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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the fiscal year ended February 29, 2000
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 0-14749
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-0910696
(State of Incorporation) (I.R.S. Employer Identification No.)
265 Turner Drive, Durango, CO 81301
(Address of principal executive offices)
(970) 259-0554
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.03 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
On May 23, 2000, there were 1,956,784 shares of Common Stock outstanding. The
aggregate market value of the Common Stock (based on the average of the closing
bid and ask prices as quoted on the Nasdaq National Market System on May 23,
2000) held by non-affiliates was $5,587,206.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2000 Annual Meeting of Stockholders (Part III)
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
TABLE OF CONTENTS
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Page No.
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PART I.
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Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II.
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures About Market Risk 25
Item 8 Financial Statements 27
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
45
PART III.
Item 10 Directors and Executive Officers of the Registrant 45
Item 11 Executive Compensation 45
Item 12 Security Ownership of Certain Beneficial Owners and Management 45
Item 13 Certain Relationships and Related Transactions 45
PART IV.
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
</TABLE>
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PART I.
ITEM 1. BUSINESS
GENERAL
Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain Chocolate
Factory, Inc. (the "Company") is an international franchiser and confectionery
manufacturer. The Company is headquartered in Durango, Colorado and
manufactures an extensive line of premium chocolate candies and other
confectionery products. As of April 30, 2000 there were 30 Company-owned and
196 franchised Rocky Mountain Chocolate Factory stores operating in 41 states,
Canada and Guam.
Approximately 40% of the products sold at Rocky Mountain Chocolate Factory
stores are prepared on the premises. The Company believes this in-store
preparation creates a special store ambiance and the aroma and sight of
products being made attracts foot traffic and assures customers that products
are fresh.
The Company believes that its principal competitive strengths lie in its name
recognition, its reputation for the quality, variety and the taste of its
products; the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in the
manufacture of chocolate candy products and the merchandising and marketing of
chocolate and other candy products; and the control and training
infrastructures it has implemented to assure consistent customer service and
execution of successful practices and techniques at its stores.
The Company believes its manufacturing expertise and reputation for quality has
facilitated the sale of selected products through new distribution channels. The
Company is currently testing and evaluating a number of new distribution channel
programs including wholesaling, fundraising, corporate sales, mail order and
internet sales.
The Company's revenues are currently derived from three principal sources: (i)
sales to franchisees and others of chocolates and other confectionery products
manufactured by the Company (45-43-43%); (ii) sales at Company-owned stores of
chocolates and other confectionery products (including product manufactured by
the Company) (42-45-44%) and (iii) the collection of initial franchise fees and
royalties from franchisees (13-12-13%). The figures in parentheses show the
percentage of total revenues attributable to each source for fiscal years ended
February 28 (29), 2000, 1999 and 1998, respectively.
According to the National Confectionery Association, the total U.S. candy
market approximated $23.5 billion of sales in 1998. According to the Department
of Commerce, per capita consumption of chocolate exceeds 12 pounds per year
nationally, generating annual sales of approximately $13 billion. In 1998,
consumption of chocolate products increased 4.3% versus a .8% decrease in
non-chocolate candies.
In December 1997, the Company decided its Fuzziwig's Candy Factory store
segment did not meet its strategic long-term goals, and accordingly, adopted a
plan to divest itself of these operations. The Company completed the
divestiture on July 31, 1998. Fuzziwig's Candy Factory stores sold hard
conventional and nostalgic candies purchased from third party suppliers.
In Fiscal 2001, the Company plans to begin phasing out its Rocky Mountain
Chocolate Factory Company-owned store program. The Company plans to sell to new
or existing franchisees all viable Company-owned store locations with the
exception of five Company-owned stores located in key markets in Colorado (the
"Colorado Stores"). The Company intends to retain the Colorado Stores to test
sales, marketing, design and operational initiatives.
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BUSINESS STRATEGY
The Company's objective is to build on its position as a leading international
franchiser and manufacturer of high quality chocolate and other confectionery
products. The Company continually seeks opportunities to profitably expand its
business. To accomplish this objective, the Company employs a business strategy
that includes the following elements:
Product Quality and Variety
The Company maintains the unsurpassed taste and quality of its chocolate
candies by using only the finest chocolate and other wholesome ingredients. The
Company uses its own proprietary recipes, primarily developed by its master
candy maker. A typical Rocky Mountain Chocolate Factory store offers up to 100
of the Company's chocolate candies throughout the year and as many as 200,
including many packaged candies, during the holiday seasons. Individual stores
also offer numerous varieties of premium fudge and gourmet caramel apples, as
well as other products prepared in the store from Company recipes. The Company,
in fiscal 1998, implemented a major program to improve factory sales through
development and sale of an expanded line of new products, including its own
sugar-free line and themed, branded and novelty chocolate candies.
Store Atmosphere and Ambiance
The Company seeks to establish an enjoyable and inviting atmosphere in each
Rocky Mountain Chocolate Factory store. Each store prepares numerous products,
including fudge, brittles and caramel apples, in the store. In-store
preparation is designed both to be fun and entertaining for customers and to
convey an image of freshness and homemade quality. The Company's design staff
has developed easily replicable designs and specifications to ensure that the
Rocky Mountain Chocolate Factory concept is consistently implemented throughout
the system.
In February 2000, the Company retained a nationally recognized design firm to
evaluate and update its existing store design. The objective of the store
design project is fourfold: (1) increase average revenue per unit thereby
opening untapped real estate environments; (2) further emphasize the
entertainment and freshness value of the Company's in-store confectionery
factory; (3) improve the presentation of the Company's Co-branded product
offerings such as coffee and ice-cream and (4) improve operational efficiency
through optimal store layout. The Company expects to complete the store
redesign project and the testing of the new design by the end of fiscal 2001.
Site Selection
Careful selection of a site is critical to the success of a Rocky Mountain
Chocolate Factory store. Many factors are considered by the Company in
identifying suitable sites, including tenant mix, visibility, attractiveness,
accessibility, level of foot traffic and occupancy costs. Final site selection
occurs only after the Company's senior management has approved the site. The
Company believes that the experience of its management team in evaluating a
potential site is one of the Company's competitive strengths.
Customer Service Commitment
The Company emphasizes excellence in customer service and seeks to employ and
to sell franchises to motivated and energetic people. The Company also fosters
enthusiasm for its customer service philosophy and the Rocky Mountain Chocolate
Factory concept through its annual franchisee convention, annual regional
meetings and other frequent contacts with its franchisees.
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Increase Same Store Retail Sales at Existing Locations
The Company seeks to increase profitability of its store system through
increasing sales at existing store locations. System wide same store retail
sales have grown for 3 of the last 5 fiscal years:
1996 2.9%
1997 (0.5%)
1998 7.4%
1999 6.7%
2000 (4.3%)
The Company believes that its same store sales growth was positively impacted
by the sale of Beanie Babies(TM) (stuffed animals manufactured by Ty Inc.) and
related products in fiscal 1998 and 1999, because many of the Company's retail
stores capitalized on this extraordinary trend during this time period. In
fiscal 2000, however, the demand for Beanie Babies decreased significantly, and
the Company believes this decreased demand is the primary reason for negative
comparable store sales in fiscal 2000. The Company expects lower demand for
Beanie Babies and related products to negatively impact same store sales
through the end of fiscal 2001.
The Company feels that same store retail sales growth can be accelerated though
store redesign to provide a more attractive and effective retail sales
environment while retaining the Rocky Mountain Chocolate Factory store ambiance
and theme. The Company believes that development and sale of superior new
products, such as its new line of sugar-free products, will also enhance same
store retail sales growth.
In February 2000, the Company retained a nationally recognized packaging design
firm to completely redesign the packaging featured in the Company's retail
stores. The goal of the packaging redesign project is to develop an updated,
coordinated line of packaged products that capture and convey the freshness,
fun and excitement of the Rocky Mountain Chocolate Factory retail store
experience. The Company expects to complete the packaging redesign project and
the testing of the new designs by the end of fiscal 2001. The Company believes
that a successful launch of new packaging will have a positive impact on same
store sales.
Increase Same Store Pounds Purchased by Existing Locations
In fiscal 2000, the Company experienced a same store pounds purchased decline
of 2.6%. The decline in same store pounds purchased from the factory continued
what appears to be a trend of a shift in sales mix toward store-made and
authorized vendor products and away from factory made products. The Company is
in the process of designing new packaging, adding new products and focusing its
existing product lines in an effort to reverse this trend.
Enhanced Operating Efficiencies
The Company seeks to improve its profitability by controlling costs and
increasing the efficiency of its operations. Efforts in the last several years
include the purchase of additional automated factory equipment, implementation
of a comprehensive MRP II forecasting, planning, scheduling and reporting system
and the implementation of a flat-lined manufacturing strategy. These measures
have significantly improved the Company's ability to deliver its products to its
stores safely, quickly and cost-effectively. Additionally, the planned
divestiture of substantially all of the Company-owned stores is expected to
reduce the Company's exposure to real estate risk, improve the Company's
operating margins and allow the Company to increase its focus on franchising.
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EXPANSION STRATEGY
Key elements of the Company's expansion strategy include:
Unit Growth
The cornerstone of the Company's growth strategy is to aggressively pursue unit
growth opportunities in locations where the Company has traditionally been
successful, to pursue new and developing real estate environments which appear
promising based on early sales results, and to improve and expand the retail
store concept, such that previously untapped and unviable environments (such as
most regional malls) generate sufficient revenue to support a successful Rocky
Mountain Chocolate Factory location.
High Traffic Environments
The Company currently establishes franchised stores in the following
environments: factory outlet malls, tourist environments and regional malls.
The Company, over the last several years, has had a particular focus on factory
outlet mall locations. Although each of these environments has a number of
attractive features, including a high level of foot traffic, the factory outlet
mall environment has historically offered the best combination of tenant mix,
customer spending characteristics and favorable occupancy costs. The Company
has established a business relationship with the major developers in the United
States and believes that these relationships provide it with the opportunity to
take advantage of attractive sites in new and existing real estate
environments.
Name Recognition and New Market Penetration
The Company believes the visibility of its stores and the high foot traffic at
its factory outlet mall and tourist locations has generated strong name
recognition of Rocky Mountain Chocolate Factory and demand for its franchises.
The Rocky Mountain Chocolate Factory system has historically been concentrated
in the western United States and the Rocky Mountains, but recent growth has
generated a gradual easterly momentum as new stores have been opened in the
eastern half of the country. This growth has further increased the Company's
name recognition and demand for its franchises. Distribution of Rocky Mountain
Chocolate Factory products through new channels, such as major national retail
chains, also increases name recognition and brand awareness in areas of the
country in which the Company has not previously had a significant presence. The
Company believes that by distributing selected Rocky Mountain Chocolate Factory
products through new distribution channels its name recognition will improve
and benefit its entire store system.
STORE CONCEPT
The Company seeks to establish a fun and inviting atmosphere in its Rocky
Mountain Chocolate Factory store locations. Unlike most other confectionery
stores, each Rocky Mountain Chocolate Factory store prepares certain products,
including fudge and caramel apples, in the store. Customers can observe store
personnel making fudge from start to finish, including the mixing of ingredients
in old-fashioned copper kettles and the cooling of the fudge on large marble
tables, and are often invited to sample the store's products. The Company
believes that an average of approximately 40% of the revenues of Company-owned
and franchised stores are generated by sales of products prepared on the
premises. The Company believes the in-store preparation and aroma of its
products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are
fun and entertaining for its customers and convey an image of freshness and
homemade quality.
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Rocky Mountain Chocolate Factory stores have a distinctive country Victorian
decor, which further enhances their friendly and enjoyable atmosphere. Each
store includes finely-crafted wood cabinetry, copper and brass accents, etched
mirrors and large marble tables on which fudge and other products are made. To
ensure that all stores conform to the Rocky Mountain Chocolate Factory image,
the Company's design staff provides working drawings and specifications and
approves the construction plans for each new store. The Company also controls
the signage and building materials that may be used in the stores.
The average store size is approximately 1,000 square feet, approximately 650
square feet of which is selling space. Most stores are open seven days a week.
Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6
p.m. on Sundays. Store hours in tourist areas may vary depending upon the
tourist season.
PRODUCTS AND PACKAGING
The Company typically produces approximately 300 chocolate candies and other
confectionery products, using proprietary recipes developed primarily by the
Company's master candy maker. These products include many varieties of
clusters, caramels, creams, mints and truffles. The Company continues to engage
in a major effort to expand its product line by developing additional exciting
and attractive new products. During the Christmas, Easter and Valentine's Day
holiday seasons, the Company may make as many as 200 additional items,
including many candies offered in packages specially designed for the holidays.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of these
candies throughout the year and up to 200 during holiday seasons. Individual
stores also offer more than 15 premium fudges and other products prepared in
the store. The Company believes that approximately 50% of the revenues of Rocky
Mountain Chocolate Factory stores are generated by products manufactured at the
Company's factory, 40% by products made in the store using Company recipes and
ingredients purchased from the Company or approved suppliers and the remaining
10% by products, such as ice cream, soft drinks and other sundries, purchased
from approved suppliers.
The Company uses only the finest chocolates, nut meats and other wholesome
ingredients in its candies. In February 1995, the Company's Valentine's Day
gift-boxed chocolates were awarded Money Magazine's top rating and were
described as having "superior flavor" which is "intense" and "natural." The
Company continually strives to offer new confectionery products in order to
maintain the excitement and appeal of its products.
Chocolate candies manufactured by the Company are sold at prices ranging from
$12.90 to $14.90 per pound, with an average price of $13.50 per pound.
Franchisees set their own retail prices, though the Company does recommend
prices for all of its products.
The Company develops special packaging for the Christmas, Valentine's Day and
Easter holidays, and customers can have their purchases packaged in decorative
boxes and fancy tins throughout the year. The Company's packaging for its Rocky
Mountain Mints in 1995 received the Award of Excellence from the National
Paperbox Association.
OPERATING ENVIRONMENT
The Company currently establishes Rocky Mountain Chocolate Factory stores in
three primary environments: factory outlet malls, tourist areas and regional
malls. Each of these environments has a number of attractive features,
including high levels of foot traffic.
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Factory Outlet Malls
There are approximately 414 factory outlet malls in the United States, and as
of February 29, 2000, there were Rocky Mountain Chocolate Factory stores in
approximately 100 of these malls in over 35 states. The Company has established
business relationships with the major outlet mall developers in the United
States. Although not all factory outlet malls provide desirable locations for
the Company's stores, management believes the Company's relationships with
these developers will provide it with the opportunity to take advantage of
attractive sites in new and existing outlet malls.
Tourist Areas
As of February 29, 2000, there were approximately 50 Rocky Mountain Chocolate
Factory stores in locations considered to be tourist areas, including
Fisherman's Wharf in San Francisco, California and the Riverwalk in San
Antonio, Texas. Tourist areas are very attractive locations because they offer
high levels of foot traffic and favorable customer spending characteristics,
and greatly increase the Company's visibility and name recognition. The Company
believes significant opportunities exist to expand into additional tourist
areas with high levels of foot traffic.
Regional Malls
There are approximately 2,500 regional malls in the United States, and as of
February 29, 2000, there were Rocky Mountain Chocolate Factory stores in
approximately 20 of these malls, including locations in the Mall of America in
Bloomington, Minnesota; Escondido, California; Fort Collins, Colorado; and West
Palm Beach, Florida. Although often providing favorable levels of foot traffic,
regional malls typically involve more expensive rent structures and more
competing food and beverage concepts.
The Company believes there are a number of other environments that have the
characteristics necessary for the successful operation of Rocky Mountain
Chocolate Factory stores such as airports and sports arenas. Three franchised
Rocky Mountain Chocolate Factory stores exist at airport locations: two at
Denver International Airport and one at Vancouver International Airport in
Canada.
FRANCHISING PROGRAM
General
The Company's franchising philosophy is one of service and commitment to its
franchise system, and it continuously seeks to improve its franchise support
services. The Company's concept has consistently been rated as an outstanding
franchise opportunity by publications and organizations rating such
opportunities. In February 1995, Rocky Mountain Chocolate Factory was rated
seventh in Success Magazine's "Franchise Gold 100" most desirable franchises.
As of April 30, 2000, there were 196 franchised stores in the Rocky Mountain
Chocolate Factory system.
Franchisee Sourcing and Selection
The majority of new franchises are awarded to persons referred by existing
franchisees, to interested consumers who have visited Rocky Mountain Chocolate
Factory stores and to existing franchisees. The Company also advertises for new
franchisees in national and regional newspapers as suitable potential store
locations come to the Company's attention. Franchisees are approved by the
Company on the basis of the applicant's net worth and liquidity, together with
an assessment of work ethic and personality compatibility with the Company's
operating philosophy.
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In fiscal 1992, the Company entered into a franchise development agreement
covering Canada with Immaculate Confections, Ltd. of Vancouver, British
Columbia. Pursuant to this agreement, Immaculate Confections purchased the
exclusive right to franchise and operate Rocky Mountain Chocolate Factory
stores in Canada. Immaculate Confections, as of April 30, 2000, operated 28
stores under the agreement.
In fiscal 2000, the Company entered into a franchise development agreement
covering the Gulf Cooperation Council States of United Arab Emirates, Qatar,
Bahrain, Saudi Arabia, Kuwait and Oman with Al Muhairy Group of United Arab
Emirates. Pursuant to this agreement, Al Muhairy Group purchased the exclusive
right to franchise and operate Rocky Mountain Chocolate Factory stores in the
Gulf Cooperation Council States. The first store under this agreement opened in
May 2000.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic
franchisee is required to complete a 7-day comprehensive training program in
store operations and management. The Company has established a training center
at its Durango headquarters in the form of a full-sized replica of a properly
configured and merchandised Rocky Mountain Chocolate Factory store. Topics
covered in the training course include the Company's philosophy of store
operation and management, customer service, merchandising, pricing, cooking,
inventory and cost control, quality standards, record keeping, labor scheduling
and personnel management. Training is based on standard operating policies and
procedures contained in an operations manual provided to all franchisees, which
the franchisee is required to follow by terms of the franchise agreement.
Additionally, and importantly, trainees are provided with a complete
orientation to Company operations by working in key factory operational areas
and by meeting with each member of the senior management of the Company.
Training continues through the opening of the store, where Company field
consultants assist and guide the franchisee in all areas of operation.
The Company's operating objectives include providing Company knowledge and
expertise in merchandising, marketing and customer service to all front-line
store level employees to maximize their skills and ensure that they are fully
versed in the Company's proven techniques.
The Company provides ongoing support to franchisees through its field
consultants, who maintain regular and frequent communication with the stores by
phone and by site visits. The field consultants also review and discuss with
the franchisee store operating results and provide advice and guidance in
improving store profitability and in developing and executing store marketing
and merchandising programs. The Company has developed a handbook containing a
"pre-packaged" local store marketing plan, which allows franchisees to
implement cost-effective promotional programs that have proven successful in
other Rocky Mountain Chocolate Factory stores.
Quality Standards and Control
The franchise agreement for Rocky Mountain Chocolate Factory franchisees
requires compliance with the Company's procedures of operation and food quality
specifications and permits audits and inspections by the Company.
Operating standards for Rocky Mountain Chocolate Factory stores are set forth
in operating manuals. These manuals cover general operations, factory ordering,
merchandising, advertising and accounting procedures. Through their regular
visits to franchised stores, Company field consultants audit performance and
adherence to Company standards. The Company has the right to terminate any
franchise agreement for non-compliance with the Company's operating standards.
Products sold at the stores and ingredients used in the preparation of products
approved for on-site preparation must be purchased from the Company or from
approved suppliers.
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The Franchise Agreement: Terms and Conditions
The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is
made pursuant to the Uniform Franchise Offering Circular prepared in accordance
with federal and state laws and regulations. States that regulate the sale and
operation of franchises require a franchiser to register or file certain
notices with the state authorities prior to offering and selling franchises in
those states.
Under the current form of domestic Rocky Mountain Chocolate Factory franchise
agreement, franchisees pay the Company (i) an initial franchise fee of $19,500
for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a
marketing fee equal to 1% of monthly gross sales. Franchisees are generally
granted exclusive territory with respect to the operation of Rocky Mountain
Chocolate Factory stores only in the immediate vicinity of their stores.
Chocolate products not made on the premises by franchisees must be purchased
from the Company or approved suppliers.
The franchise agreements require franchisees to comply with the Company's
procedures of operation and food quality specifications, to permit inspections
and audits by the Company and to remodel stores to conform with standards in
effect. The Company may terminate the franchise agreement upon the failure of
the franchisee to comply with the conditions of the agreement and upon the
occurrence of certain events, such as insolvency or bankruptcy of the
franchisee or the commission by the franchisee of any unlawful or deceptive
practice, which in the judgment of the Company is likely to adversely affect
the Rocky Mountain Chocolate Factory system. The Company's ability to terminate
franchise agreements pursuant to such provisions is subject to applicable
bankruptcy and state laws and regulations. See "Business - Regulation."
The agreements prohibit the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreements also
give the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.
The term of each Rocky Mountain Chocolate Factory franchise agreement is five
years, and franchisees have the right to renew for two successive five-year
terms.
Franchise Financing
The Company does not provide prospective franchisees with financing for their
stores, but has developed relationships with two national sources of franchisee
financing to whom it will refer franchisees. Typically, franchisees have
obtained their own sources of such financing and have not required the
Company's assistance.
COMPANY STORE PROGRAM
As of April 30, 2000, there were 30 Company-owned Rocky Mountain Chocolate
Factory stores. Company-owned stores provide a training ground for
Company-owned store personnel and district managers and a controllable testing
ground for new products and promotions, operating and training methods and
merchandising techniques.
Managers of Company-owned stores are required to comply with all Company
operating standards and undergo training and receive support from the Company
similar to the training and support provided to franchisees. See "Franchising
Program-Training and Support" and "Franchising Program-Quality Standards and
Control."
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MANUFACTURING OPERATIONS
General
The Company manufactures its chocolate candies at its factory in Durango,
Colorado. All products are produced consistent with the Company's philosophy of
using only the finest, highest quality ingredients with no artificial
preservatives to achieve its marketing motto of "the Peak of Perfection in
Handmade Chocolates(R)."
It has always been the belief of management that the Company should control the
manufacturing of its own chocolate products. By controlling manufacturing, the
Company can better maintain its high product quality standards, offer unique,
proprietary products, manage costs, control production and shipment schedules
and potentially pursue new or under-utilized distribution channels.
Manufacturing Processes
The manufacturing process primarily involves cooking or preparing candy
centers, including nuts, caramel, peanut butter, creams and jellies, and then
coating them with chocolate or other toppings. All of these processes are
conducted in carefully controlled temperature ranges, and the Company employs
strict quality control procedures at every stage of the manufacturing process.
The Company uses a combination of manual and automated processes at its
factory. Although the Company believes that it is currently preferable to
perform certain manufacturing processes, such as dipping of some large pieces,
by hand, automation increases the speed and efficiency of the manufacturing
process. The Company has from time to time automated processes formerly
performed by hand where it has become cost-effective for the Company to do so
without compromising product quality or appearance.
The Company seeks to ensure the freshness of products sold in Rocky Mountain
Chocolate Factory stores with frequent shipments and production schedules that
are closely coordinated with projected and actual orders. Most Rocky Mountain
Chocolate Factory stores do not have significant space for the storage of
inventory, and the Company encourages franchisees and store managers to order
only the quantities that they can reasonably expect to sell within
approximately two to four weeks. For these reasons, the Company generally does
not have a significant backlog of orders.
Ingredients
The principal ingredients used by the Company are chocolate, nuts, sugar, corn
syrup, cream and butter. The factory receives shipments of ingredients daily.
To ensure the consistency of its products, the Company buys ingredients from a
limited number of reliable suppliers. In order to assure a continuous supply of
chocolate and certain nuts, the Company frequently enters into purchase
contracts of between six to eighteen months for these products. Because prices
for these products may fluctuate, the Company may benefit if prices rise during
the terms of these contracts, but it may be required to pay above-market prices
if prices fall. The Company has one or more alternative sources for all
essential ingredients and therefore believes that the loss of any supplier
would not have a material adverse effect on the Company and its results of
operations. The Company currently also purchases small amounts of finished
candy from third parties on a private label basis for sale in Rocky Mountain
Chocolate Factory stores.
Trucking Operations
The Company operates eight trucks and ships a substantial portion of its
products from the factory on its own fleet. The Company's trucking operations
enable it to deliver its products to the stores quickly and cost-effectively.
In addition, the Company
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back-hauls its own ingredients and supplies, as well as product from third
parties, on return trips as a basis for increasing trucking program economics.
MARKETING
The Company relies primarily on in-store promotion and point-of-purchase
materials to promote the sale of its products. The monthly marketing fees
collected from franchisees are used by the Company to develop new packaging and
in-store promotion and point-of-purchase materials, and to create and update
the Company's local store marketing handbooks.
The Company focuses on local store marketing efforts by providing customizable
marketing materials, including advertisements, coupons, flyers and mail order
catalogs generated by its in-house Creative Services department. The department
works directly with franchisees to implement local store marketing programs.
The Company aggressively seeks low cost, high return publicity opportunities
through participation in local and regional events, sponsorships and charitable
causes. The Company has not historically and does not intend to engage in
national advertising in the near future.
COMPETITION
The retailing of confectionery products is highly competitive. The Company and
its franchisees compete with numerous businesses that offer confectionery
products. Many of these competitors have greater name recognition and
financial, marketing and other resources than the Company. In addition, there
is intense competition among retailers for real estate sites, store personnel
and qualified franchisees. Competitive market conditions could adversely affect
the Company and its results of operations and its ability to expand
successfully.
The Company believes that its principal competitive strengths lie in its name
recognition and its reputation for the quality, value, variety and taste of its
products and the special ambiance of its stores; its knowledge and experience
in applying criteria for selection of new store locations; its expertise in
merchandising and marketing of chocolate and other candy products; and the
control and training infrastructures it has implemented to assure execution of
successful practices and techniques at its store locations. In addition, by
controlling the manufacturing of its own chocolate products, the Company can
better maintain its high product quality standards for those products, offer
proprietary products, manage costs, control production and shipment schedules
and pursue new or under-utilized distribution channels.
TRADE NAME AND TRADEMARKS
The trade name "Rocky Mountain Chocolate Factory(R)," the phrases, "The Peak of
Perfection in Handmade Chocolates(R)", "America's Chocolatier(R)", "World's
Chocolatier(TM)" as well as all other trademarks, service marks, symbols,
slogans, emblems, logos and designs used in the Rocky Mountain Chocolate
Factory system, are proprietary rights of the Company. All of the foregoing are
believed to be of material importance to the Company's business. The
registration for the trademark "Rocky Mountain Chocolate Factory" has been
granted in the United States and Canada. Applications have been filed to
register the Rocky Mountain Chocolate Factory trademark in certain foreign
countries.
The Company has not attempted to obtain patent protection for the proprietary
recipes developed by the Company's master candy-maker and is relying upon its
ability to maintain the confidentiality of those recipes.
12
<PAGE> 13
EMPLOYEES
At February 29, 2000, the Company employed approximately 330 people. Most
employees, with the exception of store, factory and corporate management, are
paid on an hourly basis. The Company also employs some people on a temporary
basis during peak periods of store and factory operations. The Company seeks to
assure that participatory management processes, mutual respect and
professionalism and high performance expectations for the employee exist
throughout the organization.
The Company believes that it provides working conditions, wages and benefits
that compare favorably with those of its competitors. The Company's employees
are not covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages at May 15, 2000 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Franklin E. Crail............. 58 Chairman of the Board, President and Director
Bryan J. Merryman............. 39 Chief Operating Officer, Chief Financial Officer, Treasurer and Director
Edward L. Dudley.............. 36 Vice President - Sales and Marketing
Clifton W. Folsom............. 46 Vice President - Franchise Development
Jay B. Haws................... 49 Vice President - Creative Services
Virginia M. Perez............. 62 Corporate Secretary
</TABLE>
Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May
1981. Since the incorporation of the Company in November 1982, he has served as
its President and a Director. He was elected Chairman of the Board in March
1986. Prior to founding the Company, Mr. Crail was co-founder and president of
CNI Data Processing, Inc., a software firm which developed automated billing
systems for the cable television industry.
Mr. Merryman joined the Company in December 1997 as Vice President - Finance
and Chief Financial Officer. Since April 1999 Mr. Merryman has also served the
Company as the Chief Operating Officer and as a Director, and since January
2000 as its Treasurer. Prior to joining the Company, Mr. Merryman was a
principal in Knightsbridge Holdings, Inc. (a leveraged buyout firm) from
January 1997 to December 1997. Mr. Merryman also served as Chief Financial
Officer of Super Shops, Inc., a retailer and manufacturer of aftermarket auto
parts from July 1996 to November 1997 and was employed for more than eleven
years by Deloitte and Touche LLP, most recently as a senior manager.
Mr. Dudley joined the Company in January 1997 to spearhead the Company's
newly-formed Product Sales Development function as Vice President - Sales and
Marketing, with the goal of increasing the Company's factory and retail sales.
During his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served
in a number of senior marketing and sales management capacities, including most
recently that of Director, Distribution Services from March 1996 to January
1997. Mr. Dudley holds B.S. degrees in Finance and Accounting from the
University of Colorado.
Mr. Folsom has served as Vice President of Franchise Development of the Company
since June 1989. He joined the Company in May 1983 as Director of Franchise
Sales and Support, and was promoted in March 1985 to Vice President of
Franchise Sales, a position he held until he began serving in his current
capacity in June 1989. From March 1978 until joining the Company, Mr. Folsom
was employed as a sales representative by Sears Roebuck & Company.
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<PAGE> 14
Mr. Haws joined the Company in August 1991 as Vice President of Creative
Services. Since 1981, Mr. Haws had been closely associated with the Company
both as a franchisee and marketing/graphic design consultant. From 1986 to 1991
he operated two Rocky Mountain Chocolate Factory franchises located in San
Francisco, California. From 1983 to 1989 he served as Vice President of
Marketing for Image Group, Inc., a marketing communications firm based in
Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky
Mountain Chocolate Factory franchises located in Sacramento and Walnut Creek,
California. From 1973 to 1983 he was principal of Jay Haws and Associates, an
advertising and graphic design agency. Mr. Haws holds a B.A. in graphics design
and communication from California State University.
Ms. Perez joined the Company in June 1996 and has served as the Company's
corporate secretary since February, 1997. From 1992 until joining the Company,
she was employed by Huettig & Schromm, Inc., a property management and
development firm in Palo Alto, California as executive assistant to the
president and owner. Huettig & Schromm developed, owned and managed over
1,000,000 square feet of office space in business parks and office buildings on
the San Francisco peninsula. Ms. Perez is a paralegal and has held various
administrative positions during her career including executive assistant to the
Chairman and owner of Sunset Magazine & Books, Inc.
SEASONAL FACTORS
The Company's sales and earnings are seasonal, with significantly higher sales
and earnings occurring during the Christmas holiday and summer vacation seasons
than at other times of the year, which causes fluctuations in the Company's
quarterly results of operations. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings
and the sale of franchises. Because of the seasonality of the Company's
business and the impact of new store openings and sales of franchises, results
for any quarter are not necessarily indicative of the results that may be
achieved in other quarters or for a full fiscal year.
REGULATION
Each of the Company-owned and franchised stores is subject to licensing and
regulation by the health, sanitation, safety, building and fire agencies in the
state or municipality where located. Difficulties or failures in obtaining the
required licensing or approvals could delay or prevent the opening of new
stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration
and disclosure requirements in the offer and sale of franchises. The Company is
also subject to the Federal Trade Commission regulations relating to disclosure
requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and
regulations governing the termination or non-renewal of franchises and other
aspects of the franchise relationship that are intended to protect franchisees.
Although these laws and regulations, and related court decisions, may limit the
Company's ability to terminate franchises and alter franchise agreements, the
Company does not believe that such laws or decisions will have a material
adverse effect on its franchise operations. However, the laws applicable to
franchise operations and relationships continue to develop, and the Company is
unable to predict the effect on its intended operations of additional
requirements or restrictions that may be enacted or of court decisions that may
be adverse to franchisers.
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<PAGE> 15
Federal and state environmental regulations have not had a material impact on
the Company's operations but more stringent and varied requirements of local
governmental bodies with respect to zoning, land use and environmental factors
could delay construction of new stores.
Companies engaged in the manufacturing, packaging and distribution of food
products are subject to extensive regulation by various governmental agencies.
A finding of a failure to comply with one or more regulations could result in
the imposition of sanctions, including the closing of all or a portion of the
Company's facilities for an indeterminate period of time.
The Company's product labeling is subject to and complies with the Nutrition
Labeling and Education Act of 1990.
The Company provides a limited amount of trucking services to third parties, to
fill available space on the Company's trucks. The Company's trucking operations
are subject to various federal and state regulations, including regulations of
the Federal Highway Administration and other federal and state agencies
applicable to motor carriers, safety requirements of the Department of
Transportation relating to interstate transportation and federal, state and
Canadian provincial regulations governing matters such as vehicle weight and
dimensions.
The Company believes it is operating in substantial compliance with all
applicable laws and regulations.
ITEM 2. PROPERTIES
The Company's manufacturing operations and corporate headquarters are located
at its 58,000 square foot manufacturing facility, which it owns, in Durango,
Colorado. During fiscal 2000, the Company's factory produced approximately 2.0
million pounds of chocolate candies, down from 2.2 million pounds in fiscal
1999. The factory has the capacity to produce approximately 3.5 million pounds
per year. In January 1998, the Company acquired a two acre parcel adjacent to
its factory to ensure the availability of adequate space to expand the factory
as volume demands.
As of April 30, 2000, 29 of the 30 Company-owned stores were occupied pursuant
to non-cancelable leases of five to ten years having varying expiration dates,
most of which contain optional five-year renewal rights. The Company does not
deem any individual store lease to be significant in relation to its overall
operations.
The Company acts as primary lessee of some franchised store premises, which it
then subleases to franchisees, but the majority of existing locations are
leased by the franchisee directly. Current Company policy is not to act as
primary lessee on any further franchised locations. At April 30, 2000, the
Company was the primary lessee at 45 of its 196 franchised stores. The
subleases for such stores are on the same terms as the Company's leases of the
premises. For information as to the amount of the Company's rental obligations
under leases on both Company-owned and franchised stores, see Note 5 of Notes
to financial statements.
15
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that are
material to the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of the Shareholders of the Company was held in Irving,
Texas at 10:00 a.m., local time, on February 29, 2000.
Proxies were solicited by the Board of Directors of the Company pursuant to
Regulation 14A under the Securities and Exchange Act of 1934. There was no
solicitation in opposition to the Board of Directors nominees as listed in the
proxy statement and all of such nominees were duly elected.
Out of a total of 2,534,979 shares of the Company's common stock outstanding and
entitled to vote, 2,072,271 shares were present in person or by proxy,
representing approximately 82 percent of the outstanding shares. The first
matter voted on by the stockholders, as fully described in the proxy statement
for the annual meeting, was the election of Franklin E. Crail, Bryan J.
Merryman, Gerald A. Kien, Lee N. Mortenson, Fred M. Trainor and Clyde Wm. Engle
as directors of the Company. No nominee received less than 98% of the shares
voted. The second matter voted on by the stockholders was a resolution to
consider and vote upon a proposal to approve the Company's 2000 Stock Option
Plan for Non-employee Directors. The resolution was adopted with the holders of
1,905,428 shares voting in favor of the resolution and 164,776 voting against
the resolution. Holders of 2,067 abstained from voting on the resolution.
16
<PAGE> 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock trades on the National Market System of The Nasdaq
Stock Market under the trading symbol "RMCF".
On May 18, 1998 the Company purchased 336,000 shares of its common stock at
$5.15 per share in a private transaction.
On various dates commencing on December 22, 1999 through February 7, 2000, the
Company purchased 203,500 shares of the Company's issued and outstanding common
stock at prices ranging from $5.25 to $5.56.
On March 21, 2000, the Company commenced a tender offer to acquire shares of its
common stock. Pursuant to the tender offer, which was completed on May 1, 2000,
the Company acquired 447,595 shares of its issued and outstanding common stock
at $6.25 per share.
The Company made these purchases because the Company felt that its Common Stock
was undervalued and that such purchases would therefore be in the best interest
of the Company and its stockholders.
The table below sets forth high and low bid information for the Common Stock as
quoted on Nasdaq for each quarter of fiscal years 2000 and 1999. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 29, 2000 HIGH LOW
<S> <C> <C>
First Quarter $ 6.688 $ 3.000
Second Quarter 6.375 5.250
Third Quarter 6.125 3.625
Fourth Quarter 5.875 4.000
FISCAL YEAR ENDED FEBRUARY 28, 1999 HIGH LOW
First Quarter $ 7.750 $ 4.750
Second Quarter 7.125 4.250
Third Quarter 6.500 4.000
Fourth Quarter 5.625 3.938
</TABLE>
On May 23, 2000 the closing bid price for the Common Stock as reported on the
Nasdaq Stock Market was $4.875.
(b) HOLDERS
On May 23, 2000 there were approximately 440 record holders of the Company's
Common Stock. The Company believes that there are more than 800 beneficial
owners of its Common Stock.
(c) DIVIDENDS
The Company has not paid cash dividends on its Common Stock since its inception
and does not intend to pay cash dividends for the foreseeable future. Any future
earnings will be retained for use in the Company's business.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended February
28 or 29, 1996 through 2000, are derived from the Financial Statements of the
Company, which have been audited by Grant Thornton LLP, independent certified
public accountants. The selected financial data should be read in conjunction
with the Financial Statements and related Notes thereto included elsewhere in
this Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
YEARS ENDED FEBRUARY 28 or 29,
SELECTED STATEMENT OF OPERATIONS DATA
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
Total revenues $ 18,552 $ 22,281 $ 23,764 $ 26,233 $ 24,647
Operating income (loss) 2,157 (1,026) 2,599 1,319 2,662
Income (loss) from continuing
operations 1,207 (1,010) 1,260 421 1,057
Income (loss) from discontinued
operations (net of income taxes) 1 (356) (1,020) -- --
Net income (loss) $ 1,208 $ (1,366) $ 240 $ 421 $ 1,057
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $ .43 $ (.35) $ .43 $ .16 $ .41
Discontinued Operations -- (.12) (.35) -- --
Net Income (loss) $ .43 $ (.47) $ .08 $ .16 $ .41
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $ .42 $ (.35) $ .43 $ .16 $ .41
Discontinued Operations -- (.12) (.35) -- --
Net Income (loss) $ .42 $ (.47) $ .08 $ .16 $ .41
Weighted average common shares
outstanding 2,797 2,908 2,913 2,665 2,581
Weighted average common shares
outstanding, assuming dilution 2,887 2,908 2,930 2,677 2,597
SELECTED BALANCE SHEET DATA
Working capital $ 2,043 $ 2,664 $ 3,949 $ 1,558 $ 1,589
Total assets 16,308 18,666 19,868 18,652 16,440
Long-term debt 2,184 5,737 5,993 5,250 3,774
Stockholders' equity 11,117 9,779 10,019 8,509 8,433
SUPPLEMENTAL INFORMATION
Earnings Before
Interest, Taxes,
Depreciation and
Amortization (EBITDA) $ 2,945 $ 2,195 $ 3,934 $ 2,951 $ 4,225
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the audited
financial statements and related Notes of the Company included elsewhere in this
report. This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties.
The Company's ability to successfully achieve expansion of its Rocky Mountain
Chocolate Factory franchise system depends on many factors not within the
Company's control including the availability of suitable sites for new store
establishment and the availability of qualified franchisees to support such
expansion.
Efforts to reverse the decline in same store pounds purchased from the factory
by franchised stores and to increase total factory sales depends on many factors
not within the Company's control including the receptivity of its franchise
system of its product introductions and promotional programs.
As a result, the actual results realized by the Company could differ materially
from the results discussed in or contemplated by the forward-looking statements
made herein. Words or phrases such as "will," "anticipate," "expect," "believe,"
"intend," "estimate," "project," "plan" or similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on the forward-looking statements in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
Results Summary
The Company posted record earnings per share, as adjusted to exclude the costs
of Whitman's Candies, Inc. unsolicited tender offer, in fiscal 2000. Earnings
per share, as adjusted, increased 219% from $.16 in fiscal 1999 to $.51 in
fiscal 2000. Earnings per share increased 156% from $.16 in fiscal 1999 to $.41
in fiscal 2000. Revenues decreased 6.0% from fiscal 1999 to fiscal 2000.
Operating income increased 102% from $1.3 million in fiscal 1999 to $2.7 million
in fiscal 2000. Net income, as adjusted to exclude the costs associated with
Whitman's tender offer, increased 212% from $421,000 in fiscal 1999 to $1.3
million in fiscal 2000. Net income increased 151% from $421,000 in fiscal 1999
to $1.1 million in fiscal 2000.
<TABLE>
<CAPTION>
Revenues
($'s in thousands) 2000 1999 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $11,036.9 $11,433.3 $ (396.4) (3.5)%
Retail Sales 10,315.5 11,759.7 (1,444.2) (12.3)%
Royalty and Marketing Fees 2,963.0 2,919.6 43.4 1.5%
Franchise Fees 331.4 119.9 211.5 176.4%
Total $24,646.8 $26,232.5 $(1,585.7) (6.0)%
</TABLE>
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<PAGE> 20
Factory Sales
Factory sales decreased 3.5%, or $396,000, to $11.0 million in fiscal 2000 from
$11.4 million in fiscal 1999. This decrease was due to the Company shifting its
strategic focus from growing sales through new distribution channels to
concentrating on its core competency, franchising the Rocky Mountain Chocolate
Factory retail store concept. New distribution channel sales amounted to
approximately $1.4 million in fiscal 1999 and decreased 45% to approximately
$800,000 in fiscal 2000.
Core factory sales (i.e. excluding new distribution channels) grew at
approximately 2.6% in fiscal 2000 compared to fiscal 1999. The increase in core
factory sales was driven primarily by an increase in the number of retail
franchise units operating in fiscal 2000 compared to fiscal 1999. Same store
factory pounds purchased from the factory by franchised stores were flat in
fiscal 2000 versus fiscal 1999. Same store pounds purchased is a comparison of
pounds purchased from the factory by franchised stores open for 12 months in
each fiscal year.
Retail Sales
Retail sales decreased $1.4 million, or 12.3%, to $10.3 million in fiscal 2000,
compared to $11.8 million in fiscal 1999. This decrease resulted primarily from
a decrease in the number of Company-owned stores from 42 as of February 28, 1999
to 34 as of February 29, 2000 and a 5.4% decrease in same store sales.
In fiscal 2001, the Company plans to begin phasing out its Rocky Mountain
Chocolate Factory Company-owned store program. The Company plans to sell to new
or existing franchisees all viable Company-owned store locations with the
exception of five Company-owned stores located in key markets in Colorado. The
Colorado Stores are excluded because these stores will be used to test sales,
marketing, design and operational initiatives.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $43,000, or 1.5%, to $2.96 million in
fiscal 2000, compared to $2.92 million in fiscal 1999. This increase resulted
from an increase in the number of units in operation from 157 in fiscal 1999 to
166 in fiscal 2000 partially offset by a decrease in same store sales of 2.8%.
Franchise fee revenues increased $212,000 in fiscal 2000 compared to fiscal 1999
due to an increase in the number of new franchises sold.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 52.6% in fiscal 2000 versus
54.8% in fiscal 1999. This improvement resulted from increased factory margins.
Factory margins increased to 36.8% in fiscal 2000 from 30.7% in fiscal 1999.
This improvement was due in part to certain changes to the Company's
manufacturing processes and cost structure. Retail store margins decreased in
fiscal 2000 to 58.7% versus 59.3% in fiscal 1999.
Franchise Costs
Franchise costs decreased $124,000, or 11.3%, in fiscal 2000 compared to fiscal
1999 due to decreased support costs. As a percentage of total royalty and
marketing fees and franchise fee revenue, franchise costs decreased to 29.7% in
fiscal 2000 from 36.2% in fiscal 1999 due to decreased support costs and a 176%
increase in franchise fee revenue.
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<PAGE> 21
Sales & Marketing
Sales and Marketing costs decreased 18.6% to $1.3 million in fiscal 2000 from
$1.6 million in fiscal 1999. This decrease is due to the de-emphasizing of new
channel sales efforts and an overall planned decrease in sales and marketing
costs.
General and Administrative
General and administrative expenses decreased 3.3% to $1.76 million in fiscal
2000 from $1.82 million in fiscal 1999, primarily as a result of decreased bad
debt expense related to new distribution channel customers. As a percentage of
total revenues, general and administrative expense increased to 7.1% in fiscal
2000 from 6.9% in fiscal 1999.
Retail Operating Expenses
Retail operating expenses decreased to $5.1 million in fiscal 2000 from $6.0
million in fiscal 1999; a decrease of 15.0%. This decrease resulted primarily
from a decrease in the number of Company-owned stores from 42 at February 28,
1999 to 34 at February 29, 2000. Retail operating expenses, as a percentage of
retail sales, improved to 49.5% in fiscal 2000 compared to 51.1% in fiscal 1999
as a result of the implementation of certain cost control measures.
Depreciation and Amortization
Depreciation and amortization increased 3.6% to $1.56 million in fiscal 2000
from $1.51 million in fiscal 1999. The increase in depreciation and amortization
is due primarily to increased depreciation on certain fixtures used in outside
channels and increased goodwill amortization related to the acquisition of
several stores from a franchisee in August of 1998, partially offset by lower
depreciation expense as a result of fewer Company-owned stores.
Other Expense
Other expense of $939,000 incurred in fiscal 2000 increased 48.7% from the
$631,000 incurred in fiscal 1999. This increase was due to non-recurring costs
of approximately $420,000 related to the unsolicited tender offer for 100% of
the Company's outstanding common stock by Whitman's Candies, Inc., which
commenced in May 1999 and was withdrawn on November 4, 1999. These non-recurring
expenses reduced earnings per share by approximately $.10 in fiscal 2000. This
expense was partially offset by decreased interest expense on lower average
amounts of outstanding long-term debt and lower average balances outstanding on
the Company's revolving line of credit.
Income Tax Expense
The Company's effective income tax rate in fiscal 2000 and fiscal 1999 was
38.7%.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store segment
did not meet its long-term strategic goals, and accordingly, made the decision
to dispose of these operations. See "NOTE 11 - DISCONTINUED OPERATIONS" of notes
to financial statements.
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<PAGE> 22
FISCAL 1999 COMPARED TO FISCAL 1998
Continuing Operations Results Summary
The Company posted record revenues in fiscal 1999. Revenues rose 10.4% from 1998
to 1999, operating income decreased $1.3 million from $2.6 million in 1998 to
$1.3 million in 1999 and income from continuing operations decreased $0.9
million from $1.3 million in 1998 to $0.4 million in 1999. Diluted earnings per
share from continuing operations decreased from $.43 per share in 1998 to $.16
per share in 1999.
<TABLE>
<CAPTION>
Revenues
($'s in thousands) 1999 1998 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $ 11,433.3 $ 10,198.6 $ 1,234.7 12.1%
Retail Sales 11,759.7 10,460.5 1,299.2 12.4%
Royalty and Marketing Fees 2,919.6 2,747.6 172.0 6.3%
Franchise Fees 119.9 357.3 (237.4) (66.4)%
Total $ 26,232.5 $ 23,764.0 $ 2,468.5 10.4%
</TABLE>
Factory Sales
Factory sales increased $1.2 million, or 12.1%, to $11.4 million in fiscal 1999,
compared to $10.2 million in 1998. This increase was due primarily to wholesale
sales of product to distribution channels outside of the Company's retail store
system. Same store pounds purchased from the factory by franchised stores
declined 2.9% in fiscal 1999 versus fiscal 1998 partially offsetting the
increase in wholesale sales. The Company believes the decline in same store
pounds purchased from the factory resulted primarily from increased retail sales
of store-made product and product purchased from authorized vendors relative to
factory-made products. Same store pounds purchased is a comparison of pounds
purchased from the factory by franchised stores open for 12 months in each
fiscal year.
Retail Sales
Retail sales increased $1.3 million, or 12.4%, to $11.8 million in fiscal 1999,
compared to $10.5 million in fiscal 1998. This increase resulted primarily from
an increase in the number of Company-owned stores from 37 as of February 28,
1998 to 42 as of February 28, 1999 and a 2.4% increase in same store sales.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $172,000, or 6.3%, to $2.9 million in
fiscal 1999, compared to $2.7 million in fiscal 1998. This increase resulted
from an increase in same store sales at franchised stores of 7.7%. Franchise fee
revenues decreased $237,000 in fiscal 1999 compared to fiscal 1998 due to a
decrease in the number of new franchises sold.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 54.8% in fiscal 1999 versus
51.0% in fiscal 1998. This deterioration resulted from decreased factory and
Company-owned store margins. Factory margins decreased to 30.7% in fiscal 1999
from 36.7% in fiscal 1998. Company-owned store margins for fiscal 1999 decreased
to 59.3% from 61.0% in fiscal 1998. Factors contributing to the decrease in
factory margins include: (1) incremental costs associated with the start-up (due
to labor shortages and facility
22
<PAGE> 23
space constraints) and ultimate closure (due to less than anticipated demand) of
a remote packaging facility; (2) production inefficiencies caused by facility
space constraints and the lack of a sufficient seasonal workforce; (3) higher
than expected third party shipping costs; (4) provisions for returns and
allowances relating to products sold to outside distribution channels and (5) a
non-recurring charge to factory cost of sales of approximately $398,000
representing write-down provisions for spoiled, excess and obsolete inventory
resulting primarily from product over-production. The reduction in Company-owned
store margins was due primarily to a product mix shift from store made product
to product produced by the factory.
Franchise Costs
Franchise costs increased $41,000, or 3.9%, in fiscal 1999 compared to fiscal
1998 due to increased support costs. As a percentage of total royalty and
marketing fees and franchise fee revenue, franchise costs increased to 36.2% in
fiscal 1999 from 34.1% in fiscal 1998 due to increased support costs and a 66.4%
decrease in franchise fee revenue.
Sales & Marketing
Sales and Marketing costs increased 32.2% to $1.6 million in fiscal 1999 from
$1.2 million in fiscal 1998. This increase is due to: (1) expansion of the
Company's sales and marketing group to support a larger base of franchised and
Company-owned stores; (2) expansion of promotional programs and marketing
materials available to franchised and Company-owned stores; (3) establishment of
a sales force focused on new distribution opportunities; (4) enhanced customer
service and new product marketing programs and (5) costs associated with certain
new distribution channel customers.
General and Administrative
General and administrative expenses increased 7.7% from $1.7 million in fiscal
1998 to $1.8 million in fiscal 1999, primarily as a result of increased bad debt
expense related to new distribution channel customers. As a percentage of total
revenues, general and administrative expense declined from 7.1% in fiscal 1998
to 6.9% in fiscal 1999.
Retail Operating Expenses
Retail operating expenses increased from $5.3 million in fiscal 1998 to $6.0
million in fiscal 1999; an increase of 13.4%. This increase resulted primarily
from an increase in the number of Company-owned stores from 37 at February 28,
1998 to 42 at February 28, 1999. Retail operating expenses, as a percentage of
retail sales, remained relatively constant at 51.1% in fiscal 1998 compared to
50.7% in fiscal 1999.
Provision for Store Closures, Impairment Loss and Loss on Write-down of Assets
In the fourth quarter of fiscal 1999, a non-recurring charge of approximately
$124,000 was recorded representing the loss expected to result from the closure
of two Company-owned stores.
Depreciation and Amortization
Depreciation and Amortization increased 12.9% to $1.5 million in fiscal 1999
from $1.3 million in fiscal 1998. The increase is due primarily to depreciation
on certain fixtures used in outside channels and depreciation related to an
increase in the number of Company-owned retail stores.
23
<PAGE> 24
Other Expense
Other expense of $631,000 incurred in fiscal 1999 increased 14.8% from the
$550,000 incurred in fiscal 1998. This increase resulted from decreased interest
income on excess cash balances in fiscal 1999 and increased interest expense
related to borrowings on the Company's line of credit facility.
Income Tax Expense
The Company's effective income tax rate in fiscal 1999 was 38.7% in comparison
with 38.5% in 1998.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the
Company entered into a definitive agreement to sell substantially all the assets
of its Fuzziwig's segment for $1.6 million. This transaction closed on July 31,
1998.
The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of
estimated losses during the phase out period of $250,000), net of applicable
income tax benefit of $587,000, has been recorded in the accompanying statement
of operations for the year ending February 28, 1998.
The operating results of Fuzziwig's, including disposition costs, and operating
losses during the phase-out period totaling $1.5 million have been segregated
from continuing operations and reported as separate line items net of applicable
income taxes in the statements of income for all applicable periods reported.
Loss from discontinued operations was $.35 per diluted share in fiscal 1998
versus nil in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of February 29, 2000, working capital was $1.59 million, approximately the
same as February 28, 1999.
Cash and cash equivalent balances decreased from $317,000 as of February 28,
1999 to $128,000 as of February 29, 2000 as a result of cash flows used in
investing and financing activities in excess of cash flows generated by
operating activities. The Company's current ratio was 1.4 to 1 at February 29,
2000 in comparison with 1.3 to 1 at February 28, 1999.
The Company's long-term debt is comprised primarily of a real estate mortgage
facility used to finance the Company's factory expansion (unpaid balance as of
February 29, 2000, $1.9 million), and chattel mortgage notes (unpaid balance as
of February 29, 2000, $3.8 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion.
The Company has a $3.0 million credit line, of which $2.9 million was available,
secured by substantially all of the Company's assets except retail store assets
and is subject to renewal in July, 2000.
For fiscal 2001, the Company anticipates making capital expenditures of
approximately $750,000, which will be used to maintain and improve existing
factory and administrative infrastructure. The Company believes that cash flow
from operations and available bank lines of credit will be sufficient to fund
capital expenditures and working capital requirements for fiscal 2001.
24
<PAGE> 25
YEAR 2000 MATTERS
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed remediation and
testing of its technology systems. As a result of those planning and
implementation efforts, the Company has experienced no significant disruptions
in mission critical information technology and non-information technology
systems as of May 15, 2000 and believes those systems successfully responded to
the Year 2000 date change. The Company expensed less than $50,000 during fiscal
2000 in connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and labor
directly affect the Company's operations. Most of the Company's leases provide
for cost-of-living adjustments and require it to pay taxes, insurance and
maintenance expenses, all of which are subject to inflation. Additionally the
Company's future lease cost for new facilities may include potentially
escalating costs of real estate and construction. There is no assurance that the
Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed
assets, and is therefore potentially less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior years
will ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday and
summer vacation seasons. In addition, quarterly results have been, and in the
future are likely to be, affected by the timing of new store openings and sales
of franchises. Because of the seasonality of the Company's business and the
impact of new store openings and sales of franchises, results for any quarter
are not necessarily indicative of results that may be achieved in other quarters
or for a full fiscal year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging activities
and does not enter into derivative financial instrument transactions for trading
or other speculative purposes. The Company also does not engage in transactions
in foreign currencies or in interest rate swap transactions that could expose
the Company to market risk. However, the Company is exposed to some commodity
price and interest rate risks.
The Company frequently enters into purchase contracts of between six to eighteen
months for chocolate and certain nuts. These contracts permit the Company to
purchase the specified commodity at a fixed price on an as-needed basis during
the term of the contract. Because prices for these products may fluctuate, the
Company may benefit if prices rise during the terms of these contracts, but it
may be required to pay above-market prices if prices fall and it is unable to
renegotiate the terms of the contract.
25
<PAGE> 26
As of February 29, 2000, $761,000 of the Company's long-term debt was subject to
a variable interest rate. Assuming that this principal amount did not change
during fiscal 2001, other than as a result of scheduled principal reductions,
and assuming that the average effective interest rate in effect on this debt for
2001 increased by one percent as compared to the average effective interest rate
in effect during 2000, the Company would incur an additional $5,300 in interest
expense in 2001, as compared to 2000, and would experience a corresponding
reduction in cash flow. A decrease in the average interest rate in effect on
this debt during 2001 would result in a corresponding decrease in interest
expense and an increase in cash flow.
The Company also has a $3.0 million bank line of credit that bears interest at a
variable rate. As of February 29, 2000, $75,000 was outstanding under the line
of credit. The Company does not believe that it is exposed to any material
interest rate risk related to the line of credit.
The Chief Financial Officer and Chief Operating Officer of the Company has
primary responsibility over the Company's long-term and short-term debt and has
primary responsibility for determining the timing and duration of commodity
purchase contracts and negotiating the terms and conditions of those contracts.
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
<S> <C>
Report of Independent Certified Public Accountants 28
Statements of Income 29
Balance Sheets 31
Statements of Changes in Stockholders Equity 32
Statements of Cash Flows 33
Notes to Financial Statements 34
</TABLE>
27
<PAGE> 28
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
We have audited the accompanying balance sheets of Rocky Mountain Chocolate
Factory, Inc. as of February 29, 2000 and February 28, 1999, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended February 29, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Mountain Chocolate
Factory, Inc. as of February 29, 2000 and February 28, 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended February 29, 2000, in conformity with accounting principles generally
accepted in the United States of America.
GRANT THORNTON LLP
Dallas, Texas
May 5, 2000
28
<PAGE> 29
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2000 1999 1998
<S> <C> <C> <C>
REVENUES
Sales $ 21,352,411 $ 23,193,011 $ 20,659,076
Franchise and royalty fees 3,294,403 3,039,517 3,104,906
Total revenues 24,646,814 26,232,528 23,763,982
COSTS AND EXPENSES
Cost of sales 11,235,252 12,706,474 10,534,195
Franchise costs 977,087 1,101,092 1,060,072
Sales & marketing 1,337,818 1,644,320 1,244,266
General and administrative 1,761,779 1,821,582 1,692,054
Retail operating 5,109,772 6,008,416 5,298,919
Provision for store closures -- 123,903 --
Depreciation and amortization 1,562,632 1,508,111 1,335,715
Total costs and expenses 21,984,340 24,913,898 21,165,221
OPERATING INCOME 2,662,474 1,318,630 2,598,761
OTHER INCOME (EXPENSE)
Interest expense (573,379) (698,557) (664,852)
Cost of unsolicited tender
offer (419,954) -- --
Interest income 54,454 67,080 114,732
Other, net (938,879) (631,477) (550,120)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,723,595 687,153 2,048,641
INCOME TAX EXPENSE 667,030 265,725 788,640
INCOME FROM CONTINUING OPERATIONS 1,056,565 421,428 1,260,001
DISCONTINUED OPERATIONS
Loss from discontinued
operations (net of income
taxes) -- -- (90,849)
Provision for estimated loss on
disposition, including
provision for operating losses
during phase out period of
$153,250 (net of income taxes) -- -- (929,234)
Total -- -- (1,020,083)
NET INCOME $ 1,056,565 $ 421,428 $ 239,918
</TABLE>
(CONTINUED)
The accompanying notes are an integral part of these statements.
29
<PAGE> 30
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2000 1999 1998
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON
SHARE
Continuing Operations $ .41 $ .16 $ .43
Discontinued Operations -- -- (.35)
Net Income $ .41 $ .16 $ .08
DILUTED EARNINGS (LOSS) PER
COMMON SHARE
Continuing Operations $ .41 $ .16 $ .43
Discontinued Operations -- -- (.35)
Net Income $ .41 $ .16 $ .08
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,580,604 2,665,567 2,912,387
DILUTIVE EFFECT OF EMPLOYEE
STOCK OPTIONS 16,441 11,776 17,158
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, ASSUMING DILUTION 2,597,045 2,677,343 2,929,545
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 31
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF FEBRUARY 28 or 29,
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 128,192 $ 317,155
Accounts and notes receivable, less allowance for
doubtful accounts of $139,912 and $259,408 2,194,325 1,874,286
Refundable income taxes 76,689 383,511
Inventories 3,084,392 3,276,550
Deferred income taxes 188,999 433,229
Other 87,785 73,827
Total current assets 5,760,382 6,358,558
PROPERTY AND EQUIPMENT, NET 8,976,014 10,238,671
OTHER ASSETS
Accounts and notes receivable 55,343 291,648
Goodwill, less accumulated amortization of $584,397
and $441,246 1,277,603 1,420,754
Other 370,514 342,469
Total other assets 1,703,460 2,054,871
Total assets $ 16,439,856 $ 18,652,100
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,930,700 $ 1,831,000
Line of credit 75,000 900,000
Accounts payable 1,055,910 1,066,986
Accrued salaries and wages 653,209 548,745
Other accrued expenses 456,300 453,407
Total current liabilities 4,171,119 4,800,138
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,773,851 5,249,769
DEFERRED INCOME TAXES 61,797 93,007
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.03 par value; 7,250,000 shares
authorized; 2,386,879 and 2,599,599 shares issued
and outstanding 71,606 77,988
Additional paid-in capital 5,879,753 7,046,032
Retained earnings 2,690,476 1,633,911
Less notes receivable from officers and directors (208,746) (248,745)
Total stockholders' equity 8,433,089 8,509,186
Total liabilities and stockholders' equity $ 16,439,856 $ 18,652,100
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2000 1999 1998
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 77,988 $ 87,373 $ 87,369
Repurchase and retirement of common
stock (6,404) (10,080) --
Issuance of common stock 4 5 4
Exercise of stock options 18 690 --
Balance at end of year 71,606 77,988 87,373
NOTES RECEIVABLE FROM OFFICERS AND
DIRECTORS
Balance at beginning of year (248,745) -- --
Issuance of notes -- (248,745) --
Redemption of Notes 39,999 -- --
Balance at end of year (208,746) (248,745) --
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 7,046,032 8,719,604 8,719,008
Repurchase and retirement of common
stock (1,169,805) (1,754,331) --
Issuance of common stock 844 699 596
Exercise of stock options 2,682 80,060 --
Balance at end of year 5,879,753 7,046,032 8,719,604
RETAINED EARNINGS
Balance at beginning of year 1,633,911 1,212,483 972,565
Net income 1,056,565 421,428 239,918
Balance at end of year 2,690,476 1,633,911 1,212,483
TOTAL STOCKHOLDERS' EQUITY $ 8,433,089 $ 8,509,186 $10,019,460
COMMON SHARES
Balance at beginning of year 2,599,599 2,912,449 2,912,299
Repurchase and retirement of common
stock (213,470) (336,000) --
Issuance of common stock 150 150 150
Exercise of stock options 600 23,000 --
Balance at end of year 2,386,879 2,599,599 2,912,449
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 33
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 or 29,
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,056,565 $ 421,428 $ 239,918
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss from discontinued operations -- -- 90,849
Provision for estimated loss on
disposition of business segment -- -- 929,234
Depreciation and amortization 1,562,632 1,508,111 1,335,715
Asset impairment and store closure
losses -- 123,903 --
(Gain) Loss on sale of assets 77,148 (11,420) (76,474)
Changes in operating assets and
liabilities:
Accounts and notes receivable 57,356 237,806 (158,353)
Refundable income taxes 306,822 99,937 (250,159)
Inventories 192,158 (708,584) (485,400)
Other assets (13,958) 29,368 74,872
Accounts payable (11,076) (229,783) 497,098
Income taxes payable 120,463 -- --
Deferred income taxes 213,020 (461,318) 767,666
Accrued liabilities (48,112) (223,533) (286,081)
Deferred income -- -- (93,000)
Net cash provided by operating
activities of continuing operations 3,513,018 785,915 2,585,885
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 503,644 39,300 8,602
Sale (purchase) of other assets (785) 58,054 (233,380)
Purchase of property and equipment (870,112) (1,383,718) (1,984,940)
Net cash used in investing activities (367,253) (1,286,364) (2,209,718)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit (825,000) 900,000 --
Proceeds from long-term debt 509,081 2,022,456 1,522,043
Payments on long-term debt (1,885,299) (2,067,860) (981,063)
Loans to officers and directors -- (248,745) --
Collection of loan from former officer 39,999 -- --
Proceeds from issuance of common stock -- -- 600
Proceeds from exercise of stock options 2,700 80,750 --
Repurchase and redemption of common
stock (1,176,209) (1,764,410) --
Net cash provided by (used in) financing
activities (3,334,728) (1,077,809) 541,580
NET CASH PROVIDED BY DISCONTINUED
OPERATIONS -- 100,032 85,028
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (188,963) (1,478,226) 1,002,775
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 317,155 1,795,381 792,606
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 128,192 $ 317,155 $ 1,795,381
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 34
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a manufacturer of an extensive line of premium chocolate candy
for sale to its franchised and Company-owned Rocky Mountain Chocolate Factory
stores located throughout the United States and in Guam, Canada and United Arab
Emirates. The Company is also a retail operator and international franchiser.
The majority of the Company's revenues are generated from wholesale and retail
sales of candy. The balance of the Company's revenues are generated from
royalties and marketing fees, based on a franchisee's monthly gross sales, and
from franchise fees, which consist of fees earned from the sale of franchises.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method based upon the estimated useful life of
the asset. Leasehold improvements are amortized on the straight-line method over
the lives of the respective leases or the service lives of the improvements,
whichever is shorter.
The Company reviews its long-lived assets, including identifiable intangible
assets, whenever events or changes indicate the carrying amount of such assets
may not be recoverable. The Company's policy is to review the recoverability of
all assets, at a minimum, on an annual basis.
Amortization of Goodwill
Goodwill is amortized on the straight-line method over ten to twenty-five years.
Franchise and Royalty Fees
Franchise fee revenue is recognized upon completion of all significant initial
services provided to the franchisee and upon satisfaction of all material
conditions of the franchise agreement. In addition to the initial franchise fee,
the Company receives a royalty fee of five percent (5%) and a marketing and
promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory
franchised stores' gross sales.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, the disclosure of
contingent assets and liabilities, at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Additionally, estimates of losses anticipated to result from store closure and
impairment are based on the best information currently available to management.
Such estimates may differ materially from results actually produced by store
closure as a result of uncertainties in the amount of finally negotiated lease
settlements, the amount of operating losses sustained by the stores to their
dates of closure and in the amount recoverable by sale or redeployment of assets
of stores to be closed.
34
<PAGE> 35
Vulnerability Due to Certain Concentrations
The Company's stores are concentrated (46%) in the factory outlet mall
environment. At April 30, 2000, 25 Company-owned stores and 79 franchise stores
of 226 total stores are located in this environment. The Company is, therefore,
vulnerable to changes in consumer traffic in this market environment and to
changes in the level of construction of additional, new factory outlet mall
locations.
Cash Equivalents
Cash equivalents include cash in excess of daily requirements which is invested
in various financial instruments having an original maturity of three months or
less.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and provides the required
pro forma disclosures prescribed by SFAS 123.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted
average number of common shares outstanding during each year of 2,580,604,
2,665,567 and 2,912,387 for the fiscal years ended February 28 (29), 2000, 1999
and 1998. Diluted earnings per share reflects the potential dilution that could
occur from common shares issuable through stock options. Incremental shares
assumed issued on the exercise of common stock options during the fiscal years
ended February 28 (29), 2000, 1999 and 1998 were 16,441, 11,776 and 17,158.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments in money market funds, other liquid assets, trade
receivables, payables, notes receivable, and debt. The fair value of all
instruments approximates the carrying value.
Reclassifications
Certain reclassifications have been made to prior years' financial statements in
order to conform with the presentation of the February 29, 2000 financial
statements.
NOTE 2 - INVENTORIES
Inventories consist of the following at February 28 or 29:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Ingredients and supplies $1,490,813 $1,594,579
Finished candy 1,593,579 1,681,971
$3,084,392 $3,276,550
</TABLE>
35
<PAGE> 36
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28 or 29:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,681,808 3,672,870
Machinery and equipment 7,590,205 7,147,833
Furniture and fixtures 2,127,282 2,408,807
Leasehold improvements 1,611,785 1,876,223
Transportation equipment 199,639 199,639
15,724,337 15,818,990
Less accumulated depreciation 6,748,323 5,580,319
Property and equipment, net $ 8,976,014 $10,238,671
</TABLE>
NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 29, 2000 the Company had a $3,000,000 line of credit from a bank,
collateralized by substantially all of the Company's assets with the exception
of the Company's retail store assets. Draws may be made under the line at 75% of
eligible accounts receivable plus 50% of eligible inventory. Interest on
borrowings is at prime (8.75% at February 29, 2000). Terms of the line require
that the line be rested (that is, that there be no outstanding balance) for a
period of 30 consecutive days during the term of the loan. The credit line is
subject to renewal in July, 2000.
Long-Term Debt
Long-term debt consists of the following at February 28 or 29:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Chattel mortgage note payable in monthly installments
of $10,500 through March 2001 including interest at
8.25% per annum, collateralized by machinery,
equipment, furniture and fixtures $ 98,171 $ 210,731
Real estate mortgage note payable in monthly
installments of $17,490 through April, 2016 including
interest at 8.25% per annum, collateralized by land
and factory building. Interest adjusted to prime in
May, 2001 and every five years thereafter until
maturity in April 2016 1,875,134 1,925,405
Chattel mortgage note payable in monthly installments
of $12,359 through April, 2002 including interest at
8.25% per annum, collateralized by equipment 293,330 412,064
Chattel mortgage note payable in monthly installments
of $24,613 through April, 2003 including interest at
8.94% per annum, collateralized by machinery,
equipment, furniture and fixtures 834,243 1,052,241
</TABLE>
36
<PAGE> 37
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
Long Term Debt - continued
<TABLE>
<S> <C> <C>
Chattel mortgage note payable in monthly installments
of $5,472 through January, 2002 including interest at
10.36% per annum, collateralized by machinery,
equipment, furniture and fixtures 113,707 164,686
Chattel mortgage note payable in monthly installments
of $27,632 through April, 2001 including interest at
7.9% per annum, collateralized by machinery,
equipment, furniture and fixtures 368,398 658,322
Chattel mortgage note payable in monthly installments
of $10,177 through October, 2001 including interest at
10.35% per annum, collateralized by
machinery, equipment, furniture and fixtures 186,204 283,500
Chattel mortgage notes payable in monthly principal
installments of $37,881 through April, 2002 plus
interest at LIBOR plus 2.85% (8.74% at February 29,
2000), collateralized by equipment, furniture and
fixtures 760,803 1,215,375
Chattel mortgage note payable in monthly installments
of $7,828 through November, 2001 including interest at
7.95% per annum, collateralized by equipment,
furniture and fixtures 153,000 231,361
Chattel mortgage note payable in monthly installments
of $454 through October, 2003 including interest at
7.91% per annum, collateralized by equipment 17,304 21,219
Chattel mortgage note payable in quarterly
installments of $90,000 through October, 2000,
$57,150 through January, 2002, and a final
installment of $38,100 in April, 2002, including
interest at 6.73% per annum collateralized by
equipment, furniture and fixtures 495,176 905,865
Chattel mortgage note payable in monthly installments
of $8,002 through February, 2003 including interest
at 8.75% per annum, collateralized by computer
equipment 252,573 --
Chattel mortgage note payable in monthly installments
of $5,294 through February, 2005 including interest
at 8.75% per annum, collateralized by machinery and
equipment 256,508 --
$5,704,551 $7,080,769
Less current maturities 1,930,700 1,831,000
$3,773,851 $5,249,769
</TABLE>
37
<PAGE> 38
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
Long Term Debt - continued
Maturities of long-term debt are as follows for the years ending February 28 or
29:
<TABLE>
<S> <C>
2001 $1,930,700
2002 1,348,064
2003 567,116
2004 183,364
2005 140,242
Thereafter 1,535,065
$5,704,551
</TABLE>
NOTE 5 - OPERATING LEASES
The Company conducts its retail operations in facilities leased under five to
ten year noncancelable operating leases. Certain leases contain renewal options
for between two and ten additional years at increased monthly rentals. The
majority of the leases provide for contingent rentals based on sales in excess
of predetermined base levels.
The following is a schedule by year of future minimum rental payments required
under such leases for the year ending February 28 or 29:
<TABLE>
<S> <C>
2001 $ 760,075
2002 485,694
2003 323,455
2004 181,284
2005 119,748
Thereafter 70,925
$1,941,181
</TABLE>
In some instances, in order to retain the right to site selection or because of
requirements imposed by the lessor, the Company has leased space for its
proposed franchise outlets. When a franchise was sold, the store was subleased
to the franchisee who is responsible for the monthly rent and other obligations
under the lease. The Company's liability as primary lessee on sublet franchise
outlets, all of which is offset by sublease rentals, is as follows for the years
ending February 28 or 29:
<TABLE>
<S> <C>
2001 $1,186,307
2002 789,389
2003 532,935
2004 343,080
2005 274,484
Thereafter 312,371
$3,438,566
</TABLE>
The following is a schedule of lease expense for all operating leases for the
three years ended February 28 or 29:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Minimum rentals $ 2,237,464 $ 2,316,508 $ 2,454,744
Less sublease rentals (1,336,496) (1,239,663) (1,294,202)
Contingent rentals 49,426 35,150 100,771
$ 950,394 $ 1,111,995 $ 1,261,313
</TABLE>
38
<PAGE> 39
NOTE 6 - INCOME TAXES
Income tax expense (benefit) relating to continuing operations is comprised of
the following for the years ending February 28 or 29:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Current
Federal $ 374,704 $ 240,834 $ 18,520
State 79,306 25,183 2,454
Total Current 454,010 266,017 20,974
Deferred
Federal 175,810 (264) 677,849
State 37,210 (28) 89,817
Total Deferred 213,020 (292) 767,666
Total $ 667,030 $ 265,725 $ 788,640
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective rate
as a percentage of pretax income is as follows for the years ending February 29
or 28:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Goodwill amortization .5% 1.2% .4%
State income taxes, net of federal benefit
3.0% 2.4% 3.1%
Other 1.2% 1.1% 1.0%
Effective Rate 38.7% 38.7% 38.5%
</TABLE>
The components of deferred income taxes at February 29 or 28 are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets 2000 1999
<S> <C> <C>
Allowance for doubtful accounts $ 54,146 $ 100,313
Inventories 4,010 28,742
Accrued compensation 73,201 67,279
Contribution carryover -- 37,249
Loss provisions 583,729 597,422
Tax credit carryforward 7,433 150,402
Deferred lease rentals 13,786 18,333
Other 29,471 7,781
765,776 1,007,521
Deferred Tax Liability - Depreciation (638,574) (667,299)
Net deferred tax asset $ 127,202 $ 340,222
</TABLE>
NOTE 7 - STOCK REPURCHASE
Between December 22, 1999 and February 7, 2000, the Company repurchased 213,470
Company shares on the open market at an average price of $5.48 per share.
On May 15, 1998, the Company purchased 336,000 shares and certain of its
directors and executive officers purchased 104,000 shares of the Company's
issued and outstanding common stock at $5.15 per share from La Salle National
Bank of Chicago, Illinois, which obtained these shares through foreclosure from
certain shareholders unrelated to any transactions of the Company. The Company
loaned certain officers and directors the funds to acquire 40,000 of the 104,000
shares purchased by them. The loans are secured by the related shares, bear
interest payable annually at 7.5% and are due May 15, 2003.
On March 21, 2000, the Company commenced a tender offer to acquire shares of its
common stock. Pursuant to the tender offer, which was completed on May 1, 2000,
the Company acquired 447,595 shares of its issued and outstanding common stock
at $6.25 per share.
39
<PAGE> 40
NOTE 8 - STOCK OPTION PLANS
Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan"), options
to purchase 215,000 shares of the Company's common stock were granted at prices
not less than market value at the date of grant. The 1985 Plan expired in
October 1995. Options granted under the 1985 Plan could not have a term
exceeding ten years. Options representing the right to purchase 54,000 shares of
the Company's common stock remained outstanding under the 1985 Plan at February
29, 2000.
Under the 1995 Stock Option Plan (the "1995 Plan"), the Nonqualified Stock
Option Plan for Nonemployee Directors (the "Director's Plan")and the 2000
Nonqualified Stock Option Plan for Nonemployee Directors (the "2000 Director's
Plan"), options to purchase up to 250,000, 90,000 and 60,000 shares,
respectively, of the Company's common stock may be granted at prices not less
than market value at the date of grant. Options granted may not have a term
exceeding ten years under the 1995 plan and the Director's Plan. Options granted
may not have a term exceeding five years under the 2000 Director's Plan. Options
representing the right to purchase 172,000, 30,000 and 40,000 shares of the
Company's common stock were outstanding under the 1995 Plan, the Director's
Plan, and the 2000 Director's Plan, respectively, at February 29, 2000.
Options become exercisable over a one to five year period from the date of the
grant. The options outstanding under these plans will expire, if not exercised,
in May 2000 through December 2009.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123). In accordance with those provisions, the Company applies APB opinion 25
and related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost if the exercise price is not
less than market. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS 123, net income and diluted income per share would have been reduced to the
pro-forma amounts indicated in the table below for the years ending February 28
or 29(in 000's except per share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net Income - as reported $ 1,057 $ 421 $ 240
Net Income - pro forma 862 362 177
Basic Income per Share-as reported .41 .16 .08
Diluted Income per Share-as reported .41 .16 .08
Basic Income per Share-pro forma .33 .14 .06
Diluted Income per Share-pro forma .33 .14 .06
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the following assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 65% 65% 65%
Risk-free interest rate 6.5% 6.0% 6.0%
Expected life of options 5 years 7 years 7 years
</TABLE>
40
<PAGE> 41
NOTE 8 - STOCK OPTION PLANS - CONTINUED
Additional information with respect to options outstanding under the Plans at
February 29, 2000, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
2000
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 241,000 $ 7.91
Granted 115,000 5.12
Exercised (600) 4.50
Forfeited (59,400) 8.66
Outstanding at end of year 296,000 $ 6.68
Options exercisable at February 29,
2000 174,200 $ 7.62
</TABLE>
<TABLE>
<CAPTION>
1999
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 290,000 $ 7.81
Exercised (23,000) 3.51
Forfeited (26,000) 10.63
Outstanding at end of year 241,000 $ 7.91
Options exercisable at February 28,
1999 141,800 $ 9.18
</TABLE>
<TABLE>
<CAPTION>
1998
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 272,000 $ 9.01
Granted 55,000 4.55
Forfeited (37,000) 11.80
Outstanding at end of year 290,000 $ 7.81
Options exercisable at February 28,
1998 151,000 $ 9.22
Weighted average fair value per share
of options granted during 2000 and
1998 were $2.89 and $3.44,
respectively. There were no options
granted during 1999
</TABLE>
41
<PAGE> 42
NOTE 8 - STOCK OPTION PLANS - CONTINUED
Information about stock options outstanding at February 29, 2000 is summarized
as follows:
<TABLE>
<CAPTION>
Options Outstanding
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
<S> <C> <C> <C>
$3.125 to 4.50 75,000 5.37 years $ 4.15
$5.12 to 5.875 140,000 7.51 years 5.27
$7.50 to 18.00 81,000 5.14 years 11.47
296,000
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Number Weighted average
Range of exercise prices Exercisable exercise price
<S> <C> <C>
$3.125 to 4.50 46,000 $ 3.98
$5.12 to 5.875 62,000 5.35
$7.50 to 18.00 66,200 12.28
174,200
</TABLE>
NOTE 9 - LOSS PROVISIONS
Loss provisions were provided as follows:
Store Closures
In February 1999, the Company adopted a plan to close two underperforming
Company-owned stores. The Company made a loss provision in February 1999 for
closure of these stores in the total amount of approximately $123,000 including
$86,000 for estimated operating losses to date of closure and $37,000 for
writedown of store assets to their estimated recoverable values.
Inventory Obsolescence
In February 1999, a loss provision was made in the amount of $398,000 to reduce
certain inventories to the lower of cost or market. This charge is included in
cost of sales in the accompanying statement of income.
NOTE 10 - OPERATING SEGMENTS
The Company classifies its business interests into three reportable segments:
Franchising, Retail stores and Manufacturing. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance and allocates resources
based on operating contribution, which excludes unallocated corporate general
and administrative costs and income tax expense or benefit. The Company's
reportable segments are strategic businesses that utilize common merchandising,
distribution, and marketing functions, as well as common information systems and
corporate administration. All intersegment sales prices are market based. Each
segment is managed separately because of the differences in required
infrastructure and the difference in products and services:
42
<PAGE> 43
NOTE 10 - OPERATING SEGMENTS - CONTINUED
<TABLE>
Franchising Manufacturing Retail Other Total
<S> <C> <C> <C> <C> <C>
FY 2000
Total revenues 3,294,403 13,716,134 10,315,509 -- 27,326,046
Intersegment revenues -- (2,679,232) -- -- (2,679,232)
Revenue from external
customers 3,294,403 11,036,902 10,315,509 -- 24,646,814
Segment profit (loss) 1,319,459 3,221,857 69,733 (2,887,454) 1,723,595
Total assets 773,664 8,850,408 5,004,654 1,811,130 16,439,856
Capital expenditures 51,173 416,398 93,515 309,026 870,112
Total depreciation &
amortization 172,969 519,938 682,929 186,796 1,562,632
FY 1999
Total revenues 3,039,517 14,737,115 11,759,655 -- 29,536,287
Intersegment revenues -- (3,303,759) -- -- (3,303,759)
Revenue from external
customers 3,039,517 11,433,356 11,759,655 -- 26,232,528
Segment profit (loss) 806,106 2,990,147 48,936 (3,158,036) 687,153
Total assets 889,713 8,947,006 6,507,865 2,307,516 18,652,100
Capital expenditures 38,666 720,670 529,172 95,210 1,383,718
Total depreciation &
amortization 178,575 447,140 666,056 216,340 1,508,111
FY 1998
Total revenues 3,104,906 13,276,949 10,460,518 -- 26,842,373
Intersegment revenues -- (3,078,391) -- -- (3,078,391)
Revenue from external
customers 3,104,906 10,198,558 10,460,518 -- 23,763,982
Segment profit (loss) 1,148,989 3,074,658 252,642 (2,427,648) 2,048,641
Total assets 1,217,689 8,388,569 4,864,567 5,397,067 19,867,892
Capital expenditures 38,749 565,711 857,974 522,506 1,984,940
Total depreciation &
amortization 83,100 426,770 631,121 194,724 1,335,715
</TABLE>
NOTE 11 - DISCONTINUED OPERATION
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations.
On June 5, 1998, the Company entered into a definitive agreement to sell
substantially all the assets of its Fuzziwig's segment for $1.6 million. This
transaction closed on July 31, 1998 (the "Closing Date"). The purchase price
included $180,000 cash, $100,000 of which was paid at the Closing Date and the
remaining $80,000 paid six months from the Closing Date. Pursuant to the
agreement, the Company also received four Rocky Mountain Chocolate Factory
stores previously operated as franchised stores by one of the purchasers and
valued at approximately $1.42 million.
The estimated loss on disposition of Fuzziwig's of approximately $929,000
(inclusive of estimated losses during the phase out period of $250,000), net of
applicable income tax benefit of $587,000, has been recorded in the accompanying
statement of income for the year ending February 28, 1998.
Operating results of the discontinued operation have been reclassified from
amounts previously reported and have been reported separately in the statements
of income.
43
<PAGE> 44
NOTE 11 - DISCONTINUED OPERATIONS - CONTINUED
Summarized financial information for the discontinued operation for the years
ended February 28 or 29 follow:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Revenues $ -- $ 1,095,431 $ 2,928,403
Loss from the discontinued operation, net
of income tax benefit of $57,235 -- -- (90,849)
Provision for loss on disposal, net of
income tax benefit of $586,766 -- -- (929,234)
</TABLE>
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28 or 29:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Interest paid $ 572,636 $ 703,953 $ 658,700
Income taxes paid (received) 26,725 165,788 (30,619)
Non-Cash Financing Activities:
Company financed sales of retail store
assets $ -- $ -- $ 715,931
</TABLE>
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc.
401(k) Plan. Eligible participants are permitted to make contributions up to 15%
of compensation. The Company makes a matching contribution, which vests ratably
over a 5 year period, and is 50% of the employee's contribution up to a maximum
of 1.5% of the employee's compensation. During the years ended February 28 or
29, 2000, 1999, and 1998, the Company contribution was approximately $0, $36,000
and $33,000, respectively, to the plan.
44
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to the executive officers of the Company is set
forth in the section entitled "Executive Officers" in Part I of this report.
The information required by this item with respect to directors is incorporated
by reference from the information under the caption "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement for the Company's Annual Meeting of Shareholders to be
held on July 14, 2000 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information appearing under the caption "Certain Transactions" in the Proxy
Statement.
45
<PAGE> 46
PART IV.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
1. Financial Statements
Page
<S> <C>
Report of Independent Certified Public Accountants 28
Statements of Income 29
Balance Sheets 31
Statements of Changes in Stockholders' Equity 32
Statements of Cash Flows 33
Notes to Financial Statements 34
2. Financial Statement Schedules
Page
Report of Independent Certified Public Accountants on Schedules 46
SCHEDULE II - Valuation and Qualifying Accounts 46
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
In connection with our audit of the financial statements of Rocky Mountain
Chocolate Factory, Inc. referred to in our report dated May 5, 2000, which is
included in Part II of this form, we have also audited Schedule II for each of
the three years in the period ended February 29, 2000. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
GRANT THORNTON LLP
Dallas, Texas
May 5, 2000
SCHEDULE II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged to Balance at End
Period Costs & Exp. Deductions of Period
<S> <C> <C> <C> <C>
Year Ended February 29, 2000
Accounts Receivable Allowance 259,408 11,589 131,085 139,912
Year Ended February 28, 1999
Accounts Receivable Allowance 214,152 120,000 74,744 259,408
Year Ended February 28, 1998
Accounts Receivable Allowance 202,029 49,525 37,402 214,152
</TABLE>
46
<PAGE> 47
3. Exhibits
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant, as Exhibit 3.1 to Current Report on Form 8-K of the
amended Registrant filed on August 1, 1988.
3.2 By-laws of the Registrant, as amended on November Exhibit 3.2 to the Annual Report on Form 10-K of the
25, 1997 Registrant for the fiscal year ended February 28, 1998.
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K of the
Registrant filed on August 1, 1988.
4.2 Term Loan and Credit Agreement dated April 5, 1996 Exhibit 4.18 to the Annual Report on Form 10-K of the
in the amount of $2,000,000 between Norwest Banks Registrant for the fiscal year ended February 29, 1996.
and the Registrant
4.3 Amendments dated February 5, 1997, May 2, 1997, Exhibit 4.12 to the Annual Report on Form 10-K of the
and May 22, 1997 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1997.
dated April 5, 1996 in the amount of $2,000,000
between Norwest Banks and the Registrant
4.4 Amendments dated December 23, 1997, March 9, 1998 Exhibit 4.4 to the Annual Report on Form 10-K of the
& May 6, 1998 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1998.
dated April 5, 1996 in the amount of $2,000,000
between Norwest Banks and the Registrant
4.5 Instruments with respect to long-term debt not
exceeding 10% of the total assets of the Company
have not been filed. The Company agrees to furnish
a copy of such instruments to the Securities and
Exchange Commission upon request.
10.1 Form of Stock Option Agreement for Incentive Stock Exhibit 10.3 to the Annual Report on Form 10-K of the
Option Plan of the Registrant* Registrant for the fiscal year ended February 28, 1986.
10.2 Incentive Stock Option Plan of the Registrant as Exhibit 10.2 to the Annual Report on Form 10-K of the
amended July 27, 1990* Registrant for the fiscal year ended February 28, 1991.
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9 of the
Registrant and its officers* Registrant filed on May 21, 1999.
10.4 Current form of franchise agreement used by the Exhibit 10.4 to the Annual Report on Form 10-K of the
Registrant Registrant for the fiscal year ended February 28, 1999.
10.5 Form of Real Estate Lease between the Registrant Exhibit 10.7 to Registration Statement on Form S-18
as Lessee and franchisee as Sublessee (Registration No. 33-2016-D).
10.6 Form of Nonqualified Stock Option Agreement for Exhibit 10.8 to the Annual Report on Form 10-K of the
Nonemployee Directors of the Registrant* Registrant for the fiscal year ended February 28, 1991.
10.7 Nonqualified Stock Option Plan for Nonemployee Exhibit 10.9 to the Annual Report on Form 10-K of the
Directors dated March 20, 1990* Registrant for the fiscal year ended February 28, 1991.
10.8 1995 Stock Option Plan of the Registrant* Exhibit 10.9 to Registration Statement on Form S-1
(Registration No. 33-62149) filed August 25, 1995.
10.9 Forms of Incentive Stock Option Agreement for 1995 Exhibit 10.10 to Registration Statement on Form S-1
Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995.
10.10 Forms of Nonqualified Stock Option Agreement for Exhibit 10.11 to Registration Statement on Form S-1
1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995.
10.11 Form of Indemnification Agreement Registrant and Exhibit 10.12 to the Annual Report on between the
its directors Form 10-K of the Registrant for the fiscal year ended
February 28, 1998.
10.12 Form of Indemnification Agreement between the Exhibit 10.13 to the Annual Report on Form 10-K of the
Registrant and its officers Registrant for the fiscal year ended February 28, 1998.
10.13 Form of Promissory Note and Stock Pledge Agreement Exhibit 10.14 to the Annual Report on Form 10-K of the
between the Registrant and certain of its officers Registrant for the fiscal year ended February 28, 1998.
and directors
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
10.14 Asset Purchase Agreement dated June 5, 1998 Exhibit 10.15 to the Annual Report on Form 10-K of the
between the Registrant as seller and Resort Registrant for the fiscal year ended February 28, 1998.
Confections, Inc. et al., as purchasers
11.1 Statement re: computation of per share earnings Filed herewith.
23.1 Consent of Independent Public Accountants Filed herewith.
27.1 Fiscal 2000 Financial Data Schedule Filed herewith.
</TABLE>
* Management contract or compensatory plan
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the year ended February 29, 2000.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
/s/ Bryan J. Merryman
----------------------------------
BRYAN J. MERRYMAN
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Director
Date: May 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: May 26, 2000 /s/ Franklin E. Crail
---------------------------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President, and
Director
(principal executive officer)
Date: May 26, 2000 /s/ Bryan J. Merryman
---------------------------------------
BRYAN J. MERRYMAN
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Director
(principal financial and
accounting officer)
Date: May 26, 2000 /s/ Gerald A. Kien
---------------------------------------
GERALD A. KIEN, Director
Date: May 26, 2000 /s/ Lee N. Mortenson
---------------------------------------
LEE N. MORTENSON, Director
Date: May 26, 2000 /s/ Fred M. Trainor
---------------------------------------
FRED M. TRAINOR, Director
Date: May 26, 2000 /s/ Clyde Wm. Engle
---------------------------------------
CLYDE Wm. ENGLE, DIRECTOR
50
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant, as Exhibit 3.1 to Current Report on Form 8-K of the
amended Registrant filed on August 1, 1988.
3.2 By-laws of the Registrant, as amended on November Exhibit 3.2 to the Annual Report on Form 10-K of the
25, 1997 Registrant for the fiscal year ended February 28, 1998.
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K of the
Registrant filed on August 1, 1988.
4.2 Term Loan and Credit Agreement dated April 5, 1996 Exhibit 4.18 to the Annual Report on Form 10-K of the
in the amount of $2,000,000 between Norwest Banks Registrant for the fiscal year ended February 29, 1996.
and the Registrant
4.3 Amendments dated February 5, 1997, May 2, 1997, Exhibit 4.12 to the Annual Report on Form 10-K of the
and May 22, 1997 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1997.
dated April 5, 1996 in the amount of $2,000,000
between Norwest Banks and the Registrant
4.4 Amendments dated December 23, 1997, March 9, 1998 Exhibit 4.4 to the Annual Report on Form 10-K of the
& May 6, 1998 to Term Loan and Credit Agreement Registrant for the fiscal year ended February 28, 1998.
dated April 5, 1996 in the amount of $2,000,000
between Norwest Banks and the Registrant
4.5 Instruments with respect to long-term debt not
exceeding 10% of the total assets of the Company
have not been filed. The Company agrees to furnish
a copy of such instruments to the Securities and
Exchange Commission upon request.
10.1 Form of Stock Option Agreement for Incentive Stock Exhibit 10.3 to the Annual Report on Form 10-K of the
Option Plan of the Registrant* Registrant for the fiscal year ended February 28, 1986.
10.2 Incentive Stock Option Plan of the Registrant as Exhibit 10.2 to the Annual Report on Form 10-K of the
amended July 27, 1990* Registrant for the fiscal year ended February 28, 1991.
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9 of the
Registrant and its officers* Registrant filed on May 21, 1999.
10.4 Current form of franchise agreement used by the Exhibit 10.4 to the Annual Report on Form 10-K of the
Registrant Registrant for the fiscal year ended February 28, 1999.
10.5 Form of Real Estate Lease between the Registrant Exhibit 10.7 to Registration Statement on Form S-18
as Lessee and franchisee as Sublessee (Registration No. 33-2016-D).
10.6 Form of Nonqualified Stock Option Agreement for Exhibit 10.8 to the Annual Report on Form 10-K of the
Nonemployee Directors of the Registrant* Registrant for the fiscal year ended February 28, 1991.
10.7 Nonqualified Stock Option Plan for Nonemployee Exhibit 10.9 to the Annual Report on Form 10-K of the
Directors dated March 20, 1990* Registrant for the fiscal year ended February 28, 1991.
10.8 1995 Stock Option Plan of the Registrant* Exhibit 10.9 to Registration Statement on Form S-1
(Registration No. 33-62149) filed August 25, 1995.
10.9 Forms of Incentive Stock Option Agreement for 1995 Exhibit 10.10 to Registration Statement on Form S-1
Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995.
10.10 Forms of Nonqualified Stock Option Agreement for Exhibit 10.11 to Registration Statement on Form S-1
1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25, 1995.
10.11 Form of Indemnification Agreement Registrant and Exhibit 10.12 to the Annual Report on between the
its directors Form 10-K of the Registrant for the fiscal year ended
February 28, 1998.
10.12 Form of Indemnification Agreement between the Exhibit 10.13 to the Annual Report on Form 10-K of the
Registrant and its officers Registrant for the fiscal year ended February 28, 1998.
10.13 Form of Promissory Note and Stock Pledge Agreement Exhibit 10.14 to the Annual Report on Form 10-K of the
between the Registrant and certain of its officers Registrant for the fiscal year ended February 28, 1998.
and directors
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
10.14 Asset Purchase Agreement dated June 5, 1998 Exhibit 10.15 to the Annual Report on Form 10-K of the
between the Registrant as seller and Resort Registrant for the fiscal year ended February 28, 1998.
Confections, Inc. et al., as purchasers
11.1 Statement re: computation of per share earnings Filed herewith.
23.1 Consent of Independent Public Accountants Filed herewith.
27.1 Fiscal 2000 Financial Data Schedule Filed herewith.
</TABLE>
