ROCKY MOUNTAIN CHOCOLATE FACTORY INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended February 28, 2002
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________

Commission file number 0-14749

Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)

Colorado 84-0910696
(State of Incorporation) (I.R.S. Employer Identification No.)

265 Turner Drive, Durango, CO 81301
(Address of principal executive offices)

(970) 259-0554
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.0225 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

On April 15, 2002, there were 2,476,973 shares of Common Stock outstanding. The
aggregate market value of the Common Stock (based on the average of the closing
bid and ask prices as quoted on the Nasdaq National Market System on April 15,
2002 held by non-affiliates was $20,575,284.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's proxy statement furnished to stockholders in
connection with the 2002 Annual Meeting of Stockholders (the "Proxy Statement")
are incorporated by reference in Part III of this Report. The Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days of the
close of the registrant's fiscal year.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K

TABLE OF CONTENTS

2

PART I.

ITEM 1. BUSINESS
GENERAL

Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain Chocolate
Factory, Inc. (the "Company") is an international franchiser and confectionery
manufacturer. The Company is headquartered in Durango, Colorado and manufactures
an extensive line of premium chocolate candies and other confectionery products.
As of March 31, 2002 there were 4 Company-owned and 227 franchised Rocky
Mountain Chocolate Factory stores operating in 40 states, Canada, Guam and the
United Arab Emirates.

Approximately 40% of the products sold at Rocky Mountain Chocolate Factory
stores are prepared on the premises. The Company believes this in-store
preparation creates a special store ambiance and the aroma and sight of products
being made attracts foot traffic and assures customers that products are fresh.

The Company believes that its principal competitive strengths lie in its brand
name recognition, its reputation for the quality, variety and the taste of its
products; the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in the
manufacture of chocolate candy products and the merchandising and marketing of
chocolate and other candy products; and the control and training infrastructures
it has implemented to assure consistent customer service and execution of
successful practices and techniques at its stores.

The Company believes its manufacturing expertise and reputation for quality has
facilitated the sale of selected products through new distribution channels. The
Company is currently selling its products in a number of new distribution
channel programs including wholesaling, fundraising, corporate sales, mail order
and internet sales.

The Company's revenues are currently derived from three principal sources: (i)
sales to franchisees and others of chocolates and other confectionery products
manufactured by the Company (70-53-45%); (ii) sales at Company-owned stores of
chocolates and other confectionery products (including product manufactured by
the Company) (8-31-42%) and (iii) the collection of initial franchise fees and
royalties from franchisees (22-16-13%). The figures in parentheses show the
percentage of total revenues attributable to each source for fiscal years ended
February 28 (29), 2002, 2001 and 2000, respectively.

According to the National Confectionery Association, the total U.S. candy market
approximated $23.8 billion of retail sales in 2000. According to the Department
of Commerce, per capita consumption of chocolate exceeds 13 pounds per year
nationally, generating annual sales of approximately $13 billion. In 2000,
consumption of chocolate products was approximately the same as 1999.

In Fiscal 2001, the Company began phasing out its Rocky Mountain Chocolate
Factory Company-owned store program. In fiscal 2002, the Company has sold to new
or existing franchisees all Company-owned store locations with the exception of
four Company-owned stores located in key markets in Colorado (the "Colorado
Stores"). The Company intends to retain the Colorado Stores to test sales,
marketing, design and operational initiatives.

BUSINESS STRATEGY

The Company's objective is to build on its position as a leading international
franchiser and manufacturer of high quality chocolate and other confectionery
products. The Company continually seeks opportunities to profitably expand its
business. To accomplish this objective, the Company employs a business strategy
that includes the following elements:

3

Product Quality and Variety

The Company maintains the unsurpassed taste and quality of its chocolate candies
by using only the finest chocolate and other wholesome ingredients. The Company
uses its own proprietary recipes, primarily developed by its master candy maker.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of the
Company's chocolate candies throughout the year and as many as 200, including
many packaged candies, during the holiday seasons. Individual stores also offer
numerous varieties of premium fudge and gourmet caramel apples, as well as other
products prepared in the store from Company recipes.

Store Atmosphere and Ambiance

The Company seeks to establish an enjoyable and inviting atmosphere in each
Rocky Mountain Chocolate Factory store. Each store prepares numerous products,
including fudge, brittles and caramel apples, in the store. In-store preparation
is designed both to be fun and entertaining for customers and to convey an image
of freshness and homemade quality. The Company's design staff has developed
easily replicable designs and specifications to ensure that the Rocky Mountain
Chocolate Factory concept is consistently implemented throughout the system.

In February 2000, the Company retained a nationally recognized design firm to
evaluate and update its existing store design. The objective of the store design
project is threefold: (1) increase average revenue per unit thereby opening
untapped real estate environments; (2) further emphasize the entertainment and
freshness value of the Company's in-store confectionery factory; and (3) improve
operational efficiency through optimal store layout. The Company completed the
store redesign project and the testing of the new design in fiscal 2002. Through
March 31, 2002, 9 stores incorporating the new design have been opened. Initial
results are encouraging.

Site Selection

Careful selection of a site is critical to the success of a Rocky Mountain
Chocolate Factory store. Many factors are considered by the Company in
identifying suitable sites, including tenant mix, visibility, attractiveness,
accessibility, level of foot traffic and occupancy costs. Final site selection
occurs only after the Company's senior management has approved the site. The
Company believes that the experience of its management team in evaluating a
potential site is one of the Company's competitive strengths.

Customer Service Commitment

The Company emphasizes excellence in customer service and seeks to employ and to
sell franchises to motivated and energetic people. The Company also fosters
enthusiasm for its customer service philosophy and the Rocky Mountain Chocolate
Factory concept through its annual franchisee convention, regional meetings and
other frequent contacts with its franchisees.

Increase Same Store Retail Sales at Existing Locations

The Company seeks to increase profitability of its store system through
increasing sales at existing store locations. System wide same store retail
sales are as follows:

1998 7.4%
1999 6.7%
2000 (4.3)%
2001 (3.9)%
2002 0.0%

4

The Company believes that its same store sales growth was positively impacted by
the sale of Beanie Babies(TM) (stuffed animals manufactured by Ty Inc.) and
related products in fiscal 1998 and 1999, because many of the Company's retail
stores capitalized on this extraordinary trend during this time period. In
fiscal 2000 and 2001, however, the demand for Beanie Babies decreased
significantly, and the Company believes this decreased demand is the primary
reason for negative comparable store sales in fiscal 2000 and 2001. As expected,
this trend reversed in fiscal 2002.

The Company feels that same store retail sales growth can be accelerated though
store redesign to provide a more attractive and effective retail sales
environment while retaining the Rocky Mountain Chocolate Factory store ambiance
and theme.

In February 2000, the Company retained a nationally recognized packaging design
firm to completely redesign the packaging featured in the Company's retail
stores. The Company has designed a contemporary and coordinated line of packaged
products that capture and convey the freshness, fun and excitement of the Rocky
Mountain Chocolate Factory retail store experience. The Company completed the
packaging redesign project during 2002. Testing of the new designs has yielded
positive results. The Company believes that the successful launch of new
packaging will have a positive future impact on same store sales.

Increase Same Store Pounds Purchased by Existing Locations

In fiscal 2002, the Company experienced a same store pounds purchased decline of
7.6%. The decline in same store pounds purchased from the factory continued what
appears to be a trend of a shift in sales mix toward store-made products and
away from factory-made products. The Company is in the process of designing new
packaging, adding new products and focusing its existing product lines in an
effort to control this trend.

Enhanced Operating Efficiencies

The Company seeks to improve its profitability by controlling costs and
increasing the efficiency of its operations. Efforts in the last several years
include the purchase of additional automated factory equipment, implementation
of a comprehensive MRP II forecasting, planning, scheduling and reporting
system, implementation of alternative manufacturing strategies and installation
of enhanced Point-of-Sale (POS) systems in all of it's Company-owned and thirty
of its franchised stores through March 31, 2002. These measures have
significantly improved the Company's ability to deliver its products to its
stores safely, quickly and cost-effectively and impact store operations.
Additionally, the divestiture of substantially all of the Company-owned stores
has reduced the Company's exposure to real estate risk, improved the Company's
operating margins and allowed the Company to increase its focus on franchising.

EXPANSION STRATEGY

Key elements of the Company's expansion strategy include:

Unit Growth

The cornerstone of the Company's growth strategy is to aggressively pursue unit
growth opportunities in locations where the Company has traditionally been
successful, to pursue new and developing real estate environments which appear
promising based on early sales results, and to improve and expand the retail
store concept, such that previously untapped and unviable environments (such as
most regional malls) generate sufficient revenue to support a successful Rocky
Mountain Chocolate Factory location.

5

High Traffic Environments

The Company currently establishes franchised stores in the following
environments: factory outlet malls, tourist environments, regional malls, street
fronts and other entertainment oriented environments. The Company, over the last
several years, has had a particular focus on factory outlet mall locations.
Although each of these environments has a number of attractive features,
including a high level of foot traffic, the factory outlet mall environment has
historically offered the best combination of tenant mix, customer spending
characteristics and favorable occupancy costs. The Company is optimistic that
its exciting new store design will allow it to target untapped potential of the
over 1,200 regional malls in the United States. The Company has established a
business relationship with most of the major developers in the United States and
believes that these relationships provide it with the opportunity to take
advantage of attractive sites in new and existing real estate environments.

Name Recognition and New Market Penetration

The Company believes the visibility of its stores and the high foot traffic at
most of its locations has generated strong name recognition of Rocky Mountain
Chocolate Factory and demand for its franchises. The Rocky Mountain Chocolate
Factory system has historically been concentrated in the western United States
and the Rocky Mountains, but recent growth has generated a gradual easterly
momentum as new stores have been opened in the eastern half of the country. This
growth has further increased the Company's name recognition and demand for its
franchises. Distribution of Rocky Mountain Chocolate Factory products through
new channels also increases name recognition and brand awareness in areas of the
country in which the Company has not previously had a significant presence. The
Company believes that by distributing selected Rocky Mountain Chocolate Factory
products through new distribution channels its name recognition will improve and
benefit its entire store system.

STORE CONCEPT

The Company seeks to establish a fun and inviting atmosphere in its Rocky
Mountain Chocolate Factory store locations. Unlike most other confectionery
stores, each Rocky Mountain Chocolate Factory store prepares certain products,
including fudge and caramel apples, in the store. Customers can observe store
personnel making fudge from start to finish, including the mixing of ingredients
in old-fashioned copper kettles and the cooling of the fudge on large marble
tables, and are often invited to sample the store's products. The Company
believes that an average of approximately 40% of the revenues of franchised
stores are generated by sales of products prepared on the premises. The Company
believes the in-store preparation and aroma of its products enhance the ambiance
at Rocky Mountain Chocolate Factory stores, are fun and entertaining for its
customers and convey an image of freshness and homemade quality.

The majority of existing Rocky Mountain Chocolate Factory stores have a
distinctive country Victorian decor, which further enhances their friendly and
enjoyable atmosphere. Each store includes finely crafted wood cabinetry, copper
and brass accents, etched mirrors and large marble tables on which fudge and
other products are made. To ensure that all stores conform to the Rocky Mountain
Chocolate Factory image, the Company's design staff provides working drawings
and specifications and approves the construction plans for each new store. The
Company also controls the signage and building materials that may be used in the
stores.

In fiscal 2002, the Company launched its new store design concept intended
specifically for high foot traffic regional shopping malls. The new store design
concept is modern with crisp and clean site lines and an even stronger emphasis
on the Company's unique upscale kitchen. Based on encouraging initial results,
the Company is requiring that all new Rocky Mountain Chocolate Factory stores
incorporate the new design concept.

6

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.

KIOSK CONCEPT

In fiscal 2002, the Company opened its first full service retail kiosk concept.
The kiosk is a vehicle for retail environments where in-line real estate is
unavailable or build-out costs and/or rent factors do not meet the Company's
financial criteria. The kiosk, which is approximately 250 square feet,
incorporates the Company's trademark cooking area where caramel apples, fudge
and other popular confections are prepared in front of customers using
traditional cooking utensils. The kiosk also includes the Company's core product
and gifting lines in order to provide the customer with a full Rocky Mountain
Chocolate Factory experience.

The Company believes the kiosk concept enhances its franchise opportunity by
providing more flexibility in support of existing franchisees' expansion
programs and allows new franchisees that otherwise would not qualify for an
in-line location an opportunity to join the Rocky Mountain Chocolate Factory
system.

PRODUCTS AND PACKAGING

The Company typically produces approximately 300 chocolate candies and other
confectionery products, using proprietary recipes developed primarily by the
Company's master candy maker. These products include many varieties of clusters,
caramels, creams, mints and truffles. The Company continues to engage in a major
effort to expand its product line by developing additional exciting and
attractive new products. During the Christmas, Easter and Valentine's Day
holiday seasons, the Company may make as many as 100 additional items, including
many candies offered in packages specially designed for the holidays. A typical
Rocky Mountain Chocolate Factory store offers up to 100 of these candies
throughout the year and up to an additional 100 during holiday seasons.
Individual stores also offer more than 15 premium fudges and other products
prepared in the store. The Company believes that approximately 50% of the
revenues of Rocky Mountain Chocolate Factory stores are generated by products
manufactured at the Company's factory, 40% by products made in the store using
Company recipes and ingredients purchased from the Company or approved suppliers
and the remaining 10% by products, such as ice cream, coffee and other sundries,
purchased from approved suppliers.

The Company uses only the finest chocolates, nut meats and other wholesome
ingredients in its candies and continually strives to offer new confectionery
products in order to maintain the excitement and appeal of its products. The
Company develops special packaging for the Christmas, Valentine's Day and Easter
holidays, and customers can have their purchases packaged in decorative boxes
and fancy tins throughout the year.

Chocolate candies manufactured by the Company are sold at prices ranging from
$12.90 to $15.90 per pound, with an average price of $14.90 per pound.
Franchisees set their own retail prices, though the Company does recommend
prices for all of its products.

OPERATING ENVIRONMENT

The Company currently establishes Rocky Mountain Chocolate Factory stores in
four primary environments: factory outlet malls, tourist areas, regional malls
and street fronts. Each of these environments has a number of attractive
features, including high levels of foot traffic.

7

Factory Outlet Malls

There are approximately 260 factory outlet malls in the United States, and as of
February 28, 2002, there were Rocky Mountain Chocolate Factory stores in
approximately 90 of these malls in over 35 states. The Company has established
business relationships with most of the major outlet mall developers in the
United States. Although not all factory outlet malls provide desirable locations
for the Company's stores, management believes the Company's relationships with
these developers will provide it with the opportunity to take advantage of
attractive sites in new and existing outlet malls.

Tourist Areas and Street Fronts

As of February 28, 2002, there were approximately 60 Rocky Mountain Chocolate
Factory stores in locations considered to be tourist areas, including
Fisherman's Wharf in San Francisco, California and the Riverwalk in San Antonio,
Texas. Tourist areas are very attractive locations because they offer high
levels of foot traffic and favorable customer spending characteristics, and
greatly increase the Company's visibility and name recognition. The Company
believes significant opportunities exist to expand into additional tourist areas
with high levels of foot traffic.

Regional Malls

There are approximately 1,200 regional malls in the United States, and as of
February 28, 2002, there were Rocky Mountain Chocolate Factory stores in
approximately 20 of these malls, including locations in the Mall of America in
Bloomington, Minnesota; Escondido, California; Fort Collins, Colorado; and West
Palm Beach, Florida. Although often providing favorable levels of foot traffic,
regional malls typically involve more expensive rent structures and more
competing food and beverage concepts. The Company's new store concept is
designed to unlock the potential of the regional mall environment.

The Company believes there are a number of other environments that have the
characteristics necessary for the successful operation of Rocky Mountain
Chocolate Factory stores such as airports and sports arenas. Three franchised
Rocky Mountain Chocolate Factory stores exist at airport locations: two at
Denver International Airport and one at Vancouver International Airport in
Canada.

FRANCHISING PROGRAM

General

The Company's franchising philosophy is one of service and commitment to its
franchise system, and the Company continuously seeks to improve its franchise
support services. The Company's concept has consistently been rated as an
outstanding franchise opportunity by publications and organizations rating such
opportunities. In February 2001, Rocky Mountain Chocolate Factory was rated the
number one franchise opportunity in the candy category by Entrepreneur Magazine.
As of March 31, 2002, there were 223 franchised stores in the Rocky Mountain
Chocolate Factory system.

Franchisee Sourcing and Selection

The majority of new franchises are awarded to persons referred by existing
franchisees, to interested consumers who have visited Rocky Mountain Chocolate
Factory stores and to existing franchisees. The Company also advertises for new
franchisees in national and regional newspapers as suitable potential store
locations come to the Company's attention. Franchisees are approved by the
Company on the basis of the applicant's net worth and liquidity, together with
an assessment of work ethic and personality compatibility with the Company's
operating philosophy.

8

In fiscal 1992, the Company entered into a franchise development agreement
covering Canada with Immaculate Confections, Ltd. of Vancouver, British
Columbia. Pursuant to this agreement, Immaculate Confections purchased the
exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores
in Canada. Immaculate Confections, as of March 31, 2002, operated 23 stores
under the agreement.

In fiscal 2000, the Company entered into a franchise development agreement
covering the Gulf Cooperation Council States of United Arab Emirates, Qatar,
Bahrain, Saudi Arabia, Kuwait and Oman with Al Muhairy Group of United Arab
Emirates. Pursuant to this agreement, Al Muhairy Group purchased the exclusive
right to franchise and operate Rocky Mountain Chocolate Factory stores in the
Gulf Cooperation Council States. Al Muhairy Group, as of March 31, 2002,
operated 2 stores under this agreement.

Training and Support

Each domestic franchisee owner/operator and each store manager for a domestic
franchisee is required to complete a 7-day comprehensive training program in
store operations and management. The Company has established a training center
at its Durango headquarters in the form of a full-sized replica of a properly
configured and merchandised Rocky Mountain Chocolate Factory store. Topics
covered in the training course include the Company's philosophy of store
operation and management, customer service, merchandising, pricing, cooking,
inventory and cost control, quality standards, record keeping, labor scheduling
and personnel management. Training is based on standard operating policies and
procedures contained in an operations manual provided to all franchisees, which
the franchisee is required to follow by terms of the franchise agreement.
Additionally, and importantly, trainees are provided with a complete orientation
to Company operations by working in key factory operational areas and by meeting
with each member of the senior management of the Company. Training continues
through the opening of the store, where Company field consultants assist and
guide the franchisee in all areas of operation.

The Company's operating objectives include providing Company knowledge and
expertise in merchandising, marketing and customer service to all front-line
store level employees to maximize their skills and ensure that they are fully
versed in the Company's proven techniques.

The Company provides ongoing support to franchisees through its field
consultants, who maintain regular and frequent communication with the stores by
phone and by site visits. The field consultants also review and discuss with the
franchisee store operating results and provide advice and guidance in improving
store profitability and in developing and executing store marketing and
merchandising programs. The Company has developed a handbook containing a
"pre-packaged" local store marketing plan, which allows franchisees to implement
cost-effective promotional programs that have proven successful in other Rocky
Mountain Chocolate Factory stores.

Quality Standards and Control

The franchise agreement for Rocky Mountain Chocolate Factory franchisees
requires compliance with the Company's procedures of operation and food quality
specifications and permits audits and inspections by the Company.

Operating standards for Rocky Mountain Chocolate Factory stores are set forth in
operating manuals. These manuals cover general operations, factory ordering,
merchandising, advertising and accounting procedures. Through their regular
visits to franchised stores, Company field consultants audit performance and
adherence to Company standards. The Company has the right to terminate any
franchise agreement for non-compliance with the Company's operating standards.
Products sold at the stores and ingredients used in the preparation of products
approved for on-site preparation must be purchased from the Company or from
approved suppliers.

9

The Franchise Agreement: Terms and Conditions

The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is
made pursuant to the Uniform Franchise Offering Circular prepared in accordance
with federal and state laws and regulations. States that regulate the sale and
operation of franchises require a franchiser to register or file certain notices
with the state authorities prior to offering and selling franchises in those
states.

Under the current form of domestic Rocky Mountain Chocolate Factory franchise
agreement, franchisees pay the Company (i) an initial franchise fee of $19,500
for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a
marketing fee equal to 1% of monthly gross sales. Franchisees are generally
granted exclusive territory with respect to the operation of Rocky Mountain
Chocolate Factory stores only in the immediate vicinity of their stores.
Chocolate products not made on the premises by franchisees must be purchased
from the Company or approved suppliers. The franchise agreements require
franchisees to comply with the Company's procedures of operation and food
quality specifications, to permit inspections and audits by the Company and to
remodel stores to conform with standards in effect. The Company may terminate
the franchise agreement upon the failure of the franchisee to comply with the
conditions of the agreement and upon the occurrence of certain events, such as
insolvency or bankruptcy of the franchisee or the commission by the franchisee
of any unlawful or deceptive practice, which in the judgment of the Company is
likely to adversely affect the Rocky Mountain Chocolate Factory system. The
Company's ability to terminate franchise agreements pursuant to such provisions
is subject to applicable bankruptcy and state laws and regulations. See
"Business - Regulation."

The agreements prohibit the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreements also
give the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.

The term of each Rocky Mountain Chocolate Factory franchise agreement is ten
years, and franchisees have the right to renew for one additional ten-year term.

Franchise Financing

The Company does not provide prospective franchisees with financing for their
stores, but has developed relationships with several sources of franchisee
financing to whom it will refer franchisees. Typically, franchisees have
obtained their own sources of such financing and have not required the Company's
assistance.

COMPANY STORE PROGRAM

As of April 1, 2002, there were 4 Company-owned Rocky Mountain Chocolate Factory
stores. Company-owned stores provide a training ground for Company-owned store
personnel and district managers and a controllable testing ground for new
products and promotions, operating and training methods and merchandising
techniques.

Managers of Company-owned stores are required to comply with all Company
operating standards and undergo training and receive support from the Company
similar to the training and support provided to franchisees. See "Franchising
Program-Training and Support" and "Franchising Program-Quality Standards and
Control."

10

MANUFACTURING OPERATIONS

General

The Company manufactures its chocolate candies at its factory in Durango,
Colorado. All products are produced consistent with the Company's philosophy of
using only the finest, highest quality ingredients with no artificial
preservatives to achieve its marketing motto of "the Peak of Perfection in
Handmade Chocolates(R)."

It has always been the belief of management that the Company should control the
manufacturing of its own chocolate products. By controlling manufacturing, the
Company can better maintain its high product quality standards, offer unique,
proprietary products, manage costs, control production and shipment schedules
and potentially pursue new or under-utilized distribution channels.
Manufacturing Processes

The manufacturing process primarily involves cooking or preparing candy centers,
including nuts, caramel, peanut butter, creams and jellies, and then coating
them with chocolate or other toppings. All of these processes are conducted in
carefully controlled temperature ranges, and the Company employs strict quality
control procedures at every stage of the manufacturing process. The Company uses
a combination of manual and automated processes at its factory. Although the
Company believes that it is currently preferable to perform certain
manufacturing processes, such as dipping of some large pieces, by hand,
automation increases the speed and efficiency of the manufacturing process. The
Company has from time to time automated processes formerly performed by hand
where it has become cost-effective for the Company to do so without compromising
product quality or appearance.

The Company seeks to ensure the freshness of products sold in Rocky Mountain
Chocolate Factory stores with frequent shipments. Most Rocky Mountain Chocolate
Factory stores do not have significant space for the storage of inventory, and
the Company encourages franchisees and store managers to order only the
quantities that they can reasonably expect to sell within approximately two to
four weeks. For these reasons, the Company generally does not have a significant
backlog of orders.

Ingredients

The principal ingredients used by the Company are chocolate, nuts, sugar, corn
syrup, cream and butter. The factory receives shipments of ingredients daily. To
ensure the consistency of its products, the Company buys ingredients from a
limited number of reliable suppliers. In order to assure a continuous supply of
chocolate and certain nuts, the Company frequently enters into purchase
contracts of between six to eighteen months for these products. Because prices
for these products may fluctuate, the Company may benefit if prices rise during
the terms of these contracts, but it may be required to pay above-market prices
if prices fall. The Company has one or more alternative sources for all
essential ingredients and therefore believes that the loss of any supplier would
not have a material adverse effect on the Company and its results of operations.
The Company currently also purchases small amounts of finished candy from third
parties on a private label basis for sale in Rocky Mountain Chocolate Factory
stores.

Trucking Operations

The Company operates eight trucks and ships a substantial portion of its
products from the factory on its own fleet. The Company's trucking operations
enable it to deliver its products to the stores quickly and cost-effectively. In
addition, the Company back-hauls its own ingredients and supplies, as well as
product from third parties, on return trips as a basis for increasing trucking
program economics.

11

MARKETING

The Company relies primarily on in-store promotion and point-of-purchase
materials to promote the sale of its products. The monthly marketing fees
collected from franchisees are used by the Company to develop new packaging and
in-store promotion and point-of-purchase materials, and to create and update the
Company's local store marketing handbooks.

The Company focuses on local store marketing efforts by providing customizable
marketing materials, including advertisements, coupons, flyers and mail order
catalogs generated by its in-house Creative Services department. The department
works directly with franchisees to implement local store marketing programs.

The Company aggressively seeks low cost, high return publicity opportunities
through participation in local and regional events, sponsorships and charitable
causes. The Company has not historically and does not intend to engage in
national advertising in the near future.

COMPETITION

The retailing of confectionery products is highly competitive. The Company and
its franchisees compete with numerous businesses that offer confectionery
products. Many of these competitors have greater name recognition and financial,
marketing and other resources than the Company. In addition, there is intense
competition among retailer's for real estate sites, store personnel and
qualified franchisees. Competitive market conditions could adversely affect the
Company and its results of operations and its ability to expand successfully.

The Company believes that its principal competitive strengths lie in its name
recognition and its reputation for the quality, value, variety and taste of its
products and the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in
merchandising and marketing of chocolate and other candy products; and the
control and training infrastructures it has implemented to assure execution of
successful practices and techniques at its store locations. In addition, by
controlling the manufacturing of its own chocolate products, the Company can
better maintain its high product quality standards for those products, offer
proprietary products, manage costs, control production and shipment schedules
and pursue new or under-utilized distribution channels.

TRADE NAME AND TRADEMARKS

The trade name "Rocky Mountain Chocolate Factory(R)," the phrases, "The Peak of
Perfection in Handmade Chocolates(R)", "America's Chocolatier(R)", "World's
Chocolatier(TM)" as well as all other trademarks, service marks, symbols,
slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory
system, are proprietary rights of the Company. All of the foregoing are believed
to be of material importance to the Company's business. The registration for the
trademark "Rocky Mountain Chocolate Factory" has been granted in the United
States and Canada. Applications have been filed to register the Rocky Mountain
Chocolate Factory trademark and/or obtained in certain foreign countries.

The Company has not attempted to obtain patent protection for the proprietary
recipes developed by the Company's master candy-maker and is relying upon its
ability to maintain the confidentiality of those recipes.

12

EMPLOYEES

At February 28, 2002, the Company employed approximately 180 people. Most
employees, with the exception of store, factory and corporate management, are
paid on an hourly basis. The Company also employs some people on a temporary
basis during peak periods of store and factory operations. The Company seeks to
assure that participatory management processes, mutual respect and
professionalism and high performance expectations for the employee exist
throughout the organization.

The Company believes that it provides working conditions, wages and benefits
that compare favorably with those of its competitors. The Company's employees
are not covered by a collective bargaining agreement. The Company considers its
employee relations to be good.

EXECUTIVE OFFICERS

The executive officers of the Company and their ages at April 15, 2002 are as
follows:

Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May
1981. Since the incorporation of the Company in November 1982, he has served as
its President and a Director. He was elected Chairman of the Board in March
1986. Prior to founding the Company, Mr. Crail was co-founder and president of
CNI Data Processing, Inc., a software firm which developed automated billing
systems for the cable television industry.

Mr. Merryman joined the Company in December 1997 as Vice President - Finance and
Chief Financial Officer. Since April 1999 Mr. Merryman has also served the
Company as the Chief Operating Officer and as a Director, and since January 2000
as its Treasurer. Prior to joining the Company, Mr. Merryman was a principal in
Knightsbridge Holdings, Inc. (a leveraged buyout firm) from January 1997 to
December 1997. Mr. Merryman also served as Chief Financial Officer of Super
Shops, Inc., a retailer and manufacturer of aftermarket auto parts from July
1996 to November 1997 and was employed for more than eleven years by Deloitte
and Touche LLP, most recently as a senior manager.

Mr. Dudley joined the Company in January 1997 to spearhead the Company's newly
formed Product Sales Development function as Vice President - Sales and
Marketing, with the goal of increasing the Company's factory and retail sales.
He was promoted to Senior Vice President in June 2001. During his 10 year career
with Baxter Healthcare Corporation, Mr. Dudley served in a number of senior
marketing and sales management capacities, including most recently that of
Director, Distribution Services from March 1996 to January 1997. Mr. Dudley
holds B.S. degrees in Finance and Accounting from the University of Colorado.

13

Mr. Haws joined the Company in August 1991 as Vice President of Creative
Services. Since 1981, Mr. Haws had been closely associated with the Company both
as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he
operated two Rocky Mountain Chocolate Factory franchises located in San
Francisco, California. From 1983 to 1989 he served as Vice President of
Marketing for Image Group, Inc., a marketing communications firm based in
Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky
Mountain Chocolate Factory franchises located in Sacramento, and Walnut Creek
California. From 1973 to 1983 he was principal of Jay Haws and Associates, an
advertising and graphic design agency. Mr. Haws holds a B.A. in graphics design
and communication from California State University.

Mr. Pope became Vice President of Franchise Development in June 2001. Since
joining the Company in October 1990, he has served in various positions
including store manager, new store opener and franchise field consultant. In
March 1996 he became Director of Franchise Development and Support, a position
he held until he was promoted to his present position.

Mr. Jobson joined the Company in July 1998 as Director of Information
Technology. In June 2001, he was promoted to Chief Information Officer, a
position created to enhance the Company's strategic focus on information and
information technology. From July 1995 to July 1998, Mr. Jobson worked for ADAC
Laboratories in Durango, Colorado, a leading provider of diagnostic imaging and
information systems solutions in the healthcare industry, as Manager of
Technical Services and before that, Regional Manager.

Ms. Perez joined the Company in June 1996 and has served as the Company's
corporate secretary since February, 1997. From 1992 until joining the Company,
she was employed by Huettig & Schromm, Inc., a property management and
development firm in Palo Alto, California as executive assistant to the
president and owner. Huettig & Schromm developed, owned and managed over
1,000,000 square feet of office space in business parks and office buildings on
the San Francisco peninsula. Ms. Perez is a paralegal and has held various
administrative positions during her career including executive assistant to the
Chairman and owner of Sunset Magazine & Books, Inc.

SEASONAL FACTORS

The Company's sales and earnings are seasonal, with significantly higher sales
and earnings occurring during the Christmas holiday and summer vacation seasons
than at other times of the year, which causes fluctuations in the Company's
quarterly results of operations. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings and
the sale of franchises. Because of the seasonality of the Company's business and
the impact of new store openings and sales of franchises, results for any
quarter are not necessarily indicative of the results that may be achieved in
other quarters or for a full fiscal year.

REGULATION

Each of the Company-owned and franchised stores is subject to licensing and
regulation by the health, sanitation, safety, building and fire agencies in the
state or municipality where located. Difficulties or failures in obtaining the
required licensing or approvals could delay or prevent the opening of new
stores. New stores must also comply with landlord and developer criteria.

Many states have laws regulating franchise operations, including registration
and disclosure requirements in the offer and sale of franchises. The Company is
also subject to the Federal Trade Commission regulations relating to disclosure
requirements in the sale of franchises and ongoing disclosure obligations.

14

Additionally, certain states have enacted and others may enact laws and
regulations governing the termination or non-renewal of franchises and other
aspects of the franchise relationship that are intended to protect franchisees.
Although these laws and regulations, and related court decisions, may limit the
Company's ability to terminate franchises and alter franchise agreements, the
Company does not believe that such laws or decisions will have a material
adverse effect on its franchise operations. However, the laws applicable to
franchise operations and relationships continue to develop, and the Company is
unable to predict the effect on its intended operations of additional
requirements or restrictions that may be enacted or of court decisions that may
be adverse to franchisers.

Federal and state environmental regulations have not had a material impact on
the Company's operations but more stringent and varied requirements of local
governmental bodies with respect to zoning, land use and environmental factors
could delay construction of new stores.

Companies engaged in the manufacturing, packaging and distribution of food
products are subject to extensive regulation by various governmental agencies. A
finding of a failure to comply with one or more regulations could result in the
imposition of sanctions, including the closing of all or a portion of the
Company's facilities for an indeterminate period of time.

The Company's product labeling is subject to and complies with the Nutrition
Labeling and Education Act of 1990.

The Company provides a limited amount of trucking services to third parties, to
fill available space on the Company's trucks. The Company's trucking operations
are subject to various federal and state regulations, including regulations of
the Federal Highway Administration and other federal and state agencies
applicable to motor carriers, safety requirements of the Department of
Transportation relating to interstate transportation and federal, state and
Canadian provincial regulations governing matters such as vehicle weight and
dimensions.

The Company believes it is operating in substantial compliance with all
applicable laws and regulations.

ITEM 2. PROPERTIES

The Company's manufacturing operations and corporate headquarters are located at
its 58,000 square foot manufacturing facility, which it owns, in Durango,
Colorado. During fiscal 2002, the Company's factory produced approximately 2.04
million pounds of chocolate candies, a 0.5% increase over the approximately 2.03
million pounds produced in fiscal 2001. The factory has the capacity to produce
approximately 3.5 million pounds per year. In January 1998, the Company acquired
a two-acre parcel adjacent to its factory to ensure the availability of adequate
space to expand the factory as volume demands.

As of March 31, 2002, all of the 4 Company-owned stores were occupied pursuant
to non-cancelable leases of five to ten years having varying expiration dates
from July 2002 to December 2005, most of which contain optional five-year
renewal rights. The Company does not deem any individual store lease to be
significant in relation to its overall operations.

The Company acts as primary lessee of some franchised store premises, which it
then subleases to franchisees, but the majority of existing locations are leased
by the franchisee directly. Current Company policy is not to act as primary
lessee on any further franchised locations. At March 31, 2002, the Company was
the primary lessee at 32 of its 223 franchised stores. The subleases for such
stores are on the same terms as the Company's leases of the premises. For
information as to the amount of the Company's rental obligations under leases on
both Company-owned and franchised stores, see Note 5 of Notes to financial
statements.

15

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently involved in any legal proceedings that are material
to the Company's business or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2001 Annual Meeting of the Shareholders of the Company was held in Durango,
Colorado 10:00 a.m., local time, on July 20, 2001.

Proxies were solicited by the Board of Directors of the Company pursuant to
Regulation 14A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the Board of Directors nominees as listed in the
proxy statement and all of such nominees were duly elected.

Out of a total of 2,470,091 shares of the Company's common stock outstanding and
entitled to vote, 2,381,244 shares were present in person or by proxy,
representing approximately 96.4 percent of the outstanding shares. The first
matter voted on by the stockholders, as fully described in the proxy statement
for the annual meeting, was the election of Franklin E. Crail, Bryan J.
Merryman, Gerald A. Kien, Lee N. Mortenson, Fred M. Trainor and Clyde Wm. Engle
as directors of the Company. No nominee received less than 94.9% of the shares
voted. The second matter voted on by the stockholders was a resolution to
consider and vote upon a proposal to amend the Company's 1995 Stock Option Plan
to increase from 266,667 to 400,000 the aggregate number of shares of Common
Stock authorized for issuance under such plan. The resolution was adopted with
the holders of 1,544,357 shares voting in favor of the resolution and 250,532
voting against the resolution. Holders of 4,560 shares abstained from voting on
the resolution and 581,795 holders did not vote on the resolution.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) MARKET INFORMATION

The Company's Common Stock trades on the National Market System of The Nasdaq
Stock Market under the trading symbol "RMCF". On January 28, 2002 the Board of
Directors declared a four-for-three stock split payable on March 4, 2002 to
shareholders of record on February 11, 2002.

The Company declared this stock split because the Company felt that its Common
Stock lacked sufficient shares and related liquidity to satisfy an increasing
number of investors interested in purchasing the Company's Common Stock. All of
the following items in Item 5. have been adjusted, where necessary, for the
effects of the split.

On May 18, 1998 the Company purchased 448,000 shares of its common stock at
$3.8625 per share in a private transaction.

On various dates commencing on December 22, 1999 through February 7, 2000, the
Company purchased 284,627 shares of the Company's issued and outstanding common
stock at prices ranging from $3.9375 to $4.1719.

On March 21, 2000, the Company commenced a tender offer to acquire shares of its
common stock. Pursuant to the tender offer, which was completed on May 1, 2000,
the Company acquired 596,793 shares of its issued and outstanding common stock
at $4.6875 per share.

On January 19, 2001 and January 26, 2001 the Company purchased 50,667 and 10,666
shares, respectively, of the Company's issued and outstanding common stock at
$3.7969 per share.

Between March 6, 2001 and September 28, 2001, the Company repurchased 123,355
Company shares at an average price of $5.07 per share. Of the shares repurchased
during this period, 25,333 were repurchased from employees.

16

The Company made these purchases because the Company felt that its Common Stock
was undervalued and that such purchases would therefore be in the best interest
of the Company and its stockholders.

The table below sets forth high and low bid information for the Common Stock as
quoted on Nasdaq for each quarter of fiscal years 2002 and 2001. The quotations
reflect inter-dealer prices, without retail mark-up, markdown, or commission and
may not necessarily represent actual transactions.

On April 15, 2002 the closing bid price for the Common Stock as reported on the
Nasdaq Stock Market was $13.52.

(b) HOLDERS

On April 15, 2002 there were approximately 430 record holders of the Company's
Common Stock. The Company believes that there are more than 800 beneficial
owners of its Common Stock.

(c) DIVIDENDS

The Company has not paid cash dividends on its Common Stock since its inception
and does not intend to pay cash dividends for the foreseeable future. Any future
earnings will be retained for use in the Company's business.

17

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for the fiscal years ended February
28 or 29, 1998 through 2002, are derived from the Financial Statements of the
Company, which have been audited by Grant Thornton LLP, independent certified
public accountants. The selected financial data should be read in conjunction
with the Financial Statements and related Notes thereto included elsewhere in
this Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

(Amounts in thousands, except per share data)

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the audited
financial statements and related Notes of the Company included elsewhere in this
report. This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties.

The Company's ability to successfully achieve expansion of its Rocky Mountain
Chocolate Factory franchise system depends on many factors not within the
Company's control including the availability of suitable sites for new store
establishment and the availability of qualified franchisees to support such
expansion.

Efforts to reverse the decline in same store pounds purchased from the factory
by franchised stores and to increase total factory sales depends on many factors
not within the Company's control including the receptivity of its franchise
system of its product introductions and promotional programs.

As a result, the actual results realized by the Company could differ materially
from the results discussed in or contemplated by the forward-looking statements
made herein. Words or phrases such as "will," "anticipate," "expect," "believe,"
"intend," "estimate," "project," "plan" or similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on the forward-looking statements in this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and the related disclosures.
Estimates and assumptions include, but are not limited to, the carrying value of
notes receivable from franchisees, inventory, the useful lives of fixed assets,
goodwill, and other intangible assets, income taxes, contingencies and
litigation. The Company bases its estimates on analyses, of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

We believe that the following represent our more critical estimates and
assumptions used in the preparation of our financial statements, although not
all inclusive.

Accounts and Notes Receivable - The Company records an allowance for credit
losses based on estimates of customers' ability to pay and collateral value, as
applicable. If the financial condition of our customers or collateral were to
deteriorate, additional allowances may be required.

Revenue Recognition - The Company recognizes revenue on sales of products to
franchisees and other customers at the time of shipment. 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. The Company also recognizes a royalty fee of five percent (5%) and a
marketing and promotion fee of one percent (1%) of the Rocky Mountain Chocolate
Factory franchised stores' gross retail sales. Sales of products at retail
stores are recognized at the time of sale.

19

Inventories - The Company will write down inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.

Other accounting estimates inherent in the preparation of the Company's
financial statements include estimates associated with its evaluation of the
recoverability of goodwill, deferred tax assets, as well as those used in the
determination of liabilities related to litigation and taxation. Various
assumptions and other factors underlie the determination of these significant
estimates. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, current and expected
economic conditions, and product mix. The Company constantly re-evaluates these
significant factors and makes adjustments where facts and circumstances dictate.
Historically, actual results have not significantly deviated from those
determined using the estimates described above.

As discussed in Note 5 to the financial statements, the Company is involved in
litigation incidental to its business, the disposition of which is expected to
have no material effect on the Company's financial position or results of
operations. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in
the Company's assumptions related to these proceedings.

RESULTS OF OPERATIONS

FISCAL 2002 COMPARED TO FISCAL 2001

Results Summary

The Company posted record earnings per share in fiscal 2002. Basic earnings per
share increased 39.7% from $.58 in fiscal 2001 to $.81 in fiscal 2002. Revenues
decreased 13.9% from fiscal 2001 to fiscal 2002. Operating income increased 8.5%
from $3.1 million in fiscal 2001 to $3.4 million in fiscal 2002. Net income
increased 28.2% from $1.6 million in fiscal 2001 to $2.0 million in fiscal 2002.

Revenues

Factory Sales

Factory sales increased 14.1%, or $1.7 million, to $13.6 million in fiscal 2002
from $11.9 million in fiscal 2001. This increase was due primarily to an
increase in the number of franchised stores in operation during fiscal 2002
versus fiscal 2001. This increase was partially offset by a decrease in same
store pounds purchased from the factory by franchised stores of 8.1% in fiscal
2002 versus fiscal 2001. The Company believes the decrease in same store pounds
purchased is due to a continued product mix shift from factory-made products to
store-made products.

20

Retail Sales

Retail sales decreased $5.4 million, or 77.2%, to $1.6 million in fiscal 2002
compared to $7.0 million in fiscal 2001. This decrease resulted primarily from a
decrease in the number of Company-owned stores from 14 as of February 28, 2001
to 4 as of February 28, 2002 and a 4.9% decrease in same store sales.

In fiscal 2002, the Company completed phasing out its Rocky Mountain Chocolate
Factory Company-owned store program. The Company sold to new or existing
franchisees all viable Company-owned store locations with the exception of four
Company-owned stores located in key markets in Colorado. The Colorado Stores
were excluded because these stores are used to test sales, marketing, design and
operational initiatives.

Royalties, Marketing Fees and Franchise Fees

Royalties and marketing fees increased $403,000 or 12.8%, to $3.5 million in
fiscal 2002, compared to $3.1 million in fiscal 2001. This increase resulted
from expansion in the number of units in operation from 180 in fiscal 2001 to
199 in fiscal 2002 plus growth in same store sales of 0.1%. Franchise fee
revenues increased $223,000 in fiscal 2002 compared to fiscal 2001 due to an
increase in the number of new franchises sold.

Costs and Expenses

Cost of Sales

Cost of sales as a percentage of sales increased to 63.1% in fiscal 2002 versus
53.7% in fiscal 2001. This increase resulted from decreased retail sales, which
generate higher margins than factory sales, offset by an increase in
Company-owned store margins from 58.0% in fiscal 2001 to 59.0% in fiscal 2002.
Factory margins decreased to 34.2% in fiscal 2002 from 39.4% in fiscal 2001.
This decrease in factory margins is due primarily to decreased production
efficiencies and increased inventory reserves due to packaging changes.

Franchise Costs

Franchise costs increased $163,000, or 14.5%, in fiscal 2002 compared to fiscal
2001. As a percentage of total royalty and marketing fees and franchise fee
revenue, franchise costs decreased to 30.5% in fiscal 2002 from 31.3% in fiscal
2001. This decrease as a percentage of royalty, marketing and franchise fees is
primarily a result of increased franchise support costs offset by a 17.4%
increase in income from franchise fees and royalty and marketing fees.

Sales & Marketing

Sales and marketing costs increased 10.5% to $1.3 million in fiscal 2002 from
$1.2 million in fiscal 2001. This increase is due to higher spending levels,
primarily for franchise services and advertising and promotion.

General and Administrative

General and administrative expenses increased 0.3% to $2.096 million in fiscal
2002 from $2.091 million in fiscal 2001. As a percentage of total revenues,
general and administrative expense increased to 10.8% in fiscal 2002 from 9.3%
in fiscal 2001.

21

Retail Operating Expenses

Retail operating expenses decreased to $875,000 in fiscal 2002 from $3.7 million
in fiscal 2001; a decrease of 76.6%. This decrease resulted primarily from a
decrease in the number of Company-owned stores from 14 at February 28, 2001 to 4
at February 28, 2002. Retail operating expenses, as a percentage of retail
sales, increased to 54.5% in fiscal 2002 compared to 53.1% in fiscal 2001 due to
the decrease in same store sales of 4.9%.

Depreciation and Amortization

Depreciation and amortization decreased 21.3% to $905,000 in fiscal 2002 from
$1.1 million in fiscal 2001. The decrease in depreciation and amortization is
due primarily to lower depreciation expense as a result of fewer Company-owned
stores.

Other Expense

Other expense of $162,000 incurred in fiscal 2002 decreased 71.4% from the
$566,000 incurred in fiscal 2001 due primarily to lower interest expense on
lower average outstanding amounts of and rates on both short-term and long-term
debt. The Company also earned increased interest income on higher average
outstanding balances of notes receivable.

Income Tax Expense

The Company's effective income tax rate in fiscal 2002 was 37.8%, which is
approximately the same as the effective rate in fiscal 2001.

FISCAL 2001 COMPARED TO FISCAL 2000

Results Summary

Through February 28, 2001 the Company posted record earnings per share. Basic
earnings per share increased 87.1% from $.31 in fiscal 2000 to $.58 in fiscal
2001. Costs associated with Whitman Candies, Inc.'s unsolicited tender offer
negatively impacted basic and diluted earnings per share by approximately $.07
in fiscal 2000. Revenues decreased 8.4% from fiscal 2000 to fiscal 2001.
Operating income increased 16.6% from $2.7 million in fiscal 2000 to $3.1
million in fiscal 2001. Net income increased 47.3% from $1.1 million in fiscal
2000 to $1.6 million in fiscal 2001. Net income, as adjusted to exclude the
costs associated with Whitman's tender offer, increased 18.4% from $1.3 million
in fiscal 2000 to $1.6 million in fiscal 2001.

Revenues

Factory Sales

Factory sales increased 8.1%, or $897,000, to $11.9 million in fiscal 2001 from
$11.0 million in fiscal 2000. This increase was due primarily to an increase in
the number of franchised stores in operation during fiscal 2001 versus fiscal
2000. This increase was partially offset by a decrease in same store pounds
purchased from the factory by franchised stores of 2.0% in fiscal 2001 versus
fiscal 2000.

22

Retail Sales

Retail sales decreased $3.3 million, or 31.7%, to $7.0 million in fiscal 2001
compared to $10.3 million in fiscal 2000. This decrease resulted primarily from
a decrease in the number of Company-owned stores from 34 as of February 29, 2000
to 14 as of February 28, 2001 and a 4.3% decrease in same store sales.

In fiscal 2002, the Company completed phasing out its Rocky Mountain Chocolate
Factory Company-owned store program. The Company sold to new or existing
franchisees all viable Company-owned store locations with the exception of four
Company-owned stores located in key markets in Colorado. The Colorado Stores are
excluded because these stores are used to test sales, marketing, design and
operational initiatives.

Royalties, Marketing Fees and Franchise Fees

Royalties and marketing fees increased $179,000 or 6.0%, to $3.14 million in
fiscal 2001, compared to $2.96 million in fiscal 2000. This increase resulted
from an increase in the number of units in operation from 166 in fiscal 2000 to
180 in fiscal 2001 partially offset by a decrease in same store sales of 3.9%.
Franchise fee revenues increased $116,000 in fiscal 2001 compared to fiscal 2000
due to an increase in the number of new franchises sold.

Costs and Expenses

Cost of Sales

Cost of sales as a percentage of sales increased to 53.7% in fiscal 2001 versus
52.6% in fiscal 2000. This increase resulted from decreased retail sales, which
generate higher margins than factory sales, and a decrease in Company-owned
store margins from 58.7% in fiscal 2000 to 58.0% in fiscal 2001. Factory margins
increased to 39.4% in fiscal 2001 from 36.8% in fiscal 2000. This improvement
was due in part to certain changes to the Company's manufacturing processes and
cost structure.

Franchise Costs

Franchise costs increased $146,000, or 15.0%, in fiscal 2001 compared to fiscal
2000. As a percentage of total royalty and marketing fees and franchise fee
revenue, franchise costs increased to 31.3% in fiscal 2001 from 29.7% in fiscal
2000. This increase as a percentage of royalty, marketing and franchise fees is
primarily a result of increased franchise support costs partially offset by a
8.9% increase in income from franchise fees and royalty and marketing fees.

Sales & Marketing

Sales and marketing costs decreased 12.5% to $1.2 million in fiscal 2001 from
$1.3 million in fiscal 2000. This decrease is due to the de-emphasizing of new
channel sales efforts and an overall planned decrease in sales and marketing
costs.

General and Administrative

General and administrative expenses increased 18.7% to $2.1 million in fiscal
2001 from $1.8 million in fiscal 2000, primarily as a result of increased bad
debt expense. As a percentage of total revenues, general and administrative
expense increased to 9.3% in fiscal 2001 from 7.1% in fiscal 2000.

23

Retail Operating Expenses

Retail operating expenses decreased to $3.7 million in fiscal 2001 from $5.1
million in fiscal 2000; a decrease of 26.8%. This decrease resulted primarily
from a decrease in the number of Company-owned stores from 34 at February 29,
2000 to 14 at February 28, 2001. Retail operating expenses, as a percentage of
retail sales, increased to 53.1% in fiscal 2001 compared to 49.5% in fiscal 2000
due to the decrease in same store sales of 4.3%.

Depreciation and Amortization

Depreciation and amortization decreased 26.4% to $1.15 million in fiscal 2001
from $1.56 million in fiscal 2000. The decrease in depreciation and amortization
is due primarily to lower depreciation expense as a result of fewer
Company-owned stores and fewer fixtures used in outside channels.

Other Expense

Other expense of $566,000 incurred in fiscal 2001 decreased 39.7% from the
$939,000 incurred in fiscal 2000. This decrease was due primarily to
non-recurring costs of approximately $420,000 related to the unsolicited tender
offer for 100% of the Company's outstanding common stock by Whitman's Candies,
Inc., which commenced in May 1999 and was withdrawn on November 4, 1999. These
non-recurring expenses reduced basic and diluted earnings per share by
approximately $.07 in fiscal 2000. This decline was partially offset by
increased interest expense on higher average amounts of outstanding short-term
debt.

Income Tax Expense

The Company's effective income tax rate in fiscal 2001 and fiscal 2000 was
38.7%.

LIQUIDITY AND CAPITAL RESOURCES

As of February 28, 2002, working capital was $3.9 million compared with $1.2
million as of February 28, 2001, a $2.7 million increase. The increase in
working capital was due primarily to operating results, refinancing of long-term
debt and sales of Company-owned stores to franchisees.

Cash and cash equivalent balances increased from $87,000 as of February 28, 2001
to $165,000 as of February 28, 2002 as a result of cash flows generated by
operating activities in excess of cash flows used in financing and investing
activities. The Company's current ratio was 2.27 to 1 at February 28, 2002 in
comparison with 1.29 to 1 at February 28, 2001.

The Company's long-term debt is comprised primarily of a real estate mortgage
facility used to finance the Company's factory expansion (unpaid balance as of
February 28, 2002, $2.0 million), and chattel mortgage notes (unpaid balance as
of February 28, 2002, $3.5 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion and improve and automate the Company's factory
infrastructure.

The Company has a $2.0 million credit line, of which $2.0 million was available,
secured by substantially all of the Company's assets except retail store assets
and is subject to renewal in July, 2002.

24

The table below presents significant contractual obligations of the Company at
February 28, 2002.

During fiscal 2002, the Company financed the sale of nine Company-owned stores
to a single franchisee in the amount of approximately $1.3 million.

For fiscal 2003, the Company anticipates making capital expenditures of
approximately $675,000, which will be used to maintain and improve existing
factory and administrative infrastructure. The Company believes that cash flow
from operations and available bank lines of credit will be sufficient to fund
capital expenditures and working capital requirements for fiscal 2003.

IMPACT OF INFLATION

Inflationary factors such as increases in the costs of ingredients and labor
directly affect the Company's operations. Most of the Company's leases provide
for cost-of-living adjustments and require it to pay taxes, insurance and
maintenance expenses, all of which are subject to inflation. Additionally, the
Company's future lease cost for new facilities may include potentially
escalating costs of real estate and construction. There is no assurance that the
Company will be able to pass on increased costs to its customers.

Depreciation expense is based on the historical cost to the Company of its fixed
assets, and is therefore potentially less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior years
will ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.

SEASONALITY

The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday and
summer vacation seasons. In addition, quarterly results have been, and in the
future are likely to be, affected by the timing of new store openings and sales
of franchises. Because of the seasonality of the Company's business and the
impact of new store openings and sales of franchises, results for any quarter
are not necessarily indicative of results that may be achieved in other quarters
or for a full fiscal year.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations.
This standard eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 to have a
material effect on the Company's financial position or results of operations.

25

In June 2001, the FASB issued SFAS 142, Goodwill and Intangible Assets, which
revises the accounting for purchased goodwill and intangible assets. As
discussed in Note 1 to the financial statements, goodwill has historically been
amortized on the straight-line method over ten to twenty-five years. Under SFAS
142, goodwill and intangible assets with indefinite lives will no longer be
amortized, but will be tested for impairment annually, and also in the event of
an impairment indicator. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The Company expects that adoption of SFAS 142 will increase
annual operating income by approximately $118,000, which approximates the annual
amortization. The Company adopted SFAS 142 on March 1, 2002.

In August 2001, the FASB issued SFAS 144, Accounting for Impairment or Disposal
of Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The company does not believe that the implementation of this
standard will have any material effect on its financial position, results of
operations or cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not engage in commodity futures trading or hedging activities
and does not enter into derivative financial instrument transactions for trading
or other speculative purposes. The Company also does not engage in transactions
in foreign currencies or in interest rate swap transactions that could expose
the Company to market risk. However, the Company is exposed to some commodity
price and interest rate risks.

The Company frequently enters into purchase contracts of between six to eighteen
months for chocolate and certain nuts. These contracts permit the Company to
purchase the specified commodity at a fixed price on an as-needed basis during
the term of the contract. Because prices for these products may fluctuate, the
Company may benefit if prices rise during the terms of these contracts, but it
may be required to pay above-market prices if prices fall and it is unable to
renegotiate the terms of the contract.

As of February 28, 2002, approximately $4,800 of the Company's long-term debt
was subject to a variable interest rate. The Company also has a $2.0 million
bank line of credit that bears interest at a variable rate. As of February 28,
2002, no amount was outstanding under the line of credit. The Company does not
believe that it is exposed to any material interest rate risk related to the
line of credit.

The Chief Financial Officer and Chief Operating Officer of the Company has
primary responsibility over the Company's long-term and short-term debt and has
primary responsibility for determining the timing and duration of commodity
purchase contracts and negotiating the terms and conditions of those contracts.

26

ITEM 8. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

27

Report of Independent Certified Public Accountants

Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.

We have audited the accompanying balance sheets of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 2002 and 2001, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended February 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
February 28, 2002, in conformity with accounting principles generally accepted
in the United States of America.

GRANT THORNTON LLP

Dallas, Texas
April 12, 2002

28

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME

The accompanying notes are an integral part of these statements.

29

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS

The accompanying notes are an integral part of these statements.

30

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these statements.

31

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.

32

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Rocky Mountain Chocolate Factory, Inc. is an international franchiser,
confectionery manufacturer and retail operator in the United States, Guam,
Canada, and the United Arab Emirates. The Company manufactures an extensive line
of premium chocolate candies and other confectionery products. The Company's
revenues are currently derived from three principal sources: sales to
franchisees and others of chocolates and other confectionery products
manufactured by the Company; the collection of initial franchise fees and
royalties from franchisees' sales; and sales at Company-owned stores of
chocolates and other confectionery products.

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.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.

Property and Equipment and Other Assets

Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method based upon the estimated useful life of
the asset, which range from five to thirty-nine years. Leasehold improvements
are amortized on the straight-line method over the lives of the respective
leases or the service lives of the improvements, whichever is shorter. Other
intangible assets at February 28, 2002 and 2001 were approximately $586,000 and
$382,000, respectively.

The Company reviews its long-lived assets through analysis of undiscounted cash
flows, including identifiable intangible assets, whenever events or changes
indicate the carrying amount of such assets may not be recoverable. The
Company's policy is to review the recoverability of all assets, at a minimum, on
an annual basis.

Amortization of Goodwill

Goodwill has historically been amortized on the straight-line method over ten to
twenty-five years. In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill
and Intangible Assets, which revises the accounting for purchased goodwill and
intangible assets. Under SFAS 142, goodwill and intangible assets with
indefinite lives will no longer be amortized, but will be tested for impairment
annually, and also in the event of an impairment indicator. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. The Company
expects that adoption of SFAS 142 will increase annual operating income by
approximately $118,000, which approximates the annual amortization. The Company
adopted SFAS 142 on March 1, 2002.

Sales

Sales of products to franchisees and other customers are recognized at the time
of shipment. Sales of products at retail stores are recognized at the time of
sale.

Shipping Fees

Shipping fees charged to customers by the Company's Trucking department are
reported as sales. Shipping costs incurred by the Company's trucking department
are reported as cost of sales.

33

Franchise and Royalty Fees

Franchise fee revenue is recognized upon completion of all significant initial
services provided to the franchisee and upon satisfaction of all material
conditions of the franchise agreement. In addition to the initial franchise fee,
the Company receives a royalty fee of five percent (5%) and a marketing and
promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory
franchised stores' gross sales.

Use of Estimates

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, the disclosure of contingent assets and liabilities, at the date of
the financial statements, and revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Vulnerability Due to Certain Concentrations

Franchised stores are concentrated (40%) in the factory outlet mall environment.
At February 28, 2002, no Company-owned stores and 91 franchise stores of 228
total stores are located in this environment. The Company is, therefore,
vulnerable to changes in consumer traffic in this market environment and to
changes in the level of construction of additional, new factory outlet mall
locations.

As of February 28, 2002, the Company had long-term notes receivable of
approximately $2.5 million due from a single franchisee resulting from the
Company financing the sale of seventeen Company-owned stores. The notes are
collateralized by the underlying store assets. The Company is, therefore,
vulnerable to change in the cash flow from these locations.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and provides the required
pro forma disclosures prescribed by SFAS 123.

Advertising and Promotional Expenses

The Company expenses advertising costs as incurred. Total advertising expense
amounted to approximately $420,000, $320,000 and $296,000 for the fiscal years
ended February 28(29), 2002, 2001 and 2000, respectively.

Earnings Per Share

Basic earnings per share is computed as net earnings divided by the weighted
average number of common shares outstanding during each year of 2,473,268,
2,701,433 and 3,440,805 for the fiscal years ended February 28 (29), 2002, 2001
and 2000. Diluted earnings per share reflects the potential dilution that could
occur from common shares issuable through stock options. Incremental shares
assumed issued on the exercise of common stock options during the fiscal years
ended February 28 (29), 2002, 2001 and 2000 were 163,120, 7,224 and 21,922.
During 2002, 2001 and 2000, 62,495, 293,333 and 281,333 stock options were
excluded from diluted shares as their affect was anti-dilutive.

34

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
short-term investments in money market funds, other liquid assets, trade
receivables, payables, notes receivable, and debt. The fair value of all
instruments approximates the carrying value.

Reclassifications

Certain reclassifications have been made to prior years' financial statements in
order to conform with the presentation of the February 28, 2002 financial
statements.

NOTE 2 - INVENTORIES

Inventories consist of the following at February 28:

NOTE 3 - PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following at February 28:

NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT

Line of Credit

At February 28, 2002 the Company had a $2,000,000 line of credit from a bank,
collateralized by substantially all of the Company's assets with the exception
of the Company's retail store assets. Draws may be made under the line at 75% of
eligible accounts receivable plus 50% of eligible inventories. Interest on
borrowings is at prime less 50 basis points (4.25% at February 28, 2002). At
February 28, 2002, $2,000,000 was available for borrowings under the line of
credit. Terms of the line require that the line be rested (that is, that there
be no outstanding balance) for a period of 30 consecutive days during the term
of the loan. The credit line is subject to renewal in July, 2002.

35

NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED

Long-term debt

Long-term debt consists of the following at February 28:

Maturities of long-term debt are as follows for the years ending February 28 or
29:

2003 $ 1,188,300
2004 1,131,800
2005 1,021,754
2006 511,892
2007 113,349
Thereafter 1,545,951
$ 5,513,046

36

NOTE 4 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED

Long Term Debt - continued

Additionally, the line of credit and certain term debt are subject to various
financial ratio and leverage covenants. At February 28, 2002 the Company was in
violation of the Capital Expenditures covenant, for which it has received a
waiver.

NOTE 5 - COMMITMENTS AND CONTINGENCIES

Operating leases

The Company conducts its retail operations in facilities leased under five to
ten-year noncancelable operating leases. Certain leases contain renewal options
for between two and ten additional years at increased monthly rentals. The
majority of the leases provide for contingent rentals based on sales in excess
of predetermined base levels.

The following is a schedule by year of future minimum rental payments required
under such leases for the years ending February 28 or 29:

2003 $ 187,615
2004 114,544
2005 90,241
2006 41,100
$ 433,500

In some instances, in order to retain the right to site selection or because of
requirements imposed by the lessor, the Company has leased space for its
proposed franchise outlets. When a franchise was sold, the store was subleased
to the franchisee who is responsible for the monthly rent and other obligations
under the lease. The Company's liability as primary lessee on sublet franchise
outlets, all of which is offset by sublease rentals, is as follows for the years
ending February 28 or 29:

2003 $ 785,219
2004 561,420
2005 387,282
2006 311,190
2007 171,947
Thereafter 83,632
$ 2,300,690

The following is a schedule of lease expense for all retail space operating
leases for the three years ended February 28 or 29:

The Company also leases trucking equipment under operating leases. The following
is a schedule by year of future minimum rental payments required under such
leases for the years ending February 28 or 29:

2003 $ 293,739
2004 273,893
2005 200,917
2006 92,111
$ 860,660

37

NOTE 5 - COMMITMENTS AND CONTINGENCIES - CONTINUED

Operating leases - Continued

The following is a schedule of lease expense for trucking equipment operating
leases for the three years ended February 28 or 29:

Contingencies

The Company is party to various legal proceedings arising in the ordinary course
of business. Management believes that the resolution of these matters will not
have a significant adverse effect on the Company's financial position, results
of operations or cash flows.

NOTE 6 - INCOME TAXES

Income tax expense (benefit) is comprised of the following for the years ending
February 28 or 29:

A reconciliation of the statutory federal income tax rate and the effective rate
as a percentage of pretax income is as follows for the years ending February 29
or 28:

The components of deferred income taxes at February 28 are as follows:

38

NOTE 7 - STOCKHOLDERS' EQUITY

Stock Split

On January 28, 2002 the Board of Directors approved a four-for-three stock split
payable March 4, 2002 to shareholders of record at the close of business on
February 11, 2002. Shareholders received one additional share of Common Stock
for every three shares owned prior to the record date and par value changed from
$.03 to $.0225 per share. Immediately prior to the split there were 1,855,918
shares outstanding. Subsequent to the split there were 2,474,640 shares
outstanding. All share and per share data have been restated in all years
presented to give effect to the stock split.

Stock Repurchases

Between March 6, 2001 and September 28, 2001, the Company repurchased 123,355
Company shares at an average price of $5.07 per share. Of the shares repurchased
during this time period, 25,333 were repurchased from employees.

In January 2001 the Company repurchased 61,333 Company shares at an average
price of $3.80 per share.

On March 21, 2000, the Company commenced a tender offer to acquire shares of its
common stock. Pursuant to the tender offer, which was completed on May 1, 2000,
the Company acquired 596,793 shares of its issued and outstanding common stock
at $4.6875 per share.

Between December 22, 1999 and February 7, 2000, the Company repurchased 284,627
Company shares on the open market at an average price of $4.13 per share.

On May 15, 1998, the Company purchased 448,000 shares and certain of its
directors and executive officers purchased 138,667 shares of the Company's
issued and outstanding common stock at $3.8625 per share from La Salle National
Bank of Chicago, Illinois, which obtained these shares through foreclosure from
certain shareholders unrelated to any transactions of the Company. The Company
loaned certain officers and directors the funds to acquire 53,333 of the 138,667
shares purchased by them. The loans are secured by the related shares, bear
interest payable annually at 7.5% and are due May 15, 2003.

NOTE 8 - STOCK OPTION PLANS

Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan"), options
to purchase 286,667 shares of the Company's common stock were granted at prices
not less than market value at the date of grant. The 1985 Plan expired in
October 1995. Options granted under the 1985 Plan could not have a term
exceeding ten years. Options representing the right to purchase 36,000 shares of
the Company's common stock remained outstanding under the 1985 Plan at February
28, 2002.

Under the 1995 Stock Option Plan (the "1995 Plan"), the Nonqualified Stock
Option Plan for Nonemployee Directors (the "Director's Plan") and the 2000
Nonqualified Stock Option Plan for Nonemployee Directors (the "2000 Director's
Plan"), options to purchase up to 400,000, 120,000 and 80,000 shares,
respectively, of the Company's common stock may be granted at prices not less
than market value at the date of grant. Options granted may not have a term
exceeding ten years under the 1995 plan and the Director's Plan. Options granted
may not have a term exceeding five years under the 2000 Director's Plan. Options
representing the right to purchase 312,664, 26,666 and 58,664 shares of the
Company's common stock were outstanding under the 1995 Plan, the Director's
Plan, and the 2000 Director's Plan, respectively, at February 28, 2002. Options
become exercisable over a one to five year period from the date of the grant.
The options outstanding under these plans will expire, if not exercised, in June
2002 through March 2010.

39

NOTE 8 - STOCK OPTION PLANS - CONTINUED

The Company has adopted the disclosure-only provisions of SFAS 123. In
accordance with those provisions, the Company applies APB 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost if the exercise price is not less than market.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant dates as prescribed by SFAS 123, net
income and earnings per share would have been reduced to the pro-forma amounts
indicated in the table below for the years ending February 28 or 29(in 000's
except per share amounts):

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the following weighted average
assumptions:

Information with respect to options outstanding under the Plans at February 28,
2002, and changes for the three years then ended was as follows:

40

NOTE 8 - STOCK OPTION PLANS - CONTINUED

Additional information about stock options outstanding at February 28, 2002 is
summarized as follows:

41

NOTE 9 - OPERATING SEGMENTS

The Company classifies its business interests into three reportable segments:
Franchising, Retail stores and Manufacturing. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance and allocates resources
based on operating contribution, which excludes unallocated corporate general
and administrative costs and income tax expense or benefit. The Company's
reportable segments are strategic businesses that utilize common merchandising,
distribution, and marketing functions, as well as common information systems and
corporate administration. All intersegment sales prices are market based. Each
segment is managed separately because of the differences in required
infrastructure and the difference in products and services:

NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION

For the three years ended February 28 or 29:

42

NOTE 11 - EMPLOYEE BENEFIT PLAN

The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc.
401(k) Plan. Eligible participants are permitted to make contributions up to 15%
of compensation. The Company makes a matching contribution, which vests ratably
over a 3-year period, and is 25% of the employee's contribution up to a maximum
of 1.5% of the employee's compensation. For fiscal 2001 and 2000, the Company
made an additional discretionary contribution by doubling the normal matching.
During the years ended February 28 or 29, 2002, 2001 and 2000, the Company's
contribution was approximately $33,000, $68,000 and $70,000, respectively, to
the plan.

NOTE 12 - STORE SALES

In connection with the Company's plans to phase out its Company-owned stores,
the Company sold ten Company-owned stores in 2002 resulting in sales proceeds
consisting of cash and notes receivable of approximately $1.2 million and
recognized and deferred gains of approximately $124,000 and $386,000,
respectively.

In connection with the Company's plans to phase out its Company-owned stores,
the Company sold eighteen Company-owned stores in 2001 resulting in sales
proceeds consisting of cash and notes receivable of approximately $2.3 million
and recognized and deferred gains of approximately $542,000 and $193,000,
respectively.

At February 28, 2002, the Company has $3,141,000 of notes receivable
outstanding. The notes require monthly payments and bear interest at rates
ranging from 7.25% to 12.5%. The notes mature through February 2006 and are
secured by the assets of the sold stores.

Of the notes receivable outstanding at February 28, 2002, $2,482,000 are from a
single franchisee. These notes require variable monthly payments, bear interest
at rates ranging from 7.25% to 12.0% and mature in February 2005. During fiscal
2002 the Company adjusted the repayment schedule of these notes to correspond to
the franchisee's store operating cycles. The Company also financed an additional
$300,000 of inventory and wrote-off $189,000 of the notes receivable.

NOTE 13 - SUMMARIZED QUARTERLY DATA (UNAUDITED)

Following is a summary of the quarterly results of operations for the years
ended February 28, 2002 and 2001:

43

NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations.
This standard eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 to have a
material effect on the Company's financial position or results of operations.

In June 2001, the FASB issued SFAS 142, Goodwill and Intangible Assets, which
revises the accounting for purchased goodwill and intangible assets. See Note 1.

In August 2001, the FASB issued SFAS 144, Accounting for Impairment or Disposal
of Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The company does not believe that the implementation of this
standard will have any material effect on its financial position, results of
operations or cash flows.

44

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information with respect to the executive officers of the Company is set
forth in the section entitled "Executive Officers" in Part I of this report.

The information required by this item with respect to directors is incorporated
by reference from the information under the caption "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement for the Company's Annual Meeting of Shareholders to be
held on July 19, 2002 (the "Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
information appearing under the caption "Certain Transactions" in the Proxy
Statement.

45

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements

2. Financial Statement Schedules

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES

Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.

In connection with our audit of the financial statements of Rocky Mountain
Chocolate Factory, Inc. referred to in our report dated April 12, 2002, which is
included in Part II of this Form 10-K, we have also audited Schedule II for each
of the three years in the period ended February 28, 2002. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.

GRANT THORNTON LLP

Dallas, Texas
April 12, 2002

SCHEDULE II - Valuation and Qualifying Accounts

46

3. Exhibits

(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, 2002.

49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.

/S/ Bryan J. Merryman
--------------------------------
BRYAN J. MERRYMAN
Chief Operating Officer,Chief
Financial Officer, Treasurer and
Director

Date: May 23 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Date: May 23, 2002 /S/ Franklin E. Crail
---------------------------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President, and
Director
(principal executive officer)

Date: May 23, 2002 /S/ Bryan J. Merryman
---------------------------------------
BRYAN J. MERRYMAN
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Director
(principal financial and
accounting officer)

Date: May 23, 2002 /S/ Gerald A. Kien
---------------------------------------
GERALD A. KIEN, Director

Date: May 23, 2002 /S/ Lee N. Mortenson
---------------------------------------
LEE N. MORTENSON, Director

Date: May 23, 2002 /S/ Fred M. Trainor
---------------------------------------
FRED M. TRAINOR, Director

Date: May 23, 2002 /S/ Clyde Wm. Engle
---------------------------------------
CLYDE Wm. ENGLE, Director

50

EXHIBIT INDEX