. This increase was due primarily to an increase in the number of franchised stores in operation during fiscal 2001 versus fiscal 2000. This increase was partially offset by a decrease in same store pounds purchased from the factory by franchised stores of 2.0% in fiscal 2001 versus fiscal 2000. 18 19 Retail Sales Retail sales decreased $3.3 million, or 31.7%, to $7.0 million in fiscal 2001 compared to $10.3 million in fiscal 2000. This decrease resulted primarily from a decrease in the number of Company-owned stores from 34 as of February 29, 2000 to 14 as of February 28, 2001 and a 4.3% decrease in same store sales. In fiscal 2002, the Company plans to complete phasing out its Rocky Mountain Chocolate Factory Company-owned store program. The Company plans to sell to new or existing franchisees all viable Company-owned store locations with the exception of four Company-owned stores located in key markets in Colorado. The Colorado Stores are excluded because these stores will be used to test sales, marketing, design and operational initiatives. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $179,000 or 6.0%, to $3.14 million in fiscal 2001, compared to $2.96 million in fiscal 2000. This increase resulted from an increase in the number of units in operation from 166 in fiscal 2000 to 180 in fiscal 2001 partially offset by a decrease in same store sales of 3.9%. Franchise fee revenues increased $116,000 in fiscal 2001 compared to fiscal 2000 due to an increase in the number of new franchises sold. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales increased to 53.7% in fiscal 2001 versus 52.6% in fiscal 2000. This increase resulted from decreased retail sales, which generate higher margins than factory sales, and a decrease in Company-owned store margins from 58.7% in fiscal 2000 to 58.0% in fiscal 2001. Factory margins increased to 39.4% in fiscal 2001 from 36.8% in fiscal 2000. This improvement was due in part to certain changes to the Company's manufacturing processes and cost structure. Franchise Costs Franchise costs increased $146,000, or 15.0%, in fiscal 2001 compared to fiscal 2000. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 31.3% in fiscal 2001 from 29.7% in fiscal 2000. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of increased franchise support costs partially offset by a 8.9% increase in income from franchise fees and royalty and marketing fees. Sales & Marketing Sales and Marketing costs decreased 12.5% to $1.2 million in fiscal 2001 from $1.3 million in fiscal 2000. This decrease is due to the de-emphasizing of new channel sales efforts and an overall planned decrease in sales and marketing costs. General and Administrative General and administrative expenses increased 18.7% to $2.1 million in fiscal 2001 from $1.8 million in fiscal 2000, primarily as a result of increased bad debt expense. As a percentage of total revenues, general and administrative expense increased to 9.1% in fiscal 2001 from 7.1% in fiscal 2000. 19 20 Retail Operating Expenses Retail operating expenses decreased to $3.7 million in fiscal 2001 from $5.1 million in fiscal 2000; a decrease of 26.8%. This decrease resulted primarily from a decrease in the number of Company-owned stores from 34 at February 29, 2000 to 14 at February 28, 2001. Retail operating expenses, as a percentage of retail sales, increased to 53.1% in fiscal 2001 compared to 49.5% in fiscal 2000 due to the decrease in same store sales of 4.3%. Depreciation and Amortization Depreciation and amortization decreased 26.4% to $1.15 million in fiscal 2001 from $1.56 million in fiscal 2000. The decrease in depreciation and amortization is due primarily to lower depreciation expense as a result of fewer Company-owned stores and fewer fixtures used in outside channels. Other Expense Other expense of $566,000 incurred in fiscal 2001 decreased 39.7% from the $939,000 incurred in fiscal 2000. This decrease was due primarily to non-recurring costs of approximately $420,000 related to the unsolicited tender offer for 100% of the Company's outstanding common stock by Whitman's Candies, Inc., which commenced in May 1999 and was withdrawn on November 4, 1999. These non-recurring expenses reduced earnings per share by approximately $.10 in fiscal 2000. This decline was partially offset by increased interest expense on higher average amounts of outstanding short-term debt. Income Tax Expense The Company's effective income tax rate in fiscal 2001 and fiscal 2000 was 38.7%. FISCAL 2000 COMPARED TO FISCAL 1999 Results Summary The Company posted record earnings per share, as adjusted to exclude the costs of Whitman's Candies, Inc. unsolicited tender offer, in fiscal 2000. Earnings per share, as adjusted, increased 219% from $.16 in fiscal 1999 to $.51 in fiscal 2000. Earnings per share increased 156% from $.16 in fiscal 1999 to $.41 in fiscal 2000. Revenues decreased 6.0% from fiscal 1999 to fiscal 2000. Operating income increased 102% from $1.3 million in fiscal 1999 to $2.7 million in fiscal 2000. Net income, as adjusted to exclude the costs associated with Whitman's tender offer, increased 212% from $421,000 in fiscal 1999 to $1.3 million in fiscal 2000. Net income increased 151% from $421,000 in fiscal 1999 to $1.1 million in fiscal 2000. Revenues
($'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%)
20 21 Factory Sales Factory sales decreased 3.5%, or $396,000, to $11.0 million in fiscal 2000 from $11.4 million in fiscal 1999. This decrease was due to the Company shifting its strategic focus from growing sales through new distribution channels to concentrating on its core competency, franchising the Rocky Mountain Chocolate Factory retail store concept. New distribution channel sales amounted to approximately $1.4 million in fiscal 1999 and decreased 45% to approximately $800,000 in fiscal 2000. Core factory sales (i.e. excluding new distribution channels) grew at approximately 2.6% in fiscal 2000 compared to fiscal 1999. The increase in core factory sales was driven primarily by an increase in the number of retail franchise units operating in fiscal 2000 compared to fiscal 1999. Same store factory pounds purchased from the factory by franchised stores were flat in fiscal 2000 versus fiscal 1999. Same store pounds purchased is a comparison of pounds purchased from the factory by franchised stores open for 12 months in each fiscal year. Retail Sales Retail sales decreased approximately $1.4 million, or 12.3%, to $10.3 million in fiscal 2000, compared to $11.8 million in fiscal 1999. This decrease resulted primarily from a decrease in the number of Company-owned stores from 42 as of February 28, 1999 to 34 as of February 29, 2000 and a 5.4% decrease in same store sales. Royalties, Marketing Fees and Franchise Fees Royalties and marketing fees increased $43,000, or 1.5%, to $2.96 million in fiscal 2000, compared to $2.92 million in fiscal 1999. This increase resulted from an increase in the number of units in operation from 157 in fiscal 1999 to 166 in fiscal 2000 partially offset by a decrease in same store sales of 2.8%. Franchise fee revenues increased $212,000 in fiscal 2000 compared to fiscal 1999 due to an increase in the number of new franchises sold. Costs and Expenses Cost of Sales Cost of sales as a percentage of sales decreased to 52.6% in fiscal 2000 versus 54.8% in fiscal 1999. This improvement resulted from increased factory margins. Factory margins increased to 36.8% in fiscal 2000 from 30.7% in fiscal 1999. This improvement was due in part to certain changes to the Company's manufacturing processes and cost structure. Retail store margins decreased in fiscal 2000 to 58.7% versus 59.3% in fiscal 1999. Franchise Costs Franchise costs decreased $124,000, or 11.3%, in fiscal 2000 compared to fiscal 1999 due to decreased support costs. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 29.7% in fiscal 2000 from 36.2% in fiscal 1999 due to decreased support costs and a 176% increase in franchise fee revenue. Sales & Marketing Sales and Marketing costs decreased 18.6% to $1.3 million in fiscal 2000 from $1.6 million in fiscal 1999. This decrease is due to the de-emphasizing of new channel sales efforts and an overall planned decrease in sales and marketing costs. 21 22 General and Administrative General and administrative expenses decreased 3.3% to $1.76 million in fiscal 2000 from $1.82 million in fiscal 1999, primarily as a result of decreased bad debt expense related to new distribution channel customers. As a percentage of total revenues, general and administrative expense increased to 7.1% in fiscal 2000 from 6.9% in fiscal 1999. Retail Operating Expenses Retail operating expenses decreased to $5.1 million in fiscal 2000 from $6.0 million in fiscal 1999; a decrease of 15.0%. This decrease resulted primarily from a decrease in the number of Company-owned stores from 42 at February 28, 1999 to 34 at February 29, 2000. Retail operating expenses, as a percentage of retail sales, improved to 49.5% in fiscal 2000 compared to 51.1% in fiscal 1999 as a result of the implementation of certain cost control measures. Depreciation and Amortization Depreciation and amortization increased 3.6% to $1.56 million in fiscal 2000 from $1.51 million in fiscal 1999. The increase in depreciation and amortization is due primarily to increased depreciation on certain fixtures used in outside channels and increased goodwill amortization related to the acquisition of several stores from a franchisee in August of 1998, partially offset by lower depreciation expense as a result of fewer Company-owned stores. Other Expense Other expense of $939,000 incurred in fiscal 2000 increased 48.7% from the $631,000 incurred in fiscal 1999. This increase was due to non-recurring costs of approximately $420,000 related to the unsolicited tender offer for 100% of the Company's outstanding common stock by Whitman's Candies, Inc., which commenced in May 1999 and was withdrawn on November 4, 1999. These non-recurring expenses reduced earnings per share by approximately $.10 in fiscal 2000. This expense was partially offset by decreased interest expense on lower average amounts of outstanding long-term debt and lower average balances outstanding on the Company's revolving line of credit. Income Tax Expense The Company's effective income tax rate in fiscal 2000 and fiscal 1999 was 38.7%. Discontinued Operations In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment did not meet its long-term strategic goals, and accordingly, made the decision to dispose of these operations. See "NOTE 11 - DISCONTINUED OPERATIONS" of notes to financial statements. LIQUIDITY AND CAPITAL RESOURCES As of February 28, 2001, working capital was $1.2 million compared with $1.6 million as of February 29, 2000, a $400,000 decrease. The decrease in working capital was due primarily to increased short-term borrowings, the proceeds of which were used to purchase shares of the Company's common stock. Cash and cash equivalent balances decreased from $128,000 as of February 29, 2000 to $87,000 as of February 28, 2001 as a result of cash flows used in financing activities in excess of cash flows generated by operating and investing activities. The Company's current ratio was 1.29 to 1 at February 28, 2001 in comparison with 1.38 to 1 at February 29, 2000. 22 23 The Company's long-term debt is comprised primarily of a real estate mortgage facility used to finance the Company's factory expansion (unpaid balance as of February 28, 2001, $1.8 million), and chattel mortgage notes (unpaid balance as of February 28, 2001, $3.0 million) used to fund the fiscal 1996 and 1997 Company-owned store expansion and improve and automate the Company's factory infrastructure. The Company has a $3.0 million credit line, of which $2.45 million was available, secured by substantially all of the Company's assets except retail store assets and is subject to renewal in July, 2001. During fiscal 2001, the Company financed the sale of eight Company-owned stores for a single franchisee in the amount of approximately $870,000. For fiscal 2002, the Company anticipates making capital expenditures of approximately $675,000, which will be used to maintain and improve existing factory and administrative infrastructure. The Company believes that cash flow from operations and available bank lines of credit will be sufficient to fund capital expenditures and working capital requirements for fiscal 2002. IMPACT OF INFLATION Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally the Company's future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers. Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years. SEASONALITY The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company's products have occurred during the Christmas holiday and summer vacation seasons. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of the Company's business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year. 23 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not engage in commodity futures trading or hedging activities and does not enter into derivative financial instrument transactions for trading or other speculative purposes. The Company also does not engage in transactions in foreign currencies or in interest rate swap transactions that could expose the Company to market risk. However, the Company is exposed to some commodity price and interest rate risks. The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of February 28, 2001, $223,000 of the Company's long-term debt was subject to a variable interest rate. Assuming that this principal amount did not change during fiscal 2002, other than as a result of scheduled principal reductions, and assuming that the average effective interest rate in effect on this debt for 2002 increased by one percent as compared to the average effective interest rate in effect during 2001, the Company would incur an additional $1,200 in interest expense in 2002, as compared to 2001, and would experience a corresponding reduction in cash flow. A decrease in the average interest rate in effect on this debt during 2002 would result in a corresponding decrease in interest expense and an increase in cash flow. The Company also has a $3.0 million bank line of credit that bears interest at a variable rate. As of February 28, 2001, $550,000 was outstanding under the line of credit. The Company does not believe that it is exposed to any material interest rate risk related to the line of credit. The Chief Financial Officer and Chief Operating Officer of the Company has primary responsibility over the Company's long-term and short-term debt and has primary responsibility for determining the timing and duration of commodity purchase contracts and negotiating the terms and conditions of those contracts. 24 25 ITEM 8. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
Page Report of Independent Certified Public Accountants 26 Statements of Income 27 Balance Sheets 28 Statements of Changes in Stockholders Equity 29 Statements of Cash Flows 30 Notes to Financial Statements 31
25 26 Report of Independent Certified Public Accountants Board of Directors and Stockholders Rocky Mountain Chocolate Factory, Inc. We have audited the accompanying balance sheets of Rocky Mountain Chocolate Factory, Inc. as of February 28, 2001 and February 29, 2000, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended February 28, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. as of February 28, 2001 and February 29, 2000, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2001, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Dallas, Texas April 27, 2001 26 27 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2001 2000 1999 REVENUES Sales $ 18,982,948 $ 21,352,411 $ 23,193,011 Franchise and royalty fees 3,588,889 3,294,403 3,039,517 Total revenues 22,571,837 24,646,814 26,232,528 COSTS AND EXPENSES Cost of sales 10,190,091 11,235,252 12,706,474 Franchise costs 1,123,506 977,087 1,101,092 Sales & marketing 1,170,636 1,337,818 1,644,320 General and administrative 2,090,579 1,761,779 1,821,582 Retail operating 3,742,140 5,109,772 6,008,416 Provision for store closures -- -- 123,903 Depreciation and amortization 1,149,590 1,562,632 1,508,111 Total costs and expenses 19,466,542 21,984,340 24,913,898 OPERATING INCOME 3,105,295 2,662,474 1,318,630 OTHER INCOME (EXPENSE) Interest expense (660,620) (573,379) (698,557) Cost of unsolicited tender offer -- (419,954) -- Interest income 94,298 54,454 67,080 Other, net (566,322) (938,879) (631,477) INCOME FROM OPERATIONS BEFORE INCOME TAXES 2,538,973 1,723,595 687,153 INCOME TAX EXPENSE 982,585 667,030 265,725 NET INCOME $ 1,556,388 $ 1,056,565 $ 421,428 BASIC EARNINGS PER COMMON SHARE $ .77 $ .41 $ .16 DILUTED EARNINGS PER COMMON SHARE $ .77 $ .41 $ .16 WEIGHTED AVERAGE COMMON SHARE OUTSTANDING 2,026,075 2,580,604 2,665,567 DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 5,418 16,441 11,776 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 2,031,493 2,597,045 2,677,343
The accompanying notes are an integral part of these statements. 27 28 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS
AS OF FEBRUARY 28 or 29, 2001 2000 ASSETS CURRENT ASSETS Cash and cash equivalents $ 87,301 $ 128,192 Accounts receivable, less allowance for doubtful accounts of $59,342 and $139,912 2,161,457 1,931,187 Notes receivable 135,768 263,138 Refundable income taxes 37,574 76,689 Inventories 2,800,128 3,084,392 Deferred income taxes 113,906 188,999 Other 270,714 87,785 Total current assets 5,606,848 5,760,382 PROPERTY AND EQUIPMENT, NET 6,820,377 8,976,014 OTHER ASSETS Notes receivable, less allowance for doubtful notes of $143,202 and $0 1,212,572 55,343 Goodwill, less accumulated amortization of $614,603 and $584,397 915,397 1,277,603 Other 486,869 370,514 Total other assets 2,614,838 1,703,460 Total assets $ 15,042,063 $ 16,439,856 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,556,800 $ 1,930,700 Line of credit 550,000 75,000 Accounts payable 1,065,210 1,055,910 Accrued salaries and wages 1,006,630 653,209 Other accrued expenses 179,425 456,300 Total current liabilities 4,358,065 4,171,119 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,297,340 3,773,851 DEFERRED GAIN ON SALE OF ASSETS 192,246 -- DEFERRED INCOME TAXES 131,985 61,797 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.03 par value; 7,250,000 shares authorized; 1,923,284 and 2,386,879 shares issued and outstanding 57,698 71,606 Additional paid-in capital 2,926,612 5,879,753 Retained earnings 4,246,864 2,690,476 Less notes receivable from officers and directors (168,747) (208,746) Total stockholders' equity 7,062,427 8,433,089 Total liabilities and stockholders' equity $ 15,042,063 $ 16,439,856
The accompanying notes are an integral part of these statements. 28 29 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2001 2000 1999 COMMON STOCK Balance at beginning of year $ 71,606 $ 77,988 $ 87,373 Repurchase and retirement of common stock (14,808) (6,404) (10,080) Issuance of common stock 360 4 5 Exercise of stock options 540 18 690 Balance at end of year 57,698 71,606 77,988 NOTES RECEIVABLE FROM OFFICERS AND DIRECTORS Balance at beginning of year (208,746) (248,745) - Issuance of note - - (248,745) Reduction of notes 39,999 39,999 - Balance at end of year (168,747) (208,746) (248,745) ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 5,879,753 7,046,032 8,719,604 Repurchase and retirement of common stock (3,065,491) (1,169,805) (1,754,331) Issuance of common stock 49,640 844 699 Exercise of stock options 62,710 2,682 80,060 Balance at end of year 2,926,612 5,879,753 7,046,032 RETAINED EARNINGS Balance at beginning of year 2,690,476 1,633,911 1,212,483 Net income 1,556,388 1,056,565 421,428 Balance at end of year 4,246,864 2,690,476 1,633,911 TOTAL STOCKHOLDERS' EQUITY $7,062,427 $8,433,089 $8,509,186 COMMON SHARES Balance at beginning of year 2,386,879 2,599,599 2,912,449 Repurchase and retirement of common stock (493,595) (213,470) (336,000) Issuance of common stock 12,000 150 150 Exercise of stock options 18,000 600 23,000 Balance at end of year 1,923,284 2,386,879 2,599,599
The accompanying notes are an integral part of these statements. 29 30 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 or 29, 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,556,388 $ 1,056,565 $ 421,428 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,149,590 1,562,632 1,508,111 Provision for doubtful accounts 125,202 11,589 120,000 Asset impairment and store closure losses -- -- 123,903 (Gain) Loss on sale of assets (29,875) 77,148 (11,420) Changes in operating assets and liabilities: Accounts and notes receivable (485,353) 45,767 117,806 Refundable income taxes 39,115 306,822 99,937 Inventories 284,264 192,158 (708,584) Other assets (182,929) (13,958) 29,368 Accounts payable 9,300 (11,076) (229,783) Income taxes payable (120,463) 120,463 -- Deferred income taxes 145,281 213,020 (461,318) Accrued liabilities (8,649) (48,112) (223,533) Net cash provided by operating activities of continuing operations 2,481,871 3,513,018 785,915 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 1,495,670 503,644 39,300 Sale (purchase) of other assets (199,523) (785) 58,054 Purchase of property and equipment (466,448) (870,112) (1,383,718) Net cash provided by (used in) investing activities 829,699 (367,253) (1,286,364) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in line of credit 475,000 (825,000) 900,000 Proceeds from long-term debt 1,232,247 509,081 2,022,456 Payments on long-term debt (2,082,658) (1,885,299) (2,067,860) Loans to officers and directors -- -- (248,745) Reduction of loan from former officer 39,999 39,999 -- Proceeds from exercise of stock options 63,250 2,700 80,750 Repurchase and redemption of common stock (3,080,299) (1,176,209) (1,764,410) Net cash used in financing activities (3,352,461) (3,334,728) (1,077,809) NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- -- 100,032 NET DECREASE IN CASH AND CASH EQUIVALENTS (40,891) (188,963) (1,478,226) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 128,192 317,155 1,795,381 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 87,301 $ 128,192 $ 317,155
The accompanying notes are an integral part of these statements. 30 31 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Rocky Mountain Chocolate Factory, Inc. is an international franchiser, confectionery manufacturer and retail operator in the United States, Guam, Canada, and the United Arab Emirates. The Company manufactures an extensive line of premium chocolate candies and other confectionery products. The Company's revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees' sales; and sales at Company-owned stores of chocolates and other confectionery products. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. The Company reviews its long-lived assets, including identifiable intangible assets, whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company's policy is to review the recoverability of all assets, at a minimum, on an annual basis. Amortization of Goodwill Goodwill is amortized on the straight-line method over ten to twenty-five years. Franchise and Royalty Fees Franchise fee revenue is recognized upon completion of all significant initial services provided to the franchisee and upon satisfaction of all material conditions of the franchise agreement. In addition to the initial franchise fee, the Company receives a royalty fee of five percent (5%) and a marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory franchised stores' gross sales. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Additionally, estimates of losses anticipated to result from store closure and impairment are based on the best information currently available to management. Such estimates may differ materially from results actually produced by store closure as a result of uncertainties in the amount of finally negotiated lease settlements, the amount of operating losses sustained by the stores to their dates of closure and in the amount recoverable by sale or redeployment of assets of stores to be closed. 31 32 Vulnerability Due to Certain Concentrations The Company's stores are concentrated (45%) in the factory outlet mall environment. At April 30, 2001, 4 Company-owned stores and 95 franchise stores of 221 total stores are located in this environment. The Company is, therefore, vulnerable to changes in consumer traffic in this market environment and to changes in the level of construction of additional, new factory outlet mall locations. As of April 30, 2001, the Company had long-term notes receivable of approximately $1.3 million due from a single franchisee resulting from the Company financing the sale of thirteen Company-owned stores. The notes are collateralized by the underlying store assets. The Company is, therefore, vulnerable to change in the cash flow from these locations. Cash Equivalents Cash equivalents include cash in excess of daily requirements which is invested in various financial instruments having an original maturity of three months or less. Stock-Based Compensation Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and provides the required pro forma disclosures prescribed by SFAS 123. Earnings Per Share Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding during each year of 2,026,075, 2,580,604 and 2,665,567 for the fiscal years ended February 28 (29), 2001, 2000 and 1999. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options. Incremental shares assumed issued on the exercise of common stock options during the fiscal years ended February 28 (29), 2001, 2000 and 1999 were 5,418, 16,441 and 11,776. During 2001, 2000 and 1999, 220,000, 211,000 and 129,000 stock options were excluded from diluted shares as their affect was anti-dilutive. Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, short-term investments in money market funds, other liquid assets, trade receivables, payables, notes receivable, and debt. The fair value of all instruments approximates the carrying value. Reclassifications Certain reclassifications have been made to prior years' financial statements in order to conform with the presentation of the February 28, 2001 financial statements. 32 33 NOTE 2 - INVENTORIES Inventories consist of the following at February 28 or 29:
2001 2000 Ingredients and supplies $1,312,014 $1,490,813 Finished candy 1,488,114 1,593,579 $2,800,128 $3,084,392
NOTE 3 - PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following at February 28 or 29:
2001 2000 Land $ 513,618 $ 513,618 Building 3,723,086 3,681,808 Machinery and equipment 6,493,850 7,590,205 Furniture and fixtures 1,127,023 2,127,282 Leasehold improvements 832,148 1,611,785 Transportation equipment 205,539 199,639 12,895,264 15,724,337 Less accumulated depreciation 6,074,887 6,748,323 Property and equipment, net $ 6,820,377 $ 8,976,014
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT Line of Credit At February 28, 2001 the Company had a $3,000,000 line of credit from a bank, collateralized by substantially all of the Company's assets with the exception of the Company's retail store assets. Draws may be made under the line at 75% of eligible accounts receivable plus 50% of eligible inventory. Interest on borrowings is at prime (8.5% at February 28, 2001). At February 28, 2001, $2,450,000 was available for borrowings under the line of credit. Terms of the line require that the line be rested (that is, that there be no outstanding balance) for a period of 30 consecutive days during the term of the loan. The credit line is subject to renewal in July, 2001. Long-Term Debt Long-term debt consists of the following at February 28 or 29:
2001 2000 Real estate mortgage note payable in monthly installments of $17,490 through April, 2016 including interest at 8.25% per annum, collateralized by land and factory building. Interest adjusted to prime in May, 2001 and every five years thereafter until maturity in April 2016 $1,806,468 $1,875,134 Chattel mortgage note payable in monthly installments of $10,500 through March, 2001 including interest at 8.25% per annum, collateralized by machinery, equipment, furniture and fixtures -- 98,171 Chattel mortgage note payable in monthly installments of $12,359 through April, 2002 including interest at 8.25% per annum, collateralized by equipment 164,421 293,330
33 34 NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED Long Term Debt - continued Chattel mortgage note payable in monthly installments of $25,268 through April, 2003 including interest at 8.94% per annum, collateralized by machinery, equipment, furniture and fixtures. $596,015 $834,243 Chattel mortgage note payable in monthly installments of $5,472 through January, 2002 including interest at 10.36% per annum, collateralized by machinery, equipment, furniture and fixtures. 57,188 113,707 Chattel mortgage note payable in monthly installments of $27,632 through April, 2001 including interest at 7.9% per annum, collateralized by machinery, equipment, furniture and fixtures. 54,723 368,398 Chattel mortgage note payable in monthly installments of $10,177 through October, 2001 including interest at 10.35% per annum, collateralized by machinery, equipment, furniture and fixtures. 78,341 186,204 Chattel mortgage notes payable in monthly principal installments of $37,881 through April, 2002 plus interest at LIBOR plus 2.85% (8.42% at February 28, 2001), collateralized by equipment, furniture and fixtures. 223,283 760,803 Chattel mortgage note payable in monthly installments of $7,828 through November, 2001 including interest at 7.95% per annum, collateralized by equipment, furniture and fixtures. 68,177 153,000 Chattel mortgage note payable in monthly installments of $454 through October, 2003 including interest at 7.91% per annum, collateralized by equipment. 13,070 17,304 Chattel mortgage note payable in quarterly installments of $51,240 through January, 2002, and a final installment of $34,160 April, 2002, including interest at 6.73% per annum collateralized by equipment, furniture and fixtures. 227,975 495,176 Chattel mortgage note payable in monthly installments of $8,002 through February, 2003 including interest at 8.75% per annum, collateralized by computer equipment. 175,938 252,573 Chattel mortgage note payable in monthly installments of $5,294 through February, 2005 including interest at 8.75% per annum, collateralized by machinery and equipment. 214,100 256,508 Chattel mortgage note payable in monthly installments of $2,832 through January, 2006 including interest at 8.5% per annum, collateralized by machinery and equipment. 136,920 --
34 35 NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED Long Term Debt - continued Chattel mortgage note payable in monthly installments of interest only through May, 2001 and $31,685 thereafter through April, 2002 including interest at 8.75% per annum with the balance outstanding due May, 2002, collateralized by substantially all business assets. $1,000,000 $ -- Note payable in monthly installments of $5,497 through September, 2001 including interest at 7.59% per annum. 37,521 -- 4,854,140 5,704,551 Less current maturities 1,556,800 1,930,700 $3,297,340 $3,773,851
Maturities of long-term debt are as follows for the years ending February 28 or 29: 2002 $1,556,800 2003 1,363,080 2004 211,871 2005 171,648 2006 118,606 Thereafter 1,432,135 $4,854,140
Additionally, the line of credit and certain term debt are subject to various financial ratio and leverage covenants. At February 28, 2001 the Company was in violation of the Tangible Net Worth covenant, for which it has received a waiver. NOTE 5 - OPERATING LEASES The Company conducts its retail operations in facilities leased under five to ten year noncancelable operating leases. Certain leases contain renewal options for between two and ten additional years at increased monthly rentals. The majority of the leases provide for contingent rentals based on sales in excess of predetermined base levels. The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29: 2002 $ 343,237 2003 258,502 2004 178,351 2005 136,750 2006 86,037 Thereafter 34,500 $1,037,377
35 36 NOTE 5 - OPERATING LEASES - CONTINUED In some instances, in order to retain the right to site selection or because of requirements imposed by the lessor, the Company has leased space for its proposed franchise outlets. When a franchise was sold, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease. The Company's liability as primary lessee on sublet franchise outlets, all of which is offset by sublease rentals, is as follows for the years ending February 28 or 29: 2002 $ 971,938 2003 669,112 2004 426,407 2005 265,100 2006 183,273 Thereafter 83,024 $2,598,854
The following is a schedule of lease expense for all operating leases for the three years ended February 28 or 29:
2001 2000 1999 Minimum rentals $ 1,860,783 $ 2,237,464 $ 2,316,508 Less sublease rentals (1,186,307) (1,336,496) (1,239,663) Contingent rentals 22,030 49,426 35,150 $ 696,506 $ 950,394 $ 1,111,995
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:
2001 2000 1999 Current Federal $ 761,667 $ 374,704 $ 240,834 State 75,637 79,306 25,183 Total Current 837,304 454,010 266,017 Deferred Federal 128,539 175,810 (264) State 16,742 37,210 (28) Total Deferred 145,281 213,020 (292) Total $ 982,585 $ 667,030 $ 265,725
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:
2001 2000 1999 Statutory rate 34.0% 34.0% 34.0% Goodwill amortization .3% .5% 1.2% State income taxes, net of federal benefit 2.2% 3.0% 2.4% Other 2.2% 1.2% 1.1% Effective Rate 38.7% 38.7% 38.7%
36 37 NOTE 6 - INCOME TAXES - CONTINUED The components of deferred income taxes at February 29 or 28 are as follows:
Deferred Tax Assets 2001 2000 Allowance for doubtful accounts and notes $ 78,385 $ 54,146 Inventories 36,620 4,010 Accrued compensation 54,320 73,201 Loss provisions 160,436 583,729 Tax credit carryforward - 7,433 Deferred lease rentals 2,821 13,786 Other 4,875 29,471 337,457 765,776 Deferred Tax Liability - Depreciation (355,536) (638,574) Net deferred tax asset (liability) $ (18,079) $ 127,202
NOTE 7 - STOCK REPURCHASE Between March 6, 2001 and April 19, 2001, the Company repurchased 69,716 Company shares at an average price of $6.06 per share. Of the shares repurchased during this time period, 19,000 were repurchased from employees. In January 2001 the Company repurchased 46,000 Company shares at an average price of $5.06 per share. On March 21, 2000, the Company commenced a tender offer to acquire shares of its common stock. Pursuant to the tender offer, which was completed on May 1, 2000, the Company acquired 447,595 shares of its issued and outstanding common stock at $6.25 per share. Between December 22, 1999 and February 7, 2000, the Company repurchased 213,470 Company shares on the open market at an average price of $5.48 per share. On May 15, 1998, the Company purchased 336,000 shares and certain of its directors and executive officers purchased 104,000 shares of the Company's issued and outstanding common stock at $5.15 per share from La Salle National Bank of Chicago, Illinois, which obtained these shares through foreclosure from certain shareholders unrelated to any transactions of the Company. The Company loaned certain officers and directors the funds to acquire 40,000 of the 104,000 shares purchased by them. The loans are secured by the related shares, bear interest payable annually at 7.5% and are due May 15, 2003. NOTE 8 - STOCK OPTION PLANS Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan"), options to purchase 215,000 shares of the Company's common stock were granted at prices not less than market value at the date of grant. The 1985 Plan expired in October 1995. Options granted under the 1985 Plan could not have a term exceeding ten years. Options representing the right to purchase 46,000 shares of the Company's common stock remained outstanding under the 1985 Plan at February 28, 2001. Under the 1995 Stock Option Plan (the "1995 Plan"), the Nonqualified Stock Option Plan for Nonemployee Directors (the "Director's Plan")and the 2000 Nonqualified Stock Option Plan for Nonemployee Directors (the "2000 Director's Plan"), options to purchase up to 250,000, 90,000 and 60,000 shares, respectively, of the Company's common stock may be granted at prices not less than market value at the date of grant. Options granted may not have a term exceeding ten years under the 1995 plan and the Director's Plan. Options granted may not have a term exceeding five years under the 2000 Director's Plan. Options representing the right to purchase 181,000, 20,000 and 40,000 shares of the Company's common stock were outstanding under the 1995 Plan, the 37 38 NOTE 8 - STOCK OPTION PLANS - CONTINUED Director's Plan, and the 2000 Director's Plan, respectively, at February 28, 2001. Options become exercisable over a one to five year period from the date of the grant. The options outstanding under these plans will expire, if not exercised, in June 2002 through March 2010. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with those provisions, the Company applies APB opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost if the exercise price is not less than market. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant dates as prescribed by SFAS 123, net income and diluted income per share would have been reduced to the pro-forma amounts indicated in the table below for the years ending February 28 or 29(in 000's except per share amounts):
2001 2000 1999 Net Income - as reported $ 1,556 $ 1,057 $ 421 Net Income - pro forma 1,427 862 362 Basic Income per Share-as reported .77 .41 .16 Diluted Income per Share-as reported .77 .41 .16 Basic Income per Share-pro forma .70 .33 .14 Diluted Income per Share-pro forma .70 .33 .14
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:
2001 2000 1999 Expected dividend yield 0% 0% 0% Expected stock price volatility 50% 65% 65% Risk-free interest rate 6.5% 6.5% 6.0% Expected life of options 7 years 5 years 7 years
Information with respect to options outstanding under the Plans at February 28, 2001, and changes for the three years then ended was as follows:
2001 Weighted Average Shares Exercise Price Outstanding at beginning of year 296,000 $ 6.68 Granted 10,000 4.00 Exercised (18,000) 3.51 Forfeited (1,000) 7.75 Outstanding at end of year 287,000 $ 6.78 Options exercisable at February 28, 2001 185,800 $ 7.64
2000 Weighted Average Exercise Price Shares 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
38 39 NOTE 8 - STOCK OPTION PLANS - CONTINUED
1999 Weighted Average Shares Exercise Price Outstanding at beginning of year 290,000 $ 7.81 Granted (23,000) 3.51 Forfeited (26,000) 10.63 Outstanding at end of year 241,000 $ 7.91 Options exercisable at February 28, 1999 141,800 $ 9.18 Weighted average fair value per share of options granted during 2001 and 2000 were $1.87 and $2.89, respectively. There were no options granted during 1999.
Additional information about stock options outstanding at February 28, 2001 is summarized as follows:
Options Outstanding Weighted average Number remaining contractual Weighted average Range of exercise prices outstanding life exercise price $4.00 to 4.50 67,000 6.20 years $ 4.30 $5.12 to 5.875 140,000 6.51 years 5.27 $7.50 to 18.00 80,000 4.13 years 11.52 287,000
Options Exercisable Number Weighted average Range of exercise prices Exercisable exercise price $4.00 to 4.50 47,000 $ 4.26 $5.12 to 5.875 66,000 5.38 $7.50 to 18.00 72,800 11.88 185,800
NOTE 9 - LOSS PROVISIONS Loss provisions were provided as follows: Store Closures In February 1999, the Company adopted a plan to close two underperforming Company-owned stores. The Company made a loss provision in February 1999 for closure of these stores in the total amount of approximately $123,000 including $86,000 for estimated operating losses to date of closure and $37,000 for writedown of store assets to their estimated recoverable values. Inventory Obsolescence In February 1999, a loss provision was made in the amount of $398,000 to reduce certain inventories to the lower of cost or market. This charge is included in cost of sales in the accompanying statements of income. 39 40 NOTE 10 - OPERATING SEGMENTS The Company classifies its business interests into three reportable segments: Franchising, Retail stores and Manufacturing. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company's reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All intersegment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:
Franchising Manufacturing Retail Other Total FY 2001 Total revenues 3,588,889 14,284,080 7,049,421 -- 24,922,390 Intersegment revenues -- (2,350,553) -- -- (2,350,553) Revenue from external customers 3,588,889 11,933,527 7,049,421 -- 22,571,837 Segment profit (loss) 1,324,940 3,876,785 209,779 (2,872,531) 2,538,973 Total assets 1,853,333 8,547,291 2,597,870 2,043,569 15,042,063 Capital expenditures 44,128 134,740 167,539 120,041 466,448 Total depreciation & amortization 86,844 457,629 420,661 184,456 1,149,590 FY 2000 Total revenues 3,294,403 13,716,134 10,315,509 -- 27,326,046 Intersegment revenues -- (2,679,232) -- -- (2,679,232) Revenue from external customers 3,294,403 11,036,902 10,315,509 -- 24,646,814 Segment profit (loss) 1,319,459 3,221,857 69,733 (2,887,454) 1,723,595 Total assets 773,664 8,850,408 5,004,654 1,811,130 16,439,856 Capital expenditures 51,173 416,398 93,515 309,026 870,112 Total depreciation & amortization 172,969 519,938 682,929 186,796 1,562,632 FY 1999 Total revenues 3,039,517 14,737,115 11,759,655 -- 29,536,287 Intersegment revenues -- (3,303,759) -- -- (3,303,759) Revenue from external customers 3,039,517 11,433,356 11,759,655 -- 26,232,528 Segment profit (loss) 806,106 2,990,147 48,936 (3,158,036) 687,153 Total assets 889,713 8,947,006 6,507,865 2,307,516 18,652,100 Capital expenditures 38,666 720,670 529,172 95,210 1,383,718 Total depreciation & amortization 178,575 447,140 666,056 216,340 1,508,111
NOTE 11 - DISCONTINUED OPERATION In December 1997, the Company decided its Fuzziwig's Candy Factory Store ("Fuzziwig's") segment did not meet its long-term strategic goals, and accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the Company entered into a definitive agreement to sell substantially all the assets of its Fuzziwig's segment for $1.6 million. This transaction closed on July 31, 1998 (the "Closing Date"). The purchase price included $180,000 cash, $100,000 of which was paid at the Closing Date and the remaining $80,000 paid six months from the Closing Date. Pursuant to the agreement, the Company also received four Rocky Mountain Chocolate Factory stores previously operated as franchised stores by one of the purchasers and valued at approximately $1.42 million. Operating results of the discontinued operation have been reclassified from amounts previously reported and have been reported separately in the statements of income. For the year ended February 28, 1999, the discontinued operation produced approximately $1.1 million of revenue. 40 41 NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION For the three years ended February 28 or 29:
2001 2000 1999 Interest paid $666,055 $572,636 $703,953 Income taxes paid 918,653 26,725 165,788 Non-Cash Financing Activities: Company financed sales of retail store assets $996,493 $ -- $ --
NOTE 13 - EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted to make contributions up to 15% of compensation. The Company makes a matching contribution, which vests ratably over a 3 year period, and is 25% of the employee's contribution up to a maximum of 1.5% of the employee's compensation. For fiscal 2001 and 2000, the Company made an additional discretionary contribution by doubling the normal matching. During the years ended February 28 or 29, 2001, 2000, and 1999, the Company's cash contribution was approximately $70,000, $0 and $36,000, respectively, to the plan. NOTE 14 - STORE SALES In connection with the Company's plans to phase out its Company-owned stores, the Company sold eighteen Company-owned stores resulting in sales proceeds consisting of cash and notes receivable of approximately $2.3 million and recognized and deferred gains of approximately $542,000 and $193,000, respectively. At February 28, 2001, the Company has $1,452,000 notes receivable outstanding. The notes require monthly payments and bear interest at rates ranging from 9.0% to 12.5%. The notes mature from December 2001 to March 2003 and are secured by the assets of the sold stores. 41 42 NOTE 15 - SUMMARIZED QUARTERLY DATA (UNAUDITED) Following is a summary of the quarterly results of operations for the years ended February 28 (29), 2001 and 2000:
Fiscal Quarter First Second Third Fourth Total 2001 Total revenue $ 5,237,673 $ 5,585,086 $ 6,339,802 $ 5,409,276 $22,571,837 Gross margin 2,169,166 2,394,544 2,361,831 1,867,316 8,792,857 Net income 218,944 504,936 554,123 278,385 1,556,388 Basic earnings per share 0.10 0.26 0.28 0.14 0.77 Diluted earnings per share 0.10 0.26 0.28 0.14 0.77 2000 Total revenue $ 5,589,530 $ 6,073,037 $ 7,056,655 $ 5,927,592 $24,646,814 Gross margin 2,257,182 2,691,405 2,925,075 2,243,497 10,117,159 Net income 98,433 336,751 435,778 185,603 1,056,565 Basic earnings per share 0.04 0.13 0.17 0.07 0.41 Diluted earnings per share 0.04 0.13 0.17 0.07 0.41
42 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information with respect to the executive officers of the Company is set forth in the section entitled "Executive Officers" in Part I of this report. The information required by this item with respect to directors is incorporated by reference from the information under the caption "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's Proxy Statement for the Company's Annual Meeting of Shareholders to be held on July 20, 2001 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information appearing under the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information appearing under the caption "Certain Transactions" in the Proxy Statement. 43 44 PART IV. ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements Page Report of Independent Certified Public Accountants 26 Statements of Income 27 Balance Sheets 28 Statements of Changes in Stockholders' Equity 29 Statements of Cash Flows 30 Notes to Financial Statements 31 2. Financial Statement Schedules Page Report of Independent Certified Public Accountants on Schedules 44 SCHEDULE II - Valuation and Qualifying Accounts 44 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES Board of Directors and Stockholders Rocky Mountain Chocolate Factory, Inc. In connection with our audit of the financial statements of Rocky Mountain Chocolate Factory, Inc. referred to in our report dated April 27, 2001, which is included in Part II of this form, we have also audited Schedule II for each of the three years in the period ended February 28, 2001. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Dallas, Texas April 27, 2001 SCHEDULE II - Valuation and Qualifying Accounts
Balance at Additions Beginning of Charged to Balance at End Period Costs & Exp. Deductions of Period Year Ended February 28, 2001 Accounts and Notes Receivable Allowance 139,912 125,202 62,570 202,544 Year Ended February 29, 2000 Accounts Receivable Allowance 259,408 11,589 131,085 139,912 Year Ended February 28, 1999 Accounts Receivable Allowance 214,152 120,000 74,744 259,408
44 45 3. Exhibits The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of the annual report. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the fourth quarter of the year ended February 28, 2001. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. /s/ Bryan J. Merryman --------------------- BRYAN J. MERRYMAN Chief Operating Officer,Chief Financial Officer, Treasurer and Director Date: May 18, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: May 18, 2001 /s/ Franklin E. Crail -------------------------------- FRANKLIN E. CRAIL Chairman of the Board of Directors, President, and Director (principal executive officer) Date: May 18, 2001 /s/ Bryan J. Merryman -------------------------------- BRYAN J. MERRYMAN Chief Operating Officer, Chief Financial Officer, Treasurer and Director (principal financial and accounting officer) Date: May 18, 2001 /s/ Gerald A. Kien -------------------------------- GERALD A. KIEN, Director Date: May 18, 2001 /s/ Lee N. Mortenson -------------------------------- LEE N. MORTENSON, Director Date: May 18, 2001 /s/ Fred M. Trainor -------------------------------- FRED M. TRAINOR, Director Date: May 18, 2001 /s/ Clyde Wm. Engle -------------------------------- CLYDE Wm. ENGLE, Director 45 46 EXHIBIT INDEX
EXHIBIT INCORPORATED BY NUMBER DESCRIPTION REFERENCE TO - ------- ----------- --------------- 3.1 Articles of Incorporation of the Exhibit 3.1 to Current Report on Form 8-K of the Registrant Registrant, as amended filed on August 1, 1988. 3.2 By-laws of the Registrant, as amended on Exhibit 3.2 to the Annual Report on Form 10-K of the November 25, 1997 Registrant for the fiscal year ended February 28, 1998. 4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K of the Registrant filed on August 1, 1988. 4.2 Term Loan and Credit Agreement dated Exhibit 4.18 to the Annual Report on Form 10-K of the April 5, 1996 in the amount of $2,000,000 Registrant for the fiscal year ended February 29, 1996. between Norwest Banks and the Registrant 4.3 Amendments dated February 5, 1997, May 2, Exhibit 4.12 to the Annual Report on Form 10-K of the 1997, and May 22, 1997 to Term Loan and Registrant for the fiscal year ended February 28, 1997. Credit Agreement dated April 5, 1996 in the amount of $2,000,000 between Norwest Banks and the Registrant 4.4 Amendments dated December 23, 1997, March Exhibit 4.4 to the Annual Report on Form 10-K of the 9, 1998 & May 6, 1998 to Term Loan and Registrant for the fiscal year ended February 28, 1998. Credit Agreement dated April 5, 1996 in the amount of $2,000,000 between Norwest Banks and the Registrant 4.5 Instruments with respect to long-term debt not exceeding 10% of the total assets of the Company have not been filed. The Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 10.1 Form of Stock Option Agreement for the Exhibit 10.3 to the Annual Report on Form 10-K of the Registrant* Registrant for the fiscal year ended February 28, 1986. 10.2 Incentive Stock Option Plan of the Exhibit 10.2 to the Annual Report on Form 10-K of the Registrant as amended July 27, 1990* Registrant for the fiscal year ended February 28, 1991.
47
INCORPORATED BY DESCRIPTION REFERENCE TO ----------- --------------- 10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9 of the Registrant filed Registrant and its officers* on May 21, 1999. 10.4 Current form of franchise agreement used Exhibit 10.4 to the Annual Report on form 10-K of the by the Registrant Registrant for the fiscal year ended February 28, 1999. 10.5 Form of Real Estate Lease between the Exhibit 10.7 to Registration Statement on Form S-18 Registrant as Lessee and franchisee as (Registration No. 33-2016-D). Sublessee 10.6 Form of Nonqualified Stock Option Exhibit 10.8 to the Annual Report on Form 10-K of the Agreement for Nonemployee Directors for Registrant for the fiscal year ended February 28, 1991. the Registrant* 10.7 Nonqualified Stock Option Plan for Exhibit 10.9 to the Annual Report on Form 10-K of the Nonemployee Directors dated March 20, Registrant for the fiscal year ended February 28, 1991. 1990* 10.8 1995 Stock Option Plan of the Registrant* Exhibit 10.9 to Registration Statement on Form S-1 (Registration No. 33-62149) filed August 25, 1995. 10.9 Forms of Incentive Stock Option Agreement Exhibit 10.10 to Registration Statement on Form S-1 for 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995. 10.10 Forms of Nonqualified Stock Option Exhibit 10.11 to Registration Statement on Form S-1 Agreement for 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995. 10.11 Form of Indemnification Agreement between Exhibit 10.12 to the Annual Report on Form 10-K of the the Registrant and its directors Registrant for the fiscal year ended February 28, 1998. 10.12 Form of Indemnification Agreement between Exhibit 10.13 to the Annual Report on Form 10-K of the the Registrant and its officers Registrant for the fiscal year ended February 28, 1998. 10.13 Form of Promissory Note and Stock Pledge Exhibit 10.14 to the Annual Report on Form 10-K of the Agreement between the Registrant and Registrant for the fiscal year ended February 28, 1998. certain of its officers and directors
48
INCORPORATED BY DESCRIPTION REFERENCE TO ----------- --------------- 10.14 Asset Purchase Agreement dated June 5, Exhibit 10.15 to the Annual Report on Form 10-K of the 1998 between the Registrant as seller and Registrant for the fiscal year ended February 28, 1998. Resort Confections, Inc. et al., as purchasers 11.1 Statement re: computation of per share Filed herewith. earnings 23.1 Consent of Independent Public Accountants Filed herewith.
EX-11.1 2 d87609ex11-1.txt COMPUTATION OF EARNINGS 1 EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
For Years Ended February 28 (29), 2001 2000 1999 BASIC EARNINGS PER SHARE Net income $1,556,388 $1,056,565 $ 421,428 Weighted average number of common shares outstanding 2,026,075 2,580,604 2,665,567 Dilutive effect of employee stock options 5,418 16,441 11,776 Weighted average common shares outstanding, assuming dilution 2,031,493 2,597,045 2,677,343 BASIC EARNINGS PER COMMON SHARE $ .77 $ .41 $ .16 DILUTED EARNINGS PER COMMON SHARE $ .77 $ .41 $ .16
EX-23.1 3 d87609ex23-1.txt CONSENT OF INDEP. CERTIFIED PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 27, 2001, accompanying the financial statements included in the Annual Report of Rocky Mountain Chocolate Factory, Inc. on Form 10-K for the year ended February 28, 2001. We hereby consent to the incorporation by reference of said report in the Registration Statements of Rocky Mountain Chocolate Factory, Inc. on Forms S-8 (File No. 33-79342, effective May 25, 1994, File No. 33-62689, effective September 15, 1995, File No. 33-63177, effective October 3, 1995, File No. 33-64651, effective November 30, 1995, File No. 33-64653, effective November 30, 1995, and File No. 333-8739, effective July 24, 1996). GRANT THORNTON LLP Dallas, Texas April 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----