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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 28, 2007
OR
| o | 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 (State of Incorporation) |
84-0910696 (I.R.S. Employer Identification No.) |
265 Turner Drive, Durango, CO 81303
(Address of principal executive offices)
(Address of principal executive offices)
(970) 259-0554
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities Registered Pursuant To Section 12(b) Of The Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock $.03 Par Value per Share | The NASDAQ Stock Market LLC |
Securities Registered Pursuant To Section 12(g) Of The Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15 (d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer and larger accelerated filer” in
Rule 12b of the Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
On April 30, 2007, there were 6,071,043 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 Global Market on April 30, 2007) held by non-affiliates
was $66,068,406.
As of
March 31, 2007 Hodges Capital Management, Inc. held 680,560 shares of outstanding Common
Stock. These shares have been included in the dollar value of Common Stock held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement furnished to stockholders in connection with the 2007
Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference in Part III of
this Report. The Proxy Statement will be filed with the Securities and Exchange Commission within
120 days of the close of the registrant’s fiscal year.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
FORM 10-K
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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”, and sometimes referred to herein with the pronouns “we,” “us,” or “our”) is an
international franchiser and confectionery manufacturer. The Company is headquartered in Durango,
Colorado and manufactures an extensive line of premium chocolate candies and other confectionery
products. As of March 31, 2007 there were 5 Company-owned and 316 franchised Rocky Mountain
Chocolate Factory stores operating in 38 states, Canada, Guam and the United Arab Emirates.
On average, approximately 50% of the products sold at Rocky Mountain Chocolate Factory stores are
prepared on the premises. The Company believes this in-store preparation creates a special store
ambiance and the aroma and sight of products being made attracts foot traffic and assures customers
that products are fresh.
The Company believes that its principal competitive strengths lie in its brand name recognition,
its reputation for the quality, variety and taste of its products; the special ambiance of its
stores; its knowledge and experience in applying criteria for selection of new store locations; its
expertise in the manufacture of chocolate candy products and the merchandising and marketing of
chocolate and other candy products; and the control and training infrastructures it has implemented
to assure consistent customer service and execution of successful practices and techniques at its
stores.
The Company believes its manufacturing expertise and reputation for quality has facilitated the
sale of selected products through new distribution channels. The Company is currently selling its
products in a select number of new distribution channels 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 (72-69-68%);
(ii) sales at Company-owned stores of chocolates and other confectionery products (including
product manufactured by the Company) (8-11-11%) and (iii) the collection of initial franchise fees
and royalties from franchisees (20-20-21%). The figures in parentheses show the percentage of total
revenues attributable to each source for fiscal years ended February 28, 2007, 2006 and 2005,
respectively.
According to the National Confectioners Association, the total U.S. candy market approximated $27.9
billion of retail sales in 2005 with chocolate generating sales of approximately $15.7 billion.
According to the Department of Commerce, per capita consumption of chocolate in 2005 was
approximately 14 pounds per year nationally and increased 5% when compared to 2004.
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 the Company’s master candy makers. A typical Rocky Mountain Chocolate
Factory store offers up to 100 of the Company’s chocolate candies throughout the year and as many
as 200, including many packaged candies, during the holiday seasons. Individual stores also offer
numerous varieties of premium fudge and gourmet caramel apples, as well as other products prepared
in the store from Company recipes.
Store Atmosphere and Ambiance
The Company seeks to establish an enjoyable and inviting atmosphere in each Rocky Mountain
Chocolate Factory store. Each store prepares numerous products, including fudge, barks 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.
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In February 2000, the Company retained a nationally recognized design firm to evaluate and update
its existing store design. The objective of the store design project is threefold: (1) increase
average revenue per unit thereby opening untapped real estate environments; (2) further emphasize
the entertainment and freshness value of the Company’s in-store confectionery factory; and (3)
improve operational efficiency through optimal store layout. The Company completed the store
redesign project and the testing of the new design in fiscal 2002. Through March 31, 2007, 159
stores incorporating the new design have been opened.
Site Selection
Careful selection of a site is critical to the success of a Rocky Mountain Chocolate Factory store.
Many factors are considered by the Company in identifying suitable sites, including tenant mix,
visibility, attractiveness, accessibility, level of foot traffic and occupancy costs. Final site
selection occurs only after the Company’s senior management has approved the site. The Company
believes that the experience of its management team in evaluating a potential site is one of the
Company’s competitive strengths.
Customer Service Commitment
The Company emphasizes excellence in customer service and seeks to employ and to sell franchises to
motivated and energetic people. The Company also fosters enthusiasm for its customer service
philosophy and the Rocky Mountain Chocolate Factory concept through its bi-annual franchisee
convention, regional meetings and other frequent contacts with its franchisees.
Increase Same Store Retail Sales at Existing Locations
The Company seeks to increase profitability of its store system through increasing sales at
existing store locations. Changes in system wide domestic same store retail sales are as follows:
2003 |
(3.4 | %) | ||
2004 |
(0.6 | %) | ||
2005 |
4.8 | % | ||
2006 |
2.4 | % | ||
2007 |
0.3 | % |
The Company believes that the negative trend in fiscal 2003 and through the third fiscal quarter of
2004 was due to the overall weak economy and retail environment, especially in tourist areas where
many of the stores operate. The Company experienced positive same store sales of 5.4% in its fiscal
fourth quarter of 2004 and believes the positive trend is due primarily to a recovery in the United
States economy through fiscal 2006.
In February 2000, the Company retained a nationally recognized packaging design firm to completely
redesign the packaging featured in the Company’s retail stores. The Company has designed a
contemporary and coordinated line of packaged products that capture and convey the freshness, fun
and excitement of the Rocky Mountain Chocolate Factory retail store experience. The Company
completed the packaging redesign project during 2002. The Company also believes that the successful
launch of new packaging has had a positive impact on same store sales.
Increase Same Store Pounds Purchased by Existing Locations
In fiscal 2007, same store pounds purchased by franchisees decreased 2.6% compared to the prior
fiscal year. The Company continues to add new products and focus its existing product lines in an
effort to increase same store pounds purchased by existing locations.
Enhanced Operating Efficiencies
The Company seeks to improve its profitability by controlling costs and increasing the efficiency
of its operations. Efforts in the last several years include the purchase of additional automated
factory equipment, implementation of a comprehensive MRP II forecasting, planning, scheduling and
reporting system, implementation of alternative manufacturing strategies and installation of
enhanced Point-of-Sale (POS) systems in all of its Company-owned and 162 of its franchised stores
through March 31, 2007. These measures have significantly improved the Company’s ability to deliver
its products to its stores safely, quickly and cost-effectively and impact store operations.
Additionally, the divestiture of substantially all of the Company-owned stores in fiscal 2002 has
reduced the Company’s exposure to real estate risk, improved the Company’s operating margins and
allowed the Company to increase its focus on franchising.
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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 for franchisees which appear promising based on early sales
results, and to improve and expand the retail store concept, such that previously untapped and
unfeasible environments (such as most regional centers) 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: outlet centers,
tourist environments, regional centers, street fronts, airports and other entertainment oriented
environments. The Company, over the last several years, has had a particular focus on regional
center locations. The Company is optimistic that its exciting new store design will allow it to
continue targeting the over 1,400 regional centers in the United States. The Company has
established a business relationship with most of the major developers in the United States and
believes that these relationships provide it with the opportunity to take advantage of attractive
sites in new and existing real estate environments.
Name Recognition and New Market Penetration
The Company believes the visibility of its stores and the high foot traffic at most of its
locations has generated strong name recognition of Rocky Mountain Chocolate Factory and demand for
its franchises. The Rocky Mountain Chocolate Factory system has historically been concentrated in
the western and Rocky Mountain region of the United States, but recent growth has generated a
gradual easterly momentum as new stores have been opened in the eastern half of the country. This
growth has further increased the Company’s name recognition and demand for its franchises.
Distribution of Rocky Mountain Chocolate Factory products through new channels also increases name
recognition and brand awareness in areas of the country in which the Company has not previously had
a significant presence. The Company believes that by distributing selected Rocky Mountain Chocolate
Factory products through new distribution channels its name recognition will improve and benefit
its entire store system.
Store Concept
The Company seeks to establish a fun and inviting atmosphere in its Rocky Mountain Chocolate
Factory store locations. Unlike most other confectionery stores, each Rocky Mountain Chocolate
Factory store prepares certain products, including fudge and caramel apples, in the store.
Customers can observe store personnel making fudge from start to finish, including the mixing of
ingredients in old-fashioned copper kettles and the cooling of the fudge on large granite or marble
tables, and are often invited to sample the store’s products. The Company believes that an average
of approximately 50% of the revenues of franchised stores are generated by sales of products
prepared on the premises. The Company believes the in-store preparation and aroma of its products
enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for its
customers and convey an image of freshness and homemade quality.
Rocky Mountain Chocolate Factory stores opened prior to fiscal 2002 have a distinctive country
Victorian decor, which further enhances their friendly and enjoyable atmosphere. Each store
includes finely crafted wood cabinetry, copper and brass accents, etched mirrors and large marble
tables on which fudge and other products are made. To ensure that all stores conform to the Rocky
Mountain Chocolate Factory image, the Company’s design staff provides working drawings and
specifications and approves the construction plans for each new store. The Company also controls
the signage and building materials that may be used in the stores.
In fiscal 2002, the Company launched its revised store design concept intended specifically for
high foot traffic regional shopping centers. The revised store design concept is modern with crisp
and clean site lines and an even stronger emphasis on the Company’s unique upscale kitchen. Based
on results, the Company is requiring that all new Rocky Mountain Chocolate Factory stores
incorporate the revised store design concept.
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.
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Kiosk Concept
In fiscal 2002, the Company opened its first full service retail kiosk concept. The kiosk is a
vehicle for retail environments where in-line real estate is unavailable or build-out costs and/or
rent factors do not meet the Company’s financial criteria. The kiosk, which ranges from 150 to 250
square feet, incorporates the Company’s trademark cooking area where caramel apples, fudge and
other popular confections are prepared in front of customers using traditional cooking utensils.
The kiosk also includes the Company’s core product and gifting lines in order to provide the
customer with a full Rocky Mountain Chocolate Factory experience.
The Company believes the kiosk concept enhances its franchise opportunity by providing more
flexibility in support of existing franchisees’ expansion programs and allows new franchisees that
otherwise would not qualify for an in-line location an opportunity to join the Rocky Mountain
Chocolate Factory system. As of March 31, 2007 there were 24 kiosks in operation.
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 makers. These
products include many varieties of clusters, caramels, creams, mints and truffles. The Company
continues to engage in a major effort to expand its product line by developing additional exciting
and attractive new products. During the Christmas, Easter and Valentine’s Day holiday seasons, the
Company may make as many as 100 additional items, including many candies offered in packages
specially designed for the holidays. A typical Rocky Mountain Chocolate Factory store offers up to
100 of these candies throughout the year and up to an additional 100 during holiday seasons.
Individual stores also offer more than 15 premium fudges and other products prepared in the store.
The Company believes that, on average, approximately 40% of the revenues of Rocky Mountain
Chocolate Factory stores are generated by products manufactured at the Company’s factory, 50% by
products made in the store using Company recipes and ingredients purchased from the Company or
approved suppliers and the remaining 10% by products, such as ice cream, coffee and other sundries,
purchased from approved suppliers.
The Company uses only the finest chocolates, nut meats and other wholesome ingredients in its
candies and continually strives to offer new confectionery items in order to maintain the
excitement and appeal of its products. The Company develops special packaging for the Christmas,
Valentine’s Day and Easter holidays, and customers can have their purchases packaged in decorative
boxes and fancy tins throughout the year.
Chocolate candies manufactured by the Company are sold at prices ranging from $14.90 to $24.00 per
pound, with an average price of $18.30 per pound. Franchisees set their own retail prices, though
the Company does recommend prices for all of its products.
Operating Environment
The Company currently establishes Rocky Mountain Chocolate Factory stores in five primary
environments: regional centers, tourist areas, outlet centers, street fronts, airports and other
entertainment oriented shopping centers. Each of these environments has a number of attractive
features, including high levels of foot traffic.
Outlet Centers
There are approximately 110 factory outlet centers in the United States, and as of February 28,
2007, there were Rocky Mountain Chocolate Factory stores in approximately 65 of these centers in
over 25 states. The Company has established business relationships with most of the major outlet
center developers in the United States. Although not all factory outlet centers 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 centers.
Tourist Areas, Street Fronts and Other Entertainment Oriented Shopping Centers
As of February 28, 2007, there were approximately 45 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.
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Regional Centers
There are approximately 1,400 regional centers in the United States, and as of February 28, 2007,
there were Rocky Mountain Chocolate Factory stores in approximately 100 of these centers, including
locations in the Mall of America in Bloomington, Minnesota; and Fort Collins, Colorado. Although
often providing favorable levels of foot traffic, regional centers typically involve more expensive
rent structures and competing food and beverage concepts. The Company’s new store concept is
designed to unlock the potential of the regional center environment.
The Company believes there are a number of other environments that have the characteristics
necessary for the successful operation of Rocky Mountain Chocolate Factory stores such as airports
and sports arenas. Nine franchised Rocky Mountain Chocolate Factory stores exist at airport
locations: two at Denver International Airport, one at Charlotte International Airport, one at
Minneapolis International Airport, one at Phoenix Sky Harbor Airport, one at Salt Lake City
International Airport, and three in Canada; one at Edmonton International Airport, one at Toronto
Pearson International Airport and one at Vancouver International Airport.
Franchising Program
General
The Company’s franchising philosophy is one of service and commitment to its franchise system, and
the Company continuously seeks to improve its franchise support services. The Company’s concept has
consistently been rated as an outstanding franchise opportunity by publications and organizations
rating such opportunities. In February 2007, Rocky Mountain Chocolate Factory was rated the number
one franchise opportunity in the candy category by Entrepreneur Magazine. As of March 31, 2007,
there were 316 franchised stores in the Rocky Mountain Chocolate Factory system. See the audited
financial statements and the related notes thereto included elsewhere in the report for a
discussion of the revenues, profits or losses and total assets related to the franchising segment
of the Company’s business.
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.
In fiscal 1992, the Company entered into a franchise development agreement covering Canada with
Immaculate Confections, Ltd. of Vancouver, British Columbia. Pursuant to this agreement, Immaculate
Confections purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory
stores in Canada. Immaculate Confections, as of March 31, 2007, operated 35 stores under the
agreement.
In fiscal 2000, the Company entered into a franchise development agreement covering the Gulf
Cooperation Council States of United Arab Emirates, Qatar, Bahrain, Saudi Arabia, Kuwait and Oman
with Al Muhairy Group of United Arab Emirates. Pursuant to this agreement, Al Muhairy Group
purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in
the Gulf Cooperation Council States. Al Muhairy Group, as of March 31, 2007, operated 3 stores
under this agreement.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic franchisee is
required to complete a 7-day comprehensive training program in store operations and management. The
Company has established a training center at its Durango headquarters in the form of a full-sized
replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store. Topics
covered in the training course include the Company’s philosophy of store operation and management,
customer service, merchandising, pricing, cooking, inventory and cost control, quality standards,
record keeping, labor scheduling and personnel management. Training is based on standard operating
policies and procedures contained in an operations manual provided to all franchisees, which the
franchisee is required to follow by terms of the franchise agreement. Additionally, and
importantly, trainees are provided with a complete orientation to Company operations by working in
key factory operational areas and by meeting with members of the senior management of the Company.
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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.
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 for each store, (ii) royalties based on
monthly gross sales, and (iii) a marketing fee based on monthly gross sales. Franchisees are
generally granted exclusive territory with respect to the operation of Rocky Mountain Chocolate
Factory stores only in the immediate vicinity of their stores. Chocolate products not made on the
premises by franchisees must be purchased from the Company or approved suppliers. The franchise
agreements require franchisees to comply with the Company’s procedures of operation and food
quality specifications, to permit inspections and audits by the Company and to remodel stores to
conform with standards in effect. The Company may terminate the franchise agreement upon the
failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of
certain events, such as insolvency or bankruptcy of the franchisee or the commission by the
franchisee of any unlawful or deceptive practice, which in the judgment of the Company is likely to
adversely affect the Rocky Mountain Chocolate Factory system. The Company’s ability to terminate
franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws
and regulations. See “Business — Regulation.”
The agreements prohibit the transfer or assignment of any interest in a franchise without the prior
written consent of the Company. The agreements also give the Company a right of first refusal to
purchase any interest in a franchise if a proposed transfer would result in a change of control of
that franchise. The refusal right, if exercised, would allow the Company to purchase the interest
proposed to be transferred under the same terms and conditions and for the same price as offered by
the proposed transferee.
The term of each Rocky Mountain Chocolate Factory franchise agreement is ten years, and franchisees
have the right to renew for one additional ten-year term.
Franchise Financing
The Company does not provide prospective franchisees with financing for their stores, but has
developed relationships with several sources of franchisee financing to whom it will refer
franchisees. Typically, franchisees have obtained their own sources of such financing and have not
required the Company’s assistance.
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Company Store Program
As of March 31 2007, there were 5 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, which may then be incorporated into the franchise store
operations.
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.”
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®.”
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. See the
audited financial statements and the related notes thereto included elsewhere in this report for a
discussion of the revenues, profits or losses and total assets related to the manufacturing segment
of the Company’s business.
Manufacturing Processes
The manufacturing process primarily involves cooking or preparing candy centers, including nuts,
caramel, peanut butter, creams and jellies, and then coating them with chocolate or other toppings.
All of these processes are conducted in carefully controlled temperature ranges, and the Company
employs strict quality control procedures at every stage of the manufacturing process. The Company
uses a combination of manual and automated processes at its factory. Although the Company believes
that it is currently preferable to perform certain manufacturing processes, such as dipping of some
large pieces, by hand, automation increases the speed and efficiency of the manufacturing process.
The Company has from time to time automated processes formerly performed by hand where it has
become cost-effective for the Company to do so without compromising product quality or appearance.
The Company seeks to ensure the freshness of products sold in Rocky Mountain Chocolate Factory
stores with frequent shipments. Most Rocky Mountain Chocolate Factory stores do not have
significant space for the storage of inventory, and the Company encourages franchisees and store
managers to order only the quantities that they can reasonably expect to sell within approximately
two to four weeks. For these reasons, the Company generally does not have a significant backlog of
orders.
Ingredients
The principal ingredients used by the Company are chocolate, nuts, sugar, corn syrup, cream and
butter. The factory receives shipments of ingredients daily. To ensure the consistency of its
products, the Company buys ingredients from a limited number of reliable suppliers. In order to
assure a continuous supply of chocolate and certain nuts, the Company frequently enters into
purchase contracts of between six to eighteen months for these products. Because prices for these
products may fluctuate, the Company may benefit if prices rise during the terms of these contracts,
but it may be required to pay above-market prices if prices fall. The Company has one or more
alternative sources for all essential ingredients and therefore believes that the loss of any
supplier would not have a material adverse effect on the Company and its results of operations. The
Company currently also purchases small amounts of finished candy from third parties on a private
label basis for sale in Rocky Mountain Chocolate Factory stores.
Trucking Operations
The Company operates eight trucks and ships a substantial portion of its products from the factory
on its own fleet. The Company’s trucking operations enable it to deliver its products to the stores
quickly and cost-effectively. In addition, the Company back-hauls its own ingredients and supplies,
as well as product from third parties, on return trips as a basis
for increasing trucking program economics.
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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 FactoryÒ,” the phrases, “The Peak of Perfection in
Handmade ChocolatesÒ”, “America’s ChocolatierÒ”, “The World’s
Chocolatierâ” as
well as all other trademarks, service marks, symbols, slogans, emblems, logos and designs used in
the Rocky Mountain Chocolate Factory system, are proprietary rights of the Company. All of the
foregoing are believed to be of material importance to the Company’s business. The registration for
the trademark “Rocky Mountain Chocolate Factory” has been granted in the United States and Canada.
Applications have been filed to register the Rocky Mountain Chocolate Factory trademark and/or
obtained in certain foreign countries.
The Company has not attempted to obtain patent protection for the proprietary recipes developed by
the Company’s master candy-maker and is relying upon its ability to maintain the confidentiality of
those recipes.
Employees
At February 28, 2007, the Company employed approximately 200 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.
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Executive Officers
The executive officers of the Company and their ages at April 28, 2007 are as follows:
| Name | Age | Position | ||
Franklin E. Crail |
65 | Chairman of the Board, President and Director | ||
Bryan J. Merryman |
46 | Chief Operating Officer, Chief Financial Officer, Treasurer and Director | ||
Gregory L. Pope |
40 | Sr. Vice President - Franchise Development and Operations | ||
Edward L. Dudley |
43 | Sr. Vice President - Sales and Marketing | ||
William K. Jobson |
51 | Chief Information Officer | ||
Jay B. Haws |
57 | Vice President - Creative Services | ||
Virginia M. Perez |
69 | Corporate Secretary |
Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. Since the
incorporation of the Company in November 1982, he has served as its President and a Director. He
was elected Chairman of the Board in March 1986. Prior to founding the Company, Mr. Crail was
co-founder and president of CNI Data Processing, Inc., a software firm which developed automated
billing systems for the cable television industry.
Mr. Merryman joined the Company in December 1997 as Vice President — Finance and Chief Financial
Officer. Since April 1999 Mr. Merryman has also served the Company as the Chief Operating Officer
and as a Director, and since January 2000 as its Treasurer. Prior to joining the Company, Mr.
Merryman was a principal in Knightsbridge Holdings, Inc. (a leveraged buyout firm) from January
1997 to December 1997. Mr. Merryman also served as Chief Financial Officer of Super Shops, Inc., a
retailer and manufacturer of aftermarket auto parts from July 1996 to November 1997 and was
employed for more than eleven years by Deloitte and Touche LLP, most recently as a senior manager.
Mr. Pope became Sr. Vice President of Franchise Development and Operations in May 2004. Since
joining the Company in October 1990, he has served in various positions including store manager,
new store opener and franchise field consultant. In March 1996 he became Director of Franchise
Development and Support. In June 2001 he became Vice President of Franchise Development, a position
he held until he was promoted to his present position.
Mr. Dudley joined the Company in January 1997 to spearhead the Company’s newly formed Product Sales
Development function as Vice President — Sales and Marketing, with the goal of increasing the
Company’s factory and retail sales. He was promoted to Senior Vice President in June 2001. During
his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served in a number of senior
marketing and sales management capacities, including most recently that of Director, Distribution
Services from March 1996 to January 1997.
Mr. Jobson joined the Company in July 1998 as Director of Information Technology. In June 2001, he
was promoted to Chief Information Officer, a position created to enhance the Company’s strategic
focus on information and information technology. From July 1995 to July 1998, Mr. Jobson worked for
ADAC Laboratories in Durango, Colorado, a leading provider of diagnostic imaging and information
systems solutions in the healthcare industry, as Manager of Technical Services and before that,
Regional Manager.
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.
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.
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Seasonal Factors
The Company’s sales and earnings are seasonal, with significantly higher sales and earnings
occurring during the Christmas holiday and summer vacation seasons than at other times of the year,
which causes fluctuations in the Company’s quarterly results of operations. In addition, quarterly
results have been, and in the future are likely to be, affected by the timing of new store openings
and the sale of franchises. Because of the seasonality of the Company’s business and the impact of
new store openings and sales of franchises, results for any quarter are not necessarily indicative
of the results that may be achieved in other quarters or for a full fiscal year.
Regulation
Each of the Company-owned and franchised stores is subject to licensing and regulation by the
health, sanitation, safety, building and fire agencies in the state or municipality where located.
Difficulties or failures in obtaining the required licensing or approvals could delay or prevent
the opening of new stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration and disclosure
requirements in the offer and sale of franchises. The Company is also subject to the Federal Trade
Commission regulations relating to disclosure requirements in the sale of franchises and ongoing
disclosure obligations.
Additionally, certain states have enacted and others may enact laws and regulations governing the
termination or non-renewal of franchises and other aspects of the franchise relationship that are
intended to protect franchisees. Although these laws and regulations, and related court decisions,
may limit the Company’s ability to terminate franchises and alter franchise agreements, the Company
does not believe that such laws or decisions will have a material adverse effect on its franchise
operations. However, the laws applicable to franchise operations and relationships continue to
develop, and the Company is unable to predict the effect on its intended operations of additional
requirements or restrictions that may be enacted or of court decisions that may be adverse to
franchisers.
Federal and state environmental regulations have not had a material impact on the Company’s
operations but more stringent and varied requirements of local governmental bodies with respect to
zoning, land use and environmental factors could delay construction of new stores.
Companies engaged in the manufacturing, packaging and distribution of food products are subject to
extensive regulation by various governmental agencies. A finding of a failure to comply with one or
more regulations could result in the imposition of sanctions, including the closing of all or a
portion of the Company’s facilities for an indeterminate period of time. The Company’s product
labeling is subject to and complies with the Nutrition Labeling and Education Act of 1990 and the
Food Allergen Labeling and Consumer Protection Act of 2004.
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.
The Internet address of the Company’s website is www.rmcf.com.
The Company makes available free of charge, through the Company’s Internet website, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15 (d) of the Exchange act, as soon
as reasonably practicable after we file such material with, or furnish it to, the Securities and
Exchange Commission (the “SEC”).
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Item 1A. Risk Factors
Ingredients Subject to the Price Fluctuations
Several of the principal ingredients used in our products, including chocolate and nuts, are
subject to significant price fluctuations. Although cocoa beans, the primary raw material used in
the production of chocolate, are grown commercially in Africa, Brazil and several other countries
around the world, cocoa beans are traded in the commodities market, and their supply and price are
therefore subject to volatility. We believe our principal chocolate supplier purchases most of its
beans at negotiated prices from African growers, often at a premium to commodity prices. Although
the price of chocolate has been relatively stable in recent years, the supply and price of cocoa
beans, and in turn of chocolate, are affected by many factors, including monetary fluctuations and
economic, political and weather conditions in countries in which cocoa beans are grown. We purchase
most of our nut meats from domestic suppliers who procure their products from growers around the
world. The price and supply of nuts are also affected by many factors, including weather conditions
in the various regions in which the nuts we use are grown. Although we often enter into purchase
contracts for these products, significant or prolonged increases in the prices of chocolate or of
one or more types of nuts, or the unavailability of adequate supplies of chocolate or nuts of the
quality sought by us, could have a material adverse effect on us and our results of operations.
Suitable Sites for Franchised Stores at Reasonable Occupancy Costs
Our expansion plans are critically dependent on our ability to obtain suitable sites at reasonable
occupancy costs for our franchised stores and kiosks in the regional center environment. There is
no assurance that we will be able to obtain suitable locations for our franchised stores and kiosks
in this environment at a cost that will allow such stores to be economically viable.
Growth Dependent Upon Attracting and Retaining Qualified Franchisees
Our continued growth and success is dependent in part upon our ability to attract, retain and
contract with qualified franchisees and the ability of those franchisees to operate their stores
successfully and to promote and develop the Rocky Mountain Chocolate Factory store concept and our
reputation for an enjoyable in-store experience and product quality. Although we have established
criteria to evaluate prospective franchisees and have been successful in attracting franchisees,
there can be no assurance that franchisees will be able to operate successfully Rocky Mountain
Chocolate Factory stores in their franchise areas in a manner consistent with our concepts and
standards.
Federal, State and Local Regulation
We are subject to regulation by the Federal Trade Commission and must comply with certain state
laws governing the offer, sale and termination of franchises and the refusal to renew franchises.
Many state laws also regulate substantive aspects of the franchisor-franchisee relationship by, for
example, requiring the franchisor to deal with its franchisees in good faith, prohibiting
interference with the right of free association among franchisees and regulating discrimination
among franchisees in charges, royalties or fees. Franchise laws continue to develop and change, and
changes in such laws could impose additional costs and burdens on franchisors. Our failure to
obtain approvals to sell franchises and the adoption of new franchise laws, or changes in existing
laws, could have a material adverse effect on us and our results of operations.
Each of our 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 required licenses or approvals from such agencies could delay
or prevent the opening of a new store. We and our franchisees are also subject to laws governing
our relationships with employees, including minimum wage requirements, overtime, working and safety
conditions and citizenship requirements. Because a significant number of our employees are paid at
rates related to the federal minimum wage, increases in the minimum wage would increase our labor
costs. The failure to obtain required licenses or approvals, or an increase in the minimum wage
rate, employee benefits costs (including costs associated with mandated health insurance coverage)
or other costs associated with employees, could have a material adverse effect on us and our
results of operations.
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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 our facilities for an indeterminate period of time, and could have a material adverse
effect on us and our results of operations.
Competition
The retailing of confectionery products is highly competitive. We and our franchisees compete with
numerous businesses that offer confectionery products. Many of these competitors have greater name
recognition and financial, marketing and other resources than we do. In addition, there is intense
competition among retailers for real estate sites, store personnel and qualified franchisees.
Competitive market conditions could have a material adverse effect on us and our results of
operations and our ability to expand successfully.
Consumer Tastes and Trends
The sale of our products is affected by changes in consumer tastes and eating habits, including
views regarding consumption of chocolate. Numerous other factors that we cannot control, such as
economic conditions, demographic trends, traffic patterns and weather conditions, influence the
sale of our products. Changes in any of these factors could have a material adverse effect on us
and our results of operations.
Company Manufactured Products
We believe that approximately 40% of franchised stores’ revenues are generated by sales of products
manufactured by and purchased from us, 50% by sales of products made in the stores with ingredients
purchased from us or approved suppliers and 10% by sales of products purchased from approved
suppliers for resale in the stores. Franchisees’ sales of products manufactured by us generate
higher revenues to us than sales of store-made or other products. A significant decrease in the
amount of products franchisees purchase from us, therefore, could adversely affect our total
revenues and results of operations. Such a decrease could result from franchisees’ decisions to
sell more store-made products or products purchased from third party suppliers.
Inflation – Costs of Ingredients and Labor
Inflationary factors such as increases in the costs of ingredients, energy and labor directly
affect our operations. Most of our leases provide for cost-of-living adjustments and require us to
pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally,
our future lease costs for new facilities may reflect potentially escalating costs of real estate
and construction. There is no assurance that we will be able to pass on our increased costs to our
customers.
Seasonality of Sales
Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during
the Christmas and summer vacation seasons than at other times of the year, which causes
fluctuations in our 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 our 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. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s manufacturing operations and corporate headquarters are located at its 53,000 square
foot manufacturing facility, which it owns, in Durango, Colorado. During fiscal 2007, the Company’s
factory produced approximately 2.73 million pounds of chocolate candies, an increase of 11% from
the approximately 2.46 million pounds produced in fiscal 2006. 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.
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As of March 31, 2007, all of the 5 Company-owned stores were occupied pursuant to non-cancelable
leases of five to ten years having varying expiration dates from August 2008 to January 2011, some
of which contain optional five-year renewal rights. The Company does not deem any individual store
lease to be significant in relation to its overall operations.
The Company acts as primary lessee of some franchised store premises, which it then subleases to
franchisees, but the majority of existing locations are leased by the franchisee directly. Current
Company policy is not to act as primary lessee on any further franchised locations. At March 31,
2007, the Company was the primary lessee at 3 of its 316 franchised stores. The subleases for such
stores are on the same terms as the Company’s leases of the premises. For information as to the
amount of the Company’s rental obligations under leases on both Company-owned and franchised
stores, see Note 5 of Notes to financial statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that are material to the Company’s
business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Part II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s Common Stock trades on the National Global Market which is part of The Nasdaq Stock
Market under the trading symbol “RMCF”. On May 18, 2005 the Board of Directors approved a
four-for-three stock split payable on June 13, 2005 to shareholders of record as of May 31, 2005.
On February 15, 2005 the Board of Directors declared a 5% stock dividend payable on March 10, 2005
to shareholders of record as of February 28, 2005. On May 4, 2004 the Board of Directors declared a
10 percent stock dividend payable on May 27, 2004 to shareholders of record as of May 13, 2004. On
February 15, 2007, the Board of Directors declared a fourth quarter cash dividend of $0.09 cents
per common share outstanding. The cash dividend was paid March 16, 2007 to shareholders of record
as of March 2, 2007.
The Company declared these stock dividends and these stock splits because the Company felt that its
Common Stock lacked sufficient shares and related liquidity to satisfy an increasing number of
investors interested in purchasing the Company’s Common Stock. All of the following items in this
Item 5. have been adjusted, where necessary, for the effects of the dividend and splits.
Between March 1, 2007 and April 9, 2007 the Company repurchased 42,200 shares at an average price
of $13.77 per share. Between May 1, 2006 and February 28, 2007 the Company repurchased 241,087
shares at an average price of $13.58 per share. Between March 24, 2006 and April 28, 2006 the
Company repurchased 70,713 shares at an average price of $15.65 per share. Between October 7, 2005
and February 3, 2006 the Company repurchased 176,599 Company shares at an average price of $15.36
per share. Between April 18 and April 20, 2005, the Company repurchased 17,647 Company shares at an
average price of $13.94 per share. Between March 11, 2004 and June 14, 2004 the Company repurchased
125,216 Company shares at an average price of $6.74 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 price information for the Common Stock for each quarter of
fiscal years 2007 and 2006, and dividend information.
| Dividends | ||||||||||||
| Fiscal Year Ended February 28, 2007 | HIGH | LOW | declared | |||||||||
Fourth Quarter |
15.49 | 13.28 | .0900 | |||||||||
Third Quarter |
14.97 | 12.45 | .0900 | |||||||||
Second Quarter |
14.50 | 11.67 | .0800 | |||||||||
First Quarter |
16.00 | 12.75 | .0800 | |||||||||
In addition to the above, the Company issued 250 registered shares on June 22, 2006 to franchisees
in recognition of excellence through its Franchise of the Year program.
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| Dividends | ||||||||||||
| Fiscal Year Ended February 28, 2006 | HIGH | LOW | declared | |||||||||
Fourth Quarter |
$ | 17.76 | $ | 13.40 | .0800 | |||||||
Third Quarter |
$ | 18.56 | $ | 13.76 | .0700 | |||||||
Second Quarter |
$ | 25.70 | $ | 16.50 | .0675 | |||||||
First Quarter |
$ | 18.75 | $ | 12.89 | .0675 | |||||||
On April 30, 2007 the closing price for the Common Stock was $13.49.
Holders
On April 30, 2007 there were approximately 400 record holders of the Company’s Common Stock. The
Company believes that there are more than 800 beneficial owners of its Common Stock.
Repurchases
Issuer Purchases of Equity Securities
| (c) Total Number of | ||||||||||||||||
| Shares Purchased as | (d) Approximate Dollar | |||||||||||||||
| (a) Total Number | Part of Publicly | Value of Shares that May | ||||||||||||||
| of Shares | (b) Average Price | Announced Plans or | Yet Be Purchased Under the | |||||||||||||
| Period | Purchased | Paid per Share | Programs (1) | Plans or Programs (2) | ||||||||||||
December 2006 |
— | — | — | $ | 1,492,610 | |||||||||||
January 2007 |
32,800 | 13.71 | 32,800 | 1,043,039 | ||||||||||||
February 2007 |
9,888 | 13.81 | 9,888 | 906,473 | ||||||||||||
Total |
42,688 | $ | 13.73 | 42,688 | $ | 906,473 | ||||||||||
| (1) | During the fourth quarter of Fiscal 2007 ending February 28, 2007, the Company purchased 42,688 shares in the open market. | |
| (2) | On May 4, 2006 and May 25, 2006 the Company announced plans to repurchase up to $2,000,000 of the Company’s common stock in the open market or in private transactions, whenever deemed appropriate by management. The plans were only to expire once the designated amounts were reached. The May 4, 2006 plan was completed in July 2006. The Company plans to continue the May 25, 2006 plan until it has been fulfilled. |
The following table provides information with respect to the Company’s equity compensation
plans as of February 28, 2007.
Equity Compensation Plan Information
| Number of | ||||||||||||
| securities to be | ||||||||||||
| issued upon exercise | Weighted average | Number of | ||||||||||
| of outstanding | exercise price of | securities remaining | ||||||||||
| options, warrants | outstanding options, | available for future | ||||||||||
| Plan category | and rights | warrants and rights | issuance | |||||||||
Equity compensation
plans approved by
security holders |
419,087 | $ | 10.29 | 97,660 | ||||||||
Equity compensation
plans not approved
by security holders |
-0- | -0- | -0- | |||||||||
Total |
419,087 | $ | 10.29 | 97,660 | ||||||||
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Comparison of Return on Equity
The following graph reflects the total return, which assumes reinvestment of dividends, of a
$100 investment in the Company’s Common Stock, in the Nasdaq U.S. Index, in the Russell 2000 Index
and in a Peer Group Index of companies in the confectionery industry, on February 28, 2002.
| Base Period | Return | Return | Return | Return | Return | |||||||||||||||||||
| Company/Index Name | 2/2002 | 2/2003 | 2/2004 | 2/2005 | 2/2006 | 2/2007 | ||||||||||||||||||
Rocky Mountain
Chocolate Factory,
Inc. |
100.00 | 68.48 | 147.89 | 370.30 | 377.47 | 343.88 | ||||||||||||||||||
Nasdaq Index — US |
100.00 | 77.98 | 117.44 | 119.24 | 133.56 | 141.45 | ||||||||||||||||||
Russell 2000 Index |
100.00 | 77.90 | 128.08 | 140.28 | 163.55 | 179.70 | ||||||||||||||||||
Peer Group(l) |
100.00 | 93.03 | 109.61 | 140.87 | 131.59 | 138.15 | ||||||||||||||||||
| (1) | Comprised of the following companies: The Hershey Company, Imperial Sugar Company, Monterey Gourmet Foods, Inc., Paradise, Inc., Tootsie Roll Industries, Inc., Valhi, Inc. and Wrigley (Wm.), Jr. Company. |
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended February 28 or 29, 2003
through 2007, are derived from the Financial Statements of the Company, which have been audited by
Ehrhardt Keefe Steiner & Hottman PC or Grant Thornton LLP, independent registered public accounting
firms. 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.”
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(Amounts in thousands, except per share data)
| YEARS ENDED FEBRUARY 28 | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Selected Statement
of Operations Data |
||||||||||||||||||||
Total revenues |
$ | 31,573 | $ | 28,074 | $ | 24,524 | $ | 21,133 | $ | 19,461 | ||||||||||
Operating income |
7,561 | 6,459 | 5,339 | 3,779 | 1,496 | |||||||||||||||
Net income |
4,745 | $ | 4,065 | $ | 3,317 | $ | 2,319 | $ | 852 | |||||||||||
Basic Earnings per
Common Share |
$ | .77 | $ | .65 | $ | .55 | $ | .40 | $ | .15 | ||||||||||
Diluted Earnings
per Common Share |
$ | .75 | $ | .61 | $ | .51 | $ | .37 | $ | .14 | ||||||||||
Weighted
average common
shares
outstanding |
6,126 | 6,268 | 6,007 | 5,854 | 5,764 | |||||||||||||||
Weighted
average common
shares
outstanding,
assuming
dilution |
6,342 | 6,676 | 6,481 | 6,304 | 6,249 | |||||||||||||||
Selected Balance Sheet Data |
||||||||||||||||||||
Working capital |
$ | 7,503 | $ | 7,533 | $ | 8,008 | $ | 6,394 | $ | 4,765 | ||||||||||
Total assets |
18,456 | 19,057 | 19,248 | 17,967 | 16,084 | |||||||||||||||
Long-term debt |
— | — | 1,539 | 1,986 | 3,073 | |||||||||||||||
Stockholders’ equity |
14,515 | 15,486 | 13,894 | 11,590 | 9,891 | |||||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A Note About Forward Looking Statements
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 nature of the
Company’s operations and the environment in which it operates subject it to changing economic,
competitive, regulatory and technological conditions, risks and uncertainties. The statements,
other than statements of historical fact, included in this report are forward-looking statements.
Many of the forward-looking statements contained in this document may be identified by the use of
forward-looking words such as “will,” “intend,” “believe,” “expect,” “anticipate,” “should,”
“plan,” “estimate” and “potential,” or similar expressions. Factors which could cause results to
differ include, but are not limited to: changes in the confectionery business environment,
seasonality, consumer interest in the Company’s products, general economic conditions, consumer
trends, costs and availability of raw materials, competition and the effect of government
regulation. Government regulation which the Company and its franchisees either are or may be
subject to and which could cause results to differ from forward-looking statements include, but are
not limited to: local, state and federal laws regarding health, sanitation, safety, building and
fire codes, franchising, employment, manufacturing, packaging and distribution of food products and
motor carriers. For a detailed discussion of the risks and uncertainties that may cause the
Company’s actual results to differ from the forward-looking statements contained herein, please see
the “Risk Factors” contained in this document at 1A. These forward-looking statements apply only as
of the date of this report. As such they should not be unduly relied upon for more current
circumstances. Except as required by law, the Company is not obligated to release publicly any
revisions to these forward-looking statements that might reflect events or circumstances occurring
after the date of this report or those that might reflect the occurrence of unanticipated events.
The Company is a product-based international franchisor. The Company’s revenues and profitability
are derived principally from its franchised system of retail stores that feature chocolate and
other confectionery products. The Company also sells its candy in selected locations outside its
system of retail stores to build brand awareness. The Company operates five retail units as a
laboratory to test marketing, design and operational initiatives.
The Company is subject to seasonal fluctuations in sales because of the location of its
franchisees, which have traditionally been located in resort or tourist locations. As the Company
expands its geographical diversity to include regional centers, it has seen some
18
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moderation to its
seasonal sales mix. Seasonal fluctuation in sales causes 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. Additionally, 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.
The most important factors in continued growth in the Company’s earnings are ongoing unit growth,
increased same store sales and increased same store pounds purchased from the factory.
Historically, unit growth has more than offset decreases in same store sales and same store pounds
purchased.
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 depend on many factors, including new store openings and the
receptivity of the Company’s franchise system to the Company’s product introductions and
promotional programs. Same store pounds purchased from the factory by franchised stores were
approximately the same as the prior year period in the first quarter, and declined 7.3% in the
second quarter, 1.5% in the third quarter, 6.1% in the fourth quarter and 2.6% overall in Fiscal
2007.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are
based upon the Company’s financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and the related disclosures. Estimates and
assumptions include, but are not limited to, the carrying value of accounts and notes receivable
from franchisees, inventories, the useful lives of fixed assets, goodwill, and other intangible
assets, income taxes, contingencies and litigation. The Company bases its estimates on analyses, of
which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the following represent our more critical estimates and assumptions used in the
preparation of our financial statements, although not all inclusive.
Accounts and Notes Receivable — In the normal course of business, the Company extends credit to
customers, primarily franchisees, that satisfy pre-defined credit criteria. The Company believes
that it has limited concentration of credit risk primarily because its receivables are often
secured by the assets of the franchisees to which the Company ordinarily extends credit, including,
but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is
determined through analysis of the aging of accounts receivable, assessments of collectibility
based on historical trends, and an evaluation of the impact of current and projected economic
conditions. The process by which the Company performs its analysis is conducted on a customer by
customer, or franchisee by franchisee, basis and takes into account, among other relevant factors,
sales history, outstanding receivables, customer financial strength, as well as customer specific
and geographic market factors relevant to projected performance. The Company monitors the
collectibility of its accounts receivable on an ongoing basis by assessing the credit worthiness of
its customers and evaluating the impact of reasonably likely changes in economic conditions that
may impact credit risks. Estimates with regard to the collectibility of accounts receivable are
reasonably likely to change in the future.
The Company recorded expense of approximately $32,000 per year for potential uncollectible accounts
over the three-year period ended February 28, 2007. Write-offs of uncollectible accounts net of
recoveries averaged approximately $9,400 over the same period. The provision
for uncollectible accounts is recognized as general and administrative expense in the Statements of
Income. Over the past three years, the allowances for doubtful notes and accounts have ranged from
2.6% to 4.4% of gross receivables.
Revenue Recognition — The Company recognizes revenue on sales of products to franchisees and other
customers at the time of delivery. Through fiscal 2006, franchise fee revenue was recognized upon
completion of all significant initial services provided to the franchisee and
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upon satisfaction of
all material conditions of the franchise agreement. The initial $5,000 portion of the fee was
recognized upon signing of the franchise agreement. The balance of the fee was recognized upon the
franchisee’s commitment to a property lease. Beginning in fiscal 2007, franchise fee revenue is
recognized upon the opening of the store. The Company also recognizes a royalty fee of
approximately five percent (5%) and a marketing and promotion fee of one percent (1%) of the Rocky
Mountain Chocolate Factory franchised stores’ gross retail sales. Sales of products at retail
stores are recognized at the time of sale.
Inventories — The Company’s inventories are stated at the lower of cost or market value and are
reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories.
Our estimate for such allowance is based on our review of inventories on hand compared to estimated
future usage and demand for our products. Such review encompasses not only potentially perishable
inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual
future usage and demand for our products are less favorable than those projected by our review,
inventory write-downs may be required. We closely monitor our inventory, both perishable and
non-perishable, and related shelf and product lives. Historically we have experienced low levels of
obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year
period ended February 28, 2007, the Company recorded expense averaging approximately $68,000 per
year for potential inventory losses, or approximately 0.5% of total cost of sales for that period.
Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired
assets and liabilities. Effective March 1, 2002, under SFAS 142 all goodwill with indefinite lives
is no longer subject to amortization. SFAS 142 requires that an impairment test be conducted
annually or in the event of an impairment indicator. Our test conducted in fiscal 2007 showed no
impairment of our goodwill.
Other accounting estimates inherent in the preparation of the Company’s financial statements
include estimates associated with its evaluation of the recoverability of deferred tax assets, as
well as those used in the determination of liabilities related to litigation and taxation. Various
assumptions and other factors underlie the determination of these significant estimates. The
process of determining significant estimates is fact specific and takes into account factors such
as historical experience, current and expected economic conditions, and product mix. The Company
constantly re-evaluates these significant factors and makes adjustments where facts and
circumstances dictate. Historically, actual results have not significantly deviated from those
determined using the estimates described above.
As discussed in Note 5 to the financial statements, the Company is involved in litigation
incidental to its business, the disposition of which is expected to have no material effect on the
Company’s financial position or results of operations. It is possible, however, that future results
of operations for any particular quarterly or annual period could be materially affected by changes
in the Company’s assumptions related to these proceedings.
Results of Operations
Fiscal 2007 Compared To Fiscal 2006
Results Summary
Basic earnings per share increased 18.5% from $.65 in fiscal 2006 to $.77 in fiscal 2007. Revenues
increased 12.5% from fiscal 2006 to fiscal 2007. Operating income increased 17.1% from $6.5 million
in fiscal 2006 to $7.6 million in fiscal 2007. Net income increased 16.7% from $4.1 million in
fiscal 2006 to $4.7 million in fiscal 2007. The increase in revenue, earnings per share, operating
income, and net income in fiscal 2007 compared to fiscal 2006 was due primarily to increased number
of franchised stores in operation, increased sales to speciality markets and the corresponding
increases in revenue.
Revenues
| ($’s in thousands) | 2007 | 2006 | Change | % Change | ||||||||||||
Factory sales |
$ | 22,709.0 | $ | 19,297.2 | $ | 3,411.8 | 17.7 | % | ||||||||
Retail sales |
2,626.7 | 3,046.0 | (419.3 | ) | (13.8 | %) | ||||||||||
Royalty and marketing fees |
5,603.8 | 5,047.9 | 555.9 | 11.0 | % | |||||||||||
Franchise fees |
633.8 | 682.5 | (48.7 | ) | (7.1 | %) | ||||||||||
Total |
$ | 31,573.3 | $ | 28,073.6 | $ | 3,499.7 | 12.5 | % | ||||||||
Factory Sales
The increase in factory sales was due to the growth in the average number of franchised stores in
operation to 302 in fiscal 2007 from 285 in fiscal 2006 and an increase of 53.3% in sales to
specialty markets. Partially offsetting this increase was a 2.6% decrease in same store pounds
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purchased from the factory by franchised stores when compared to the same period in the prior year.
The Company believes that this same store pounds decrease reflects an unseasonably hot summer in
many regions of the country. Historically, retail sales of chocolate products suffer when weather
conditions are unusually hot in particular markets.
Retail Sales
The decrease in retail sales resulted primarily from a decrease in the average number of
Company-owned stores in operation from 9 in fiscal 2006 to 7 in fiscal 2007. Same store sales at
Company-owned stores increased 6.9% from fiscal 2006 to fiscal 2007.
Royalties, Marketing Fees and Franchise Fees
The increase in royalties and marketing fees resulted from growth in the average number of domestic
units in operation from 251 in fiscal 2006 to 266 in fiscal 2007 plus an increase in same store
sales of 0.3%. Franchise fee revenues decreased due to a decrease in the number of franchises sold
during the same period last year.
Costs and Expenses
| % | ||||||||||||||||
| ($’s in thousands) | 2007 | 2006 | Change | Change | ||||||||||||
Cost of
sales — factory
adjusted |
$ | 14,942.9 | $ | 12,732.3 | $ | 2,210.6 | 17.4 | % | ||||||||
Cost of sales — retail |
1,045.7 | 1,224.3 | (178.6 | ) | (14.6 | %) | ||||||||||
Franchise costs |
1,570.0 | 1,466.3 | 103.7 | 7.1 | % | |||||||||||
Sales and marketing |
1,538.5 | 1,321.0 | 217.5 | 16.5 | % | |||||||||||
General and administrative |
2,538.7 | 2,239.1 | 299.6 | 13.4 | % | |||||||||||
Retail operating |
1,502.1 | 1,755.7 | (253.6 | ) | (14.4 | %) | ||||||||||
Total |
$ | 23,137.9 | $ | 20,738.7 | $ | 2,399.2 | 11.6 | % | ||||||||
Adjusted Gross margin
| % | ||||||||||||||||
| ($’s in thousands) | 2007 | 2006 | Change | Change | ||||||||||||
Factory adjusted gross margin |
$ | 7,766.1 | $ | 6,564.9 | $ | 1,201.2 | 18.3 | % | ||||||||
Retail |
1,581.0 | 1,821.7 | (240.7 | ) | (13.2 | %) | ||||||||||
Total |
$ | 9,347.1 | $ | 8,386.6 | $ | 960.5 | 11.5 | % | ||||||||
(Percent) |
||||||||||||||||
Factory adjusted gross margin |
34.2 | % | 34.0 | % | 0.2 | 0.6 | % | |||||||||
Retail |
60.2 | % | 59.8 | % | 0.4 | 0.7 | % | |||||||||
Total |
36.9 | % | 37.5 | % | (0.6 | ) | (1.6 | %) | ||||||||
Adjusted gross margin is equal to gross margin minus depreciation and amortization expense. We
believe adjusted gross margin is helpful in understanding our past performance as a supplement to
gross margin and other performance measures calculated in conformity with accounting principles
generally accepted in the United States (“GAAP”). We believe that adjusted gross margin is useful
to investors because it provides a measure of operating performance and our ability to generate
cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross
margin rather than gross margin to make incremental pricing decisions. Adjusted gross margin has
limitations as an analytical tool because it excludes the impact of depreciation and amortization
expense and you should not consider it in isolation or as a substitute for any measure reported
under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary
element of our costs and our ability to generate income. Due to these limitations, we use adjusted
gross margin as a measure of performance only in conjunction with GAAP measures of performance such
as gross margin. The following table provides a reconciliation of adjusted gross margin to gross
margin, the most comparable performance measure under GAAP:
| ($’s in thousands) | 2007 | 2006 | ||||||
Factory adjusted gross margin |
$ | 7,766.1 | $ | 6,564.9 | ||||
Less: Depreciated and Amortization |
412.6 | 381.1 | ||||||
Factory GAAP gross margin |
$ | 7,353.5 | $ | 6,183.8 | ||||
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Cost of Sales
Factory margins were consistent from fiscal 2006 to fiscal 2007. Higher commodity and labor costs
were offset by increased production volume, which lowered fixed costs per unit of production.
Increases in Company-owned store margin is due to changes in mix of product sold.
Franchise Costs
The increase in franchise costs is due to increased professional fees and incentive compensation
costs. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise
costs decreased to 25.2% in fiscal 2007 from 25.6% in fiscal 2006. This decrease as a percentage of
royalty, marketing and franchise fees is primarily a result of higher franchise revenues relative
to costs.
Sales and Marketing
The increase in sales and marketing was due primarily to increased incentive compensation costs and
expenses related to a 53.3% increase in sales to specialty markets.
General and Administrative
The increase in general and administrative costs is due primarily to increased incentive
compensation costs related to Company performance. As a percentage of total revenues, general and
administrative expenses were unchanged at 8.0% in fiscal 2007 compared to 8.0% in fiscal 2006.
Retail Operating Expenses
The decrease in retail operating expenses was due primarily to a decrease in the average number of
Company-owned stores during fiscal 2007 versus fiscal 2006. Retail operating expenses, as a
percentage of retail sales, decreased from 57.6% in fiscal 2006 to 57.2% in fiscal 2007 due to a
larger decrease in costs relative to the increase in revenues.
Depreciation and Amortization
Depreciation and amortization of $874,000 in fiscal 2007 was essentially unchanged from the
$876,000 incurred in fiscal 2006.
Other, Net
Other, net of $67,000 realized in fiscal 2007 represents a decrease of $9,000 from the $76,000
realized in fiscal 2006, due primarily to lower interest income on lower average outstanding
balances of notes receivable and invested cash. Notes receivable balances are declining due to
payments and the Company has been using its excess cash to repurchase stock. The Company also
incurred less interest expense on lower average balances of long-term debt. The Company paid its
long-term debt in full during the first quarter of fiscal 2006.
Income Tax Expense
The Company’s effective income tax rate in fiscal 2007 was 37.8%, which is the same as the
effective rate in fiscal 2006.
Fiscal 2006 Compared To Fiscal 2005
Results Summary
Basic earnings per share increased 18.2% from $.55 in fiscal 2005 to $.65 in fiscal 2006. Revenues
increased 14.5% from fiscal 2005 to fiscal 2006. Operating income increased 21.0% from $5.3 million
in fiscal 2005 to $6.5 million in fiscal 2006. Net income increased 22.6% from $3.3 million in
fiscal 2005 to $4.1 million in fiscal 2006. The increase in revenue, earnings per share, operating
income, and net income in fiscal 2006 compared to fiscal 2005 was due primarily to increased number
of franchised stores in operation, increased same store sales at franchised units and increased
sales to customers outside the Company’s system of franchised retail stores.
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Revenues
| ($’s in thousands) | 2006 | 2005 | Change | % Change | ||||||||||||
Factory sales |
$ | 19,297.2 | $ | 16,654.4 | $ | 2,642.8 | 15.9 | % | ||||||||
Retail sales |
3,046.0 | 2,726.4 | 319.6 | 11.7 | % | |||||||||||
Royalty and marketing fees |
5,047.9 | 4,577.5 | 470.4 | 10.3 | % | |||||||||||
Franchise fees |
682.5 | 565.3 | 117.2 | 20.7 | % | |||||||||||
Total |
$ | 28,073.6 | $ | 24,523.6 | $ | 3,550.0 | 15.5 | % | ||||||||
Factory Sales
The increase in factory sales was due to an increase in the average number of franchised stores in
operation to 285 in fiscal 2006 from 263 in fiscal 2005 and an increase in factory sales to
customers outside the Company’s system of franchised retail stores of 46.3% in fiscal 2006 versus a
17% increase in fiscal 2005. Same store pounds purchased by franchised stores in fiscal 2006 were
approximately the same as the prior fiscal year.
Retail Sales
The increase in retail sales resulted primarily from an increase in the average number
Company-owned stores in operation from 8 in fiscal 2005 to 9 in fiscal 2006 plus an increase in
same-store sales at Company-owned stores of 0.3%.
Royalties, Marketing Fees and Franchise Fees
This increase in royalties and marketing fees resulted from growth in the average number of
domestic units in operation from 233 in fiscal 2006 to 251 in fiscal 2006 plus an increase in same
store sales of 2.5%. Franchise fee revenues increased due to an increase in the franchise fee of
approximately 25% partially offset by a decrease in the number of franchises sold during the same
period last year.
Costs and Expenses
| % | ||||||||||||||||
| ($’s in thousands) | 2006 | 2005 | Change | Change | ||||||||||||
Cost of sales — factory |
$ | 12,732.3 | $ | 10,704.8 | $ | 2,027.5 | 18.9 | % | ||||||||
Cost of sales — retail |
1,224.3 | 1,036.4 | 187.9 | 18.1 | % | |||||||||||
Franchise costs |
1,466.3 | 1,411.9 | 54.4 | 3.9 | % | |||||||||||
Sales and marketing |
1,321.0 | 1,294.7 | 26.3 | 2.0 | % | |||||||||||
General and administrative |
2,239.1 | 2,497.7 | (258.6 | ) | (10.4 | %) | ||||||||||
Retail operating |
1,755.7 | 1,453.8 | 301.9 | 20.8 | % | |||||||||||
Total |
$ | 20,738.7 | $ | 18,399.3 | $ | 2,339.4 | 12.7 | % | ||||||||
Adjusted Gross margin
| % | ||||||||||||||||
| ($’s in thousands) | 2006 | 2005 | Change | Change | ||||||||||||
Factory adjusted gross margin |
$ | 6,564.9 | $ | 5,949.6 | $ | 615.3 | 10.3 | % | ||||||||
Retail |
1,821.7 | 1,690.0 | 131.7 | 7.8 | % | |||||||||||
Total |
$ | 8,386.6 | $ | 7,639.6 | $ | 747.0 | 9.8 | % | ||||||||
(Percent) |
||||||||||||||||
Factory adjusted gross margin |
34.0 | % | 35.7 | % | (1.7 | %) | (4.8 | %) | ||||||||
Retail |
59.8 | % | 62.0 | % | (2.2 | %) | (3.5 | %) | ||||||||
Total |
37.5 | % | 39.4 | % | (1.9 | %) | (4.8 | %) | ||||||||
Adjusted gross margin is equal to gross margin minus depreciation and amortization expense. We
believe adjusted gross margin is helpful in understanding our past performance as a supplement to
gross margin and other performance measures calculated in conformity with accounting principles
generally accepted in the United States (“GAAP”). We believe that adjusted gross margin is useful
to investors because it provides a measure of operating performance and our ability to generate
cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross
margin rather than gross margin to make incremental pricing decisions. Adjusted gross margin has
limitations as an analytical tool because it excludes the impact of depreciation and amortization
expense and you should not consider it in isolation or as a substitute for any measure reported
under GAAP. Our use of
capital assets makes depreciation and amortization expense a necessary element of our costs and our
ability to generate income.
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Due to these limitations, we use adjusted gross margin as a measure of performance only in
conjunction with GAAP measures of performance such as gross margin. The following table provides a
reconciliation of adjusted gross margin to gross margin, the most comparable performance measure
under GAAP:
| ($’s in thousands) | 2006 | 2005 | ||||||
Factory adjusted gross margin |
$ | 6,564.9 | $ | 5,949.6 | ||||
Less: Depreciation and amortization |
381.1 | 359.7 | ||||||
Factory GAAP gross margin |
$ | 6,183.8 | $ | 5,589.9 | ||||
Cost of Sales
Factory margins declined 170 basis points from fiscal 2005 to fiscal 2006 due to a shift in product
mix sold, increased fuel and commodity prices, and slightly lower factory efficiencies. Reduction
in Company-owned store margin is due to changes in mix of product sold and increased promotional
cost.
Franchise Costs
The increase in franchise costs is due to a planned increase in personnel costs and related support
expenditures. As a percentage of total royalty and marketing fees and franchise fee revenue,
franchise costs decreased to 25.6% in fiscal 2006 from 27.5% in fiscal 2005. This decrease as a
percentage of royalty, marketing and franchise fees is primarily a result of higher franchise
revenues relative to costs.
Sales & Marketing
The increase in sales and marketing was due primarily to increased promotional costs.
General and Administrative
The decrease in general and administrative costs is due primarily to decreased incentive
compensation costs. An increase in professional fees partially offset this decrease. As a
percentage of total revenues, general and administrative expenses decreased to 8.0% in fiscal 2006
compared to 10.2% in fiscal 2005. This decrease resulted from a higher increase in total revenues
relative to the decrease in general and administrative costs.
Retail Operating Expenses
This increase in retail operating expenses was due primarily to an increase in the average number
of Company-owned stores during fiscal 2006 versus fiscal 2005. Retail operating expenses, as a
percentage of retail sales, increased from 53.3% in fiscal 2005 to 57.6% in fiscal 2006 due to a
larger increase in costs relative to the increase in revenues.
Depreciation and Amortization
Depreciation and amortization of $876,000 in fiscal 2006 increased 11.6% from the $785,000 incurred
in fiscal 2005 due primarily to increased capital expenditures related to the remodel of the
Company’s manufacturing and administrative facilities.
Other, Net
Other expense, net of $76,000 income realized in fiscal 2006 represents an increase of $83,000 from
the $7,000 incurred in fiscal 2005, due primarily to lower interest expense on lower average
outstanding balances of long-term debt plus interest income on invested cash and lower average
outstanding amounts of notes receivable.
Income Tax Expense
The Company’s effective income tax rate in fiscal 2006 was 37.8%, which is the same as the
effective rate in fiscal 2005.
Liquidity and Capital Resources
As of February 28, 2007, working capital was $7.5 million compared with $7.5 million as of February
28, 2006. The lack of change in working capital was due primarily to operating results less the
payment of $2.0 million in cash dividends and the repurchase and retirement of $4.4 million of the
Company’s common stock.
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Cash and cash equivalent balances decreased from $3.5 million as of February 28, 2006 to $2.8
million as of February 28, 2007 as a result of cash flows generated by operating and investing
activities being less than cash flows used in financing activities. The Company’s current ratio was
3.38 to 1 at February 28, 2007 in comparison with 3.39 to 1 at February 28, 2006. The Company
monitors current and anticipated future levels of cash and cash equivalents in relation to
anticipated operating, financing and investing requirements.
The Company has a $5.0 million credit line, of which $5.0 million was available (subject to certain
borrowing base limitations) as of February 28, 2007, secured by substantially all of the Company’s
assets except retail store assets. The credit line is subject to renewal in July, 2007.
The table below presents significant contractual obligations of the Company at February 28, 2007.
| (Amounts in thousands) | Less than | After | ||||||||||||||||||
| Contractual Obligations | 1 year | 1-3 Years | 4-5 years | 5 years | Total | |||||||||||||||
Line of credit |
— | — | — | — | — | |||||||||||||||
Notes payable |
— | — | — | — | — | |||||||||||||||
Operating leases |
415 | 490 | 123 | — | 1,028 | |||||||||||||||
Other long-term
obligations |
101 | 157 | 146 | 462 | 866 | |||||||||||||||
Total Contractual
cash obligations |
516 | 647 | 269 | 462 | 1,894 | |||||||||||||||
For fiscal 2008, the Company anticipates making capital expenditures of approximately $750,000,
which will be used to maintain and improve existing factory and administrative infrastructure and
update certain Company-owned stores. The Company believes that cash flow from operations will be
sufficient to fund capital expenditures and working capital requirements for fiscal 2008. If
necessary, the Company has available bank lines of credit to help meet these requirements.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect the
Company’s operations. Most of the Company’s leases provide for cost-of-living adjustments and
require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation.
Additionally, the Company’s future lease cost for new facilities may include potentially escalating
costs of real estate and construction. There is no assurance that the Company will be able to pass
on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed assets, and is
therefore potentially less than it would be if it were based on current replacement cost. While
property and equipment acquired in prior years will ultimately have to be replaced at higher
prices, it is expected that replacement will be a gradual process over many years.
Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly
results of operations. Historically, the strongest sales of the Company’s products have occurred
during the Christmas holiday and summer vacation seasons. In addition, quarterly results have been,
and in the future are likely to be, affected by the timing of new store openings and sales of
franchises. Because of the seasonality of the Company’s business and the impact of new store
openings and sales of franchises, results for any quarter are not necessarily indicative of results
that may be achieved in other quarters or for a full fiscal year.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in
accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in
accordance with Statement 109 and requires a more-likely-than-not recognition threshold. A tax
position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant
information. Subsequent recognition, derecognition, and measurement is based on management’s best
judgment given the facts, circumstances and information available at the reporting date. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Early adoption is permitted as of the
beginning of an enterprise’s fiscal year, provided the enterprise has not yet issued financial
statements,
including
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financial statements for any interim period, for that fiscal year. Our effective date for
adopting FIN No. 48 is as of March 1, 2007, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening accumulated deficit. Based upon the Company’s
evaluation of the effects of this guidance, we do not believe that it will have a significant
impact on the Company’s financial statements.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a
framework for measuring fair value under GAAP and expands disclosures about fair value measurement.
SFAS 157 also creates consistency and comparability in fair value measurements among the many
accounting pronouncements that require fair value measurements but does not require any new fair
value measurements. SFAS 157 is effective for fiscal years (including interim periods) beginning
after November 15, 2007. The Company will adopt SFAS No. 157 in fiscal 2009 and does not expect it
to have a significant impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities — Including an amendment of FASB Statement No. 115. This standard amends SFAS
115, Accounting for Certain Investment in Debt and Equity Securities, with respect to accounting
for a transfer to the trading category for all entities with available-for-sale and trading
securities electing the fair value option. This standard allows companies to elect fair value
accounting for many financial instruments and other items that currently are not required to be
accounted as such, allows different applications for electing the option for a single item or
groups of items, and requires disclosures to facilitate comparisons of similar assets and
liabilities that are accounted for differently in relation to the fair value option. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 159
in fiscal 2009 and does not expect it to have a significant impact on the Company’s financial
statements.
In December 2006, the FASB issued EITF 00-19-2, “Accounting for Registration Payment Arrangements.”
This FASB Staff Position (FSP) addresses an issuer’s accounting for registration payment
arrangements. This FSP specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other agreement, should
be separately recognized and measured in accordance with FASB Statement No. 5, “Accounting for
Contingencies.” The guidance in this FSP amends FASB Statements No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” and No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity,” and FASB Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,” to include scope exceptions for registration payment arrangements. This
FSP further clarifies that a financial instrument subject to a registration payment arrangement
should be accounted for in accordance with other applicable generally accepted accounting
principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to
the registration payment arrangement. Based upon the Company’s preliminary evaluation of the
effects of this guidance, we do not believe that it will have a significant impact on the
Company’s financial statements.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting
Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 provides interpretive guidance on how
the effects of the carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement for the purpose of the materiality assessment. Application
of SAB 108 is encouraged in any report for an interim period of the first fiscal year ending after
November 15, 2006. Previously filed interim reports need not be amended. However, comparative
information presented in reports for interim periods of the first year subsequent to initial
application should be adjusted to reflect the cumulative effect adjustment as of the beginning of
the year of initial application. We took the provisions of SAB 108 into account in restating our
financial statements as set forth in this Form 10-K. See Note 14 to the Consolidated Financial
Statements.
26
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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.
The Company has a $5.0 million bank line of credit that bears interest at a variable rate. As of
February 28, 2007, no amount was outstanding under the line of credit. The Company does not believe
that it is exposed to any material interest rate risk related to the line of credit.
The Chief Financial Officer and Chief Operating Officer of the Company has primary responsibility
over the Company’s long-term and short-term debt and has primary responsibility for determining the
timing and duration of commodity purchase contracts and negotiating the terms and conditions of
those contracts.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
| Page | ||||
| 29 | ||||
| 30 | ||||
| 31 | ||||
| 32 | ||||
| 33 | ||||
| 34 | ||||
28
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
Durango, Colorado
Rocky Mountain Chocolate Factory, Inc.
Durango, Colorado
We have audited the accompanying balance sheets of Rocky Mountain Chocolate Factory, Inc. (the
“Company”) as of February 28, 2007 and 2006, and the related statements of income, changes in
stockholders’ equity and cash flows for the years ended February 28, 2007, 2006 and 2005. 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Rocky Mountain Chocolate Factory, Inc. as of February 28, 2007
and 2006, and the results of their operations and their cash flows for each of the years ended
February 28, 2007, 2006 and 2005, in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting
as of February 28, 2007, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated May 14, 2007 expressed an unqualified opinion on management’s assessment of, and the
effective operation of, internal control over financial reporting.
Ehrhardt Keefe Steiner & Hottman PC
May 14, 2007
Denver, Colorado
Denver, Colorado
29
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
| FOR THE YEARS ENDED FEBRUARY 28 | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Revenues |
||||||||||||
Sales |
$ | 25,335,739 | $ | 22,343,209 | $ | 19,380,861 | ||||||
Franchise and royalty fees |
6,237,594 | 5,730,403 | 5,142,758 | |||||||||
Total revenues |
31,573,333 | 28,073,612 | 24,523,619 | |||||||||
Costs and Expenses |
||||||||||||
Cost of sales, exclusive of
depreciation and amortization expense
of $412,546, $381,141 and $359,633 |
15,988,620 | 13,956,550 | 11,741,205 | |||||||||
Franchise costs |
1,570,026 | 1,466,322 | 1,411,901 | |||||||||
Sales & marketing |
1,538,476 | 1,320,979 | 1,294,702 | |||||||||
General and administrative |
2,538,667 | 2,239,109 | 2,497,718 | |||||||||
Retail operating |
1,502,134 | 1,755,738 | 1,453,740 | |||||||||
Depreciation and amortization |
873,988 | 875,940 | 785,083 | |||||||||
Total costs and expenses |
24,011,911 | 21,614,638 | 19,184,349 | |||||||||
Operating Income |
7,561,422 | 6,458,974 | 5,339,270 | |||||||||
Other Income (Expense) |
||||||||||||
Interest expense |
— | (19,652 | ) | (99,988 | ) | |||||||
Interest income |
67,071 | 95,360 | 92,938 | |||||||||
Other, net |
67,071 | 75,708 | (7,050 | ) | ||||||||
Income Before Income Taxes |
7,628,493 | 6,534,682 | 5,332,220 | |||||||||
Income Tax Expense |
2,883,575 | 2,470,110 | 2,015,580 | |||||||||
Net Income |
$ | 4,744,918 | $ | 4,064,572 | $ | 3,316,640 | ||||||
Basic Earnings per Common Share |
$ | .77 | $ | .65 | $ | .55 | ||||||
Diluted Earnings per Common Share |
$ | .75 | $ | .61 | $ | .51 | ||||||
Weighted Average Common Shares Outstanding |
6,125,831 | 6,268,202 | 6,006,883 | |||||||||
Dilutive Effect of Employee Stock Options |
216,524 | 407,411 | 474,499 | |||||||||
Weighted Average Common Shares
Outstanding, Assuming Dilution |
6,342,355 | 6,675,613 | 6,481,382 | |||||||||
The accompanying notes are an integral part of these statements.
30
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
| AS OF FEBRUARY 28 | ||||||||
| 2007 | 2006 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 2,830,175 | $ | 3,489,750 | ||||
Accounts receivable, less allowance for
doubtful accounts of $187,519 and $46,920 |
3,756,212 | 3,296,690 | ||||||
Notes receivable |
50,600 | 116,997 | ||||||
Inventories, less reserve for slow moving
inventory of $147,700 and $61,032 |
3,482,139 | 2,938,234 | ||||||
Deferred income taxes |
272,871 | 117,715 | ||||||
Other |
367,420 | 481,091 | ||||||
Total current assets |
10,759,417 | 10,440,477 | ||||||
Property and Equipment, Net |
5,754,122 | 6,698,604 | ||||||
Other Assets |
||||||||
Notes receivable, less valuation allowance
of $-0- and $52,005 |
310,453 | 278,741 | ||||||
Goodwill, net |
939,074 | 1,133,751 | ||||||
Intangible assets, net |
349,358 | 402,469 | ||||||
Other |
343,745 | 103,438 | ||||||
Total other assets |
1,942,630 | 1,918,399 | ||||||
Total assets |
$ | 18,456,169 | $ | 19,057,480 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 898,794 | $ | 1,145,410 | ||||
Accrued salaries and wages |
931,614 | 507,480 | ||||||
Other accrued expenses |
585,402 | 750,733 | ||||||
Dividend payable |
551,733 | 504,150 | ||||||
Deferred income |
288,500 | — | ||||||
Total current liabilities |
$ | 3,256,043 | $ | 2,907,773 | ||||
Deferred Income Taxes |
685,613 | 663,889 | ||||||
Commitments and Contingencies |
||||||||
Stockholders’ Equity |
||||||||
Common stock, $.03 par value; 100,000,000
shares authorized; 100,000,000 and
6,113,243, 6,281,920 shares issued and
outstanding |
183,397 | 188,458 | ||||||
Additional paid-in capital |
6,996,728 | 10,372,530 | ||||||
Retained earnings |
7,334,388 | 4,924,830 | ||||||
Total stockholders’ equity |
14,514,513 | 15,485,818 | ||||||
Total liabilities and stockholders’ equity |
$ | 18,456,169 | $ | 19,057,480 | ||||
The accompanying notes are an integral part of these statements.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| FOR THE YEARS ENDED FEBRUARY 28 | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Common Stock |
||||||||||||
Balance at beginning of year |
$ | 188,458 | $ | 184,096 | $ | 179,458 | ||||||
Repurchase and retirement of common stock |
(9,354 | ) | (5,827 | ) | (3,756 | ) | ||||||
Issuance of common stock |
25 | 53 | 18 | |||||||||
Exercise of stock options and other |
4,268 | 10,136 | 8,376 | |||||||||
Balance at end of year |
183,397 | 188,458 | 184,096 | |||||||||
Additional Paid-In Capital |
||||||||||||
Balance at beginning of year |
10,372,530 | 11,051,176 | 2,631,358 | |||||||||
Repurchase and retirement of common stock |
(4,371,736 | ) | (2,952,614 | ) | (840,450 | ) | ||||||
Stock dividends declared |
— | — | 8,156,857 | |||||||||
Costs related to stock splits and
dividends |
— | (8,902 | ) | (15,638 | ) | |||||||
Issuance of common stock |
15,798 | 37,447 | 4,939 | |||||||||
Exercise of stock options and other |
820,206 | 1,062,593 | 582,750 | |||||||||
Tax benefit from employee stock
transactions |
159,930 | 1,182,830 | 531,360 | |||||||||
Balance at end of year |
6,996,728 | 10,372,530 | 11,051,176 | |||||||||
Retained Earnings |
||||||||||||
Balance at beginning of year |
4,924,830 | 2,658,298 | 8,779,136 | |||||||||
Net income |
4,744,918 | 4,064,572 | 3,316,640 | |||||||||
Stock dividends declared |
— | — | (8,156,857 | ) | ||||||||
Cash dividends declared |
(2,078,208 | ) | (1,798,040 | ) | (1,280,621 | ) | ||||||
Adoption of
SAB 108 |
(257,152 | ) | — | — | ||||||||
Balance at end of year |
7,334,388 | 4,924,830 | 2,658,298 | |||||||||
Total Stockholders’ Equity |
$ | 14,514,513 | $ | 15,485,818 | $ | 13,893,570 | ||||||
Common Shares |
||||||||||||
Balance at beginning of year |
6,281,920 | 6,136,528 | 5,981,948 | |||||||||
Repurchase and retirement of common stock |
(311,800 | ) | (194,246 | ) | (125,216 | ) | ||||||
Issuance of common stock |
834 | 1,752 | 616 | |||||||||
Exercise of stock options and other |
142,289 | 337,886 | 279,180 | |||||||||
Balance at end of year |
6,113,243 | 6,281,920 | 6,136,528 | |||||||||
The accompanying notes are an integral part of these statements.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
| FOR THE YEARS ENDED FEBRUARY 28 | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Cash Flows From Operating Activities: |
||||||||||||
Net income |
$ | 4,744,918 | $ | 4,064,572 | $ | 3,316,640 | ||||||
Adjustments to reconcile net income to
net cash provided by operating
activities: |
||||||||||||
Depreciation and amortization |
873,988 | 875,940 | 785,083 | |||||||||
Provision for loss on accounts and notes
receivable and related foreclosure costs |
70,000 | — | 25,000 | |||||||||
Provision for inventory loss |
70,000 | 45,000 | 90,000 | |||||||||
Loss on sale of assets |
101 | 37,411 | 44,789 | |||||||||
Expense recorded for stock options |
201,269 | — | — | |||||||||
Deferred income taxes |
(133,432 | ) | 4,195 | 135,716 | ||||||||
Changes in operating assets and
liabilities: |
||||||||||||
Accounts receivable |
(711,456 | ) | (445,921 | ) | (453,255 | ) | ||||||
Refundable income taxes |
— | 364,630 | (364,630 | ) | ||||||||
Inventories |
(613,905 | ) | (461,207 | ) | (136,402 | ) | ||||||
Other assets |
104,843 | (236,640 | ) | 89,661 | ||||||||
Accounts payable |
(246,616 | ) | 56,934 | 135,934 | ||||||||
Income taxes payable |
(33,729 | ) | (824,860 | ) | (121,403 | ) | ||||||
Accrued liabilities |
452,255 | 602,187 | 23,726 | |||||||||
Deferred income |
5,000 | — | — | |||||||||
Net cash provided by operating activities |
4,783,236 | 4,082,241 | 3,570,859 | |||||||||
Cash Flows From Investing Activities: |
||||||||||||
Additions to notes receivable |
(124,452 | ) | — | (236,142 | ) | |||||||
Proceeds received on notes receivable |
211,143 | 345,442 | 172,776 | |||||||||
Proceeds (expense) from sale or
distribution of assets |
434,335 | (4,395 | ) | 23,834 | ||||||||
Decrease in other assets |
(134,221 | ) | 15,748 | 451 | ||||||||
Purchase of property and equipment |
(201,037 | ) | (1,300,314 | ) | (1,406,698 | ) | ||||||
Net cash provided by (used in) investing
activities |
185,768 | (943,519 | ) | (1,445,779 | ) | |||||||
Cash Flows From Financing Activities: |
||||||||||||
Payments on long-term debt |
— | (1,665,084 | ) | (1,401,490 | ) | |||||||
Costs of stock split or dividend |
— | (8,902 | ) | (15,638 | ) | |||||||
Issuance of common stock |
623,206 | 1,072,729 | 591,126 | |||||||||
Tax benefit of stock option exercise |
159,930 | 1,182,830 | 531,360 | |||||||||
Repurchase and redemption of common stock |
(4,381,090 | ) | (2,958,441 | ) | (844,206 | ) | ||||||
Dividends paid |
(2,030,625 | ) | (1,710,980 | ) | (1,099,639 | ) | ||||||
Net cash used in financing activities |
(5,628,579 | ) | (4,087,848 | ) | (2,238,487 | ) | ||||||
Net Decrease In Cash And Cash Equivalents |
(659,575 | ) | (949,126 | ) | (113,407 | ) | ||||||
Cash And Cash Equivalents At
Beginning Of Year |
3,489,750 | 4,438,876 | 4,552,283 | |||||||||
Cash And Cash Equivalents At End Of Year |
$ | 2,830,175 | $ | 3,489,750 | $ | 4,438,876 | ||||||
The accompanying notes are an integral part of these statements.
33
Table of Contents
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Rocky Mountain Chocolate Factory, Inc. is an international franchiser, confectionery manufacturer
and retail operator in the United States, Guam, Canada, and the United Arab Emirates. The Company
manufactures an extensive line of premium chocolate candies and other confectionery products. The
Company’s revenues are currently derived from three principal sources: sales to franchisees and
others of chocolates and other confectionery products manufactured by the Company; the collection
of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores
of chocolates and other confectionery products. The following table summarizes the number of Rocky
Mountain Chocolate Factory stores at February 28, 2007:
| Sold, Not Yet | ||||||||||||
| Open | Open | Total | ||||||||||
Company owned stores |
— | 5 | 5 | |||||||||
Franchise stores – Domestic stores |
13 | 255 | 268 | |||||||||
Franchise stores – Domestic kiosks |
2 | 24 | 26 | |||||||||
Franchise stores – International |
— | 38 | 38 | |||||||||
| 15 | 322 | 337 | ||||||||||
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of six
months or less to be cash equivalents. The Company continually monitors its positions with, and the
credit quality of, the financial institutions it invests with. As of the balance sheet date, and
periodically throughout the year, the Company has maintained balances in various operating accounts
in excess of federally insured limits, approximately $2.7 million at February 28, 2007.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential
liabilities for workers’ compensation, general liability, property insurance, director and
officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities
associated with the risks that are retained by the Company are estimated, in part, by considering
historical claims experience, demographic factors, severity factors and other assumptions. While
the Company believes that its assumptions are appropriate, the estimated accruals for these
liabilities could be significantly affected if future occurrences and claims differ from these
assumptions and historical trends.
Accounts and Notes Receivable
At the time that accounts, notes and royalties receivable are originated, the Company considers a
reserve for doubtful accounts. The provision for uncollectible amounts is continually reviewed and
adjusted to maintain the allowance at a level considered adequate to cover future losses. The
allowance is management’s best estimate of uncollectible amounts and is determined based on
historical performance that is tracked by the Company on an ongoing basis. The losses ultimately
incurred could differ materially in the near term from the amounts estimated in determining the
allowance. At February 28, 2007, the Company has $361,000 of notes receivable outstanding. The
notes require monthly payments and bear interest at rates ranging from 8.0% to 12.5%. The notes
mature through February 2012 and are secured by the assets financed.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
Property and Equipment and Other Assets
Property and equipment are recorded at cost. Depreciation and amortization are computed using the
straight-line method based upon the estimated useful life of the asset, which range from five to
thirty-nine years. Leasehold improvements are amortized on the straight-line method over the
lives of the respective leases or the service lives of the improvements, whichever is shorter.
34
Table of Contents
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED
The Company reviews its long-lived assets through analysis of estimated fair value, 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.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the differences between the tax
basis of assets and liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years. The Company’s temporary differences are
listed in Note 6.
Goodwill
Goodwill arose from two transaction types. The first type was the result of the incorporation of
the Company after its inception as a partnership. The goodwill recorded was the excess of the
purchase price of the Company over the fair value of its assets. The Company has allocated this
goodwill equally between its Franchising and Manufacturing operations. The second type was the
purchase of various retail stores, either individually or as a group, for which the purchase price
was in excess of the fair value of the assets acquired.
Sales
Sales of products to franchisees and other customers are recognized at the time of delivery. Sales
of products at retail stores are recognized at the time of sale.
Shipping Fees
Shipping fees charged to customers by the Company’s trucking department are reported as sales.
Shipping costs incurred by the Company for inventory are reported as cost of sales or inventory.
Franchise and Royalty Fees
Franchise fee revenue is recognized upon opening of the franchise store. Also see Note 14 to these
financial statements. In addition to the initial franchise fee, the Company receives a royalty fee
of approximately five percent (5%) and a marketing and promotion fee of one percent (1%) of the
Rocky Mountain Chocolate Factory franchised stores’ gross sales.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in
the United States of America, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities,
at the date of the financial statements, and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations
As of February 28, 2007, the Company had notes receivable of approximately $360,000 due from four
franchisees. The notes are collateralized by the underlying store assets. The Company is,
therefore, vulnerable to changes in the cash flow from these locations.
Stock-Based Compensation
At February 28, 2007, the Company had stock-based compensation plans for employees and nonemployee
directors which authorized the granting of stock options.
Prior to March 1, 2006, the Company accounted for the plans under the measurement and recognition
provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations, permitted under Statement of Financial Accounting Standard
No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). As a result, employee stock
option-based compensation was included as a pro forma disclosure in the Notes to the Company’s
Financial Statements for prior year periods.
35
Table of Contents
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED
Effective March 1, 2006, the Company adopted the recognition provisions of Statement of Financial
Accounting Standard No. 123R, “Share-Based Payment” (“SFAS No. 123R”), using the
modified-prospective transition method. Under this transition method, compensation cost in 2006
includes the portion vesting in the period for (1) all share-based payments granted prior to,
but not vested, as of March 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, and (2) all share-based payments granted subsequent
to March 1, 2006, based on the grant date fair value estimated in accordance with the provisions of
SFAS No. 123R. Results for the prior periods have not been restated.
The Company did not issue stock options and recorded $0 related equity-based compensation expense
during the year ended February 28, 2007. Compensation costs related to share-based compensation are
generally amortized over the vesting period in selling, general and administrative expenses in the
statement of operations.
On February 21, 2006, the Company accelerated the vesting of all outstanding stock options and
recognized a share-based compensation charge related to this acceleration. The Company recognized
an additional share-based compensation charge of $131,000 for the year ended February 28, 2007
related to this acceleration due to changes in certain estimates and assumptions related to
employee turnover since the acceleration date. Adjustments in future periods may be necessary as
actual results could differ from these estimates and assumptions.
Prior to adopting SFAS No. 123R, the Company presented all benefits from tax deductions arising
from equity-based compensation as a non-cash transaction in the Statement of Cash Flows. SFAS No.
123R requires that the tax benefits in excess of the compensation cost recognized for those
exercised options be classified as cash provided by financing activities. The excess tax benefit
included in net cash provided by financing activities for the years ended February 28, 2007, 2006
and 2005 was $159,930, $1,182,830 and $531,360, respectively.
The weighted-average fair value of stock options granted during the years ended February 28, 2007
and 2006 was $0 and $3.03 per share, respectively. As of February 28, 2007, there was $0 (before
any related tax benefit) of unrecognized compensation cost related to non-vested share-based
compensation.
| 2007 | 2006 | 2005 | ||||||||||
Net Income – as reported |
$ | 4,745 | $ | 4,065 | $ | 3,317 | ||||||
Stock-based compensation expense
included in reported net income, net
of tax |
— | 43 | — | |||||||||
Deduct stock-based compensation
expense determined under fair value
based method, net of tax |
— | (676 | ) | (120 | ) | |||||||
Net Income – pro forma |
4,745 | 3,432 | 3,197 | |||||||||
Basic Earnings per Share-as reported |
.77 | .65 | .55 | |||||||||
Diluted Earnings per Share-as reported |
.75 | .61 | .51 | |||||||||
Basic Earnings per Share-pro forma |
.77 | .55 | .53 | |||||||||
Diluted Earnings per Share-pro forma |
.75 | .51 | .50 | |||||||||
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. Diluted earnings per share reflects the potential
dilution that could occur from common shares issuable through stock options. During 2007, 2006 and
2005, 133,704, 137,320 and 0 stock options were excluded from diluted shares as their affect was
anti-dilutive.
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Total advertising expense amounted to $308,052,
$354,367 and $296,985 for the fiscal years ended February 28, 2007, 2006 and 2005, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade receivables,
payables, notes receivable, and debt. The fair value of all instruments approximates the
carrying value.
36
Table of Contents
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED
Reclassifications
Certain reclassifications have been made to the prior years’ financial statements in order to
conform to the current year presentation.
NOTE 2 — INVENTORIES
Inventories consist of the following at February 28:
| 2007 | 2006 | |||||||
Ingredients and supplies |
$ | 1,730,850 | $ | 1,507,193 | ||||
Finished candy |
1,751,289 | 1,431,041 | ||||||
| $ | 3,482,139 | $ | 2,938,234 | |||||
NOTE 3 — PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28:
| 2007 | 2006 | |||||||
Land |
$ | 513,618 | $ | 513,618 | ||||
Building |
4,717,230 | 4,705,242 | ||||||
Machinery and equipment |
6,284,433 | 6,252,011 | ||||||
Furniture and fixtures |
673,194 | 817,137 | ||||||
Leasehold improvements |
418,764 | 641,637 | ||||||
Transportation equipment |
350,714 | 331,640 | ||||||
| 12,957,953 | 13,261,285 | |||||||
Less accumulated depreciation |
7,203,831 | 6,562,681 | ||||||
Property and equipment, net |
$ | 5,754,122 | $ | 6,698,604 | ||||
NOTE 4 — LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 2007 the Company had a $5.0 million line of credit from a bank, collateralized by
substantially all of the Company’s assets with the exception of the Company’s retail store assets.
Draws may be made under the line at 75% of eligible accounts receivable plus 50% of eligible
inventories. Interest on borrowings is at prime less 50 basis points (7.75% at February 28, 2007).
At February 28, 2007, $5.0 million was available for borrowings under the line of credit, subject
to borrowing base limitations. 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.
Additionally, the line of credit is subject to various financial ratio and leverage covenants. At
February 28, 2007 the Company was in compliance with all such covenants. The credit line is subject
to renewal in July, 2007.
NOTE 5 — COMMITMENTS AND CONTINGENCIES
Operating leases
The Company conducts its retail operations in facilities leased under five to ten-year
noncancelable operating leases. Certain leases contain renewal options for between five and ten
additional years at increased monthly rentals. The majority of the leases provide for contingent
rentals based on sales in excess of predetermined base levels.
The following is a schedule by year of future minimum
rental payments required under such leases for the years
ending February 28 or 29:
2008 |
$ | 208,900 | ||
2009 |
162,000 | |||
2010 |
113,000 | |||
2011 |
74,100 | |||
| $ | 558,000 |
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
37
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NOTE 5 — COMMITMENTS AND CONTINGENCIES — CONTINUED
franchise outlets, all of which is offset by sublease rentals, is as follows for the years ending
February 28 or 29:
2008 |
$ | 100,900 | ||
2009 |
87,300 | |||
2010 |
69,700 | |||
2011 |
71,800 | |||
2012 |
73,900 | |||
Thereafter |
462,400 | |||
| $ | 866,000 |
The following is a schedule of lease expense for all retail operating leases for the three years
ended February 28:
| 2007 | 2006 | 2005 | ||||||||||
Minimum rentals |
$ | 438,797 | $ | 611,535 | $ | 616,669 | ||||||
Less sublease rentals |
(108,200 | ) | (239,300 | ) | (313,800 | ) | ||||||
Contingent rentals |
26,640 | 23,921 | 28,949 | |||||||||
| $ | 357,237 | $ | 396,156 | $ | 331,818 | |||||||
The Company also leases trucking equipment under operating
leases. The following is a schedule by year of future
minimum rental payments required under such leases for the
years ending February 28 or 29:
2008 |
$ | 206,400 | ||
2009 |
157,000 | |||
2010 |
58,200 | |||
2011 |
48,500 | |||
| $ | 470,100 |
The following is a schedule of lease expense for trucking equipment operating leases for the three
years ended February 28 or 29:
| 2007 | 2006 | 2005 | ||||||||||
| 187,599 | 308,719 | 304,515 | ||||||||||
Purchase contracts
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. Currently the Company has contracted for approximately $1,555,500 of
raw materials under such agreements.
Contingencies
The Company is party to various legal proceedings arising in the ordinary course of business.
Management believes that the resolution of these matters will not have a significant adverse effect
on the Company’s financial position, results of operations or cash flows.
NOTE 6 — INCOME TAXES
Income tax expense is comprised of the following for the years ending February 28 or 29:
| 2007 | 2006 | 2005 | ||||||||||
Current |
||||||||||||
Federal |
$ | 2,533,401 | $ | 2,147,826 | $ | 1,586,493 | ||||||
State |
483,605 | 318,089 | 293,371 | |||||||||
Total Current |
3,017,007 | 2,465,915 | 1,879,864 | |||||||||
Deferred |
||||||||||||
Federal |
(120,018 | ) | 3,774 | 122,072 | ||||||||
State |
(13,414 | ) | 421 | 13,644 | ||||||||
Total Deferred |
(133,432 | ) | 4,195 | 135,716 | ||||||||
Total |
$ | 2,883,575 | $ | 2,470,110 | $ | 2,015,580 | ||||||
38
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NOTE 6 — INCOME TAXES — CONTINUED
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 28 or 29:
| 2007 | 2006 | 2005 | ||||||||||
Statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income taxes, net of federal benefit |
4.1 | % | 3.2 | % | 3.8 | % | ||||||
Other |
(0.3 | %) | .6 | % | — | |||||||
Effective Rate |
37.8 | % | 37.8 | % | 37.8 | % | ||||||
The components of deferred income taxes at February 28 are as follows:
| 2007 | 2006 | |||||||
Deferred Tax Assets |
||||||||
Allowance for doubtful accounts and notes |
$ | 70,882 | $ | 37,394 | ||||
Inventories |
55,831 | 23,070 | ||||||
Accrued compensation |
42,701 | 49,632 | ||||||
Loss provisions and deferred income |
143,925 | 49,173 | ||||||
Self insurance accrual |
15,368 | 15,370 | ||||||
Amortization, design costs |
67,208 | 60,355 | ||||||
| 395,915 | 234,994 | |||||||
Deferred Tax Liabilities |
||||||||
Depreciation and amortization |
(808,657 | ) | (781,168 | ) | ||||
Net deferred tax liability |
$ | (412,742 | ) | $ | (546,174 | ) | ||
Current deferred tax assets |
$ | 272,871 | $ | 117,715 | ||||
Non-current deferred tax liabilities |
(685,613 | ) | (663,889 | ) | ||||
Net deferred tax liability |
$ | (412,742 | ) | $ | (546,174 | ) | ||
NOTE 7 — STOCKHOLDERS’ EQUITY
Stock Issuance
In March 2006, the Company issued 584 shares of stock, valued at $12,500, for partial payment of
certain sales services for one year. In June 2006 the Company issued 250 shares of stock valued at
$3,322 for franchise recognition at the Company’s National Convention.
In September 2005, the Company issued 1,752 shares of stock, valued at $37,500, for certain
licensing rights for five years and partial payment of certain sales services for one year.
Stock Dividends
On February 15, 2005 the Board of Directors declared a 5 percent stock dividend payable on March
10, 2005 to shareholders of record as of February 28, 2005. Shareholders received one additional
share of Common Stock for every twenty shares owned prior to the record date. Subsequent to the
dividend there were 4,602,135 shares outstanding.
On May 4, 2004 the Board of Directors declared a 10 percent stock dividend payable on May 27, 2004
to shareholders of record as of May 13, 2004. Shareholders received one additional share of Common
Stock for every ten shares owned prior to the record date. Subsequent to the dividend there were
4,286,722 shares outstanding.
Stock Splits
On May 18, 2005 the Board of Directors approved a four-for-three stock split payable June 13, 2005
to shareholders of record at the close of business on May 31, 2005. Shareholders received one
additional share of common stock for every three shares owned prior to the record date. Immediately
prior to the split there were 4,639,244 shares outstanding. Subsequent to the split there were
6,186,007 shares outstanding.
All share and per share data have been restated in all years presented to give effect to the stock
dividends and stock splits.
39
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NOTE 7 — STOCKHOLDERS’ EQUITY — CONTINUED
Stock Repurchases
Between March 1, 2007 and April 9, 2007 the Company repurchased 42,200 shares at an average price
of $13.77 per share. Between May 1, 2006 and February 28, 2007 the Company repurchased
241,087 shares at an average price of $13.58 per share. Between March 24, 2006 and April 28, 2006
the Company repurchased 70,713 shares at an average price of $15.65 per share. Between
October 7, 2005 and February 3, 2006 the Company repurchased 176,599 Company shares at an average
price of $15.36 per share. Between April 18 and April 20, 2005 the Company repurchased 17,647
shares at an average price of $13.94 per share. Between March 11, 2004 and June 14, 2004 the
Company repurchased 125,216 Company shares at an average price of $6.74 per share.
Cash Dividend
The Company paid a quarterly cash dividend of $0.0429 per common share on June 16, 2004 and
September 16, 2004 to shareholders of record on June 3, 2004 and September 2, 2004, respectively.
The Company paid a quarterly cash dividend of $0.0571 per common share on December 16, 2004 to
shareholders of record on December 2, 2004. The Company paid a quarterly cash dividend of $0.0675
per common share on March 16, 2005, June 16, 2005 and September 16, 2005 to shareholders of record
on March 11, 2005, June 3, 2005 and September 1, 2005 respectively. The Company paid a quarterly
cash dividend of $0.07 per common share on December 16, 2005 to shareholders of record on December
1, 2005. The Company paid a quarterly cash dividend of $0.08 per common share on March 16, 2006,
June 16, 2006 and September 16, 2006 to shareholders of record on March 8, 2006, June 2, 2006 and
September 1, 2006, respectively. The Company paid a quarterly cash dividend of $0.09 per common
share on December 15, 2006 and March 16, 2007 to shareholders of record on December 1, 2006 and
March 2, 2007.
Future declaration of dividends will depend on, among other things, the Company’s results of
operations, capital requirements, financial condition and on such other factors as the Company’s
Board of Directors may in its discretion consider relevant and in the best long term interest of
the shareholders.
NOTE 8 — STOCK OPTION PLANS
Under the 1995 Stock Option Plan (the “1995 Plan”), the 2004 Stock Option Plan (the “2004 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 924,000, 420,000, 277,200 and 266,400 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, the 2004 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 70,216, 321,151, 0 and 27,720 shares of the Company’s common
stock were outstanding under the 1995 Plan, the 2004 Plan, the Director’s Plan, and the 2000
Director’s Plan, respectively, at February 28, 2007. On February 21, 2006, the Company accelerated
the vesting of all outstanding stock options in order to prevent past option grants from having an
impact on future results. The options outstanding under these plans will expire, if not exercised
through February 2016.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model utilizing the following weighted average assumptions:
| 2007 | 2006 | 2005 | ||||||||||
Expected dividend yield |
n/a | 2.18 | % | 2.16 | % | |||||||
Expected stock price volatility |
n/a | 30 | % | 30 | % | |||||||
Risk-free interest rate |
n/a | 4.5 | % | 3.8 | % | |||||||
Expected life of options |
n/a | 5 years | 5 years | |||||||||
Information with respect to options outstanding under the Plans at February 28, 2007, and changes
for the three years then ended was as follows:
| 2007 | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
Outstanding at beginning of year |
575,876 | $ | 9.04 | |||||
Granted |
— | — | ||||||
Exercised |
(142,289 | ) | 4.38 | |||||
Forfeited |
(14,500 | ) | 18.72 | |||||
Outstanding at end of year |
419,087 | $ | 10.29 | |||||
Options exercisable at February 28, 2007 |
419,087 | $ | 10.29 | |||||
40
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NOTE 8 — STOCK OPTION PLANS — CONTINUED
| 2006 | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
Outstanding at beginning of year |
770,000 | $ | 4.69 | |||||
Granted |
149,640 | 18.14 | ||||||
Exercised |
(337,884 | ) | 3.17 | |||||
Forfeited |
(5,880 | ) | 7.78 | |||||
Outstanding at end of year |
575,876 | $ | 9.04 | |||||
Options exercisable at February 28, 2006 |
575,876 | $ | 9.04 | |||||
| 2005 | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
Outstanding at beginning of year |
758,142 | $ | 2.52 | |||||
Granted |
300,720 | 7.71 | ||||||
Exercised |
(278,542 | ) | 2.12 | |||||
Forfeited |
(10,320 | ) | 2.54 | |||||
Outstanding at end of year |
770,000 | $ | 4.69 | |||||
Options exercisable at February 29, 2005 |
284,020 | $ | 2.76 | |||||
Weighted average fair value per share of
options granted during 2007, 2006 and 2005
were $0, $3.03 and $2.05, respectively. |
||||||||
Additional information about stock options outstanding at February 28, 2007 is
summarized as follows:
| Options Outstanding | ||||||||||||
| Number | Weighted average | Weighted average | ||||||||||
| exercisable | remaining contractual life | exercise price | ||||||||||
Range of exercise prices |
||||||||||||
$1.603 to 3.935 |
73,296 | 5.00 | 3.52 | |||||||||
$6.149 to 7.807 |
213,731 | 7.23 | 7.76 | |||||||||
$14.955 to 21.600 |
132,060 | 8.10 | 18.15 | |||||||||
NOTE 9 — OPERATING SEGMENTS
The Company classifies its business interests into two reportable segments: Franchising and
Manufacturing. The Company has five Company-owned stores. Company-owned stores provide an
environment for testing new products and promotions, operating and training methods and
merchandising techniques. Company management evaluates these stores in relation to their
contribution to franchising efforts. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in Note 1. The Company evaluates
performance and allocates resources based on operating contribution, which excludes unallocated
corporate general and administrative costs, provision for loss on accounts and notes receivable and
related foreclosure 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 inter-segment sales prices
are market based. Each segment is managed separately because of the differences in required
infrastructure and the difference in products and services:
| Franchising | Manufacturing | Other | Total | |||||||||||||
FY 2007 |
||||||||||||||||
Total revenues |
$ | 8,864,314 | $ | 24,656,272 | $ | — | $ | 33,520,596 | ||||||||
Intersegment revenues |
— | (1,947,253 | ) | — | (1,947,253 | ) | ||||||||||
Revenue from external customers |
8,864,314 | 22,709,019 | — | 31,573,333 | ||||||||||||
Segment profit (loss) |
3,222,840 | 7,084,812 | (2,679,159 | ) | 7,628,493 | |||||||||||
Total assets |
2,438,225 | 10,660,079 | 5,357,865 | 18,456,169 | ||||||||||||
Capital expenditures |
32,703 | 108,372 | 59,962 | 201,037 | ||||||||||||
Total depreciation &
amortization |
233,346 | 434,398 | 206,244 | 873,988 | ||||||||||||
FY 2006 |
||||||||||||||||
Total revenues |
$ | 8,776,429 | $ | 21,035,748 | $ | — | $ | 29,812,177 | ||||||||
Intersegment revenues |
— | (1,738,565 | ) | — | (1,738,565 | ) | ||||||||||
Revenue from external customers |
8,776,429 | 19,297,183 | — | 28,073,612 | ||||||||||||
Segment profit (loss) |
2,986,944 | 5,884,990 | (2,337,252 | ) | 6,534,682 | |||||||||||
Total assets |
2,964,486 | 10,209,790 | 5,883,204 | 19,057,480 | ||||||||||||
Capital expenditures |
90,757 | 878,871 | 330,686 | 1,300,314 | ||||||||||||
Total depreciation &
amortization |
264,658 | 406,494 | 204,788 | 875,940 | ||||||||||||
41
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NOTE 9 — OPERATING SEGMENTS — CONTINUED
| Franchising | Manufacturing | Other | Total | |||||||||||||
FY 2005 |
||||||||||||||||
Total revenues |
$ | 7,869,207 | $ | 18,058,455 | $ | — | $ | 25,927,662 | ||||||||
Intersegment revenues |
— | (1,404,043 | ) | — | (1,404,043 | ) | ||||||||||
Revenue from external customers |
7,869,207 | 16,654,412 | — | 24,523,619 | ||||||||||||
Segment profit (loss) |
2,714,261 | 5,256,713 | (2,638,754 | ) | 5,332,220 | |||||||||||
Total assets |
2,809,651 | 9,043,385 | 7,394,938 | 19,247,974 | ||||||||||||
Capital expenditures |
462,088 | 687,632 | 256,978 | 1,406,698 | ||||||||||||
Total depreciation &
amortization |
223,561 | 384,291 | 177,231 | 785,083 | ||||||||||||
NOTE 10 — SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28:
| 2007 | 2006 | 2005 | ||||||||||
Interest paid |
$ | — | $ | 19,872 | $ | 100,067 | ||||||
Income taxes paid |
2,890,807 | 560,485 | 1,834,536 | |||||||||
Non-Cash
Operating Activities: |
||||||||||||
Revenue
Recognition Changes (Note 14) |
||||||||||||
Accounts
receivable |
$ | (129,928 | ) | $ | — | $ | — | |||||
Income taxes
payable |
156,276 | — | — | |||||||||
Deferred
income |
(283,500 | ) | — | — | ||||||||
Retained
earnings |
257,152 | — | — | |||||||||
Non-Cash Investing Activities: |
||||||||||||
Dividend payable |
$ | 47,583 | $ | 87,060 | $ | 180,982 | ||||||
Issue stock for rights and services |
15,822 | 37,500 | — | |||||||||
Fair value of assets received upon
settlement of notes and accounts
receivable: |
||||||||||||
Store to be operated |
— | 200,000 | — | |||||||||
Inventory |
— | 3,815 | — | |||||||||
Note receivable |
— | 153,780 | — | |||||||||
NOTE 11 — EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan.
Eligible participants are permitted to make contributions up to statutory limits. The Company makes
a matching contribution, which vests ratably over a 3-year period, and is 25% of the employee’s
contribution up to a maximum of 1.5% of the employee’s compensation. For fiscal 2006 and 2005, the
Company made an additional discretionary contribution by doubling the normal matching. During the
years ended February 28, 2007, 2006 and 2005, the Company’s contribution was approximately $40,000,
$46,000 and $74,000, respectively, to the plan.
NOTE 12 — SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the fiscal years ended February
28, 2007 and 2006:
| Fiscal Quarter | ||||||||||||||||||||
| First | Second | Third | Fourth | Total | ||||||||||||||||
2007 |
||||||||||||||||||||
Total revenue |
$ | 6,768,412 | $ | 6,779,569 | $ | 9,094,436 | $ | 8,930,916 | $ | 31,573,333 | ||||||||||
Gross margin before
depreciation |
2,012,762 | 2,071,381 | 2,622,621 | 2,640,355 | 9,347,119 | |||||||||||||||
Net income |
930,541 | 1,039,790 | 1,331,795 | 1,442,792 | 4,744,918 | |||||||||||||||
Basic earnings per share |
.15 | .17 | .22 | .24 | .77 | |||||||||||||||
Diluted earnings per share |
.14 | .17 | .21 | .23 | .75 | |||||||||||||||
| Fiscal Quarter | ||||||||||||||||||||
| First | Second | Third | Fourth | Total | ||||||||||||||||
2006 |
||||||||||||||||||||
Total revenue |
$ | 5,366,801 | $ | 6,583,160 | $ | 7,997,547 | $ | 8,126,104 | $ | 28,073,612 | ||||||||||
Gross margin before
depreciation |
1,633,931 | 2,091,825 | 2,444,166 | 2,216,737 | 8,386,659 | |||||||||||||||
Net income |
752,585 | 1,123,538 | 1,115,740 | 1,072,709 | 4,064,572 | |||||||||||||||
Basic earnings per share |
.12 | .18 | .18 | .17 | .65 | |||||||||||||||
Dilute earnings per share |
.11 | .17 | .17 | .16 | .61 | |||||||||||||||
The
Company has evaluated the impact of changes to revenue recognition on
a quarterly basis and determined that the change is not significant
to the results of any quarter. See Note 14 to the Consolidated
Financial Statements.
42
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NOTE 13 — GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at February 28:
| 2007 | 2006 | |||||||||||||||||||
| Gross | Gross | |||||||||||||||||||
| Amortization | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
| Period | Value | Amortization | Value | Amortization | ||||||||||||||||
Intangible assets subject to amortization |
||||||||||||||||||||
Store design |
10 Years | 205,777 | 106,204 | $ | 205,777 | $ | 85,093 | |||||||||||||
Packaging licenses |
3-5 Years | 120,830 | 104,164 | 120,830 | 99,164 | |||||||||||||||
Packaging design |
10 Years | 430,973 | 217,854 | 430,973 | 170,854 | |||||||||||||||
Trademark |
— | 20,000 | — | |||||||||||||||||
Total |
777,580 | 428,222 | 757,580 | 355,111 | ||||||||||||||||
Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill |
1,011,458 | 267,020 | 1,275,962 | 336,847 | ||||||||||||||||
Franchising goodwill |
295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||
Manufacturing segment-Goodwill |
295,000 | 197,682 | 295,000 | 197,682 | ||||||||||||||||
Total Goodwill |
1,601,458 | 662,384 | 1,865,962 | 732,211 | ||||||||||||||||
Total intangible assets |
$ | 2,379,038 | $ | 1,090,606 | $ | 2,623,542 | $ | 1,087,322 | ||||||||||||
Amortization
expense related to intangible assets totaled $73,111, $77,092 and
$72,058 during the
fiscal year ended February 28, 2007, 2006 and 2005. The aggregate estimated amortization expense for
intangible assets remaining as of February 28, 2007 is as follows:
2008 |
73,100 | |||
2009 |
73,100 | |||
2010 |
73,100 | |||
2011 |
64,400 | |||
2012 |
40,300 | |||
Thereafter |
5,358 | |||
Total |
329,358 |
During fiscal year 2007 the Company sold or closed four Company stores. The sale and closures
resulted in the reduction of Company store goodwill and related accumulated amortization of
$264,504 and $69,827, respectively, for a net decrease in goodwill of $194,677.
NOTE 14
— REVENUE RECOGNITION CHANGES
Historically the Company has recognized franchise fees upon completion of all significant initial
services provided to the franchisee and upon satisfaction of all material conditions of the
franchise agreement. Effective with the fourth quarter of fiscal 2007, the Company decided to
change that policy to more closely coincide with industry practice, that is, to recognize franchise
fees when the franchise store opens. Due to the change the Company recorded adjustments to its
March 1, 2006 balance sheet as follows:
Increase in deferred income |
$ | 283,500 | ||
Decrease in income taxes payable |
107,163 | |||
Decrease in retained earnings |
176,337 |
Historically the Company has recognized factory revenue upon shipment of candy to franchisees on
Company trucks. Effective with the fourth quarter of fiscal 2007, the Company decided to change
that policy to recognize factory revenue upon delivery of candy to franchisees. Due to the change
the Company recorded adjustments to its March 1, 2006 balance sheet as follows:
Decrease in accounts receivable |
$ | 379,636 | ||
Increase in inventory |
249,708 | |||
Decrease in income taxes payable |
49,113 | |||
Decrease in retained earnings |
80,815 |
NOTE 15 — RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in
accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in
accordance with Statement 109 and requires a more-likely-than-not recognition threshold. A tax
position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant
information. Subsequent recognition, derecognition, and measurement is based on management’s best
judgment given the facts, circumstances and information available at the reporting date. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Early adoption is permitted as of the
beginning of an enterprise’s fiscal year, provided the enterprise has not yet issued financial
statements, including financial statements for any interim period, for that fiscal year. Our
effective date for adopting FIN No. 48 is as of March 1, 2007, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening accumulated deficit. Based
upon
the Company’s evaluation of the effects of this guidance, we do not believe that it will have a
significant impact on the Company’s financial statements.
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NOTE 15 — RECENT ACCOUNTING PRONOUNCEMENTS—CONTINUED
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a
framework for measuring fair value under GAAP and expands disclosures about fair value measurement.
SFAS 157 also creates consistency and comparability in fair value measurements among the many
accounting pronouncements that require fair value measurements but does not require any new fair
value measurements. SFAS 157 is effective for fiscal years (including interim periods) beginning
after November 15, 2007. The Company will adopt SFAS No. 157 in fiscal 2009 and does not expect it
to have a significant impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities — Including an amendment of FASB Statement No. 115. This standard amends SFAS
115, Accounting for Certain Investment in Debt and Equity Securities, with respect to accounting
for a transfer to the trading category for all entities with available-for-sale and trading
securities electing the fair value option. This standard allows companies to elect fair value
accounting for many financial instruments and other items that currently are not required to be
accounted as such, allows different applications for electing the option for a single item or
groups of items, and requires disclosures to facilitate comparisons of similar assets and
liabilities that are accounted for differently in relation to the fair value option. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 159
in fiscal 2009 and does not expect it to have a significant impact on the Company’s financial
statements.
In December 2006, the FASB issued EITF 00-19-2, “Accounting for Registration Payment Arrangements.”
This FASB Staff Position (FSP) addresses an issuer’s accounting for registration payment
arrangements. This FSP specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other agreement, should
be separately recognized and measured in accordance with FASB Statement No. 5, “Accounting for
Contingencies.” The guidance in this FSP amends FASB Statements No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” and No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity,” and FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others,” to include scope exceptions for
registration payment arrangements. This FSP further clarifies that a financial instrument subject
to a registration payment arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles (GAAP) without regard to the contingent obligation to
transfer consideration pursuant to the registration payment arrangement. Based upon the Company’s
preliminary evaluation of the effects of this guidance, we do not believe that it will have a
significant impact on the Company’s financial statements.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements. SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a current
year misstatement for the purpose of the materiality assessment. Application of SAB 108 is
encouraged in any report for an interim period of the first fiscal year ending after November 15,
2006. Previously filed interim reports need not be amended. However, comparative information
presented in reports for interim periods of the first year subsequent to initial application should
be adjusted to reflect the cumulative effect adjustment as of the beginning of the year of initial
application. We took the provisions of SAB 108 into account in restating our financial statements
as set forth in this Form 10-K. See Note 14 to the Consolidated Financial Statements.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls
and procedures and internal control over financial reporting (collectively, “Control Systems”) may
not prevent or detect all failures or misstatements of the type sought to be avoided by Control
Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systems
to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer
(the “CFO”), does not expect that the Company’s Control Systems will prevent all error or all
fraud. A Control System, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the Control System are met. Further, the design of a
Control System must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
Control Systems, no evaluation can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These reports by management, including the
CEO and CFO, on the effectiveness of the Company’s Control Systems express only reasonable
assurance of the conclusions reached.
Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the Company’s reports under the
Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in
the SEC’s rules and forms, and that such information is accumulated and communicated to management,
including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of
February 28, 2007, of the Company’s disclosure controls and procedures (as defined in Rule
13a—15(e) and 15d—15(e) under the Exchange Act). Based on that evaluation, the CEO and CFO have
concluded that the Company’s disclosure controls and procedures were effective as of February 28,
2007.
Management’s Annual Report on Internal Control over Financial Reporting — Management is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Management, with the participation of the CEO
and CFO, has evaluated the effectiveness, as of February 28, 2007, of the Company’s internal
control over financial reporting. In making this evaluation, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission in its publication Internal
Control-Integrated Framework. Based on that evaluation, the CEO and CFO have concluded that the
Company’s internal control over financial reporting was effective as of February 28, 2007.
Changes in Internal Control over Financial Reporting — There were no changes in the Company’s
internal control over financial reporting identified in connection with the evaluation required by
paragraph (d) of Section 240.13a-15 of the Exchange Act that occurred during the Company’s last
fiscal quarter (the Company’s fourth quarter in the case of an annual report) that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Attestation Report of the Registered Public Accounting Firm — The Company’s independent registered
public accounting firm, Ehrhardt Keefe Steiner & Hottman PC has issued the following attestation
report on the Company’s assessment and opinion on the effectiveness of the Company’s internal
control over financial reporting:
45
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Rocky Mountain Chocolate Factory, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting, that Rocky Mountain Chocolate Factory, Inc. (the
“Company”) maintained effective internal control over financial reporting as of February 28, 2007
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of the effectiveness to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate. In our opinion,
management’s assessment that the Company maintained effective internal control over financial
reporting as of February 28, 2007, is fairly stated, in all material respects, based upon the
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of February 28, 2007,
based upon the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the financial statements as of and for the year ended February 28, 2007, of
the Company and our report dated May 14, 2007 expressed an unqualified opinion on those financial
statements.
Ehrhardt Keefe Steiner & Hottman PC
Denver, CO
May 14, 2007
May 14, 2007
46
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ITEM 9B. OTHER INFORMATION
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 expected to be held on July 13, 2007 (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 AND RELATED STOCKHOLDER MATTERS
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 and Related
Stockholder Matters” 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information appearing
under the caption “Principal Accountant Fees and Services” in the Proxy Statement.
47
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PART IV.
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements
| Page | ||||
Report of Independent Registered Public Accounting Firms |
29 | |||
Statements of Income |
30 | |||
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 Registered Public Accounting Firm |
48 | |||
SCHEDULE II — Valuation and Qualifying Accounts |
48 | |||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
Durango, Colorado
Rocky Mountain Chocolate Factory, Inc.
Durango, Colorado
In connection with our audit of the financial statements of Rocky Mountain Chocolate Factory, Inc.
referred to in our report dated May 14, 2007, which is included in Part II of this Form 10-K, we
have also audited Schedule II for the year ended February 28, 2007. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set forth therein.
Ehrhardt Keefe Steiner & Hottman PC
May 14, 2007
Denver, Colorado
Denver, Colorado
SCHEDULE II — Valuation and Qualifying Accounts
| Balance at | Additions | |||||||||||||||
| Beginning of | Charged to | Balance at End | ||||||||||||||
| Period | Costs & Exp. | Deductions | of Period | |||||||||||||
Year Ended February 28, 2007
Valuation Allowance for
Accounts and Notes
Receivable |
98,925 | 70,000 | (18,594 | ) | 187,519 | |||||||||||
Year Ended February 28, 2006
Valuation Allowance for
Accounts and Notes
Receivable |
132,646 | -0- | 33,721 | 98,925 | ||||||||||||
Year Ended February 29, 2005
Valuation Allowance for
Accounts and Notes
Receivable |
120,635 | 25,000 | 12,989 | 132,646 | ||||||||||||
48
Table of Contents
3. Exhibits
| Exhibit | ||||
| Number | Description | Incorporated by Reference to | ||
3.1
|
Articles of Incorporation of the Registrant, as amended | Filed herewith. | ||
3.2
|
By-laws of the Registrant, as amended on November 25, 1997 | Filed herewith. | ||
4.1
|
Specimen Common Stock Certificate | Filed herewith. | ||
4.2
|
Business Loan Agreement dated July 31, 2006 between Wells Fargo Bank and the Registrant | Exhibit 4.2 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2006. | ||
4.3
|
Promissory Note dated July 31, 2006 in the amount of $5,000,000 between Wells Fargo Bank and the Registrant | Exhibit 4.4 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2006. | ||
10.1
|
Form of Employment Agreement between the Registrant and its officers | Filed herewith. | ||
10.2
|
Current form of franchise agreement used by the Registrant | Exhibit 10.4 to the Quarterly Report on form 10-Q of the Registrant for the quarter ended May 31, 2005. | ||
10.3
|
Form of Real Estate Lease between the Registrant as Lessee and franchisee as Sublessee | Exhibit 10.7 to Registration Statement on Form S-18 (Registration No. 33-2016-D). | ||
10.4
|
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. | ||
10.5
|
Forms of Incentive Stock Option Agreement for 1995 Stock Option Plan | Exhibit 10.10 to Registration Statement on Form S-1 (Registration No. 33-62149) filed on August 25, 1995. | ||
10.6
|
Forms of Nonqualified Stock Option Agreement for 1995 Stock Option Plan | Exhibit 10.11 to Registration Statement on Form S-1 (Registration No. 33-62149) filed on August 25, 1995. | ||
10.7
|
Form of Indemnification Agreement between the Registrant and its directors | Filed herewith. | ||
10.8
|
Form of Indemnification Agreement between the Registrant and its officers | Filed herewith. | ||
10.9
|
2000 Nonqualified Stock Option Plan for Nonemployee Directors Of the Registrant |
Exhibit 99.1 to Registration Statement on Form S-8 (Registration No. 333-109936 filed on October 23, 2003. | ||
10.10
|
2004 Stock Option Plan of the Registrant | Exhibit 99.1 to Registration Statement on Form S-8 (Registration No. 333-119107) filed September 17, 2004. | ||
10.11
|
Commodity Contract with Guittard Chocolate Company* |
Filed herewith. | ||
23.1
|
Consent of Independent Registered Public Accounting Firm | Filed herewith. | ||
31.1
|
Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, Chief Executive Officer | Filed herewith. |
49
Table of Contents
3. Exhibits — CONTINUED
| Exhibit | ||||
| Number | Description | Incorporated by Reference to | ||
31.2
|
Certification Pursuant TO Section 302 of the Sarbanes-Oxley Act of 2002, Chief Financial Officer | Filed herewith. | ||
32.1
|
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer | Filed herewith. | ||
32.2
|
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Financial Officer | Filed herewith |
| * | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Commission. |
50
Table of Contents
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. | ||||||
Date: May 14, 2007
|
/S/ Bryan J. Merryman
|
|||||
| Chief Operating Officer, Chief | ||||||
| Financial Officer, Treasurer and Director | ||||||
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 14, 2007
|
/S/ Franklin E. Crail
|
|||
| Chairman of the Board of Directors, President, and Director | ||||
| (principal executive officer) | ||||
Date: May 14, 2007
|
/S/ Bryan J. Merryman | |||
| BRYAN J. MERRYMAN | ||||
| Chief Operating Officer, Chief Financial Officer, Treasurer and Director | ||||
| (principal financial and accounting officer) | ||||
Date: May 14, 2007
|
/S/ Gerald A. Kien | |||
| GERALD A. KIEN, Director | ||||
Date: May 14, 2007
|
/S/ Lee N. Mortenson | |||
| LEE N. MORTENSON, Director | ||||
Date: May 14, 2007
|
/S/ Fred M. Trainor | |||
| FRED M. TRAINOR, Director | ||||
Date: May 14, 2007
|
/S/ Clyde Wm. Engle | |||
| CLYDE Wm. ENGLE, Director |
51
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
| Number | Description | Incorporated by Reference to | ||
3.1
|
Articles of Incorporation of the Registrant, as amended | Filed herewith. | ||
3.2
|
By-laws of the Registrant, as amended on November 25, 1997 | Filed herewith. | ||
4.1
|
Specimen Common Stock Certificate | Filed herewith. | ||
4.2
|
Business Agreement dated July 31, 2006 between Wells Fargo Bank and the Registrant | Exhibit 4.2 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2006. | ||
4.3
|
Promissory Note dated July 31, 2006 in the amount of $5,000,000 between Wells Fargo Bank and the Registrant. | Exhibit 4.4 to the Quarterly Report on Form 10-Q of the Registrant for the quarter ended August 31, 2006. | ||
10.1
|
Form of Employment Agreement between the Registrant and its officers | Filed herewith. | ||
10.2
|
Current form of franchise agreement used by the Registrant | Exhibit 10.4 to the Quarterly Report on form 10-Q of the Registrant for the quarter ended May 31, 2005. | ||
10.3
|
Form of Real Estate Lease between the Registrant as Lessee and franchisee as Sublessee | Exhibit 10.7 to Registration Statement on Form S-18 (Registration No. 33-2016-D). | ||
10.4
|
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. | ||
10.5
|
Forms of Incentive Stock Option Agreement for 1995 Stock Option Plan | Exhibit 10.10 to Registration Statement on Form S-1 (Registration No. 33-62149) filed on August 25, 1995. | ||
10.6
|
Forms of Nonqualified Stock Option Agreement for 1995 Stock Option Plan | Exhibit 10.11 to Registration Statement on Form S-1 (Registration No. 33-62149) filed on August 25, 1995. | ||
10.7
|
Form of Indemnification Agreement between the Registrant and its directors | Filed herewith. | ||
10.8
|
Form of Indemnification Agreement between the Registrant and its officers | Filed herewith. | ||
10.9
|
2000 Nonqualified Stock Option Plan for Nonemployee Directors Of the Registrant | Exhibit 99.1 to Registration Statement on Form S-8 (Registration No. 333-109936 filed on October 23, 2003. | ||
10.10
|
2004 Stock Option Plan of the Registrant | Exhibit 99.1 to Registration Statement on Form S-8 (Registration No. 333-119107) filed September 17, 2004. | ||
10.11
|
Commodity Contract with Guittard Chocolate Company* | Filed herewith. | ||
23.1
|
Consent of Independent Registered Public Accounting Firm | Filed herewith. |
Table of Contents
3. EXHIBIT INDEX — CONTINUED
| Exhibit Number | Description | Incorporated by Reference to | ||
31.1
|
Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, Chief Executive Officer | Filed herewith. | ||
31.2
|
Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, Chief Financial Officer | Filed herewith. | ||
32.1
|
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer | Filed herewith. | ||
32.2
|
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Financial Officer | Filed herewith |
| * | Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Commission. |