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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
- - - --- OF 1934
For the fiscal year ended February 28, 1997
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
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Rocky Mountain Chocolate Factory, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-0910696
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
265 Turner Drive, Durango, Colorado 81301
- - - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(970) 259-0554
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(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.03 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At May 12, 1997, there were 2,912,299 shares of Common Stock outstanding. The
aggregate market value of the Common Stock (based on the average of the closing
bid and asked prices as quoted on the NASDAQ National Market System on May 12,
1997) held by non-affiliates was $5,368,698.
Documents incorporated by reference: None
The Exhibit Index is located on page 55.
This document contains 159 pages including exhibits.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . 18
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 21
ITEM 8. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . 49
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . 54
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 55
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PART I.
ITEM 1. BUSINESS
GENERAL
Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain
Chocolate Factory, Inc. is a manufacturer, franchiser and operator of two
retail concepts: Rocky Mountain Chocolate Factory-TM- and Fuzziwig's Candy
Factory-TM-. Headquartered in Durango, Colorado, the Company manufactures an
extensive line of premium chocolate candies and other confectionery products
for sale at its franchised and Company-owned Rocky Mountain Chocolate Factory
stores. Fuzziwig's Candy Factory is a new concept store that sells hard
conventional and nostalgic/unusual candies (which are not manufactured by the
Company, but procured from wholesale candy suppliers) in a themed, self-serve
environment featuring animation, movement, music, color and entertainment.
As of April 30, 1997 there were 43 Company-owned and 172 franchised Rocky
Mountain Chocolate Factory stores operating in 42 states and Canada, and 12
Company-owned and 1 franchised Fuzziwig's store operating in 11 states.
Approximately 30% of the products sold at the Company-owned and franchised
Rocky Mountain Chocolate Factory stores are prepared on the premises. The
Company believes this in-store preparation creates a special ambiance at "Rocky
Mountain Chocolate Factory" stores. The aroma and sight of products being made
attract passersby and assures them that those products are indeed fresh.
Fuzziwig's Candy Factory stores sell only pre-made candies. No candies are
prepared on Fuzziwig's premises.
The Company believes that its principal competitive strengths lie in its
name recognition, and its reputation for the quality, variety and taste of its
products; the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in the
manufacture of chocolate candy products and the merchandising and marketing of
chocolate and other candy products; and the control and training infrastructures
it has implemented to assure consistent customer service and execution of
successful practices and techniques at its franchised and Company-owned stores.
In addition, the Company believes it derives a competitive strength by
manufacturing its own chocolate candy products, through which the Company can
better maintain its high product quality standards, offer proprietary products,
manage costs, control production and shipment schedules and potentially pursue
new or under-utilized distribution channels for its Rocky Mountain Chocolate
Factory candy line.
The Company's revenues come from three principal sources: (i) sales to
franchisees of chocolates and other confectionery products manufactured by the
Company (38-44-47%); (ii) sales to the public at Company-owned stores of
chocolates and other confectionery products (51-42-37%) and (iii) the collection
of initial fees and royalties from franchisees (11-14-16%). The figures in
parentheses show the percentage of total revenues attributable to each source
for fiscal years 1997, 1996 and 1995, respectively.
The total U.S. candy market exceeded $14.0 billion of sales in 1994,
according to the National Confectionery Association. Candy sales have risen 29%
since 1988, with an average annual growth rate of between 4% and 6%, according
to United States Department of Commerce figures. According to the Department of
Commerce, per capita consumption of chocolate exceeds 10 pounds per year
nationally, generating annual sales of approximately $7.0 billion. Sales of
chocolate products are expected to grow at a rate of 3 to 4% annually, according
to THE CANDY MARKET.
The Company's executive offices are located at 265 Turner Drive, Durango,
Colorado 81301 and its telephone number is (970) 259-0554.
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BUSINESS STRATEGY
The Company's objective is to build on its position as a leading franchiser
and operator of retail chocolate stores in the United States and to continually
seek opportunities to profitably expand its business. To accomplish this
objective, the Company employs a business strategy that includes the following
elements:
PRODUCT QUALITY AND VARIETY. The Company maintains the unsurpassed taste
and quality of its 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, who has over 40 years of
experience in the confectionery industry. A typical Rocky Mountain Chocolate
Factory store offers up to 100 of the Company's chocolate candies throughout the
year and as many as 200, including many packaged candies, during the holiday
seasons. Individual stores also offer several varieties of premium fudge and
gourmet caramel apples, as well as other products prepared in the store from
Company recipes. The Company, in fiscal 1998, is executing a major program
designed to improve factory sales through development and sale of an expanded
line of new products, including its own sugar-free line and themed, branded and
novelty chocolate candies.
Candy sold in its Fuzziwig's stores is purchased from wholesale candy
suppliers to provide a broad variety of hard conventional and unusual/nostalgic
candies of a level of quality competitive with that provided by other themed or
bulk hard candy stores.
STORE ATMOSPHERE AND AMBIANCE. The Company seeks to establish an enjoyable
and inviting atmosphere in each Rocky Mountain Chocolate Factory and Fuzziwig's
Candy Factory store. Each Rocky Mountain Chocolate Factory store prepares
certain 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 special ambiance
of Rocky Mountain Chocolate Factory stores is also achieved through the use of
distinctive decor designed to give the store an attractive country Victorian
look. Fuzziwig's Candy Factory stores, although not providing in-store candy
preparation, provide a fun-filled experience for the customer through the use of
animation, color, music and movement in this themed, stylized "candy factory".
The Company's design staff has developed easily replicable designs and
specifications to ensure that the Rocky Mountain Chocolate Factory and
Fuzziwig's Candy Factory concepts are consistently implemented throughout the
system. The Company in fiscal 1998 will be testing new store designs for both
Rocky Mountain Chocolate Factory and Fuzziwig's concepts with the goal of
increasing same store retail sales and improving store economics. Included in
the new designs is use of an animated store front window at Rocky Mountain
Chocolate Factory stores to attract consumer interest and a potential modified
design of the existing Fuzziwig's Candy Factory store window.
SITE SELECTION. Careful selection of a site is critical to the success of
a Rocky Mountain Chocolate Factory or Fuzziwig's Candy Factory store. Many
factors are considered by the Company in identifying suitable sites, including
tenant mix, visibility, attractiveness, accessibility, level of foot traffic and
occupancy costs. Final site selection, for both franchised and Company-owned
stores, occurs only after the Company's senior management has approved the site.
The Company believes that the experience of its management team in evaluating a
potential site is one of the Company's competitive strengths.
CUSTOMER SERVICE COMMITMENT. The Company emphasizes excellence in customer
service and seeks to employ, and to sell franchises to, motivated and energetic
people. The Company has implemented sales incentive programs for the employees
of Company-owned stores so that the store personnel having direct contact with
customers share in the success of their stores. The Company also fosters
enthusiasm for its customer service philosophy and the Rocky Mountain Chocolate
Factory concept through its annual franchisee convention, annual regional
meetings and other frequent contacts with its franchisees and store managers.
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INCREASE SAME STORE RETAIL SALES AT EXISTING LOCATIONS. The Company seeks
to increase profitability of its store system through increasing sales at
existing store locations. System wide same store retail sales have grown each
year for the last 5 years, except for fiscal 1997:
1993 1.0%
1994 1.3%
1995 3.4%
1996 2.9%
1997 (.52%)
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 embodying more shelf space and accessibility/visibility of products
while retaining the Rocky Mountain Chocolate Factory and Fuzziwig's store
ambiances and themes. The Company has developed and will be testing a
redesigned store concept in the second quarter of fiscal 1998. The Company is
currently developing an animated front window for its Rocky Mountain Chocolate
Factory stores and redesigning its existing Fuzziwig's Candy Factory store
window to add more movement, color and music to attract the consumer into the
store. It is felt that development and sale of superior new products such as
its new line of sugar-free products as discussed above, will also prove to be
conducive to the goal of enhanced same store retail sales growth.
INCREASE SAME STORE POUNDS PURCHASED BY EXISTING LOCATIONS. In fiscal
1997, the Company experienced a same store pounds purchased decline of 3.6%.
The decline in same store pounds purchased from the factory continued what
appears to be a trend of a shift in sales mix toward store-made and authorized
vendor products and away from factory made products. The Company has
implemented a program designed to reverse the decline and to increase same store
pounds purchased from the factory through new product development and
introduction, new packaging development and purchase-volume-based rebates on
factory product purchased by its franchisees. The Company has, at the same
time, hired a new Vice President - Product Sales Development with extensive
product and marketing management experience to spearhead the new product and
packaging development effort. His charter, in addition to new product
development, is to emphasize active sales promotion of new and existing
products, to assess and assure the provision of enhanced customer service and to
evaluate the potential of alternative channels of distribution for the Company
as discussed below. The Company believes that a one-time increase of 10% in
same store pounds purchased is possible based upon historically achieved
relationships between retail revenues and pounds purchased from the factory,
followed by modest growth or stability. Such an increase would provide a strong
element to promote factory revenue growth. No guarantee can be given, however,
that such an increase will in fact be achieved.
COMPANY STORES. The Company, in fiscal 1997, experienced financial losses
in its Company-owned store program primarily as a result of disappointing
results of new Rocky Mountain Chocolate Factory stores established in fiscal
1997 and 1996, together with same store retail sales declines at a number of its
existing stores. A same store sales decline of 2.7% partially offset the impact
of an increased number of stores (57 at February 28, 1997 in comparison with 42
at February 29, 1996) on total revenues generated by Rocky Mountain Chocolate
Factory and Fuzziwig's Company-owned stores. Poor sales volume results occurred
largely because of lower foot traffic than expected in the factory outlet mall
environment in which most Company-owned stores operate and as a result of a
decline in revenues in the second year of operation from grand opening levels of
revenue at stores established in the last fiscal year at new factory outlet
malls. Disappointing sales volumes resulted in insufficient sales volume
leveraging of expenses producing financial losses for the program.
The Company in fiscal 1998 will close an estimated 8 underperforming Rocky
Mountain Chocolate Factory stores (no Fuzziwig's stores are currently slated for
closure) and sell to potential franchisees certain other stores with the goal of
improving Company-owned store program profitability and of reducing the number
of Company-owned stores to a nucleus of more profitable store locations.
Additionally, the Company in fiscal 1997 made impairment provisions reducing the
asset values on its books for "impaired" Company-owned stores.
5
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The Company in fiscal 1998 anticipates opening few Company-owned stores
and to refocus its efforts to continue to improve the profitably of the
smaller number of remaining stores. In particular, the Company is testing a
new store design in conjunction with a program of new product introduction
with the goal of increasing same store retail sales. It is coupling this
effort with a focused continued program of improving store margins and
reducing expenses by optimizing product mix, effecting control and
motivational policies, practices and programs to reduce theft and through
further emphasis on a financial control and bonus program to assure
achievement of expense targets.
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 equipment including a computer-controlled shell-filling machine for
truffles, a candy bar molding machine, an automated pre-mixer to mix chocolate
and nuts and an automated tempering machine to control the tempering of the
chocolate used in the manufacture of the Company's chocolate products. These
items enable the Company to produce certain of its products much more quickly
and at a lower cost than previously. In March 1996, the Company implemented a
comprehensive MRP II forecasting, planning, scheduling and reporting system to
improve the efficiency of manufacturing operations. The Company in the spring
of calendar year 1995, completed a factory expansion and expanded its operation
of a small fleet of trucks for the shipment of its products. These measures have
significantly improved the Company's ability to deliver its products to
franchised and Company-owned stores safely, quickly and cost-effectively.
EXPANSION STRATEGY
The Company opened its first Rocky Mountain Chocolate Factory store in 1981
and at the end of fiscal 1993 had a total of 88 stores, most of which were
franchised. Over the last four years, the Company has increased its total number
of stores to 228. Key elements of the Company's expansion strategy include:
SELECTIVE UNIT GROWTH FOR ROCKY MOUNTAIN CHOCOLATE FACTORY. The Company
is experiencing constraints in the growth in the number of its Rocky Mountain
Chocolate Factory locations posed by a slowdown in the pace of establishment
of new factory outlet centers and saturation of existing factory outlet and
other environments where its concept has proven successful. Despite such
constraints, the Company is continuing to seek locations in its traditional
operating environments such as prime tourist areas, regional malls, mixed use
and factory outlet centers to satisfy demand for franchises through
establishment of additional stores as prime locations become available. The
Company believes, however, that further growth in revenues will come
primarily from development and execution of sales through the potential
opening of new channels of distribution (see "New Channels of Distribution,"
below) and through increased same store factory and retail sales from/at
existing locations, as discussed below.
HIGH TRAFFIC ENVIRONMENTS. The Company currently establishes franchised
and Company-owned stores in three primary environments: factory outlet malls,
tourist environments and regional malls. The Company, over the last several
years, has had a particular focus on factory outlet mall locations. Although
each of these environments has a number of attractive features, including a high
level of foot traffic, the factory outlet mall environment has historically
offered the best combination of tenant mix, customer spending characteristics
and favorable occupancy costs. The Company has established a business
relationship with the major outlet mall developers in the United States and
believes that these relationships provide it with the opportunity to take
advantage of attractive sites in new and existing outlet malls. As discussed
above, the Company is experiencing a slowdown in the availability of new factory
outlet locations and saturation of other environments where its concept has
proven to be successful. The Company is exploring new channels of distribution,
expansion of its Fuzziwig's concept, and is seeking to secure increased
purchases of its products from existing store locations as a basis for its
continued growth.
6
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NAME RECOGNITION AND NEW MARKET PENETRATION. The Company believes the
visibility of its stores and the high tourist traffic at its factory outlet mall
and tourist locations has generated strong name recognition 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 Company-owned and franchised stores have been opened in the
eastern half of the country. This growth has further increased the Company's
name recognition and demand for its franchises. The Company believes this
growing name recognition will facilitate its future growth.
POSITION FUZZIWIG'S FOR FASTER GROWTH. The Company believes the new,
Fuzziwig's Candy Factory-TM- store concept, may allow it to expand its
presence in the Company's existing market environments. The concept uses
creative lighting, music, animation and movement to entertain customers and
to appeal to both children and adults. A total of 13 Fuzziwigs-TM- stores (12
Company-owned and 1 franchised) were in operation at April 30, 1997. The new
self-serve store concept sells a line of hard conventional and
unusual/nostalgic candies much different from candies sold at existing Rocky
Mountain Chocolate Factory stores.
The Company is currently in process of redesigning of the Fuzziwig's store
plan including fixtures and animation with the goal of reducing cost, allowing
"scalability" to lower space requirements, particularly in the regional mall
environment, with the goal of improving store economics. Evidence from
operation of Fuzziwig's stores in locations where Rocky Mountain Chocolate
Factory stores also exist is that the concept does not compete with or detract
significantly from the sales volume of existing Rocky Mountain Chocolate Factory
stores. The Company believes this is due to the different line of candies sold
by Fuzziwig's stores relative to that sold by its Rocky Mountain Chocolate
Factory Stores.
NEW CHANNELS OF DISTRIBUTION. The Company is currently exploring the
opening of new channels of distribution to increase sales of its products. The
Company believes, as discussed above, that availability of locations where its
Rocky Mountain Chocolate Factory store concept has proven successful is imposing
constraint to its future growth. The Company feels that distribution of its
products through vehicles such as:
Fund-raising
Mail order
Corporate sales
may help restore the Company's growth momentum. The Company is currently
gathering facts preparatory to a test of fund raising at several test sites
throughout the U.S. and is beginning to assess the potential of a Corporate
sales program for the Company. The Company anticipates within the second
quarter of fiscal 1998 development of a mail order catalogue for use during the
Christmas holiday selling season. The Company believes that, should initial
assessment of these distribution concepts produce positive results, that (with
the exception of a Christmas catalogue to be developed and utilized in the third
quarter of fiscal 1998) that they will be developed commercially in the first
quarter of fiscal 1999. The Company anticipates that execution of distribution
through these alternative channels will not compete with existing Rocky Mountain
Chocolate Factory stores both due to a geographical focus of the programs away
from areas of Rocky Mountain Chocolate Factory store concentration and due to
distribution through these channels of a small, select group of Rocky Mountain
Chocolate Factory products.
The following tables set forth the number of Rocky Mountain Chocolate
Factory stores opened and closed during the last five fiscal years:
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<TABLE>
<CAPTION>
Rocky Mountain Chocolate Factory Stores
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YEAR ENDED FEBRUARY 28 OR 29,
-----------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Company-owned stores:
Opened . . . . . . . . . . . . . . . . . . . 1 8 13 18 11
Closed . . . . . . . . . . . . . . . . . . . 1 1 1 2 3
Acquired from franchisees. . . . . . . . . . 0 0 1 2 0
Sold to franchisees. . . . . . . . . . . . . 2 1 4 0 3
Total open at year end . . . . . . . . 7 13 22 40 45
Franchised stores: . . . . . . . . . . . . . . .
Opened . . . . . . . . . . . . . . . . . . . 18 30 30 27 22
Closed . . . . . . . . . . . . . . . . . . . 2 6 8 5 6
Acquired from Company . . . . . . . . . . . 2 1 4 0 3
Sold to Company. . . . . . . . . . . . . . . 0 0 1 2 0
Total open at year end . . . . . . . . 81 106 131 151 170
System-wide stores:
Opened . . . . . . . . . . . . . . . . . . . 19 38 43 45 33
Closed . . . . . . . . . . . . . . . . . . . 3 7 9 7 9
Total open at year end. . . . . . . . . 88 119 153 191 215
</TABLE>
Fuzziwig's Candy Factory Stores
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YEAR ENDED
FEBRUARY 28 OR 29,
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1996 1997
---- ----
Company-owned stores:. . . . . . . . . .
Opened. . . . . . . . . . . . . . . . 2 10
Closed. . . . . . . . . . . . . . . . - -
Acquired from franchisees . . . . . . - -
Sold to franchisees . . . . . . . . . - -
Total open at year end. . . . . . . 2 12
Franchised stores:
Opened. . . . . . . . . . . . . . . . - 1
Closed. . . . . . . . . . . . . . . . - -
Acquired from Company . . . . . . . . - -
Sold to Company . . . . . . . . . . . - -
Total open at year end. . . . . . . - 1
System-wide stores:. . . . . . . . . . .
Opened. . . . . . . . . . . . . . . . 2 11
Closed. . . . . . . . . . . . . . . . - -
Total open at year end. . . . . . . 2 13
As of April 30, 1997, the Company had signed leases for 3 additional Rocky
Mountain Chocolate Factory and 2 Fuzziwig's planned to open as Company-owned
stores and no leases for additional franchised stores. The Company is not in the
process of negotiating leases for any further Company-owned or franchised
stores.
STORE CONCEPT
The Company seeks to establish a fun and inviting atmosphere in its Rocky
Mountain Chocolate Factory and Fuzziwig's store locations.
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ROCKY MOUNTAIN CHOCOLATE FACTORY STORES: Unlike most other confectionery
stores, each Rocky Mountain Chocolate Factory store prepares certain products,
including fudge and caramel apples, in the store. Customers can observe store
personnel make fudge from start to finish, including the mixing of ingredients
in old-fashioned copper kettles and the cooling of the fudge on large marble
tables, and are often invited to sample the store's products. The Company
believes that an average of approximately 30% of the revenues of Company-owned
and franchised stores are generated by sales of products prepared on the
premises. The Company believes the in-store preparation and aroma of its
products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are
fun and entertaining for its customers and convey an image of freshness and
homemade quality.
Rocky Mountain Chocolate Factory stores have a distinctive country
Victorian decor, which further enhances their friendly and enjoyable atmosphere.
Each store includes finely-crafted wood cabinetry, copper and brass accents,
etched mirrors and large marble tables on which fudge and other products are
made. To ensure that all stores conform to the Rocky Mountain Chocolate Factory
image, the Company's design staff provides working drawings and specifications
and approves the construction plans for each new franchised or Company-owned
store. The Company also controls the signage and building materials that may be
used in the stores. As discussed above, the Company is executing a program of
store redesign to provide a more attractive and effective retail sales
environment embodying more shelf space, accessibility/visibility of products,
and animation, while retaining the Rocky Mountain Chocolate Factory ambiance and
theme.
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.
FUZZIWIG'S CANDY FACTORY STORES: Fuzziwig's Candy Factory stores have been
designed to provide an entertaining, fun-filled experience for the customer
whether child or adult. The stores are colorful and animated. The front window
provides an attractive display of "Kayo" a monkey peddling his bicycle providing
the "power source" for the "machinery" and "conveyors" producing and
transporting the candy "manufactured" in the store. Upon entering the store,
the customer immediately sees the animated Professor Fuzziwig character pulling
the lever "controls" governing the "factory operations" together with the array
of "machinery", "conveyors" and other "transport mechanisms" through which the
candy "travels" to the clear yellow plastic candy bins containing the
merchandise for sale. Within the store, favorite fun-filled tunes are heard to
emphasize the atmosphere of fun and excitement in the store. Traveling from
candy bin to candy bin with the clear "Fuzzibag" provided, the customer makes
their selections from over 200 popular hard and "pan" candies displayed. The
customer is serviced at check out in friendly, courteous fashion by a colorfully
costumed service representative trained to complete their enjoyable experience.
Fuzziwig's stores average 1,200 square feet. Stores are open 7 days per
week. Typical operating hours are 10 a.m. to 9:00 p.m. Monday thru Saturday and
12 noon to 6:00 p.m. on Sundays. As discussed above, the Company is currently in
process of redesign of the Fuzziwig's store plan to reduce the required initial
investment, allowing "scalability" to lower space requirements, but with
retention of the Fuzziwig's theme including animation, music, color and
entertainment to maintain the tone and quality of the shopping experience. As
with Rocky Mountain Chocolate Factory stores, the Company maintains rigorous
procedures to assure that all Fuzziwig's stores conform to the Fuzziwig's Candy
Factory image and theme, the Company's design staff provides working drawings
and specifications and approves the construction plans for each new franchised
or Company-owned store and controls the signage and building materials that may
be used in the stores.
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PRODUCTS AND PACKAGING
ROCKY MOUNTAIN CHOCOLATE FACTORY: The Company typically produces
approximately 250 chocolate candies and other confectionery products, using
proprietary recipes developed primarily by the Company's master candy maker.
These products include many varieties of clusters, caramels, creams, mints and
truffles. The Company also produces custom-molded theme candy bars tailored to
promotional concepts of individual stores. As discussed above, the Company in
fiscal 1998, is engaging 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 300 additional items, including many candies offered in packages
specially designed for the holidays. A typical Rocky Mountain Chocolate Factory
store offers up to 100 of these candies throughout the year and up to 200 during
holiday seasons. Individual stores also offer more than 15 premium fudges and
other products prepared in the store. The Company believes that approximately
50% of the revenues of Rocky Mountain Chocolate Factory stores are generated by
products manufactured at the Company's factory, 30% by products made in the
store using Company recipes and ingredients purchased from the Company or
approved suppliers and the remaining 20% by products, such as ice cream, soft
drinks and other sundries, purchased from approved suppliers.
The Company uses only the finest chocolates, nut meats and other wholesome
ingredients in its candies. In February 1995 the Company's Valentine's Day
gift-boxed chocolates were awarded MONEY MAGAZINE'S top rating and were
described as having "superior flavor" which is "intense" and "natural." The
Company continually strives to offer new confectionery products in order to
maintain the excitement and appeal of its products.
Chocolate candies manufactured by the Company are sold at Company-owned and
franchised stores at prices ranging from $12.90 to $14.90 per pound, with an
average price of $13.50 per pound. Franchisees set their own retail prices,
though the Company does recommend prices for all its products.
The Company's in-house graphics designers create packaging that reflects
the country Victorian theme of its stores. The Company develops special
packaging for the Christmas, Valentine's Day and Easter holidays, and customers
can have their purchases packaged in decorative boxes and fancy tins throughout
the year. The Company's new packaging for its Rocky Mountain Mints in 1995
received the AWARD OF EXCELLENCE from the National Paperbox Association.
FUZZIWIG'S CANDY FACTORY: Fuzziwig's Candy Factory stores offer over 200
hard and "pan" candies. Fuzziwig's Candy Factory candies, unlike Rocky Mountain
Chocolate Factory product, are purchased from outside vendors and represent the
best quality of such candies available on the market. Candies sold at
Company-owned Fuzziwig's Candy Factory stores are sold at one price, $6.95 per
pound. Franchisees set their own retail prices, though the Company recommends
that the franchisee sell all of its products at one price utilizing the same
pricing concept as Company-owned stores.
OPERATING ENVIRONMENTS
The Company currently establishes franchised and Company-owned Rocky
Mountain Chocolate Factory and Fuzziwig's stores in three primary environments:
factory outlet malls, tourist areas and regional malls. Each of these
environments has a number of attractive features, including high levels of foot
traffic.
FACTORY OUTLET MALLS. There are approximately 325 factory outlet malls in
the United States, and as of April 30, 1997, there were Rocky Mountain Chocolate
Factory or Fuzziwig's stores in 125 of these malls in 41 states. The Company has
established business relationships with the major outlet mall developers in the
United States. Although not all factory outlet malls provide desirable locations
for the Company's stores, management believes the Company's relationships with
these developers will provide it with the opportunity to take advantage of
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attractive sites in new and existing outlet malls. As discussed above, however,
the Company is experiencing a constraint posed by a national slowdown in the
establishment of new factory outlet centers and saturation of existing factory
outlet centers with Rocky Mountain Chocolate Factory stores. The factory outlet
environment remains largely untapped, however, as an environment for the
Company's Fuzziwig's Candy Factory stores.
TOURIST AREAS. As of April 30, 1997, there were approximately 62 Rocky
Mountain Chocolate Factory stores in franchised locations considered to be
tourist areas, including Aspen, Colorado; Fisherman's Wharf in San Francisco,
California; and the Riverwalk in San Antonio, Texas. Although some have short
selling seasons, many tourist areas are very attractive locations because they
offer high levels of foot traffic and favorable customer spending
characteristics, and greatly increase the Company's visibility and name
recognition. The Company believes there are significant opportunities to expand
into additional tourist areas with high levels of foot traffic by both its Rocky
Mountain Chocolate Factory and Fuzziwig's Candy Factory stores. Currently there
are no Fuzziwig's stores in tourist areas.
REGIONAL MALLS. There are approximately 2,500 regional malls in the United
States, and as of April 30, 1997, there were Rocky Mountain Chocolate Factory
stores in approximately 29 of these, including the franchised locations in the
Mall of America in Bloomington, Minnesota; Escondido, California; Fort Collins,
Colorado; and West Palm Beach, Florida. Although often providing favorable
levels of foot traffic, regional malls typically involve expensive rent
structures rendering economic criteria for investment in such locations more
difficult to satisfy.
The Company believes there are a number of other environments that have the
characteristics necessary for the successful operation of Rocky Mountain
Chocolate Factory stores or the sale of the Company's products, such as
airports, sports arenas and corporate sales. Three franchised Rocky Mountain
Chocolate Factory stores exist at airport locations: two at Denver International
Airport and one at Vancouver International Airport in Canada.
FRANCHISING PROGRAM
GENERAL. The Company believes it has excellent relations with its
franchisees. The Company's philosophy is one of service and commitment to its
franchise system, and it continuously seeks to improve its franchise support
services. The Company's concept has consistently been rated as an outstanding
franchise opportunity by publications and organizations rating such
opportunities. In February 1995, Rocky Mountain Chocolate Factory was rated
seventh in SUCCESS MAGAZINE'S "Franchise Gold 100" most desirable franchises. As
of April 30, 1997, there were 172 franchised stores in the Rocky Mountain
Chocolate Factory system and 1 franchised Fuzziwig's store location.
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 or Fuzziwig's stores and to
existing franchisees. The Company also advertises for new franchisees in
national and regional newspapers as suitable potential store locations come to
the Company's attention. Franchisees are approved by the Company on the basis of
the applicant's net worth and liquidity, together with an assessment of work
ethic and personality compatibility with the Company's operating philosophy.
In fiscal 1992, the Company entered into a franchise development agreement
covering Canada with Immaculate Confections, Ltd. of Vancouver, British
Columbia. Pursuant to this agreement, Immaculate Confections purchased the
exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores
in Canada. Immaculate Confections, as of April 30, 1997, operated 17 stores
under the agreement.
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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 operation and management. The Company
has established a training center at its Durango headquarters in the form of a
full-sized replica of a properly configured and merchandised Rocky Mountain
Chocolate Factory store. Training for Fuzziwig's Candy Factory franchisees
occurs in the Company training center and at the Fuzziwig's candy store in
Durango, Colorado. Topics covered in the training course include the Company's
philosophy of store operation and management, customer service, merchandising,
pricing, cooking (for Rocky Mountain Chocolate Factory franchisees), 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 (Rocky
Mountain Chocolate Factory franchisees only) and by meeting with each member of
the senior management of the Company. Training continues through the opening of
the store, where Company field personnel assist and guide the franchisee in all
areas of operation.
The Company's operating objectives include providing Company knowledge and
expertise in merchandising, marketing and customer service to all front-line
store level employees to maximize their skills and ensure that they are fully
versed in the Company's proven techniques.
The Company provides ongoing support to franchisees through its district
managers, who maintain regular and frequent communication with the stores by
phone and by site visits. The district managers also review and discuss with the
franchisee store operating results and provide advice and guidance in improving
store profitability and in developing and executing store marketing and
merchandising programs. The Company has developed a handbook containing a
"pre-packaged" local store marketing plan, which allows franchisees to implement
cost-effective promotional programs that have proven successful in other Rocky
Mountain Chocolate Factory and Fuzziwig's stores.
Regional conferences are held each fall with a focus on holiday
merchandising techniques in preparation for the fall and Christmas holidays.
"Town Meetings" are held each March with the goal of furthering communication
and obtaining franchisee feedback in anticipation of the Company's annual
Franchisee Convention. The Company holds its annual convention each May, at
which seminars and workshops are presented on subjects considered vital to
continuing improvement in operating results of Rocky Mountain Chocolate Factory
stores.
QUALITY STANDARDS AND CONTROL. The franchise agreement for both Rocky
Mountain Chocolate Factory and Fuzziwig's franchisees requires franchisees to
comply with the Company's procedures of operation and food quality
specifications and to permit audits and inspections by the Company.
Operating standards for Rocky Mountain Chocolate Factory and Fuzziwig's
Candy Factory stores are set forth in operating manuals. These manuals cover
general operations, factory ordering (Rocky Mountain Chocolate Factory stores
only), merchandising and advertising and accounting procedures. Through their
regular visits to franchised stores, Company district managers audit performance
and adherence to Company standards. The Company has the right to terminate any
franchise agreement for non-compliance with the Company's operating standards.
Products sold at the stores and ingredients used in the preparation of products
approved for on-site preparation must be purchased from the Company or from
approved suppliers. In the case of Fuzziwig's Candy Factory stores, all
products sold in the stores are purchased from one or more of 39 approved
suppliers.
THE FRANCHISE AGREEMENT: TERMS AND CONDITIONS. The domestic offer and sale
of Rocky Mountain Chocolate Factory and Fuzziwig's Candy Factory franchises is
made by its respective Uniform Franchise Offering Circular for each franchise
prepared in accordance with federal and
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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 agreement for the Company's Fuzziwig's-TM- store concept
provides for an initial franchise fee of $25,000 for each new store and
royalties equal to 7% of monthly gross sales. As with Rocky Mountain Chocolate
Factory franchises, Fuzziwig's franchises grant an exclusive territory only in
the immediate vicinity of their stores.
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 from time to time for the Rocky Mountain Chocolate Factory and Fuzziwig's
systems. The Company may terminate the franchise agreement upon the failure of
the franchisee to comply with the conditions of the agreement and upon the
occurrence of certain events, such as insolvency or bankruptcy of the franchisee
or the commission by the franchisee of any unlawful or deceptive practice, which
in the judgment of the Company is likely to adversely affect the Rocky Mountain
Chocolate Factory system. The Company's ability to terminate franchise
agreements pursuant to such provisions is subject to applicable bankruptcy and
state laws and regulations. See "Business - Regulation."
The agreements prohibit the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreements also
give the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.
The term of each Rocky Mountain Chocolate Factory franchise agreement is
five years, and franchisees have the right to renew for two successive five-year
terms. The term of each Fuzziwig's franchise agreement is ten years, and
franchisees have the right to renew for two additional terms of 5 years each.
The Company's agreements with 15 franchisees will expire in fiscal year 1998.
The Company anticipates that substantially all such agreements will be renewed.
FRANCHISE FINANCING. The Company does not provide prospective franchisees
with financing for their stores, but has developed relationships with two
national sources of franchisee financing to whom it will refer franchisees.
Typically, franchisees have obtained their own sources of such financing and
have not required the Company's assistance.
COMPANY STORE PROGRAM
GENERAL. As of April 30, 1997, there were 43 Company-owned Rocky Mountain
Chocolate Factory and 12 Company-owned Fuzziwig's Candy Factory stores. As
discussed above, the Company in fiscal 1998 will close an estimated 8
underperforming Rocky Mountain Chocolate Factory Company-owned stores and sell
to potential franchisees certain other Company-owned stores with the goal of
improving Company-owned store program profitability and of reducing the number
of stores to a nucleus of more profitable store locations. The Company, in
fiscal 1998 anticipates opening few Company-owned stores and to refocus its
efforts to improve the profitability of its smaller number of remaining stores.
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Company-owned stores provide a training ground for Company-owned store and
district managers and a controllable testing ground for new products and
promotions, operating and training methods and merchandising techniques. In many
cases, the Company has been able to take advantage of a promising new location
by establishing a Company-owned store when a delay in finding a qualified
franchisee might have jeopardized the Company's ability to secure the site.
Managers of Company-owned stores are required to comply with all Company
operating standards and undergo training and receive support from the Company
similar to the training and support provided to franchisees. See "Franchising
Program-Training and Support" and "-Quality Standards and Control." The
Company's Director of Company Stores and her staff regularly visit Company-owned
stores to ensure compliance with Company standards and procedures and to provide
advice and support.
MANUFACTURING OPERATIONS
GENERAL. The Company manufactures its chocolate candies at its factory in
Durango, Colorado for sale to Rocky Mountain Chocolate Factory franchisees and
for retail sale at Rocky Mountain Chocolate Factory Company-owned stores. All
products are produced consistent with the Company's philosophy of using only the
finest, highest quality ingredients with no artificial preservatives to achieve
its marketing motto of "the peak of perfection in handmade chocolates."
In fiscal 1997, the Company produced approximately 1.7 million pounds of
candy and anticipates producing approximately 1.9 million pounds in fiscal 1998.
Current factory capacity is approximately 3.5 million pounds per year.
It has always been the belief of management that the Company should control
the manufacturing of its own 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.
The Company conducts summer tours of its factory for the many tourists from
throughout the U.S. arriving in Durango each summer, as a vehicle for increasing
Company and brand awareness.
MANUFACTURING PROCESSES. The manufacturing process primarily involves
cooking or preparing candy centers, including nuts, caramel, peanut butter,
creams and jellies, and then coating them with chocolate or other toppings. All
of these processes are conducted in carefully controlled temperature ranges, and
the Company employs strict quality control procedures at every stage of the
manufacturing process. The Company uses a combination of manual and automated
processes at its factory. Although the Company believes that it is currently
preferable to manufacture certain products by hand, such as dipping of some
large pieces, automation increases the speed and efficiency of the manufacturing
process. The Company has from time to time automated processes formerly
performed by hand where it has become cost-effective for the Company to do so
without compromising product quality or appearance. Recent examples include the
purchase of a computer-controlled shell filling machine for truffles and a
molding machine for candy bars and peanut butter cups, which enable the Company
to produce these candies much more quickly and at a lower cost.
The Company seeks to ensure the freshness of products sold in Rocky
Mountain Chocolate Factory stores with frequent shipments and production
schedules that are closely coordinated with projected and actual orders. In
March of 1996, the Company implemented a comprehensive MRP II forecasting,
planning, scheduling and reporting system to improve the efficiency of
manufacturing scheduling of production. Franchised and Company-owned stores
place orders to the Company's factory one or two times per month, on average,
and the Company generally ships its candies within five working days after the
order is received. Finished candies remain in
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inventory an average of four weeks or less prior to shipment. Most Rocky
Mountain Chocolate Factory stores do not have significant space for the storage
of inventory, and the Company encourages franchisees and store managers to order
only the quantities that they can reasonably expect to sell within approximately
two to four weeks. For these reasons, the Company generally does not have a
significant backlog of orders.
INGREDIENTS. The principal ingredients used by the Company are chocolate,
nuts, sugar, corn syrup, peanut butter, cream and butter. The factory receives
shipments of ingredients daily. To ensure the consistency of its products, the
Company buys ingredients from a limited number of reliable suppliers. In order
to assure a continuous supply of chocolate and certain nuts, the Company
frequently enters into purchase contracts for these products having durations of
six to 18 months. Because prices for these products may fluctuate, the Company
may benefit if prices rise during the terms of these contracts, but it may be
required to pay above-market prices if prices fall. The Company has one or more
alternative sources for all essential ingredients and therefore believes that
the loss of any supplier would not have a material adverse effect on the Company
and its results of operations. The Company currently also purchases small
amounts of finished candy from third parties on a private label basis for sale
in Rocky Mountain Chocolate Factory stores.
FACTORY AND TRUCKING OPERATIONS. The Company in fiscal 1996 expanded its
factory from 27,000 square feet to 53,000 square feet, which provided space for
additional automated equipment and for warehousing of ingredients and finished
candies prior to shipment. Beginning in fiscal 1994, the Company also began
operating several trucks and now ships a substantial portion of its products
from the factory on its fleet of trucks. The Company's trucking operations and
factory expansion have significantly improved the Company's ability 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.
MARKETING
The Company relies primarily on in-store promotion and point-of-purchase
materials to promote the sale of its products. The monthly marketing fees
collected from franchisees are used by the Company to develop new packaging and
in-store promotion and point-of-purchase materials, and to create and update the
Company's local store marketing handbooks.
The Company focuses on local store marketing efforts by providing
customizable marketing materials, including advertisements, coupons, flyers and
mail order catalogs generated by its in-house Creative Services department. The
department works directly with franchisees to implement local store marketing
programs.
The Company aggressively seeks low cost, high return publicity
opportunities through its in-house public relations staff by participating in
local and regional events, sponsorships and charitable causes. The Company has
not historically and does not intend to engage in national advertising in the
near future. The Company is evaluating the feasibility of a co-operative local
radio and television advertising program with its franchisees for possible
implementation in fiscal 1998.
COMPETITION
The retailing of confectionery products is highly competitive. The Company
and its franchisees compete with numerous businesses that offer confectionery
products. Many of these competitors have greater name recognition and financial,
marketing and other resources than the Company. In addition, there is intense
competition among retailers for real estate sites, store personnel and qualified
franchisees. Competitive market conditions could adversely affect the Company
and its results of operations and its ability to expand successfully.
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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 franchised and
Company-owned 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 potentially pursue new or
under-utilized distribution channels.
TRADE NAME AND TRADEMARKS
The trade names "Rocky Mountain Chocolate Factory" and "Fuzziwig's Candy
Factory" and the phrases "The Peak of Perfection in Handmade Chocolates" and
"America's Chocolatier", 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. An application has been
filed and is pending to register the trademark Fuzziwig's in the United
States. Applications have also been filed to register the Rocky Mountain
Chocolate Factory trademark in certain foreign countries.
The Company has not attempted to obtain patent protection for the
proprietary recipes developed by the Company's master candy-maker and is relying
upon its ability to maintain the confidentiality of those recipes.
EMPLOYEES
At April 30, 1997, the Company employed 412 persons. Most employees, with
the exception of store, factory and corporate management, are paid on an hourly
basis. The Company also employs some people on a temporary basis during peak
periods of store and factory operations. The Company seeks to assure that
participatory management processes, mutual respect and professionalism and high
performance expectations for the employee exist throughout the organization.
The Company believes that it provides working conditions, wages and
benefits that compare favorably with those of its competitors. The Company's
employees are not covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
SEASONAL FACTORS
The Company's sales and earnings are seasonal, with significantly higher
sales and earnings occurring during the Christmas and summer vacation seasons
than at other times of the year, which causes fluctuations in the Company's
quarterly results of operations. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings and
the sale of franchises. Because of the seasonality of the Company's business
and the impact of new store openings and sales of franchises, results for any
quarter are not necessarily indicative of the results that may be achieved in
other quarters or for a full fiscal year.
REGULATION
Each of the Company-owned and franchised stores is subject to licensing and
regulation by the health, sanitation, safety, building and fire agencies in the
state or municipality where located. Difficulties or failures in obtaining the
required licensing or approvals could
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delay or prevent the opening of new stores. New stores must also comply with
landlord and developer criteria.
Many states have laws regulating franchise operations, including
registration and disclosure requirements in the offer and sale of franchises.
The Company is also subject to the Federal Trade Commission regulations relating
to disclosure requirements in the sale of franchises and ongoing disclosure
obligations.
Additionally, certain states have enacted and others may enact laws and
regulations governing the termination or nonrenewal of franchises and other
aspects of the franchise relationship that are intended to protect franchisees.
Although these laws and regulations, and related court decisions, may limit the
Company's ability to terminate franchises and alter franchise agreements, the
Company does not believe that such laws or decisions will have a material
adverse effect on its franchise operations. However, the laws applicable to
franchise operations and relationships continue to develop, and the Company is
unable to predict the effect on its intended operations of additional
requirements or restrictions that may be enacted or of court decisions that may
be adverse to 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 Nutrition Labeling and Education Act of 1990 became effective May 8,
1994. Pursuant to the Act, the Company filed a "Small Business Food Labeling
Exemption Notice" with the U.S. Food and Drug Administration, which provides
a phased timeline for implementing labeling compliant with the Act. The
Company is currently implementing product labeling in fulfillment of the Act
within the timeline allowed under its Small Business exemption.
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 53,000 square foot manufacturing facility which it owns in
Durango, Colorado. During fiscal 1997, the Company's factory produced
approximately 1.7 million pounds of chocolates, up from 1.6 million pounds in
fiscal 1996 and 1.3 million pounds in fiscal 1995. The factory has the capacity
to produce approximately 3.5 million pounds per year.
As of April 30, 1997, all 55 Company-owned stores were occupied pursuant to
non-cancelable leases of five to ten years having varying expiration dates, most
of which contain optional five-year renewal rights. The Company does not deem
any individual store lease to be significant in relation to its overall
operations.
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The Company acts as primary lessee of some franchised store premises, which
it then subleases to franchisees, but the majority of existing locations are
leased by the franchisee directly. Current Company policy is not to act as
primary lessee on any further franchised locations. At April 30, 1997, the
Company was the primary lessee at 55 of its 172 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 E to the Financial
Statements contained elsewhere in this Report.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that are
material to the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
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 17, 1996 the Company purchased on the open market 125,000 shares
of its Common Stock at a price of $8.09 per share. The Company made this
purchase because the Company felt and continues to feel that its Common Stock is
undervalued.
The table below sets forth high and low bid information for the Common
Stock as quoted on NASDAQ for each quarter of fiscal years 1996 and 1997. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
FISCAL YEAR ENDED FEBRUARY 29, 1996 HIGH LOW
---- ---
FIRST QUARTER.......................... 15 3/4 13 1/2
SECOND QUARTER......................... 18 1/2 15 3/4
THIRD QUARTER.......................... 17 1/2 12
FOURTH QUARTER......................... 12 1/4 8
FISCAL YEAR ENDED FEBRUARY 28, 1997
HIGH LOW
---- ---
FIRST QUARTER........................... 8 1/4 7
SECOND QUARTER.......................... 10 7/8 7 1/2
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THIRD QUARTER........................... 7 3/4 5 3/4
FOURTH QUARTER.......................... 6 3/4 4 3/8
On May 12, 1997 the closing bid price for the Common Stock as reported on the
NASDAQ Stock Market was $3.25.
(b) HOLDERS
On May 12, 1997 there were approximately 410 record holders of the
Company's Common Stock. The Company believes that there are more than 1860
beneficial owners of its Common Stock.
(c) DIVIDENDS
The Company has not paid since its inception, nor does it intend to pay in
the foreseeable future, cash dividends on its Common Stock. Any future earnings
will be retained for use in the Company's business.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data and store data)
The selected financial data presented below for the fiscal years ended
February 28 or 29, 1993 through 1997, are derived from the Financial Statements
of the Company, which have been audited by Grant Thornton LLP, independent
auditors. The selected financial data should be read in conjunction with the
Financial Statements and related Notes thereto included elsewhere in this Report
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
--------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Factory sales $3,798 $4,998 $6,399 $8,156 $9,188
Retail sales 1,763 2,642 5,028 7,939 12,486
Royalties and marketing fees 1,000 1,233 1,607 2,034 2,342
Franchise fees 437 488 582 614 256
------- ------- ------- ------- -------
Total revenues 6,998 9,361 13,616 18,743 24,272
------- ------- ------- ------- -------
Costs and expenses:
Cost of chocolate sales 3,506 4,530 5,986 8,599 11,508
Franchise costs 929 1,008 1,377 1,803 2,000
General and administrative expense 815 969 1,234 1,437 1,990
Retail operating expenses 1,245 1,603 2,749 4,746 8,087
Provision for store closures 1,358
Impairment loss - retail operations - - - - 597
Loss on obsolete and disposed assets - - - - 331
------- ------- ------- ------- -------
Total costs and expenses 6,495 8,110 11,346 16,585 25,871
------- ------- ------- ------- -------
Operating income (loss) 503 1,251 2,270 2,158 (1,599)
Other income (expense):
Interest expense (101) (88) (153) (300) (474)
Interest income 5 10 23 58 29
------- ------- ------- ------- -------
Total other income (expense) (96) (78) (130) (242) (445)
------- ------- ------- ------- -------
Litigation settlements (154)
Income (loss) before income tax expense 407 1,173 2,140 1,916 (2,198)
Income tax expense (benefit) 3 311 790 708 (832)
------- ------- ------- ------- -------
Net income (loss) $404 $862 $1,350 $1,208 $(1,366)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Income (loss) per common share-fully diluted $.14 $.32 $.49 $.42 ($.46)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average number of common shares
outstanding - fully diluted 2,459 2,533 2,726 2,890 2,952
STORE DATA:
Number of stores open at end of period:
Company-owned 7 13 22 42 57
Franchised 81 106 131 151 171
------- ------- ------- ------- -------
Total 88 119 153 193 228
------- ------- ------- ------- -------
------- ------- ------- ------- -------
SYSTEM-WIDE REVENUES: $19,886 $26,011 $35,612 $46,880 $57,505
------- ------- ------- ------- -------
------- ------- ------- ------- -------
<CAPTION>
FEBRUARY 28 OR 29
-----------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $1,716 $1,889 $1,627 $ 2,043 $2,664
Total assets 4,496 6,024 10,181 16,314 18,590
Long-term debt
(excluding current
portion) 1,000 604 2,314 2,184 5,737
Stockholders' equity 2,881 4,143 5,907 11,117 9,779
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
RESULTS SUMMARY
The Company reported net loss of $1,365,702 for fiscal 1997 in comparison
with a $1,207,745 profit for fiscal 1996; a decrease of $2,573,447 and 213%.
Primary causes for this shortfall in operating results are as follows:
1. A restructuring loss provision of $2.2 million representing planned
fiscal 1998 shutdown of 9 unprofitable Company-owned Rocky Mountain
Chocolate Factory stores ($1.4 million) and an impairment provision on
4 Rocky Mountain Chocolate Factory stores and 2 Fuzziwig's stores
($800,000) considered impaired under the provisions of Financial
Accounting Standard (FAS) 121, together with writedown of other
miscellaneous store assets;
2. Company-owned store losses resulting primarily from stores to be
closed, located in underperforming factory outlet centers with
diminished foot traffic;
3. Lack of new locations for unit growth adversely impacting franchise
fee revenues;
4. Decreased same store pounds purchased from its factory.
As discussed below, the Company anticipates the combination of store closure of
underperforming Company-owned stores with actions it is taking to improve same
store retail sales will improve ongoing profitability of its Company-owned store
program. The Company intends to explore alternative channels of distribution
(e.g. fund raising, mail order, corporate sales) as a means of increasing
factory revenues and as a replacement of limited franchise fee revenue growth
resulting from location limitations. The Company has also embarked upon a
program to increase same store pounds purchased though new product introduction
to replace products (such as sugar free products) currently purchased by its
stores from outside vendors. It has also effected a rebate program rewarding
stores increasing purchases of factory product with a purchase-volume-based
rebate.
Before the restructure loss provision, the Company earned a fiscal year 1997
profit of $39,400.
Below is a detailed analysis of financial results by revenue, cost of revenue
and expense item:
REVENUES
Revenue results by revenue component for fiscal 1997 in comparison with fiscal
1996 are as follows ($000):
21
<PAGE>
Revenue Component 1997 1996 Change Change%
- - - ----------------- ---- ---- ------ -------
Factory Sales $ 9,188.2 $ 8,156.5 $ 1,031.7 12.6%
Royalty and
Marketing Fees 2,342.4 2,034.0 308.4 15.2%
Franchise Fees 255.6 614.3 (358.7) (58.4%)
Retail Sales 12,486.3 7,938.5 4,547.8 57.3%
--------- --------- --------- ------
Total $24,272.5 $18,743.3 $ 5,529.2 29.5%
--------- --------- --------- ------
--------- --------- --------- ------
FACTORY SALES
Factory sales represent candy sales to the Company's Rocky Mountain
Chocolate Factory franchised store locations. Significantly increased factory
sales resulted primarily from the larger number of franchised Rocky Mountain
Chocolate Factory stores in existence throughout the year (170 franchised Rocky
Mountain Chocolate Factory stores franchised at February 28, 1997 in comparison
with 151 at February 29, 1996) as augmented by the impact of an approximate 2.6%
price increase effected in January 1996. Same store pounds purchased declined
by 3.6% in fiscal 1997, partially offsetting the impact of increased stores and
the price increase. The decline in same store pounds purchased from the factory
continued what appears to be a trend of a shift in sales mix toward store-made
and authorized vendor products and away from factory made products. When
computing same store pounds purchased from the factory, purchases by franchised
stores open for 12 months in each period are compared.
The Company has effected a program of new product introduction to replace
products (such as sugar free products) currently purchased by its stores from
outside vendors as a basis for increasing same store pounds purchased from its
factory. It has also effected a rebate program rewarding stores increasing
purchases of factory product with a purchase-volume-based rebate.
ROYALTY AND MARKETING FEES AND FRANCHISE FEES
Increased royalty and marketing fees resulted from the impact of a larger
number of franchised stores in existence throughout the year. Same store sales
at franchised stores were approximately constant, neither increasing nor
decreasing. The Company sold 19 new franchise locations in fiscal 1997 in
comparison with 41 in fiscal 1996 resulting in the decreased franchise fee
revenue shown, in combination with the effect of lower balance - due revenue
recognition on franchises previously sold.
As discussed above (see "Business" - "Selective unit growth for Rocky
Mountain Chocolate Factory"), the Company is experiencing a constraint in the
growth in the number of its Rocky Mountain Chocolate Factory locations posed by
a slowdown in the pace of establishment of new factory outlet centers and
saturation of existing factory outlet and other environments where its concept
has proven successful. Such location availability limitations provide an
associated constraint in the growth of franchise fee and royalty revenues. The
number of locations available to establish Fuzziwig's Candy Factory stores is
not location limited due to the small number of currently existing Fuzziwig's
locations and due to the fact that (due to its sale of a different product line
than Rocky Mountain Chocolate Factory stores) Fuzziwig's locations do not
compete with or detract significantly from sales volumes of existing Rocky
Mountain Chocolate Factory locations where both stores exist together at one
mall or other site.
22
<PAGE>
RETAIL SALES
Retail sales of Company-owned stores increased as a result of a larger
number of Company stores in existence throughout the year (57 stores existed at
February 29, 1997, in comparison with 42 in existence at February 29, 1996) in
fiscal 1997 in comparison with the prior fiscal year as partially offset by the
impact of a same store retail sales decline of 2.7%. The decline in same store
sales is believed to result from the effect of lower foot traffic in the
factory outlet mall environment in which most Company-owned stores operate, and
as a result of a decline in revenues in the second year of operation from grand
opening levels of revenue at stores established in the last fiscal year at new
factory outlet malls.
Company-owned store sales revenues are anticipated to decline somewhat in
fiscal 1998 from fiscal 1997 levels as a result of closure and sale of stores,
as discussed above, coupled with a conscious decision to selectively limit
Company-owned store additions in fiscal 1998.
COSTS AND EXPENSES
COST OF CHOCOLATE SALES. Cost of chocolate sales, which include costs
incurred by the Company to manufacture candy sold by its Company-owned stores
and to its franchised stores, increased 33.8% to $11.5 million in fiscal 1997
from $8.6 million in fiscal 1996. Cost of chocolate sales as a percentage of
total chocolate sales (defined as the total of factory sales and retail sales)
decreased to 53.1% in 1997 from 53.4% in 1996.
Cost of chocolate sales as a percentage of total chocolate sales improved
modestly in fiscal 1997 as a result of a significant increase in higher margin
retail sales as a percentage of total chocolate sales brought about by the
increase in the number of Company-owned stores, coupled with full year operation
of a large number of stores open for only a partial year in the previous year.
This "mix effect" was substantially offset by an absolute 1.4% decline in
factory margins brought about by large obsolete inventory loss provisions
coupled with the manufacturing overhead volume impact of factory
sales/production volumes below planned levels (resulting largely from the
decline in same store pounds purchased from the factory referenced above). As
such volume shortfalls result in "overhead underabsorption", such underabsorbed
overhead is charged to cost of chocolate sales, adversely affecting factory
margins.
The Company in fiscal 1996 experienced a decline of factory margins of 4%
absolute for the full year and 6.7% absolute in the second half from factory
margin results experienced in the prior year full year and second half periods.
The Company has made major improvement in manufacturing performance as a result
of its concerted effort to correct for the increased material usage, reduced
labor efficiencies and increased overhead spending resulting in this decline in
factory margins. As a result of its efforts, factory margins have improved
significantly from depressed levels existing in the second half of fiscal 1996,
before the impact of obsolete inventory and factory sales and production volume
shortfalls on factory margins, as discussed above. Before the effect of such
impacts, factory margins are approximately 1% absolute below recent year
historical averages. The Company continues to seek improvement in factory
margins through further automation to reduce cost and by its program to improve
factory sales and production volumes through its programs to improve same store
pounds purchased, as discussed above. In April 1997 the Company increased the
factory price of its products by 2.8% to compensate for material and factory
wage increases, with the goal of improving factory margin.
FRANCHISE COSTS. FRANCHISE costs increased 10.9% from $1.8 million in
fiscal 1996 to $2.0 million in fiscal 1997. As a percentage of the total of
royalty and marketing fees and franchise fee revenue, franchise costs increased
to 77.0% of such fees in fiscal 1997 from 68.1% in fiscal 1996. The addition of
an expanded marketing group to support corporate public relations and
promotional programs and marketing materials in support of the Company's larger
23
<PAGE>
base of stores is the primary cause of this increase. Decreased franchise fee
revenues relative to last year is also a partial cause of this increase in
relative percentage.
GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative expenses
increased 38.5% from $1.4 million in fiscal 1996 to $2.0 million in fiscal 1997,
primarily as a result of increased bad debt provisions (a $260,000 increase from
the prior year) coupled with increased expense for administrative support
personnel, and increased depreciation expense for additional investment in
computer hardware and software. Increased bad debt provisions resulted from
providing for potential loss on lease settlements and notes receivable for 2
franchised stores expected to close, together with increased provision for loss
on accounts receivable on several other troubled stores and accounts. As a
percentage of total revenues, general and administrative expense increased from
7.7% in fiscal 1996 to 8.2% in fiscal 1997, primarily due to the increase in
expenses noted above.
RETAIL OPERATING EXPENSES. Retail operating expenses increased from $4.7
million in fiscal 1996 to $8.1 million in fiscal 1997; an increase of 70.4%.
This increase resulted primarily from the effect of the larger number of
Company-owned stores in existence throughout the year and partially as a result
of amortization of capitalized expenditures incurred in the "start-up" phase of
many new stores established in late fiscal 1996. As a percentage of retail
sales, retail operating expenses increased from 59.8% in fiscal 1996 to 64.8% in
fiscal 1997 as a result of insufficient sales volume leveraging resulting from
the decline in same store retail sales at Company-owned Rocky Mountain Chocolate
Factory stores as discussed above, and partially as a result of this "start-up"
effect and partially as a result of sales volumes at many Company-owned stores,
(particularly those established within the last 12 months) significantly below
Company expectations.
As discussed above, the Company in fiscal 1998 will close an estimated 8
underperforming Company-owned stores not meeting minimum economic criteria. The
Company also has continued its program to sell certain other Company-owned
stores to potential franchisees.
In fiscal 1997, a restructuring charge, NOT included, in retail operating
expenses but reflected as individual profit and loss statement line items, was
provided to income of $2.2 million representing estimated loss expected to
result from these closures and from writedown of certain other store assets
considered impaired under provisions of Financial Accounting Standard (FAS) 121
"Accounting for the Impairment of Long-Lived Assets."
Note that such sale, closure and slowdown of establishment of new Rocky
Mountain Chocolate Factory stores is currently not anticipated to affect its
expansion program for its new store concept Fuzziwig's and conversion of
existing Company-owned Fuzziwig's locations to franchised locations or closure
of such locations is not currently planned. The Company does not expect sale of
stores to have appreciable positive or negative impact on Company earnings
performance because store profits sacrificed in such cases are expected to be
approximately compensated for by royalties generated and cost of capital saved,
Any gains or losses realized on store disposition are also not expected to be
material to Company results of operations.
The Company believes that, through its store closures and its continued program
to sell certain other Company-owned stores to potential franchisees, it will
improve the on-going profitability of its Company-owned store program.
OTHER EXPENSE
Other expense of $445,000 incurred in fiscal 1997 increased 83.7% from the
$242,200 incurred in fiscal 1996. Other expense increased as a result increased
interest expense resulting from borrowings in support of the Company's Company-
owned store expansion.
24
<PAGE>
INCOME TAX EXPENSE
The Company's effective income tax rate in fiscal 1997 of 37.9%
approximated the 37.0% in fiscal 1996.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
RESULTS SUMMARY
The Company reported net income of $1,207,745 for fiscal 1996 in comparison
with $1,350,432 for fiscal 1995; a decrease of $142,687 and 10.6%.
Below is a detailed analysis of financial results by revenue, cost of
revenue and expense line item:
REVENUES
Revenue results by revenue component for fiscal 1996 in comparison with
fiscal 1995 are as follows ($000):
Revenue Component 1996 1995 Change Change%
- - - ----------------- ---- ---- ------ -------
Factory Sales $ 8,156.5 $ 6,399.3 $1,757.2 27.5%
Royalty and
Marketing Fees 2,034.0 1,606.6 427.4 26.6%
Franchise Fees 614.3 581.9 32.4 5.6%
Retail Sales 7,938.5 5,028.3 2,910.2 57.9%
--------- --------- -------- ------
Total $18,743.3 $13,616.1 $5,127.2 37.7%
--------- --------- -------- ------
--------- --------- -------- ------
FACTORY SALES
Factory sales represent candy sales to the Company's franchised Rocky
Mountain Chocolate Factory store locations. Significantly increased factory
sales resulted primarily from the larger number of franchised stores in
existence throughout the year (151 franchised stores at February 29, 1996 in
comparison with 131 at February 28, 1995) as augmented by the impact of an
approximate 2% price increase effected in April 1995. Same store pounds
purchased declined by 1% in fiscal 1996. When computing same store pounds
purchased from the factory, purchases by franchised stores open for 12 months in
each period are compared.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES
Increased royalties and marketing fees resulted from the combined impact of
a larger number of franchised stores in existence throughout the year together
with an increase in same store sales at franchised stores of approximately 2.8%.
The Company sold 41 new franchises in fiscal 1996 in comparison with 39 in
fiscal 1995 resulting in the increased franchise fee revenue shown, in
combination with the effect of higher balance - due revenue recognition on
franchises previously sold: $5,000 is earned upon franchise agreement signing
with the balance of $14,500 earned upon signing of the lease of the facility
representing the franchised location.
25
<PAGE>
RETAIL SALES
Retail sales of Company-owned stores increased as a result of a larger
number of Company-owned stores in existence throughout the year (42 stores
existed at February 29, 1996, in comparison with 22 in existence at February 28,
1995) in fiscal 1996 in comparison with the prior fiscal year coupled with a
same store retail sales increase of 4%.
COSTS AND EXPENSES
COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs
incurred by the Company to manufacture candy sold by its Company-owned stores
and to its franchised stores, increased 43.6% to $8.6 million in fiscal 1996
from $6.0 million in fiscal 1995. Cost of chocolate sales as a percentage of
total chocolate sales (defined as the total of factory sales and retail sales)
increased to 53.4% in fiscal 1996 from 52.4% in 1995.
Cost of chocolate sales as a percentage of total chocolate sales had been
expected to improve as a result of an increase in higher margin retail sales as
a percentage of total chocolate sales brought about by the rapid and large
increase in the number of Company-owned stores, together with the effect of an
approximate 2% retail and factory price increase effected in April, 1995. This
has not occurred due to an absolute 4% decline in factory margins resulting from
increased material usage and lesser labor efficiencies in the manufacture of the
Company's products, the effect of increased manufacturing overhead cost relative
to pounds produced, together with certain price reductions in selected
categories of Company product sales.
FRANCHISE COSTS. Franchise costs increased 31.0% to $1.8 million in 1996
from $1.4 million in fiscal 1995. As a percentage of the total of royalties and
marketing fees and franchise fees, franchise costs increased to 68.1% of such
fees in 1996 from 62.9% in 1995. The hiring of additional field support and
associated administrative personnel to support the Company's accelerated pace of
new franchise signing and store opening activities and the larger base of stores
is the partial cause of this increase. Additionally, the Company incurred
increased expenses for promotional programs and marketing materials to support
the larger base of stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 16.4% to $1.4 million in fiscal 1996 from $1.2 million in fiscal 1995,
as a result of increased expense for administrative support personnel and
increased depreciation expense for additional investment in computer hardware
and software to serve as the platform for additional manufacturing and
administrative control capability for the Company. As a percentage of total
revenues, general and administrative expense declined to 7.7% in fiscal 1996
from 9.1% in fiscal 1995, due to a focus by the Company on minimizing increases
in administrative personnel and other administrative cost by a concerted effort
to effect automated data entry and control processes as a basis for minimizing
such increases.
RETAIL OPERATING EXPENSES. Retail operating expenses increased 72.6% to
$4.7 million in fiscal 1996 from $2.7 million in fiscal 1995. This increase
resulted from the effect of the larger number of Company-owned stores in
existence as discussed above. As a percentage of retail sales, retail operating
expenses increased to 59.8% in fiscal 1996 from 54.7% in fiscal 1995. The
Company experienced delays in store openings in fiscal 1996. This delay in
store openings resulted in total revenue growth not in proportion to the
increase in operating expenses. Additionally, the Company for the first time in
fiscal 1996, began a program of allocating directly-related administrative
expense to support the Company-owned store programs to retail operating expense.
26
<PAGE>
OTHER EXPENSE
Other expense of $242,000 incurred in fiscal 1996 increased 86.3% from the
$130,000 incurred in fiscal 1995. This increase resulted from increased interest
expense caused by borrowings in support of the Company's factory expansion and
Company-owned store expansion as partially offset by increased interest income
resulting from cash surpluses generated by the Company's stock offering
completed in September, 1995.
INCOME TAX EXPENSE
The Company's effective income tax rate in fiscal 1996 of 37.0%
approximated the 36.9% in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flows in fiscal 1997 increased $495,000 and 52.1% from the
$949,900 in fiscal 1996 to $1,444,700 in fiscal 1997. This increase resulted
from operating cash flows generated by increased number of Company-owned stores
(reflected in increased depreciation and amortization charges shown in the
Company's statements of cash flows).
At February 28, 1997, working capital was $2,663,775 in comparison with
$2,043,143 at February 28, 1996, a $620,632 increase. This increase resulted
from fixed asset financing achieved recovering cash from investments in Company
store operating assets previously funded from operating cash flows, together
with the impact of improved operating cash flows, as discussed above.
Cash and cash equivalent balances increased from $528,787 at February 29,
1996 to $792,606 at February 28, 1997. The Company's current ratio was 1.9/1 at
February 28, 1997 in comparison with 1.7/1 at February 29, 1996.
The Company's long-term debt is comprised primarily of real estate mortgage
financing provided by a local banking facility used to finance the Company's
factory expansion (unpaid balance as of February 28, 1997, $1,614,033), and
chattel mortgage financing (unpaid balance as of February 28, 1997, $4,971,160)
provided both by local banking facilities and national financing facilities and
used to fund the Company's Company-owned store expansion.
The Company also possessed a $2,000,000 working capital line of credit at
February 28, 1997, secured by accounts receivable and inventories, which line
had a $0 balance at that date. The line was renewed for an additional 12 month
period at May 22, 1997 and expires July, 1998.
The Company possessed $750,000 in fixed asset availability lines of credit
at February 28, 1997.
For fiscal 1998, the Company anticipates making $1.1 million in capital
expenditures. Of this sum, approximately $600,000 is anticipated to be used for
the opening of new Company-owned stores where lease commitments have already
been made, (as discussed above, the Company has reduced its expansion program in
the establishment of Company-owned stores), with the balance anticipated to be
used for the purchase of additional factory equipment and computer equipment for
the Company's administrative functions.
The Company believes that cash flow from operating activities and available
bank lines of fixed asset and working capital credit will be sufficient to
service debt, fund anticipated capital expenditures and provide necessary
working capital at least through the end of fiscal 1998. There can be no
guarantee, however, that unforeseen events will not require the Company to
secure additional sources of financing. Such events could include the need to
repay loans secured by any Company-owned stores which may be closed. The
Company may also seek additional
27
<PAGE>
financing from time to time, through borrowings or public or private offerings
of equity or debt securities, to fund its future expansion plans.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and
labor directly affect the Company's operations. Most of the Company's leases
provide for cost-of-living adjustments and require it to pay taxes, insurance
and maintenance expenses, all of which are subject to inflation. Additionally
the Company's future lease cost for new facilities may reflect potentially
escalating cost of real estate and construction. There is no assurance that the
Company will be able to pass on its increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed
assets, and therefore is less than it would be if it were based on current
replacement cost. While property and equipment acquired in prior years will
ultimately have to be replaced at higher prices, it is expected that replacement
will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas 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.
EFFECT OF NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, which is effective for
financial statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per share amounts were
computed. The adoption of this new standard is not expected to have a material
impact on the disclosure of earnings per share in the financial statements of
the Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are forward-looking statements
that reflect assumptions made by management based on information currently
available to it, and the Company can give no assurance that the expectations or
potential occurrences reflected in such statements will be realized. Should one
or more of the uncertainties underlying such expectations materialize or
underlying assumptions prove incorrect, actual results may vary materially from
those expected.
Whether factory margins improve depends on many factors that are not within
the Company's control. Such factors include the ability of the Company to
reduce manufacturing overhead cost per pound through correction of negative
trends in same store pounds purchased and associated factory sales and
production volumes.
The Company's ability to successfully achieve expansion of its Rocky
Mountain Chocolate Factory and Fuzziwig's franchise systems depends on many
factors also not within the Company's control including the availability of
suitable sites for new store establishment, the availability of qualified
franchisees to support such expansion and acceptance by the public of the
Fuzziwig's concept.
28
<PAGE>
Efforts to sell, close or improve operating results of under-performing
Company-owned stores depends on many factors not within the Company's control
including availability of qualified buyers and its ability to negotiate out of
existing leases under favorable terms, as well as on consumer traffic and
spending patterns.
Efforts to improve the decline in same store pounds purchased and to
increase total factory sales depends on many factors not within the Company's
control including the receptivity of its franchise system and of customers in
potential new distribution channels to its product introductions and promotional
programs, which receptivity is by no means assured.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . 31
BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 34
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY. . . . . . . . . . . . . 35
STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . 37
30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
We have audited the accompanying consolidated balance sheets of Rocky Mountain
Chocolate Factory, Inc. as of February 28, 1997 and February 29, 1996, and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended February 28, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rocky Mountain
Chocolate Factory, Inc. as of February 28, 1997 and February 29, 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended February 28, 1997, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Dallas, Texas
April 23, 1997
31
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
February 28, February 29,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 792,606 $ 528,787
Accounts and notes receivable-trade,less allowance
for doubtful accounts of $202,029 in 1997 and
$28,196 in 1996 1,729,971 1,463,901
Inventories 2,311,321 2,504,908
Deferred income taxes 722,595 59,219
Other 181,133 224,001
----------- -----------
Total current assets 5,737,626 4,780,816
PROPERTY AND EQUIPMENT - AT COST
Land 122,558 122,558
Building 3,644,357 3,596,905
Leasehold improvements 2,213,116 1,753,165
Machinery and equipment 6,446,612 4,898,174
Furniture and fixtures 2,667,420 2,330,057
Transportation equipment 246,499 228,816
----------- -----------
15,340,562 12,929,675
Less accumulated depreciation and amortization 3,565,194 2,468,084
----------- -----------
11,775,368 10,461,591
----------- -----------
OTHER ASSETS
Accounts and notes receivable - trade, due after
one year 82,774 111,588
Goodwill, net of accumulated amortization of
$277,344 in 1997 and $253,740 in 1996 312,656 336,260
Deferred income taxes 43,044 -
Other 638,637 624,185
----------- -----------
1,077,111 1,072,033
----------- -----------
$18,590,105 $16,314,440
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
LIABILITIES and STOCKHOLDERS' EQUITY
February 28, February 29,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ - $ 1,000,000
Current maturities of long-term debt 847,881 134,538
Accounts payable - trade 799,671 998,520
Accrued compensation 465,338 335,926
Accrued liabilities 867,961 214,460
Income taxes payable - 54,229
Deferred income 93,000 -
----------- -----------
Total current liabilities 3,073,851 2,737,673
LONG-TERM DEBT, less current maturities 5,737,312 2,183,877
DEFERRED INCOME TAXES - 275,508
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - authorized, 7,250,000
shares,$.03 par value; issued, 3,041,302
shares in 1997 and 3,034,302 in 1996 91,239 91,029
Additional paid-in capital 9,730,872 9,703,985
Retained earnings 972,565 2,338,267
----------- -----------
10,794,676 12,133,281
Less common stock held in treasury, at cost -
129,003 shares in 1997 and 129,153 shares in
1996 1,015,734 1,015,899
----------- -----------
9,778,942 11,117,382
----------- -----------
$18,590,105 $16,314,440
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
-------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Sales $21,674,485 $16,094,995 $11,427,700
Franchise and royalty fees 2,597,985 2,648,303 2,188,434
----------- ----------- -----------
24,272,470 18,743,298 13,616,134
COSTS AND EXPENSES
Cost of sales 11,508,384 8,598,798 5,985,970
Franchise costs 1,999,964 1,803,506 1,376,820
General and administrative 1,989,958 1,436,551 1,234,002
Retail operating expenses 8,087,052 4,746,026 2,749,511
Provision for store closures 1,358,398 - -
Impairment loss - retail
operations 597,062 - -
Loss on writedown of assets 330,587 - -
----------- ----------- -----------
25,871,405 16,584,881 11,346,303
----------- ----------- -----------
Operating (loss) profit (1,598,935) 2,158,417 2,269,831
OTHER INCOME (EXPENSE)
Interest expense (473,618) (299,792) (152,592)
Interest income 28,637 57,620 22,580
----------- ----------- -----------
(444,981) (242,172) (130,012)
Litigation settlements (154,300) - -
Income (loss) before income
tax expense (2,198,216) 1,916,245 2,139,819
----------- ----------- -----------
INCOME TAX EXPENSE (BENEFIT)
Current 149,414 583,488 749,516
Deferred (981,928) 125,012 39,871
----------- ----------- -----------
(832,514) 708,500 789,387
----------- ----------- -----------
NET INCOME (LOSS) (1,365,702) 1,207,745 1,350,432
Dividend requirements
on preferred stock - - 14,610
----------- ----------- -----------
INCOME (LOSS) ALLOCABLE TO
COMMON STOCKHOLDERS $(1,365,702) $ 1,207,745 $ 1,335,822
----------- ----------- -----------
----------- ----------- -----------
PRIMARY INCOME (LOSS) PER COMMON
AND EQUIVALENT SHARE $ (.46) $ .42 $ .51
----------- ----------- -----------
----------- ----------- -----------
Weighted average and equivalent
shares 2,950,265 2,887,063 2,612,730
----------- ----------- -----------
----------- ----------- -----------
FULLY-DILUTED INCOME (LOSS) PER
COMMON AND EQUIVALENT SHARE $ (.46) $ .42 $ .49
----------- ----------- -----------
----------- ----------- -----------
Weighted average and equivalent
shares 2,951,722 2,889,538 2,725,690
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended
---------------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 91,029 $ 79,029 $ 65,590
Conversion of 7% convertible notes to
common - - 12,972
Sale of common stock - 10,125 -
Conversion of preferred stock to
common - 435 17
Exercise of stock options 210 1,440 450
----------- ----------- -----------
Balance at end of year 91,239 91,029 79,029
----------- ----------- -----------
PREFERRED STOCK
Balance at beginning of year - 1,462 1,496
Conversion of preferred stock to
common - (1,309) (34)
Redemption of preferred stock - (153) -
----------- ----------- -----------
Balance at end of year - - 1,462
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 9,703,985 4,700,527 4,197,838
Conversion of 7% convertible notes to
common - - 387,029
Sale of common stock - 4,846,010 -
Conversion of preferred stock to
common - 874 17
Exercise of stock options 26,040 180,435 114,280
Distribution of treasury stock 847 2,010 1,363
Redemption of preferred stock - (25,871) -
----------- ----------- -----------
Balance at end of year 9,730,872 9,703,985 4,700,527
----------- ----------- -----------
RETAINED EARNINGS
Balance at beginning of year 2,338,267 1,130,522 (117,341)
Net income (loss) for the year (1,365,702) 1,207,745 1,350,432
Preferred stock dividends - - (102,569)
----------- ----------- -----------
Balance at end of year 972,565 2,338,267 1,130,522
----------- ----------- -----------
TREASURY STOCK, AT COST
Balance at beginning of year (1,015,899) (4,733) (4,870)
Purchase of stock for treasury - (1,011,331) -
Distribution of treasury stock 165 165 137
----------- ----------- -----------
Balance at end of year (1,015,734) (1,015,899) (4,733)
----------- ----------- -----------
$ 9,778,942 $11,117,382 $ 5,906,807
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
For the years ended
-----------------------------------------
February 28, February 29, February 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
COMMON SHARES
Balance at beginning of year 3,034,302 2,634,289 2,186,335
Conversion of 7% convertible notes to
common - - 432,376
Sale of common stock - 337,500 -
Conversion of preferred stock to
common - 14,513 578
Exercise of stock options 7,000 48,000 15,000
----------- ----------- -----------
Balance at end of year 3,041,302 3,034,302 2,634,289
----------- ----------- -----------
----------- ----------- -----------
PREFERRED SHARES
Balance at beginning of year - 14,610 14,954
Redemption of preferred stock `- (1,532) -
Conversion of preferred stock to
common - (13,078) (344)
----------- ----------- -----------
Balance at end of year - - 14,610
----------- ----------- -----------
----------- ----------- -----------
TREASURY SHARES
Balance at beginning of year 129,153 4,303 4,428
Purchase of stock for treasury - 125,000 -
Distribution of treasury stock (150) (150) (125)
----------- ----------- -----------
Balance at end of year 129,003 129,153 4,303
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
----------------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,365,702) $1,207,745 $1,350,432
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 1,682,158 823,890 487,737
Asset impairment and store
closure losses 2,230,047 - -
Gain on sale of assets (72,707) - -
Changes in operating assets and
liabilities:
Accounts and notes receivable -
trade (110,556) (260,338) (117,236)
Inventories 193,587 (817,892) (602,672)
Other assets 42,868 (113,896) (47,474)
Accounts payable-trade (198,849) 159,403 332,011
Income taxes payable (287,518) (229,101) 121,134
Deferred income taxes (981,928) 125,012 39,871
Accrued liabilities and
compensation 220,270 55,080 153,954
Deferred income 93,000 - -
----------- ----------- -----------
Net cash provided by operating
activities 1,444,670 949,903 1,717,757
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 420,690 - -
Purchase of other assets (622,631) (164,353) (50,064)
Purchase of property and equipment (4,272,950) (5,464,166) (4,399,958)
----------- ----------- -----------
Net cash used in investing activities $(4,474,891) $(5,628,519) $(4,450,022)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
For the years ended
-----------------------------------------
February 28, February 29, February 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit $(1,000,000) $1,000,000 $ -
Proceeds from issuance of long-term
debt 7,071,852 1,500,000 2,437,500
Principal payments on long-term debt (2,805,074) (1,678,332) (270,882)
Proceeds from sale of common stock - 4,856,135 -
Proceeds from exercise of stock
options 26,250 181,875 52,876
Redemption of preferred stock - (26,024) -
Dividends paid - - (102,570)
Proceeds from distribution of
treasury stock 1,012 2,175 1,500
Purchase of stock for treasury - (1,011,331) -
----------- ----------- -----------
Net cash provided by financing
activities 3,294,040 4,824,498 2,118,424
----------- ----------- -----------
Net increase (decrease)in cash and
cash equivalents 263,819 145,882 (613,841)
Cash and cash equivalents at
beginning of year 528,787 382,905 996,746
----------- ----------- -----------
Cash and cash equivalents at end of year $ 792,606 $ 528,787 $ 382,905
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTARY DISCLOSURES:
Interest paid $ 469,237 $ 301,481 $ 155,015
Income taxes paid 436,932 812,589 628,382
Non-cash financing activities:
Issuance of 432,376 shares of common
stock upon conversion of 7%
convertible notes in 1995 - - 400,000
Owner financed equipment purchase - - 30,000
Conversion of preferred stock into - 1,309 34
common stock
</TABLE>
The accompanying notes are an integral part of these statements.
38
<PAGE>
ROCKY MOUNTAIN CHOCLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Description of the nature of Company operations, together with a summary of the
significant accounting policies applied in the preparation of the accompanying
financial statements and of the estimates used in their preparation follows:
NATURE OF OPERATIONS
The Company is a manufacturer of an extensive line of premium chocolate candy
for sale to its franchised and at its Company-owned Rocky Mountain Chocolate
Factory stores located throughout the United States and in Canada. The Company
is also the operator and franchiser of a new concept store called Fuzziwig's
Candy Factory. This new concept store sells hard conventional and
nostalgic/unusual candies (which are not manufactured by the Company, but
procured from wholesale candy suppliers) in a themed, self-serve environment
featuring animation, movement, music, color and entertainment. The majority of
the Company's revenues are generated from sales of candy. The balance of the
Company's revenues are generated from royalties and marketing fees, based on a
franchisee's monthly gross sales, and from franchise fees, which consist of fees
earned from the sale of franchises.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
computed by the straight-line method based upon the estimated useful life of the
asset. Leasehold improvements are amortized on the straight-line method over
the lives of the respective leases or the service lives of the improvements,
whichever is shorter.
AMORTIZATION OF GOODWILL
Goodwill is amortized on the straight-line method over twenty-five years.
FRANCHISE AND ROYALTY FEES
Franchise fee revenue is recognized upon completion of all significant initial
services provided to the franchisee and upon satisfaction of all material
conditions of the franchise agreement. In addition to the initial franchise
fee, the Company receives a royalty fee of five percent (5%) and a marketing and
promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory
franchised stores' gross sales. The Company receives a royalty fee of seven
percent (7%) of the gross sales from franchised Fuzziwig's Candy Factory stores.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, the disclosure of
contingent assets and liabilities, at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
39
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
USE OF ESTIMATES - CONTINUED
Additionally, estimates of losses anticipated to result from store closure and
impairment are based on the best information currently available to management.
Such estimates may differ materially from results actually produced by store
closure as a result of uncertainties in the amount of finally negotiated lease
settlements, the amount of operating losses sustained by the stores to their
dates of closure and in the amount recoverable by sale or redeployment of assets
of stores to be closed. Estimates of impairment losses on underperforming
Company-owned stores to remain open have been made based on forecasts of future
operating results and cash flows of such stores, which forecasts are also
susceptible to uncertainties and may change materially in the near term.
VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's stores are concentrated in the factory outlet mall environment.
At February 28, 1997, 53 Company-owned stores and 69 franchise stores of 228
total stores (53.5%) are located in this environment. The Company is,
therefore, vulnerable to changes in consumer traffic in this market environment
and to changes in the level of construction of additional, new factory outlet
mall locations.
CASH EQUIVALENTS
Cash equivalents include cash in excess of daily requirements which is invested
in various financial instruments having an original maturity of three months or
less.
INCOME (LOSS) PER COMMON SHARE
Primary income (loss) per common and common equivalent share is computed by
dividing net income (loss), adjusted for dividends on preferred stock, by the
weighted average number of common and common equivalent shares outstanding
during the year. Common equivalent shares result from the assumed issuance of
shares under the Company's stock option plans when dilutive. Fully-diluted
income per common share is computed as above but assumes conversion of
convertible notes payable and cumulative convertible preferred stock, when
dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, short-
term investments in money market fund and other liquid assets, trade receivable
and payable, notes receivable and debt, which has variable rates. The fair
value of all instruments approximates the carrying value.
NOTE B - NEW ACCOUNTING PRONOUNCEMENT
The FASB has issued Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this new
standard is not expected to have a material impact on the disclosure of earnings
per share in the financial statements.
40
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C - INVENTORIES
Inventories consist of the following:
February 28, February 29,
1997 1996
------------ ------------
Ingredients and supplies $1,168,216 $1,117,517
Finished candy 1,143,105 1,387,391
---------- ----------
$2,311,321 $2,504,908
---------- ----------
---------- ----------
NOTE D - LINE OF CREDIT AND LONG-TERM DEBT
LINE OF CREDIT
At February 28, 1997 the Company possessed a $2,000,000 line of credit from a
bank, collateralized by accounts receivable and inventory. Draws may be made
under the line at 75% of eligible accounts receivable plus 30% of eligible
inventory up to $500,000. Interest on borrowings is at prime (8.25% at February
28, 1997 and at February 29, 1996). Terms of the line require that the line be
rested (that is, that there be no outstanding balance) for a period of 60
consecutive days during the term of the loan. The credit line expires in July,
1998.
The terms of the Line of Credit and notes payable with a bank provide for the
maintenance of certain financial covenants. Because of the net loss reported by
the Company for the year ended February 28, 1997, the Company would not have
been in compliance with one such covenant had the bank not granted waiver of
such technical default. On May 22, 1997, the Company and the bank entered into
an amendment to the Term Loan and Credit Agreement effective as of March 1, 1997
which provides, among other things, a decrease in the Tangible Net Worth
requirement from $10,000,000 to $9,000,000 and extension of the line of credit
to July 1998.
LONG-TERM DEBT
February 28, February 29,
1997 1996
------------ ------------
Chattel mortgage note payable in monthly
installments of $10,500 through March, 2001
including interest at 8.25% per annum,
collateralized by machinery, equipment,
furniture and fixtures. 415,557 -
Real estate mortgage note payable in monthly
installments of $14,250 through April, 2011;
interest rate of 8.25%; collateralized by
factory building. Interest adjusted to prime
in May, 2001 and every five years thereafter
until maturity in April 2016. 1,614,033 -
41
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
LONG-TERM DEBT - CONTINUED
February 28, February 29,
1997 1996
------------ ------------
Chattel mortgage note payable in monthly
installments of $12,359 through April, 2002
including interest at 8.25% per annum,
collateralized by equipment 622,158 -
Chattel mortgage note payable in monthly
installments of $24,613 through April, 2003
including interest at 8.94% per annum,
collateralized by machinery, equipment,
furniture and fixtures. 1,434,090 -
Chattel mortgage note payable in monthly
installments of $5,472 through January, 2002;
interest rate of 10.36%; collateralized by
machinery, equipment, furniture and fixtures. 248,849 -
Chattel mortgage note payable in monthly
installments of $6,396 through April, 2003
including interest at 9.72% per annum,
collateralized by equipment, furniture and
fixtures 368,783 -
Chattel mortgage note payable in monthly
installments of $10,177 through October, 2001
including interest at 10.35% per annum,
collateralized by machinery, equipment,
furniture and fixtures. 450,432 -
Eight Chattel mortgage notes payable in monthly
installments of $32,277 through February 2002
including interest at between 8.75% and
9.44% per annum, collateralized by equipment,
furniture and fixtures. 1,431,291 -
Chattel mortgage note payable in monthly
installments of $9,247 through August, 2004
including interest at 8.25% per annum,
collateralized by machinery, equipment,
furniture and fixtures. - 658,479
Real estate mortgage note payable in
monthly installments of $14,506
through August, 2014; interest rate of
8.25%; collateralized by factory building. - 1,625,798
Other - 34,138
---------- ----------
6,585,193 2,318,415
Less current maturities 847,881 134,538
---------- ----------
$5,737,312 $2,183,877
---------- ----------
---------- ----------
42
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
LONG-TERM DEBT - CONTINUED
Maturities of long-term debt are as follows:
Year-Ending February 28 (29),
-----------------------------
1998 $ 847,881
1999 928,150
2000 1,016,064
2001 1,096,584
2002 845,164
Thereafter 1,851,350
----------
$6,585,193
----------
----------
NOTE E - OPERATING LEASES
The Company conducts its retail sales operations in facilities leased under five
to ten year noncancelable operating leases. Certain leases contain renewal
options for between two and ten additional years at increased monthly rentals.
The majority of the leases provide for contingent rentals based on sales in
excess of predetermined base levels.
The following is a schedule by year of future minimum rental payments required
under such leases:
Year-Ending February 28 (29),
-----------------------------
1998 $ 1,252,288
1999 1,215,706
2000 1,121,401
2001 975,165
2002 482,141
Thereafter 681,841
-----------
$ 5,728,542
-----------
-----------
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:
Year-Ending February 28 (29),
-----------------------------
1998 $1,294,202
1999 1,166,474
2000 989,149
2001 726,482
2002 384,003
Thereafter 666,095
----------
$5,226,405
----------
----------
43
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E - OPERATING LEASES - CONTINUED
The following is a schedule of lease expense for all operating leases for the
three years ended February 28, 1997:
1997 1996 1995
---------- ---------- ----------
Minimum rentals $2,278,591 $1,547,817 $1,042,235
Less sublease rentals (1,184,301) (982,780) (663,457)
Contingent rentals 47,116 56,037 33,040
---------- ---------- ----------
$1,141,406 $ 621,074 $ 411,818
---------- ---------- ----------
---------- ---------- ----------
NOTE F - RELATED PARTY LEASE
Until June, 1994 the Company leased land and its factory building under a ten
year operating lease with the President of the Company for a monthly rental of
$7,750. On June 2, 1994 the Company acquired the land and building from the
President at a price of $700,332.
NOTE G - INCOME TAXES
Income tax expense is comprised of the following:
Years Ended February 28 - 29,
1997 1996 1995
--------- --------- ---------
Current
Federal $146,743 $527,211 $658,061
State 2,671 56,277 91,455
--------- --------- ---------
Total Current 149,414 583,488 749,516
--------- --------- ---------
Deferred
Federal (879,936) 116,527 34,759
State (101,992) 8,485 5,112
--------- --------- ---------
Total Deferred (981,928) 125,012 39,871
--------- --------- ---------
Total $(832,514) $708,500 $789,387
--------- --------- ---------
--------- --------- ---------
A reconciliation of the statutory federal income tax rate and the effective rate
as a percentage of pretax income is as follows:
Years Ended February 28 - 29,
1997 1996 1995
-------- -------- --------
Statutory rate 34.0% 34.0% 34.0%
Goodwill amortization .4% .4% .4%
State income taxes, net of
federal benefit 3.0% 2.2% 3.0%
Other .5% .4% (.5%)
-------- -------- --------
Effective Rate 37.9% 37.0% 36.9%
-------- -------- --------
-------- -------- --------
44
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G - INCOME TAXES - CONTINUED
The components of deferred income taxes at February 28, 1997 and February 29,
1996 are as follows:
Deferred Tax Asset 1997 1996
------------------ --------- ---------
Allowance for doubtful accounts $ 99,728 $ 10,573
Accrued compensation 63,666 48,646
Deferred income 35,944 -
Contribution carryover 9,610 -
Loss provisions 940,972 -
Alternative minimum tax carryforward 85,689 -
Deferred lease rentals 33,914 18,729
--------- ---------
1,269,523 77,948
Deferred Tax Liabilities
------------------------
Depreciation (503,884) (294,237)
--------- ---------
Net deferred tax asset (liability) $ 765,639 $(216,289)
--------- ---------
--------- ---------
NOTE H - PREFERRED STOCK
On February 15, 1995, the Company called for redemption of all outstanding
shares of its Preferred Stock at a redemption price of $10.41, including $.21 in
unpaid, accrued dividends. As of March 17, 1995, all preferred shares had been
converted or redeemed.
Each share of the $1.00 cumulative convertible preferred stock was entitled to a
cumulative annual dividend of $1.00 and was convertible into common stock at
$9.00 per share of common stock with each share of preferred stock being valued
at $10.00 for the purpose of such conversion. The conversion price was subject
to adjustment in certain events. The value of each share of preferred stock for
the purpose of conversion was increased by the amount of all unpaid cumulative
dividends. The preferred stock was redeemable at the option of the Company at a
call price of $10.20 per share plus cumulative dividends.
NOTE I - STOCK OPTION PLANS
Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan") options
to purchase 215,000 shares of the Company's common stock were granted at prices
not less than market value at the date of grant. The 1985 Plan expired in
October 1995. Options granted under the 1985 Plan could not have a term
exceeding ten years. Grants of options representing 111,000 shares of the
Company's common stock remained outstanding under the 1985 Plan at February 28,
1997.
Under the 1995 Stock Option Plan (the "1995 Plan") and the Nonqualified Stock
Option Plan for Nonemployee Directors (the "Directors' Plan"), options to
purchase up to 100,000 and 90,000 shares, respectively, of the Company's common
stock may be granted at prices not less than market value at the date of grant.
Options granted may not have a term exceeding ten years. Grants of options
representing 121,000 and 40,000 shares of the Company's common stock remained
outstanding under the 1995 Plan and Directors' Plan, respectively at February
28, 1997.
45
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - STOCK OPTION PLANS - CONTINUED
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 March 1998 through January 2007. Options for 161,000 shares were exercisable
at February 28, 1997.
The Company has adopted the disclosure-only provisions of Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation". In accordance with
those provisions, the Company applies APB opinion 25 and related interpretations
in accounting for its stock option plans and, accordingly, does not recognize
compensation cost if the exercise price is not less than market. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by Financial Accounting Standard
123, net income (loss) and income (loss) per share would have been reduced to
the pro-forma amounts indicated in the table below (in 000's except per share
amounts):
Years Ended February 28 (29):
-----------------------------
1997 1996
------- -------
Net Income (Loss)-as reported $(1,366) $ 1,208
Net Income (Loss)-pro forma $(1,530) $ 876
Income per Share-as reported $ (.46) $ .42
Income (Loss) per Share-pro forma $ (.52) $ .30
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the following assumptions:
Expected dividend yield 0%
Expected stock price volatility 50%
Risk-free interest rate 6.5%
Expected life of options 7 years
Additional information with respect to options outstanding under the Plans at
February 28, 1997, and changes for the two years then ended was as follows:
1997
---------------------------
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding at beginning of year 224,000 $ 11.95
Granted 111,000 $ 7.05
Exercised (7,000) $ 3.75
Cancelled (56,000) $ 18.25
------- ---------
Outstanding at end of year 272,000 $ 9.01
-------
-------
Options exercisable at February 28, 1997 161,000 $ 10.11
Weighted average fair value per share of
options granted during 1997 $4.04
46
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - STOCK OPTION PLANS - CONT.
<TABLE>
<CAPTION>
1996
------------------------------
Weighted
Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at beginning of year 186,000 $ 6.95
Granted 87,000 $ 18.19
Exercised (48,000) $ 3.79
Forfeited (1,000) $ 18.25
--------
Outstanding at end of year 224,000 $ 11.95
--------
--------
Options exercisable at February 29, 1996 200,000 $ 11.19
Information about stock options outstanding at February 28, 1997 is summarized as follows:
</TABLE>
Options Outstanding
-------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
- - - ------------------------ ----------- ---------------- ----------------
$3.125 to 5.875 91,000 5.42 years $ 4.32
$6.25 to 7.75 90,000 9.21 years 7.70
$11.50 to 18.25 91,000 7.45 years 14.99
--------
272,000
--------
--------
Options Exercisable
------------------------------------
Weighted
Number average
Range of exercise prices exercisable exercise price
- - - ------------------------ ----------- --------------
$3.125 to 5.875 71,000 $3.88
$6.25 to 7.75 - -
$11.50 to 18.25 90,000 $15.03
-------
161,000
-------
-------
NOTE J - SEGMENT INFORMATION
The Company operates in only one industry segment. All significant revenues
relate to sales of its products through Company operated and franchised retail
stores.
47
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE K - LOSS PROVISIONS
Loss provisions were provided as follows in the fiscal year ended February 28,
1997:
STORE CLOSURES
On February 11, 1997 the Company adopted a plan to close eight underperforming
Company-owned stores. The anticipated closure date of these stores varies
between May 1997 and February 1998. The Company made a loss provision in
February, 1997 for closure of these stores in the total amount of $1,302,000
including $138,000 for estimated operating losses to date of closure, $473,000
for estimated cost of settlement of leases, and $691,000 for writedown of store
assets to their estimated recoverable values. A loss provision of $56,000 was
made in February, 1997 for estimated cost of settlement of leases relating to
the Company's liability as primary lessee on sublet franchise outlets (also see
Note E).
LONG-LIVED ASSET IMPAIRMENTS
An impairment loss for retail operations was recognized in the amount of
$597,000 for six underperforming Company-owned stores to remain open. Current
and historical operating and cash flow losses indicate that recorded asset
values for these stores are not fully recoverable. Assets with net book value
of $885,000 were reduced to their estimated fair value based on prices of
similar assets or estimated present value of future net cash flows expected to
be generated from the stores.
ASSET OBSOLESCENCE AND DISPOSITIONS
A loss provision was made in the amount of $331,000 for estimated loss on future
disposition of certain obsolete factory assets and to reduce to net realizable
value certain surplus fixtures and equipment utilized in Company-owned stores.
LITIGATION SETTLEMENTS
In fiscal 1997 the Company settled in the amount of $154,000, litigation brought
against it for premature lease termination resulting from closure in fiscal 1996
of one Company-owned store and of one franchised store where the Company was the
primary lessee on the franchisee- sublet location.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
---- --- --------
Franklin E. Crail.............. 55 Chairman of the Board, President,
Treasurer and Director
Edward L. Dudley............... 33 Vice President - Product Sales
Development
Clifton W. Folsom.............. 43 Vice President - Franchise Support
Gary S. Hauer.................. 52 Vice President - Manufacturing and
Director
Jay B. Haws.................... 46 Vice President - Marketing
Lawrence C. Rezentes........... 49 Vice President - Finance
Virginia M. Perez.............. 59 Corporate Secretary
Gerald A. Kien................. 66 Director
Lee N. Mortenson............... 61 Director
Everett A. Sisson.............. 76 Director
Fred M. Trainor................ 58 Director
FRANKLIN E. CRAIL. Mr. Crail co-founded the first Rocky Mountain
Chocolate Factory store in May 1981. Since the incorporation of the Company
in November 1982, he has served as its President and a Director, and since
September 1981 as its Treasurer. He was elected Chairman of the Board in
March 1986. Prior to founding the Company, Mr. Crail was co-founder and
president of CNI Data Processing, Inc., a software firm which developed
automated billing systems for the cable television industry.
EDWARD L. DUDLEY. Mr. Dudley joined the Company in January 1997 to
spearhead the Company's newly-formed Product Sales Development function as Vice
President - Product Sales Development, with the goal of increasing Company
factory and retail sales. Mr. Dudley served in a number of senior marketing and
sales management capacities, including most recently that of Director,
Distribution Services, during his 10 year career with Baxter Healthcare
Corporation. Mr. Dudley holds B.S. degrees in Finance and Accounting from the
University of Colorado.
CLIFTON W. FOLSOM. Mr. Folsom has served as Vice President of Franchise
Support of the Company since June 1989. He joined the Company in May 1983 as
Director of Franchise Sales and Support, and was promoted in March 1985 to Vice
President of Franchise Sales, a position he held until he began serving in his
current capacity in June 1989. From March 1978 until joining the Company,
Mr. Folsom was employed as a sales representative by Sears Roebuck & Company.
GARY S. HAUER. Mr. Hauer joined the Company in May 1996 as Vice President
of Manufacturing and has served as a Director of the Company since June 1996.
Mr. Hauer has served in a number of manufacturing management capacities over a
28 year career in the chocolate confectionery and food industries, including 18
years with See's Candies, the last 10 years of which he served as plant manager.
Mr. Hauer possesses a B.S. in business administration from San Jose State
University.
JAY B. HAWS. Mr. Haws joined the Company in August 1991 as Vice President
of Marketing. Since 1981, Jay had been closely associated with the Company both
as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he
was Vice-President and President of Chocolate Factory, Inc., which operated two
Rocky Mountain Chocolate Factory franchises
49
<PAGE>
located in San Francisco, California. From 1983 to 1989 he served as Vice
President of Marketing for Image Group, Inc., a marketing communications firm
based in Northern California. Concurrently, Mr. Haws was co-owner of two other
Rocky Mountain Chocolate Factory franchises located in Sacramento and Walnut
Creek, California. From 1973 to 1983 he was principal of Jay Haws and
Associates, an advertising and graphic design agency. Mr. Haws holds a B.A. in
graphics design and communication from California State University.
LAWRENCE C. REZENTES. Mr. Rezentes joined the Company in July 1990 as Vice
President of Finance. From 1989 to April 1990, he served as Vice President of
Finance for Fanamation, Inc., a designer and manufacturer of robotic inspection
systems. From 1985 through 1988, he was a principal in Venture Consulting
Resource, a financial and business planning consulting organization to
technology-based businesses and to the venture capital community. From 1980
through 1984, Mr. Rezentes was co-founder and Vice President of Finance of
Infomed Corporation, a venture capital financed pioneer in the field of computer
and telecommunications-based medical diagnosis. Mr. Rezentes holds a B.S. in
accounting from Fairleigh Dickinson University and an M.B.A. in finance from the
University of Chicago Graduate School of Business. He is a certified public
accountant.
VIRGINIA M. PEREZ. 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.
GERALD A. KIEN. Mr. Kien was first elected as a Director of the Company in
August 1995. From 1993 to 1995 Mr. Kien served as President and Chief Executive
Officer of Remote Sensing Technologies, Inc., a subsidiary of Envirotest
Systems, Inc., a company engaged in the development of instrumentation for
vehicle emissions testing. From 1989 to 1993 Mr. Kien served as Chairman,
President and Chief Executive Officer of Sun Electric Corporation, a
manufacturer of automotive test equipment, and has served as a Director and as
Chairman of the Executive Committee of that Company since 1980. Sun Electric
merged with Snap-On Tools in 1993, and Mr. Kien remained as President of the Sun
Electric division of Snap-On Tools until his retirement in 1994. Mr. Kien was a
co-founder of the First National Bank of Hoffman Estates and remained as a
Director from 1979 to 1990, and was a Director of the Charter Bank and Trust of
Illinois from 1984 to 1990. He served as a Director of Systems Control, Inc. and
Vehicle Test Technologies, Inc., from 1989 to 1993, both of which are engaged in
emissions testing of motor vehicles. Mr. Kien received his Ph.D. from the
University of Illinois Graduate College of Medicine, in 1959.
LEE N. MORTENSON. Mr. Mortenson has served on the Board of Directors of
the Company since 1987. Since December 1993, Mr. Mortenson has been President
and a Director of Coronet Insurance Company. Mr. Mortenson has served, since May
1988, as President and a Director and, since December 1990, as Chief Operating
Officer of Sunstates Corporation (formerly known as Acton Corporation). He also
served as Chief Executive Officer of Sunstates Corporation, the parent
corporation of Coronet, from May 1988 to December 1990. Sunstates Corporation is
engaged in non-standard automative casualty insurance, manufacturing and real
estate development. Since 1984, Mr. Mortenson has served as President, Chief
Operating Officer and a Director of Telco Capital Corporation, a diversified
financial services and manufacturing company and an indirect parent of Coronet.
Mr. Mortenson also served as a Director of Hickory Furniture Company from 1980
to 1993 and of Sun Electric Corporation, a manufacturer of automotive test
equipment, from 1988 to 1992 and has served as a Director of Alba-Waldensian,
Inc., since 1984, of NRG Inc., a leasing company, since 1987, and of Wellco
Enterprises, Inc., a boot manufacturer, since 1994.
On December 10, 1996, the Director of Insurance of the State of Illinois,
as Conservator, took possession and control of the assets and properties of
Coronet Insurance
50
<PAGE>
Company and certain of its affiliated companies and issued a Cease and Desist
Order prohibiting issuance of new or renewal policies of insurance, following
the reduction of such companies' statutory surplus to less that the minimum
amounts required under insurance regulations. On December 24, 1996, the
Director of Insurance, as Conservator, ordered the complete liquidation of
Coronet and such affiliates for the benefit of its creditors and policyholders.
Mr. Mortenson also serves as director or officer of certain of these affiliates
of Coronet.
EVERETT A. SISSON. Mr. Sisson was first elected as a Director of the Company in
August 1995. Mr. Sisson is President of The American Growth Group, which is
engaged in land development, investment, management services and management
consulting, a position he has held since he formed the firm in 1966. Mr. Sisson
served as a Director of the Century Companies of America, a company providing
life insurance and related financial products, from 1962 until 1991, and
Chairman of the Board from 1977 until 1983. Mr. Sisson has been a Director of
Coronet since 1992. During various periods over the past 20 years, Mr. Sisson
served as a Director and member of several Board committees of Libco
Corporation, Wisconsin Real Estate Investment Trust, Hickory Furniture Company,
Telco Capital Corporation, Greater Heritage Corporation, Indiana Financial
Investors Inc., Sunstates Corporation and Acton Corporation.
FRED M. TRAINOR. Mr. Trainor has served as a Director since August 1992.
Mr. Trainor is the founder, and since 1984 has served as Chief Executive Officer
and President of AVCOR Health Care Products, Inc., Fort Worth, Texas, a
manufacturer and marketer of specialty dressings products. Prior to founding
AVCOR Health Care Products, Inc., in 1984, Mr. Trainor was a founder, Chief
Executive Officer and President of Tecnol, Inc. of Fort Worth, Texas, also a
company involved with the health care industry. Before founding Tecnol, Inc.,
Mr. Trainor was with American Hospital Supply Corporation (AHSC) for
thirteen years in a number of management capacities.
The Board of Directors has a standing Audit Committee and Compensation
Committee, each consisting of Messrs. Mortenson, Trainor, Sisson and Kien.
Currently, all directors of the Company are elected annually by the stockholders
and hold office until their respective successors are elected and qualified.
SECTION 16(a) COMPLIANCE
The Company has no knowledge that any director, executive officer or 10%
stockholder was required to file a Form 5 for fiscal 1996 and failed to do so,
and the Company has received a written representation that a Form 5 was not
required from each such person other than Clyde Wm. Engle who, together with
certain affiliated companies is a 10% stockholder of the Company. In making
these disclosures, the Company has relied solely on written representations of
its directors, executive officers and 10% stockholders and copies of the reports
filed by them with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual
compensation paid for the years indicated to the Company's Chief Executive
Officer (the "named officer"). No other executive officer of the Company met
the minimum compensation threshold of $100,000 for inclusion in the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL ALL OTHER
COMPENSATION COMPENSATION(2)
------------ ---------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS
--------------------------- ---- --------- -----
<S> <C> <C> <C> <C>
Franklin E. Crail, 1997 $150,000 -0- $2,250
Chairman of the Board and President 1996 $146,538 $10,000 $1,833
1995 $129,618 $31,050 $2,162
</TABLE>
51
<PAGE>
(1) Includes amounts deferred at the Named Officer's election pursuant to
the Company's 401(k) Plan.
(2) Represents Company contributions on behalf of the Named Officer under
the Company's 401(k) Plan.
Additional columns required by Securities and Exchange Commission rules to
be included in the foregoing table, and certain additional tables required by
such rules, have been omitted because no compensation required to be disclosed
therein was paid or awarded to the Named Officer.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any compensation for serving on the
Board or on committees. Directors are entitled to receive stock option awards
under the Company's 1990 Nonqualified Stock Option Plan for Nonemployee
Directors ("the Directors' Plan").
The Directors' Plan, as amended, provides for automatic grants of
nonqualified stock options covering a maximum of 90,000 shares of Common Stock
of the Company to Directors of the Company who are not also employees or
officers of the Company and who have not made an irrevocable, one-time election
to decline to participate in the plan. The Directors' Plan provides that during
the term of the plan options will be granted automatically to new nonemployee
Directors upon their election. Each such option permits the nonemployee director
to purchase 10,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on the date of grant of the option. Each
nonemployee director's option may be exercised in full during the period
beginning one year after the grant date of such option and ending ten years
after such grant date, unless the option expires sooner due to termination of
service or death.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors consists of
Lee N. Mortenson, Fred M. Trainor, Gerald A. Kien, and Everett A. Sisson. None
of the foregoing persons is or has been an officer of the Company.
In 1987, the Company granted to Coronet Insurance Company the right to
require the Company, at the Company's expense, to register for public sale the
shares of Common Stock of the Company acquired by Coronet pursuant to the
conversion of the Company's 7% Convertible Secured Notes, all of which have
previously been converted by Coronet. Such registration rights, which apply to
724,562 of the shares of Common Stock currently held by Coronet, are exercisable
by Coronet at any time. However, Coronet may not exercise the registration
rights more than once in any consecutive 12-month period nor more than three
times in the aggregate, unless Coronet agrees to pay all the Company's costs and
expenses in connection therewith. Coronet has exercised such registration
rights one time, in connection with the public offering of Common Stock
completed in September and October, 1995. The Company also granted "piggyback"
rights to Coronet entitling Coronet to participate in registered offerings of
Common Stock by the Company in certain circumstances. Coronet's assets are
currently under the control of the Director of Insurance of the State of
Illinois. See Item 12, below.
Mr. Mortenson is President and a director of Coronet and a director and
officer of certain affiliated corporations of Coronet. Mr. Sisson has been a
director of Coronet since 1992 and, during various periods over the past 20
years, has served as a director of certain affiliated corporations of Coronet.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, at May 12, 1997, with respect
to (i) each person known to the Company to be the beneficial owner of more than
5% of the Company's Common
52
<PAGE>
Stock, (ii) the shares of the Company's Common Stock beneficially owned by each
Director and nominee (which includes the Named Officer) and (iii) by Directors
and executive officers of the Company as a group.
The number of shares beneficially owned includes shares of Common Stock in
which the persons named below have either investment or voting power. A person
is also deemed to be the beneficial owner of a security if that person has the
right to acquire beneficial ownership of that security within sixty (60) days
through the exercise of an option or through the conversion of another security.
Except as noted, each beneficial owner has sole investment and voting power with
respect to the Common Stock.
Common Stock not outstanding that is subject to options or conversion
privileges is deemed to be outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by the person holding such options
or conversion privileges, but is not deemed to be outstanding for the purpose of
computing the percentage of Common Stock beneficially owned by any other person.
Rocky Mountain Holdings Company ("Holdings") has pledged to LaSalle
National Bank of Chicago, Illinois, 799,357 of the shares of Common Stock
indicated in the table below as being beneficially owned by Clyde Wm. Engle,
representing 27.5% of the total outstanding shares as of May 12, 1997, to secure
certain indebtedness to such bank. Holdings, a subsidiary of Coronet Insurance
Company ("Coronet"), is the direct owner of the pledge shares. See footnote (2)
to the table below. Holdings has retained voting rights with respect to the
pledged shares. An event resulting in foreclosure on the indebtedness could
result in a change in control of the Company at a subsequent date.
The Director of Insurance of the State of Illinois, as Conservator, took
possession and control of the assets and properties of Coronet and certain of
its affiliates, including Casualty Insurance Company of Florida and Crown
Casualty Company, on December 10, 1996, and, on December 24, 1996, ordered the
complete liquidation of Coronet and such affiliates for the benefit of their
creditors and policyholders. It is the Company's understanding that the details
of such liquidation, and of any related dispositions of the 868,757 shares of
the Company's Common Stock held by Coronet's subsidiaries, as described in
footnote (2) to the table below, have not been finalized. Any such dispositions
could result in a change in control of the Company at a subsequent date. Such
shares represent 29.8% of the total outstanding shares of Common Stock as of May
12, 1997. The Director of Insurance has advised the Company that sales of the
shares on the market, if any, would be made in an orderly fashion over a period
of time to minimize any impact on the market for the Company's stock.
Common Stock
- - - ------------
Amount and
Name of Nature of Percent
Beneficial Beneficial of
Owner (1) Ownership class
- - - ---------- ---------- -------
Clyde Wm. Engle et al. 893,757 (2) 30.7%
Franklin E. Crail 293,099 10.1%
Gary S. Hauer 35,991 (3) 1.2%
Everett A. Sisson 10,000 (4) .3%
Gerald A. Kien 10,000 (4) .3%
Lee N. Mortenson 12,500 (4) .4%
Fred M. Trainor 20,000 (4) .7%
All executive officers
and directors as a
group (10 persons) 537,522 (5) 18.5%
- - - ---------------------
(1) Mr. Engle's address is 3500 West Peterson Avenue, Chicago, Illinois 60659.
Mr. Crail's address is the same as the Company's address
53
<PAGE>
(2) 868,757 of the shares indicated as being beneficially owned by Mr. Engle
are held of record by the following subsidiaries of Coronet: Holdings
(799,357 shares), Casualty Insurance Company of Florida (58,670 shares) and
Crown Casualty Company (10,730 shares). Such shares may also be deemed to
be beneficially owned by the following affiliates of Coronet: Normandy
Insurance Agency, Inc., Sunstates Corporation, Hickory Furniture Company,
Telco Capital Corporation and RDIS Corporation. Mr. Engle is the
beneficial owner of a majority equity interest in RDIS Corporation, the
ultimate parent of the foregoing corporations. This information is based
on Forms 4 dated June 6, 1996, filed by Mr. Engle, Coronet and such
affiliates and a Form 4 dated March 8, 1997, filed by Mr. Engle with the
Securities and Exchange Commission and on information provided to the
Company by Coronet. The Form 4 filed by Mr. Engle indicates that he
beneficially owns an additional 25,000 shares, of which 15,000 shares are
owned by a corporation in which Mr. Engle owns a majority interest, and
10,000 shares are owned beneficially by members of Mr. Engle's immediate
family. Mr. Eagle disclaims beneficial ownership of the shares owned by
his family members.
(3) Mr. Hauer has the right to acquire these shares within 60 days through the
exercise of employee stock options previously granted to him.
(4) Includes 10,000 shares that Messrs. Mortenson, Trainor, Sisson and Kien
each has the right to acquire within 60 days through the exercise of
options granted pursuant to the Directors Plan.
(5) Includes shares which officers and directors as a group have the right to
acquire through the exercise of options granted pursuant to the Company's
1985 Incentive Stock Option Plan, 1995 Stock Option Plan, and the
Director's Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the heading "Compensation Committee
Interlocks and Insider Participation" in Item 11, Executive Compensation, above,
is incorporated by reference in this Item 13.
54
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS Page
-------------------- ----
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS. . . . . . . . . . . . . . . . . . . 31
BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . . . . 32
STATEMENTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 34
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . . . . . . . . 35
STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . . 37
2. FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the required information is not present
or not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements or the
notes thereto.
3. EXHIBITS
Exhibit Incorporated by
Number Description Reference to
------ ----------- ---------------
3.1 Articles of Incorporation of Exhibit 3.1 to Current Report on
the Registrant, as amended Form 8-K of the Registrant filed on
August 1, 1988.
3.2 By-laws of the Registrant, as Exhibit 3.2 to the Annual Report on
amended on June 10, 1987 Form 10-K of the Registrant for the
fiscal year ended February 28, 1987.
4.1 Specimen Common Stock Exhibit 4.1 to Current Report on
Certificate Form 8-K of the Registrant filed on
August 1, 1988.
4.2 Working capital loan Exhibit 4.8 to the Annual Report on
agreement dated October 17, Form 10-K of the Registrant for the
1991 between the Company and Fiscal year ended February 29, 1992
Burns National Bank of
Durango (Amended by change in
terms agreements provided as
Exhibits 4.12 and 4.16 below)
4.3 Lease agreement dated July Exhibit 4.10 to the Annual Report
19, 1991 between the Company on Form 10-K of the Registrant for
and Ford Equipment Leasing the Fiscal year ended February 29,
Company 1992
4.4 Installment note dated August Exhibit 4.11 to the Annual Report
23, 1991 between the Company on Form 10-K of the Registrant for
and Textron Financial the Fiscal year ended February 29,
Corporation 1992
55
<PAGE>
Exhibit Incorporated by
Number Description Reference to
------ ----------- ---------------
4.5 Change in terms agreement (to Exhibit 4.12 to the Annual Report
working capital loan on Form 10-KSB of registrant for
agreement dated October 17, the fiscal year ended February 28,
1991 filed as Exhibit 4.8) 1994
dated October 17, 1994
4.6 Letters of commitment from Exhibit 4.13 to the Form 10-K of
financial institutions registrant for the fiscal year
supporting commitment of ended February 29, 1996
$3,500,000 in financing
4.7 Chattel mortgage loan Exhibit 4.14 to the Form 10-K of
agreement dated June 2, 1994 registrant for the fiscal year
in the amount of $750,000 ended February 29, 1996
between the registrant and
First National Bank of
Farmington
4.8 Real estate mortgage loan Exhibit 4.15 to the Form 10-K of
agreement dated June 2, 1994 registrant for the fiscal year
in the amount of $1,687,500 ended February 29, 1996
between the registrant and
First National Bank of
Farmington
4.9 Change in terms agreement (to Exhibit 4.16 to the Form 10-K of
working capital loan registrant for the fiscal year
agreement dated October 17, ended February 29, 1996
1991 filed as Exhibit 4.8)
dated April 12, 1995
4.10 Chattel mortgage loan Exhibit 4.17 to the Form 10-K of
agreement dated April 12, registrant for the fiscal year
1995 in the amount of ended February 29, 1996
$1,500,000 between the
registrant and First National
Bank of Farmington
4.11 Working Capital availability Exhibit 4.18 to the Form 10-K of
loan agreement dated April 5, registrant for the fiscal year
1996 in the amount of ended February 29, 1996
$2,000,000 between Norwest
Banks and the Registrant
4.12 Working Capital availability Filed Herewith
loan agreement dated May 22,
1997 in the amount of
$2,000,000 between Norwest
Banks and the Registrant
10.1 Form of Stock Option Exhibit 10.3 to the Annual Report
Agreement for Incentive Stock on Form 10-K of the Registrant for
Option Plan of the Registrant* the fiscal year ended February 28,
1986.
56
<PAGE>
Exhibit Incorporated by
Number Description Reference to
------ ----------- ---------------
10.2 Incentive Stock Option Plan Exhibit 10.2 to the Annual Report
of the Registrant as amended on Form 10-K of the Registrant for
July 27, 1990 * the fiscal year ended February 28,
1991
10.4 Current form of franchise Filed herewith.
agreement used by the
Registrant
10.5 Form of Real Estate Lease Exhibit 10.7 to Registration
between the Registrant as Statement on Form S-18
Lessee and franchisee as (Registration No. 33-2016-D).
Sublessee
10.7 Form of Nonqualified Stock Exhibit 10.8 to the Annual Report
Option Agreement for on Form 10-K of the Registrant for
Nonemployee Directors for the the fiscal year ended February 28,
Registrant * 1991.
10.8 Nonqualified Stock Option Exhibit 10.9 to the Annual Report
Plan for Nonemployee on Form 10-K of the Registrant for
Directors dated March 20, the fiscal year ended February 28,
1990 * 1991
10.9 1995 Stock Option Plan of the Exhibit 10.9 to Registration
Registrant* Statement on Form S-1 (Registration
No. 33-62149) filed August 25, 1995
10.10 Forms of Incentive Stock Exhibit 10.10 to Registration
Option Agreement for 1995 Statement on Form S-1 (Registration
Stock Option Plan* No. 33-62149) filed on August 25,
1995
10.11 Forms of Nonqualified Stock Exhibit 10.11 to Registration
Option Agreement for 1995 Statement on Form S-1 (Registration
Stock Option Plan* No. 33-62149) filed on August 25,
1995
11.1 Statement re-computation of Filed herewith.
per share earnings
23.1 Consent of independent public Filed herewith
accountants
27.1 Financial Data Schedule Filed herewith
* Management contract or compensatory plan
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the year ended February 28, 1997.
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Sequentially
Number Description Reference to Numbered Page
------- ----------- --------------- -------------
<S> <C> <C> <C>
3.1 Articles of Incorporation of Exhibit 3.1 to Current Report on
the Registrant, as amended Form 8-K of the Registrant filed
on August 1, 1988.
3.2 By-laws of the Registrant, Exhibit 3.2 to the Annual Report
as amended on June 10, 1987 on Form 10-K of the Registrant
for the fiscal year ended
February 28, 1987.
4.1 Specimen Common Stock Exhibit 4.1 to Current Report on
Certificate Form 8-K of the Registrant filed
on August 1, 1988.
4.2 Working capital loan Exhibit 4.8 to the Annual Report
agreement dated October 17, on Form 10-K of the Registrant
1991 between the Company and for the Fiscal year ended
Burns National Bank of February 29, 1992
Durango (Amended by change
in terms agreements provided
as Exhibits 4.12 and 4.16
below)
4.3 Lease agreement dated July Exhibit 4.10 to the Annual Report
19, 1991 between the Company on Form 10-K of the Registrant
and Ford Equipment Leasing for the Fiscal year ended
Company February 29, 1992
4.4 Installment note dated Exhibit 4.11 to the Annual Report
August 23, 1991 between the on Form 10-K of the Registrant
Company and Textron for the Fiscal year ended
Financial Corporation February 29, 1992
4.5 Change in terms agreement Exhibit 4.12 to the Annual Report
(to working capital loan on Form 10-KSB of registrant for
agreement dated October 17, the fiscal year ended February
1991 filed as Exhibit 4.8) 28, 1994
dated October 17, 1994
4.6 Letters of commitment from Exhibit 4.13 to the Form 10-K of
financial institutions registrant for the fiscal year
supporting commitment of ended February 29, 1996
$3,500,000 in financing
4.7 Chattel mortgage loan Exhibit 4.14 to the Form 10-K of
agreement dated June 2, 1994 registrant for the fiscal year
in the amount of $750,000 ended February 29, 1996
between the registrant and
First National Bank of
Farmington
58
<PAGE>
Exhibit Incorporated by Sequentially
Number Description Reference to Numbered Page
------- ----------- --------------- -------------
4.8 Real estate mortgage loan Exhibit 4.15 to the Form 10-K of
agreement dated June 2, 1994 registrant for the fiscal year
in the amount of $1,687,500 ended February 29, 1996
between the registrant and
First National Bank of
Farmington
4.9 Change in terms agreement Exhibit 4.16 to the Form 10-K of
(to working capital loan registrant for the fiscal year
agreement dated October 17, ended February 29, 1996
1991 filed as Exhibit 4.8)
dated April 12, 1995
4.10 Chattel mortgage loan Exhibit 4.17 to the Form 10-K of
agreement dated April 12, registrant for the fiscal year
1995 in the amount of ended February 29, 1996
$1,500,000 between the
registrant and First
National Bank of Farmington
4.11 Working Capital availability Exhibit 4.18 to the Form 10-K of
loan agreement dated April registrant for the fiscal year
5, 1996 in the amount of ended February 29, 1996
$2,000,000 between Norwest
Banks and the Registrant
4.12 Working Capital availability Filed Herewith
loan agreement dated May 22,
1997 in the amount of
$2,000,000 between Norwest
Banks and the Registrant
10.1 Form of Stock Option Exhibit 10.3 to the Annual Report
Agreement for Incentive on Form 10-K of the Registrant
Stock Option Plan of the for the fiscal year ended
Registrant * February 28, 1986.
10.2 Incentive Stock Option Plan Exhibit 10.2 to the Annual Report
of the Registrant as amended on Form 10-K of the Registrant
July 27, 1990 * for the fiscal year ended
February 28, 1991
10.4 Current form of franchise Filed herewith.
agreement used by the
Registrant
59
<PAGE>
Exhibit Incorporated by Sequentially
Number Description Reference to Numbered Page
------- ----------- --------------- -------------
10.5 Form of Real Estate Lease Exhibit 10.7 to Registration
between the Registrant as Statement on Form S-18
Lessee and franchisee as (Registration No. 33-2016-D).
Sublessee
10.7 Form of Nonqualified Stock Exhibit 10.8 to the Annual Report
Option Agreement for on Form 10-K of the Registrant
Nonemployee Directors for for the fiscal year ended
the Registrant * February 28, 1991.
10.8 Nonqualified Stock Option Exhibit 10.9 to the Annual Report
Plan for Nonemployee on Form 10-K of the Registrant
Directors dated March 20, for the fiscal year ended
1990 * February 28, 1991
10.9 1995 Stock Option Plan of Exhibit 10.9 to Registration
the Registrant* Statement on Form S-1
(Registration No. 33-62149) filed
August 25, 1995
10.10 Forms of Incentive Stock Exhibit 10.10 to Registration
Option Agreement for 1995 Statement on Form S-1
Stock Option Plan* (Registration No. 33-62149) filed
on August 25, 1995
10.11 Forms of Nonqualified Stock Exhibit 10.11 to Registration
Option Agreement for 1995 Statement on Form S-1
Stock Option Plan* (Registration No. 33-62149) filed
on August 25, 1995
11.1 Statement re-computation of Filed herewith.
per share earnings
23.1 Consent of independent Filed herewith
public accountants
27.1 Financial Data Schedule Filed herewith
</TABLE>
* Management contract or compensatory plan
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the year ended February 28, 1997.
60
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
By /S/ FRANKLIN E. CRAIL
----------------------------
FRANKLIN E. CRAIL
President
Date: May 26, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: May 26, 1997 /S/ FRANKLIN E. CRAIL
-----------------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President,
Treasurer and Director
(principal executive officer)
Date: May 26, 1997 /S/ LAWRENCE C. REZENTES
-----------------------------
LAWRENCE C. REZENTES
Vice President - Finance
(principal financial and
accounting officer)
Date: May 26, 1997 /S/ GARY S. HAUER
-----------------------------
GARY S. HAUER
Vice President - Manufacturing,
Director
Date: May 26, 1997 /S/ GERALD A KIEN
-----------------------------
GERALD A. KIEN, Director
Date: May 26, 1997 /S/ LEE N. MORTENSON
-----------------------------
LEE N. MORTENSON, Director
Date: May 26, 1997 /S/ EVERETT A. SISSON
-----------------------------
EVERETT A. SISSON, Director
Date: May 26, 1997 /S/ FRED M. TRAINOR
-----------------------------
FRED M. TRAINOR, Director
61
<PAGE>
Exhibit 4.12
<PAGE>
THIRD AMENDMENT
TO
TERM LOAN AND CREDIT AGREEMENT
THIS THIRD AMENDMENT OF TERM LOAN AND CREDIT AGREEMENT (the "Third
Amendment") is entered into this 22nd day of May, 1997, by and between Norwest
Bank Colorado, National Association (the "Bank") and the Rocky Mountain
Chocolate Factory, Inc. (the "Borrower").
RECITALS
I. On April 5, 1996, the Borrower and the Bank entered into a Term Loan
and Credit Agreement (the "Agreement") setting forth the terms and conditions of
a revolving line of credit facility and three term loan credit facilities
extended by the Bank to the Borrower.
II. On February 5, 1997, and May 2, 1997, the Bank and the Borrower
entered into agreements amending certain terms of the Agreement (the "First
Amendment" and the "Second Amendment," respectively).
III. The Bank and the Borrower now wish to modify certain other terms of
the Agreement concerning renewal of the Credit and changes of certain covenants.
NOW, THEREFORE, in consideration of the premises contained herein, the
parties agree as follows:
1 INCORPORATION OF RECITALS. The recitals are incorporated herein.
2 CAPITALIZED TERMS. Unless the context requires otherwise, all capitalized
terms in the Second Amendment shall have the same meaning as ascribed to
them in the Agreement, the First Amendment and the Second Amendment.
3 AMENDMENTS. The Agreement is amended as follows:
3.1. Section 1.10 of the Agreement is deleted and replaced with the
following new section 1.10:
"1.10. Borrowing Base Certificate" shall mean a schedule of Borrower's
Accounts Receivable, Acceptable Accounts Receivable, Inventory,
Acceptable Inventory, and Account Receivable agings, executed by an
authorized officer of the Borrower and in form acceptable to the
Bank."
<PAGE>
3.2. Section 1.14 of the Agreement is deleted and replaced with the
following new section 1.14:
"1.14. "Credit Maturity Date' shall mean July 31, 1998."
3.3 Section 2.1.2 of the Agreement is deleted and replaced with the
following new section 2.1.2:
"2.1.2. The purpose of the Credit is to finance Accounts Receivable
from the franchise stores and the purchase of raw materials."
3.4. Section 2.4 of the Agreement is deleted in its entirety.
3.5. Section 6 of the Agreement is deleted in its entirety and replaced
with the following new section 6, which new section 6 shall be effective
March 1, 1997:
"6. Affirmative Covenants
The Borrower covenants and agrees that so long as any
Indebtedness remains outstanding hereunder, unless the Bank shall
otherwise consent in writing, it will:
6.1 Pay, when due, all taxes assessed against it or its property
except to the extent and so long as contested in good faith.
6.2 Maintain its corporate existence, comply with all laws and
regulations applicable thereto, and comply with all laws
applicable to the Borrower and the Borrower's business,
including but not limited to all laws governing the
Borrower's franchise operations.
6.3 Furnish to the Bank:
6.3.1. Within 90 days after the end of each fiscal year of
the Borrower (i) a detailed report of audit of the Borrower
for such fiscal year including the balance sheet of the
Borrower as of the end of such fiscal year and the
statements of profit and loss and surplus of the Borrower
for the fiscal year then ended, prepared by independent
certified public accountants satisfactory to the Bank, and
(ii) a certificate of such accountants stating whether, in
making their audit, they have become aware of any Event of
Default set forth in Section 8 hereof, or of any event which
might become such an Event of Default after the lapse of
time or the giving of notice
Third Amendment
2 of 6
<PAGE>
and the lapse of time, which has occurred and is then
continuing and, if any such event has occurred and is
continuing, specifying the nature and period of existence
thereof.
6.3.2. Within 30 days after the end of each month, the
balance sheet of the Borrower as of the end of such period
and the statement of profit and loss and surplus of the
Borrower from the beginning of such fiscal year to the end
of such period, unaudited, but certified as correct (subject
to year end adjustments) by an appropriate officer of the
Borrower.
6.3.3. Annually, within 90 days after the Borrower's fiscal
year end, a properly completed United States Securities and
Exchange Commission Form 10K.
6.3.4. Quarterly, within 45 days after the end of each
quarter, a properly completed United States Securities and
Exchange Commission Form 10Q.
6.3.5. Monthly, within 45 days after the end of each
calendar month, Borrowing Base Certificates.
6.3.6. Monthly, a list of all franchisees currently in
default, if any, together with a description of the nature
of each default.
6.3.7. Annually, within 90 days after the end of the
Borrower's fiscal year, a list of monthly projections of the
Borrower's business for the coming year and a list of annual
projections for the coming 3 years.
6.3.8. Annually, a copy of a policy of insurance, showing
the Bank as Loss Payee, Mortgagee, or Additional Insured,
covering all personal and real property of the Borrower, and
its subsidiaries and affiliates, if any.
6.3.9. Promptly upon knowledge thereof, notice of the Bank
in writing of the occurrence of any event which has or
might, after the lapse of time or the giving of notice and
the lapse of time, become an event of default under Section
8 of this Agreement; and,
6.3.10 Promptly, such other information as the Bank may
reasonably request.
Third Amendment
3 of 6
<PAGE>
6.4. Maintain present management of the Borrower, present
ownership interest of the Borrower's management, and the
Borrower's present principal place of business.
6.5. Use proceeds from sales of Borrower's assets to repay
borrowings hereunder.
6.6. Maintain at all times its Inventory, Equipment, real estate
and other properties in good condition and repair (normal
wear and tear excepted), and pay and discharge or cause to
be paid and discharged when due, the cost of repairs to or
maintenance of the same, and pay or cause to be paid all
rental or mortgage payments due on such real estate.
6.7. Maintain at all times a ratio of debt to Tangible Net Worth
of not more than 1.00 to 1.00.
6.8. Maintain at all times a ratio of Current Assets to Current
Liabilities of not less than 1.50 to 1.00.
6.9. Maintain at all times a Tangible Net Worth of more than
$9,000,000.00.
6.10. Maintain at all times a minimum Cash Flow Coverage Ratio of
more than 1.25 to 1:00.
6.11. Maintain at all times a
loan-to-value ratio of no more than 75%. If the Bank
reasonably believes that (i) the market value of the
Borrower's real property has declined or (ii) Debt
Service Coverage has fallen below 1:25 to 1:00 or (iii)
regulatory requirements of the Bank have changed, the
Bank may require that the property be reappraised at
the Borrower's expense, and in the event of a decline
in the value of the property, that the Borrower reduce
amounts outstanding under Credit or the Term Loans or
take such other measures as the Bank may require at
that time.
6.12. Maintain at all times a Working Capital of at least
2,250,000.00.
6.13. When requested so to do, make available for inspection by
duly authorized representatives of the Bank any of its books
and records, and furnish the Bank any information regarding
its
Third Amendment
4 of 6
<PAGE>
business affairs and financial condition within a
reasonable time after written request therefor.
6.14. Promptly notify the Bank of any defaults occurring
with any franchisee of the Borrower, of any litigation
initiated against the Borrower, and of the Borrower's
intent to acquire additional factory facilities or
other business operations."
3.6 Section 7.3 of the Agreement is deleted and replaced with the
following new section 7.3, which new section 7.3 shall be effective as of
March 1, 1997:
"7.3. Permit the aggregate amount of the Borrower's capital
expenditures for fixed assets, including but not limited to fixed
asset leases and lease purchases, to exceed $1,750,000.00 annually."
4 NEW LOANS. The Borrower agrees to inform the Bank of the Borrower's
intentions, if any, to incur new debt in order to perm the Bank to
offer financing of such new debt to the Borrower.
5 REPRESENTATION AND WARRANTIES. The Borrower restates and reaffirms
all warranties made in the Agreement, and represents and warrants that
no Event of Default or event that, with the passing of time may become
an Event of Default has occurred or is occurring, except for those
Events of Default or events previously disclosed to the Bank or
acknowledged by the Bank in writing.
6. INTEGRATION OF AGREEMENTS. The Agreement, the First Amendment, the
Second Amendment, and the Third Amendment shall be read together so
as to give effect to the terms of all. All terms and provisions set
forth in the Agreement, the First Amendment, and the Second Amendment
that are not specifically amended herein shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BANK:
Norwest Bank Colorado, National Association
By: /s/ Michael Noesen
------------------------------
Michael Noesen, Vice President
Third Amendment
5 of 6
<PAGE>
BORROWER:
Rocky Mountain Chocolate Factory, Inc.
By: /s/ Lawrence C. Rezentes
------------------------------
Name: Lawrence C. Rezentes
-----------------------------
Title: Chief Financial Officer
----------------------------
Third Amendment
6 of 6
<PAGE>
Exhibit 10.4
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FRANCHISE AGREEMENT
TABLE OF CONTENTS
1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. GRANT OF FRANCHISE . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Grant of Franchise . . . . . . . . . . . . . . . . . . . . . . 1
2.2. Scope of Franchise Operations. . . . . . . . . . . . . . . . . 1
3. FRANCHISED LOCATION AND DESIGNATED AREA. . . . . . . . . . . . . . . . 2
3.1. Franchised Location. . . . . . . . . . . . . . . . . . . . . . 2
3.2. Protected Territory. . . . . . . . . . . . . . . . . . . . . . 2
3.3. Limitation on Franchise Rights . . . . . . . . . . . . . . . . 2
3.4. Franchisor's Reservation of Rights . . . . . . . . . . . . . . 3
4. INITIAL FRANCHISE FEE. . . . . . . . . . . . . . . . . . . . . . . . . 3
4.1. Initial Franchise Fee. . . . . . . . . . . . . . . . . . . . . 3
5. DEVELOPMENT OF FRANCHISED LOCATION . . . . . . . . . . . . . . . . . . 3
5.1. Approval of Lease. . . . . . . . . . . . . . . . . . . . . . . 3
5.2. Conversion and Design. . . . . . . . . . . . . . . . . . . . . 4
5.3. Signs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.4. Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.5. Permits and Licenses . . . . . . . . . . . . . . . . . . . . . 5
5.6. Commencement of Operations . . . . . . . . . . . . . . . . . . 5
6. TRAINING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.1. Initial Training Program . . . . . . . . . . . . . . . . . . . 5
6.2. Length of Training . . . . . . . . . . . . . . . . . . . . . . 6
6.3. Additional Training. . . . . . . . . . . . . . . . . . . . . . 6
7. DEVELOPMENT ASSISTANCE . . . . . . . . . . . . . . . . . . . . . . . . 6
7.1. Franchisor's Development Assistance. . . . . . . . . . . . . . 6
8. OPERATIONS MANUAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.1. Operations Manual. . . . . . . . . . . . . . . . . . . . . . . 7
8.2. Confidentiality of Operations Manual Contents. . . . . . . . . 7
8.3. Changes to Operations Manual . . . . . . . . . . . . . . . . . 8
9. OPERATING ASSISTANCE . . . . . . . . . . . . . . . . . . . . . . . . . 8
9.1. Franchisor's Services. . . . . . . . . . . . . . . . . . . . . 8
9.2. Additional Franchisor Services . . . . . . . . . . . . . . . . 9
<PAGE>
10. FRANCHISEE'S OPERATIONAL COVENANTS . . . . . . . . . . . . . . . . . . 9
10.1. Business Operations. . . . . . . . . . . . . . . . . . . . . . 9
11. ROYALTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
11.1. Monthly Royalty. . . . . . . . . . . . . . . . . . . . . . . . 12
11.2. Gross Retail Sales . . . . . . . . . . . . . . . . . . . . . . 12
11.3. Royalty Payments . . . . . . . . . . . . . . . . . . . . . . . 12
12. ADVERTISING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
12.1. Approval of Advertising. . . . . . . . . . . . . . . . . . . . 13
12.2. Local Advertising. . . . . . . . . . . . . . . . . . . . . . . 13
12.3. Marketing and Promotion Fee. . . . . . . . . . . . . . . . . . 13
12.4. Regional Advertising Programs. . . . . . . . . . . . . . . . . 14
12.5. Marketing Services . . . . . . . . . . . . . . . . . . . . . . 15
13. QUALITY CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.1. Compliance with Operations Manual. . . . . . . . . . . . . . . 15
13.2. Standards and Specifications . . . . . . . . . . . . . . . . . 15
13.3. Inspections. . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.4. Restrictions on Services and Products. . . . . . . . . . . . . 15
13.5. Approved Suppliers . . . . . . . . . . . . . . . . . . . . . . 16
13.6. Request to Change Supplier . . . . . . . . . . . . . . . . . . 16
13.7. Approval of Intended Supplier. . . . . . . . . . . . . . . . . 16
14. TRADEMARKS, TRADE NAMES AND PROPRIETARY INTERESTS. . . . . . . . . . . 17
14.1. Marks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
14.2. No Use of Other Marks. . . . . . . . . . . . . . . . . . . . . 17
14.3. Licensed Methods . . . . . . . . . . . . . . . . . . . . . . . 17
14.4. Effect of Termination. . . . . . . . . . . . . . . . . . . . . 17
14.5. Mark Infringement. . . . . . . . . . . . . . . . . . . . . . . 17
14.6. Franchisee's Business Name . . . . . . . . . . . . . . . . . . 18
14.7. Change of Marks. . . . . . . . . . . . . . . . . . . . . . . . 18
15. REPORTS, RECORDS AND FINANCIAL STATEMENTS. . . . . . . . . . . . . . . 18
15.1. Franchisee Reports . . . . . . . . . . . . . . . . . . . . . . 18
15.2. Annual Financial Statements. . . . . . . . . . . . . . . . . . 19
15.3. Verification . . . . . . . . . . . . . . . . . . . . . . . . . 19
15.4. Books and Records. . . . . . . . . . . . . . . . . . . . . . . 19
15.5. Audit of Books and Records . . . . . . . . . . . . . . . . . . 19
15.6. Failure to Comply with Reporting Requirements. . . . . . . . . 20
15.7. Shopping Service . . . . . . . . . . . . . . . . . . . . . . . 20
16. ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
16.1. Assignment by Franchisee . . . . . . . . . . . . . . . . . . . 20
16.2. Pre-Conditions to Franchisee's Assignment. . . . . . . . . . . 20
16.3. Franchisor's Approval of Transfer. . . . . . . . . . . . . . . 21
16.4. Right of First Refusal . . . . . . . . . . . . . . . . . . . . 21
16.5. Types of Transfers . . . . . . . . . . . . . . . . . . . . . . 22
16.6. Assignment by the Franchisor . . . . . . . . . . . . . . . . . 23
16.7. Franchisee's Death or Disability . . . . . . . . . . . . . . . 23
17. TERM AND EXPIRATION. . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.1. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.2. Rights Upon Expiration . . . . . . . . . . . . . . . . . . . . 23
17.3. Exercise of Option for Successor Franchise . . . . . . . . . . 24
17.4. Conditions of Refusal. . . . . . . . . . . . . . . . . . . . . 24
18. DEFAULT AND TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . 24
18.1. Termination by Franchisor - Effective Upon Notice. . . . . . . 24
18.2. Termination by Franchisor - Thirty Days Notice . . . . . . . . 26
18.3. Franchisor's Remedies. . . . . . . . . . . . . . . . . . . . . 27
18.4. Right to Purchase. . . . . . . . . . . . . . . . . . . . . . . 27
18.5. Obligations of Franchisee Upon Termination or Expiration . . . 28
18.6. State and Federal Law. . . . . . . . . . . . . . . . . . . . . 29
19. BUSINESS RELATIONSHIP. . . . . . . . . . . . . . . . . . . . . . . . . 29
19.1. Independent Businesspersons. . . . . . . . . . . . . . . . . . 29
19.2. Payment of Third Party Obligations . . . . . . . . . . . . . . 30
19.3. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . 30
20. RESTRICTIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 30
20.1. Non-Competition During Term. . . . . . . . . . . . . . . . . . 30
20.2. Post-Termination Covenant Not to Compete . . . . . . . . . . . 31
20.3. Confidentiality of Proprietary Information . . . . . . . . . . 32
20.4. Confidentiality Agreement. . . . . . . . . . . . . . . . . . . 32
21. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
21.1. Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . 32
21.2. Proof of Insurance Coverage. . . . . . . . . . . . . . . . . . 32
22. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . 33
22.1. Governing Law/Consent to Venue and Jurisdiction. . . . . . . . 33
22.2. Modification . . . . . . . . . . . . . . . . . . . . . . . . . 33
22.3. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 33
22.4. Delegation by the Franchisor . . . . . . . . . . . . . . . . . 33
22.5. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 34
22.6. Review of Agreement. . . . . . . . . . . . . . . . . . . . . . 34
<PAGE>
22.7. Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . 34
22.8. Injunctive Relief. . . . . . . . . . . . . . . . . . . . . . . 34
22.9. No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
22.10. No Right to Set Off. . . . . . . . . . . . . . . . . . . . . . 34
22.11. Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . 34
22.12. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
22.13. Acknowledgment . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBITS
I. Addendum to Franchise Agreement - Location Approval
II. Personal Guaranty
III. Statement of Ownership
<PAGE>
2.2. SCOPE OF FRANCHISE OPERATIONS. The Franchisee agrees at all times to
faithfully, honestly and diligently perform the Franchisee's obligations
hereunder, and to continuously exert best efforts to promote the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business. The Franchisee agrees to utilize the Marks and
Licensed Methods to operate all aspects of the business franchised hereunder in
accordance with the methods and systems developed and prescribed from time to
time by the Franchisor, all of which are a part of the Licensed Methods. The
Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business shall offer all products
and services as the Franchisor shall designate and shall be restricted from
manufacturing, offering or selling any products and services not previously
approved by the Franchisor in writing. The Franchisee is required to devote a
minimum of 50% of all retail floor space to ROCKY MOUNTAIN CHOCOLATE FACTORY
brand bulk chocolates and packaged candies. The Franchisee's ROCKY MOUNTAIN
CHOCOLATE FACTORY Business must feature ROCKY MOUNTAIN CHOCOLATE FACTORY brand
candy, cookies made from ROCKY MOUNTAIN CHOCOLATE FACTORY brand cookie dough and
other confectionery products ("Candy") and related nonconfectionary items
("Items") approved by the Franchisor in writing. The products which Franchisee
shall be permitted to serve, make and/or sell are store-made candies prepared
from recipes and specifications authorized in the Franchisor's Operations
Manual, described in Article 8 below, through the process of dipping, molding
and cooking ("Store-Made Candies"), Australian glazed fruit, chocolate sandwich
cookies, graham crackers, pretzels, fresh and dried fruit items, dog bones and
plain chocolate ("Candy-Related Items"), and such other Items which the
Franchisor has approved in writing, in its sole discretion.
3. FRANCHISED LOCATION AND DESIGNATED AREA
3.1. FRANCHISED LOCATION. The Franchisee is granted the right and
franchise to own and operate a ROCKY MOUNTAIN CHOCOLATE FACTORY Business at the
address and location which shall be set forth in EXHIBIT I attached hereto
("Franchised Location"). If, at the time of execution of this Agreement, the
Franchised Location cannot be designated as a specific address because a
location has not been selected and approved, then the Franchisee shall promptly
take steps to choose and acquire a location for its ROCKY MOUNTAIN CHOCOLATE
FACTORY Business within the Designated Area, set forth in EXHIBIT I. In such
circumstances, the Franchisee shall select and propose to the Franchisor for the
Franchisor's prior approval a specific location for the Franchised Location
which, once approved by the Franchisor, shall hereinafter be set forth in the
rider to EXHIBIT I.
3.2. PROTECTED TERRITORY. So long as the Franchisee is in compliance with
this Agreement, the Franchisor shall not establish or license another person or
entity to establish a
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ROCKY MOUNTAIN CHOCOLATE FACTORY Business within a certain geographic area as
set forth in EXHIBIT I ("Protected Territory").
3.3. LIMITATION ON FRANCHISE RIGHTS. The rights that are hereby granted to
the Franchisee are for the specific Franchised Location and Protected Territory
and cannot be transferred to an alternative Franchised Location or Protected
Territory, or any other location, without the prior written approval of the
Franchisor, which approval shall not be unreasonably withheld. The Marks and
Licensed Methods are licensed to the Franchisee for the operation of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business only at the Franchised Location; therefore,
the Franchisee may not operate food carts or kiosks, participate in food
festivals or offer any other type of off-site food services using the Marks and
Licensed Methods without the prior written consent of the Franchisor.
3.4. FRANCHISOR'S RESERVATION OF RIGHTS. The Franchisee acknowledges that
the franchise granted hereunder is non-exclusive and that the Franchisor retains
the rights, among others: (1) to use, and to license others to use, the Marks
and Licensed Methods for the operation of ROCKY MOUNTAIN CHOCOLATE FACTORY
Businesses at any location other than in the Protected Territory; (2) to use the
Marks and Licensed Methods in connection with other services and products,
promotional and marketing efforts or related items, materials or services or in
alternative channels of distribution, without regard to the location of the use,
including, but not limited to, the wholesale sale of its products to unrelated
retail outlets or to candy distributors; and (3) to use and license the use of
other proprietary marks or methods in connection with the operation of retail
stores selling gourmet chocolates and other premium confectionery products
business at any location, which businesses are the same as, or similar to, or
different from a ROCKY MOUNTAIN CHOCOLATE FACTORY Business, on any terms and
conditions as the Franchisor deems advisable, and without granting the
Franchisee any rights therein.
4. INITIAL FRANCHISE FEE
4.1. INITIAL FRANCHISE FEE. In consideration for the right to develop and
operate one ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the Franchisee agrees to
pay to the Franchisor an initial franchise fee of $19,500, $5,000 of which is
due and payable as of the date of execution of this Agreement, with the balance
of $14,500 due and payable at the earlier of 120 days from the date this
Agreement is executed or the date that a lease is executed for a Franchised
Location that has been approved by the Franchisor. The Franchisee acknowledges
and agrees that the initial franchise fee represents payment for the initial
grant of the rights to use the Marks and Licensed Methods, that the Franchisor
has earned the initial franchise fee upon receipt thereof and that the fee is
under no circumstances refundable to the Franchisee after it is paid, unless
otherwise specifically set forth in this Agreement.
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5. DEVELOPMENT OF FRANCHISED LOCATION
5.1. APPROVAL OF LEASE. The Franchisee shall obtain the Franchisor's prior
written approval before executing any lease or purchase agreement for the
Franchised Location. Any lease for the Franchised Location shall, at the option
of the Franchisor, contain a provision: (1) allowing for assignment of the lease
to the Franchisor in the event that this Agreement is terminated or not renewed
for any reason; (2) giving the Franchisor the right to cure any default by the
Franchisee under such lease; and (3) providing the Franchisor with the right,
exercisable upon and as a condition of the approval of the Franchised Location,
to execute the lease agreement or other document providing entitlement to the
use of the Franchised Location in its own name or jointly with the Franchisee as
lessee and, upon the exercise of such option, the Franchisor shall provide the
Franchisee with the right to use the premises as its sublessee, assignee, or
other similar capacity upon the same terms and conditions as obtained by the
Franchisor. The Franchisee shall deliver a copy of the signed lease for the
Franchised Location to the Franchisor within 15 days of its execution. The
Franchisee acknowledges that approval of a lease for the Franchised Location by
the Franchisor does not constitute a recommendation, endorsement or guarantee by
the Franchisor of the suitability of the location or the lease and the
Franchisee should take all steps necessary to ascertain whether such location
and lease are acceptable to the Franchisee.
5.2. CONVERSION AND DESIGN. The Franchisee acknowledges that the layout,
design, decoration and color scheme of ROCKY MOUNTAIN CHOCOLATE FACTORY
Businesses are an integral part of the Franchisor's proprietary Licensed Methods
and accordingly, the Franchisee shall convert, design and decorate the
Franchised Location in accordance with the Franchisor's plans and
specifications. The Franchisee shall also obtain the Franchisor's written
consent to any conversion, design or decoration of the premises before
remodeling or decorating begins, recognizing that such remodeling, decoration
and any related costs are the Franchisee's sole responsibility.
5.3. SIGNS. The Franchisee shall purchase or otherwise obtain for use at
the Franchised Location and in connection with the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business signs which comply with the standards and specifications of the
Franchisor as set forth in the Operations Manual, as that term is defined in
Section 8.1. It is the Franchisee's sole responsibility to insure that any
signs comply with applicable local ordinances, building codes and zoning
regulations. Any modifications to the Franchisor's standards and specifications
for signs which must be made due to local ordinances, codes or regulations shall
be submitted to the Franchisor for prior written approval. The Franchisee
acknowledges the Marks, or any other name, symbol or identifying marks on any
signs shall only be used in accordance with the Franchisor's standards and
specifications and only with the prior written approval of the Franchisor.
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5.4. EQUIPMENT. The Franchisee shall purchase or otherwise obtain for use
at the Franchised Location and in connection with the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business equipment of a type and in an amount which complies with the
standards and specifications of the Franchisor. The Franchisee acknowledges
that the type, quality, configuration, capability and/or performance of the
equipment are all standards and specifications which are a part of the Licensed
Methods and therefore such equipment must be purchased, leased, or otherwise
obtained in accordance with the Franchisor's standards and specifications and
only from suppliers or other sources approved by the Franchisor. The Franchisee
must purchase a facsimile machine and connect it to a phone line which is
separate from the main phone number for the Business. The Franchisor reserves
the right to require the Franchisee to purchase or lease computer hardware and
software for use in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business. The Franchisor also reserves the right to require that it be given
reasonable access to information and data regarding the Franchisee's ROCKY
MOUNTAIN CHOCOLATE FACTORY Business by computer modem.
5.5. PERMITS AND LICENSES. The Franchisee agrees to obtain all such
permits and certifications as may be required for the lawful construction
and operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business together with
all certifications from government authorities having jurisdiction over the
site that all requirements for construction and operation have been met,
including without limitation, zoning, access, sign, health, safety
requirements, building and other required construction permits, licenses to
do business and fictitious name registrations, sales tax permits, health and
sanitation permits and ratings and fire clearances. Franchisee agrees to
obtain all customary contractors' sworn statements and partial and final lien
waivers for construction, remodeling, decorating and installation of
equipment at the Franchised Location. Copies of all subsequent inspection
reports, warnings, certificates and ratings issued by any governmental entity
during the term of this Agreement in connection with the conduct of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business which indicates the Franchisee's failure
to meet or maintain the highest governmental standards, or less than full
compliance by the Franchisee with any applicable law, rule or regulation,
shall be forwarded to the Franchisor within five days of the Franchisee's
receipt thereof.
5.6. COMMENCEMENT OF OPERATIONS. Unless otherwise agreed in writing by
the Franchisor and the Franchisee, the Franchisee has 180 days from the date of
this Agreement within which to complete the initial training program, described
in Section 6.1 of this Agreement, select and develop the Franchised Location and
commence operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The
Franchisor will extend the time in which the Franchisee has to commence
operations for a reasonable period of time in the event factors beyond the
Franchisee's reasonable control prevent the Franchisee from
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meeting this development schedule, so long as the Franchisee has made reasonable
and continuing efforts to comply with such development obligations and the
Franchisee requests, in writing, an extension of time in which to have its ROCKY
MOUNTAIN CHOCOLATE FACTORY Business established before such development period
lapses.
6. TRAINING
6.1. INITIAL TRAINING PROGRAM. The Franchisee or, if the Franchisee is not
an individual, the person designated by the Franchisee to assume primary
responsibility for the management of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business, ("General Manager") is required to attend and successfully complete
the initial training program which is offered by the Franchisor at one of the
Franchisor's designated training facilities. Up to three individuals are
eligible to participate in the Franchisor's initial training program without
charge of a tuition or fee. The Franchisee shall be responsible for any and all
traveling and living expenses incurred in connection with attendance at the
training program. At least one individual must successfully complete the
initial training program prior to the Franchisee's commencement of operation of
its ROCKY MOUNTAIN CHOCOLATE FACTORY Business.
6.2. LENGTH OF TRAINING. The initial training program shall consist of 10
days of instruction at a location designated by the Franchisor; provided,
however, that the Franchisor reserves the right to waive a portion of the
training program or alter the training schedule, if in the Franchisor's sole
discretion, the Franchisee or General Manager has sufficient prior experience or
training.
6.3. ADDITIONAL TRAINING. From time to time, the Franchisor may present
seminars, conventions or continuing development programs or conduct meetings for
the benefit of the Franchisee. The Franchisee or its General Manager shall be
required to attend any ongoing mandatory seminars, conventions, programs or
meetings as may be offered by the Franchisor. The Franchisor shall give the
Franchisee at least 30 days prior written notice of any ongoing seminar,
convention or program which is deemed mandatory. The Franchisor shall not
require that the Franchisee attend any ongoing training more often than once a
year. All mandatory training will be offered without charge of a tuition or
fee; provided, however, the Franchisee will be responsible for all traveling and
living expenses which are associated with attendance at the same.
7. DEVELOPMENT ASSISTANCE
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7.1. FRANCHISOR'S DEVELOPMENT ASSISTANCE. The Franchisor shall provide the
Franchisee with assistance in the initial establishment of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business as follows:
(a) Provision of the initial training program to be conducted at the
Franchisor's designated training facilities or at another location
designated by the Franchisor, as described in Article 6 above.
(b) Provision of written specifications for a Franchised Location
which shall include, without limitation, specifications for space
requirements, build out and the demographics and character of surrounding
area. The Franchisee acknowledges that the Franchisor shall have no other
obligation to provide assistance in the selection and approval of a
Franchised Location other than the provision of such written specifications
and approval or disapproval of a proposed Franchised Location, which
approval or disapproval shall be based on information submitted to the
Franchisor in a form sufficient to assess the proposed location as may be
reasonably required by the Franchisor.
(c) Direction regarding the required conversion, design and
decoration of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business premises, plus
specifications concerning signs, decor and equipment.
(d) Direction regarding the selection of suppliers of equipment,
items and materials used and inventory offered for sale in connection with
the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. After execution of this
Agreement, the Franchisor will provide the Franchisee with a list of
approved suppliers, if any, of such equipment, items, materials and
inventory and, if available, a description of any national or central
purchase and supply agreements offered by such approved suppliers for the
benefit of ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees.
(e) Provision of an operations manual in accordance with Section 8
below.
(f) As the Franchisor may reasonably schedule, and depending on
availability of personnel, the Franchisor will make available to the
Franchisee at or close to the commencement of the Franchisee's ROCKY
MOUNTAIN CHOCOLATE FACTORY Business a representative ("Site
Representative") to be present during the opening of the Franchisee's ROCKY
MOUNTAIN CHOCOLATE FACTORY Business. There will be no charge to the
Franchisee for this service provided by the Franchisor. The Site
Representative will assist the Franchisee's employees in opening the
Business, unless in the Franchisor's determination, the Franchisee or the
General Manager have had sufficient prior training or experience.
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8. OPERATIONS MANUAL
8.1. OPERATIONS MANUAL. The Franchisor agrees to provide to the
Franchisee one or more manuals, technical bulletins, cookbooks and recipes or
other written materials (collectively referred to as "Operations Manual")
covering Candy ordering, manufacturing, processing and stocking and other
operating and in-store marketing techniques for the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business. The Franchisee agrees that it shall comply with the
Operations Manual as an essential aspect of its obligations under this
Agreement and failure by the Franchisee to substantially comply with the
Operations Manual may be considered by the Franchisor to be a breach of this
Agreement.
8.2. CONFIDENTIALITY OF OPERATIONS MANUAL CONTENTS. The Franchisee agrees
to use the Marks and Licensed Methods only as specified in the Operations
Manual. The Operations Manual is the sole property of the Franchisor and shall
be used by the Franchisee only during the term of this Agreement and in strict
accordance with the terms and conditions hereof. The Franchisee shall not
duplicate the Operations Manual nor disclose its contents to persons other than
its employees or officers who have signed a confidentiality and noncompetition
agreement in a form approved by the Franchisor. The Franchisee shall return the
Operations Manual to the Franchisor upon the expiration, termination or
assignment of this Agreement.
8.3. CHANGES TO OPERATIONS MANUAL. The Franchisor reserves the right to
revise the Operations Manual from time to time as it deems necessary to update
or change operating and marketing techniques or standards and specifications.
The Franchisee, within 30 days of receiving any updated information, shall in
turn update its copy of the Operations Manual as instructed by the Franchisor
and shall conform its operations with the updated provisions within a reasonable
time thereafter. The Franchisee acknowledges that a master copy of the
Operations Manual maintained by the Franchisor at its principal office shall be
controlling in the event of a dispute relative to the content of any Operations
Manual.
9. OPERATING ASSISTANCE
9.1. FRANCHISOR'S SERVICES. The Franchisor agrees that, during the
Franchisee's operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the
Franchisor shall make available to the Franchisee the following services:
(a) Upon the reasonable request of the Franchisee, consultation by
telephone regarding the continued operation and management of a ROCKY
MOUNTAIN
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CHOCOLATE FACTORY Business and advice regarding the retail services,
product quality control, inventory issues, customer relations issues and
similar advice.
(b) Access to advertising and promotional materials as may be
developed by the Franchisor, the cost of which may be passed on to the
Franchisee at the Franchisor's option.
(c) On-going updates of information and programs regarding the candy
industry, the ROCKY MOUNTAIN CHOCOLATE FACTORY concept and related Licensed
Methods, including, without limitation, information about special or new
products which may be developed and made available to ROCKY MOUNTAIN
CHOCOLATE FACTORY Franchisees.
(d) The Franchisor shall make the initial training program available
to replacement or additional General Managers during the term of this
Agreement. The Franchisor reserves the right to charge a tuition or fee in
an amount payable in advance, commensurate with the then current published
prices of the Franchisor for such training. The Franchisee shall be
responsible for all travel and living expenses incurred by its personnel
during the training program. Further, the availability of the training
programs shall be subject to space considerations and prior commitments to
new ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees.
9.2. ADDITIONAL FRANCHISOR SERVICES. Although not obligated to do so, upon
the reasonable request of the Franchisee, the Franchisor may make its employees
or designated agents available to the Franchisee for on-site advice and
assistance in connection with the ongoing operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business governed by this Agreement. In the event that the
Franchisee requests such additional assistance and the Franchisor agrees to
provide the same, the Franchisor reserves the right to charge the Franchisee for
all travel, lodging, living expenses, telephone charges and other identifiable
expenses associated with such assistance, plus a fee based on the time spent by
each employee on behalf of the Franchisee, which fee will be charged in
accordance with the then current daily or hourly rates being charged by
Franchisor for assistance.
10. FRANCHISEE'S OPERATIONAL COVENANTS
10.1. BUSINESS OPERATIONS. The Franchisee acknowledges that it is solely
responsible for the successful operation of its ROCKY MOUNTAIN CHOCOLATE FACTORY
Business and that the continued successful operation thereof is, in part,
dependent upon the Franchisee's compliance with this Agreement and the
Operations Manual. In addition to all
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other obligations contained in this Agreement and in the Operations Manual, the
Franchisee covenants that:
(a) The Franchisee shall maintain clean, efficient and high quality
ROCKY MOUNTAIN CHOCOLATE FACTORY Business operations and shall operate the
business in accordance with the Operations Manual and in such a manner as
not to detract from or adversely reflect upon the name and reputation of
the Franchisor and the goodwill associated with the ROCKY MOUNTAIN
CHOCOLATE FACTORY name and Marks.
(b) The Franchisee will conduct itself and operate its ROCKY
MOUNTAIN CHOCOLATE FACTORY Business in compliance with all applicable laws,
health department regulations and other ordinances and in such a manner so
as to promote a good public image in the business community. In connection
therewith, the Franchisee will be solely and fully responsible for
obtaining any and all licenses to carry on the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business. The Franchisee shall promptly forward to the Franchisor
copies of all health department, fire department, building department and
other similar reports of inspections as and when they become available.
(c) The Franchisee acknowledges that proper management of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business is important and shall insure that the
Franchisee or a designated General Manager who has completed the
Franchisor's initial training program be responsible for the management of
the ROCKY MOUNTAIN CHOCOLATE FACTORY Business after commencement of
Business operations and be present at the Franchised Location during
operation of the Business.
(d) The Franchisee shall offer only authorized products and services
as are more fully described in the Operations Manual, which may include,
without limitation, Candy, Store-Made Candy, Candy-Related Items, Items and
other authorized confectionery food and beverage products. The Franchisee
shall offer all types of products and services as from time to time may be
prescribed by the Franchisor and shall refrain from offering any other
types of products or services, or operating or engaging in any other type
of business or profession, from or through the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business, including, without limitation, filling "Wholesale
Orders", defined below, any catering or off-premises sales, without the
prior written consent of the Franchisor. "Wholesale Orders" are defined as
those orders or sales where the principal purpose of the purchase is for
resale, not consumption, or any sale other than those sold over the counter
at a price other than that price charged to the general public; provided,
however, that volume discounted sales made on the premises at the
Franchised Location to a single purchaser, not for resale, and discounted
sales made on the premises at the Franchised Location to charitable
organizations for fund-raising purposes shall be permitted. Candy,
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Store-Made Candies, Candy-Related Items and Items shall never be sold in
containers or bags other than those supplied by the Franchisor or other
supplier approved by the Franchisor.
(e) The Franchisee shall promptly pay when due all taxes and other
obligations owed to third parties in the operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business, including without limitation, unemployment and
sales taxes, and any and all accounts or other indebtedness of every kind
incurred by the Franchisee in the conduct of the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business. In the event of a bona fide dispute as to the liability
for taxes assessed or other indebtedness, the Franchisee may contest the
validity or the amount of the tax or indebtedness in accordance with
procedures of the taxing authority or applicable law; however, in no event
shall the Franchisee permit a tax sale or seizure by levy or execution or
similar writ or warrant, or attachment by a creditor to occur against the
premises of the Franchised Location, or any improvement thereon.
(f) The Franchisee shall subscribe for and maintain not fewer than
two separate telephone numbers for its ROCKY MOUNTAIN CHOCOLATE FACTORY
Business at the Franchised Location, both of which shall be listed and
identified exclusively with the ROCKY MOUNTAIN CHOCOLATE FACTORY Business
in all official telephone directories and in all advertising in which such
numbers appear and shall be separate and distinct from all other telephone
numbers subscribed for by the Franchisee. One number shall be used
exclusively for voice communication and the other shall be used exclusively
for a facsimile machine.
(g) The Franchisee shall comply with all agreements with third
parties related to the ROCKY MOUNTAIN CHOCOLATE FACTORY Business including,
in particular, all provisions of any premises lease.
(h) The Franchisee and all employees of the Franchisee shall adhere
to strict grooming and dress code guidelines while on duty at the
Franchised Location. The Franchisee is required, at the Franchisee's
expense, to purchase specified wearing apparel from suppliers approved by
the Franchisor. All General Managers, employees of the Franchisee, the
Franchisee and its owners shall wear the specified uniform at all times
while working at the Franchised Location. The Franchisor has the right, in
its sole and absolute discretion, to change or modify such dress code
guidelines.
(i) The Franchisee agrees to renovate, refurbish, remodel or replace,
at its own expense, the real and personal property and equipment used in
the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, when
reasonably required by the Franchisor in order to comply with the image,
standards of operation and
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performance capability established by the Franchisor from time to time. If
the Franchisor changes its image or standards of operation, it shall give
the Franchisee a reasonable period of time within which to comply with such
changes.
(j) The Franchisee shall be responsible for training all of its
employees who work in any capacity in the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business. The Franchisee must conduct its employee training in the manner
and according to the standards as prescribed in the Operations Manual. Any
employee who does not satisfactorily complete the training shall not work
in any capacity in the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY
Business.
(k) The Franchisee shall at all times during the term of this
Agreement own and control the ROCKY MOUNTAIN CHOCOLATE FACTORY Business
authorized hereunder. Upon request of the Franchisor, the Franchisee shall
promptly provide satisfactory proof of such ownership to the Franchisor.
The Franchisee represents that the Statement of Ownership, attached hereto
as EXHIBIT III and by this reference incorporated herein, is true,
complete, accurate and not misleading, and, in accordance with the
information contained in the Statement of Ownership, the controlling
ownership of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business is held by the
Franchisee. The Franchisee shall promptly provide the Franchisor with a
written notification if the information contained in the Statement of
Ownership changes at any time during the term of this Agreement and shall
comply with the applicable transfer provisions contained in Article 16
herein. In addition, if the Franchisee is an entity, all of the owners of
the Franchisee shall sign the Personal Guaranty attached hereto as EXHIBIT
II.
(l) The Franchisee shall at all times during the term of this
Agreement keep its ROCKY MOUNTAIN CHOCOLATE FACTORY Business open during
the business hours as may be designated by the Franchisor from time to time
in the Operations Manual.
(m) Unless notified in writing otherwise by the Franchisor, all Candy
and related products shall be sold and shipped to the Franchisee on a net
30-day basis, or according to the then current payment terms set by the
Franchisor or its designated suppliers. The Franchisor reserves the right
to charge interest at the rate of 1.5% per month if the Franchisee fails to
pay for its orders on time and the Franchisor reserves the right to
discontinue shipment of products to the Franchisee if the Franchisee is
repeatedly delinquent in paying for its products, in the Franchisor's sole
discretion. The Franchisee may be required to "prepay" factory orders,
notwithstanding the payment policy set forth above, in the event of poor
payment performance. The Franchisor reserves the right to change payment
terms and policies at any time. The Franchisor also reserves the right to
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change the price for Candy and Items from time to time as may be set forth
in the most recent price bulletin sent to all franchisees or the then
current Operations Manual.
11. ROYALTIES
11.1. MONTHLY ROYALTY. The Franchisee agrees to pay to the Franchisor a
monthly royalty ("Royalty") equal to 5% of the total amount of its Gross Retail
Sales, defined in Section 11.2 below, generated from or through its ROCKY
MOUNTAIN CHOCOLATE FACTORY Business.
11.2. GROSS RETAIL SALES. "Gross Retail Sales" shall be defined as
receipts and income of any kind from all products or services sold from or
through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, including any such sale
of products or services made for cash or upon credit, or partly for cash and
partly for credit, regardless of collection of charges for which credit is
given, less returns for which refunds are made, provided that the refund shall
not exceed the sales price and exclusive of discounts, sales taxes and other
taxes, amounts received in settlement of a loss of merchandise, shipping
expenses paid by the customer and discount sales to corporations or to charities
for fund-raising purposes. "Gross Retail Sales" shall also include the fair
market value of any services or products received by the Franchisee in barter or
exchange for its services and products.
11.3. ROYALTY PAYMENTS. The Franchisee agrees that Royalty payments shall
be paid monthly and sent to the Franchisor, post-marked no later than the 15th
of each month based on Gross Retail Sales for the immediately preceding month.
Royalty payments shall be accompanied by monthly reports, as more fully
described in Article 15 hereof, and standard transmittal forms containing
information regarding the Franchisee's Gross Retail Sales and such additional
information as may be requested by the Franchisor. The Franchisor reserves the
right to require Royalty payments be made on a weekly or bi-weekly basis if the
Franchisee does not timely or fully submit the required payments or reports.
The Franchisor shall have the right to verify such Royalty payments from time to
time as it deems necessary, in any reasonable manner. In the event that the
Franchisee fails to pay any Royalties within 14 days after they are due, the
Franchisee shall, in addition to such Royalties, pay a late charge equivalent to
18% of the late Royalty payment; provided, however, in no event shall the
Franchisee be required to pay a late payment at a rate greater than the maximum
interest rate permitted by applicable law. If the Franchisee pays Royalties
with a check returned for non-sufficient funds more than one time in any
calendar year, in addition to all other remedies which may be available, the
Franchisor shall have the right to require that Royalty payments be made by
certified or cashier's checks.
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12. ADVERTISING
12.1. APPROVAL OF ADVERTISING. The Franchisee shall obtain the
Franchisor's prior written approval of all written advertising or other
marketing or promotional programs regarding the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business, including, without limitation, "Yellow Pages" advertising, newspaper
ads, flyers, brochures, coupons, direct mail pieces, specialty and novelty items
and radio and television advertising. The Franchisee shall also obtain the
Franchisor's prior written approval of all promotional materials provided by
vendors. The proposed written advertising or a description of the marketing or
promotional program shall be submitted to the Franchisor at least 10 days prior
to publication, broadcast or use. The Franchisee acknowledges that advertising
and promoting the ROCKY MOUNTAIN CHOCOLATE FACTORY Business in accordance with
the Franchisor's standards and specifications is an essential aspect of the
Licensed Methods, and the Franchisee agrees to comply with all advertising
standards and specifications. The Franchisee shall display all required
promotional materials, signs, point of purchase displays and other marketing
materials in its ROCKY MOUNTAIN CHOCOLATE FACTORY Business in the manner
prescribed by the Franchisor. The Franchisee shall not, under any
circumstances, use handwritten signs in the operation of its Business.
12.2. LOCAL ADVERTISING. The Franchisor reserves the right to require the
Franchisee to spend up to 1% of monthly Gross Retail Sales on local advertising
to create public awareness of the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY
Business. The Franchisee will submit to the Franchisor an accounting of the
amounts spent on advertising within 30 days following the end of each calendar
quarter. If the Franchisor requires its franchisees to advertise locally as
described above, all Franchisor-owned Businesses will be required to spend money
for local advertising on an equal percentage basis with all franchised
Businesses. If the Franchisee's lease requires it to advertise locally, the
Franchisor may, in its sole discretion, count such expenditures toward the
Franchisee's local advertising expenditure required by this Section 12.2. The
Franchisee shall obtain the Franchisor's prior written approval of all written
advertising and promotional materials before publication.
12.3. MARKETING AND PROMOTION FEE. The Franchisee shall pay to the
Franchisor, in addition to Royalties, a fee of 1% of the total amount of the
Franchisee's Gross Retail Sales ("Marketing and Promotion Fee"). The Marketing
and Promotion Fee shall be in addition to and not in lieu of the Franchisee's
expenditures for local advertising, as described in Section 12.2 above. The
following terms and conditions will apply:
(a) The Marketing and Promotion Fee shall be payable concurrently
with the payment of the Royalties, mailed to the Franchisor, postmarked no
later than the 15th day
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of each month, for all Marketing and Promotion Fees based on Gross Retail
Sales for the immediately preceding month.
(b) The Marketing and Promotion Fees will be subject to the same late
charges as the Royalties, in an amount and manner set forth in Section 12.3
above.
(c) Upon written request by the Franchisee, the Franchisor will make
available to the Franchisee, no later than 120 days after the end of each
fiscal year, an annual financial statement which indicates how the
Marketing and Promotion Fees have been spent.
(d) The Marketing and Promotion Fees, will be administered by the
Franchisor, in its sole discretion, and may be used for production and
placement of point of purchase advertising, in-store signage, in-store
promotions, media advertising, direct mailings, brochures, collateral
material advertising, surveys of advertising effectiveness, or other
advertising or public relations expenditures relating to advertising the
Franchisee's services and products.
(e) The Franchisor may reimburse itself for independent audits,
reasonable accounting, bookkeeping, reporting and legal expenses, taxes and
other reasonable direct and indirect expenses as may be incurred by the
Franchisor or its authorized representatives in connection with the
programs funded by the Marketing and Promotion Fees. The Franchisor will
not be liable for any act or omission with respect to such Marketing and
Promotion Fees which is consistent with this Agreement and is done in good
faith.
12.4. REGIONAL ADVERTISING PROGRAMS. Although not obligated to do so, the
Franchisor reserves the right to allocate all or a portion of the Marketing and
Promotion Fees as may be collected in accordance with Section 12.3 above toward
a regional advertising program for the benefit of ROCKY MOUNTAIN CHOCOLATE
FACTORY franchisees located within a particular region. The Franchisor has the
right, in its sole discretion, to determine the composition of all geographic
territories and market areas for the implementation of such regional advertising
and promotion campaigns and to require that the Franchisee participate in such
regional advertising programs as and when they may be established by the
Franchisor. If a regional advertising program is implemented on behalf of a
particular region by the Franchisor, the Franchisor, to the extent reasonably
calculable, will only use contributions from ROCKY MOUNTAIN CHOCOLATE FACTORY
franchisees within such region for the particular regional advertising program.
The Franchisor also reserves the right to establish an advertising cooperative
for a particular region to enable the cooperative to self-administer the
regional advertising program. If a regional advertising cooperative is
established by the Franchisor, the Franchisee agrees that it will participate in
the same.
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12.5. MARKETING SERVICES. The Franchisor may, in its sole discretion,
offer marketing and merchandising services to the Franchisee at rates that are
competitive with those charged by third parties offering similar services. The
Franchisee may utilize such services, if they are offered, at the Franchisee's
option. Services offered by the Franchisor may include marketing consulting,
graphic design, copywriting, advertising, public relations and merchandising
consulting in the Franchisor's sole discretion.
13. QUALITY CONTROL
13.1. COMPLIANCE WITH OPERATIONS MANUAL. The Franchisee agrees to
maintain and operate the ROCKY MOUNTAIN CHOCOLATE FACTORY Business in compliance
with this Agreement and the standards and specifications contained in the
Operations Manual, as the same may be modified from time to time by the
Franchisor.
13.2. STANDARDS AND SPECIFICATIONS. The Franchisor will make available to
the Franchisee standards and specifications for products and services offered at
or through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business and specifically, for
the candy processing recipes, uniforms, materials, forms, menu boards, items and
supplies used in connection with the Business. The Franchisor reserves the
right to change standards and specifications for services and products offered
at or through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business and for the candy
processing recipes, uniforms, materials, forms, items and supplies used in
connection with the Business upon 30 days prior written notice to the
Franchisee. The Franchisee shall strictly adhere to all of the Franchisor's
current standards and specifications for the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business as prescribed from time to time.
13.3. INSPECTIONS. The Franchisor shall have the right to examine the
Franchised Location, including the inventory, products, equipment, materials or
supplies, to ensure compliance with all standards and specifications set by the
Franchisor. The Franchisor shall conduct such inspections during regular
business hours and the Franchisee may be present at such inspections. The
Franchisor, however, reserves the right to conduct the inspections without prior
notice to the Franchisee.
13.4. RESTRICTIONS ON SERVICES AND PRODUCTS. The Franchisee will be
required to purchase any and all of its Candy, including cookie dough, for its
ROCKY MOUNTAIN CHOCOLATE FACTORY Business from the Franchisor or its designee.
Candy shall consist of any and all varieties from time to time made available to
the Franchisor's franchisees by the Franchisor and its designated suppliers.
The parties hereby acknowledge the uniqueness and importance of Candy being
prepared by the Franchisor or its designee in order to maintain the uniformity,
quality and uniqueness of Candy, and therefore the Franchisor and its designees
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are hereby appointed the Franchisee's exclusive source of Candy. The Franchisee
is prohibited from offering or selling any products or services not authorized
by Franchisor, including, without limitation, operating a catering or wholesale
business as part of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. However, if
the Franchisee proposes to offer, conduct or utilize any products, services,
materials, forms, items and supplies for use in connection with or sale through
the ROCKY MOUNTAIN CHOCOLATE FACTORY Business which are not previously approved
by the Franchisor as meeting its specifications, the Franchisee shall first
notify the Franchisor in writing requesting approval. The Franchisor may, in
its sole discretion, for any reason whatsoever, elect to withhold such approval;
however, in order to make such determination, the Franchisor may require
submission of specifications, information, or samples of such products,
services, materials, forms, items or supplies. The Franchisor will advise the
Franchisee within a reasonable time whether such products, services, materials,
forms, items or supplies meet its specifications.
13.5. APPROVED SUPPLIERS. The Franchisee shall purchase all products,
services, supplies and materials required for the operation of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business licensed herein, from manufacturers,
suppliers or distributors designated by the Franchisor or, if there is no
designated supplier for a particular product, service, supply or material, from
such other suppliers who meet all of the Franchisor's specifications and
standards as to quality, composition, finish, appearance and service, and who
shall adequately demonstrate their capacity and facilities to supply the
Franchisee's needs in the quantities, at the times, and with the reliability
requisite to an efficient operation.
13.6. REQUEST TO CHANGE SUPPLIER. In the event the Franchisee desires to
purchase products, services, supplies or materials from manufacturers, suppliers
or distributors other than those previously approved by the Franchisor, the
Franchisee shall, prior to purchasing any such products, services, supplies or
materials, give the Franchisor a written request by certified mail, return
receipt requested, to change supplier. In the event the Franchisor rejects the
Franchisee's requested new manufacturer, supplier or distributor, the Franchisor
must, within 60 days of the receipt of the Franchisee's request to change
supplier notify the Franchisee in writing of its rejection. Failure to notify
the Franchisee within such time period shall constitute a waiver of any and all
objections by the Franchisor to the new manufacturer, supplier or distributor
submitted by the Franchisee. The Franchisor may continue from time to time to
inspect any manufacturer's, suppliers, or distributor's facilities and products
to assure proper production, processing, storing and transportation of products,
services, supplies or materials to be purchased from the manufacturer, supplier
or distributor by the Franchisee. Permission for such inspection shall be a
condition of the continued approval of such manufacturer, supplier or
distributor.
13.7. APPROVAL OF INTENDED SUPPLIER. The Franchisor may at its sole
discretion, for any reason whatsoever, elect to withhold approval of the
manufacturer, supplier or distributor; however, in order to make such
determination, the Franchisor may require that
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samples from a proposed new supplier be delivered to the Franchisor for testing
prior to approval and use. A charge not to exceed the actual cost of the test
may be made by the Franchisor and shall be paid by the Franchisee.
14. TRADEMARKS, TRADE NAMES AND PROPRIETARY INTERESTS
14.1. MARKS. The Franchisee hereby acknowledges that the Franchisor has
the sole right to license and control the Franchisee's use of the ROCKY MOUNTAIN
CHOCOLATE FACTORY service mark and other of the Marks, and that such Marks shall
remain under the sole and exclusive ownership and control of the Franchisor.
The Franchisee acknowledges that it has not acquired any right, title or
interest in such Marks except for the right to use such Marks in the operation
of its ROCKY MOUNTAIN CHOCOLATE FACTORY Business as it is governed by this
Agreement.
14.2. NO USE OF OTHER MARKS. The Franchisee further agrees that no
service mark other than "ROCKY MOUNTAIN CHOCOLATE FACTORY" or such other Marks
as may be specified by the Franchisor shall be used in the marketing, promotion
or operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business.
14.3. LICENSED METHODS. The Franchisee hereby acknowledges that the
Franchisor owns and controls the distinctive plan for the establishment,
operation and promotion of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business and all
related licensed methods of doing business, previously defined as the "Licensed
Methods", which include, but are not limited to, gourmet chocolate specialty
recipes and cooking methods, confectionery ordering, processing, manufacturing,
stocking and inventory control, technical equipment standards, order fulfillment
methods and customer relations, marketing techniques, written promotional
materials, advertising, and accounting systems, all of which constitute trade
secrets of the Franchisor, and the Franchisee acknowledges that the Franchisor
has valuable rights in and to such trade secrets. The Franchisee further
acknowledges that it has not acquired any right, title or interest in the
Licensed Methods except for the right to use the Licensed Methods in the
operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business as it is governed by
this Agreement.
14.4. EFFECT OF TERMINATION. In the event this Agreement is terminated
for any reason, the Franchisee shall immediately cease using any of the Licensed
Methods and Marks, trade names, trade dress, trade secrets, copyrights or any
other symbols used to identify the ROCKY MOUNTAIN CHOCOLATE FACTORY Business,
and all rights the Franchisee had to the same shall automatically terminate.
The Franchisee agrees to execute any documents of assignment as may be necessary
to transfer any rights the Franchisee may possess in and to the Marks.
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14.5. MARK INFRINGEMENT. The Franchisee agrees to notify the
Franchisor in writing of any possible infringement or illegal use by others
of a trademark the same as or confusingly similar to the Marks which may come
to its attention. The Franchisee acknowledges that the Franchisor shall have
the right, in its sole discretion, to determine whether any action will be
taken on account of any possible infringement or illegal use. The Franchisor
may commence or prosecute such action in the Franchisor's own name and may
join the Franchisee as a party thereto if the Franchisor determines it to be
reasonably necessary for the continued protection and quality control of the
Marks and Licensed Methods. The Franchisor shall bear the reasonable cost of
any such action, including attorneys' fees. The Franchisee agrees to fully
cooperate with the Franchisor in any such litigation.
14.6. FRANCHISEE'S BUSINESS NAME. The Franchisee acknowledges that the
Franchisor has a prior and superior claim to the ROCKY MOUNTAIN CHOCOLATE
FACTORY trade name. The Franchisee shall not use the words "ROCKY MOUNTAIN
CHOCOLATE FACTORY" in the legal name of its corporation, partnership or any
other business entity used in conducting the business provided for in this
Agreement. The Franchisee also agrees not to register or attempt to register a
trade name using the word "ROCKY MOUNTAIN CHOCOLATE FACTORY" in the Franchisee's
name or that of any other person or business entity, without prior written
consent of the Franchisor. When this Agreement is terminated, the Franchisee
shall execute any assignment or other document the Franchisor requires to
transfer to itself any rights the Franchisee may possess in a trade name
utilizing the word ROCKY MOUNTAIN CHOCOLATE FACTORY or any other Mark owned by
the Franchisor. The Franchisee further agrees that it will not identify itself
as being "Rocky Mountain Chocolate Factory, Inc." or as being associated with
the Franchisor in any manner other than as a franchisee or licensee. The
Franchisee further agrees that in all advertising and promotion and promotional
materials it will display its business name only in obvious conjunction with the
phrase "ROCKY MOUNTAIN CHOCOLATE FACTORY Licensee" or "ROCKY MOUNTAIN CHOCOLATE
FACTORY Franchisee" or with such other words and in such other phrases as may
from time to time be prescribed in the Operations Manual, in the Franchisor's
sole discretion.
14.7. CHANGE OF MARKS. In the event that the Franchisor, in its sole
discretion, shall determine it necessary to modify or discontinue use of any
proprietary Marks, or to develop additional or substitute marks, the Franchisee
shall, within a reasonable time after receipt of written notice of such a
modification or discontinuation from the Franchisor, take such action, at the
Franchisee's sole expense, as may be necessary to comply with such modification,
discontinuation, addition or substitution.
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15. REPORTS, RECORDS AND FINANCIAL STATEMENTS
15.1. FRANCHISEE REPORTS. The Franchisee shall establish and maintain at
its own expense a bookkeeping and accounting system which conforms to the
specifications which the Franchisor may prescribe from time to time, including
the Franchisor's current "Standard Code of Accounts" as described in the
Operations Manual. The Franchisee shall supply to the Franchisor such reports
in a manner and form as the Franchisor may from time to time reasonably require,
including:
(a) Monthly summary reports, in a form as may be prescribed by the
Franchisor, mailed to the Franchisor postmarked no later than the 15th day
of the month and containing information relative to the previous month's
operations; and
(b) Quarterly financial statements, prepared in accordance with
Generally Accepted Accounting Principles ("GAAP"), and consisting of a
profit and loss statement and balance sheet for the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business, mailed to the Franchisor postmarked no later
than the 15th day following the end of the calendar quarter, based on
operating results of the prior quarter, which shall be submitted in a form
approved by the Franchisor and shall be certified by the Franchisee to be
correct.
The Franchisor reserves the right to disclose data derived from such
reports, without identifying the Franchisee, except to the extent identification
of the Franchisee is required by law.
15.2. ANNUAL FINANCIAL STATEMENTS. The Franchisee shall, within 90 days
after the end of its fiscal year, provide to the Franchisor annual unaudited
financial statements, compiled or reviewed by an independent certified public
accountant acceptable to and approved by the Franchisor and prepared in
accordance with GAAP, and state and federal income tax returns prepared by a
certified public accountant. If these financial statements or tax returns show
an underpayment of any amounts owed to the Franchisor, these amounts shall be
paid to the Franchisor concurrently with the submission of the statements or
returns.
15.3. VERIFICATION. Each report and financial statement to be submitted to
the Franchisor hereunder shall be signed and verified by the Franchisee.
15.4. BOOKS AND RECORDS. The Franchisee shall maintain all books and
records for its ROCKY MOUNTAIN CHOCOLATE FACTORY Business in accordance with
generally accepted accounting principles, consistently applied, and preserve
these records for at least five years after the fiscal year to which they
relate.
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15.5. AUDIT OF BOOKS AND RECORDS. The Franchisee shall permit the
Franchisor to inspect and audit the books and records of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business at any reasonable time, at the Franchisor's expense.
If any audit discloses a deficiency in amounts for payments owed to the
Franchisor pursuant to this Agreement, then such amounts shall become
immediately payable to the Franchisor by the Franchisee, with interest from the
date such payments were due at the lesser of 1 1/2% per month or the maximum
rate allowed by law. In addition, if it is found by such audit that the Gross
Retail Sales of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business have been
understated by five percent (5%) or more during the period audited, the
Franchisee shall pay all reasonable costs and expenses the Franchisor incurred
in connection with such audit.
15.6. FAILURE TO COMPLY WITH REPORTING REQUIREMENTS. If the Franchisee
fails to prepare and submit any statement or report as required under this
Article 15, then the Franchisor shall have the right to treat the Franchisee's
failure as good cause for termination of this Agreement. In addition to all
other remedies available to the Franchisor, in the event that the Franchisee
fails to prepare and submit any statement or report required under this Article
15 for two consecutive reporting periods, the Franchisor shall be entitled to
make an audit, at the expense of the Franchisee, of the Franchisee's books,
records and accounts, including the Franchisee's bank accounts, which in any way
pertain to the Gross Retail Sales of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business. The statements or reports not previously submitted shall be prepared
by or under the direction and supervision of an independent certified public
accountant selected by the Franchisor.
15.7. SHOPPING SERVICE. The Franchisor reserves the right to use third
party shopping services from time to time to evaluate the conduct of the
Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business, including such things as
customer service, cleanliness, merchandising and proper use of registers. The
Franchisor may use such shopping services to inspect the Franchisee's ROCKY
MOUNTAIN CHOCOLATE FACTORY Business at any time at the Franchisor's expense,
without prior notification to the Franchisee. The Franchisor may make the
results of any such service evaluation available to the Franchisee, in the
Franchisor's sole discretion.
16. ASSIGNMENT
16.1. ASSIGNMENT BY FRANCHISEE. The franchise granted herein is personal
to the Franchisee and, except as stated below, the Franchisor shall not allow or
permit any transfer, assignment, subfranchise or conveyance of this Agreement or
any interest hereunder.
16.2. PRE-CONDITIONS TO FRANCHISEE'S ASSIGNMENT. The Franchisee shall
not sell, transfer or assign its rights under this Agreement or any interest in
it, or any part or portion of
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any business entity that owns it or all or a substantial portion of the assets
of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, unless the Franchisee obtains
the Franchisor's written consent and complies with the following requirements:
(a) Payment of all amounts due and owing pursuant to this Agreement
by the Franchisee to the Franchisor or its affiliates or to third parties
whose debts or obligations the Franchisor has guaranteed on behalf of the
Franchisee, if any;
(b) Agreement by the proposed transferee to satisfactorily complete
the initial training program described in this Agreement, which training
may be completed by the transferee either prior to or immediately after
assignment of this Agreement;
(c) Execution of a Franchise Agreement in a form then currently
offered by the Franchisor, which shall supersede this Agreement in all
respects. If a new Franchise Agreement is signed, the terms thereof may
differ from the terms of this Agreement; provided, however, the transferee
will not be required to pay any additional initial franchise fee;
(d) Provision by the Franchisee of written notice to the Franchisor
30 days' prior to the proposed effective date of the transfer, such notice
to contain information reasonably detailed to enable the Franchisor to
evaluate the terms and conditions of the proposed transfer;
(e) The proposed transferee shall have provided information to the
Franchisor sufficient for the Franchisor to assess the proposed
transferee's business experience, aptitude and financial qualification, and
the Franchisor shall have ascertained that the proposed transferee meets
such qualifications;
(f) Execution by Franchisee of a general release, in a form
satisfactory to the Franchisor, of any and all claims against the
Franchisor, its affiliates and their respective officers, directors,
employees and agents;
(g) Payment by the Franchisee or the proposed transferee of $2,500;
and
(h) Agreement by the Franchisee to abide by the post-termination
covenant not to compete set forth in Section 19.2 below.
16.3. FRANCHISOR'S APPROVAL OF TRANSFER. The Franchisor has 30 days from
the date of the written notice to approve or disapprove in writing, of the
Franchisee's proposed assignment. The Franchisee acknowledges that the proposed
transferee shall be evaluated for approval by the Franchisor based on the same
criteria as is currently being used to assess new
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franchisees of the Franchisor and that such proposed transferee shall be
provided, if appropriate, with such disclosures as may be required by state or
federal law. If the Franchisee and its proposed transferee comply with all
conditions for assignment set forth herein and the Franchisor has not given the
Franchisee notice of its approval or disapproval within such period, approval is
deemed granted.
16.4. RIGHT OF FIRST REFUSAL. In the event the Franchisee wishes to sell,
transfer or assign its rights under this Agreement or any interest in it, or any
part or portion of any business entity that owns it, or all or a substantial
portion of the assets of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the
Franchisee agrees to grant to the Franchisor a 30 day right of first refusal to
purchase such rights, interest or assets on the same terms and conditions as are
contained in the written offer to purchase submitted to the Franchisee by the
proposed purchaser; provided, however, the following additional terms and
conditions shall apply:
(a) The Franchisee shall notify the Franchisor of such offer by
sending a written notice to the Franchisor (which notice may be the same
notice as required by Section 16.2(d) above), enclosing a copy of the
written offer from the proposed purchaser;
(b) The 30 day right of first refusal period will run concurrently
with the period in which the Franchisor has to approve or disapprove the
proposed transferee;
(c) Such right of first refusal is effective for each proposed
transfer and any material change in the terms or conditions of the proposed
transfer shall be deemed a separate offer on which a new 30 day right of
first refusal shall be given to the Franchisor;
(d) If the consideration or manner of payment offered by a third
party is such that the Franchisor may not reasonably be required to furnish
the same, then the Franchisor may purchase the interest which is proposed
to be sold for the reasonable cash equivalent. If the parties cannot agree
within a reasonable time on the cash consideration, an independent
appraiser shall be designated by the Franchisor, whose determination will
be binding upon the parties. All expenses of the appraiser shall be paid
for equally between the Franchisor and the Franchisee; and
(e) If the Franchisor chooses not to exercise its right of first
refusal, the Franchisee shall be free to complete the sale, transfer or
assignment, subject to compliance with Sections 16.2 and 16.3 above.
Absence of a reply to the Franchisee's notice of a proposed sale within the
30 day period is deemed a waiver of such right of first refusal.
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16.5. TYPES OF TRANSFERS. The Franchisee acknowledges that the
Franchisor's right to approve or disapprove of a proposed sale or transfer, and
all other requirements and rights related to such proposed sale or transfer, as
provided for above, shall apply (1) if the Franchisee is a partnership or other
business association, to the addition or deletion of a partner or members of the
association or the transfer of any partnership or membership among existing
partners or members; (2) if the Franchisee is a corporation, to any proposed
transfer or assignment of 25% or more of the stock of the corporate Franchisee,
whether such transfer occurs in a single transaction or several transactions;
and (3) if the Franchisee is an individual, to the transfer from such individual
or individuals to a corporation controlled by them, in which case the
Franchisor's approval will be conditioned upon: (i) the continuing personal
guarantee of the individual (or individuals) for the performance of obligations
under this Agreement; (ii) the issuance and/or transfer of shares which would
affect a change in ownership of 25% or more of the stock in the corporation
being conditioned on the Franchisor's prior written approval; (iii) a limitation
on the corporation's business activity to that of operating the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business and related activities; and (iv) other reasonable
conditions. With respect to a proposed transfer as described in subsection (1)
and (3) of this Section, the Franchisor's right of first refusal to purchase, as
set forth above, shall not apply and the Franchisor will waive any transfer fee
chargeable to the Franchisee for a transfer under these circumstances.
16.6. ASSIGNMENT BY THE FRANCHISOR. This Agreement is fully assignable by
the Franchisor and shall inure to the benefit of any assignee or other legal
successor in interest, and the Franchisor shall in such event be fully released
from the same.
16.7. FRANCHISEE'S DEATH OR DISABILITY. Upon the death or permanent
disability of the Franchisee (or the Franchisee's individual controlling the
Franchisee entity), the executor, administrator, conservator, guardian or other
personal representative of such person shall transfer the Franchisee's interest
in this Agreement or such interest in the Franchisee entity to an approved third
party. Such disposition of this Agreement or such interest (including, without
limitation, transfer by bequest or inheritance) shall be completed within a
reasonable time, not to exceed 120 days from the date of death or permanent
disability, and shall be subject to all terms and conditions applicable to
transfers contained in this Article 16. Provided, however, that for purposes of
this Section 16.7, there shall be no fee charged by the Franchisor for the
initial training program offered to the transferee. Failure to transfer the
interest in this Agreement or such interest in the Franchisee entity within said
period of time shall constitute a breach of this Agreement. For the purposes
hereof, the term "permanent disability" shall mean a mental or physical
disability, impairment or condition that is reasonably expected to prevent or
actually does prevent the Franchisee or the owner of a controlling interest in
the Franchisee entity from supervising the management and operation of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business for a period of 120 days from the onset of
such disability, impairment or condition.
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17. TERM AND EXPIRATION
17.1. TERM. The term of this Agreement is for a period of five years from
the date of this Agreement, unless sooner terminated as provided herein.
17.2. RIGHTS UPON EXPIRATION. At the end of the initial term hereof the
Franchisee shall have the option to renew its franchise rights for two
additional five year terms, by acquiring successor franchise rights, if the
Franchisor does not exercise its right not to offer a successor franchise in
accordance with Section 17.4 below and if the Franchisee:
(a) At least 30 days prior to expiration of the term, executes the
form of Franchise Agreement then in use by the Franchisor;
(b) Has complied with all provisions of this Agreement during the
current term, including the payment on a timely basis of all Royalties and
other fees due hereunder. "Compliance" shall mean, at a minimum, that the
Franchisee has not received any written notification from the Franchisor of
breach hereunder more than four times during the term hereof;
(c) Upgrades and/or remodels the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business and its operations at the Franchisee's sole expense (the necessity
of which shall be in the sole discretion of the Franchisor) to conform with
the then current Operations Manual;
(d) Executes a general release, in a form satisfactory to the
Franchisor, of any and all claims against the Franchisor and its
affiliates, and their respective officers, directors, employees and agents
arising out of or relating to this Agreement; and
(e) Pays a success or franchise fee of $100.
17.3. EXERCISE OF OPTION FOR SUCCESSOR FRANCHISE. The Franchisee may
exercise its option for a successor franchise by giving written notice of such
exercise to the Franchisor not less than 210 days prior to the scheduled
expiration of this Agreement. The Franchisee's successor franchise rights shall
become effective by signing the Franchise Agreement then currently being offered
to new franchisees of the Franchisor.
17.4. CONDITIONS OF REFUSAL. The Franchisor shall not be obligated to
offer the Franchisee a successor franchise upon the expiration of this Agreement
if the Franchisee fails to comply with any of the above conditions of renewal.
In such event, except for failure to
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execute the then current Franchise Agreement or pay the successor franchise fee,
the Franchisor shall give notice of expiration at least 180 days prior to the
expiration of the term, and such notice shall set forth the reasons for such
refusal to offer successor franchise rights. Upon the expiration of this
Agreement, the Franchisee shall comply with the provisions of Section 18.2
below.
18. DEFAULT AND TERMINATION
18.1. TERMINATION BY FRANCHISOR - EFFECTIVE UPON NOTICE. The Franchisor
shall have the right, at its option, to terminate this Agreement and all rights
granted the Franchisee hereunder, without affording the Franchisee any
opportunity to cure any default (subject to any state laws to the contrary,
where state law shall prevail), effective upon receipt of notice by the
Franchisee, addressed as provided in Section 22.12, upon the occurrence of any
of the following events:
(a) ABANDONMENT. If the Franchisee ceases to operate the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business or otherwise abandons the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business for a period of five consecutive days,
or any shorter period that indicates an intent by the Franchisee to
discontinue operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business,
unless and only to the extent that full operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business is suspended or terminated due to fire, flood,
earthquake or other similar causes beyond the Franchisee's control and not
related to the availability of funds to the Franchisee;
(b) INSOLVENCY; ASSIGNMENTS. If the Franchisee becomes insolvent or
is adjudicated a bankrupt; or any action is taken by the Franchisee, or by
others against the Franchisee under any insolvency, bankruptcy or
reorganization act, (this provision may not be enforceable under federal
bankruptcy law, 11 U.S.C. Sections 101 ET SEQ.), or if the Franchisee makes
an assignment for the benefit of creditors, or a receiver is appointed by
the Franchisee;
(c) UNSATISFIED JUDGMENTS; LEVY; FORECLOSURE. If any material
judgment (or several judgments which in the aggregate are material) is
obtained against the Franchisee and remains unsatisfied or of record for 30
days or longer (unless a supersedeas or other appeal bond has been filed);
or if execution is levied against the Franchisee's business or any of the
property used in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business and is not discharged within five days; or if the real or personal
property of the Franchisee's business shall be sold after levy thereupon by
any sheriff, marshall or constable;
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(d) CRIMINAL CONVICTION. If the Franchisee is convicted of a felony,
a crime involving moral turpitude, or any crime or offense that is
reasonably likely, in the sole opinion of the Franchisor, to materially and
unfavorably affect the Licensed Methods, Marks, goodwill or reputation
thereof,
(e) FAILURE TO MAKE PAYMENTS. If the Franchisee fails to pay any
amounts due the Franchisor or affiliates, including any amounts which may
be due as a result of any subleases or lease assignments between the
Franchisee and the Franchisor, within 10 days after receiving notice that
such fees or amounts are overdue;
(f) MISUSE OF MARKS. If the Franchisee misuses or fails to follow the
Franchisor's directions and guidelines concerning use of the Franchisor's
Marks and fails to correct the misuse or failure within ten days after
notification from the Franchisor;
(g) UNAUTHORIZED DISCLOSURE. If the Franchisee intentionally or
negligently discloses to any unauthorized person the contents of or any
part of the Franchisor's Operations Manual or any other trade secrets or
confidential information of the Franchisor;
(h) REPEATED NONCOMPLIANCE. If the Franchisee has received two
previous notices of default from the Franchisor and is again in default of
this Agreement within a 12 month period, regardless of whether the previous
defaults were cured by the Franchisee; or
(i) UNAUTHORIZED TRANSFER. If the Franchisee sells, transfers or
otherwise assigns the Franchise, an interest in the Franchise or the
Franchisee entity, this Agreement, the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business or a substantial portion of the assets of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business owned by the Franchisee without complying with
the provisions of Article 16 above.
18.2. TERMINATION BY FRANCHISOR - THIRTY DAYS NOTICE. The Franchisor
shall have the right to terminate this Agreement (subject to any state laws to
the contrary, where state law shall prevail), effective upon 30 days written
notice to the Franchisee, if the Franchisee breaches any other provision of this
Agreement and fails to cure the default during such 30 day period. In that
event, this Agreement will terminate without further notice to the Franchisee,
effective upon expiration of the 30 day period. Defaults shall include, but not
be limited to, the following:
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(a) FAILURE TO MAINTAIN STANDARDS. The Franchisee fails to maintain
the then current operating procedures and adhere to the specifications and
standards established by the Franchisor as set forth herein or in the
Operations Manual or otherwise communicated to the Franchisee;
(b) DECEPTIVE PRACTICES. The Franchisee engages in any unauthorized
business or practice or sells any unauthorized product or service under the
Franchisor's Marks or under a name or mark which is confusingly similar to
the Franchisor's Marks;
(c) FAILURE TO OBTAIN CONSENT. The Franchisee fails, refuses or
neglects to obtain the Franchisor's prior written approval or consent as
required by this Agreement;
(d) FAILURE TO COMPLY WITH MANUAL. The Franchisee fails or refuses
to comply with the then-current requirements of the Operations Manual; or
(e) BREACH OF RELATED AGREEMENT. The Franchisee defaults under any
term of the sublease or lease assignment for the Franchised Location, any
other agreement material to the ROCKY MOUNTAIN CHOCOLATE FACTORY Business
or any other Franchise Agreement between the Franchisor and the Franchisee
and such default is not cured within the time specified in such sublease,
other agreement or other Franchise Agreement.
Notwithstanding the foregoing, if the breach is curable, but is of a nature
which cannot be reasonably cured within such 30 day period and the Franchisee
has commenced and is continuing to make good faith efforts to cure the breach
during such 30 day period, the Franchisee shall be given an additional
reasonable period of time to cure the same, and this Agreement shall not
automatically terminate without written notice from the Franchisor.
18.3. FRANCHISOR'S REMEDIES.
(a) FAILURE TO PAY. In addition to all other remedies that may be
exercised by the Franchisor upon a default by the Franchisee under the
terms of this Agreement, the Franchisor reserves the right to collect
amounts due from the Franchisee to any third party and to pay the third
party directly. If the Franchisor collects any such amounts, the
Franchisor may, in its sole discretion, charge the Franchisee an
administrative fee to reimburse the Franchisor for its costs of collecting
and paying such amounts. Any administrative fee charged would not exceed
15% of the total amount of money collected.
(b) FAILURE TO MAINTAIN STANDARDS. In addition to all other remedies
that may be exercised by the Franchisor upon a default by the Franchisee
under the terms of this Agreement, the Franchisor may collect a fee of $500
per day for every day following the
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30 day cure period in which the Franchisee continues to breach this
Agreement by failing to maintain and adhere to the Franchisor's standards
and specifications for the operation of the Franchisee's Business.
18.4. RIGHT TO PURCHASE. Upon termination or expiration of this
Agreement for any reason, the Franchisor shall have the option to purchase
the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, which may include, at the
Franchisor's option, all of the Franchisee's interest, if any, in and to the
real estate upon which the ROCKY MOUNTAIN CHOCOLATE FACTORY Business is
located, and all buildings and other improvements thereon, including
leasehold interests, at fair market value, less any amount apportioned to the
goodwill of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business which is
attributable to the Franchisor's Marks and Licensed Methods, and less any
amounts owed to the Franchisor by the Franchisee. The following additional
terms shall apply to the Franchisor's exercise of this option:
(a) The Franchisor's option hereunder shall be exercisable by
providing the Franchisee with written notice of its intention to exercise
the option given to the Franchisee no later than the effective date of
termination, in the case of termination, or at least 90 days prior to the
expiration of the term of the franchise, in the case of non-renewal.
(b) In the event that the Franchisor and the Franchisee cannot agree
to a fair market value of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business,
then the fair market value shall be determined by an independent third
party appraisal. The Franchisor and the Franchisee shall each select one
independent, qualified appraiser, and the two so selected shall select a
third appraiser, all three to determine the fair market value of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Business. The purchase price shall be the
median of the fair market values as determined by the three appraisers.
(c) The Franchisor and the Franchisee agree that the terms and
conditions of this right and option to purchase may be recorded, if deemed
appropriate by the Franchisor, in the real property records and the
Franchisor and the Franchisee further agree to execute such additional
documentation as may be necessary and appropriate to effectuate such
recording.
(d) The closing for the purchase of the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business will take place no later than 60 days after the
termination or nonrenewal date. The Franchisor will pay the purchase price
in full at the closing, or, at its option, in five equal consecutive
monthly installments with interest at a rate of ten percent per annum. The
Franchisee must sign all documents of assignment and transfer as are
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reasonably necessary for purchase of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Business by the Franchisor.
In the event that the Franchisor does not exercise the Franchisor's right to
repurchase the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business as set
forth above, the Franchisee will be free to keep or to sell, after such
termination or expiration, to any third party, all of the physical assets of its
ROCKY MOUNTAIN CHOCOLATE FACTORY Business; provided, however, that all
appearances of the Marks are first removed in a manner approved in writing by
the Franchisor. The Franchisor will only be obligated to purchase any assets of
the ROCKY MOUNTAIN CHOCOLATE FACTORY Business in the event and to the extent it
is required by applicable state or federal law.
18.5. OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR EXPIRATION. The
Franchisee is obligated upon termination or expiration of this Agreement to
immediately:
(a) Pay to the Franchisor all Royalties, other fees, and any and all
amounts or accounts payable then owed the Franchisor or its affiliates
pursuant to this Agreement, or pursuant to any other agreement, whether
written or oral, including subleases and lease assignments, between the
parties;
(b) Cease to identify itself as a ROCKY MOUNTAIN CHOCOLATE FACTORY
Franchisee or publicly identify itself as a former Franchisee or use any of
the Franchisor's trade secrets, signs, symbols, devices, trade names,
trademarks, or other materials.
(c) Immediately cease to identify the Franchised Location as being,
or having been, associated with the Franchisor, and immediately cease using
any proprietary mark of the Franchisor or any mark in any way associated
with the ROCKY MOUNTAIN CHOCOLATE FACTORY Marks and Licensed Methods;
(d) Deliver to the Franchisor all Candy inventory which bears the
ROCKY MOUNTAIN CHOCOLATE FACTORY logo, signs, sign-faces, advertising
materials, forms and other materials bearing any of the Marks or otherwise
identified with the Franchisor and obtained by and in connection with this
Agreement;
(e) Immediately deliver to the Franchisor the Operations Manual and
all other information, documents and copies thereof which are proprietary
to the Franchisor;
(f) Promptly take such action as may be required to cancel all
fictitious or assumed names or equivalent registrations relating to its use
of any Marks which are
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under the exclusive control of the Franchisor or, at the option of the
Franchisor, assign the same to the Franchisor;
(g) Notify the telephone company and all telephone directory
publishers of the termination or expiration of the Franchisee's right to
use any telephone number and any regular, classified or other telephone
directory listings associated with any Mark and to authorize transfer
thereof to the Franchisor or its designee. The Franchisee acknowledges
that, as between the Franchisee and the Franchisor, the Franchisor has the
sole rights to and interest in all telephone, telecopy or facsimile machine
numbers and directory listings associated with any Mark. The Franchisee
authorizes the Franchisor, and hereby appoints the Franchisor and any of
its officers as the Franchisee's attorney-in-fact, to direct the telephone
company and all telephone directory publishers to transfer any telephone,
telecopy or facsimile machine numbers and directory listings relating to
the ROCKY MOUNTAIN CHOCOLATE FACTORY Business to the Franchisor or its
designee, should the Franchisee fail or refuse to do so, and the telephone
company and all telephone directory publishers may accept such direction or
this Agreement as conclusive of the Franchisor's exclusive rights in such
telephone numbers and directory listings and the Franchisor's authority to
direct their transfer; and
(h) Abide by all restrictive covenants set forth in Article 20 of
this Agreement.
18.6. STATE AND FEDERAL LAW. THE PARTIES ACKNOWLEDGE THAT IN THE
EVENT THAT THE TERMS OF THIS AGREEMENT REGARDING TERMINATION OR
EXPIRATION ARE INCONSISTENT WITH APPLICABLE STATE OR FEDERAL LAW,
SUCH LAW SHALL GOVERN THE FRANCHISEE'S RIGHTS REGARDING TERMINATION OR
EXPIRATION OF THIS AGREEMENT.
19. BUSINESS RELATIONSHIP
19.1. INDEPENDENT BUSINESSPERSONS. The parties agree that each of them
are independent businesspersons, their only relationship is by virtue of this
Agreement and that no fiduciary relationship is created hereunder. Neither
party is liable or responsible for the other's debts or obligations, nor shall
either party be obligated for any damages to any person or property directly or
indirectly arising out of the operation of the other party's business authorized
by or conducted pursuant to this Agreement. The Franchisor and the Franchisee
agree that neither of them will hold themselves out to be the agent, employer or
partner of the other and that neither of them has the authority to bind or incur
liability on behalf of the other.
19.2. PAYMENT OF THIRD PARTY OBLIGATIONS. The Franchisor shall have no
liability for the Franchisee's obligations to pay any third parties, including
without limitation, any
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product vendors, or any sales, use, service, occupation, excise, gross receipts,
income, property or other tax levied upon the Franchisee, the Franchisee's
property, the ROCKY MOUNTAIN CHOCOLATE FACTORY Business or upon the Franchisor
in connection with the sales made or business conducted by the Franchisee
(except any taxes the Franchisor is required by law to collect from the
Franchisee with respect to purchases from the Franchisor).
19.3. INDEMNIFICATION. The Franchisee agrees to indemnify, defend and hold
harmless the Franchisor, its subsidiaries and affiliates, and their respective
shareholders, directors, officers, employees, agents, successors and assignees,
(the "Indemnified Parties") against, and to reimburse them for all claims,
obligations and damages described in this Section 19.3, any and all third party
obligations described in Section 19.2 and any and all claims and liabilities
directly or indirectly arising out of the operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Business or arising out of the use of the Marks and Licensed
Methods in any manner not in accordance with this Agreement. For purposes of
this indemnification, claims shall mean and include all obligations, actual and
consequential damages and costs reasonably incurred in the defense of any claim
against the Indemnified Parties, including, without limitation, reasonable
accountants', attorneys' and expert witness fees, costs of investigation and
proof of facts, court costs, other litigation expenses and travel and living
expenses. The Franchisor shall have the right to defend any such claim against
it. This indemnity shall continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement.
20. RESTRICTIVE COVENANTS
20.1. NON-COMPETITION DURING TERM. The Franchisee acknowledges that, in
addition to the license of the Marks hereunder, the Franchisor has also licensed
commercially valuable information which comprises and is a part of the Licensed
Methods, including without limitation, recipes, operations, marketing,
advertising and related information and materials and that the value of this
information derives not only from the time, effort and money which went into its
compilation, but from the usage of the same by all the franchisees of the
Franchisor using the Marks and Licensed Methods. The Franchisee therefore
agrees that other than the ROCKY MOUNTAIN CHOCOLATE FACTORY Business licensed
herein, neither the Franchisee nor any of the Franchisee's officers, directors,
shareholders or partners, nor any member of his or their immediate families,
shall during the term of this Agreement:
(a) have any direct or indirect controlling interest as a disclosed
or beneficial owner in a "Competitive Business" as defined below;
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(b) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for a Competitive Business;
or
(c) divert or attempt to divert any business related to, or any
customer or account of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the
Franchisor's business or any other ROCKY MOUNTAIN CHOCOLATE FACTORY
franchisee's business, by direct inducement or otherwise, or divert or
attempt to divert the employment of any employee of the Franchisor or
another franchisee licensed by the Franchisor to use the Marks and Licensed
Methods, to any Competitive Business by any direct inducement or otherwise.
The term "Competitive Business" as used in this Agreement shall mean any
business operating, or granting franchises or licenses to others to operate, a
retail, wholesale, distribution or manufacturing business deriving more than 5%
of its gross receipts from the sale, processing or manufacturing of Candy, Items
or other products which are offered in ROCKY MOUNTAIN CHOCOLATE FACTORY
Businesses and which constitutes 5% or more of the Gross Retail Sales of any
ROCKY MOUNTAIN CHOCOLATE FACTORY Business; provided, however, the Franchisee
shall not be prohibited from owning securities in a Competitive Business if such
securities are listed on a stock exchange or traded on the over-the-counter
market and represent 5% or less of that class of securities issued and
outstanding.
20.2. POST-TERMINATION COVENANT NOT TO COMPETE. Upon termination or
expiration of this Agreement for any reason, the Franchisee and its officers,
directors, shareholders, and/or partners agree that, for a period of two
years commencing on the effective date of termination or expiration, or the
date on which the Franchisee ceases to conduct business, whichever is later,
neither Franchisee nor its officers, directors, shareholders, and/or partners
shall have any direct or indirect interest (through a member of any immediate
family of the Franchisee or its Owners or otherwise) as a disclosed or
beneficial owner, investor, partner, director, officer, employee, consultant,
representative or agent or in any other capacity in any Competitive Business,
defined in Section 20.1 above, located or operating within a 10 mile radius
of the Franchised Location or within ten miles of any other franchised or
company-owned ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The restrictions of
this Section shall not be applicable to the ownership of shares of a class of
securities listed on a stock exchange or traded on the over-the-counter
market that represent 5% or less of the number of shares of that class of
securities issued and outstanding. The Franchisee and its officers,
directors, shareholders, and/or partners expressly acknowledge that they
possess skills and abilities of a general nature and have other opportunities
for exploiting such skills. Consequently, enforcement of the covenants made
in this Section will not deprive them of their personal goodwill or ability
to earn a living.
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20.3. CONFIDENTIALITY OF PROPRIETARY INFORMATION. The Franchisee shall
treat all information it receives which comprises or is a part of the Licensed
Methods licensed hereunder as proprietary and confidential and will not use such
information in an unauthorized manner or disclose the same to any unauthorized
person without first obtaining the Franchisor's written consent. The Franchisee
acknowledges that the Marks and the Licensed Methods have valuable goodwill
attached to them, that the protection and maintenance thereof is essential to
the Franchisor and that any unauthorized use or disclosure of the Marks and
Licensed Methods will result in irreparable harm to the Franchisor.
20.4. CONFIDENTIALITY AGREEMENT. The Franchisor reserves the right to
require that the Franchisee cause each of its officers, directors, partners,
shareholders, and General Manager, and, if the Franchisee is an individual,
immediate family members, to execute a Nondisclosure and Noncompetition
Agreement containing the above restrictions, in a form approved by the
Franchisor.
21. INSURANCE
21.1. INSURANCE COVERAGE. The Franchisee shall procure, maintain and
provide evidence of (i) comprehensive general liability insurance for the
Franchised Location and its operations with a limit of not less than $1,000,000
combined single limit, or such greater limit as may be required as part of any
lease agreement for the Franchised Location; (ii) automobile liability insurance
covering all employees of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business with
authority to operate a motor vehicle in an amount not less than $1,000,000 or,
with the prior written consent of the Franchisor, such lesser amount as may be
available at a commercially reasonable rate, but in no event less than any
statutorily imposed minimum coverage; (iii) unemployment and worker's
compensation insurance with a broad form all-states endorsement coverage
sufficient to meet the requirements of the law; and (iv) all-risk personal
property insurance in an amount equal to at least 100% of the replacement costs
of the contents and tenant improvements located at the ROCKY MOUNTAIN CHOCOLATE
FACTORY Business. All of the required policies of insurance shall name the
Franchisor as an additional named insured and shall provide for a 30 day advance
written notice to the Franchisor of cancellation.
21.1. PROOF OF INSURANCE COVERAGE. The Franchisee will provide proof
of insurance to the Franchisor prior to commencement of operations at its
ROCKY MOUNTAIN CHOCOLATE FACTORY Business. This proof will show that the
insurer has been authorized to inform the Franchisor in the event any
policies lapse or are cancelled. The Franchisor has the right to change the
minimum amount of insurance the Franchisee is required to maintain by giving
the Franchisee prior reasonable notice, giving due consideration to what is
reasonable and customary in the similar business. Noncompliance
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with the insurance provisions set forth herein shall be deemed a material breach
of this Agreement; in the event of any lapse in insurance coverage, in addition
to all other remedies, the Franchisor shall have the right to demand that the
Franchisee cease operations of the ROCKY MOUNTAIN CHOCOLATE FACTORY Businesses
until coverage is reinstated, or, in the alternative, pay any delinquencies in
premium payments and charge the same back to the Franchisee.
22. MISCELLANEOUS PROVISIONS
22.1. GOVERNING LAW/CONSENT TO VENUE AND JURISDICTION. Except to the
extent governed by the United States Trademark Act of 1946 (Lanham Act, 15
U.S.C. Sections 1051 ET SEQ.) or other federal law, this Agreement, the
franchise and the relationship between the Franchisor and the Franchisee shall
be governed by the laws of the state of Colorado. The Franchisee agrees that
the Franchisor may institute any action against the Franchisee in any state or
federal court of general jurisdiction in the state of Colorado and the
Franchisee irrevocably submits to the jurisdiction of such courts and waives any
objection he may have to either the jurisdiction of or venue in such courts.
The Franchisee agrees that the only proper venue for any action shall be in the
County of La Plata, State of Colorado.
22.2. MODIFICATION. The Franchisor and/or the Franchisee may modify this
Agreement only upon execution of a written agreement between the two parties.
The Franchisee acknowledges that the Franchisor may modify its standards and
specifications and operating and marketing techniques set forth in the
Operations Manual unilaterally under any conditions and to the extent in which
the Franchisor, in its sole discretion, deems necessary to protect, promote, or
improve the Marks and the quality of the Licensed Methods, but under no
circumstances will such modifications be made arbitrarily without such
determination.
22.3. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties and supersedes any and all prior agreements concerning
the subject matter hereof. The Franchisee agrees and understands that the
Franchisor shall not be liable or obligated for any oral representations or
commitments made prior to the execution hereof and that no modifications of
this Agreement shall be effective except those in writing and signed by both
parties. The Franchisor does not authorize and will not be bound by any
representation of any nature other than those expressed in this Agreement.
The Franchisee further acknowledges and agrees that no representations have
been made to it by the Franchisor regarding projected sales volumes, market
potential, revenues, profits of the Franchisee's ROCKY MOUNTAIN CHOCOLATE
FACTORY Business, or operational assistance other than as stated in this
Agreement or in any disclosure document provided by the Franchisor or its
representatives.
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22.4. DELEGATION BY THE FRANCHISOR. From time to time, the Franchisor
shall have the right to delegate the performance of any portion or all of its
obligations and duties hereunder to third parties, whether the same are agents
of the Franchisor or independent contractors which the Franchisor has contracted
with to provide such services. The Franchisee agrees in advance to any such
delegation by the Franchisor of any portion or all of its obligations and duties
hereunder.
22.5. EFFECTIVE DATE. This Agreement shall not be effective until
accepted by the Franchisor as evidenced by dating and signing by an officer of
the Franchisor.
22.6. REVIEW OF AGREEMENT. The Franchisee acknowledges that it had a copy
of this Agreement in its possession for a period of time not fewer than 10 full
business days, during which time the Franchisee has had the opportunity to
submit same for professional review and advice of the Franchisee's choosing
prior to freely executing this Agreement.
22.7. ATTORNEYS' FEES. In the event of any default on the part of either
party to this Agreement, in addition to all other remedies, the party in default
will pay the aggrieved party all amounts due and all damages, costs and
expenses, including reasonable attorneys' fees, incurred by the aggrieved party
in any legal action, arbitration or other proceeding as a result of such
default, plus interest at the highest rate allowable by law, accruing from the
date of such default.
22.8. INJUNCTIVE RELIEF. Nothing herein shall prevent the Franchisor or
the Franchisee from seeking injunctive relief to prevent irreparable harm, in
addition to all other remedies.
22.9. NO WAIVER. No waiver of any condition or covenant contained in this
Agreement or failure to exercise a right or remedy by the Franchisor or the
Franchisee shall be considered to imply or constitute a further waiver by the
Franchisor or the Franchisee of the same or any other condition, covenant,
right, or remedy.
22.10. NO RIGHT TO SET OFF. The Franchisee shall not be allowed to set
off amounts owed to the Franchisor for Royalties, fees or other amounts due
hereunder, against any monies owed to Franchisee, nor shall the Franchisee in
any event withhold such amounts due to any alleged nonperformance by the
Franchisor hereunder, which right of set off is hereby expressly waived by the
Franchisee.
22.11. INVALIDITY. If any provision of this Agreement is held invalid
by any tribunal in a final decision from which no appeal is or can be taken,
such provision shall be deemed modified to eliminate the invalid element and, as
so modified, such provision shall be deemed
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a part of this Agreement as though originally included. The remaining
provisions of this Agreement shall not be affected by such modification.
22.12. NOTICES. All notices required to be given under this Agreement
shall be given in writing, by certified mail, return receipt requested, or by an
overnight delivery service providing documentation of receipt, at the address
set forth in the first Section of this Agreement or at such other addresses as
the Franchisor or the Franchisee may designate from time to time, and shall be
effectively given when deposited in the United States mails, postage prepaid, or
when received via overnight delivery, as may be applicable.
22.13. ACKNOWLEDGEMENT. BEFORE SIGNING THIS AGREEMENT, THE FRANCHISEE
SHOULD READ IT CAREFULLY WITH THE ASSISTANCE OF LEGAL COUNSEL. THE FRANCHISEE
ACKNOWLEDGES THAT:
(A) THE SUCCESS OF THE BUSINESS VENTURE CONTEMPLATED HEREIN INVOLVES
SUBSTANTIAL RISKS AND DEPENDS UPON THE FRANCHISEE'S ABILITY AS AN
INDEPENDENT BUSINESS PERSON AND ITS ACTIVE PARTICIPATION IN THE DAILY
AFFAIRS OF THE BUSINESS, AND
(B) NO ASSURANCE OR WARRANTY, EXPRESS OR IMPLIED, HAS BEEN GIVEN AS
TO THE POTENTIAL SUCCESS OF SUCH BUSINESS VENTURE OR THE EARNINGS LIKELY TO
BE ACHIEVED, AND
(C) NO STATEMENT, REPRESENTATION OR OTHER ACT, EVENT OR
COMMUNICATION, EXCEPT AS SET FORTH IN THIS DOCUMENT, AND IN ANY OFFERING
CIRCULAR SUPPLIED TO THE FRANCHISEE IS BINDING ON THE FRANCHISOR IN
CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT.
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FUZZIWIG'S-TM- CANDY FACTORY
FRANCHISE AGREEMENT
TABLE OF CONTENTS
1. PURPOSE............................................................ 1
2. GRANT OF FRANCHISE................................................. 1
2.1. Grant of Franchise........................................ 1
2.2. Scope of Franchise Operations............................. 1
3. FRANCHISED LOCATION AND DESIGNATED AREA............................ 2
3.1. Franchised Location....................................... 2
3.2. Protected Territory....................................... 2
3.3. Limitation on Franchise Rights........................... 2
3.4. Franchisor's Reservation of Rights........................ 2
4. INITIAL FRANCHISE FEE.............................................. 3
4.1. Initial Franchise Fee..................................... 3
5. DEVELOPMENT OF FRANCHISED LOCATION................................. 3
5.1. Approval of Lease......................................... 3
5.2. Conversion and Design..................................... 4
5.3. Signs..................................................... 4
5.4. Equipment................................................. 4
5.5. Permits and Licenses...................................... 4
5.6. Commencement of Operations................................ 5
6. TRAINING........................................................... 5
6.1. Initial Training Program.................................. 5
6.2. Length of Training........................................ 5
6.3. Additional Training....................................... 6
7. DEVELOPMENT ASSISTANCE............................................. 6
7.1. Franchisor's Development Assistance....................... 6
8. OPERATIONS MANUAL.................................................. 7
8.1. Operations Manual......................................... 7
8.2. Confidentiality of Operations Manual Contents............. 7
8.3. Changes to Operations Manual.............................. 7
9. OPERATING ASSISTANCE............................................... 8
9.1. Franchisor's Services..................................... 8
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9.2. Additional Franchisor Services............................ 8
10. FRANCHISEE'S OPERATIONAL COVENANTS................................. 9
10.1. Business Operations....................................... 9
11. ROYALTIES.......................................................... 12
11.1. Monthly Royalty........................................... 12
11.2. Gross Retail Sales........................................ 12
11.3. Royalty Payments.......................................... 12
12. ADVERTISING........................................................ 13
12.1. Approval of Advertising................................... 13
12.2. Local Advertising......................................... 13
12.3. Marketing and Promotion Fee............................... 13
12.4. Regional Advertising Programs............................. 14
12.5. Marketing Services........................................ 15
13. QUALITY CONTROL.................................................... 15
13.1. Compliance with Operations Manual......................... 15
13.2. Standards and Specifications.............................. 15
13.3. Inspections............................................... 15
13.4. Restrictions on Services and Products..................... 15
14. MARKS, TRADE NAMES AND PROPRIETARY INTERESTS....................... 17
14.1. Marks..................................................... 17
14.2. No Use of Other Marks..................................... 17
14.3. Licensed Methods.......................................... 17
14.4. Effect of Termination..................................... 17
14.5. Mark Infringement......................................... 17
14.6. Franchisee's Business Name................................ 18
14.7. Change of Marks........................................... 18
15. REPORTS, RECORDS AND FINANCIAL STATEMENTS.......................... 18
15.1. Franchisee Reports....................................... 18
15.2. Annual Financial Statements............................... 19
15.3. Verification.............................................. 19
15.4. Books and Records......................................... 19
15.5. Audit of Books and Records................................ 19
15.6. Failure to Comply with Reporting Requirements............. 20
15.7. Shopping Service.......................................... 20
16. ASSIGNMENT......................................................... 20
16.1. Assignment by Franchisee.................................. 20
16.2. Pre-Conditions to Franchisee's Assignment................. 20
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16.3. Franchisor's Approval of Transfer......................... 21
16.4. Right of First Refusal.................................... 21
16.5. Types of Transfers........................................ 22
16.6. Assignment by the Franchisor.............................. 23
16.7. Franchisee's Death or Disability.......................... 23
17. TERM AND EXPIRATION................................................ 23
17.1. Term...................................................... 23
17.2. Rights Upon Expiration.................................... 23
17.3. Exercise of Option for Successor Franchise................ 24
17.4. Conditions of Refusal..................................... 24
18. DEFAULT AND TERMINATION............................................ 24
18.1. Termination by Franchisor - Effective Upon Notice......... 24
18.2. Termination by Franchisor - Thirty Days Notice............ 26
18.3. Franchisor's Remedies..................................... 27
18.4. Right to Purchase......................................... 27
18.5. Obligations of Franchisee Upon Termination or Expiration.. 28
18.6. State and Federal Law..................................... 29
19. BUSINESS RELATIONSHIP.............................................. 30
19.1. Independent Businesspersons............................... 30
19.2. Payment of Third Party Obligations........................ 30
19.3. Indemnification........................................... 30
20. RESTRICTIVE COVENANTS.............................................. 30
20.1. Non-Competition During Term............................... 30
20.2. Post-Termination Covenant Not to Compete.................. 31
20.3. Confidentiality of Proprietary Information................ 32
20.4. Confidentiality Agreement................................. 32
21. INSURANCE.......................................................... 32
21.1. Insurance Coverage....................................... 32
21.2. Proof of Insurance Coverage.............................. 32
22. MISCELLANEOUS PROVISIONS........................................... 33
22.1. Governing Law/Consent to Venue and Jurisdiction........... 33
22.2. Modification.............................................. 33
22.3. Entire Agreement.......................................... 33
22.4. Delegation by the Franchisor.............................. 33
22.5. Effective Date............................................ 34
22.6. Review of Agreement....................................... 34
22.7. Attorneys' Fees........................................... 34
22.8. Injunctive Relief......................................... 34
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22.9. No Waiver.......................................................... 34
22.10. No Right to Set Off................................................ 34
22.11. Invalidity......................................................... 34
22.12. Notices............................................................ 34
22.13. Acknowledgment..................................................... 35
EXHIBITS
I. Addendum to Franchise Agreement - Location Approval
II. Personal Guaranty
III. Statement of Ownership
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EXIHBIT II
TO FRANCHISE AGREEMEENT
GUARANTY AND ASSUMPTION OF FRANCHISEE'S OBLIGATIONS
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In consideration of, and as an inducement to, the execution of the above
Franchise Agreement (the "Agreement") by Rocky Mountain Chocolate Factory, Inc.
("the Franchisor"), each of the undersigned hereby personally and
unconditionally:
Guarantees to the Franchisor and its successors and assigns, for the term
of this Agreement, including renewals thereof, that the franchisee as that
term is defmed in the Agreement ("Franchisee") shall punctually pay and
perform each and every undertaking, agreement and covenant set forth in the
Agreement; and
Agrees to be personally bound by, and personally liable for the breach of,
each and every provision in the Agreement.
Each of the undersigned waives the following:
1. Acceptance and notice of acceptance by the Franchisor of the foregoing
undertaking;
2. Notice of demand for payment of any indebtedness or nonperformance of
any obligations hereby guaranteed;
3. Protest and notice of default to any party with respect to the
indebtedness or nonperformance of any obligations hereby guaranteed;
4. Any right he or she may have to require that any action be brought
against Franchisee or any other person as a condition of liability;
and
5. Any and all other notices and legal or equitable defenses to which he
or she may be entitled.
Each of the undersigned consents and agrees that:
1. His or her direct and immediate liability under this guaranty shall be
joint and several;
2. He or she shall render any payment or performance required under the
Agreement upon demand if Franchisee fails or refuses punctually to do
so;
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prescribed from time to time by the Franchisor, all of which are a part of
the Licensed Methods. The Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business
shall offer all products and services as the Franchisor shall designate and
shall be restricted from manufacturing, offering or selling any products and
services not previously approved by the Franchisor in writing. The
Franchisee is required to devote a minimum of 80% of its retail floor space
to specified brands and types of bulk candies and confections and the
remainder of its retail floor space to non-confectionery items, such as gifts
and toys. The Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business must
feature bulk candy and other confectionery products ("Candy") purchased from
specified suppliers and related nonconfectionery items ("Items") approved by
the Franchisor in writing.
3. FRANCHISED LOCATION AND DESIGNATED AREA
3.1. FRANCHISED LOCATION. The Franchisee is granted the right and
franchise to own and operate a FUZZIWIG'S-TM- CANDY FACTORY Business at the
address and location which shall be set forth in EXHIBIT 1, attached hereto
("Franchised Location"). If, at the time of execution of this Agreement, the
Franchised Location cannot be designated as a specific address because a
location has not been selected and approved, then the Franchisee shall
promptly take steps to choose and acquire a location for its FUZZIWIG'S-TM-
CANDY FACTORY Business within the Designated Area, set forth in EXHIBIT I. In
such circumstances, the Franchisee shall select and propose to the Franchisor
for the Franchisor's prior approval a specific location for the Franchised
Location which, once approved by the Franchisor, shall hereinafter be set
forth in the rider to EXHIBIT 1.
3.2. PROTECTED TERRITORY. So long as the Franchisee is in compliance
with this Agreement, the Franchisor shall not establish or license another
person or entity to establish a FUZZIWIG'S-TM- CANDY FACTORY Business within
a certain geographic area as set forth in EXHIBIT I ("Protected Territory").
3.3. LIMITATION ON FRANCHISE RIGHTS. The rights that are hereby granted
to the Franchisee are for the specific Franchised Location and Protected
Territory and cannot be transferred to an alternative Franchised Location or
Protected Territory, or any other location, without the prior written
approval of the Franchisor, which approval shall not be unreasonably
withheld. The Marks and Licensed Methods are licensed to the Franchisee for
the operation of the FUZZIWIG'S-TM- CANDY FACTORY Business only at the
Franchised Location; therefore, the Franchisee may not operate food carts or
kiosks, participate in food festivals or offer any other type of off-site
food services using the Marks and Licensed Methods without the prior written
consent of the Franchisor.
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3.4. FRANCHISOR'S RESERVATION OF RIGHTS. The Franchisee acknowledges
that the franchise granted hereunder is non-exclusive and that the Franchisor
retains the rights, among others: (1) to use, and to license others to use,
the Marks and Licensed Methods for the operation of FUZZIWIG'S-TM- CANDY
FACTORY Businesses at any location other than in the Protected Territory; (2)
to use the Marks and Licensed Methods in connection with other services and
products, promotional and marketing efforts or related items, materials or
services or in alternative channels of distribution, without regard to the
location of the use, including, but not limited to, the wholesale sale of its
products to unrelated retail outlets or to candy distributors; and (3) to use
and license the use of other proprietary marks or methods in connection with
the operation of retail stores selling candy and other confectionery products
business at any location, which businesses are the same as, or similar to, or
different from a FUZZIWIG'S-TM- CANDY FACTORY Business, on any terms and
conditions as the Franchisor deems advisable, and without granting the
Franchisee any rights therein.
4. INITIAL FRANCHISE FEE
4.1. INITIAL FRANCHISE FEE. In consideration for the right to develop
and operate one FUZZIWIG'S-TM- CANDY FACTORY Business, the Franchisee agrees
to pay to the Franchisor an initial franchise fee of $25,000, $15,000 of
which is due and payable as of the date of execution of this Agreement, with
the balance of $10,000 due and payable at the earlier of 180 days from the
date this Agreement is executed or the date that a lease is executed for a
Franchised Location that has been approved by the Franchisor. The Franchisee
acknowledges and agrees that the initial franchise fee represents payment for
the initial grant of the rights to use the Marks and Licensed Methods, that
the Franchisor has earned the initial franchise fee upon receipt thereof and
that the fee is under no circumstances refundable to the Franchisee after it
is paid, unless otherwise specifically set forth in this Agreement.
5. DEVELOPMENT OF FRANCHISED LOCATION
5.1. APPROVAL OF LEASE. The Franchisee shall obtain the Franchisor's
prior written approval before executing any lease or purchase agreement for the
Franchised Location. Any lease for the Franchised Location shall, at the option
of the Franchisor, contain a provision: (1) allowing for assignment of the lease
to the Franchisor in the event that this Agreement is terminated or not renewed
for any reason; (2) giving the Franchisor the right to cure any default by the
Franchisee under such lease; and (3) providing the Franchisor with the right,
exercisable upon and as a condition of the approval of the Franchised Location,
to execute the lease agreement or other document providing entitlement to the
use of the Franchised Location in its own name or jointly with the Franchisee as
lessee and, upon the exercise of such option, the Franchisor shall provide the
Franchisee with the right to use the premises as
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its sublessee, assignee, or other similar capacity upon the same terms and
conditions as obtained by the Franchisor. The Franchisee shall deliver a copy
of the signed lease for the Franchised Location to the Franchisor within 15 days
of its execution. The Franchisee acknowledges that approval of a lease for the
Franchised Location by the Franchisor does not constitute a recommendation,
endorsement or guarantee by the Franchisor of the suitability of the location or
the lease and the Franchisee should take all steps necessary to ascertain
whether such location and lease are acceptable to the Franchisee.
5.2. CONVERSION AND DESIGN. The Franchisee acknowledges that the layout,
design, decoration and color scheme of FUZZIWIG'S-TM- CANDY FACTORY
Businesses are an integral part of the Franchisor's proprietary Licensed
Methods and accordingly, the Franchisee shall convert, design and decorate
the Franchised Location in accordance with the Franchisor's plans and
specifications and with the assistance of contractors and suppliers
designated by the Franchisor. The Franchisee shall also obtain the
Franchisor's written consent to any conversion, design or decoration of the
premises before remodeling or decorating begins, recognizing that such
remodeling, decoration and any related costs are the Franchisee's sole
responsibility.
5.3. SIGN. The Franchisee shall purchase or otherwise obtain for use at
the Franchised Location and in connection with the FUZZIWIG'S-TM- CANDY
FACTORY Business signs which comply with the standards and specifications of
the Franchisor as set forth in the Operations Manual, as that term is defined
in Section 8. 1. It is the Franchisee's sole responsibility to insure that
any signs comply with applicable local ordinances, mall regulations, building
codes and zoning regulations. Any modifications to the Franchisor's
standards and specifications for signs which must be made due to local
ordinances, codes or regulations shall be submitted to the Franchisor for
prior written approval. The Franchisee acknowledges the Marks, or any other
name, symbol or identifying marks on any signs shall only be used in
accordance with the Franchisor's standards and specifications and only with
the prior written approval of the Franchisor.
5.4. EQUIPMENT. The Franchisee shall purchase or otherwise obtain for
use at the Franchised Location and in connection with the FUZZIWIG'S-TM-
CANDY FACTORY Business equipment of a type and in an amount which complies
with the standards and specifications of the Franchisor. The Franchisee
acknowledges that the type, quality, configuration, capability and/or
performance of the equipment are all standards and specifications which are a
part of the Licensed Methods and therefore such equipment must be purchased,
leased, or otherwise obtained in accordance with the Franchisor's standards
and specifications and only from suppliers or other sources approved by the
Franchisor. The Franchisee must purchase a facsimile machine and connect it
to a phone line which is separate from the main phone number for the
Business. The Franchisor reserves the right to require the Franchisee to
purchase or lease computer hardware and software for use in the operation
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of the FUZZIWIG'S-TM- CANDY FACTORY Business. The Franchisor also reserves
the right to require that it be given reasonable access to information and
data regarding the Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business by
computer modem.
5.5. PERMITS AND LICENSES. The Franchisee agrees to obtain all such
pen-nits and certifications as may be required for the lawful construction
and operation of the FUZZIWIG'S-TM- CANDY FACTORY Business together with all
certifications from goverrunent authorities having jurisdiction over the site
that all requirements for construction and operation have been met, including
without limitation, zoning, access, sign, health, safety requirements,
building and other required construction permits, licenses to do business and
fictitious name registrations, sales tax permits, health and sanitation
permits and ratings and fire clearances. Franchisee agrees to obtain all
customary contractors' sworn statements and partial and final lien waivers
for construction, remodeling, decorating and installation of equipment at the
Franchised Location. Copies of all subsequent inspection reports, warnings,
certificates and ratings issued by any govenunental entity during the term of
this Agreement in connection with the conduct of the FUZZIWIG'S-TM- CANDY
FACTORY Business which indicates the Franchisee's failure to meet or maintain
the highest governmental standards, or less than full compliance by the
Franchisee with any applicable law, rule or regulation, shall be forwarded to
the Franchisor within five days of the Franchisee's receipt thereof
5.6. COMMENCEMENT OF OPERATIONS. Unless otherwise agreed in writing by
the Franchisor and the Franchisee, the Franchisee has 270 days from the date
of this Agreement within which to complete the initial training program,
described in Section 6.1 of this Agreement, select and develop the Franchised
Location and commence operation of the FUZZIWIG'S-TM- CANDY FACTORY Business.
The Franchisor will extend the time in which the Franchisee has to commence
operations for a reasonable period of time in the event factors beyond the
Franchisee's reasonable control prevent the Franchisee from meeting this
development schedule, so long as the Franchisee has made reasonable and
continuing efforts to comply with such development obligations and the
Franchisee requests, in writing, an extension of time in which to have its
FUZZIWIG'S-TM- CANDY FACTORY Business established before such development
period lapses.
6. TRAINING
6.1. INITIAL TRAINING PROGRAM. The Franchisee or, if the Franchisee is
not an individual, the person designated by the Franchisee to assume primary
responsibility for the management of the FUZZIWIG'S-TM- CANDY FACTORY
Business, ("General Manager") is required to attend and successfully complete
the initial training program which is offered by the Franchisor at one of the
Franchisor's designated training facilities. Up to four individuals are
eligible to participate in the Franchisor's initial training program without
charge of a
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tuition or fee. The Franchisee shall be responsible for any and all traveling
and living expenses incurred in connection with attendance at the training
program. At least one individual must successfully complete the initial
training program prior to the Franchisee's commencement of operation of its
FUZZIWIG'S-TM- CANDY FACTORY Business.
6.2. LENGTH OF TRAINING. The initial training program shall consist of a
total of 11 days, five of which shall be classroom instruction at a location
designated by the Franchisor and six of which shall be on-site at the Franchised
Location during the grand opening period. The Franchisee, the General Manager
and the Franchisee's principals must attend the on-site training during the
grand opening period. The Franchisor reserves the right to waive a portion of
the training program or alter the training schedule, if in the Franchisor's sole
discretion, the Franchisee or General Manager has sufficient prior experience or
training.
6.3. ADDITIONAL TRAINING. From time to time, the Franchisor may present
seminars, conventions or continuing development programs or conduct meetings for
the benefit of the Franchisee. The Franchisee or its General Manager shall be
required to attend any ongoing mandatory seminars, conventions, programs or
meetings as may be offered by the Franchisor. The Franchisor shall give the
Franchisee at least 30 days prior written notice of any ongoing seminar,
convention or program which is deemed mandatory. The Franchisor shall not
require that the Franchisee attend any ongoing training more often than once a
year. All mandatory training will be offered without charge of a tuition or
fee; provided, however, the Franchisee will be responsible for all traveling and
living expenses which are associated with attendance at the same.
7. DEVELOPMENT ASSISTANCE
7.1. FRANCHISOR'S DEVELOPMENT ASSISTANCE. The Franchisor shall provide the
Franchisee with assistance in the initial establishment of the FUZZIWIG'S-TM-
CANDY FACTORY Business as follows:
(a) Provision of the initial training program to be conducted at
the Franchisor's designated training facilities or at another location
designated by the Franchisor, as described in Article 6 above.
(b) Provision of written specifications for a Franchised
Location which shall include, without limitation, specifications for space
requirements, build out and the demographics and character of the mall, if
applicable, and the surrounding area. The Franchisee acknowledges that the
Franchisor shall have no other obligation to provide assistance in the
selection and approval of a Franchised Location other than the provision of
such written specifications and approval or disapproval of a proposed
Franchised
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Location, which approval or disapproval shall be based on information
submitted to the Franchisor in a form sufficient to assess the proposed
location as may be reasonably required by the Franchisor.
(c) Direction regarding the required conversion, design and
decoration of the FUZZIWIG'S-TM- CANDY FACTORY Business premises, plus
specifications concerning signs, decor, animation and equipment.
(d) Direction regarding the selection of suppliers of equipment,
animated characters, items and materials used and inventory offered for
sale in connection with the FUZZIWIG'S-TM- CANDY FACTORY Business. After
execution of this Agreement, the Franchisor will provide the Franchisee
with a list of approved suppliers, if any, of such equipment, animated
characters, items, materials and inventory and, if available, a description
of any national or central purchase and supply agreements offered by such
approved suppliers for the benefit of FUZZIWIG'S-TM- CANDY FACTORY
franchisees.
(e) Provision of an operations manual in accordance with Section
8 below.
(f) As the Franchisor may reasonably schedule, and depending on
availability of personnel, the Franchisor will make available to the
Franchisee at or close to the commencement of the Franchisee's
FUZZIWIG'S-TM- CANDY FACTORY Business a representative ("Site
Representative") to be present for up to six days during the opening of
the Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business. There will be no
charge to the Franchisee for this service provided by the Franchisor. The
Site Representative will assist the Franchisee's employees in opening the
Business, unless in the Franchisor's determination, the Franchisee or the
General Manager have had sufficient prior training or experience.
8. OPERATIONS MANUAL
8.1. OPERATIONS MANUAL. The Franchisor agrees to provide to the
Franchisee one or more manuals, technical bulletins, or other written
materials (collectively referred to as "Operations Manual") covering Candy
ordering, stocking and other operating and in-store marketing techniques for
the FUZZIWIG'S-TM- CANDY FACTORY Business. The Franchisee agrees that it
shall comply with the Operations Manual as an essential aspect of its
obligations under this Agreement and failure by the Franchisee to
substantially comply with the Operations Manual may be considered by the
Franchisor to be a breach of this Agreement.
8.2. CONFIDENTIALITY OF OPERATIONS MANUAL CONTENTS. The Franchisee agrees
to use the Marks and Licensed Methods only as specified in the Operations
Manual. The
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Operations Manual is the sole property of the Franchisor and shall be used by
the Franchisee only during the term of this Agreement and in strict accordance
with the terms and conditions hereof. The Franchisee shall not duplicate the
Operations Manual nor disclose its contents to persons other than its employees
or officers who have signed a confidentiality and noncompetition agreement in a
form approved by the Franchisor. The Franchisee shall return the Operations
Manual to the Franchisor upon the expiration, termination or assignment of this
Agreement.
8.3. CHANGES TO OPERATIONS MANUAL. The Franchisor reserves the right to
revise the Operations Manual from time to time as it deems necessary to update
or change operating and marketing techniques or standards and specifications.
The Franchisee, within 30 days of receiving any updated information, shall in
turn update its copy of the Operations Manual as instructed by the Franchisor
and shall conform its operations with the updated provisions within a reasonable
time thereafter. The Franchisee acknowledges that a master copy of the
Operations Manual maintained by the Franchisor at its principal office shall be
controlling in the event of a dispute relative to the content of any Operations
Manual.
9. OPERATING ASSISTANCE
9.1. FRANCHISOR'S SERVICES. The Franchisor agrees that, during the
Franchisee's operation of the FUZZIWIG'S CANDY FACTORY Business, the Franchisor
shall make available to the Franchisee the following services:
(a) Upon the reasonable request of the Franchisee, consultation
by telephone regarding the continued operation and management of a
FUZZIWIG'S-TM- CANDY FACTORY Business and advice regarding the retail
services, product quality control, inventory issues, customer relations
issues and similar advice.
(b) Access to advertising and promotional materials as may be
developed by the Franchisor, the cost of which may be passed on to the
Franchisee at the Franchisor's option.
(c) On-going updates of information and programs regarding the
candy industry, the FUZZIWIG'S-TM- CANDY FACTORY concept and related
Licensed Methods, including, without limitation, information about
special or new products which may be developed and made available to
FUZZIWIG'S-TM- CANDY FACTORY Franchisees.
(d) The Franchisor shall make the initial training program
available to replacement or additional General Managers during the term of
this Agreement. The
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Franchisor reserves the right to charge a tuition or fee in an amount
payable in advance, commensurate with the then current published prices of
the Franchisor for such training. The Franchisee shall be responsible for
all travel and living expenses incurred by its personnel during the
training program. Further, the availability of the training programs shall
be subject to space considerations and prior commitments to new
FUZZIWIG'S-TM- CANDY FACTORY franchisees.
9.2. ADDITIONAL FRANCHISOR SERVICES. Although not obligated to do so,
upon the reasonable request of the Franchisee, the Franchisor may make its
employees or designated agents available to the Franchisee for on-site advice
and assistance in connection with the ongoing operation of the FUZZIWIG'S-TM-
CANDY FACTORY Business governed by this Agreement. In the event that the
Franchisee requests such additional assistance and the Franchisor agrees to
provide the same, the Franchisor reserves the right to charge the Franchisee for
all travel, lodging, living expenses, telephone charges and other identifiable
expenses associated with such assistance, plus a fee based on the time spent by
each employee on behalf of the Franchisee, which fee will be charged in
accordance with the then current daily or hourly rates being charged by
Franchisor for assistance.
10. FRANCHISEE'S OPERATIONAL COVENANTS
10.1. BUSINESS OPERATIONS. The Franchisee acknowledges that it is solely
responsible for the successful operation of its FUZZIWIG'S-TM- CANDY FACTORY
Business and that the continued successful operation thereof is, in part,
dependent upon the Franchisee's compliance with this Agreement and the
Operations Manual. In addition to all other obligations contained in this
Agreement and in the Operations Manual, the Franchisee covenants that:
(a) The Franchisee shall maintain clean, efficient and high
quality FUZZIWIG'S-TM- CANDY FACTORY Business operations and shall operate
the business in accordance with the Operations Manual and in such a manner
as not to detract from or adversely reflect upon the name and reputation of
the Franchisor and the goodwill associated with the FUZZIWIG'S-TM- CANDY
FACTORY name and Marks.
(b) The Franchisee will conduct itself and operate its
FUZZIWIG'S-TM- CANDY FACTORY Business in compliance with all applicable
laws, health department regulations and other ordinances and in such a
manner so as to promote a good public image in the business community.
In connection therewith, the Franchisee will be solely and fully
responsible for obtaining any and all licenses to carry on the
FUZZIWIG'S-TM- CANDY FACTORY Business. The Franchisee shall
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promptly forward to the Franchisor copies of all health department, fire
department, building department and other similar reports of inspections as
and when they become available.
(c) The Franchisee acknowledges that proper management of the
FUZZIWIG'S-TM- CANDY FACTORY Business is important and shall insure that the
Franchisee or a designated General Manager who has completed the
Franchisor's initial training program be responsible for the management of
the FUZZIWIG'S-TM- CANDY FACTORY Business after commencement of Business
operations and be present at the Franchised Location during operation of
the Business.
(d) The Franchisee shall offer only authorized products and services
as are more fully described in the Operations Manual, which may include,
without limitation, Candy, Items and other authorized confectionery
products. The Franchisee shall offer all types of products and services as
from time to time may be prescribed by the Franchisor and shall refrain
from offering any other types of products or services, or operating or
engaging in any other type of business or profession, from or through the
FUZZIWIG'S-TM- CANDY FACTORY Business, including, without limitation,
filling "Wholesale Orders", defined below, any catering or off-premises
sales, without the prior written consent of the Franchisor. "Wholesale
Orders" are defined as those orders or sales where the principal purpose
of the purchase is for resale, not consumption, or any sale other than those
sold over the counter at a price other than that price charged to the
general public; provided, however, that volume discounted sales made on the
premises at the Franchised Location to a single purchaser, not for resale,
and discounted sales made on the premises at the Franchised Location to
charitable organizations for fund-raising purposes shall be permitted.
Candy and other Items shall never be sold in containers or bags other than
those supplied by the Franchisor or other supplier approved by the
Franchisor.
(e) The Franchisee shall promptly pay when due all taxes and other
obligations owed to third parties in the operation of the FUZZIWIG'S-TM-
CANDY FACTORY Business, including without limitation, unemployment and sales
taxes, and any and all accounts or other indebtedness of every kind
incurred by the Franchisee in the conduct of the FUZZIWIG'S-TM- CANDY
FACTORY Business. In the event of a bona fide dispute as to the liability
for taxes assessed or other indebtedness, the Franchisee may contest the
validity or the amount of the tax or indebtedness in accordance with
procedures of the taxing authority or applicable law; however, in no event
shall the Franchisee permit a tax sale or seizure by levy or execution or
similar writ or warrant, or attachment by a creditor to occur against the
premises of the Franchised Location, or any improvement thereon.
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(f) The Franchisee acknowledges that the unique design, decor, music
and animation found in the FUZZIWIG'S-TM- CANDY FACTORY Business are
important and the Franchisee shall insure that the theme, animation,
decoration, product display, uniforms and background music are all strictly
adhered to without exception in the operation of the FUZZIWIG'S-TM- CANDY
FACTORY Business.
(g) The Franchisee shall subscribe for and maintain not fewer than
two separate telephone numbers for its FUZZIWIG'S-TM- CANDY FACTORY
Business at the Franchised Location, both of which shall be listed and
identified exclusively with the FUZZIWIG'S-TM- CANDY FACTORY Business in
all official telephone directories and in all advertising in which such
numbers appear and shall be separate and distinct from all other telephone
numbers subscribed for by the Franchisee. One number shall be used
exclusively for voice communication and the other shall be used exclusively
for a facsimile machine.
(h) The Franchisee shall comply with all agreements with third
parties related to the FUZZIWIG'S-TM- CANDY FACTORY Business including, in
particular, all provisions of any premises lease.
(i) The Franchisee and all employees of the Franchisee shall adhere
to strict grooming and dress code guidelines while on duty at the
Franchised Location. The Franchisee is required, at the Franchisee's
expense, to purchase specified wearing apparel from suppliers approved by
the Franchisor. All General Managers, employees of the Franchisee, the
Franchisee and its owners, shall wear the specified uniform at all times
while working at the Franchised Location. The Franchisor has the right, in
its sole and absolute discretion, to change or modify such dress code
guidelines.
(j) The Franchisee agrees to renovate, refurbish, remodel or replace,
at its own expense, the real and personal property and equipment used in
the operation of the FUZZIWIG'S-TM- CANDY FACTORY Business, when reasonably
required by the Franchisor in order to comply with the image, standards of
operation and performance capability established by the Franchisor from
time to time. If the Franchisor changes its image or standards of
operation, it shall give the Franchisee a reasonable period of time within
which to comply with such changes.
(k) The Franchisee shall be responsible for training all of its
employees who work in any capacity in the FUZZIWIG'S-TM- CANDY FACTORY
Business. The Franchisee must conduct its employee training in the manner
and according to the standards as prescribed in the Operations Manual. Any
employee who does not satisfactorily complete the training shall not work
in any capacity in the Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business.
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(l) The Franchisee shall at all times during the term of this
Agreement own and control the FUZZIWIG'S' CANDY FACTORY Business authorized
hereunder. Upon request of the Franchisor, the Franchisee shall promptly
provide satisfactory proof of such ownership to the Franchisor. The
Franchisee represents that the Statement of Ownership, attached hereto as
EXHIBIT III and by this reference incorporated herein, is true, complete,
accurate and not misleading, and, in accordance with the information
contained in the Statement of Ownership, the controlling ownership of the
FUZZIWIG'S-TM- CANDY FACTORY Business is held by the Franchisee. The
Franchisee shall promptly provide the Franchisor with a written
notification if the information contained in the Statement of Ownership
changes at any time during the term of this Agreement and shall comply with
the applicable transfer provisions contained in Article 16 herein. In
addition, if the Franchisee is an entity, all of the owners of the
Franchisee shall sign the Personal Guaranty attached hereto as EXHIBIT 11.
(m) The Franchisee shall at all times during the term of this
Agreement keep its FUZZIWIG'S-TM- CANDY FACTORY Business open during the
business hours as may be designated by the Franchisor from time to time in
the Operations Manual.
(n) Unless notified in writing otherwise by the Franchisor, all Candy
and related products shall be sold and shipped to the Franchisee on a net
30-day basis, or according to the then current payment terms set by the
Franchisor or its designated suppliers. The Franchisor reserves the right
to charge interest at the rate of 1.5% per month if the Franchisee fails to
pay for its orders on time and the Franchisor reserves the right to
discontinue shipment of products to the Franchisee if the Franchisee is
repeatedly delinquent in paying for its products, in the Franchisor's sole
discretion. The Franchisee may be required to "prepay" factory orders,
notwithstanding the payment policy set forth above, in the event of poor
payment performance. The Franchisor reserves the right to change payment
terms and policies at any time. The Franchisor also reserves the right to
change the price for Candy and Items from time to time as may be set forth
in the most recent price bulletin sent to all franchisees or the then
current Operations Manual.
(o) The Franchisee acknowledges that the Franchisor has no
responsibility or liability whatsoever for the maintenance, repair or
replacement at any time of any equipment used in the operation of the
Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business, including but not
limited to, animated characters, audio components, and other items.
Any warranties or guaranties of any item must be purchased directly
from the dealer or manufacturer.
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11. ROYALTIES
11.1. MONTHLY ROYALTY. The Franchisee agrees to pay to the Franchisor a
monthly royalty ("Royalty") equal to seven percent of the total amount of its
Gross Retail Sales, defined in Section 11.2 below, generated from or through its
FUZZIWIG'S-TM- CANDY FACTORY Business.
11.2. GROSS RETAIL SALES. "Gross Retail Sales" shall be defined as
receipts and income of any kind from all products or services sold from or
through the FUZZIWIG'S-TM- CANDY FACTORY Business, including any such sale of
products or services made for cash or upon credit, or partly for cash and partly
for credit, regardless of collection of charges for which credit is given, less
returns for which refunds are made, provided that the refund shall not exceed
the sales price and exclusive of discounts, sales taxes and other taxes, amounts
received in settlement of a loss of merchandise and shipping expenses paid by
the customer. "Gross Retail Sales" shall also include the fair market value of
any services or products received by the Franchisee in barter or exchange for
its services and products.
11.3. ROYALTY PAYMENTS. The Franchisee agrees that Royalty payments
shall be paid monthly and sent to the Franchisor, post-marked no later than the
15th of each month based on Gross Retail Sales for the immediately preceding
month. Royalty payments shall be accompanied by monthly reports, as more fully
described in Article 15 hereof, and standard transmittal forms containing
information regarding the Franchisee's Gross Retail Sales and such additional
information as may be requested by the Franchisor. The Franchisor reserves the
right to require Royalty payments be made on a weekly or bi-weekly basis if the
Franchisee does not timely or fully submit the required payments or reports.
The Franchisor shall have the right to verify such Royalty payments from time to
time as it deems necessary, in any reasonable manner. In the event that the
Franchisee fails to pay any Royalties within 14 days after they are due, the
Franchisee shall, in addition to such Royalties, pay a late charge equivalent to
18% of the late Royalty payment; provided, however, in no event shall the
Franchisee be required to pay a late payment at a rate greater than the maximum
interest rate permitted by applicable law. If the Franchisee pays Royalties
with a check returned for non-sufficient funds more than one time in any
calendar year, in addition to all other remedies which may be available, the
Franchisor shall have the right to require that Royalty payments be made by
certified or cashier's checks.
12. ADVERTISING
12.1. APPROVAL OF ADVERTISING. The Franchisee shall obtain the
Franchisor's prior written approval of all written advertising or other
marketing or promotional programs
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regarding the FUZZIWIG'S-TM- CANDY FACTORY Business, including, without
limitation, "Yellow Pages" advertising, newspaper ads, flyers, brochures,
coupons, direct mail pieces, specialty and novelty items and radio and
television advertising. The Franchisee shall also obtain the Franchisor's
prior written approval of all promotional materials provided by vendors. The
proposed written advertising or a description of the marketing or promotional
program shall be submitted to the Franchisor at least IO days prior to
publication, broadcast or use. The Franchisee acknowledges that advertising
and promoting the FUZZIWIG'S-TM- CANDY FACTORY Business in accordance with
the Franchisor's standards and specifications is an essential aspect of the
Licensed Methods, and the Franchisee agrees to comply with all advertising
standards and specifications. The Franchisee shall display all required
promotional materials, signs, point of purchase displays and other marketing
materials in its FUZZIWIG'S-TM- CANDY FACTORY Business and in the manner
prescribed by the Franchisor. The Franchisee shall not, under any
circumstances use handwritten signs in the operation of its Business.
12.2. LOCAL ADVERTI5ING. The Franchisor reserves the right to require
the Franchisee to spend up to one percent of monthly Gross Retail Sales on
local advertising to create public awareness of the Franchisee's
FUZZIWIG'S-TM- CANDY FACTORY Business. The Franchisee will submit to the
Franchisor an accounting of the amounts spent on advertising within 30 days
following the end of each calendar quarter. If the Franchisor requires its
franchisees to advertise locally as described above, all Franchisor-owned
Businesses will be required to spend money for local advertising on an equal
percentage basis with all franchised Businesses. If the Franchisee's lease
requires it to advertise locally, the Franchisor may, in its sole discretion,
count such expenditures toward the Franchisee's local advertising expenditure
required by this Section 12.2. The Franchisee shall obtain the Franchisor's
prior written approval of all written advertising and promotional materials
before publication.
12.3. MARKETING AND PROMOTION FEE. The Franchisor reserves the right to
require the Franchisee to pay to the Franchisor, in addition to Royalties, a fee
of up to one percent of the total amount of the Franchisee's Gross Retail Sales.
("Marketing and Promotion Fee"). If required, the Marketing and Promotion Fee
shall be in addition to and not in lieu of the Franchisee's expenditures for
local advertising, as described in Section 12.2 above. The following terms and
conditions will apply:
(a) The Marketing and Promotion Fee shall be payable
concurrently with the payment of the Royalties, mailed to the Franchisor,
postmarked no later than the 15th day of each month, for all Marketing and
Promotion Fees based on Gross Retail Sales for the immediately preceding
month.
(b) The Marketing and Promotion Fees will be subject to the same
late charges as the Royalties, in an amount and manner set forth in Section
12.3 above.
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(c) Upon written request by the Franchisee, the Franchisor will
make available to the Franchisee, no later than 120 days after the end of
each fiscal year, an annual financial statement which indicates how the
Marketing and Promotion Fees have been spent.
(d) The Marketing and Promotion Fees, will be administered by
the Franchisor, in its sole discretion, and may be used for production
and placement of point of purchase advertising, in-store signage, in-store
promotions, media advertising, direct mailings, brochures, collateral
material advertising, surveys of advertising effectiveness, or other
advertising or public relations expenditures relating to advertising the
Franchisee's services and products.
(e) The Franchisor may reimburse itself for independent audits,
reasonable accounting, bookkeeping, reporting and legal expenses, taxes
and other reasonable direct and indirect expenses as may be incurred by
the Franchisor or its authorized representatives in connection with the
programs funded by the Marketing and Promotion Fees. The Franchisor will
not be liable for any act or omission with respect to such Marketing and
Promotion Fees which is consistent with this Agreement and is done in good
faith.
12.4. REGIONAL ADVERTISING PROGRAMS. Although not obligated to do so,
the Franchisor reserves the right to allocate all or a portion of the
Marketing and Promotion Fees as may be collected in accordance with Section
12.3 above toward a regional advertising program for the benefit of
FUZZIWIG'S-TM- CANDY FACTORY franchisees located within a particular region.
The Franchisor has the right, in its sole discretion, to determine the
composition of all geographic territories and market areas for the
implementation of such regional advertising and promotion campaigns and to
require that the Franchisee participate in such regional advertising programs
as and when they may be established by the Franchisor. If a regional
advertising program is implemented on behalf of a particular region by the
Franchisor, the Franchisor, to the extent reasonably calculable, will only
use contributions from FUZZIWIG'S-TM- CANDY FACTORY franchisees within such
region for the particular regional advertising program. The Franchisor also
reserves the right to establish an advertising cooperative for a particular
region to enable the cooperative to self-administer the regional advertising
program. If a regional advertising cooperative is established by the
Franchisor, the Franchisee agrees that it will participate in the same.
12.5. MARKETING SERVICES. The Franchisor may, in its sole discretion,
offer marketing and merchandising services to the Franchisee at rates that are
competitive with those charged by third parties offering similar services. The
Franchisee may utilize such services, if they are offered, at the Franchisee's
option. Services offered by the Franchisor
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may include marketing consulting, graphic design, copywriting, advertising,
public relations and merchandising consulting, in the Franchisor's sole
discretion.
13. QUALITY CONTROL
13.1. COMPLIANCE WITH OPERATIONS MANUAL. The Franchisee agrees to
maintain and operate the FUZZIWIG'S-TM- CANDY FACTORY Business in compliance
with this Agreement and the standards and specifications contained in the
Operations Manual, as the same may be modified from time to time by the
Franchisor.
13.2. STANDARDS AND SPECIFICATIONS. The Franchisor will make available
to the Franchisee standards and specifications for products and services
offered at or through the FUZZIWIG'S-TM- CANDY FACTORY Business and
specifically for the animated characters, decor, product displays, music,
theme, uniforms, materials, forms, menu boards, items and supplies used in
connection with the Business. The Franchisor reserves the right to change
standards and specifications for services and products offered at or through
the FUZZIWIG'S-TM- CANDY FACTORY Business and for the animated characters,
decor, product displays, music, theme, uniforms, materials, forms, menu
boards, items and supplies used in connection with the Business upon 30 days
prior written notice to the Franchisee. The Franchisee shall strictly adhere
to all of the Franchisor's current standards and specifications for the
FUZZIWIG'S-TM- CANDY FACTORY Business as prescribed from time to time.
13.3. INSPECTIONS. The Franchisor shall have the right to examine the
Franchised Location, including the inventory, products, equipment, materials or
supplies, to ensure compliance with all standards and specifications set by the
Franchisor. The Franchisor shall conduct such inspections during regular
business hours and the Franchisee may be present at such inspections. The
Franchisor, however, reserves the right to conduct the inspections without prior
notice to the Franchisee.
13.4. RESTRICTIONS ON SERVICES AND PRODUCTS. The Franchisee will be
required to purchase any and all of its Candy, for its FUZZIWIG'S-TM- CANDY
FACTORY Business from the Franchisor or its designee. Candy shall consist of
any and all varieties from time to time made available to the Franchisor's
franchisees by the Franchisor and its designated suppliers. The parties
hereby acknowledge the uniqueness and importance of Candy being prepared by
the Franchisor or its designee in order to maintain the uniformity, quality
and uniqueness of Candy, and therefore the Franchisor and its designees are
hereby appointed the Franchisee's exclusive source of Candy. The Franchisee
is prohibited from offering or selling any products or services not
authorized by Franchisor, including, without limitation, operating a catering
or wholesale business as part of the FUZZIWIG'S-TM- CANDY FACTORY Business.
However, if the Franchisee proposes to offer, conduct or utilize any
products, services, materials, forms,
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items and supplies for use in connection with or sale through the
FUZZIWIG'S-TM- CANDY FACTORY Business which are not previously approved by
the Franchisor as meeting its specifications, the Franchisee shall first
notify the Franchisor in writing requesting approval. The Franchisor may, in
its sole discretion, for any reason whatsoever, elect to withhold such
approval; however, in order to make such determination, the Franchisor may
require submission of specifications, information, or samples of such
products, services, materials, forms, items or supplies. The Franchisor will
advise the Franchisee within a reasonable time whether such products,
services, materials, forms, items or supplies meet its specifications.
13.5. APPROVED SUPPLIERS. The Franchisee shall purchase all products,
services, supplies and materials required for the operation of the
FUZZIWIG'S-TM- CANDY FACTORY Business licensed herein, from manufacturers,
suppliers or distributors designated by the Franchisor or, if there is no
designated supplier for a particular product, service, supply or material,
from such other suppliers who meet all of the Franchisor's specifications and
standards as to quality, composition, finish, appearance and service, and who
shall adequately demonstrate their capacity and facilities to supply the
Franchisee's needs in the quantities, at the times, and with the reliability
requisite to an efficient operation.
13.6. REQUEST TO CHANGE SUPPLIER. In the event the Franchisee desires
to purchase products, services, supplies or materials from manufacturers,
suppliers or distributors other than those previously approved by the
Franchisor, the Franchisee shall, prior to purchasing any such products,
services, supplies or materials, give the Franchisor a written request by
certified mail, return receipt requested, to change supplier. In the event
the Franchisor rejects the Franchisee's requested new manufacturer, supplier
or distributor, the Franchisor must, within 60 days of the receipt of the
Franchisee's request to change supplier notify the Franchisee in writing of
its rejection. Failure to notify the Franchisee within such time period
shall constitute a waiver of any and all objections by the Franchisor to the
new manufacturer, supplier or distributor submitted by the Franchisee. The
Franchisor may continue from time to time to inspect any manufacturer's,
suppliers, or distributor's facilities and products to assure proper
production, processing, storing and transportation of products, services,
supplies or materials to be purchased from the manufacturer, supplier or
distributor by the Franchisee. Permission for such inspection shall be a
condition of the continued approval of such manufacturer, supplier or
distributor.
13.7. APPROVAL OF INTENDED SUPPLIER. The Franchisor may at its sole
discretion, for any reason whatsoever, elect to withhold approval of the
manufacturer, supplier or distributor; however, in order to make such
determination, the Franchisor may require that samples from a proposed new
supplier be delivered to the Franchisor for testing prior to approval and use.
A charge not to exceed the actual cost of the test may be made by the Franchisor
and shall be paid by the Franchisee.
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14. MARKS, TRADE NAMES AND PROPRIETARY INTERESTS
14.1. MARKS. The Franchisee hereby acknowledges that the Franchisor has
the sole right to license and control the Franchisee's use of the
FUZZIWIG'S-TM- CANDY FACTORY service mark and other of the Marks, and that
such Marks shall remain under the sole and exclusive ownership and control of
the Franchisor. The Franchisee acknowledges that it has not acquired any
right, title or interest in such Marks except for the right to use such marks
in the operation of its FUZZIWIG'S-TM- CANDY FACTORY Business as it is
governed by this Agreement.
14.2. N0 USE OF OTHER MARKS. The Franchisee further agrees that no
service mark other than "FUZZIWIG'S-TM- CANDY FACTORY" or such other Marks as
may be specified by the Franchisor shall be used in the marketing, promotion
or operation of the FUZZIWIG'S-TM- CANDY FACTORY Business.
14.3. LICENSED METHODS. The Franchisee hereby acknowledges that the
Franchisor owns and controls the distinctive plan for the establishment,
operation and promotion of the FUZZIWIG'S-TM- CANDY FACTORY Business and all
related licensed methods of doing business, previously defined as the
"Licensed Methods", which include, but are not limited to, bulk candy
sources, product mix and display, confectionery ordering, processing,
stocking and inventory control, technical equipment standards, order
fulfillment methods and customer relations, marketing techniques, written
promotional materials, advertising, and accounting systems, all of which
constitute trade secrets of the Franchisor, and the Franchisee acknowledges
that the Franchisor has valuable rights in and to such trade secrets. The
Franchisee further acknowledges that it has not acquired any right, title or
interest in the Licensed Methods except for the right to use the Licensed
Methods in the operation of the FUZZIWIG'S-TM- CANDY FACTORY Business as it
is governed by this Agreement.
14.4. EFFECT OF TERMINATION. In the event this Agreement is terminated
for any reason, the Franchisee shall immediately cease using any of the
Licensed Methods and Marks, trade names, trade dress, trade secrets,
copyrights or any other symbols used to identify the FUZZIWIG'S-TM- CANDY
FACTORY Business, and all rights the Franchisee had to the same shall
automatically terminate. The Franchisee agrees to execute any documents of
assignment as may be necessary to transfer any rights the Franchisee may
possess in and to the Marks.
14.5. MARK INFRINGEMENT. The Franchisee agrees to notify the Franchisor
in writing of any possible infringement or illegal use by others of a trademark
the same as or confusingly similar to the Marks which may come to its attention.
The Franchisee acknowledges that the Franchisor shall have the right, in its
sole discretion, to determine whether any action will be taken on account of any
possible infringement or illegal use. The
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Franchisor may commence or prosecute such action in the Franchisor's own name
and may join the Franchisee as a party thereto if the Franchisor determines it
to be reasonably necessary for the continued protection and quality control of
the Marks and Licensed Methods. The Franchisor shall bear the reasonable cost
of any such action, including attorneys' fees. The Franchisee agrees to fully
cooperate with the Franchisor in any such litigation.
14.6. FRANCHISEE'S BUSINESS NAME. The Franchisee acknowledges that the
Franchisor has a prior and superior claim to the FUZZIWIG'S-TM- CANDY FACTORY
trade name. The Franchisee shall not use the words "FUZZIWIG'S-TM- CANDY
FACTORY" in the legal name of its corporation, partnership or any other
business entity used in conducting the business provided for in this
Agreement. The Franchisee also agrees not to register or attempt to register
a trade name using the word "FUZZIWIG'S-TM- CANDY FACTORY" in the
Franchisee's name or that of any other person or business entity, without
prior written consent of the Franchisor. When this Agreement is terminated,
the Franchisee shall execute any assignment or other document the Franchisor
requires to transfer to itself any rights the Franchisee may possess in a
trade name utilizing the word FUZZIWIG'S-TM- CANDY FACTORY or any other Mark
owned by the Franchisor. The Franchisee further agrees that it will not
identify itself as being "Fuzziwig's Candy Factory, Inc." or as being
associated with the Franchisor in any manner other than as a franchisee or
licensee. The Franchisee further agrees that in all advertising and
promotion and promotional materials it will display its business name only in
obvious conjunction with the phrase "FUZZIWIG'S-TM- CANDY FACTORY Licensee"
or "FUZZIWIG'S-TM- CANDY FACTORY Franchisee" or with such other words and in
such other phrases as may from time to time be prescribed in the Operations
Manual, in the Franchisor's sole discretion.
14.7. CHANGE OF MARKS. In the event that the Franchisor, in its sole
discretion, shall determine it necessary to modify or discontinue use of any
proprietary Marks, or to develop additional or substitute marks, the Franchisee
shall, within a reasonable time after receipt of written notice of such a
modification or discontinuation from the Franchisor, take such action, at the
Franchisee's sole expense, as may be necessary to comply with such modification,
discontinuation, addition or substitution.
15. REPORTS, RECORDS AND FINANCIAL STATEMENTS
15.1. FRANCHISEE REPORTS. The Franchisee shall establish and maintain at
its own expense a bookkeeping and accounting system which conforms to the
specifications which the Franchisor may prescribe from time to time, including
the Franchisor's current "Standard Code of Accounts" as described in the
Operations Manual. The Franchisee shall supply to the
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Franchisor such reports in a manner and form as the Franchisor may from time to
time reasonably require, including:
(a) Monthly summary reports, in a form as may be prescribed by the
Franchisor, mailed to the Franchisor postmarked no later than the 15th day
of the month and containing information relative to the previous month's
operations; and
(b) Quarterly financial statements, prepared in accordance with
Generally Accepted Accounting Principles ("GAAP"), and consisting of a
profit and loss statement and balance sheet for the FUZZIWIG'S-TM- CANDY
FACTORY Business, mailed to the Franchisor postmarked no later than the
15th day following the end of the calendar quarter, based on operating
results of the prior quarter, which shall be submitted in a form approved
by the Franchisor and shall be certified by the Franchisee to be correct.
The Franchisor reserves the right to disclose data derived from such
reports, without identifying the Franchisee, except to the extent identification
of the Franchisee is required by law.
15.2. ANNUAL FINANCIAL STATEMENTS. The Franchisee shall, within 90
days after the end of its fiscal year, provide to the Franchisor annual
unaudited financial statements, compiled or reviewed by an independent certified
public accountant acceptable to and approved by the Franchisor and prepared in
accordance with GAAP, and state and federal income tax returns prepared by a
certified public accountant. If these financial statements or tax returns show
an underpayment of any amounts owed to the Franchisor, these amounts shall be
paid to the Franchisor concurrently with the submission of the statements or
returns.
15.3. VERIFICATION. Each report and financial statement to be
submitted to the Franchisor hereunder shall be signed and verified by the
Franchisee.
15.4. BOOKS AND RECORDS. The Franchisee shall maintain all books and
records for its FUZZIWIG'S-TM- CANDY FACTORY Business in accordance with
generally accepted accounting principles, consistently applied, and preserve
these records for at least five years after the fiscal year to which they
relate.
15.5. AUDIT OF BOOKS AND RECORDS. The Franchisee shall permit the
Franchisor to inspect and audit the books and records of the FUZZIWIG'S-TM-
CANDY FACTORY Business at any reasonable time, at the Franchisor's expense.
If any audit discloses a deficiency in amounts for payments owed to the
Franchisor pursuant to this Agreement, then such amounts shall become
immediately payable to the Franchisor by the Franchisee, with interest from
the date such payments were due at the lesser of one and one-half percent per
month or the
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maximum rate allowed by law. In addition, if it is found by such audit that
the Gross Retail Sales of the FUZZIWIG'S-TM- CANDY FACTORY Business have been
understated by five percent or more during the period audited, the Franchisee
shall pay all reasonable costs and expenses the Franchisor incurred in
connection with such audit.
15.6. FAILURE TO COMPLY WITH REPORTING REQUIREMENTS. If the Franchisee
fails to prepare and submit any statement or report as required under this
Article 15, then the Franchisor shall have the right to treat the
Franchisee's failure as good cause for termination of this Agreement. In
addition to all other remedies available to the Franchisor, in the event that
the Franchisee fails to prepare and submit any statement or report required
under this Article 15 for two consecutive reporting periods, the Franchisor
shall be entitled to make an audit, at the expense of the Franchisee, of the
Franchisee's books, records and accounts, including the Franchisee's bank
accounts, which in any way pertain to the Gross Retail Sales of the
FUZZIWIG'S-TM- CANDY FACTORY Business. The statements or reports not
previously submitted shall be prepared by or under the direction and
supervision of an independent certified public accountant selected by the
Franchisor.
15.7. SHOPPING SERVICE. The Franchisor reserves the right to use third
party shopping services from time to time to evaluate the conduct of the
Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business, including such things as
customer service, cleanliness, merchandising and proper use of registers.
Franchisor may use such shopping services to inspect the Franchisee's
FUZZIWIG'S-TM- CANDY FACTORY Business at any time at the Franchisor's
expense, without prior notification to the Franchisee. The Franchisor may
make the results of any such service evaluation available to the Franchisee,
in the Franchisor's sole discretion.
16. ASSIGNMENT
16.1. ASSIGNMENT BY FRANCHISEE. The franchise granted herein is
personal to the Franchisee and, except as stated below, the Franchisor shall
not allow or permit any transfer, assignment, subfranchise or conveyance of
this Agreement or any interest hereunder.
16.2. PRE-CONDITIONS TO FRANCHISEE'S ASSIGNMENT. The Franchisee shall
not sell, transfer or assign its rights under this Agreement or any interest
in it, or any part or portion of any business entity that owns it or all or a
substantial portion of the assets of the FUZZIWIG'S-TM- CANDY FACTORY
Business, unless the Franchisee obtains the Franchisor's written consent and
complies with the following requirements:
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(a) Payment of all amounts due and owing pursuant to this
Agreement by the Franchisee to the Franchisor or its affiliates or to third
parties whose debts or obligations the Franchisor has guaranteed on behalf
of the Franchisee, if any;
(b) Agreement by the proposed transferee to satisfactorily
complete the initial training program described in this Agreement, which
training may be completed by the transferee either prior to or immediately
after assignment of this Agreement;
(c) Execution of a Franchise Agreement in a form then currently
offered by the Franchisor, which shall supersede this Agreement in all
respects. If a new Franchise Agreement is signed, the terms thereof may
differ from the terms of this Agreement; provided, however, the transferee
will not be required to pay any additional initial franchise fee;
(d) Provision by the Franchisee of written notice to the
Franchisor 30 days' prior to the proposed effective date of the transfer,
such notice to contain information reasonably detailed to enable the
Franchisor to evaluate the terms and conditions of the proposed transfer;
(e) The proposed transferee shall have provided information to
the Franchisor sufficient for the Franchisor to assess the proposed
transferee's business experience, aptitude and financial qualification, and
the Franchisor shall have ascertained that the proposed transferee meets
such qualifications;
(f) Execution by Franchisee of a general release, in a form
satisfactory to the Franchisor, of any and all claims against the
Franchisor, its affiliates and their respective officers, directors,
employees and agents;
(g) Payment by the Franchisee or the proposed transferee of
$2,500; and
(h) Agreement by the Franchisee to abide by the post-termination
covenant not to compete set forth in Section 19.2 below.
16.3. FRANCHISOR'S APPROVAL OF TRANSFER. The Franchisor has 30 days from
the date of the written notice to approve or disapprove in writing, of the
Franchisee's proposed assignment. The Franchisee acknowledges that the
proposed transferee shall be evaluated for approval by the Franchisor based
on the same criteria as is currently being used to assess new franchisees
of the Franchisor and that such proposed transferee shall be provided, if
appropriate, with such disclosures as may be required by state or federal
law. If the Franchisee and its proposed transferee comply with all
conditions for assignment set forth
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herein and the Franchisor has not given the Franchisee notice of its approval or
disapproval within such period, approval is deemed granted.
16.4. RIGHT OF FIRST REFUSAL. In the event the Franchisee wishes to
sell, transfer or assign its rights under this Agreement or any interest in it,
or any part or portion of any business entity that owns it, or all or a
substantial portion of the assets of the FUZZIWIG'S-TM- CANDY FACTORY Business,
the Franchisee agrees to grant to the Franchisor a 30 day right of first refusal
to purchase such rights, interest or assets on the same terms and conditions as
are contained in the written offer to purchase submitted to the Franchisee by
the proposed purchaser; provided, however, the following additional terms and
conditions shall apply:
(a) The Franchisee shall notify the Franchisor of such offer by
sending a written notice to the Franchisor (which notice may be the same
notice as required by Section 16.2(d) above), enclosing a copy of the
written offer from the proposed purchaser;
(b) The 30 day right of first refusal period will run
concurrently with the period in which the Franchisor has to approve or
disapprove the proposed transferee;
(c) Such right of first refusal is effective for each proposed
transfer and any material change in the terms or conditions of the proposed
transfer shall be deemed a separate offer on which a new 30 day right of
first refusal shall be given to the Franchisor;
(d) If the consideration or manner of payment offered by a third
party is such that the Franchisor may not reasonably be required to furnish
the same, then the Franchisor may purchase the interest which is proposed
to be sold for the reasonable cash equivalent. If the parties cannot agree
within a reasonable time on the cash consideration, an independent
appraiser shall be designated by the Franchisor, whose determination will
be binding upon the parties. All expenses of the appraiser shall be paid
for equally between the Franchisor and the Franchisee; and
(e) If the Franchisor chooses not to exercise its right of first
refusal, the Franchisee shall be free to complete the sale, transfer or
assignment, subject to compliance with Sections 16.2 and 16.3 above.
Absence of a reply to the Franchisee's notice of a proposed sale within the
30 day period is deemed a waiver of such right of first refusal.
16.5. TYPES OF TRANSFERS. The Franchisee acknowledges that the
Franchisor's right to approve or disapprove of a proposed sale or transfer, and
all other requirements and rights related to such proposed sale or transfer, as
provided for above, shall apply (1) if the
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Franchisee is a partnership or other business association, to the addition or
deletion of a partner or members of the association or the transfer of any
partnership or membership among existing partners or members; (2) if the
Franchisee is a corporation, to any proposed transfer or assignment of 25% or
more of the stock of the corporate Franchisee, whether such transfer occurs in a
single transaction or several transactions; and (3) if the Franchisee is an
individual, to the transfer from such individual or individuals to a corporation
controlled by them, in which case the Franchisor's approval will be conditioned
upon: (i) the continuing personal guarantee of the individual (or individuals)
for the performance of obligations under this Agreement; (ii) the issuance
and/or transfer of shares which would affect a change in ownership of 25% or
more of the stock in the corporation being conditioned on the Franchisor's prior
written approval; (iii) a limitation on the corporation's business activity to
that of operating the FUZZIWIG'S-TM- CANDY FACTORY Business and related
activities; and (iv) other reasonable conditions. With respect to a proposed
transfer as described in subsection (1) and (3) of this Section, the
Franchisor's right of first refusal to purchase, as set forth above, shall not
apply and the Franchisor will waive any transfer fee chargeable to the
Franchisee for a transfer under these circumstances.
16.6. ASSIGNMENT BY THE FRANCBISOR. This Agreement is fully assignable
by the Franchisor and shall inure to the benefit of any assignee or other legal
successor in interest, and the Franchisor shall in such event be fully released
from the same.
16.7. FRANCHISEE'S DEATH OR DISABILITY. Upon the death or permanent
disability of the Franchisee (or the Franchisee's individual controlling the
Franchisee entity), the executor, administrator, conservator, guardian or other
personal representative of such person shall transfer the Franchisee's interest
in this Agreement or such interest in the Franchisee entity to an approved third
party. Such disposition of this Agreement or such interest (including, without
limitation, transfer by bequest or inheritance) shall be completed within a
reasonable time, not to exceed 120 days from the date of death or permanent
disability, and shall be subject to all terms and conditions applicable to
transfers contained in this Article 16. Provided, however, that for purposes of
this Section 16.7, there shall be no fee charged by the Franchisor for the
initial training program offered to the transferee. Failure to transfer the
interest in this Agreement or such interest in the Franchisee entity within said
period of time shall constitute a breach of this Agreement. For the purposes
hereof, the term "permanent disability" shall mean a mental or physical
disability, impairment or condition that is reasonably expected to prevent or
actually does prevent the Franchisee or the owner of a controlling interest in
the Franchisee entity from supervising the management and operation of the
FUZZIWIG'S-TM- CANDY FACTORY Business for a period of 120 days from the onset of
such disability, impairment or condition.
17. TERM AND EXPIRATION
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17.1. TERM. The term of this Agreement is for a period of 10 years from
the date of this Agreement, unless sooner terminated as provided herein.
17.2. RIGHTS UPON EXPIRATION. At the end of the initial term hereof the
Franchisee shall have the option to renew its franchise rights for two
additional terms of FIVE years each, by acquiring successor franchise rights, if
the Franchisor does not exercise its right not to offer a successor franchise in
accordance with Section 17.4 below and if the Franchisee:
(a) At least 30 days prior to expiration of the term, executes
the form of Franchise Agreement then in use by the Franchisor;
(b) Has complied with all provisions of this Agreement during
the current term, including the payment on a timely basis of all Royalties
and other fees due hereunder. "Compliance" shall mean, at a minimum, that
the Franchisee has not received any written notification from the
Franchisor of breach hereunder more than four times during the term hereof;
(c) Upgrades and/or remodels the FUZZIWIG'S-TM- CANDY FACTORY
Business and its operations at the Franchisee's sole expense (the necessity
of which shall be in the sole discretion of the Franchisor) to conform
with the then current Operations Manual;
(d) Executes a general release, in a form satisfactory to the
Franchisor, of any and all claims against the Franchisor and its
affiliates, and their respective officers, directors, employees and agents
arising out of or relating to this Agreement; and
(e) Pays a successor franchise fee of $2,500.
17.3. EXERCISE OF OPTION FOR SUCCESSOR FRANCHISE. The Franchisee may
exercise its option for a successor franchise by giving written notice of such
exercise to the Franchisor not less than 210 days prior to the scheduled
expiration of this Agreement. The Franchisee's successor franchise rights shall
become effective by signing the Franchise Agreement then currently being offered
to new franchisees of the Franchisor.
17.4. CONDITIONS OF REFUSAL. The Franchisor shall not be obligated to
offer the Franchisee a successor franchise upon the expiration of this Agreement
if the Franchisee fails to comply with any of the above conditions of renewal.
In such event, except for failure to execute the then current Franchise
Agreement or pay the successor franchise fee, the Franchisor shall give notice
of expiration at least 180 days prior to the expiration of the term, and such
notice shall set forth the reasons for such refusal to offer successor franchise
rights.
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Upon the expiration of this Agreement, the Franchisee shall comply with the
provisions of Section 18.2 below.
18. DEFAULT AND TERMINATION
18.1. TERMINATION BY FRANCHISOR - EFFECTIVE UPON NOTICE. The Franchisor
shall have the right, at its option, to terminate this Agreement and all rights
granted the Franchisee hereunder, without affording the Franchisee any
opportunity to cure any default (subject to any state laws to the contrary,
where state law shall prevail), effective upon receipt of notice by the
Franchisee, addressed as provided in Section 22.12, upon the occurrence of any
of the following events:
(a) ABANDONMENT. If the Franchisee ceases to operate the
FUZZIWIG'S-TM- CANDY FACTORY Business or otherwise abandons the
FUZZIWIG'S-TM- CANDY FACTORY Business for a period of five consecutive
days, or any shorter period that indicates an intent by the Franchisee to
discontinue operation of the FUZZIWIG'S-TM- CANDY FACTORY Business, unless
and only to the extent that full operation of the FUZZIWIG'S-TM- CANDY
FACTORY Business is suspended or terminated due to fire, flood, earthquake
or other similar causes beyond the Franchisee's control and not related to
the availability of funds to the Franchisee;
(b) INSOLVENCY, ASSIGNMENTS. If the Franchisee becomes insolvent
or is adjudicated a bankrupt; or any action is taken by the Franchisee, or
by others against the Franchisee under any insolvency, bankruptcy or
reorganization act, (this provision may not be enforceable under federal
bankruptcy law, 11 U.S.C. Sections 101 ET SEQ.), or if the Franchisee makes
an assignment for the benefit of creditors, or a receiver is appointed by
the Franchisee;
(c) UNSATISFIED JUDGMENTS; LEVY; FORECLOSURE. If any material
judgment (or several judgments which in the aggregate are material) is
obtained against the Franchisee and remains unsatisfied or of record for 30
days or longer (unless a supersedeas or other appeal bond has been filed);
or if execution is levied against the Franchisee's business or any of the
property used in the operation of the FUZZIWIG'S-TM- CANDY FACTORY Business
and is not discharged within five days; or if the real or personal property
of the Franchisee's business shall be sold after levy thereupon by any
sheriff, marshall or constable;
(d) CRIMINAL CONVICTION. If the Franchisee is convicted of a
felony, a crime involving moral turpitude, or any crime or offense that is
reasonably likely, in
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the sole opinion of the Franchisor, to materially and unfavorably affect
the Licensed Methods, Marks, goodwill or reputation thereof;
(e) FAILURE TO MAKE PAYMENTS. If the Franchisee fails to pay any
amounts due the Franchisor or affiliates, including any amounts which may
be due as a result of any subleases or lease assignments between the
Franchisee and the Franchisor, within 10 days after receiving notice that
such fees or amounts are overdue;
(f) MISUSE OF MARKS. If the Franchisee misuses or fails to
follow the Franchisor's directions and guidelines concerning use of the
Franchisor's Marks and fails to correct the misuse or failure within ten
days after notification from the Franchisor;
(g) UNAUTHORIZED DISCLOSURE. If the Franchisee intentionally or
negligently discloses to any unauthorized person the contents of or any
part of the Franchisor's Operations Manual or any other trade secrets or
confidential information of the Franchisor;
(h) REPEATED NONCOMPLIANCE. If the Franchisee has received two
previous notices of default from the Franchisor and is again in default of
this Agreement within a 12 month period, regardless of whether the previous
defaults were cured by the Franchisee; or
(i) UNAUTHORIZED TRANSFER. If the Franchisee sells, transfers
or otherwise assigns the Franchise, an interest in the Franchise or the
Franchisee entity, this Agreement, the FUZZIWIG'S-TM- CANDY FACTORY Business
or a substantial portion of the assets of the FUZZIWIG'S-TM- CANDY FACTORY
Business owned by the Franchisee without complying with the provisions of
Article 16 above.
18.2. TERMINATION BY FRANCHISOR - THIRTY DAYS NOTICE. The Franchisor
shall have the right to terminate this Agreement (subject to any state laws to
the contrary, where state law shall prevail), effective upon 30 days written
notice to the Franchisee, if the Franchisee breaches any other provision of this
Agreement and fails to cure the default during such 30 day period. In that
event, this Agreement will terminate without further notice to the Franchisee,
effective upon expiration of the 30 day period. Defaults shall include, but not
be limited to, the following:
(a) FAILURE TO MAINTAIN STANDARDS. The Franchisee fails to
maintain the then-current operating procedures and adhere to the
specifications and standards established by the Franchisor as set forth
herein or in the Operations Manual or otherwise communicated to the
Franchisee;
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(b) DECEPTIVE PRACTICES. The Franchisee engages in any
unauthorized business or practice or sells any unauthorized product or
service under the Franchisor's Marks or under a name or mark which is
confusingly similar to the Franchisor's Marks;
(c) FAILURE TO OBTAIN CONSENT. The Franchisee fails, refuses or
neglects to obtain the Franchisor's prior written approval or consent as
required by this Agreement;
(d) FAILURE TO COMPLY WITH MANUAL. The Franchisee fails or
refuses to comply with the then-current requirements of the Operations
Manual; or
(e) BREACH OF RELATED AGREEMENT. The Franchisee defaults under
any term of the sublease or lease assignment for the Franchised Location,
any other agreement material to the FUZZIWIG'S-TM- CANDY FACTORY Business or
any other Franchise Agreement between the Franchisor and the Franchisee and
such default is not cured within the time specified in such sublease, other
agreement or other Franchise Agreement.
Notwithstanding the foregoing, if the breach is curable, but is of a nature
which cannot be reasonably cured within such 30 day period and the Franchisee
has commenced and is continuing to make good faith efforts to cure the breach
during such 30 day period, the Franchisee shall be given an additional
reasonable period of time to cure the same, and this Agreement shall not
automatically terminate without written notice from the Franchisor.
18.3. FRANCHISOR'S REMEDIES.
(a) FAILURE TO PAY. In addition to all other remedies that may
be exercised by the Franchisor upon a default by the Franchisee under the
terms of this Agreement, the Franchisor reserves the right to collect
amounts due from the Franchisee to any third party and to pay the third
party directly. If the Franchisor collects any such amounts, the
Franchisor may, in its sole discretion, charge the Franchisee an
administrative fee to reimburse the Franchisor for its costs of collecting
and paying such amounts. Any administrative fee charged would not exceed
15% of the total amount of money collected.
(b) FAILURE TO MAINTAIN STANDARDS. In addition to all other
remedies that may be exercised by the Franchisor upon a default by the
Franchisee under the terms of this Agreement, the Franchisor may collect a
fee of $500 per day for every day following the 30 day cure period in which
the Franchisee continues to breach this
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Agreement by failing to maintain and adhere to the Franchisor's standards
and specifications for the operation of the Franchisee's Business.
18.4. RIGHT TO PURCHASE. Upon termination or expiration of this
Agreement for any reason, the Franchisor shall have the option to purchase
the FUZZIWIG'S-TM- CANDY FACTORY Business, which may include, at the
Franchisor's option, all of the Franchisee's interest, if any, in and to the
real estate upon which the FUZZIWIG'S-TM- CANDY FACTORY Business is located,
and all buildings and other improvements thereon, including leasehold
interests, at fair market value, less any amount apportioned to the goodwill
of the FUZZIWIG'S-TM- CANDY FACTORY Business which is attributable to the
Franchisor's Marks and Licensed Methods, and less any amounts owed to the
Franchisor by the Franchisee. The following additional terms shall apply to
the Franchisor's exercise of this option:
(a) The Franchisor's option hereunder shall be exercisable by
providing the Franchisee with written notice of its intention to exercise
the option given to the Franchisee no later than the effective date of
termination, in the case of termination, or at least 90 days prior to the
expiration of the term of the franchise, in the case of non-renewal.
(b) In the event that the Franchisor and the Franchisee cannot
agree to a fair market value of the FUZZIWIG'S-TM- CANDY FACTORY Business,
then the fair market value shall be determined by an independent third
party appraisal. The Franchisor and the Franchisee shall each select one
independent, qualified appraiser, and the two so selected shall select a
third appraiser, all three to determine the fair market value of the
FUZZIWIG'S-TM- CANDY FACTORY Business. The purchase price shall be the
median of the fair market values as determined by the three appraisers.
(c) The Franchisor and the Franchisee agree that the terms and
conditions of this right and option to purchase may be recorded, if deemed
appropriate by the Franchisor, in the real property records and the
Franchisor and the Franchisee further agree to execute such additional
documentation as may be necessary and appropriate to effectuate such
recording.
(d) The closing for the purchase of the FUZZIWIG'S-TM- CANDY
FACTORY Business will take place no later than 60 days after the
termination or nonrenewal date. The Franchisor will pay the purchase price
in full at the closing, or, at its option, in five equal consecutive
monthly installments with interest at a rate of ten percent per annum. The
Franchisee must sign all documents of assignment and transfer as are
reasonably necessary for purchase of the FUZZIWIG'S-TM- CANDY FACTORY
Business by the Franchisor.
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In the event that the Franchisor does not exercise the Franchisor's right to
purchase the Franchisee's FUZZIWIG'S-TM- CANDY FACTORY Business as set forth
above, the Franchisee will be free to keep or to sell, after such termination
or expiration, to any third party, all of the physical assets of its
FUZZIWIG'S-TM-CANDY FACTORY Business; provided, however, that all appearances
of the Marks are first removed in a manner approved in writing by the
Franchisor. Notwithstanding the foregoing sentence, the Franchisee
acknowledges that it is impossible to remove the appearance of trademark from
certain items used in the Business, such as the animated characters, and
therefore, if the Franchisor does not exercise its right to purchase the
Franchisee's Business, the Franchisee agrees to sell all of its animated
characters and all other proprietary items, as determined by the Franchisor
in its sole discretion, to the Franchisor for a price equal to the lesser of:
(1) depreciated book value or (2) actual market value. The Franchisor will
only be obligated to purchase any assets of the FUZZIWIG'S-TM- CANDY FACTORY
Business in the event and to the extent it is required by applicable state or
federal law.
18.5. OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR EXPIRATION. The
Franchisee is obligated upon termination or expiration of this Agreement to
immediately:
(a) Pay to the Franchisor all Royalties, other fees, and any and
all amounts or accounts payable then owed the Franchisor or its affiliates
pursuant to this Agreement, or pursuant to any other agreement, whether
written or oral, including subleases and lease assignments, between the
parties;
(b) Cease to identify itself as a FUZZIWIG'S-TM- CANDY FACTORY
Franchisee or publicly identify itself as a former Franchisee or use any of
the Franchisor's trade secrets, signs, symbols, devices, trade names,
trademarks, or other materials.
(c) Immediately cease to identify the Franchised Location as
being, or having been, associated with the Franchisor, and immediately
cease using any proprietary mark of the Franchisor or any mark in any way
associated with the FUZZIWIG'S-TM- CANDY FACTORY Marks and Licensed Methods;
(d) Deliver to the Franchisor all Candy inventory which bears
the FUZZIWIG'S-TM- CANDY FACTORY logo, signs, sign-faces, advertising
materials, forms and other materials bearing any of the Marks or
otherwise identified with the Franchisor and obtained by and in
connection with this Agreement;
(e) Immediately deliver to the Franchisor the Operations Manual
and all other information, documents and copies thereof which are
proprietary to the Franchisor;
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(f) Promptly take such action as may be required to cancel all
fictitious or assumed names or equivalent registrations relating to its use
of any Marks which are under the exclusive control of the Franchisor or, at
the option of the Franchisor, assign the same to the Franchisor;
(g) Notify the telephone company and all telephone directory
publishers of the termination or expiration of the Franchisee's right to
use any telephone number and any regular, classified or other telephone
directory listings associated with any Mark and to authorize transfer
thereof to the Franchisor or its designee. The Franchisee acknowledges
that, as between the Franchisee and the Franchisor, the Franchisor has the
sole rights to and interest in all telephone, telecopy or facsimile machine
numbers and directory listings associated with any Mark. The Franchisee
authorizes the Franchisor, and hereby appoints the Franchisor and any of
its officers as the Franchisee's attorney-in-fact, to direct the telephone
company and all telephone directory publishers to transfer any telephone,
telecopy or facsimile machine numbers and directory listings relating to
the FUZZIWIG'S-TM- CANDY FACTORY Business to the Franchisor or its designee,
should the Franchisee fail or refuse to do so, and the telephone company
and all telephone directory publishers may accept such direction or this
Agreement as conclusive of the Franchisor's exclusive rights in such
telephone numbers and directory listings and the Franchisor's authority to
direct their transfer; and
(h) Abide by all restrictive covenants set forth in Article 20
of this Agreement.
18.6. STATE AND FEDERAL LAW. THE PARTIES ACKNOWLEDGE THAT IN THE EVENT
THAT THE TERMS OF THIS AGREEMENT REGARDING TERMINATION OR EXPIRATION ARE
INCONSISTENT WITH APPLICABLE STATE OR FEDERAL LAW, SUCH LAW SHALL GOVERN THE
FRANCHISEE'S RIGHTS REGARDING TERMINATION OR EXPIRATION OF THIS AGREEMENT.
19. BUSINESS RELATIONSHIP
19.1. INDEPENDENT BUSINESSPERSONS. The parties agree that each of them
are independent businesspersons, their only relationship is by virtue of this
Agreement and that no fiduciary relationship is created hereunder. Neither
party is liable or responsible for the other's debts or obligations, nor shall
either party be obligated for any damages to any person or property directly or
indirectly arising out of the operation of the other party's business authorized
by or conducted pursuant to this Agreement. The Franchisor and the Franchisee
31
<PAGE>
agree that neither of them will hold themselves out to be the agent, employer or
partner of the other and that neither of them has the authority to bind or incur
liability on behalf of the other.
19.2. PAYMENT OF THIRD PARTY OBLIGATIONS. The Franchisor shall have no
liability for the Franchisee's obligations to pay any third parties,
including without limitation, any product vendors, or any sales, use,
service, occupation, excise, gross receipts, income, property or other tax
levied upon the Franchisee, the Franchisee's property, the FUZZIWIG'S-TM-
CANDY FACTORY Business or upon the Franchisor in connection with the sales
made or business conducted by the Franchisee (except any taxes the Franchisor
is required by law to collect from the Franchisee with respect to purchases
from the Franchisor).
19.3. INDEMNIFICATION. The Franchisee agrees to indemnify, defend and
hold harmless the Franchisor, its subsidiaries and affiliates, and their
respective shareholders, directors, officers, employees, agents, successors
and assignees, (the "Indemnified Parties") against, and to reimburse them for
all claims, obligations and damages described in this Section 19.3, any and
all third party obligations described in Section 19.2 and any and all claims
and liabilities directly or indirectly arising out of the operation of the
FUZZIWIG'S-TM- CANDY FACTORY Business or arising out of the use of the Marks
and Licensed Methods in any manner not in accordance with this Agreement.
For purposes of this indemnification, claims shall mean and include all
obligations, actual and consequential damages and costs reasonably incurred
in the defense of any claim against the Indemnified Parties, including,
without limitation, reasonable accountants', attorneys' and expert witness
fees, costs of investigation and proof of facts, court costs, other
litigation expenses and travel and living expenses. The Franchisor shall
have the right to defend any such claim against it. This indemnity shall
continue in full force and effect subsequent to and notwithstanding the
expiration or termination of this Agreement.
20. RESTRICTIVE COVENANTS
20.1. NON-COMPETITION DURING TERM. The Franchisee acknowledges that,
in addition to the license of the Marks hereunder, the Franchisor has also
licensed commercially valuable information which comprises and is a part of
the Licensed Methods, including without limitation, recipes, operations,
marketing, advertising and related information and materials and that the
value of this information derives not only from the time, effort and money
which went into its compilation, but from the usage of the same by all the
franchisees of the Franchisor using the Marks and Licensed Methods. The
Franchisee therefore agrees that other than the FUZZIWIG'S-TM- CANDY FACTORY
Business licensed herein, neither the Franchisee nor any of the Franchisee's
officers, directors, shareholders or partners, nor any member of his or their
immediate families, shall during the term of this Agreement:
32
<PAGE>
(a) have any direct or indirect controlling interest as a disclosed
or beneficial owner in a "Competitive Business" as defined below;
(b) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for a Competitive Business;
or
(c) divert or attempt to divert any business related to, or any
customer or account of the FUZZIWIG'S CANDY FACTORY Business, the
Franchisor's business or any other FUZZIWIG'S-TM- CANDY FACTORY franchisee's
business, by direct inducement or otherwise, or divert or attempt to divert
the employment of any employee of the Franchisor or another franchisee
licensed by the Franchisor to use the Marks and Licensed Methods, to any
Competitive Business by any direct inducement or otherwise.
The term "Competitive Business" as used in this Agreement shall mean any
business operating, or granting franchises or licenses to others to operate,
a retail, wholesale, distribution or manufacturing business deriving more
than 5% of its gross receipts from the sale, processing or manufacturing of
Candy, Items or other products which are offered in FUZZIWIG'S-TM- CANDY
FACTORY Businesses and which constitutes 5% or more of the Gross Retail Sales
of any FUZZIWIG'S-TM- CANDY FACTORY Business; provided, however, the
Franchisee shall not be prohibited from owning securities in a Competitive
Business if such securities are listed on a stock exchange or traded on the
over-the-counter market and represent 5% or less of that class of securities
issued and outstanding.
20.2. POST-TERMINATION COVENANT NOT TO COMPETE. Upon termination or
expiration of this Agreement for any reason, the Franchisee and its officers,
directors, shareholders, and/or partners agree that, for a period of two
years commencing on the effective date of termination or expiration, or the
date on which the Franchisee ceases to conduct business, whichever is later,
neither Franchisee nor its officers, directors, shareholders, and/or partners
shall have any direct or indirect interest (through a member of any immediate
family of the Franchisee or its Owners or otherwise) as a disclosed or
beneficial owner, investor, partner, director, officer, employee, consultant,
representative or agent or in any other capacity in any Competitive Business,
defined in Section 20.1 above, located or operating within a 1O mile radius
of the Franchised Location or within 1O miles of any other franchised or
company-owned FUZZIWIG'S-TM-CANDY FACTORY Business. The restrictions of this
Section shall not be applicable to the ownership of shares of a class of
securities listed on a stock exchange or traded on the over-the-counter
market that represent 5% or less of the number of shares of that class of
securities issued and outstanding. The Franchisee and its officers,
directors, shareholders, and/or partners expressly acknowledge that they
possess skills and abilities of a general nature and have other opportunities
for
33
<PAGE>
exploiting such skills. Consequently, enforcement of the covenants made in this
Section will not deprive them of their personal goodwill or ability to earn a
living.
20.3. CONFIDENTIALITY OF PROPRIETARY INFORMATION. The Franchisee shall
treat all information it receives which comprises or is a part of the Licensed
Methods licensed hereunder as proprietary and confidential and will not use such
information in an unauthorized manner or disclose the same to any unauthorized
person without first obtaining the Franchisor's written consent. The Franchisee
acknowledges that the Marks and the Licensed Methods have valuable goodwill
attached to them, that the protection and maintenance thereof is essential to
the Franchisor and that any unauthorized use or disclosure of the Marks and
Licensed Methods will result in irreparable harm to the Franchisor.
20.4. CONFIDENTIALITY AGREEMENT. The Franchisor reserves the right to
require that the Franchisee cause each of its officers, directors, partners,
shareholders, and General Manager, and, if the Franchisee is an individual,
immediate family members, to execute a Nondisclosure and Noncompetition
Agreement containing the above restrictions, in a form approved by the
Franchisor.
21. INSURANCE
21.1. INSURANCE COVERAGE. The Franchisee shall procure, maintain and
provide evidence of (i) comprehensive general liability insurance for the
Franchised Location and its operations with a limit of not less than
$1,000,000 combined single limit, or such greater limit as may be required as
part of any lease agreement for the Franchised Location; (ii) automobile
liability insurance covering all employees of the FUZZIWIG'S-TM- CANDY
FACTORY Business with authority to operate a motor vehicle in an amount not
less than $1,000,000 or, with the prior written consent of the Franchisor,
such lesser amount as may be available at a commercially reasonable rate, but
in no event less than any statutorily imposed minimum coverage; (iii)
unemployment and worker's compensation insurance with a broad form all-states
endorsement coverage sufficient to meet the requirements of the law; and (iv)
all-risk personal property insurance in an amount equal to at least 100% of
the replacement costs of the contents and tenant improvements located at the
FUZZIWIG'S-TM- CANDY FACTORY Business. All of the required policies of
insurance shall name the Franchisor as an additional named insured and shall
provide for a 30 day advance written notice to the Franchisor of cancellation.
21.2. PROOF OF INSURANCE COVERAGE. The Franchisee will provide proof
of insurance to the Franchisor prior to commencement of operations at its
FUZZIWIG'S-TM- CANDY FACTORY Business. This proof will show that the insurer
has been authorized to inform the Franchisor in the event any policies lapse
or are canceled. The Franchisor has the
34
<PAGE>
right to change the minimum amount of insurance the Franchisee is required to
maintain by giving the Franchisee prior reasonable notice, giving due
consideration to what is reasonable and customary in the similar business.
Noncompliance with the insurance provisions set forth herein shall be deemed
a material breach of this Agreement; in the event of any lapse in insurance
coverage, in addition to all other remedies, the Franchisor shall have the
right to demand that the Franchisee cease operations of the FUZZIWIG'S-TM-
CANDY FACTORY Businesses until coverage is reinstated, or, in the
alternative, pay any delinquencies in premium payments and charge the same
back to the Franchisee.
22. MISCELLANEOUS PROVISIONS
22.1. GOVERNING LAW/CONSENT TO VENUE AND JURISDICTION. Except to the
extent governed by the United States Trademark Act of 1946 (Lanham Act, 15
U.S.C. Sections 1051 ET SEQ.) or other federal law, this Agreement, the
franchise and the relationship between the Franchisor and the Franchisee
shall be governed by the laws of the state of Colorado. The Franchisee
agrees that the Franchisor may institute any action against the Franchisee in
any state or federal court of general jurisdiction in the state of Colorado
and the Franchisee irrevocably submits to the jurisdiction of such courts and
waives any objection he may have to either the jurisdiction of or venue in
such courts. The Franchisee agrees that the only proper venue for any action
shall be in the County of La Plata, State of Colorado.
22.2. MODIFICATION. The Franchisor and/or the Franchisee may modify
this Agreement only upon execution of a written agreement between the two
parties. The Franchisee acknowledges that the Franchisor may modify its
standards and specifications and operating and marketing techniques set forth in
the Operations Manual unilaterally under any conditions and to the extent in
which the Franchisor, in its sole discretion, deems necessary to protect,
promote, or improve the Marks and the quality of the Licensed Methods, but under
no circumstances will such modifications be made arbitrarily without such
determination.
22.3. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties and supersedes any and all prior agreements concerning
the subject matter hereof. The Franchisee agrees and understands that the
Franchisor shall not be liable or obligated for any oral representations or
commitments made prior to the execution hereof and that no modifications of
this Agreement shall be effective except those in writing and signed by both
parties. The Franchisor does not authorize and will not be bound by any
representation of any nature other than those expressed in this Agreement.
The Franchisee further acknowledges and agrees that no representations have
been made to it by the Franchisor regarding projected sales volumes, market
potential, revenues, profits of the Franchisee's FUZZIWIG'S-TM- CANDY FACTORY
Business, or operational assistance other than as stated in this Agreement or
in any disclosure document provided by the Franchisor or its representatives.
35
<PAGE>
22.4. DELEGATION BY THE FRANCHISOR. From time to time, the Franchisor
shall have the right to delegate the performance of any portion or all of its
obligations and duties hereunder to third parties, whether the same are agents
of the Franchisor or independent contractors which the Franchisor has contracted
with to provide such services. The Franchisee agrees in advance to any such
delegation by the Franchisor of any portion or all of its obligations and duties
hereunder.
22.5. EFFECTIVE DATE. This Agreement shall not be effective until
accepted by the Franchisor as evidenced by dating and signing by an officer of
the Franchisor.
22.6. REVIEW OF AGREEMENT. The Franchisee acknowledges that it had a
copy of this Agreement in its possession for a period of time not less than ten
full business days, during which time the Franchisee has had the opportunity to
submit same for professional review and advice of the Franchisee's choosing
prior to freely executing this Agreement.
22.7. ATTORNEYS' FEES. In the event of any default on the part of
either party to this Agreement, in addition to all other remedies, the party in
default will pay the aggrieved party all amounts due and all damages, costs and
expenses, including reasonable attorneys' fees, incurred by the aggrieved party
in any legal action, arbitration or other proceeding as a result of such
default, plus interest at the highest rate allowable by law, accruing from the
date of such default.
22.8. INJUNCTIVE RELIEF. Nothing herein shall prevent the Franchisor
or the Franchisee from seeking injunctive relief to prevent irreparable harm, in
addition to all other remedies.
22.9. NO WAIVER. No waiver of any condition or covenant contained in
this Agreement or failure to exercise a right or remedy by the Franchisor or the
Franchisee shall be considered to imply or constitute a further waiver by the
Franchisor or the Franchisee of the same or any other condition, covenant,
right, or remedy.
22.10. NO RIGHT TO SET OFF. The Franchisee shall not be allowed to set
off amounts owed to the Franchisor for Royalties, fees or other amounts due
hereunder, against any monies owed to Franchisee, nor shall the Franchisee in
any event withhold such amounts due to any alleged nonperformance by the
Franchisor hereunder, which right of set off is hereby expressly waived by the
Franchisee.
22.11. INVALIDITY. If any provision of this Agreement is held invalid
by any tribunal in a final decision from which no appeal is or can be taken,
such provision shall be deemed modified to eliminate the invalid element and, as
so modified, such provision shall be deemed
36
<PAGE>
Exhibit 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
February 28, February 29, February 28,
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE
Net income (loss) ($1,365,702) $1,207,745 $1,350,432
Dividend requirements
on preferred stock - - (14,610)
----------- ----------- ----------
Net income allocable
to common and common
equivalent shares ($1,365,702) $1,207,745 $1,335,822
----------- ----------- ----------
----------- ----------- ----------
Weighted average number of
common shares outstanding 2,908,512 2,797,201 2,517,449
Net effect of dilutive stock
options based on the treasury
stock method using average
market price 41,753 89,862 95,281
----------- ----------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,950,265 2,887,063 2,612,730
----------- ----------- ----------
----------- ----------- ----------
PRIMARY INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $(.46) $ .42 $ .51
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
<PAGE>
Exhibit 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. And SUBSIDARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE - CONTINUED
<TABLE>
<CAPTION>
February 28, February 29, February 28,
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE
Net income (loss) ($1,365,702) $1,207,745 $1,350,432
Dividend requirements
on preferred stock - - (14,610)
------------ ----------- ----------
Net income allocable
to common and common
equivalent shares ($1,365,702) $1,207,745 $1,335,822
------------ ----------- ----------
------------ ----------- ----------
Weighted average number of
common shares outstanding 2,908,512 2,797,201 2,517,449
Assuming conversion of
convertible debt - - 107,798
Assuming conversion of
preferred stock - - -
Net effect of dilutive stock
options based on the treasury
stock method using average
market price 43,210 92,337 100,443
------------ ----------- ----------
Weighted average number of common
and common equivalent shares
outstanding 2,951,722 2,887,063 2,612,730
------------ ----------- ----------
------------ ----------- ----------
INCOME (LOSS) PER COMMON EQUIVALENT
SHARE ASSUMING FULL DILUTION $ (.46) $ .42 $ .49
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
For 1995, if conversion of the preferred stock were assumed, the related income
per share would be $.51.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 23, 1997, accompanying the financial
statements incorporated by reference or included in the Annual Report of Rocky
Mountain Chocolate Factory, Inc. on Form 10-K for the year ended February 28,
1997. We hereby consent to the incorporation by reference of said report in
the Registration Statements of Rocky Mountain Chocolate Factory, Inc. on
Forms S-8 (File No. 33-79342, effective May 25, 1994 and File No. 33-64653,
effective November 30, 1995).
GRANT THORNTON LLP
Dallas, Texas
May 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 792,606
<SECURITIES> 0
<RECEIVABLES> 1,729,971
<ALLOWANCES> 0
<INVENTORY> 2,322,321
<CURRENT-ASSETS> 5,737,626
<PP&E> 15,340,562
<DEPRECIATION> 3,565,194
<TOTAL-ASSETS> 18,590,105
<CURRENT-LIABILITIES> 3,073,851
<BONDS> 5,737,312
0
0
<COMMON> 91,239
<OTHER-SE> 10,703,437
<TOTAL-LIABILITY-AND-EQUITY> 18,590,105
<SALES> 21,674,485
<TOTAL-REVENUES> 24,272,470
<CGS> 11,508,384
<TOTAL-COSTS> 25,871,405
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444,981
<INCOME-PRETAX> (2,198,216)
<INCOME-TAX> (832,514)
<INCOME-CONTINUING> (1,365,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,365,702)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
