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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended February 29, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-14749
------------------------------
Rocky Mountain Chocolate Factory, Inc.
--------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0910696
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Turner Drive, Durango, Colorado 81301
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(970) 259-0554
---------------
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.03 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At May 13, 1996, there were 2,905,149 shares of Common Stock outstanding. The
aggregate market value of the Common Stock (based on the average of the closing
bid and asked prices as quoted on the NASDAQ National Market System on May
13,1996) held by non-affiliates was $11,128,587.
Documents incorporated by reference: None
The Exhibit Index is located on page 47
This document contains 149 pages including exhibits
1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 13
Item 3. Legal Proceedings..................................... 15
Item 4. Submission of Matters to a Vote
of Security Holders................................ 15
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................... 16
Item 6. Selected Financial Data.............................. 18
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations......................... 19
Item 8. Financial Statements................................. 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............ 41
PART III
Item 10. Directors and Executive Officers of the
Registrant........................................ 41
Item 11. Executive Compensation............................... 43
Item 12. Security Ownership of Certain
Beneficial Owners and Management.................. 44
Item 13. Certain Relationships and Related
Transactions...................................... 45
PART IV
Item 14. Exhibits and Reports on Form 8-K..................... 47
2
PART I.
ITEM 1. BUSINESS
GENERAL
Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain
Chocolate Factory, Inc. (the "Company" or the "Registrant") manufactures an
extensive line of premium chocolate candies and other confectionery products
from its own proprietary recipes for sale at its franchised and Company-owned
stores. As of April 30, 1996 there were 41 Company-owned and 153
franchised "Rocky Mountain Chocolate Factory" stores operating in 40 states and
Canada.
Approximately 30% of the products sold at the Company-owned and franchised
stores are prepared on the premises. The Company believes this in-store
preparation creates a special ambiance at "Rocky Mountain Chocolate Factory"
stores. The aroma and sight of products being made attract passersby and
assures them that those products are indeed fresh.
The Company believes that its principal competitive strengths lie in its
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
manufacturing, merchandising and marketing of chocolate 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
franchised and Company-owned stores. In addition, the Company believes it
derives a competitive strength by manufacturing its own products, through which
the Company can better maintain its high product quality standards, offer
proprietary products, manage costs, control production and shipment schedules
and potentially pursue new or under-utilized distribution channels.
The Company's revenues come from three principal sources: (i) sales to
franchisees of chocolates and other confectionery products manufactured by the
Company (53-47-44%); (ii) sales to the public at Company-owned stores of
chocolates and other confectionery products (28-37-42%) and (iii) the collection
of initial fees and royalties from franchisees (19-16-14%). The figures in
parentheses show the percentage of total revenues attributable to each source
for fiscal years 1994, 1995 and 1996, respectively.
The total U.S. candy market exceeded $14.0 billion of sales in 1994,
according to the National Confectionery Association. Candy sales have risen 29%
since 1988, with an average annual growth rate of between 4% and 6%, according
to United States Department of Commerce figures. According to the Department of
Commerce, per capita consumption of chocolate exceeds 10 pounds per year
nationally, generating annual sales of approximately $7.0 billion. Sales of
chocolate products are expected to grow at a rate of 3% to 4% annually,
according to THE CANDY MARKET.
The Company's executive offices are located at 265 Turner Drive, Durango,
Colorado 81301 and its telephone number is (970) 259-0554.
BUSINESS STRATEGY
The Company's objective is to build on its position as a leading franchisor
and operator of retail chocolate stores in the United States and to continually
seek 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 candies by using only the finest chocolate and other
wholesome ingredients. The Company uses its own proprietary recipes, primarily
developed by its master candy maker, who has over 40 years of experience in the
confectionery industry. 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 more than 15 varieties of premium fudge 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 certain products,
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including fudge, brittles and caramel apples, in the store. Instore preparation
is designed both to be fun and entertaining for customers and to convey an image
of freshness and homemade quality. The special ambiance of Rocky Mountain
Chocolate Factory stores is also achieved through the use of distinctive decor
designed to give the store an attractive country Victorian look. 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.
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, for both franchised and Company owned stores, 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 excellent customer
service and seeks to employ, and to sell franchises to, motivated and energetic
people. The Company has implemented sales incentive programs for the employees
of franchised and Company owned stores so that the store personnel having direct
contact with customers share in the success of their stores. The Company also
fosters enthusiasm for its customer service philosophy and the Rocky Mountain
Chocolate Factory concept through its annual franchisee convention, annual
regional meetings and other frequent contacts with its franchisees and store
managers.
ENHANCED OPERATING EFFICIENCIES. The Company seeks to maximize its
profitability by controlling costs and improving the efficiency of its
operations. Efforts in the last fiscal year include the purchase of additional
automated equipment such as a computer controlled shell filling machine for
truffles, a candy bar molding machine, an automated pre-mixer to mix chocolate
and nuts and an automated tempering machine to control the tempering of the
chocolate used in the manufacture of the Company's products. These items enable
the Company to produce certain of its products much more quickly and at a lower
cost. In March 1996, the Company implemented a comprehensive MRP II forecasting,
planning, scheduling and reporting system to improve the efficiency of
manufacturing operations. The Company in the spring of calendar year 1995,
completed a factory expansion and expanded its operation of a small fleet of
trucks for the shipment of its products. These measures have significantly
improved the Company's ability to deliver its products to franchised and Company
owned stores safely, quickly and cost-effectively.
EXPANSION STRATEGY
The Company opened its first Rocky Mountain Chocolate Factory store in 1981
and at the end of fiscal 1992 had a total of 72 stores, most of which were
franchised. Over the last four years, the Company has increased its total number
of stores to 194. Key elements of the Company's expansion strategy include:
AGGRESSIVE, BALANCED GROWTH. The Company's expansion strategy is to
balance the growth of its Company-owned and franchised stores by increasing its
emphasis on Company-owned store expansion. A Company-owned store provides a
greater potential economic return to the Company than does a franchised store.
In many cases, the Company is able to take advantage of a promising new location
by establishing a Company-owned store when a delay in finding a qualified
franchisee might jeopardize the Company's ability to secure the site.
Company-owned stores also provide a training ground for Company-owned store and
district managers and a controllable testing ground for new products and
promotions, operating and training methods and merchandising techniques. The
Company will continue to open additional franchised stores, which enable the
Company to expand its system more quickly with no capital investment. The
Company believes that its recent factory expansion has provided the
manufacturing capacity necessary to support the Company's expansion plans for
the next several years.
HIGH TRAFFIC ENVIRONMENTS. The Company currently establishes franchised
and Company-owned stores in three primary environments: factory outlet malls,
tourist environments and regional malls, with a particular focus on factory
outlet mall locations. Although each of these environments has a number of
attractive features, including a high level of foot traffic, the factory outlet
mall environment currently offers the best combination of tenant mix, customer
spending characteristics and favorable occupancy costs. The Company has
established a business relationship with the major
4
outlet mall 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 outlet malls.
NAME RECOGNITION AND NEW MARKET PENETRATION. The Company believes the
visibility of its stores and the high tourist traffic at its factory outlet mall
and tourist locations has generated strong name recognition and demand for its
franchises. The Rocky Mountain Chocolate Factory system has historically been
concentrated in the western United States and the Rocky Mountains, but recent
growth has generated a gradual easterly momentum as new Company-owned and
franchised 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. The Company believes its growing name recognition will facilitate
the continued expansion of the Rocky Mountain Chocolate Factory system into new
market areas.
NEW STORE CONCEPT. The Company has developed a new store concept,
Fuzziwigs-TM-, which it believes may allow it to expand its presence in its
existing market environments, particularly regional malls. The concept uses
creative lighting, music, animation and movement to entertain customers and
appeal to both children and adults. A total of three FuzziwigsTM stores were in
operation at April 30, 1996, in Phoenix, Arizona; Michigan City, Indiana; and
Jeffersonville, Ohio. The new self-serve store concept sells a line of hard
conventional and unusual/nostalgic candies much different from candies sold at
existing Rocky Mountain Chocolate Factory stores. Initial indications are that
the new concept does not compete with existing Rocky Mountain Chocolate Factory
stores.
The following table sets forth the number of Rocky Mountain Chocolate
Factory stores opened and closed during the last five fiscal years:
YEAR ENDED FEBRUARY 28 OR 29,
--------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Company-owned stores:
Opened. . . . . . . . . . . . . 5 1 8 13 20
Closed. . . . . . . . . . . . . 0 1 1 1 2
Acquired from franchisees . . . 1 0 0 1 2
Sold to franchisees . . . . . . 0 2 1 4 0
Total open at year end. . . . . 9 7 13 22 42
Franchised stores:. . . . . . . .
Opened. . . . . . . . . . . . . 8 18 30 30 27
Closed. . . . . . . . . . . . . 5 2 6 8 5
Acquired from Company . . . . . 0 2 1 4 0
Sold to Company . . . . . . . . 1 0 0 1 2
Total open at year end. . . . . 63 81 106 131 151
System-wide stores: . . . . . . .
Opened. . . . . . . . . . . . . 13 19 38 43 47
Closed. . . . . . . . . . . . . 5 3 7 9 7
Total open at year end. . . . 72 88 119 153 193
As of April 30, 1996, the Company had signed leases for 15 additional
Company-owned stores (all in factory outlet malls) and 15 additional franchised
stores, and is currently completing the screening of qualified franchisees to
operate such franchised stores. In addition, the Company is in the process of
negotiating leases for 20 additional Company-owned or franchised stores, 15 of
which will be in factory outlet malls. Implementation of the Company's expansion
plans is subject to various contingencies, including the availability of
suitable sites and of qualified franchisees.
STORE CONCEPT
The Company seeks to establish a fun and inviting atmosphere in its Rocky
Mountain Chocolate Factory stores. 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
make fudge from start to finish, including the mixing of ingredients in
old-fashioned copper kettles and the cooling of the fudge on large marble
tables, and are often
5
invited to sample the store's products. The Company believes that an average of
approximately 30% of the revenues of Company-owned and franchised stores are
generated by sales of products prepared on the premises. The Company believes
the in-store preparation and aroma of its products enhance the ambiance at Rocky
Mountain Chocolate Factory stores, are fun and entertaining for its customers
and convey an image of freshness and homemade quality.
Rocky Mountain Chocolate Factory stores have a distinctive country
Victorian decor, which further enhances their friendly and enjoyable atmosphere.
Each store includes finely-crafted wood cabinetry, copper and brass accents,
etched mirrors and large marble tables on which fudge and other products are
made. To ensure that all stores conform to the Rocky Mountain Chocolate Factory
image, the Company's design staff provides working drawings and specifications
and approves the construction plans for each new franchised or Company-owned
store. The Company also controls the signage and building materials that may be
used in the stores.
The average store size is approximately 1,000 square feet, approximately
650 square feet of which is selling space. Most stores are open seven days a
week. Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon
to 6 p.m. on Sundays. Store hours in tourist areas may vary depending upon the
tourist season. The Company's average cash investment for the Company-owned
stores opened during 1996, excluding pre-opening costs but including initial
inventories, was approximately $142,000.
PRODUCTS AND PACKAGING
The Company typically produces approximately 250 chocolate candies and
other confectionery products, using proprietary recipes developed primarily by
the Company's master candy maker. These products include many varieties of
clusters, caramels, creams, mints and truffles. The Company also produces
custom-molded theme candy bars tailored to promotional concepts of individual
stores. During the Christmas, Easter and Valentine's Day holiday seasons, the
Company may make as many as 300 additional items, including many candies offered
in packages specially designed for the holidays. A typical Rocky Mountain
Chocolate Factory store offers up to 100 of these candies throughout the year
and up to 200 during holiday seasons. Individual stores also offer more than 15
premium fudges and other products prepared in the store. The Company believes
that approximately 50% of the revenues of Rocky Mountain Chocolate Factory
stores are generated by products manufactured at the Company's factory, 30% by
products made in the store using Company recipes and ingredients purchased from
the Company or approved suppliers and the remaining 20% by products, such as ice
cream, soft drinks and other sundries, purchased from approved suppliers.
The Company uses only the finest chocolates, nut meats and other wholesome
ingredients in its candies. In February 1995 the Company's Valentine's Day
gift-boxed chocolates were awarded MONEY MAGAZINE'S top rating and were
described as having "superior flavor" which is "intense" and "natural." The
Company continually strives to offer new confectionery products in order to
maintain the excitement and appeal of its products.
Chocolate candies manufactured by the Company are sold at Company-owned and
franchised stores at prices ranging from $11.00 to $16.00 per pound, with an
average price of $12.00 per pound. Franchisees set their own retail prices,
though the Company does recommend prices for all its products.
The Company's in-house graphics designers create packaging that reflects
the country Victorian theme of its stores. The Company develops special
packaging for the Christmas, Valentine's Day and Easter holidays, and customers
can have their purchases packaged in decorative boxes and fancy tins throughout
the year. The Company's new packaging for its Rocky Mountain Mints in 1995
received the AWARD OF EXCELLENCE from the National Paperbox Association.
6
OPERATING ENVIRONMENTS
The Company currently establishes franchised and Company-owned stores in
three primary environments: factory outlet malls, tourist areas and regional
malls, with a particular focus on factory outlet mall locations. Although each
of these environments has a number of attractive features, including high levels
of foot traffic, the factory outlet mall environment currently offers the best
combination of tenant mix, customer spending characteristics and favorable
occupancy costs.
FACTORY OUTLET MALLS. There are approximately 325 factory outlet malls in
the United States, and as of April 30, 1996, there were Rocky Mountain Chocolate
Factory stores in approximately 100 of these malls in 40 states. Management
believes that approximately 25 new factory outlet locations will be established
each year for at least the next several years. The Company has established
business relationships with the major outlet mall developers in the United
States. Although not all factory outlet malls provide desirable locations for
Rocky Mountain Chocolate Factory stores, management believes the Company's
relationships with these developers will provide it with the opportunity to take
advantage of attractive sites in new and existing outlet malls.
TOURIST AREAS. As of April 30, 1996, there were approximately 60 Rocky
Mountain Chocolate Factory stores in franchised locations considered to be
tourist areas, including Aspen, Colorado; Fisherman's Wharf in San Francisco,
California; and the Riverwalk in San Antonio, Texas. Although some have short
selling seasons, many 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 there are significant opportunities to expand
into additional tourist areas with high levels of foot traffic.
REGIONAL MALLS. There are approximately 2,500 regional malls in the United
States, and as of April 30, 1996, there were Rocky Mountain Chocolate Factory
stores in approximately 29 of these, including the franchised locations in the
Mall of America in Bloomington, Minnesota; Escondido, California; Fort Collins,
Colorado; and West Palm Beach, Florida. Although often providing favorable
levels of foot traffic, regional malls typically involve expensive rent
structures rendering economic criteria for investment in such locations more
difficult to satisfy.
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 or the sale of the Company's products, such as
airports, sports arenas and corporate sales. Three franchised Rocky Mountain
Chocolate Factory stores exist at airport locations: two at Denver International
Airport and one at Vancouver International Airport in Canada.
FRANCHISING PROGRAM
GENERAL. The Company believes it has excellent relations with its
franchisees. The Company's philosophy is one of service and commitment to its
franchise system, and it continuously seeks to improve its franchise support
services. The Company's concept has consistently been rated as an outstanding
franchise opportunity by publications and organizations rating such
opportunities. In February 1995, Rocky Mountain Chocolate Factory was rated
seventh in SUCCESS MAGAZINE'S "Franchise Gold 100" most desirable franchises. As
of April 30, 1996, there were 155 franchised stores in the Rocky Mountain
Chocolate Factory system.
FRANCHISEE SOURCING AND SELECTION. The majority of new franchises are
awarded to persons referred by existing franchisees, to interested consumers who
have visited Rocky Mountain Chocolate Factory stores and to existing
franchisees. The Company also advertises for new franchisees in national and
regional newspapers as suitable potential store locations come to the Company's
attention. Franchisees are approved by the Company on the basis of the
applicant's net worth and liquidity, together with an assessment of work ethic
and personality compatibility with the Company's operating philosophy.
Currently, 18 domestic franchisees own two or more Rocky Mountain Chocolate
Factory stores and 120 domestic franchisees own a single store. The largest
number of stores owned by a single domestic franchisee is 5 .
7
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. The agreement requires the franchise developer to open a minimum of
20 stores over a five year period and to comply with certain minimum purchase
requirements. As of April 30, 1996, there were 17 Canadian stores in operation.
TRAINING AND SUPPORT. Each domestic franchisee owner/operator and each
store manager for a domestic franchisee is required to complete a 10-day
comprehensive training program in store operation and management. The Company
has established a training center at its Durango headquarters in the form of a
full-sized replica of a properly configured and merchandised Rocky Mountain
Chocolate Factory store. Topics covered in the training course include the
Company's philosophy of store operation and management, customer service,
merchandising, pricing, cooking, inventory and cost control, quality standards,
record keeping, labor scheduling and personnel management. Training is based on
standard operating policies and procedures contained in an operations manual
provided to all franchisees, which the franchisee is required to follow by terms
of the franchise agreement. Additionally, and importantly, trainees are provided
with a complete orientation to Company operations by working in key factory
operational areas and by meeting with each member of the senior management of
the Company. Training continues through the opening of the store, where Company
field personnel assist and guide the franchisee in all areas of operation.
The Company's operating objectives include providing Company knowledge and
expertise in merchandising, marketing and customer service to all front-line
store level employees to maximize their skills and ensure that they are fully
versed in the Company's proven techniques.
The Company provides ongoing support to franchisees through its five
district managers, who maintain regular and frequent communication with the
stores by phone and by site visits. The district managers 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.
Regional conferences are held each fall with a focus on holiday
merchandising techniques in preparation for the fall and Christmas holidays.
Additionally, the Company holds an annual convention each May, at which seminars
and workshops are presented on subjects considered vital to continuing
improvement in operating results of Rocky Mountain Chocolate Factory stores.
QUALITY STANDARDS AND CONTROL. The franchise agreement requires
franchisees to comply with the Company's procedures of operation and food
quality specifications and to permit 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 and advertising and accounting procedures. Through their
regular visits to franchised stores, Company district managers 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 by its 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
franchisor 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 franchise agreement, franchisees pay the
Company (i) an initial franchise fee of $19,500 for each store, (ii) royalties
equal to 5% of monthly gross sales, and (iii) a marketing fee equal to 1% of
monthly gross sales. Franchisees are generally granted exclusive territory with
respect to the operation of Rocky Mountain Chocolate Factory stores only in
8
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 agreement for the Company's Fuzziwigs-TM- new store concept
is currently under development but is expected to provide for an initial
franchise fee of $25,000 for each new store and royalties equal to 7% of
monthly gross sales. Other terms are expected to be substantially the same as
the Company's existing form of franchise agreement. The Company expects to
begin sale of Fuzziwigs-TM- franchises in May of 1996).
The franchise agreement requires 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 from time to time for the Rocky Mountain Chocolate Factory system. 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 agreement prohibits the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreement also
gives 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 franchise agreement is five years, and franchisees
generally have the right to renew for two successive five-year terms. The
Company's agreements with 8 franchisees will expire in fiscal year 1997. The
Company anticipates that substantially all such agreements will be renewed.
FRANCHISE FINANCING. The Company does not provide prospective franchisees
with financing for their stores, but has developed relationships with two
national sources of franchisee financing to whom it will refer franchisees.
Typically, franchisees have obtained their own sources of such financing and
have not required the Company's assistance.
COMPANY STORE PROGRAM
GENERAL. As of April 30, 1996, there were 41 Company-owned Rocky Mountain
Chocolate Factory stores. Although Company-owned stores require an initial
capital outlay by the Company, they also provide a greater potential economic
return to the Company than franchised stores. The average cost to the Company in
fiscal 1996 of opening a new Company-owned store was approximately $142,000 for
its chocolate stores and $225,000 for its Fuzziwigs-TM- stores, excluding
pre-opening costs but including initial inventories.
Company-owned stores also provide a training ground for Company-owned store
and district managers and a controllable testing ground for new products and
promotions, operating and training methods and merchandising techniques. In many
cases, the Company is able to take advantage of a promising new location by
establishing a Company-owned store when a delay in finding a qualified
franchisee might jeopardize the Company's ability to secure the site.
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 "-Quality Standards and Control." The
Company's Director of Company Stores and his staff regularly visit Company-owned
stores to ensure compliance with Company standards and procedures and to provide
advice and support.
FUZZIWIG'S NEW CONCEPT STORE. The Company has developed and opened a new
store concept called Fuzziwigs-TM-, which it believes may allow it to expand its
presence in its existing market environments, particularly regional malls. The
new concept uses creative lighting, music, animation and movement to entertain
customers. The Company believes the new concept appeals to children and
9
adults of all ages. The new store concept sells a different line of candies than
the Company's current concept, and initial indications are that the new concept
does not compete with existing Rocky Mountain Chocolate Factory Stores.
A total of three Fuzziwigs-TM- stores (all Company-owned) were in operation
at April 30, 1996 in Phoenix, Arizona; Michigan City, Indiana; and
Jeffersonville, Ohio. It cost an average of $225,000 to establish each store
including inventories but excluding pre-opening costs.
The Company expects to begin franchising the new concept in May, 1996 under
proposed terms of the franchise agreement as discussed above, and intends to
both franchise and operate as Company-owned stores the new concept. The Company
believes that the new store concept can be operated successfully in most
locations in which Rocky Mountain Chocolate Factory stores currently operate.
The Company believes that significant economic advantage will be provided where
a franchisee or Company-owned store manager is able to manage concurrently
employees of both a new concept store and a traditional Rocky Mountain Chocolate
Factory store in a single regional or factory outlet mall or other location.
MANUFACTURING OPERATIONS
GENERAL. The Company manufactures its products at its factory in Durango,
Colorado for sale to franchisees and for retail sale at Company-owned stores.
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."
In fiscal 1996, the Company produced approximately 1.6 million pounds of
candy and anticipates producing approximately 1.9 million pounds in fiscal 1997.
Current factory capacity is approximately 3.5 million pounds per year.
It has always been the belief of management that the Company should control
the manufacturing of its own products. By controlling manufacturing, the Company
can better maintain its high product quality standards, offer proprietary
products, manage costs, control production and shipment schedules and
potentially pursue new or under-utilized distribution channels.
MANUFACTURING PROCESSES. The manufacturing process primarily involves
cooking or preparing candy centers, including nuts, caramel, peanut butter,
creams and jellies, and then coating them with chocolate or other toppings. All
of these processes are conducted in carefully controlled temperature ranges, and
the Company employs strict quality control procedures at every stage of the
manufacturing process. The Company uses a combination of manual and automated
processes at its factory. Although the Company believes that it is currently
preferable to manufacture certain products by hand, such as dipping of some
large pieces, 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. Recent examples include the
purchase of a computer-controlled shell filling machine for truffles and a
molding machine for candy bars, which enable the Company to produce these
candies much more quickly and at a lower cost.
The Company seeks to ensure the freshness of products sold in Rocky
Mountain Chocolate Factory stores with frequent shipments and production
schedules that are closely coordinated with projected and actual orders. In
March of 1996, the Company implemented a comprehensive MRP II forecasting,
planning, scheduling and reporting system to improve the efficiency of
manufacturing scheduling of production. Franchised and Company-owned stores
place orders to the Company's factory several times per month, on average, and
the Company generally ships its candies within five working days after the order
is received. Finished candies remain in inventory an average of one to four
weeks prior to shipment. 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, peanut butter, cream and butter. The factory receives
shipments of ingredients daily. To
10
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 for these products having durations of six to 18 months. 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.
FACTORY AND TRUCKING OPERATIONS. The Company in fiscal 1996 expanded its
factory from 27,000 square feet to 53,000 square feet, which provided space for
additional automated equipment and for warehousing of ingredients and finished
candies prior to shipment. Beginning in fiscal 1994, the Company also began
operating several trucks and now ships a substantial portion of its products
from the factory on its own trucks. The Company's trucking operations and recent
factory expansion have significantly improved the Company's ability to deliver
its products to the stores quickly and cost-effectively.
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 its in-house public relations staff by participating in
local and regional events, sponsorships and charitable causes. The Company has
not historically and does not intend to engage in regional or national
advertising in the immediate future.
The Company has not historically and does not intend to engage in regional
or national print, radio or television advertising.
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 candy products; and the
control and training infrastructures it has implemented to assure execution of
successful practices and techniques at its franchised and Company-owned store
locations. In addition, by controlling the manufacturing of its own products,
the Company can better maintain its high product quality standards, offer
proprietary products, manage costs, control production and shipment schedules
and potentially pursue new or under-utilized distribution channels.
TRADE NAME AND TRADEMARKS
The trade name "Rocky Mountain Chocolate Factory" and the phrases "The Peak
of Perfection in Handmade Chocolates" and "America's Chocolatier", and as well
as all other trademarks, service
11
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" and
"Fuzziwig's" has been granted in the United States and Canada. Applications have
been filed to register the trademarks 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 April 30, 1996, the Company employed 402 persons, of whom 288 were store
employees, 80 were factory workers and 34 were corporate personnel. 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.
SEASONAL FACTORS
The Company's 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 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 nonrenewal 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 franchisors.
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.
12
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 Nutrition Labeling and Education Act of 1990 became effective May 8,
1994. Pursuant to the Act, the Company has filed a "Small Business Food Labeling
Exemption Notice" with the U.S. Food and Drug Administration, which exempts the
Company's current packaged products from Nutrition Labeling requirements.
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.
RECENT FINANCINGS
In September and October 1995, the Company completed a public offering of
common stock which provided it with net proceeds after offering expenses of
approximately $4.8 million. Approximately $1.5 million of these net proceeds
was utilized to retire then-existing debt. The balance of approximately $3.3
million augmented the Company's working capital reserves, and was used in part
for Company-owned store expansion.
In April 1996, the Company refinanced existing debt including its 20-year
real estate mortgage loan ($1.6 million principal outstanding at the date of
refinancing) and Chattel mortgage term loan ($.7 million principal outstanding
at the date of refinancing) under the following terms:
(1) Real Estate Mortgage loan; term 20 year; interest rate 8 1/4% per
annum fixed; rate adjustment on each 5 year anniversary date to then-
existing prime
(2) Chattel mortgage term loan; term 6 years; interest rate 8 1/4% fixed
Additionally, in April, 1996, the Company secured the following incremental
financing to finance its fiscal 1997 growth objectives in the establishment of
additional Company-owned Rocky Mountain Chocolate Factory and Fuzziwig's stores
and to support its working capital needs.
(1) Working capital availability line of credit; $2,000,000; interest rate
at prime; secured by accounts receivable and inventory; line must be
rested for at least 60 consecutive days in any 12 month period;
balance owed at April 30, 1996, zero;
(2) Fixed Asset availability line of credit; $500,000; interest rate 8
1/2% per annum fixed; secured by furniture, fixtures and equipment
purchased or to be purchased by the Company; term 5 years; balance
owed at April 30, 1996, $500,000;
(3) Fixed Asset availability line of credit; $2,500,000; 8.9% per annum
fixed; secured by furniture, fixtures and equipment purchased or to be
purchased by the Company; term 7 years; balance owed at April 30,
1996, $1,500,000;
(4) Fixed Asset availability line of credit; $2,000,000; 8.3% per annum
interest rate fixed; secured by furniture, fixtures and equipment to
be purchased by the Company; term 6 years; balance owed at April 30,
1996, zero.
ITEM 2. PROPERTIES
FACTORY CAPACITY AND EXPANSION
The Company's manufacturing operations and corporate headquarters are
located at the Company's Durango, Colorado facility. The Company expanded its
factory in fiscal year 1995 from its then 27,000 square feet to its current
53,000 square feet. This expansion was substantially completed by February 1995
and increased the production capacity of the factory to an estimated
13
3.5 million pounds per year. In addition, the Company purchased, as an integral
part of the expansion, equipment to automate certain of its production processes
and additional equipment to allow it to produce products such as candy bars that
it previously purchased from outside vendors. The decision to expand the factory
and to procure additional machinery and equipment was based on the Company's
assessment that full efficient utilization had been made of the then-existing
facility at 11/2 shifts per day operation, due in particular to the limiting
constraint of product shipping and receiving areas. It was based, additionally,
on calculated increased manufacturing direct labor and other efficiencies
anticipated to result from the expansion and investment in equipment estimated
by the Company to produce approximately $.15 savings for each pound of chocolate
produced. The Company believes that its current facilities are adequate to
support its operations and system expansion for the next several years.
MANUFACTURING PERFORMANCE AND PROGRAM FOR IMPROVEMENT
The Company, in fiscal 1996, experienced a decline in factory margins
produced by the combined effects of increased material usage and lesser labor
efficiencies in the production of the Company's products than that existing in
the prior fiscal year. Additionally, increased manufacturing overhead cost
relative to pounds of product produced contributed to this factory margin
decline.
The Company has effected a concerted plan to correct for its reduced
factory margins as follows:
(1) The Company has hired a New Vice President - Operations, a former
Senior Manufacturing Manager with See's Candies, with extensive
experience in chocolate candy manufacturing process improvement,
manufacturing management and control, with the goal of challenging
existing manufacturing practices and assessing the effectiveness of
existing manufacturing processes used by the Company in the
manufacture of its products;
(2) The Company has effected a comprehensive MRP II-based forecasting,
planning, scheduling and reporting system to improve the effectiveness
and efficiency of factory operations;
(3) The Company has strongly enhanced the visibility of and accountability
for the achievement of daily factory material utilization and labor
efficiency performance standards by factory supervisors and employees.
These actions are intended to return factory gross margin performance to
that existing previously through the combined impact of improvement in
manufacturing practices and processes, improved manufacturing scheduling and
logistics, and accountability for the achievement of manufacturing performance
standards by manufacturing supervisors and employees. The Company is continuing
to investigate the causes producing these unfavorable labor efficiency and
material utilization effects. There can be no guarantee, however, that Company
efforts will be successful or that reduced gross margin performance at the
Factory will not continue.
For further discussion of the impact of reduced factory margins on
financial condition and results of operations and of the plan to correct for
reduced factory margins, see item 7 of this report captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LEASE COMMITMENTS
As of April 30, 1996, all 41 Company-owned stores were occupied pursuant to
non-cancelable leases of five to ten years having varying expiration dates, most
of which contain optional five-year renewal rights. The Company does not deem
any individual store lease to be significant in relation to its overall
operations.
The Company acts as primary lessee of some franchised store premises, which
it then subleases to franchisees, but the majority of existing locations are
leased by the franchisee directly. New locations, however, are increasingly
requiring the Company to act as primary lessee, particularly in the factory
outlet environment which has become the Company's focus. At April 30, 1996, the
Company was the primary lessee at 48 of its 153 franchised stores. The subleases
for such stores are on the
14
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 D to the Financial Statements contained
elsewhere in this Report.
ITEM 3. LEGAL PROCEEDINGS
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
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
On July 28, 1994, the Company's Common Stock began trading on the National
Market System of The National Association of Securities Dealers Automated
Quotation System ("NASDAQ"). Prior to that date, the Common Stock was traded
over-the-counter on NASDAQ. The trading symbol for the Common Stock, which did
not change, is "RMCF." Until March 17, 1995 the Company's $1.00 Cumulative
Convertible Preferred Stock ("Preferred Stock") also traded on such markets
under the symbol "RMCFP". On February 15, 1995, the Company called for
redemption on March 17, 1995 all outstanding shares of its Preferred Stock at a
redemption price of $10.41, including accrued dividends. As of February 28,
1995 14,610 shares of Preferred Stock were outstanding and as of March 17, 1995,
all shares of Preferred Stock had been converted or redeemed by the Company and
the Preferred Stock was de-listed from the NASDAQ National Market System.
On January 17, 1996 the Company purchased on the open market 125,000 shares
of its common stock at a price of $8.09/share. The company made this purchase
because the Company felt and continues to feel that its common stock is
undervalued, as well as to signal its belief to the market.
The table below sets forth high and low bid information for the Common Stock
as quoted on NASDAQ for each quarter of fiscal years 1995 and 1996. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
Fiscal Year Ended February 28, 1995 HIGH LOW
- ----------------------------------- ---- ---
FIRST QUARTER
Common Stock........................... 12 11 1/2
SECOND QUARTER
Common Stock........................... 12 1/2 11 1/2
THIRD QUARTER
Common Stock........................... 13 1/2 11 3/4
FOURTH QUARTER
Common Stock........................... 13 1/2 13 1/4
Fiscal Year Ended February 29, 1996 HIGH LOW
- ----------------------------------- ---- ---
FIRST QUARTER
Common Stock........................... 15 3/4 13 1/2
SECOND QUARTER
Common Stock........................... 18 1/2 15 3/4
THIRD QUARTER
Common Stock........................... 17 1/2 12
FOURTH QUARTER
Common Stock........................... 12 1/4 8
On May 13, 1996 the closing bid price for the Common Stock as reported on
the NASDAQ National Market System was $7.
16
(B) HOLDERS
On May 13, 1996 there were approximately 385 record holders of the
Company's Common Stock. The Company believes that there are more than 830
beneficial owners of its Common Stock.
(C) DIVIDENDS
The Company has not paid since its inception, nor does it intend to pay in
the foreseeable future, cash dividends on its Common Stock. Any future earnings
will be retained for use in the Company's business.
17
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data and store data)
The selected financial data presented below for the fiscal years ended
February 28 or 29, 1992 through 1996, are derived from the Financial Statements
of the Company, which have been audited by Grant Thornton LLP, independent
auditors. 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."
YEAR ENDED FEBRUARY 28 OR 29,
------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
STATEMENT OF INCOME DATA:
Revenues:
Factory sales. . . . . . . . . . . . . . . . . . . . . . $ 3,023 $ 3,798 $ 4,998 $ 6,399 $8,156
Retail sales . . . . . . . . . . . . . . . . . . . . . . 1,570 1,763 2,642 5,028 7,939
Royalties and marketing fees . . . . . . . . . . . . . . 909 1,000 1,233 1,607 2,034
Franchise fees . . . . . . . . . . . . . . . . . . . . . 208 437 488 582 614
----- ----- ----- ------ ------
Total revenues. . . . . . . . . . . . . . . . . . . . 5,710 6,998 9,361 13,616 18,743
----- ----- ----- ------ ------
Costs and expenses:
Cost of chocolate sales. . . . . . . . . . . . . . . . . 3,021 3,506 4,530 5,986 8,599
Franchise costs. . . . . . . . . . . . . . . . . . . . . 772 929 1,008 1,377 1,803
General and administrative expenses. . . . . . . . . . . 817 815 969 1,234 1,437
Retail operating expenses. . . . . . . . . . . . . . . . 1,069 1,245 1,603 2,749 4,746
----- ----- ----- ------ ------
Total costs and expenses. . . . . . . . . . . . . . . 5,679 6,495 8,110 11,346 16,585
----- ----- ----- ------ ------
Operating income. . . . . . . . . . . . . . . . . . . . . 31 503 1,251 2,270 2,158
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . (85) (101) (88) (153) (300)
Interest income. . . . . . . . . . . . . . . . . . . . . 20 5 10 23 58
-- - -- -- --
Total other income (expense). . . . . . . . . . . . . (65) (96) (78) (130) (242)
---- ---- ---- ----- -----
Income (loss) before income tax expense . . . . . . . . . (34) 407 1,173 2,140 1,916
Income tax expense. . . . . . . . . . . . . . . . . . . . _ 3 311(1) 790 708
----- ----- ----- ------ ------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $(34) $404 $862 $ 1,350 1,208
----- ----- ----- ------ ------
----- ----- ----- ------ ------
Income (loss) per common share -- fully diluted . . . . . $(.10) $.14 $.32 $.49 $.42
----- ---- ---- ---- ----
----- ---- ---- ---- ----
Weighted average number of common shares
outstanding -- fully diluted. . . . . . . . . . . . . . . 1,527 2,459 2,533 2,726 2,890
STORE DATA:
Number of stores open at end of period:
Company-owned. . . . . . . . . . . . . . . . . . . . . . 9 7 13 22 42
Franchised . . . . . . . . . . . . . . . . . . . . . . . 63 81 106 131 151
-- -- --- --- ---
Total . . . . . . . . . . . . . . . . . . . . . . . . 72 88 119 153 193
-- -- --- --- ---
-- -- --- --- ---
SYSTEM-WIDE REVENUES: . . . . . . . . . . . . . . . . . . . $15,439 $19,886 $26,011 $35,612 $46,880
------- ------- ------- ------- -------
------- ------- ------- ------- -------
FEBRUARY 28 OR 29
-----------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . . . . . . $1,118 $1,716 $1,889 $ 1,627 $ 2,043
Total assets . . . . . . . . . . . . . . . . . . . . . . 4,381 4,496 6,024 10,181 16,314
Long-term debt (excluding current portion) . . . . . . . 985 1,000 604 2,314 2,184
Stockholders' equity . . . . . . . . . . . . . . . . . . 2,445 2,881 4,143 5,907 11,117
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
RESULTS SUMMARY
The Company reported net income of $1,207,745 for fiscal 1996 in comparison
with $1,350,432 for fiscal 1995; a decrease of $142,687 and 10.6%.
The following presents an outline of the causes of the decline in net
income together with the corrective actions taken by the Company to correct for
these:
CAUSE:
A decline in factory margins produced primarily by the combined effects of
increased material usage and lesser labor efficiencies than that existing in the
prior fiscal year. Additionally increased manufacturing overhead cost relative
to pounds of product produced contributed to this factory margin decline.
CORRECTIVE ACTIONS:
The Company has effected a concerted plan to correct for its reduced
factory margins as follows:
(1) The Company has hired a Vice President - Operations, a former Senior
Manufacturing Manager with See's Candies, with extensive experience in
chocolate candy manufacturing process improvement, manufacturing
management and control, with the goal of challenging existing
manufacturing practices and assessing the effectiveness of existing
manufacturing processes used by the Company in the manufacture of its
products (see part III Item 10. "Directors and Officers of the
Registrant");
(2) The Company has effected a comprehensive MRP II-based forecasting,
planning, scheduling and reporting system to improve the effectiveness
and efficiency of factory operations;
(3) The Company has strongly enhanced the visibility of and accountability
for the achievement of daily factory material utilization and labor
efficiency performance standards by factory supervisors and employees.
These actions are intended to return factory gross margin performance to
that existing previously through the combined impact of improvement in
manufacturing practices and processes, improved manufacturing scheduling and
logistics, and accountability for the achievement of manufacturing performance
standards by manufacturing supervisors and employees. The Company is continuing
to investigate the causes producing these unfavorable labor efficiency and
material utilization effects. There can be no guarantee, however, that Company
efforts will be successful or that reduced gross margin performance at the
factory will not continue.
The Company, further, has increased its prices on its products by an
average of 2.6% effective January 1, 1996.
CAUSE:
Higher Company-owned store expense relative to revenues resulting from
delay in new Company-owned store openings in comparison with planned openings
and as a result of unusually warm summer weather. Both of these factors caused
Company-owned store revenues to be lower than anticipated.
CORRECTIVE ACTION:
19
(1) Delay in Company-owned store openings resulted from delay in
availability of space from developers. The Company has secured
locations from developers in support of its planned store
establishment for fiscal 1997. Although the Company is unaware of any
forthcoming delays in the availability of space by developers, the
Company is unable to compensate for the effect of such delays if they
occur. There can be no guarantee that the Company will not experience
additional delays in store openings in fiscal 1997;
(2) The Company has focused its attention on effecting daily monitoring
and follow-up of sales performance at each store in total, by product
category and by employee through the use of a new Point-of-Sale system
in place at each Company-owned store. This system provides a remote
dial-up communications link with each Company-owned store from Company
headquarters and provides daily reporting of sales results in total,
by product category and by employee at each store.
Below is a detailed analysis of financial results by revenue, cost of
revenue and expense line item:
REVENUES
Revenue results by revenue component for fiscal 1996 in comparison with
fiscal 1995 are as follows ($000):
Revenue Component 1996 1995 Change Change%
- ----------------- ---- ---- ------ -------
Factory Sales $ 8,156.5 $ 6,399.3 $1,757.2 27.5%
Royalty and
Marketing Fees 2,034.0 1,606.6 427.4 26.6%
Franchise Fees 614.3 581.9 32.4 5.6%
Retail Sales 7,938.5 5,028.3 2,910.2 57.9%
-------- ------- ------- ------
Total $18,743.3 $13,616.1 $5,127.2 37.7%
--------- --------- -------- ------
FACTORY SALES
Factory sales represent candy sales to the Company's franchised store
locations. Significantly increased factory sales resulted primarily from the
larger number of franchised stores in existence throughout the year (151
franchised stores franchised at February 29, 1996 in comparison with 131 at
February 28, 1995) as augmented by the impact of an approximate 2% price
increase effected in April 1995. Same store pounds purchased declined by 1% in
fiscal 1996. When computing same store pounds purchased from the factory,
purchases by franchised stores open for 12 months in each period are compared.
ROYALTY AND MARKETING FEES AND FRANCHISE FEES
Increased royalty and marketing fees resulted from the combined impact of a
larger number of franchised stores in existence throughout the year together
with an increase in same store retail sales of approximately 2.8%. The Company
sold 41 new franchise locations in fiscal 1996 in comparison with 39 in fiscal
1995 resulting in the increased franchise fee revenue shown, in combination with
the effect of higher balance - due revenue recognition on franchises previously
sold: $5,000 is earned upon franchise agreement signing with the balance of
$14,500 earned upon signing of the lease of the facility representing the
franchised location.
RETAIL SALES
Retail sales of Company-owned stores increased as a result of a larger
number of Company stores in existence throughout the year (42 stores existed at
February 29, 1996, in comparison with 22 in
20
existence at February 28, 1995) in fiscal 1996 in comparison with the prior
fiscal year coupled with a same store retail sales increase of 4%.
The Company anticipates continued significant growth in all revenue
categories as a result of increased franchise sales revenues, increased
franchised and Company store openings, and the increased factory sales which
will result from the product needs of these additional stores. Additional
royalties are also projected to be derived from higher projected total franchise
system retail sales.
COSTS AND EXPENSES
COST OF CHOCOLATE SALES. Cost of chocolate sales, which include costs
incurred by the Company to manufacture candy sold by its Company-owned stores
and to its franchised stores, increased 43.6% to $8.6 million in fiscal 1996
from $6.0 million in fiscal 1995. Cost of chocolate sales as a percentage of
total chocolate sales (defined as the total of factory sales and retail sales)
increased to 53.4% in 1996 from 52.4% in 1995.
Cost of chocolate sales as a percentage of total chocolate sales had been
expected to improve as a result of an increase in higher margin retail sales as
a percentage of total chocolate sales brought about by the rapid and large
increase in the number of Company-owned stores, together with the effect of an
approximate 2% retail and factory price increase effected in April, 1995. This
has not occurred due to an absolute 4% decline in factory margins resulting from
increased material usage and lesser labor efficiencies in the manufacture of the
Company's products, the effect of increased manufacturing overhead cost relative
to pounds produced together with certain price reductions in selected categories
of Company product sales, as discussed above. The Company is engaged in a
concerted effort, using the strategy discussed above, to correct for the cause
of increased material usage, as well as to improve labor efficiencies with the
goal of returning factory margins to historical levels and to continue the
improvement which it had been experiencing in its margins. The Company
increased its prices by approximately 2.8% in January 1996 as part of this
margin improvement effort.
FRANCHISE COSTS. Franchise costs increased 31.0% to $1.8 million in fiscal
1996 from $1.4 million in fiscal 1995. As a percentage of the total of
royalties and marketing fees and franchise fees, franchise costs increased to
68.1% of such fees in 1996 from 62.9% in 1995. The hiring of additional field
support and associated administrative personnel to support the Company's
accelerated pace of store opening activities and the larger base of stores is
the partial cause of this increase. Additionally, the Company incurred
increased expenses for promotional programs and marketing materials to support
the larger base of stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 16.4% to $1.4 million in fiscal 1996 from $1.2 million in fiscal 1995,
as a result of increased expense for administrative support personnel and
increased depreciation expense for additional investment in computer hardware
and software to serve as the platform for additional manufacturing and
administrative control capability for the Company. As a percentage of total
revenues, general and administrative expense declined to 7.7% in fiscal 1996
from 9.1% in fiscal 1995, due to a focus by the Company on minimizing increases
in administrative personnel and other administrative cost by a concerted effort
to effect automated data entry and control processes as a basis for minimizing
such increases.
RETAIL OPERATING EXPENSE. Retail operating expense increased 72.6% to $4.7
million in fiscal 1996 from $2.7 million in fiscal 1995. This increase resulted
from the effect of the larger number of Company-owned stores in existence as
discussed above. As a percentage of retail sales, retail operating expenses
increased to 59.8% in fiscal 1996 from 54.7% in fiscal 1995. As discussed
above, the Company experienced delays in store openings in fiscal 1996. This
delay in store openings resulted in total revenue growth not in proportion to
the increase in operating expenses. Additionally, the Company for the first
time in fiscal 1996, began a program of allocating directly-related
administrative expense to support the Company-owned store programs to retail
operating expense.
OTHER EXPENSE
21
Other expense of $242,000 incurred in fiscal 1996 increased 86.3% from the
$130,000 incurred in fiscal 1995. This increase resulted from increased
interest expense caused by borrowings in support of the Company's factory
expansion and Company-owned store expansion as partially offset by increased
interest income resulting from cash surpluses generated by the Company's stock
offering (see "Liquidity and Capital Resources" discussed below).
INCOME TAX EXPENSE
The Company's effective income tax rate in fiscal 1996 of 37.0%
approximated the 36.9% in fiscal 1995.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
RESULTS SUMMARY
The Company reported net income of $1,350,432 for fiscal 1995 in comparison
with $861,787 for fiscal 1994; an increase of $488,645 and 56.7%.
REVENUES
Revenue results by revenue component for fiscal 1995 in comparison with
fiscal 1994 are as follows ($000):
Revenue Component 1995 1994 Change Change%
- ----------------- ---- ---- ------ -------
Factory Sales $ 6,399.3 $ 4,997.5 $1,401.8 28.1%
Royalty and
Marketing Fees 1,606.6 1,232.6 374.0 30.3%
Franchise Fees 581.9 489.0 92.9 19.0%
Retail Sales 5,028.3 2,642.2 2,386.1 90.3%
------- ------- ------- ------
Total $13,616.1 $9,361.3 $4,254.8 45.45%
--------- -------- -------- ------
FACTORY SALES
Significantly increased factory sales resulted primarily from the larger
number of franchised stores in existence throughout the year (131 stores existed
at February 28, 1995 in comparison with 106 at February 28, 1994) as augmented
by the full year impact of an approximate 2% price increase effected in January
1994. Same store pounds purchased from the factory declined by 5.7% in fiscal
1995.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES
Increased royalties resulted from the combined impact of a larger number of
franchised stores in existence throughout the year (131 franchised stores
existed at February 28, 1995, in comparison with 106, at February 28, 1994)
together with an increase in same store sales at franchised stores of
approximately 1.7%. The Company sold 39 new franchise locations in fiscal 1995
in comparison with 33 in fiscal 1994 resulting in the increased franchise fee
revenue shown in combination with the effect of higher balance - due revenue
recognition on franchises previously sold: $5,000 is earned upon franchise
agreement signing with the balance of $14,500 earned upon signing of the lease
of the facility representing the franchised location.
RETAIL SALES
22
Retail sales of Company-owned stores increased as a result of a larger
number of Company-owned stores in existence throughout the year (22 stores
existed at February 28, 1995, in comparison with 13 in existence at February 28,
1994) in fiscal 1995 in comparison with the prior fiscal year.
COSTS AND EXPENSES
COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs
incurred by the Company to manufacture candy sold by its Company-owned stores
and to its franchised stores, increased 32.1% to $6.0 million in 1995 from $4.5
million in 1994. Cost of chocolate sales as a percentage of total chocolate
sales (defined as the total of factory sales and retail sales) decreased to
52.4% in 1995 from 59.3% in 1994. This decrease in cost of chocolate sales as a
percentage of total chocolate sales resulted from an increase in higher margin
retail sales as a percentage of total chocolate sales, a modest factory and
retail price increase and improved manufacturing efficiencies resulting largely
from the six-month impact of the Company's factory expansion and the
implementation of additional automation at the factory. Additionally, improved
manufacturing overhead absorption, resulting from higher factory production
volumes, contributed to the decrease in cost of chocolate sales as a percentage
of total chocolate sales.
FRANCHISE COSTS. Franchise costs increased 36.6% to $1.4 million in 1995
from $1.0 million in 1994. As a percentage of the total of royalties and
marketing fees and franchise fees, franchise costs increased to 62.9% of such
fees in 1995 from 58.6% in 1994. The hiring of additional field support and
associated administrative personnel to support the Company's accelerated pace of
new franchise signing and store opening activities and the larger base of stores
is the partial cause of this increase. Additionally, the Company incurred
increased expenses for promotional programs and marketing materials.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 27.3% to $1.2 million in 1995 from $969,000 in 1994, as a result of
increased professional fees incurred to support the Company's accelerated pace
of franchise signings and lease negotiating activities and increased expense for
administrative support personnel. As a percentage of total revenues, general and
administrative expenses declined to 9.1% in 1995 from 10.4% in 1994, primarily
due to a significant increase in total revenues without a proportionate increase
in general and administrative expenses.
RETAIL OPERATING EXPENSES. Retail operating expenses increased 75.0% to
$2.7 million in 1995 from $1.6 million in 1994. This increase resulted from the
effect of the larger number of Company-owned stores in existence throughout the
fiscal year. As a percentage of retail sales, retail operating expenses declined
to 54.7% in 1995 from 59.5% in 1994 as a result of higher retail sales without a
proportionate increase in expenses due to improved expense control at
Company-owned stores.
OTHER EXPENSE
Other expense of $130,000 incurred in fiscal 1995 increased 66.7% from the
$78,000 incurred in fiscal 1994. This increase resulted from increased interest
expense associated with borrowings to finance the Company's factory expansion.
INCOME TAX EXPENSE
The Company's effective income tax rate in 1995 was 36.9% in comparison
with 26.5% in 1994. The absolute 10.4% increase in effective tax rates resulted
from full utilization of remaining net operating loss carryforwards in 1994,
offsetting income through the second quarter of that year. By comparison, in
1995, all income was fully taxed at the Company's effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At February 29, 1996, working capital was $2,043,143 in comparison with
$1,627,026 at February 28, 1995, a $416,117 increase. This increase resulted
primarily from the impact of the proceeds from the September/October, 1995
public offering (see "Recent Financings" discussed in ITEM 1 "Business" section
of this Report) after utilization of a portion of the proceeds to retire
existing debt and to fund the Company's Company-owned store expansion program.
23
Cash and cash equivalent balances increased from $382,905 at February 28,
1995 to $528,787 at February 29, 1996 as a result of this impact of the
Company's public offering. The Company's current ratio was 1.7/1 at February
29, 1996 in comparison with 1.9/1 at February 28, 1995.
The Company's long-term debt is comprised primarily of real estate mortgage
financing (unpaid balance as of February 29, 1996, $1,625,798), and Chattel
mortgage financing (unpaid balance as of February 29, 1996, $658,479) provided
by local banking facilities and used to fund the Company factory expansion. The
remaining balance of long-term debt represents lease and chattel mortgage
financing obtained from Ford Equipment Leasing and Textron Financial Corporation
(secured by Capital Equipment procured with the proceeds from this financing and
with a term, in each case, of 60 months).
The Company also possessed a $1,000,000 working capital line of credit,
secured by accounts receivable at February 29, 1996, which line had a $1,000,000
balance at that date.
As discussed in greater detail in "Recent Financings", ITEM 1 "Business"
section of this document, the Company refinanced under favorable terms its
existing real estate, Chattel mortgage and working capital loans and
additionally obtained incremental financing as follows:
(1) Increase in its working capital availability line of credit to
$2,000,000 from $1,000,000 (balance owed at April 30, 1996, zero);
(2) Achievement of fixed asset availability lines of credit totaling
$5,000,000 for use by the Company in its Company-owned store expansion
program (balance utilized and owed at April 30, 1996, $2,000,000).
In fiscal 1997, the Company anticipates making $5.9 in capital expenditures
in comparison with $5.6 million in fiscal 1996. Of this sum, approximately $5.2
million is anticipated to be used for the opening of new Company-owned stores
with the balance anticipated to be used for the purchase of capital equipment
for the factory as well as additional computer equipment for its administrative
functions.
The Company believes that cash flow from operating activities and available
bank lines of fixed asset and working capital credit will be sufficient to
service debt, fund anticipated capital expenditures and provide necessary
working capital at least through the end of fiscal 1997. There can be no
guarantee, however, that unforeseen events will not require the Company to
secure additional sources of financing. The Company may also seek additional
financing from time to time, through borrowings or public or private offerings
of equity or debt securities, to fund its future expansion plans.
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 reflect potentially
escalating costs of real estate and construction. There is no assurance that
the Company will be able to pass on its increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its
fixed assets, and therefore is 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 and summer
vacations 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
24
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.
EFFECT OF NEW ACCOUNTING STANDARD
Financial Accounting Standard (FAS) 121, "Accounting for the Impairment of
Long-Lived Assets", is effective for fiscal years beginning after December 15,
1996. This standard provides for the reduction of asset values of assets
defined in the Standard as long-lived, with the impact of this reduction being
charged to results of operations. The Company does not anticipate a material
impact of adoption of this new accounting standard on results of operations of
the Company.
25
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants........... 27
Financial Statements
Balance Sheets........................................... 28
Statements of Income..................................... 30
Statements of Changes
in Stockholders' Equity................................ 31
Statements of Cash Flows................................. 33
Notes to Financial Statements............................ 35
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Rocky Mountain Chocolate Factory, Inc.
We have audited the accompanying balance sheets of Rocky Mountain Chocolate
Factory, Inc. as of February 29, 1996 and February 28, 1995, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended February 29, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Mountain Chocolate
Factory, Inc. at February 29, 1996 and February 28, 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
February 29, 1996, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Dallas Texas
April 17, 1996
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
ASSETS
February 29, February 28,
1996 1995
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 528,787 $ 382,905
Accounts and notes receivable-trade,
less allowance for doubtful accounts
of $28,196 in 1996 and $48,366 in 1995 1,463,901 1,179,019
Inventories 2,504,908 1,687,016
Deferred income taxes 59,219 68,586
Other 224,001 110,105
------------ ------------
Total current assets 4,780,816 3,427,631
PROPERTY AND EQUIPMENT - AT COST
Land 122,558 122,558
Building 3,596,905 2,453,069
Leasehold improvements 1,753,165 803,160
Machinery and equipment 4,898,174 2,917,148
Furniture and fixtures 2,330,057 1,086,282
Transportation equipment 228,816 197,346
------------ ------------
12,929,675 7,579,563
Less accumulated depreciation and
amortization 2,468,084 1,690,118
------------ ------------
10,461,591 5,889,445
OTHER ASSETS
Accounts and notes receivable -
trade, due after one year 111,588 136,132
Goodwill, net of accumulated
amortization of $253,740 in 1996
and $230,136 in 1995 336,260 359,864
Other 624,185 368,098
------------ ------------
1,072,033 864,094
------------ ------------
$16,314,440 $10,181,170
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
28
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS - CONTINUED
LIABILITIES and STOCKHOLDERS' EQUITY
February 29 February 28
CURRENT LIABILITIES 1996 1995
------------ ------------
Short-term debt $ 1,000,000 $ -
Current maturities of long-term debt 134,538 182,852
Accounts payable - trade 998,520 839,117
Accrued compensation 335,926 222,713
Accrued liabilities 214,460 272,593
Income taxes payable 54,229 283,330
------------ ------------
Total current liabilities 2,737,673 1,800,605
LONG-TERM DEBT, less current maturities 2,183,877 2,313,895
DEFERRED INCOME TAXES 275,508 159,863
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
$1.00 cumulative convertible preferred
stock-authorized 250,000 shares, $.10
par value; issued and outstanding,
14,610 shares in 1995 - 1,462
Common stock - authorized 7,250,000 shares,
$.03 par value; issued 3,034,302 shares
in 1996 and 2,634,289 in 1995 91,029 79,029
Additional paid-in capital 9,703,985 4,700,527
Retained earnings 2,338,267 1,130,522
------------ ------------
12,133,281 5,911,540
Less common stock held in treasury, at
cost - 129,153 shares in 1996 and
4,303 shares in 1995 1,015,899 4,733
------------ ------------
11,117,382 5,906,807
------------ ------------
$ 16,314,440 $ 10,181,170
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
29
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
1996 1995 1994
------------ ------------ ------------
REVENUES
Sales $16,094,995 $11,427,700 7,639,664
Franchise and royalty fees 2,648,303 2,188,434 1,721,570
------------ ------------ ------------
18,743,298 13,616,134 9,361,234
COSTS AND EXPENSES
Cost of sales 8,598,798 5,985,970 4,529,645
Franchise costs 1,803,506 1,376,820 1,008,517
General and administrative 1,436,551 1,234,002 969,116
Retail operating expenses 4,746,026 2,749,511 1,603,290
------------ ------------ ------------
16,584,881 11,346,303 8,110,568
------------ ------------ ------------
Operating profit 2,158,417 2,269,831 1,250,666
OTHER INCOME (EXPENSE)
Interest expense (299,792) (152,592) (87,929)
Interest income 57,620 22,580 9,681
------------ ------------ ------------
(242,172) (130,012) (78,248)
Income before income
tax expense 1,916,245 2,139,819 1,172,418
------------ ------------ ------------
INCOME TAX EXPENSE
Current 583,488 749,516 259,226
Deferred 125,012 39,871 51,405
------------ ------------ ------------
708,500 789,387 310,631
------------ ------------ ------------
NET INCOME 1,207,745 1,350,432 861,787
Dividend requirements
on preferred stock - 14,610 88,733
------------ ------------ ------------
INCOME ALLOCABLE TO
COMMON STOCKHOLDERS $ 1,207,745 $ 1,335,822 $ 773,054
------------ ------------ ------------
------------ ------------ ------------
PRIMARY INCOME PER COMMON
AND EQUIVALENT SHARE $ .42 $ .51 $ .43
------------ ------------ ------------
------------ ------------ ------------
Weighted average and
equivalent shares 2,887,063 2,612,730 1,813,381
------------ ------------ ------------
------------ ------------ ------------
FULLY-DILUTED INCOME PER COMMON
AND EQUIVALENT SHARE $ .42 $ .49 $ .32
------------ ------------ ------------
------------ ------------ ------------
Weighted average and
equivalent shares 2,889,538 2,725,690 2,533,530
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
30
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended
------------------------------------------
February 29, February 28, February 28,
1996 1995 1994
------------ ------------ ------------
COMMON STOCK
Balance at beginning of year $ 79,029 $ 65,590 $ 46,868
Conversion of 7% convertible
notes to common - 12,972 12,495
Sale of common stock 10,125 - -
Conversion of preferred stock
to common 435 17 5,567
Exercise of stock options 1,440 450 660
------------ ------------ ------------
Balance at end of year 91,029 79,029 65,590
------------ ------------ ------------
PREFERRED STOCK
Balance at beginning of year 1,462 1,496 11,973
Conversion of preferred stock
to common (1,309) (34) (10,477)
Redemption of preferred stock (153) - -
------------ ------------ ------------
Balance at end of year - 1,462 1,496
------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 4,700,527 4,197,838 3,806,825
Conversion of 7% convertible
notes to common - 387,029 287,505
Sale of common stock 4,846,010 - -
Conversion of preferred stock
to common 874 17 4,909
Exercise of stock options 180,435 114,280 97,589
Distribution of treasury stock 2,010 1,363 1,010
Redemption of preferred stock (25,871) - -
------------ ------------ ------------
Balance at end of year 9,703,985 4,700,527 4,197,838
------------ ------------ ------------
RETAINED EARNINGS (Accumulated Deficit)
Balance at beginning of year 1,130,522 (117,341) (979,128)
Net income for the year 1,207,745 1,350,432 861,787
Preferred stock dividends - (102,569) -
------------ ------------ ------------
Balance at end of year 2,338,267 1,130,522 (117,341)
------------ ------------ ------------
TREASURY STOCK, AT COST
Balance at beginning of year (4,733) (4,870) (5,310)
Purchase of stock for treasury (1,011,331) - -
Distribution of treasury stock 165 137 440
------------ ------------ ------------
Balance at end of year (1,015,899) (4,733) (4,870)
------------ ------------ ------------
$ 11,117,382 $ 5,906,807 $ 4,142,713
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
31
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
For the years ended
------------------------------------------
February 29, February 28, February 28,
1996 1995 1994
------------ ------------ ------------
COMMON SHARES
Balance at beginning of year 2,634,289 2,186,335 1,562,245
Conversion of 7% convertible
notes to common - 432,376 416,493
Sale of common stock 337,500 - -
Conversion of preferred stock
to common 14,513 578 185,597
Exercise of stock options 48,000 15,000 22,000
------------ ------------ ------------
Balance at end of year 3,034,302 2,634,289 2,186,335
------------ ------------ ------------
------------ ------------ ------------
PREFERRED SHARES
Balance at beginning of year 14,610 14,954 119,725
Redemption of preferred stock (1,532) - -
Conversion of preferred stock
to common (13,078) (344) (104,771)
------------ ------------ ------------
Balance at end of year - 14,610 14,954
------------ ------------ ------------
------------ ------------ ------------
TREASURY SHARES
Balance at beginning of year 4,303 4,428 4,828
Purchase of stock for treasury 125,000 - -
Distribution of treasury stock (150) (125) (400)
------------ ------------ ------------
Balance at end of year 129,153 4,303 4,428
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
32
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
For the years ended
------------------------------------------
February 29, February 28, February 28,
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,207,745 $ 1,350,432 $ 861,787
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and 823,890 487,737 299,315
amortization
Changes in operating assets
and liabilities:
Accounts and notes
receivable - trade (260,338) (117,236) (143,873)
Inventories (817,892) (602,672) (261,520)
Other assets (113,896) (47,474) (22,104)
Accounts payable-trade 159,403 332,011 199,512
Income taxes payable (229,101) 121,134 224,051
Deferred income taxes 125,012 39,871 51,406
Accrued liabilities
and compensation 55,080 153,954 122,009
------------ ------------ ------------
Net cash provided by
operating activities 949,903 1,717,757 1,330,583
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of other assets (164,353) (50,064) (65,050)
Purchase of property and equipment (5,464,166) (4,399,958) (972,720)
------------ ------------ ------------
Net cash used in
investing activities $ (5,628,519) $ (4,450,022) $ (1,037,770)
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
33
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended
------------------------------------------
February 29, February 28, February 28,
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit $ 1,000,000 $ - $ -
Proceeds from issuance of
long-term debt 1,500,000 2,437,500 -
Principal payments on
long-term debt (1,678,332) (270,882) (87,967)
Proceeds from sale of common stock 4,856,135 - -
Proceeds from exercise of
stock options 181,875 52,876 98,248
Redemption of preferred stock (26,024) - -
Dividends paid - (102,570) -
Proceeds from sale of
treasury stock 2,175 1,500 1,450
Purchase of stock for treasury (1,011,331 - -
------------ ------------ ------------
Net cash provided by
financing activities 4,824,498 2,118,424 11,731
------------ ------------ ------------
Net increase (decrease)in
cash and cash equivalents 145,882 (613,841) 304,544
Cash and cash equivalents
at beginning of year 382,905 996,746 692,202
------------ ------------ ------------
Cash and cash equivalents
at end of year $ 528,787 $ 382,905 $ 996,746
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTARY DISCLOSURES:
Interest paid $ 301,481 $ 155,015 $ 87,054
Income taxes paid 812,589 628,382 9,128
Non-cash financing activities:
Issuance of 432,376 and
416,493 shares of common
stock upon conversion of
7% convertible notes in
1995 and 1994 respectively $ - $ 400,000 $ 300,000
Owner financed equipment
purchase - 30,000 -
Conversion of preferred stock
into common stock 1,309 34 34
The accompanying notes are an integral part of these statements.
34
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
February 29, 1996 and February 28, 1995 and 1994
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Description of the nature of company operations, together with a summary of the
significant accounting policies applied in the preparation of the accompanying
financial statements and of the estimates used in their preparation follows:
NATURE OF OPERATIONS
The Company is a manufacturer of an extensive line of premium chocolate candy
for sale at its franchised and company-owned stores located throughout the
United States and in Canada. The majority of the Company's revenues are
generated from these sales. The balance of the Company's revenues are
generated from royalties and marketing fees, based on a franchisee's monthly
gross sales, and from franchise fees, which consist of fees earned from the sale
of franchises.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
computed by the straight-line method based upon the estimated useful life of the
asset. Leasehold improvements are amortized on the straight-line method over
the lives of the respective leases or the service lives of the improvements,
whichever is shorter.
AMORTIZATION OF GOODWILL
Goodwill is amortized on the straight-line method over twenty-five years.
FRANCHISE AND ROYALTY FEES
Franchise fee revenue is recognized upon completion of all significant initial
services provided to the franchisee and upon satisfaction of all material
conditions of the franchise agreement. In addition to the initial franchise
fee, the Company receives a royalty fee of five percent (5%) and a marketing and
promotion fee of one percent (1%) of the store's gross sales.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and 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.
CASH EQUIVALENTS
Cash equivalents include cash in excess of daily requirements which is invested
in various financial instruments having an original maturity of three months or
less.
35
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
February 29, 1996 and February 28, 1995 and 1994
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
INCOME PER COMMON SHARE
Primary income per common and common equivalent share is computed by dividing
net income, adjusted for dividends on preferred stock, by the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares result from the assumed issuance of shares under the
Company's incentive stock option plan when dilutive. Fully-diluted income per
common share is computed as above but assumes conversion of convertible notes
payable and cumulative convertible preferred stock, when dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, short-
term investments in money market fund and other liquid assets, trade receivables
and payables, notes receivable and debt, which has variable rates. The fair
value of all instruments approximates the carrying value.
NOTE B - INVENTORIES
Inventories consist of the following:
February 29, February 28,
1996 1995
------------ ------------
Ingredients and supplies $1,117,517 $ 712,727
Finished candy 1,387,391 974,289
---------- ----------
$2,504,908 $1,687,016
---------- ----------
---------- ----------
NOTE C - LINE OF CREDIT AND LONG-TERM DEBT
LINE OF CREDIT:
At February 29, 1996 the Company possessed a $1,000,000 line of credit from a
bank, collateralized by accounts receivable and inventory. Draws may be made
under the line at 75% of eligible accounts receivable. Interest on borrowings
is at prime. Terms of the line require that the line be rested (that is, that
there be no outstanding balance) for two periods of not less than 30 consecutive
days during the term of the loan. The credit line expires in July, 1996.
36
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
February 29, 1996 and February 28, 1995 and 1994
NOTE C - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
LONG-TERM DEBT:
February 29, February 28,
1996 1995
------------ ------------
Chattel mortgage note payable in monthly
installments of $9,247 through August,
2004 including interest at 8.25% per
annum, collateralized by machinery,
equipment, furniture and fixtures. 658,479 711,689
Real estate mortgage note payable in
monthly installments of $14,506
through August, 2014; interest rate of
8.25%; collateralized by factory building. 1,625,798 1,660,275
Capital lease obligation, 60-month term,
payable in monthly installments of $3,503
through June, 1996; interest imputed at 11.04%. 17,082 66,070
Promissory note payable in monthly installments
of $1,000 through June, 1996, when entire
outstanding principal balance is due; non-
interest bearing; collateralized by equipment
purchased from note holder. 9,000 21,000
Chattel mortgage note payable in monthly
installments of $2,746 through May, 1996
including interest at 13.46% per annum,
collateralized by equipment 8,056 37,713
---------- ----------
2,318,415 2,496,747
Less current maturities 134,538 182,852
---------- ----------
$2,183,877 $2,313,895
---------- ----------
---------- ----------
Maturities of long-term debt are as follows:
Year-ending February 28 (29),
-----------------------------
1997 134,538
1998 109,186
1999 118,543
2000 128,701
2001 135,157
Thereafter 1,692,290
----------
$2,318,415
----------
----------
37
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
February 29, 1996 and February 28, 1995 and 1994
NOTE D - OPERATING LEASES
The Company conducts its retail sales operations in facilities leased under five
to ten year noncancelable operating leases. Certain leases contain renewal
options for between two and ten additional years at increased monthly rentals.
The majority of the leases provide for contingent rentals based on sales in
excess of predetermined base levels.
The following is a schedule by year of future minimum rental payments required
under such leases:
Year-ending February 28 (29),
-----------------------------
1997 $ 961,592
1998 960,217
1999 925,989
2000 822,134
2001 662,639
Thereafter 625,787
----------
$4,958,358
----------
----------
In some instances, in order to retain the right to site selection or because of
requirements imposed by the lessor, the Company leases space for its proposed
franchise outlets. When a franchise is sold, the store is subleased to the
franchisee who is responsible for the monthly rent and other obligations under
the lease. The Company's liability as primary lessee on sublet franchise
outlets, all of which is offset by sublease rentals, is as follows:
Year-ending February 28 (29),
-----------------------------
1997 $1,184,301
1998 1,124,310
1999 987,476
2000 829,096
2001 619,875
Thereafter 807,139
----------
$5,552,197
----------
----------
The following is a schedule of lease expense for all operating leases for the
three years ended February 29, 1996:
1996 1995 1994
---------- ----------- ----------
Minimum rentals $1,547,817 $ 1,042,235 $ 748,510
Less sublease rentals (982,780) (663,457) (422,292)
Contingent rentals 56,037 33,040 23,045
---------- ----------- ----------
$ 621,074 $ 411,818 $ 349,263
---------- ----------- ----------
---------- ----------- ----------
NOTE E - RELATED PARTY LEASE
Until June, 1994 the Company leased land and its factory building under a ten
year operating lease with the President of the Company for a monthly rental of
$7,750. On June 2, 1994 the Company acquired the land and building from the
President at a price of $700,332.
38
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
February 29, 1996 and February 28, 1995 and 1994
NOTE F - INCOME TAXES
Income tax expense is comprised of the following:
Years Ended February 29 - 28,
1996 1995 1994
---- ---- ----
Federal
Current $527,211 $658,061 $216,899
Deferred 125,012 39,871 51,405
State 56,277 91,455 42,327
-------- -------- --------
$708,500 $789,387 $310,631
-------- -------- --------
-------- -------- --------
A reconciliation of the statutory federal income tax rate and the effective rate
as a percentage of pretax income is as follows:
Years Ended February 29 - 28,
1996 1995 1994
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
Goodwill amortization .4% .4% .7%
Reduction in valuation allowance - - (11.1%)
State income taxes, net of federal
benefit 1.9% 2.8% 3.6
Other .7% (.3%) (.7%)
----- ----- -----
37.0% 36.9% 26.5%
----- ----- -----
----- ----- -----
The components of deferred income taxes at February 29, 1996 and February 28,
1995 are as follows:
Deferred Tax Asset 1996 1995
------------------ ---- ----
Allowance for doubtful accounts $ 10,573 $ 18,863
Accrued compensation 48,646 49,723
--------- ---------
Net current deferred tax asset $ 59,219 $ 68,586
--------- ---------
--------- ---------
Deferred Tax Liabilities
------------------------
Depreciation $(294,237) $(172,616)
Deferred lease rentals 18,729 12,753
--------- ---------
Net noncurrent deferred
tax liability $(275,508) $(159,863)
--------- ---------
--------- ---------
NOTE G - PREFERRED STOCK
On February 15, 1995, the Company called for redemption all outstanding shares
of its Preferred Stock at a redemption price of $10.41, including $.21 in
unpaid, accrued dividends. As of March 17, 1995, all preferred shares had been
converted or redeemed.
Each share of the $1.00 cumulative convertible preferred stock was entitled to a
cumulative annual dividend of $1.00 and was convertible into common stock at
$9.00 per share of common stock with each share of preferred stock being valued
at $10.00 for the purpose of such conversion. The conversion price was subject
to adjustment in certain events. The value of each share of preferred stock for
the purpose of conversion was increased by the amount of all unpaid cumulative
dividends. The preferred stock was redeemable at the option of the Company at a
call price of $10.20 per share plus cumulative dividends.
39
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
February 29, 1996 and February 28, 1995 and 1994
NOTE H - STOCK OPTION PLANS
Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan") options
to purchase 215,000 shares of the Company's common stock were granted at prices
not less than market value at the date of grant. The 1985 Plan expired in
October 1995. Options granted under the 1985 Plan could not have a term
exceeding ten years. Grants of options representing 124,000 shares of the
Company's common stock remain outstanding under the 1985 Plan at February 29,
1996.
Under the 1995 Stock Option Plan (the "1995 Plan") and the Nonqualified Stock
Option Plan for Nonemployee Directors (the "Nonemployee Plan"), options to
purchase up to 100,000 and 90,000 shares, respectively, of the Company's common
stock may be granted at prices not less than market value at the date of grant.
Options granted may not have a term exceeding ten years. Grants of options
representing 70,000 and 30,000 shares of the Company's common stock remain
outstanding under the 1995 Plan and Nonemployee Plan, respectively.
The options outstanding under these plans will expire, if not exercised, in
March 1998 through September 2005. Options for 200,000 shares were exercisable
at February 29, 1996.
The following table sets forth the option activity for the years ended February
28, 1995 and February 29, 1996:
Option price
------------
Shares Per share Total
-------- ------------ -----------
February 28, 1994 141,000 $3.125-13.50 $ 536,250
Granted 66,000 13.50 891,000
Forfeited (6,000) 13.50 (81,000)
Exercised (15,000) 3.125-4.00 (52,875)
-------- ------------ -----------
February 28, 1995 186,000 $3.125-13.50 1,293,375
Granted 87,000 18.25 1,587,750
Forfeited (1,000) 18.25 (18,250)
Exercised (48,000) 3.125-5.25 (181,875)
-------- ------------ -----------
February 29, 1996 224,000 $3.125-18.25 $2,681,000
-------- -----------
-------- -----------
NOTE I - SEGMENT INFORMATION
The Company operates in only one industry segment. All significant revenues
relate to sales of its products through Company operated and franchised retail
stores.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
Franklin E. Crail . . . . . . . . . 54 Chairman of the Board, President, Treasurer and Director
Ralph L. Nafziger . . . . . . . . . 50 Vice President - Manufacturing and Director
Clifton W. Folsom . . . . . . . . . 42 Vice President - Franchise Support
Jay B. Haws . . . . . . . . . . . . 45 Vice President - Marketing
Lawrence C. Rezentes. . . . . . . . 48 Vice President - Finance
Terri A. Gentry . . . . . . . . . . 45 Corporate Secretary
Lee N. Mortenson. . . . . . . . . . 60 Director
Fred M. Trainor . . . . . . . . . . 57 Director
Gerald A. Kien. . . . . . . . . . . 65 Director
Everett A. Sisson . . . . . . . . . 75 Director
FRANKLIN E. CRAIL. 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, and since September 1981 as
its Treasurer. 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.
RALPH L. NAFZIGER. Mr. Nafziger joined the Company in January 1990 as Vice
President of Manufacturing and has served as a Director of the Company since
1990. From 1988 to 1989, Mr. Nafziger served as Chief Financial Officer of
Midcontinent Airlines Inc., a regional airline operation based in Kansas City.
From 1987 to 1988, he was an independent business planning consultant to several
manufacturing and service corporations. From 1977 to 1986, Mr. Nafziger was a
principal and officer of Snugli Inc., a children's products manufacturer, which
was acquired by Huffy Corporation, a bicycle manufacturer, in 1985. Mr. Nafziger
possesses a B.S. in accounting from Pennsylvania State University.
CLIFTON W. FOLSOM. Mr. Folsom has served as Vice President of Franchise
Support of the Company since June 1989. He joined the Company in May 1983 as
Director of Franchise Sales and Support, and was promoted in March 1985 to Vice
President of Franchise Sales, a position he held until he began serving in his
current capacity in June 1989. From March 1978 until joining the Company, Mr.
Folsom was employed as a sales representative by Sears Roebuck & Company.
41
JAY B. HAWS. Mr. Haws joined the Company in August 1991 as Vice President
of Marketing. Since 1981, Jay had been closely associated with the Company both
as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he
was Vice-President and President of Chocolate Factory, Inc., which operated two
Rocky Mountain Chocolate Factory franchises located in San Francisco,
California. From 1983 to 1989 he served as Vice President of Marketing for Image
Group, Inc., a marketing communications firm based in Northern California.
Concurrently, Mr. Haws was co-owner of two other Rocky Mountain Chocolate
Factory franchises located in Sacramento and Walnut Creek, California. From 1973
to 1983 he was principal of Jay Haws and Associates, an advertising and graphic
design agency. Mr. Haws holds a B.A. in graphics design and communication from
California State University.
LAWRENCE C. REZENTES. Mr. Rezentes joined the Company in July 1990 as Vice
President of Finance. From 1989 to April 1990, he served as Vice President of
Finance for Fanamation, Inc., a designer and manufacturer of robotic inspection
systems. From 1985 through 1988, he was a principal in Venture Consulting
Resource, a financial and business planning consulting organization to
technology based businesses and to the venture capital community. From 1980
through 1984, Mr. Rezentes was co-founder and Vice President of Finance of
Infomed Corporation, a venture capital financed pioneer in the field of computer
and telecommunications-based medical diagnosis. Mr. Rezentes holds a B.S. in
accounting from Fairleigh Dickinson University and an M.B.A. in finance from the
University of Chicago Graduate School of Business. He is a certified public
accountant.
TERRI A. GENTRY. Ms. Gentry has served as the Company's corporate
secretary since April, 1996. Ms. Gentry has served the Company in a number of
administrative and managerial capacities including her current position as
Customer Service Manager, (which she fulfills concurrent with her
responsibilities as Corporate Secretary) since joining the Company in June 1991.
LEE N. MORTENSON. Mr. Mortenson has served on the Board of Directors of
the Company since 1987. Since December 1993, Mr. Mortenson has been President
and a Director of Coronet. Mr. Mortenson has served, since May 1988, as
President and a Director and, since December 1990, as Chief Operating Officer of
Sunstates Corporation (formerly known as Acton Corporation). He also served as
Chief Executive Officer of Sunstates Corporation, the parent corporation of
Coronet, from May 1988 to December 1990. Sunstates Corporation is engaged in
non-standard automative casualty insurance, manufacturing and real estate
development. Since 1984, Mr. Mortenson has served as President, Chief Operating
Officer and a Director of Telco Capital Corporation, a diversified financial
services and manufacturing company and an indirect parent of Coronet. Mr.
Mortenson also served as a Director of Hickory Furniture Company from 1980 to
1993 and of Sun Electric Corporation, a manufacturer of automotive test
equipment, from 1988 to 1992 and has served as a Director of Alba-Waldensian,
Inc., since 1984, of NRG Inc., a leasing company, since 1987, and of Wellco
Enterprises, Inc., a boot manufacturer, since 1994.
FRED M. TRAINOR. Mr. Trainor has served as a Director since August 1992.
Mr. Trainor is the founder, and since 1984 has served as Chief Executive Officer
and President of AVCOR Health Care Products, Inc., Fort Worth, Texas, a
manufacturer and marketer of specialty dressings products. Prior to founding
AVCOR Health Care Products, Inc., in 1984, Mr. Trainor was a founder, Chief
Executive Officer and President of Tecnol, Inc. of Fort Worth, Texas, also a
company involved with the health care industry. Before founding Tecnol, Inc.,
Mr. Trainor was with American Hospital Supply Corporation (AHSC) for thirteen
years in a number of management capacities.
GERALD A. KIEN. Mr. Kien was first elected as a Director of the Company in
August 1995. From 1993 to 1995 Mr. Kien served as President and Chief Executive
Officer of Remote Sensing Technologies, Inc., a subsidiary of Envirotest
Systems, Inc., a company engaged in the development of instrumentation for
vehicle emissions testing. From 1989 to 1993 Mr. Kien served as Chairman,
President and Chief Executive Officer of Sun Electric Corporation, a
manufacturer of automotive test equipment, and has served as a Director and as
Chairman of the Executive Committee of that Company since 1980. Sun Electric
merged with Snap-On Tools in 1993, and Mr. Kien remained as President of the Sun
Electric division of Snap-On Tools until his retirement in 1994. Mr. Kien was a
co-founder of the First National Bank of Hoffman Estates and remained as a
Director from 1979 to 1990, and was a Director of the Charter Bank and Trust of
Illinois from 1984 to 1990. He served as a Director of Systems Control, Inc. and
Vehicle Test Technologies, Inc., from 1989 to 1993, both of which are engaged in
emissions testing of motor vehicles. Mr. Kien received his Ph.D. from the
University of Illinois Graduate College of Medicine, in 1959.
42
EVERETT A. SISSON. Mr. Sisson was first elected as a Director of the
Company in August 1995. Mr. Sisson is President of The American Growth Group,
which is engaged in land development, investment, management services and
management consulting, a position he has held since he formed the firm in 1966.
Mr. Sisson served as a Director of the Century Companies of America, a company
providing life insurance and related financial products, from 1962 until 1991,
and Chairman of the Board from 1977 until 1983. Mr. Sisson has been a Director
of Coronet since 1992. During various periods over the past 20 years, Mr. Sisson
served as a Director and member of several Board committees of Libco
Corporation, Wisconsin Real Estate Investment Trust, Hickory Furniture Company,
Telco Capital Corporation, Greater Heritage Corporation, Indiana Financial
Investors Inc., Sunstates Corporation and Acton Corporation.
On April 17, 1996, Ralph L. Nafziger resigned from the Corporation as
Director and Officer but he has agreed to provide miscellaneous services to the
corporation through December, 1996 to assure a smooth transition. Resignation
as Director was effective immediately, with his resignation as Vice President -
Manufacturing to be effective upon the beginning of service of his successor.
Mr. Nafziger's successor as Vice President, Mr. Gary Hauer, was appointed May
17, 1996 with his service to begin May 28, 1996. A replacement for Mr. Nafziger
as Director has yet to be appointed. A summary of Mr. Hauer's background
follows:
Mr. Hauer has served in a number of manufacturing management capacities
over a 28 year career in the chocolate candy and confectionery
industries, including 18 years with See's Candies.
Mr. Hauer is currently plant manager with See's Candies, a capacity in
which he has served for the past 10 years.
The Board of Directors has a standing Audit Committee and Compensation
Committee, each consisting of Messrs. Mortenson and Trainor, Sisson and Kien.
Currently, all directors of the Company are elected annually by the stockholders
and hold office until their respective successors are elected and qualified.
SECTION 16 (a) COMPLIANCE
The Company has no knowledge that any director, executive officer of 10%
stockholder was required to file a Form 5 for fiscal 1996 and failed to do so,
and the Company has received a written representation that a Form 5 was not
required from each such person. The Company has not received such a
representation from Clyde Wm. Engle or Gerald M. Tierney, who were directors of
the Company for a portion of fiscal 1996. In making these disclosures, the
Company has relied solely on written representations of its directors, executive
officers and 10% stockholders and copies of the reports filed by them with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual
compensation paid for the years indicated to the Company's Chief Executive
Officer. No other executive officer of the Company met the minimum
compensation threshold of $100,000 for inclusion in the table.
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2)
- --------------------------- ---- -------- ------- ---------------
Franklin E. Crail,
Chairman of the Board and President 1996 $146,538 $10,000 $1,833
1995 $129,618 $31,050 $2,162
1994 $104,000 $14,500 $ 0-
43
(1) Includes amounts deferred at the Named Officer's election pursuant to
the Company's 401(k) Plan, which was first offered in fiscal 1995.
(2) Represents Company contributions on behalf of the Named Officer under
the Company's 401(k) Plan, which was first offered in fiscal 1995.
Additional columns required by Securities and Exchange Commission rules to
be included in the foregoing table, and certain additional tables required by
such rules, have been omitted because no compensation required to be disclosed
therein was paid or awarded to the Named Officer.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any compensation for serving on the
Board or on committees. Directors are entitled to receive stock option awards
under the Company's 1990 Nonqualified Stock Option Plan for Nonemployee
Directors "the Directors' Plan."
The Directors' Plan, as amended, provides for automatic grants of
nonqualified stock options covering a maximum of 60,000 shares of Common Stock
of the Company to Directors of the Company who are not also employees or
officers of the Company and who have not made an irrevocable, one-time election
to decline to participate in the plan. The Directors' Plan provides that during
the term of the plan options will be granted automatically to new nonemployee
Directors upon their election. Each such option permits the nonemployee director
to purchase 10,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on the date of grant of the option. Each
nonemployee director's option may be exercised in full during the period
beginning one year after the grant date of such option and ending ten years
after such grant date, unless the option expires sooner due to termination of
service or death. Mr. Kien and Mr. Sisson were each granted an option to
purchase 10,000 shares of Common Stock upon their election as Directors in
August 1995.
Lee N. Mortenson, a Director of the Company, is President and Director of
Coronet, and Clyde Wm. Engle, a Director of the Company from 1987 to 1995, is
Chairman of the Board of Coronet, and each is a Director and officer of certain
affiliated corporations of Coronet. Gerald M. Tierney, Jr., a Director of the
Company from 1987 to 1995, is Senior Vice President and General Counsel of Telco
Capital Corporation, an indirect parent of Coronet.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, at May 12, 1996, with respect
to (i) each person known to the Company to be the beneficial owner of more than
5% of the Company's Common Stock, (ii) the shares of the Company's Common Stock
beneficially owned by each director and nominee (which included both executive
officers named in the Summary Compensation Table) and (iii) by directors and
executive officers of the Company as a group.
The number of shares beneficially owned includes shares of Common Stock in
which the persons named below have either investment or voting power. A person
is also deemed to be the beneficial owner of a security if that person has the
right to acquire beneficial ownership of that security within sixty (60) days
through the exercise of an option or through the conversion of another security.
Except as noted, each beneficial owner has sole investment and voting power with
respect to the Common Stock.
Common Stock not outstanding that is subject to options or conversion
privileges is deemed to be outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by the person holding such options
or conversion privileges, but is not deemed to be outstanding for the purpose of
computing the percentage of Common Stock beneficially owned by any other person.
Common Stock
- ------------
Amount and
44
Name of Nature of Percent
Beneficial Beneficial of
Owner (1) Ownership Class
- ---------- ----------- -------
Coronet Insurance
Company et al. 868,757 (2) 29.9%
Franklin E. Crail 296,099 10.2%
Ralph Nafziger 46,000 (3) 1.6%
Everett A. Sisson 10,000 (4) .3%
Gerald A. Kien 10,000 (4) .3%
Lee N. Mortenson 11,000 (4) .4%
Fred M. Trainor 10,000 (4) .3%
All executive officers
and directors as a
group (10 persons) 527,431 (6) 17.0%
(1) The address of Coronet Insurance Company is 3500 West Peterson Avenue,
Chicago, Illinois 60659. Mr. Crail's address is the same as the Company's
address
(2) All of the shares indicated as being owned by Coronet are held of record by
Rocky Mountain Holdings Company, a wholly-owned subsidiary of Coronet, and
may also be deemed to be beneficially owned by the following affiliates of
Coronet: Normandy Insurance Agency, Inc., Sunstates Corporation, Wisconsin
Real Estate Investment Trust, Hickory Furniture Company, Telco Capital
Corporation, RDIS Corporation and Clyde Wm. Engle, a former director of the
Company. This information is based on Forms 4 filed by Coronet and such
affiliates with the Securities and Exchange Commission and on information
provided to the Company by Coronet.
(3) Mr. Nafziger has the right to acquire these shares within 60 days through
the exercise of employee stock options granted previously to him.
(4) Includes 10,000 shares that Messrs. Mortenson, Trainor, Sisson and Kien
each has the right to acquire within 60 days through the exercise of
options granted pursuant to the Company's Nonqualified Stock Option Plan
for Nonemployee Directors.
(5) Includes shares which officers and directors as a group have the right to
acquire through the exercise of options granted pursuant to the Company's
1985 Incentive Stock Option Plan, 1995 Stock Option Plan, and the
Director's Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, until June 1994, leased its factory in Durango, Colorado, from
Franklin E. Crail, Chairman of the Board of Directors, President and Treasurer
of the Company. The lease, which commenced August 15, 1983, had a primary term
of 10 years and was renewed for an additional five-year term in August 1993.
Monthly rentals for the fiscal years ended February 28, 1993, 1994 and 1995
(through the date of purchase) were $7,750. The lease was a net lease under
which the Company was required to pay real estate taxes, insurance and
maintenance expenses. In fiscal years 1993, 1994 and 1995 (through the date of
purchase), the Company paid Mr. Crail $93,000, $93,000 and $25,140,
respectively, pursuant to the factory lease. The Company, in June 1994, acquired
from Mr. Crail the then existing facility at a price of $700,332. The Company
believes that the terms of the lease with Mr. Crail and the terms of the
purchase transaction were at least as favorable as those that could have been
obtained from an independent third party.
In November 1987, the Company's Board of Directors approved a Note Purchase
Agreement (the "Note Purchase Agreement") dated November 16, 1987, and certain
other agreements with Coronet pursuant to which, among other things, (i) the
Company sold to Coronet 7% Convertible Secured Notes due November 16, 1997 in
the aggregate principal amount of $1,100,000 (together with an additional
$100,000 7% Convertible Secured Note due November 16, 1997 sold to Coronet in
January 1989, the "Notes"); (ii) the Company agreed, as long as any Notes
remained outstanding, to nominate and use
45
its best efforts to elect to its Board of Directors three designees of Coronet
(Coronet named Clyde Wm. Engle, Lee N. Mortenson and Gerald M. Tierney, Jr. as
its three designees, and such persons were elected to the Company's Board of
Directors in November 1987); and (iii) the Company granted Coronet certain
registration rights with respect to shares of Common Stock issuable upon
conversion of the Notes.
Between December 31, 1989 and May 31, 1994, Coronet converted the Notes
into an aggregate of 1,586,957 shares of Common Stock. Coronet completed such
conversions by converting Notes in the aggregate principal amount of $400,000
into 432,376 shares of Common Stock on May 31, 1994. At February 28, 1993, 1994
and 1995, the total principal and interest owed by the Company to Coronet under
the Notes was $714,292, $408,167 and $ 0 , respectively. The Company paid
interest on the Notes of $51,563, $50,121 and $12,250 during fiscal years 1993,
1994 and 1995 (through the date on which the final conversion occurred),
respectively.
Clyde Wm. Engle, a Director of the Company from 1987 to 1995, is Chairman
of the Board of Coronet, and Lee N. Mortenson, a Director of the Company, is
President and a Director of Coronet, and each is a Director and officer of
certain affiliated corporations of Coronet.
46
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS PAGE
Report of Independent Certified Public Accountants 27
Balance Sheets 28
Statements of Income 30
Statements of Changes in Stockholders' Equity 31
Statements of Cash Flows 33
Note to Financial Statements 35
2. FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the required information is not present
or not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements or the
notes thereto.
3. EXHIBITS
Exhibit Incorporated by
Number Description Reference to
- ------ ----------- ------------
3.1 Articles of Incorporation of Exhibit 3.1 to Current Report on
the Registrant, as amended Form 8-K of the Registrant filed
on August 1, 1988.
3.2 By-laws of the Registrant, Exhibit 3.2 to the Annual Report
as amended on June 10, 1987 on Form 10-K of the Registrant
for the fiscal year ended
February 28, 1987.
4.1 Specimen Common Stock Exhibit 4.1 to Current Report on
Certificate Form 8-K of the Registrant filed
on August 1, 1988.
4.2 Working capital loan Exhibit 4.8 to the Annual Report
agreement dated October 17, on Form 10-K of the Registrant
1991 between the Company and for the Fiscal year ended
Burns National Bank of February 29, 1992
Durango (Amended by change
in terms agreements provided
as Exhibits 4.5, 4.9, 4.11
and 4.12 below)
4.3 Lease agreement dated July Exhibit 4.10 to the Annual
19, 1991 between the Company Report on Form 10-K of the
and Ford Equipment Leasing Registrant for the Fiscal year
Company ended February 29, 1992
4.4 Installment note dated Exhibit 4.11 to the Annual
August 23, 1991 between the Report on Form 10-K of the
Company and Textron Registrant for the Fiscal year
Financial Corporation ended February 29, 1992
4.5 Change in terms agreement(to Exhibit 4.12 to the Annual
working capital loan Report on Form 10-KSB of
agreement dated October 17, registrant for the fiscal year
1991 filed as Exhibit 4.2) ended February 28, 1994
47
Exhibit Incorporated by
Number Description Reference to
- ------ ----------- ------------
dated October 17, 1994
4.6 Letters of commitment from Exhibit 4.13 to the Annual
financial institutions Report on Form 10-KSB of
supporting commitment of registrant for the fiscal
$3,500,000 in financing year ended February 28, 1994
4.7 Chattel mortgage loan Exhibit 4.14 to the annual
agreement dated June 2, 1994 report on form 10-K of the
in the amount of $750,000 Registrant for the fiscal
between the registrant and year ended February 28, 1995
First National Bank of
Farmington
4.8 Real estate mortgage loan Exhibit 4.15 to the annual
agreement dated June 2, 1994 report on form 10-K of the
in the amount of $1,687,500 Registrant for the fiscal
between the registrant and year ended February 28, 1995
First National Bank of
Farmington
4.9 Change in terms agreement (to Exhibit 4.16 to the annual
working capital loan report on form 10-K of the
agreement dated October 17, Registrant for the fiscal
1991 filed as Exhibit 4.8) year ended February 28, 1995
dated April 12, 1995
4.10 Chattel mortgage loan Exhibit 4.17 to the annual
agreement dated April 12, report on form 10-K of the
1995 in the amount of Registrant for the fiscal
$1,500,000 between the year ended February 28, 1995
registrant and First National
Bank of Farmington
4.11 Third Amendment to Loan Exhibit 4.18 to Registration
Agreement dated April 12, Statement on Form S-1
1995 (amending working (Registration No. 33-62149)
capital loan agreement dated filed on August 25, 1995
October 17, 1991 filed as
Exhibit 4.2)
4.12 Change in terms agreement (to Exhibit 4.19 to Registration
working capital loan Statement on Form S-1
agreement dated October 17, (Registration No. 33-62149)
1991 filed as Exhibit 4.2) filed on August 25, 1995
dated July, 17, 1995
4.13 Real Estate mortgage loan Filed Herewith
agreement dated April 5, 1996
in the amount of $1,650,000
between Norwest Banks and the
Registrant
4.14 Chattel mortgage loan Filed Herewith
agreement dated April 2, 1996
in the amount of $700,000
between Norwest equipment
finance and the Registrant
48
Exhibit Incorporated by
Number Description Reference to
- ------ ----------- ------------
4.15 Chattel mortgage loan Filed Herewith
agreement dated April 5, 1996
in the amount of $500,000
between Norwest Banks and the
Registrant
4.16 Chattel mortgage loan Filed Herewith
agreement dated April 2, 1996
in the amount of $1,500,000
between Norwest Equipment
Finance and the Registrant
4.17 Letters of Commitment from Filed Herewith
financial institutions
supporting commitment of
$3,000,000 in financing
4.18 Working Capital availability Filed Herewith
loan agreement dated April 5,
1996 in the amount of $ 2,000,000
between Norwest Banks and the
Registrant
10.1 Form of Stock Option Exhibit 10.3 to The Form 10-K
Agreement for Incentive Stock of the Registrant for the
Option Plan of the Annual fiscal year ended February 28,
Report of Registrant * 1986.
10.2 Incentive Stock Option Plan Exhibit 10.2 to the Annual
of the Registrant as amended Report on Form 10-K of the
July 27, 1990 * Registrant for the fiscal
year ended February 28, 1991
10.4 Current form of franchise Filed Herewith
agreement used by the
Registrant
10.5 Form of Real Estate Lease Exhibit 10.7 to Registration
between the Registrant as Statement on Form S-18
Lessee and franchisee as (Registration No. 33-2016-D).
Sublessee
10.7 Form of Nonqualified Stock Exhibit 10.7 to the
Option Agreement for Registration Statement on
Nonemployee Directors for the Form S-1 of the Registrant
Registrant * (Registration No. 33-62149
filed August 25, 1995)
10.8 Nonqualified Stock Option Exhibit 10.8 to the
Plan for Nonemployee Registration Statement on
Directors dated March 20, 1990 * Form S-1 of the Registrant
(Registration No. 33-62149
filed August 25, 1995)
* Management contract or compensatory plan
49
Exhibit Incorporated by
Number Description Reference to
- ------ ----------- ------------
10.9 1995 Stock Option Plan of Exhibit 10.9 to the
Registrant Registration Statement on
Form S-1 of the Registrant
(Registration No. 33-62149
filed August 25, 1995)
10.10 Forms of Incentive Stock Exhibit 10.10 to the
Option Stock option awards to Registration Statement on
directors * Form S-1 of the Registrant
(Registration No. 33-62149
filed August 25, 1995)
10.11 Forms of Nonqualified Stock Exhibit 10.11 to the
Option Agreement for 1995 Registration Statement on
Stock Option Plan * Form S-1 of the Registrant
(Registration No. 33-62149
filed August 25, 1995)
11.1 Statement re-computation of Filed Herewith.
per share earnings
23.1 Consent of independent public Filed Herewith.
accountants
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the year ended February 28, 1996.
* Management contract or compensatory plan
50
EXHIBIT INDEX
Exhibit Incorporated by Sequentially
Number Description Reference to Numbered Page
- ------ ----------- ------------ -------------
3.1 Articles of Incorporation Exhibit 3.1 to Current Report
of the Registrant, as on Form 8-K of the Registrant
amended filed on August 1, 1988.
3.2 By-laws of the Registrant, Exhibit 3.2 to the Annual Report
as amended on June 10, 1987 on Form 10-K of the Registrant
for the fiscal year ended
February 28, 1987.
4.1 Specimen Common Stock Exhibit 4.1 to Current Report
Certificate on Form 8-K of the Registrant
filed on August 1, 1988.
4.2 Working capital loan Exhibit 4.8 to the Annual Report
agreement dated on Form 10-K of the Registrant
October 17, 1991 between for the Fiscal year ended
the Company and Burns February 29, 1992
National Bank of Durango
(Amended by change in terms
agreements provided as
Exhibits 4.5, 4.9, 4.11
and 4.12 below)
4.3 Lease agreement dated Exhibit 4.10 to the Annual Report
July 19, 1991 between the on Form 10-K of the Registrant
Company and Ford Equipment for the Fiscal year ended
Leasing Company February 29, 1992
4.4 Installment note dated Exhibit 4.11 to the Annual Report
August 23, 1991 between the on Form 10-K of the Registrant
Company and Textron for the Fiscal year ended
Financial Corporation February 29, 1992
4.5 Change in terms agreement Exhibit 4.12 to the Annual Report
(to working capital loan on Form 10-KSB of registrant
agreement dated for the fiscal year ended
October 17, 1991 filed as February 28, 1994
Exhibit 4.2) dated
October 17, 1994
4.6 Letters of commitment from Exhibit 4.13 to the Annual Report
financial institutions on Form 10-KSB of registrant
supporting commitment of for the fiscal year ended
$ 3,500,000 in financing February 28, 1994
51
Exhibit Incorporated by Sequentially
Number Description Reference to Numbered Page
- ------ ----------- ------------ -------------
4.7 Chattel mortgage loan Exhibit 4.14 to the annual report
agreement dated on form 10-K of the Registrant
June 2, 1994 in the amount for the fiscal year ended
of $750,000 between the February 28, 1995
registrant and First
National Bank of Farmington
4.8 Real estate mortgage loan Exhibit 4.15 to the annual report
agreement dated June 2, 1994 on form 10-K of the Registrant
in the amount of $1,687,500 for the fiscal year ended
between the registrant and February 28, 1995
First National Bank of
Farmington
4.9 Change in terms agreement Exhibit 4.16 to the annual report
(to working capital loan on form 10-K of the Registrant
agreement dated for the fiscal year ended
October 17, 1991 filed as February 28, 1995
Exhibit 4.8) dated
April 12, 1995
4.10 Chattel mortgage loan Exhibit 4.17 to the annual report
agreement dated on form 10-K of the Registrant
April 12, 1995 in the for the fiscal year ended
amount of $1,500,000 February 28, 1995
between the registrant and
First National Bank of
Farmington
4.11 Third Amendment to Loan Exhibit 4.18 to Registration
Agreement dated Statement on Form S-1
April 12, 1995 (amending (Registration No. 33-62149)
working capital loan filed on August 25, 1995
agreement dated
October 17, 1991 filed as
Exhibit 4.2)
4.12 Change in terms agreement Exhibit 4.19 to Registration
(to working capital loan Statement on Form S-1
agreement dated (Registration No. 33-62149)
October 17, 1991 filed as filed on August 25, 1995
Exhibit 4.2) dated
July, 17, 1995
4.13 Real Estate mortgage loan Filed Herewith 56
agreement dated
April 5, 1996 in the amount
of $1,650,000 between
Norwest Banks and the
Registrant
4.14 Chattel mortgage loan Filed Herewith 79
agreement dated
April 2, 1996 in the amount
of $700,000 between
Norwest equipment finance
and the Registrant
4.15 Chattel mortgage loan Filed Herewith 81
agreement dated
April 5, 1996 in the amount
of $500,000 between
Norwest Banks and the
Registrant
52
Exhibit Incorporated by Sequentially
Number Description Reference to Numbered Page
- ------ ----------- ------------ -------------
4.16 Chattel mortgage loan Filed Herewith 83
agreement dated
April 2, 1996 in the amount
of $1,500,000 between
Norwest Equipment Finance
and the Registrant
4.17 Letters of Commitment from Filed Herewith 85
financial institutions
supporting commitment of
$ 3,000,000 in financing
4.18 Working Capital Filed Herewith 97
availability loan agreement
dated April 5, 1996 in
the amount of $ 2,000,000
between Norwest Banks and
the Registrant
10.1 Form of Stock Option Exhibit 10.3 to The Form 10-K
Agreement for incentive of the Registrant for the
stock option plan of the fiscal year ended
Annual Report on February 28, 1986.
Registrant *
10.2 Incentive Stock Option Exhibit 10.2 to the Annual Report
Plan of the Registrant on Form 10-K of the Registrant
as amended July 27, 1990 * for the fiscal year ended
February 28, 1991
10.4 Current form of franchise Filed Herewith 99
agreement used by the
Registrant
10.5 Form of Real Estate Lease Exhibit 10.7 to Registration Statement
between the Registrant as on Form S-18
Lessee and franchisee as (Registration No. 33-2016-D).
Sublessee
10.7 Form of Nonqualified Stock Exhibit 10.7 to the Registration
Option Agreement for Statement on Form S-1 of the
Nonemployee Directors for Registrant (Registration
the Registrant * No. 33-62149 filed August 25, 1995)
* Management contract or compensatory plan
53
Exhibit Incorporated by Sequentially
Number Description Reference to Numbered Page
- ------ ----------- ------------ -------------
10.8 Nonqualified Stock Option Exhibit 10.8 to the Registration
Plan for Nonemployee Statement on Form S-1
Directors dated of the Registrant
March 20, 1990 * (Registration No. 33-62149
filed August 25, 1995)
10.9 1995 Stock Option Plan of Exhibit 10.9 to the Registration
Registrant Statement on Form S-1 of the
Registrant (Registration
No. 33-62149 filed
August 25, 1995)
10.10 Forms of Incentive Stock Exhibit 10.10 to the Registration
Option Stock option awards Statement on Form S-1
to directors * of the Registrant (Registration
No. 33-62149 filed August 25, 1995)
10.11 Forms of Nonqualified Stock Exhibit 10.11 to the Registration
Option Agreement for Statement on Form S-1
1995 Stock Option Plan * of the Registrant
(Registration No. 33-62149
filed August 25, 1995)
11.1 Statement re-computation Filed Herewith. 143
of per share earnings
23.1 Consent of independent Filed Herewith. 148
public accountants
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the year ended February 28, 1996.
* Management contract or compensatory plan
54
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
By/S/ Franklin E. Crail
---------------------
FRANKLIN E. CRAIL
President
Date: May 24, 1996
In accordance with the Exchange Act, 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 24, 1996 /S/ Franklin E. Crail
---------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President,
Treasurer and Director
(principal executive officer)
Date: May 24, 1996 /S/ Lawrence C. Rezentes
------------------------
LAWRENCE C. REZENTES
Vice President - Finance and
Chief Financial Officer
(principal financial and
accounting officer)
Date: May 24, 1996 /S/ Gerald A. Kien
------------------
GERALD A. KIEN, Director
Date: May 24, 1996 /S/ Lee N. Mortenson
--------------------
LEE N. MORTENSON, Director
Date: May 24, 1996 /S/ Everett A. Sisson
---------------------
EVERETT A. SISSON, Director
Date: May 24, 1996 /S/ Fred M. Trainor
-------------------
FRED M. TRAINOR, Director
55
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
By
-----------------------
FRANKLIN E. CRAIL
President
Date: May 24, 1995
In accordance with the Exchange Act, 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 24, 1996
-----------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President,
Treasurer and Director
(principal executive officer)
Date: May 24, 1996
-----------------------
LAWRENCE C. REZENTES
Vice President - Finance and
Chief Financial Officer
(principal financial and
accounting officer)
Date: May 24, 1996
-----------------------
GERALD A. KIEN, Director
Date: May 24, 1996
-----------------------
LEE N. MORTENSON, Director
Date: May 24, 1996
-----------------------
EVERETT A. SISSON, Director
Date: May 24, 1996
-----------------------
FRED M. TRAINOR, Director
55