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EX-10.2 - EX-10.2 - ROCKY MOUNTAIN CHOCOLATE FACTORY INCd69460exv10w2.htm
EX-10.1 - EX-10.1 - ROCKY MOUNTAIN CHOCOLATE FACTORY INCd69460exv10w1.htm
EX-32.1 - EX-32.1 - ROCKY MOUNTAIN CHOCOLATE FACTORY INCd69460exv32w1.htm
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2009
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-14749
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Colorado
(State of incorporation)
84-0910696
(I.R.S. Employer Identification No.)
265 Turner Drive, Durango, CO 81303
(Address of principal executive offices)
(970) 259-0554
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
    (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.
On September 30, 2009 the registrant had outstanding 6,025,938 shares of its common stock, $.03 par value.
 
 

 


 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-Q
TABLE OF CONTENTS
         
    Page No.
PART I. FINANCIAL INFORMATION
       
 
       
Item 1. Financial Statements
    3-11  
 
       
Statements of Income
    3  
 
       
Balance Sheets
    4  
 
       
Statements of Cash Flows
    5  
 
       
Notes to Interim Financial Statements
    6  
 
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    11  
 
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    18  
 
       
Item 4. Controls and Procedures
    18  
 
       
PART II. OTHER INFORMATION
       
 
       
Item 1. Legal Proceedings
    18  
 
       
Item 1A. Risk Factors
    19  
 
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    19  
 
       
Item 3. Defaults Upon Senior Securities
    19  
 
       
Item 4. Submission of Matters to a Vote of Security Holders
    19  
 
       
Item 5. Other Information
    19  
 
       
Item 6. Exhibits
    20  
 
       
SIGNATURES
    20  

2


 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
(unaudited)
                                                
    Three Months Ended August 31,   Six Months Ended August 31,
    2009   2008   2009   2008
Revenues
                               
Sales
  $ 4,597,519     $ 4,673,977     $ 9,984,402     $ 10,124,262  
Franchise and royalty fees
    1,489,386       1,615,538       2,771,690       3,225,728  
Total revenues
    6,086,905       6,289,515       12,756,092       13,349,990  
 
                               
Costs and Expenses
                               
Cost of sales, exclusive of depreciation and amortization expense of $84,040, $94,831, $168,924 and $191,783, respectively
    2,858,301       3,101,653       6,466,226       6,798,607  
Franchise costs
    401,627       498,290       771,762       817,818  
Sales and marketing
    339,448       315,687       677,761       706,312  
General and administrative
    535,989       599,903       1,202,936       1,225,034  
Retail operating
    384,277       234,581       708,313       446,635  
Depreciation and amortization
    175,657       194,042       354,688       392,553  
Total costs and expenses
    4,695,299       4,944,156       10,181,686       10,386,959  
 
                               
Income from Operations
    1,391,606       1,345,359       2,574,406       2,963,031  
 
                               
Other Income (Expense)
                               
Interest expense
          (4,207 )           (8,075 )
Interest income
    7,275       4,470       12,380       12,599  
Total other, net
    7,275       263       12,380       4,524  
 
                               
Income Before Income Taxes
    1,398,881       1,345,622       2,586,786       2,967,555  
 
                               
Provision for Income Taxes
    516,554       512,680       956,710       1,130,640  
 
                               
Net Income
  $ 882,327     $ 832,942     $ 1,630,076     $ 1,836,915  
 
                               
Basic Earnings per Common Share
  $ .15     $ .14     $ .27     $ .31  
Diluted Earnings per Common Share
  $ .14     $ .14     $ .26     $ .30  
 
                               
Weighted Average Common Shares Outstanding
    6,005,891       5,984,919       5,999,277       5,983,180  
Dilutive Effect of Stock Options
    204,839       156,286       201,182       141,782  
Weighted Average Common Shares Outstanding, Assuming Dilution
    6,210,730       6,141,205       6,200,459       6,124,962  
The accompanying notes are an integral part of these financial statements.

3


 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
                 
    August 31,   February 28,
    2009   2009
    (unaudited)        
Assets
               
Current Assets
               
Cash and cash equivalents
  $ 2,100,717     $ 1,253,947  
Accounts receivable, less allowance for doubtful accounts of $464,221 and $332,719 respectively
    3,528,346       4,229,733  
Notes receivable, current portion
    34,166        
Inventories, less reserve for slow moving inventory of $255,759 and $251,922 respectively
    4,133,322       4,064,611  
Deferred income taxes
    364,051       369,197  
Other
    335,329       224,378  
Total current assets
    10,495,931       10,141,866  
 
               
Property and Equipment, Net
    5,134,766       5,253,598  
 
               
Other Assets
               
Notes receivable, less current portion
    260,711       124,452  
Goodwill, net
    1,118,414       1,046,944  
Intangible assets, net
    146,580       183,135  
Other
    93,863       91,057  
Total other assets
    1,619,568       1,445,588  
 
               
Total assets
  $ 17,250,265     $ 16,841,052  
 
               
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Accounts payable
  $ 873,962     $ 1,074,643  
Accrued salaries and wages
    412,168       423,789  
Other accrued expenses
    583,912       531,941  
Dividend payable
    602,594       598,986  
Deferred income
    107,500       142,000  
 
               
Total current liabilities
  $ 2,580,136     $ 2,771,359  
 
               
Deferred Income Taxes
    837,341       827,700  
 
               
Commitments and Contingencies
               
 
               
Stockholders’ Equity
               
Preferred stock, $.10 par value; 250,000 authorized; -0- shares issued and outstanding
               
Series A Junior Participating Preferred Stock, authorized 50,000 shares
           
Undesignated series, authorized 200,000 shares
           
Common stock, $.03 par value, 100,000,000 shares authorized, 6,025,938 and 5,989,858 issued and outstanding
    180,778       179,696  
additional paid-in capital
    7,472,796       7,311,280  
Retained earnings
    6,179,214       5,751,017  
Total stockholders’ equity
    13,832,788       13,241,993  
 
               
Total liabilities and stockholders’ equity
  $ 17,250,265     $ 16,841,052  
The accompanying notes are an integral part of these financial statements.

4


 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
                 
    Six Months Ended  
    August 31,  
    2009     2008  
Cash Flows From Operating activities
               
Net income
  $ 1,630,076     $ 1,836,915  
Adjustments to reconcile net income to net cash
               
Provided by operating activities:
               
Depreciation and amortization
    354,688       392,553  
Provision for obsolete inventory
    30,000       50,000  
Provision for loss on accounts and notes receivable
    150,000       83,000  
Loss (gain) on sale of property and equipment
    (38,416 )     16,871  
Expense recorded for stock compensation
    162,598       77,351  
Deferred income taxes
    14,787        
Changes in operating assets and liabilities:
               
Accounts receivable
    512,516       81,906  
Inventories
    (98,711 )     (238,987 )
Other current assets
    (114,752 )     (244,260 )
Accounts payable
    (200,681 )     (606,680 )
Accrued liabilities
    40,349       (68,598 )
Deferred income
    (34,500 )     (93,000 )
Net cash provided by operating activities
    2,407,954       1,287,071  
 
               
Cash Flows From Investing Activities
               
Addition to notes receivable
    (170,425 )      
Proceeds received on notes receivable
          1,798  
Proceeds from sale or distribution of assets
    5,000       8,910  
Purchases of property and equipment
    (197,883 )     (112,957 )
(Increase) decrease in other assets
    394       (116,526 )
Net cash used in investing activities
    (362,914 )     (218,775 )
 
               
Cash Flows From Financing Activities
               
Net change in line of credit
          (150,000 )
Dividends paid
    (1,198,270 )     (1,197,964 )
Net cash used in financing activities
    (1,198,270 )     (1,347,964 )
 
               
Net Increase (Decrease) in Cash and Cash Equivalents
    846,770       (279,668 )
 
               
Cash and Cash Equivalents, Beginning of Period
    1,253,947       675,642  
 
               
Cash and Cash Equivalents, End of Period
  $ 2,100,717     $ 395,974  
The accompanying notes are an integral part of these financial statements.

5


 

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Rocky Mountain Chocolate Factory, Inc. (the “Company”) is an international franchisor, confectionery manufacturer and retail operator in the United States, Canada and the United Arab Emirates. The Company manufactures an extensive line of premium chocolate candies and other confectionery products. The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales; and sales at Company-owned stores of chocolates and other confectionery products. The following table summarizes the number of Rocky Mountain Chocolate Factory stores at August 31, 2009:
                         
    Sold, Not Yet Open   Open   Total
Company owned stores
          7       7  
Franchise stores – Domestic stores
    5       256       261  
Franchise stores – Domestic kiosks
          9       9  
Franchise units – International
          48       48  
Cold Stone Creamery – co branded
    4       9       13  
Total
    9       329       338  
Basis of Presentation
The accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the six months ended August 31, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2009.
Subsequent Events
The Company has performed an evaluation of subsequent events through October 13, 2009, the date the Company issued these financial statements. Based on our evaluation, the Company is not aware of any subsequent events which would require recognition or disclosure.
Stock-Based Compensation
At August 31, 2009, the Company had stock-based compensation plans for employees and nonemployee directors that authorized the granting of stock awards.
The Company recognized $74,759 and $162,598 of equity-based compensation expense during the three and six month periods ended August 31, 2009 compared with $30,271 and $77,351 during the three and six month periods, ended August 31, 2008. Compensation costs related to share-based compensation are generally amortized over the vesting period.

6


 

NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION — CONTINUED
Stock-Based Compensation — Continued
On February 21, 2006, the Company accelerated the vesting of all outstanding stock options and recognized a share-based compensation charge related to this acceleration. Adjustments in future periods may be necessary as actual results could differ from these estimates and assumptions related to employee turnover since the acceleration date.
There were no stock options or restricted stock units granted to employees during the three and six month periods ended August 31, 2009 compared with 170,400 shares of restricted common stock units granted during the three and six month periods ended August 31, 2008. During the six month period ended August 31, 2009, the Company issued 3,000 unrestricted shares of stock to non-employee directors compared with 4,000 unrestricted shares issued to non-employee directors in same period of the prior fiscal year. There were no unrestricted shares issued during the three month period ended August 31, 2009 or 2008. Associated with these non-employee director stock issuances, the Company recognized $13,080 and $47,080 during the six month periods ended August 31, 2009 and 2008, respectively.
During the three and six month periods ended August 31, 2009, the Company recognized $74,759 and $149,518 of equity-based compensation expense related to non-vested, non-forfeited restricted stock unit grants. The restricted stock unit grants vest 20% annually over a period of five years. During the three months ended August 31, 2009, 33,080 restricted stock units vested and were issued as common stock. Total unrecognized compensation expense of non-vested, non-forfeited shares granted, as of August 31, 2009, was $1,166,300, which is expected to be recognized over the weighted average period of 3.9 years
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units. For the three months ended August 31, 2009 and 2008, 129,381 and 140,640 stock options, respectively, were excluded from the computation of earnings per share because their effect would have been anti-dilutive. For the six months ended August 31, 2009 and 2008, 216,699 and 141,132 stock options, respectively, were excluded from the computation of earnings per share because their effect would have been anti-dilutive. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.
NOTE 3 — INVENTORIES
Inventories consist of the following:
                 
    August 31, 2009   February 28, 2009
Ingredients and supplies
  $ 2,265,107     $ 2,461,020  
Finished candy
    1,868,215       1,603,591  
Total inventories
  $ 4,133,322     $ 4,064,611  
NOTE 4 — PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
                 
    August 31, 2009   February 28, 2009
Land
  $ 513,618     $ 513,618  
Building
    4,697,134       4,707,381  
Machinery and equipment
    6,837,913       6,977,006  
Furniture and fixtures
    700,766       676,970  
Leasehold improvements
    353,357       347,124  
Transportation equipment
    356,209       350,714  
 
    13,458,997       13,572,813  
                 
Less accumulated depreciation
    8,324,231       8,319,215  
Property and equipment, net
  $ 5,134,766     $ 5,253,598  

7


 

NOTE 5 — STOCKHOLDERS’ EQUITY
Shareholder Rights Plan
On May 19, 2009, the Company and Computershare Trust Company, N.A. entered into an Amended and Restated Shareholder Rights Agreement (“Rights Agreement”) which amended and restated the existing Shareholder Rights Agreement dated May 28, 1999, (“Existing Rights Plan”). In connection with the Existing Rights Plan the Company’s Board of Directors declared a dividend of one right to purchase one one-hundredth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.10 per share, for each outstanding share of the Company’s common stock, par value $0.03 per share, of the Company that was outstanding on May 28, 1999. Each share of Series A Junior Participating Preferred Stock originally entitled the holder to one hundred votes and dividends equal to one hundred times the aggregate per share amount of dividends declared per common share. There are no shares of Series A Junior Participating Preferred Stock outstanding. The Existing Rights Plan was set to expire on May 28, 2009 and, through board declaration, was replaced in its entirety by the Rights Agreement on May 18, 2009 when the Board of Directors of the Company authorized and declared a dividend of one Right (a “Right”) for each outstanding share of Common Stock of the Company (the “Common Shares”). The dividend was paid on May 19, 2009 (the “Record Date”) to the holders of record of the Common Shares at the close of business on that date. The Rights will become exercisable and detachable only following the earlier of 10 days following a public announcement that a person or group has acquired beneficial ownership of 15 percent or more of the outstanding Common Shares or 10 business days following the announcement of a tender offer or exchange offer for 15 percent or more of the outstanding Common Shares. In addition, the Company has authorized the issuance of one Right with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date. When exercisable, each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.10 per share, of the Company (the “Preferred Shares”), at a price of $30 per one one-thousandth of a Preferred Share (the “Purchase Price”), subject to adjustment. Each share of Series A Junior Participating Preferred Stock entitles the holder to one thousand votes and dividends equal to one thousand times the aggregate per share amount of dividends declared per common share.
Cash Dividend
The Company paid a quarterly cash dividend of $0.10 per common share on March 13, 2009 to shareholders of record on February 27, 2009. The Company paid a quarterly cash dividend of $0.10 per common share on June 12, 2009 to shareholders of record on June 1, 2009. On August 24, 2009 the Company declared a quarterly cash dividend of $0.10 per common share payable on September 18, 2009 to shareholders of record on September 8, 2009.
Future declaration of dividends will depend on, among other things, the Company’s results of operations, capital requirements, financial condition and on such other factors as the Company’s Board of Directors may in its discretion consider relevant and in the best long term interest of the shareholders.
NOTE 6 — SUPPLEMENTAL CASH FLOW INFORMATION
                 
    Six Months Ended
    August 31,
    2009   2008
Cash paid (received) for:
               
Interest
        $ 8,225  
Income taxes
  $ 911,555     $ 1,127,643  
 
               
Non-Cash Financing Activities Dividend Payable
  $ 3,608     $ 400  
Fair value of assets acquired in business combination
               
Store assets
  $ 6,693     $ 19,021  
Inventory
  $     $ 3,398  
Goodwill
  $ 71,470     $ 87,870  

8


 

NOTE 7 — OPERATING SEGMENTS
The Company classifies its business interests into two reportable segments: Franchising and Manufacturing. The Company’s retail stores provide an environment for testing consumer behavior, various pricing strategies, new products and promotions, operating and training methods and merchandising techniques. All Company-owned retail stores are evaluated by management in relation to their contribution to franchising efforts and are included in the Franchising segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Company’s financial statements included in the Company’s annual report on Form 10-K for the year ended February 28, 2009. 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 inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:
                                 
Three Months Ended                
August 31, 2009   Franchising   Manufacturing   Other   Total
Total revenues
  $ 2,160,296     $ 4,349,208     $     $ 6,509,504  
Intersegment revenues
          (422,599 )           (422,599 )
Revenue from external customers
    2,160,296       3,926,609             6,086,905  
Segment profit (loss)
    859,684       1,153,571       (614,374 )     1,398,881  
Total assets
    2,977,336       10,348,688       3,924,241       17,250,265  
Capital expenditures
    75,950       71,978       29,349       177,277  
Total depreciation & amortization
    40,450       89,754       45,453       175,657  
 
                               
Three Months Ended
August 31, 2008
                               
Total revenues
  $ 2,081,714     $ 4,545,838     $     $ 6,627,552  
Intersegment revenues
          (338,037 )           (338,037 )
Revenue from external customers
    2,081,714       4,207,801             6,289,515  
Segment profit (loss)
    886,696       1,111,274       (652,348 )     1,345,622  
Total assets
    2,584,527       11,037,805       2,320,155       15,942,487  
Capital expenditures
    4,409       24,026       9,349       37,784  
Total depreciation & amortization
    42,646       100,200       51,196       194,042  
                                 
Six Months Ended                
August 31, 2009   Franchising   Manufacturing   Other   Total
Total revenues
  $ 3,948,174     $ 9,667,092     $     $ 13,615,266  
Intersegment revenues
          (859,174 )           (859,174 )
Revenue from external customers
    3,948,174       8,807,918             12,756,092  
Segment profit (loss)
    1,407,649       2,502,723       (1,323,586 )     2,586,786  
Total assets
    2,977,336       10,348,688       3,924,241       17,250,265  
Capital expenditures
    78,962       89,572       29,349       197,883  
Total depreciation & amortization
    80,786       179,896       94,006       354,688  
 
                               
Six Months Ended
August 31, 2008
                               
Total revenues
  $ 4,070,566     $ 9,940,944     $     $ 14,011,510  
Intersegment revenues
          (661,520 )           (661,520 )
Revenue from external customers
    4,070,566       9,279,424             13,349,990  
Segment profit (loss)
    1,794,836       2,478,101       (1,305,382 )     2,967,555  
Total assets
    2,584,527       11,037,805       2,320,155       15,942,487  
Capital expenditures
    30,376       43,403       39,178       112,957  
Total depreciation & amortization
    88,301       202,508       101,744       392,553  

9


 

NOTE 8 — GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following:
                                         
            August 31, 2009   February 28, 2009
      Gross     Gross  
    Amortization   Carrying   Accumulated   Carrying   Accumulated
    Period   Value   Amortization   Value   Amortization
Intangible assets subject to amortization
                                       
Store design
  10 Years   $ 205,777     $ 158,980     $ 205,777     $ 148,425  
Packaging licenses
  3-5 Years     120,830       116,664       120,830       114,164  
Packaging design
  10 Years     430,973       335,356       430,973       311,856  
Total
            757,580       611,000       757,580       574,445  
 
                                       
Intangible assets not subject to amortization                                
Franchising segment-
                                       
Company stores goodwill
            1,170,798       267,020       1,099,328       267,020  
Franchising goodwill
            295,000       197,682       295,000       197,682  
Manufacturing segment-Goodwill
            295,000       197,682       295,000       197,682  
Trademark
            20,000             20,000        
Total Goodwill
            1,780,798       662,384       1,709,328       662,384  
 
                                       
Total intangible assets
          $ 2,538,378     $ 1,273,384     $ 2,466,908     $ 1,236,829  
Amortization expense related to intangible assets totaled $36,555 and $36,556 during the six months ended August 31, 2009 and 2008, respectively. The aggregate estimated amortization expense for intangible assets remaining as of August 31, 2009 is as follows:
         
Remainder of fiscal 2010
  $ 36,600  
2011
    64,400  
2012
    40,200  
2013
    4,700  
2014
    680  
Total
  $ 146,580  
NOTE 9 — STORE PURCHASE
Effective August 1, 2008 the Company took possession of a previously financed franchise store and related inventory in satisfaction of $110,289 of notes, accrued interest, and accounts receivable. The Company currently intends to retain and operate the store. The following table summarizes the allocation of the purchase price:
         
Fair value of assets acquired in business combination
       
Store assets
  $ 19,021  
Inventory
  $ 3,398  
Goodwill
  $ 87,870  
Total fair value of business combination:
  $ 110,289  
Effective July 9, 2009 the Company took possession of a previously franchise operated store and related assets in satisfaction of $38,872 of accounts receivable. The Company currently intends to retain and operate the store upon completion of fixed asset upgrades. The Company Adopted SFAS No. 141 (revised 2007), Business Combinations, as of March 1, 2009. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. In accordance with SFAS 141 (revised 2007) the Company recorded the business acquisition using the acquisition method. The Company recorded the value of the business acquisition at fair value and recorded a gain of $39,292 associated with the business acquisition. The following table summarizes the allocation of fair value on the date of acquisition:
         
Fair value of assets acquired in business combination
       
Store assets, inclusive of $91,836 of improvements made by the Company:
  $ 98,530  
Goodwill, $32,179 expected to be amortized for income tax purposes:
  $ 71,470  
Total fair value of business combination:
  $ 170,000  

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Effective March 1, 2008, the Company adopted the fair value measurement and disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities that are already subject to fair value measurements under current accounting rules. The Company determined the fair value of the business combination using transaction information for historical sales of Rocky Mountain Chocolate Factory locations. These inputs to the valuation methodology are unobservable and significant to the fair value measurement (Level 3 of the SFAS 157 value hierarchy).
Note 11 — RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, which replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS No. 162 identified the sources of accounting principles and the framework for selecting the principles used in preparing financial statements that are presented in conformity with GAAP. It arranged these sources of GAAP in a hierarchy for users to apply. Once SFAS No. 168 is in effect, all of its contents will carry the same level of authority, effectively superseding SFAS No. 162. Thus, the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The provisions of SFAS 168 will not have a material impact on the Company’s financial statements.
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
A Note About Forward-Looking Statements
The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the unaudited financial statements and related Notes of the Company included elsewhere in this report. The nature of the Company’s operations and the environment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “will,” “intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate” and “potential,” or similar expressions. Factors which could cause results to differ include, but are not limited to: changes in the confectionery business environment, seasonality, consumer interest in the Company’s products, general economic conditions, consumer trends, costs and availability of raw materials, competition, the success of the Company’s agreement with Cold Stone Creamery Brands to open co-branded stores, including but not limited to new store openings and the effect of government regulation. Government regulation which the Company and its franchisees either are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause the Company’s actual results to differ from the forward-looking statements contained herein, please see the “Risk Factors” contained in the Company’s 10-K for the fiscal year ended February 28, 2009 which can be viewed at the SEC’s website at www.sec.gov or through our website at www.rmcf.com. These forward-looking statements apply only as of the date of this report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, the Company is not obligated to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this report or those that might reflect the occurrence of unanticipated events.
The Company is a product-based international franchisor. The Company’s revenues and profitability are derived principally from its franchised system of retail stores that feature chocolate and other confectionery products. The Company also sells its candy in selected locations outside its system of retail stores to build brand awareness. The Company operates seven retail units as a laboratory to test marketing, design and operational initiatives.

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The Company is subject to seasonal fluctuations in sales because of the location of its franchisees, which are located in street fronts, tourist locations, factory outlets and regional centers. Seasonal fluctuation in sales 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. Additionally, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of the Company’s business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
The most important factors in continued growth in the Company’s earnings are ongoing unit growth, increased same store sales and increased same store pounds purchased from the factory. Historically, unit growth has more than offset decreases in same store sales and same store pounds purchased.
The Company’s ability to successfully achieve expansion of its Rocky Mountain Chocolate Factory franchise system depends on many factors not within the Company’s control including the availability of suitable sites for new store establishment and the availability of qualified franchisees to support such expansion.
Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depends on many factors not within the Company’s control including the receptivity by its franchise system of its product introductions and promotional programs. Same store pounds purchased from the factory by franchised stores declined approximately 6% in the first quarter, declined approximately 9% in the second quarter and declined approximately 7% in the first six months of fiscal 2010 as compared to the same periods in fiscal 2009.
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. Readers are cautioned not to place undue reliance on the forward-looking statements in this Quarterly Report on Form 10-Q.
Results of Operations
Three Months Ended August 31, 2009 Compared to the Three Months Ended August 31, 2008
Basic earnings per share increased 7.1% from $.14 for the three months ended August 31, 2008 to $.15 for the three months ended August 31, 2009. Revenues decreased 3.2% for the three months ended August 31, 2009 compared to the three months ended August 31, 2008. Operating income increased 3.4% from $1.3 million in the second quarter of fiscal 2009 to $1.4 million in the second quarter of fiscal 2010. Net income increased 5.9% from $833,000 in the second quarter of fiscal 2009 to $882,000 in the second quarter of fiscal 2010. The increase in operating income, and net income for the second quarter of fiscal 2010 versus the same period in fiscal 2009 was due primarily to a decrease in operating expenses.
                                 
    Three Months Ended            
    August 31,           %
($’s in thousands)   2009   2008   Change   Change
Factory sales
  $ 3,926.6     $ 4,207.8     $ (281.2 )     (6.7 %)
Retail sales
    670.9       466.2       204.7       43.9 %
Franchise fees
    44.0       105.0       (61.0 )     (58.1 %)
Royalty and Marketing fees
    1,445.4       1,510.5       (65.1 )     (4.3 %)
Total
  $ 6,086.9     $ 6,289.5     $ (202.6 )     (3.2 %)
Factory Sales
The decrease in factory sales for the three months ended August 31, 2009 versus the same period in the prior year was primarily due to a 9% decrease in same store pounds purchased by franchised stores, a 40.1% decrease in product shipments to customers outside our system of franchised retail stores and a 1.5% decrease in the average number of franchised stores in operation to 320 in the second quarter of fiscal 2010 from 325 in the second quarter of fiscal 2009.

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Retail Sales
The increase in retail sales resulted primarily from an increase in the average number of Company-owned stores in operation from 4 during the second quarter of fiscal 2009 to 7 in the second quarter of fiscal 2010. Same store retail sales increased 2.6% in the second quarter of fiscal 2010 compared to the same period in fiscal 2009.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees decreased 4.3% in the three months ended August 31, 2009 compared with the three months ended August 31, 2008. The decrease in royalty and marketing fees resulted from a decrease in same store sales at franchise locations and a decrease in the average number of domestic units in operation from 283 in the three months ended August 31, 2008 to 266 in the three months ended August 31, 2009, partially offset by an increase in the effective royalty rate, related to the Company’s factory purchase based royalty structure. Same store sales decreased 4.8% in the three months ended August 31, 2009 compared with the same period in the prior year. Franchise fee revenue decreased as a result of a decrease in the number of new domestic franchise store openings from 5 in the three months ended August 31, 2008 to 2 openings in the three months ended August 31, 2009.
Costs and Expenses
                                 
    Three months ended           %
($’s in thousands)   2009   2008   Change   Change
Cost of sales — factory adjusted
  $ 2,620.7     $ 2,935.6     $ (314.9 )     (10.7 %)
Cost of sales — retail
    237.6       166.1       71.5       43.0 %
Franchise costs
    401.6       498.3       (96.7 )     (19.4 %)
Sales and marketing
    339.5       315.7       23.8       7.5 %
General and administrative
    536.0       599.9       (63.9 )     (10.7 %)
Retail operating
    384.3       234.6       149.7       63.8 %
Total
  $ 4,519.7     $ 4,750.2     $ (230.5 )     (4.9 %)
Adjusted gross margin
                                 
    Three months ended           %
($’s in thousands)   2009   2008   Change   Change
Factory adjusted gross margin
  $ 1,305.9     $ 1,272.2     $ 33.7       2.6 %
Retail
    433.3       300.1       133.2       44.4 %
Total
  $ 1,739.2     $ 1,572.3     $ 166.9       10.6 %
 
                               
(Percent)
                               
Factory adjusted gross margin
    33.3 %     30.2 %     3.1 %     10.3 %
Retail
    64.6 %     64.3 %     0.3 %     0.5 %
Total
    37.8 %     33.6 %     4.2 %     12.5 %
Adjusted gross margin is equal to gross margin minus depreciation and amortization expense. We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin and other performance measures calculated in conformity with accounting principles generally accepted in the United States (“GAAP”). We believe that adjusted gross margin is useful to investors because it provides a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin rather than gross margin to make incremental pricing decisions. Adjusted gross margin has limitations as an analytical tool because it excludes the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin as a measure of performance only in conjunction with GAAP measures of performance such as gross margin. The following table provides a reconciliation of adjusted gross margin to gross margin, the most comparable performance measure under GAAP:

13


 

                 
    Three Months Ended
    August 31,
($’s in thousands)   2009   2008
Factory adjusted gross margin
  $ 1,305.9     $ 1,272.2  
Less: Depreciation and Amortization
    84.0       94.8  
Factory GAAP gross margin
  $ 1,221.9     $ 1,177.4  
Costs and Expenses
Cost of Sales
Factory margins increased 310 basis points from the second quarter of fiscal 2009 compared to the second quarter of fiscal 2010 due primarily to lower transportation related costs resulting from a decrease in fuel costs during the second quarter of fiscal 2010 compared with the same period in fiscal 2009.
Franchise Costs
The decrease in franchise costs for the second quarter of fiscal 2010 compared to the same period in fiscal 2009 is primarily due to a decrease in professional fees. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 27.0% in the second quarter of fiscal 2010 from 30.8% in the second quarter of fiscal 2009. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of lower franchise costs relative to revenues.
Sales and Marketing
The increase in sales and marketing for the second quarter of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to a temporary difference in expenditures related to promotional materials.
General and Administrative
The decrease in general and administrative costs for the second quarter of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to decreased professional fees, partially offset by an increase in the allowance for doubtful accounts. As a percentage of total revenues, general and administrative expense decreased to 8.8% in the second quarter of fiscal 2010 compared to 9.5% in the second quarter of fiscal 2009.
Retail Operating Expenses
The increase in retail operating expenses during the second quarter of fiscal 2010 versus the second quarter fiscal 2009 was due primarily to an increase in the average number of Company-owned stores from 4 during the three months ended August 31, 2008 to 7 during the three months ended August 31, 2009. Retail operating expenses, as a percentage of retail sales, increased from 50.3% in the second quarter of fiscal 2009 to 57.3% in the second quarter of fiscal 2010.
Depreciation and Amortization
Depreciation and amortization of $176,000 in the second quarter of fiscal 2009 decreased 9.3% from $194,000 incurred in the second quarter of fiscal 2009 due to certain assets becoming fully depreciated.
Other, Net
Other, net of $7,275 realized in the second quarter of fiscal 2010 represents an increase of $7,012 from the $263 realized in the second quarter of fiscal 2009 due to higher average outstanding cash balances and an increase in interest income realized related to notes receivable.
Income Tax Expense
The Company’s effective income tax rate decreased 1.2% in the second quarter of fiscal 2010 compared to the second quarter of the prior year. The Company’s effective income tax rate was 36.9% for the three month period ended August 31, 2009 compared with the 38.1% for the same period in the prior year. The change in the effective tax rate is primarily the result of a non- taxable gain recognized on the acquisition of a previously franchised store.

14


 

Six Months Ended August 31, 2009 Compared to the Six Months Ended August 31, 2008
Basic earnings per share decreased 12.9% from $.31 for the six months ended August 31, 2008 to $.27 for the six months ended August 31, 2009. Revenues decreased 4.4% for the six months ended August 31, 2009 compared to the same period in the prior fiscal year. Operating income decreased 13.1% from $3.0 million in the six months ended August 31, 2008 to $2.6 million in the six months ended August 31, 2009. Net income decreased 11.3% from $1.8 million in the six months ended August 31, 2008 to $1.6 million in the six months ended August 31, 2009. The decrease in earnings per share, operating income, and net income for the first six months of fiscal 2010 versus the same period in fiscal 2009 was due primarily to a decrease in same store pounds purchased by Franchise locations, partially offset by an increase in specialty market sales.
Revenues
                                 
    Six Months Ended            
    August 31,           %
($’s in thousands)   2009   2008   Change   Change
Factory sales
  $ 8,807.9     $ 9,279.4     $ (471.5 )     (5.1 %)
Retail sales
    1,176.5       844.9       331.6       39.2 %
Franchise fees
    54.0       273.5       (219.5 )     (80.3 %)
Royalty and marketing fees
    2,717.7       2,952.2       (234.5 )     (7.9 %)
Total
  $ 12,756.1     $ 13,350.0     $ (593.9 )     (4.4 %)
Factory Sales
The decrease in factory sales for the six months ended August 31, 2009 versus the six months ended August 31, 2008 was primarily due to a 7% decrease in same store pounds purchased by franchised stores and a 1.2% decrease in the average number of franchised stores in operation to 322 in the first six months of fiscal 2010 from 326 in the first six months of fiscal 2009 partially offset by a 9.5% increase in shipments to customers outside our system of franchised retail stores in the six months ended August 31, 2009, compared with the same period in the prior fiscal year.
Retail Sales
The increase in retail sales resulted primarily from an increase in the average number of Company-owned stores in operation from 4 in the first six months of fiscal 2009 to 7 in the same period of fiscal 2010. Same store retail sales decreased 0.6% in the first six months of fiscal 2010 compared to the same period in the prior year.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees resulted from a decrease of 5.5% in same store sales in the six months ended August 31, 2009 compared with the same period in the prior fiscal year. The average number of domestic franchise units in operation decreased 5.6% from 285 in the first six months of fiscal 2009 to 269 in the same period of fiscal 2010. Franchise fee revenue decreased 80.3% in the first six months of fiscal 2010 as a result of a decrease in the number of franchise store openings from 16 in the first six months of fiscal 2009 to 8 openings in the first six months of fiscal 2010.
Costs and Expenses
                                 
    Six months ended           %
($’s in thousands)   2009   2008   Change   Change
Cost of sales — factory adjusted
  $ 6,037.2     $ 6,484.4     $ (447.2 )     (6.9 %)
Cost of sales — retail
    429.0       314.2       114.8       36.5 %
Franchise costs
    771.8       817.8       (46.0 )     (5.6 %)
Sales and marketing
    677.8       706.3       (28.5 )     (4.0 %)
General and administrative
    1,202.9       1,225.0       (22.1 )     (1.8 %)
Retail operating
    708.3       446.6       261.7       58.6 %
Total
  $ 9,827.0     $ 9,994.3     $ (167.3 )     (1.7 %)

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Adjusted gross margin
                                 
    Six months ended           %
($’s in thousands)   2009   2008   Change   Change
Factory
  $ 2,770.7     $ 2,795.0     $ (24.3 )     (0.9 %)
Retail
    747.5       530.7       216.8       40.9 %
Total
  $ 3,518.2     $ 3,325.7     $ 192.5       5.8 %
 
                               
(Percent)
                               
Factory
    31.5 %     30.1 %     1.4 %     4.7 %
Retail
    63.5 %     62.8 %     0.7 %     1.1 %
Total
    35.2 %     32.8 %     2.4 %     7.3 %
Adjusted gross margin is equal to gross margin minus depreciation and amortization expense. We believe adjusted gross margin is helpful in understanding our past performance as a supplement to gross margin and other performance measures calculated in conformity with accounting principles generally accepted in the United States (“GAAP”). We believe that adjusted gross margin is useful to investors because it provides a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin rather than gross margin to make incremental pricing decisions. Adjusted gross margin has limitations as an analytical tool because it excludes the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin as a measure of performance only in conjunction with GAAP measures of performance such as gross margin. The following table provides a reconciliation of adjusted gross margin to gross margin, the most comparable performance measure under GAAP:
                 
    Six Months Ended
    August 31,
($’s in thousands)   2009   2008
Factory adjusted gross margin
  $ 2,770.7     $ 2,795.0  
Less: Depreciation and Amortization
    168.9       191.8  
Factory GAAP gross margin
  $ 2,601.8     $ 2,603.2  
Costs and Expenses
Cost of Sales
Factory margins increased 140 basis points from the first six months of fiscal 2009 compared to the same period in fiscal 2010 due primarily to lower transportation related costs resulting from a decrease in fuel costs during the second quarter of fiscal 2010 compared with the same period in fiscal 2009.
Franchise Costs
The decrease in franchise costs during the first six months of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to decreased professional fees related to franchise operations. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 27.8% in the first six months of fiscal 2010 from 25.4% in the first six months of fiscal 2009. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of lower franchise costs relative to revenues.
Sales and Marketing
The increase in sales and marketing for the second quarter of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to a temporary difference in expenditures related to promotional materials.
General and Administrative
The decrease in general and administrative costs for the first six months of fiscal 2010 versus the same period in fiscal 2009 is due primarily to decreased professional fees mostly

16


 

offset by an increase in the allowance for doubtful accounts receivable from the first six months of fiscal 2010 compared with the same period in fiscal 2009. As a percentage of total revenues, general and administrative expenses increased to 9.4% in the first six months of fiscal 2010 compared to 9.2% in the first six months of fiscal 2009.
Retail Operating Expenses
The increase in retail operating expenses was due primarily to an increase in the average number of Company-owned stores in operation from 4 in the six months ended August 31, 2008 to 7 in the six months ended August 31, 2009. Retail operating expenses, as a percentage of retail sales, increased from 52.9% in the first six months of fiscal 2009 to 60.2% in the first six months of fiscal 2010.
Depreciation and Amortization
Depreciation and amortization of $355,000 in the first six months of fiscal 2010 decreased 9.7% from $393,000 incurred in the first six months of fiscal 2009 due to certain assets becoming fully depreciated.
Other, Net
Other, net of $12,380 realized in the first six months of fiscal 2010 represents an increase of $7,856 from the $4,524 realized in the first six months of fiscal 2009 due to due to higher average outstanding cash balances and an increase in interest income realized related to notes receivable.
Income Tax Expense
The Company’s effective income tax rate in the six months ended August 31, 2009 was 37.0% which is a decrease of 1.1% compared to 38.1% during the same period in the prior year. The decrease in the effective tax rate is primarily due to an increase in allowable deductions.
Liquidity and Capital Resources
As of August 31, 2009, working capital was $8.0 million, compared with $7.4 million as of February 28, 2009, an increase of $600,000. The change in working capital was due primarily to operating results.
Cash and cash equivalent balances increased from $1.3 million as of February 28, 2009 to $2.1 million as of August 31, 2009 as a result of cash flows provided by operating activities greater than cash flows used by financing and investing activities. The Company’s current ratio was 4.1 to 1 at August 31, 2009 in comparison with 3.7 to 1 at February 28, 2009. The Company monitors current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
The Company has a $5 million ($5 million available as of August 31, 2009) working capital line of credit collateralized by substantially all of the Company’s assets with the exception of the Company’s retail store assets. The line is subject to renewal in July, 2010.
The Company believes cash flows generated by operating activities and available financing will be sufficient to fund the Company’s operations at least through the end of fiscal 2010.
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 the Company to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally the Company’s future lease costs 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.

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Seasonality
The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company’s products have occurred during the Christmas holiday and summer vacation seasons. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of the Company’s business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3.   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 August 31, 2009, the Company had no long-term debt. The Company has a $5.0 million bank line of credit that bears interest at a variable rate. As of August 31, 2009, 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 for determining the timing and duration of commodity purchase contracts and negotiating the terms and conditions of those contracts.
Item 4.   Controls and Procedures
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, and, based on their evaluation, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in the Company’s internal controls, financial or otherwise, or in other factors that have affected, or are reasonably likely to materially affect these controls. Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.   Legal Proceedings
    The Company is not currently involved in any legal proceedings other than routine litigation incidental to its business.

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Item 1A.   Risk Factors
    In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
    None
Item 3.   Defaults Upon Senior Securities
    None
Item 4.   Submission of Matters to a Vote of Security Holders
    The 2009 Annual Meeting of the Shareholders of the Company was held in Durango, Colorado on July 17, 2009.
  1.   Election of six Directors. Messrs. Franklin E. Crail, Bryan J. Merryman, Gerald A. Kien, Lee N. Mortenson, Clyde Wm. Engle and Scott G. Capdevielle were elected to the Company’s Board of Directors. The results of the voting were as follows: 4,405,223 votes in favor of Franklin E. Crail, with 1,157,374 votes withheld; 4,399,962 votes in favor of Bryan J. Merryman, with 1,157,635 votes withheld; 4,367,513 votes in favor of Gerald A. Kien, with 1,190,084 votes withheld; 4,366,977 votes in favor of Lee N. Mortenson, with 1,190,620 votes withheld; 4,242,601 votes in favor of Clyde Wm. Engle, with 1,314,996 votes withheld and 5,489,294 votes in favor of Scott G. Capdevielle with 68,303 votes withheld.
Item 5.   Other Information
    The Company executed a Promissory Note and Commercial Security Agreement dated July 31, 2009 with Wells Fargo Bank. These documents were executed to renew the existing $5 million line of credit and extend the maturity date from July 2009 to July 2010. The line is 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, however, at no time will the rate be below 5.00% per annum. Terms of the line require that the line be rested (that is, that there be no outstanding balance) for a period of 30 consecutive days during the term of the loan. Additionally, the line of credit is subject to various financial ratio and leverage covenants. Copies of the Promissory Note and Commercial Security Agreement are filed as an Exhibits 10.1 and 10.2, respectively, to this report and are incorporated herein by reference. The description of these agreements is qualified in its entirety by reference to such documents.

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Item 6.   Exhibits
     
3.1
  Articles of Incorporation of the Registrant, as amended, incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K of the Registrant for the year ended February 28, 2009
 
   
3.2
  By-laws of the Registrant, as amended on November 25, 1997, incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended February 28, 2007
 
   
10.1
  *Promissory Note dated July 31, 2009 in the amount of $5,000,000 between Wells Fargo Bank and the Registrant.
 
   
10.2
  *Commercial Security Agreement dated July 31, 2009 between Wells Fargo Bank and the Registrant.
 
   
10.3
  *Master License Agreement between Kahala Franchise Corp. and the Registrant. (Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Commission)
 
   
31.1
  *Certification Filed Pursuant To Section 302 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer
 
   
31.2
  *Certification Filed Pursuant To Section 302 Of The Sarbanes-Oxley Act of 2002, Chief Financial Officer
 
   
32.1
  **Certification Furnished Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, Chief Executive Officer
 
   
32.2
  **Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002, Chief Financial Officer
 
     
*
  Filed herewith.
 
   
**
  Furnished herewith.
Signatures
Pursuant to the requirements 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.    
 
      (Registrant)    
 
           
Date: October 13, 2009
      /s/ Bryan J. Merryman
 
Bryan J. Merryman, Chief Operating Officer,
   
 
      Chief Financial Officer, Treasurer and Director    

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