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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the fiscal year ended February 28, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-14749
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-0910696
(State of Incorporation) (I.R.S. Employer Identification No.)
265 Turner Drive, Durango, CO 81301
(Address of principal executive
offices)
(970) 259-0554
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.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. [X]
On May 24, 1999, there were 2,599,599 shares of Common Stock outstanding. The
aggregate market value of the Common Stock (based on the average of the closing
bid and ask prices as quoted on the NASDAQ National Market System on May 24,
1999) held by non-affiliates was $13,128,341.
Documents incorporated by reference: None
The Exhibit Index is located on page 51.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
TABLE OF CONTENTS
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Page No.
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PART I.
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II.
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk 23
Item 8 Financial Statements 25
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44
PART III.
Item 10 Directors and Executive Officers of the Registrant 44
Item 11 Executive Compensation 47
Item 12 Security Ownership of Certain Beneficial Owners and Management 48
Item 13 Certain Relationships and Related Transactions 51
PART IV.
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K 51
SIGNATURES 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. (the "Company") is a manufacturer, international franchiser and
retail operator. The Company is headquartered in Durango, Colorado and
manufactures an extensive line of premium chocolate candies and other
confectionery products. As of April 30, 1999 there were 40 Company-owned and 187
franchised Rocky Mountain Chocolate Factory stores operating in 41 states,
Canada and Guam.
Approximately 40% 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 store ambiance and the
aroma and sight of products being made attracts foot traffic and assures
customers that products are indeed fresh.
The Company believes that its principal competitive strengths lie in its name
recognition, its reputation for the quality, variety and the taste of its
products; the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in the
manufacture of chocolate candy products and the merchandising and marketing of
chocolate and other candy products; and the control and training infrastructures
it has implemented to assure consistent customer service and execution of
successful practices and techniques at its franchised and Company-owned stores.
The Company believes its manufacturing expertise and reputation for quality has
facilitated the sale of selected product through new distribution channels. The
Company is currently testing and evaluating a number of new distribution channel
programs including wholesaling, fundraising, corporate sales, mail order and
internet sales.
The Company's revenues are currently derived from three principal sources: (i)
sales to franchisees and others of chocolates and other confectionery products
manufactured by the Company (43-43-41%); (ii) sales at Company-owned stores of
chocolates and other confectionery products (including product manufactured by
the Company) (45-44-47%) and (iii) the collection of initial franchise fees and
royalties from franchisees (12-13-12%). The figures in parentheses show the
percentage of total revenues attributable to each source for fiscal years ended
February 28, 1999, 1998 and 1997, respectively.
According to the National Confectionery Association the total U.S. candy market
exceeded $22.7 billion of sales in 1997. 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 11 pounds per year nationally,
generating annual sales of approximately $12.5 billion. In 1997, consumption of
chocolate products increased 1.0% versus a 2.3% increase in non-chocolate
candies.
In December 1997, the Company decided its Fuzziwig's Candy Factory store segment
did not meet its strategic long-term goals, and accordingly, adopted a plan to
divest itself of these operations. The Company completed the divestiture on July
31, 1998. Fuzziwig's Candy Factory stores sold hard conventional and nostalgic
candies purchased from third party suppliers.
BUSINESS STRATEGY
The Company's objective is to build on its position as a leading international
franchiser, manufacturer of high quality chocolate and other confectionery
products, and operator of retail chocolate stores. The Company continually seeks
opportunities to profitably expand its business. To accomplish this objective,
the Company employs a business strategy that includes the following elements:
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Product Quality and Variety
The Company maintains the unsurpassed taste and quality of its chocolate candies
by using only the finest chocolate and other wholesome ingredients. The Company
uses its own proprietary recipes, primarily developed by its master candy maker.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of the
Company's chocolate candies throughout the year and as many as 200, including
many packaged candies, during the holiday seasons. Individual stores also offer
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, implemented a major program 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.
Store Atmosphere and Ambiance
The Company seeks to establish an enjoyable and inviting atmosphere in each
Rocky Mountain Chocolate Factory store. Each store prepares certain products,
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. The Company's
design staff has developed easily replicable designs and specifications to
ensure that the Rocky Mountain Chocolate Factory concept is consistently
implemented throughout the system.
Site Selection
Careful selection of a site is critical to the success of a Rocky Mountain
Chocolate Factory store. Many factors are considered by the Company in
identifying suitable sites, including tenant mix, visibility, attractiveness,
accessibility, level of foot traffic and occupancy costs. Final site selection,
for both franchised and Company-owned stores, occurs only after the Company's
senior management has approved the site. The Company believes that the
experience of its management team in evaluating a potential site is one of the
Company's competitive strengths.
Customer Service Commitment
The Company emphasizes 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.
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 fiscal years, except for fiscal 1997:
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1995 3.4%
1996 2.9%
1997 (0.5%)
1998 7.4%
1999 6.7%
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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 store ambiance and theme.
The Company believes that development and sale of superior new products, such as
its new line of sugar-free products, will also prove to be conducive to the goal
of enhanced same store retail sales growth.
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Increase Same Store Pounds Purchased by Existing Locations
In fiscal 1999, the Company experienced a same store pounds purchased decline of
2.7%. 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 is in the
process of designing new packaging, adding new products and focusing its
existing product lines in an effort to reverse this trend.
Enhanced Operating Efficiencies
The Company seeks to improve its profitability by controlling costs and
increasing the efficiency of its operations. Efforts in the last several years
include the purchase of additional automated factory equipment, implementation
of a comprehensive MRP II forecasting, planning, scheduling and reporting system
and the closure or sale of underperforming Company-owned stores. In the spring
of calendar year 1995, the Company 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
Key elements of the Company's expansion strategy include:
New Distribution Channels
In fiscal 1998, the Company began aggressively pursuing distribution of its
products outside its franchised and Company-owned store system. With limited
viable real estate available domestically for the establishment of new franchise
and Company-owned store locations the Company believes a significant portion of
its revenue growth and profitability goals will be achieved through distribution
of products outside the existing system of retail stores.
The Company believes that its strategy to distribute selected Rocky Mountain
Chocolate Factory products through new distribution channels will build its
brand awareness and customer base and ultimately increase the Company's and its
franchisees' market share.
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 availability of existing premium
locations in 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, and mixed use and factory outlet centers.
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.
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Name Recognition and New Market Penetration
The Company believes the visibility of its stores and the high foot 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.
Distribution of Rocky Mountain Chocolate Factory products through new channels,
such as major national retail chains, also increases name recognition and brand
awareness in areas of the country in which the Company has not previously had a
significant presence. The Company believes that by distributing selected Rocky
Mountain Chocolate Factory products through new distribution channels its name
recognition will improve and benefit its entire franchised and Company-owned
store systems.
STORE CONCEPT
The Company seeks to establish a fun and inviting atmosphere in its Rocky
Mountain Chocolate Factory store locations.
Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory
store prepares certain products, including fudge and caramel apples, in the
store. Customers can observe store personnel 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 40% of
the revenues of Company-owned and franchised stores are generated by sales of
products prepared on the premises. The Company believes the in-store preparation
and aroma of its products enhance the ambiance at Rocky Mountain Chocolate
Factory stores, are fun and entertaining for its customers and convey an image
of freshness and homemade quality.
Rocky Mountain Chocolate Factory stores have a distinctive country Victorian
decor, which further enhances their friendly and enjoyable atmosphere. Each
store includes finely-crafted wood cabinetry, copper and brass accents, etched
mirrors and large marble tables on which fudge and other products are made. To
ensure that all stores conform to the Rocky Mountain Chocolate Factory image,
the Company's design staff provides working drawings and specifications and
approves the construction plans for each new franchised or Company-owned store.
The Company also controls the signage and building materials that may be used in
the stores.
The average store size is approximately 1,000 square feet, approximately 650
square feet of which is selling space. Most stores are open seven days a week.
Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6
p.m. on Sundays. Store hours in tourist areas may vary depending upon the
tourist season.
PRODUCTS AND PACKAGING
The Company typically produces approximately 300 chocolate candies and other
confectionery products, using proprietary recipes developed primarily by the
Company's master candy maker. These products include many varieties of clusters,
caramels, creams, mints and truffles. The Company continues to engage in a major
effort to expand its product line by developing additional exciting and
attractive new products. During the Christmas, Easter and Valentine's Day
holiday seasons, the Company may make as many as 200 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, 40% by products made in the store using Company recipes and ingredients
purchased from the Company or approved suppliers and the remaining 10% by
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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 packaging for its Rocky Mountain Mints in 1995 received the
AWARD OF EXCELLENCE from the National Paperbox Association.
OPERATING ENVIRONMENT
The Company currently establishes franchised and Company-owned Rocky Mountain
Chocolate Factory 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 340 factory outlet malls in the United States, and as of
February 28, 1999, there were Rocky Mountain Chocolate Factory stores in
approximately 100 of these malls in over 35 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 attractive
sites in new and existing outlet malls.
Tourist Areas
As of February 28, 1999, there were approximately 50 Rocky Mountain Chocolate
Factory stores in franchised locations considered to be tourist areas, including
Fisherman's Wharf in San Francisco, California and the Riverwalk in San Antonio,
Texas. Tourist areas are very attractive locations because they offer high
levels of foot traffic and favorable customer spending characteristics, and
greatly increase the Company's visibility and name recognition. The Company
believes there are significant opportunities to expand into additional tourist
areas with high levels of foot traffic.
Regional Malls
There are approximately 2,500 regional malls in the United States, and as of
February 28, 1999, there were Rocky Mountain Chocolate Factory stores in
approximately 20 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 more expensive rent
structures and more competing food and beverage concepts.
The Company believes there are a number of other environments that have the
characteristics necessary for the successful operation of Rocky Mountain
Chocolate Factory stores such as airports and sports arenas. Three franchised
Rocky Mountain
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Chocolate Factory stores exist at airport locations: two at Denver International
Airport and one at Vancouver International Airport in Canada. As described
above, the Company has also recently begun aggressively pursuing the
distribution of its products through new distribution channels such as major
national retail, fundraising and corporate sales organizations.
FRANCHISING PROGRAM
General
The Company's franchising 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, 1999, there were 187 franchised stores in the Rocky Mountain
Chocolate Factory system.
Franchisee Sourcing and Selection
The majority of new franchises are awarded to persons referred by existing
franchisees, to interested consumers who have visited Rocky Mountain Chocolate
Factory stores and to existing franchisees. The Company also advertises for new
franchisees in national and regional newspapers as suitable potential store
locations come to the Company's attention. Franchisees are approved by the
Company on the basis of the applicant's net worth and liquidity, together with
an assessment of work ethic and personality compatibility with the Company's
operating philosophy.
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, 1999, operated 27 stores
under the agreement.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic
franchisee is required to complete a 7-day comprehensive training program in
store operations and management. The Company has established a training center
at its Durango headquarters in the form of a full-sized replica of a properly
configured and merchandised Rocky Mountain Chocolate Factory store. Topics
covered in the training course include the Company's philosophy of store
operation and management, customer service, merchandising, pricing, cooking,
inventory and cost control, quality standards, record keeping, labor scheduling
and personnel management. Training is based on standard operating policies and
procedures contained in an operations manual provided to all franchisees, which
the franchisee is required to follow by terms of the franchise agreement.
Additionally, and importantly, trainees are provided with a complete orientation
to Company operations by working in key factory operational areas and by meeting
with each member of the senior management of the Company. Training continues
through the opening of the store, where Company field consultants assist and
guide the franchisee in all areas of operation.
The Company's operating objectives include providing Company knowledge and
expertise in merchandising, marketing and customer service to all front-line
store level employees to maximize their skills and ensure that they are fully
versed in the Company's proven techniques.
The Company provides ongoing support to franchisees through its field
consultants, who maintain regular and frequent communication with the stores by
phone and by site visits. The field consultants also review and discuss with the
franchisee store operating results and provide advice and guidance in improving
store profitability and in developing and executing store marketing and
merchandising programs. The Company has developed a handbook containing a
"pre-packaged" local store marketing plan, which
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allows franchisees to implement cost-effective promotional programs that have
proven successful in other Rocky Mountain Chocolate Factory stores.
Regional conferences are held each fall with a focus on holiday merchandising
techniques in preparation for the fall and Christmas holidays. "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 Rocky Mountain Chocolate Factory franchisees
requires compliance with the Company's procedures of operation and food quality
specifications and permits audits and inspections by the Company.
Operating standards for Rocky Mountain Chocolate Factory stores are set forth in
operating manuals. These manuals cover general operations, factory ordering,
merchandising, advertising and accounting procedures. Through their regular
visits to franchised stores, Company field consultants audit performance and
adherence to Company standards. The Company has the right to terminate any
franchise agreement for non-compliance with the Company's operating standards.
Products sold at the stores and ingredients used in the preparation of products
approved for on-site preparation must be purchased from the Company or from
approved suppliers.
The Franchise Agreement: Terms and Conditions
The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is
made pursuant to the Uniform Franchise Offering Circular prepared in accordance
with federal and state laws and regulations. States that regulate the sale and
operation of franchises require a franchiser to register or file certain notices
with the state authorities prior to offering and selling franchises in those
states.
Under the current form of domestic Rocky Mountain Chocolate Factory franchise
agreement, franchisees pay the Company (i) an initial franchise fee of $19,500
for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a
marketing fee equal to 1% of monthly gross sales. Franchisees are generally
granted exclusive territory with respect to the operation of Rocky Mountain
Chocolate Factory stores only in the immediate vicinity of their stores.
Chocolate products not made on the premises by franchisees must be purchased
from the Company or approved suppliers.
The franchise agreements require franchisees to comply with the Company's
procedures of operation and food quality specifications, to permit inspections
and audits by the Company and to remodel stores to conform with standards in
effect. The Company may terminate the franchise agreement upon the failure of
the franchisee to comply with the conditions of the agreement and upon the
occurrence of certain events, such as insolvency or bankruptcy of the franchisee
or the commission by the franchisee of any unlawful or deceptive practice, which
in the judgment of the Company is likely to adversely affect the Rocky Mountain
Chocolate Factory system. The Company's ability to terminate franchise
agreements pursuant to such provisions is subject to applicable bankruptcy and
state laws and regulations. See "Business-Regulation."
The agreements prohibit the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreements also
give the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.
The term of each Rocky Mountain Chocolate Factory franchise agreement is five
years, and franchisees have the right to renew for two successive five-year
terms.
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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
As of April 30, 1999, there were 40 Company-owned Rocky Mountain Chocolate
Factory stores. Company-owned stores provide a training ground for Company-owned
store personnel and district managers and a controllable testing ground for new
products and promotions, operating and training methods and merchandising
techniques. 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 "Franchising Program-Quality Standards and
Control."
MANUFACTURING OPERATIONS
General
The Company manufactures its chocolate candies at its factory in Durango,
Colorado. All products are produced consistent with the Company's philosophy of
using only the finest, highest quality ingredients with no artificial
preservatives to achieve its marketing motto of "THE PEAK OF PERFECTION IN
HANDMADE CHOCOLATES-TM-."
It has always been the belief of management that the Company should control the
manufacturing of its own chocolate products. By controlling manufacturing, the
Company can better maintain its high product quality standards, offer unique,
proprietary products, manage costs, control production and shipment schedules
and potentially pursue new or under-utilized distribution channels.
Manufacturing Processes
The manufacturing process primarily involves cooking or preparing candy centers,
including nuts, caramel, peanut butter, creams and jellies, and then coating
them with chocolate or other toppings. All of these processes are conducted in
carefully controlled temperature ranges, and the Company employs strict quality
control procedures at every stage of the manufacturing process. The Company uses
a combination of manual and automated processes at its factory. Although the
Company believes that it is currently preferable to perform certain
manufacturing processes, such as dipping of some large pieces, by hand,
automation increases the speed and efficiency of the manufacturing process. The
Company has from time to time automated processes formerly performed by hand
where it has become cost-effective for the Company to do so without compromising
product quality or appearance.
The Company seeks to ensure the freshness of products sold in Rocky Mountain
Chocolate Factory stores with frequent shipments and production schedules that
are closely coordinated with projected and actual orders. 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.
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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.
Trucking Operations
The Company operates eight trucks and ships a substantial portion of its
products from the factory on its own fleet. The Company's trucking operations
enable it to deliver its products to the stores quickly and cost-effectively.
In addition, the Company back-hauls its own ingredients and supplies, as well
as product from third parties, on return trips as a basis for increasing
trucking program economics.
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.
COMPETITION
The retailing of confectionery products is highly competitive. The Company and
its franchisees compete with numerous businesses that offer confectionery
products. Many of these competitors have greater name recognition and financial,
marketing and other resources than the Company. In addition, there is intense
competition among retailers for real estate sites, store personnel and qualified
franchisees. Competitive market conditions could adversely affect the Company
and its results of operations and its ability to expand successfully.
The Company believes that its principal competitive strengths lie in its name
recognition and its reputation for the quality, value, variety and taste of
its products and the special ambiance of its stores; its knowledge and
experience in applying criteria for selection of new store locations; its
expertise in merchandising and marketing of chocolate and other candy
products; and the control and training infrastructures it has implemented to
assure execution of successful practices and techniques at its 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 pursue new or
under-utilized distribution channels.
11
<PAGE>
TRADE NAME AND TRADEMARKS
The trade name "ROCKY MOUNTAIN CHOCOLATE FACTORY,-Registered Trademark" the
phrases "THE PEAK OF PERFECTION IN HANDMADE CHOCOLATES-TM-" and "AMERICA'S
CHOCOLATIER-TM-", as well as all other trademarks, service marks, symbols,
slogans, emblems, logos and designs used in the Rocky Mountain Chocolate
Factory system, are proprietary rights of the Company. All of the foregoing
are believed to be of material importance to the Company's business. The
registration for the trademark "ROCKY MOUNTAIN CHOCOLATE FACTORY" has been
granted in the United States and Canada. Applications have been filed to
register the Rocky Mountain Chocolate Factory trademark in certain foreign
countries.
The Company has not attempted to obtain patent protection for the proprietary
recipes developed by the Company's master candy-maker and is relying upon its
ability to maintain the confidentiality of those recipes.
EMPLOYEES
At February 28, 1999, the Company employed approximately 390 people. Most
employees, with the exception of store, factory and corporate management, are
paid on an hourly basis. The Company also employs some people on a temporary
basis during peak periods of store and factory operations. The Company seeks to
assure that participatory management processes, mutual respect and
professionalism and high performance expectations for the employee exist
throughout the organization.
The Company believes that it provides working conditions, wages and benefits
that compare favorably with those of its competitors. The Company's employees
are not covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
SEASONAL FACTORS
The Company's sales and earnings are seasonal, with significantly higher sales
and earnings occurring during the Christmas holiday and summer vacation seasons
than at other times of the year, which causes fluctuations in the Company's
quarterly results of operations. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings and
the sale of franchises. Because of the seasonality of the Company's business and
the impact of new store openings and sales of franchises, results for any
quarter are not necessarily indicative of the results that may be achieved in
other quarters or for a full fiscal year.
REGULATION
Each of the Company-owned and franchised stores is subject to licensing and
regulation by the health, sanitation, safety, building and fire agencies in the
state or municipality where located. Difficulties or failures in obtaining the
required licensing or approvals could delay or prevent the opening of new
stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration
and disclosure requirements in the offer and sale of franchises. The Company is
also subject to the Federal Trade Commission regulations relating to disclosure
requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and
regulations governing the termination or non-renewal of franchises and other
aspects of the franchise relationship that are intended to protect
franchisees. Although these laws and regulations, and related court decisions
may limit the Company's ability to terminate franchises and alter franchise
agreements, the Company does not believe that such laws or decisions will
have a material adverse effect on its franchise operations. However, the laws
applicable to franchise operations and relationships continue to develop, and
the Company is unable to predict the effect on its intended operations of
additional requirements or restrictions that may be enacted or of court
12
<PAGE>
decisions that may be adverse to franchisers.
Federal and state environmental regulations have not had a material impact on
the Company's operations but more stringent and varied requirements of local
governmental bodies with respect to zoning, land use and environmental factors
could delay construction of new stores.
Companies engaged in the manufacturing, packaging and distribution of food
products are subject to extensive regulation by various governmental agencies. A
finding of a failure to comply with one or more regulations could result in the
imposition of sanctions, including the closing of all or a portion of the
Company's facilities for an indeterminate period of time.
The Company's product labeling is subject to and complies with the Nutrition
Labeling and Education Act of 1990.
The Company provides a limited amount of trucking services to third parties, to
fill available space on the Company's trucks. The Company's trucking operations
are subject to various federal and state regulations, including regulations of
the Federal Highway Administration and other federal and state agencies
applicable to motor carriers, safety requirements of the Department of
Transportation relating to interstate transportation and federal, state and
Canadian provincial regulations governing matters such as vehicle weight and
dimensions.
The Company believes it is operating in substantial compliance with all
applicable laws and regulations.
ITEM 2. PROPERTIES
The Company's manufacturing operations and corporate headquarters are located at
its 58,000 square foot manufacturing facility, which it owns, in Durango,
Colorado. During fiscal 1999, the Company's factory produced approximately 2.2
million pounds of chocolate candies, up from 2.0 million pounds in fiscal 1998.
The factory has the capacity to produce approximately 3.5 million pounds per
year. In January 1998, the Company acquired a two acre parcel adjacent to its
factory to ensure the availability of adequate space to expand the factory as
volume demands.
In January 1998, the Company acquired a two acre parcel adjacent to its factory
to ensure the availability of adequate space to expand the factory as volume
demands.
As of April 30, 1999, 36 of the 40 Company-owned stores were occupied pursuant
to non-cancelable leases of five to ten years having varying expiration dates,
most of which contain optional five-year renewal rights. The Company does not
deem any individual store lease to be significant in relation to its overall
operations.
The Company acts as primary lessee of some franchised store premises, which it
then subleases to franchisees, but the majority of existing locations are leased
by the franchisee directly. Current Company policy is not to act as primary
lessee on any further franchised locations. At April 30, 1999, the Company was
the primary lessee at 43 of its 187 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 6 of Notes to financial
statements.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that are material
to the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal 1999.
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 May 18, 1998 the Company purchased 336,000 shares of its common stock at
$5.15 per share in a private transaction. The Company made this purchases
because the Company felt that its Common Stock was undervalued and that such
purchase would therefore be in the best interest of the Company and its
stockholders.
The table below sets forth high and low bid information for the Common Stock as
quoted on Nasdaq for each quarter of fiscal years 1999 and 1998. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 1999 HIGH LOW
<S> <C> <C>
First Quarter $7.75 $4.750
Second Quarter 7.125 4.250
Third Quarter 6.500 4.000
Fourth Quarter 5.625 3.938
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 1998 HIGH LOW
<S> <C> <C>
First Quarter $5.125 $2.750
Second Quarter 5.250 4.000
Third Quarter 7.125 4.250
Fourth Quarter 6.594 4.500
</TABLE>
On May 24, 1999 the closing bid price for the Common Stock as reported on the
NASDAQ Stock Market was $6.00.
(b) HOLDERS
On May 24, 1999 there were approximately 420 record holders of the Company's
Common Stock. The Company believes that there are more than 2000 beneficial
owners of its Common Stock.
(c) DIVIDENDS
The Company has not paid cash dividends on its Common Stock since its inception
and does not intend to pay cash dividends for the foreseeable future. Any future
earnings will be retained for use in the Company's business.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended February
28 or 29, 1995 through 1999, 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."
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 or 29,
SELECTED STATEMENT OF OPERATIONS DATA
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Total revenues $13,616 $18,552 $22,281 $23,764 $26,233
Operating income (loss) 2,270 2,157 (1,026) 2,599 1,319
Income (loss) from continuing
operations 1,350 1,207 (1,010) 1,260 687
Income (loss) from discontinued
operations (net of income taxes) -- 1 (356) (1,020) --
Net income (loss) $1,350 $1,208 $(1,366) $240 $421
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $.53 $.43 $(.35) $.43 $.16
Discontinued Operations -- -- (.12) (.35) --
Net Income (loss) $.53 $.43 $(.47) $.08 $.16
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $.50 $.42 $(.35) $.43 $.16
Discontinued Operations -- -- (.12) (.35) --
Net Income (loss) $.50 $.42 $(.47) $.08 $.16
Weighted average common shares
outstanding 2,515 2,797 2,908 2,913 2,665
Weighted average common shares
outstanding, assuming dilution 2,718 2,887 2,908 2,930 2,677
SELECTED BALANCE SHEET DATA
Working capital $1,627 $2,043 $2,664 $3,949 $1,558
Total assets 10,181 16,308 18,666 19,868 18,652
Long-term debt 2,314 2,184 5,737 5,993 5,250
Stockholders' equity 5,907 11,117 9,779 10,019 8,509
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the audited
financial statements and related Notes of the Company included elsewhere in this
report. This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties.
The Company's ability to successfully achieve expansion of its Rocky Mountain
Chocolate Factory franchise system depends on many factors not within the
Company's control including the availability of suitable sites for new store
establishment and the availability of qualified franchisees to support such
expansion.
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<PAGE>
Efforts to reverse the decline in same store pounds purchased from the factory
by franchised stores and to increase total factory sales depends on many factors
not within the Company's control including the receptivity of its franchise
system and of customers in potential new distribution channels of its product
introductions and promotional programs.
As a result, the actual results realized by the Company could differ materially
from the results discussed in or contemplated by the forward-looking statements
made herein. Words or phrases such as "will," "anticipate," "expect," "believe,"
"intend," "estimate," "project," "plan" or similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on the forward-looking statements in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Continuing Operations Results Summary
The Company posted record revenues in fiscal 1999. Revenues rose 10.4% from
1998 to 1999, operating income decreased $1.3 million from $2.6 million in
1998 to $1.3 million in 1999 and income from continuing operations decreased
$0.9 million from $1.3 million in 1998 to $0.4 million in 1999. Diluted
earnings per share from continuing operations decreased from $.43 per share
in 1998 to $.16 per share in 1999.
Revenues
<TABLE>
<CAPTION>
($'s in thousands) 1999 1998 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $11,433.3 $10,198.6 $1,234.7 12.1%
Retail Sales 11,759.7 10,460.5 1,299.2 12.4%
Royalty and Marketing Fees 2,919.6 2,747.6 172.0 6.3%
Franchise Fees 119.9 357.3 (237.4) (66.4%)
Total $26,232.5 $23,764.0 $2,468.5 10.4%
</TABLE>
Factory Sales
Factory sales increased $1.2 million or 12.1% to $11.4 million in fiscal 1999,
compared to $10.2 million in 1998. This increase was due primarily to wholesale
sales of product to distribution channels outside of the Company's retail store
system. Same store pounds purchased from the factory by franchised stores
declined 2.9% in fiscal 1999 versus fiscal 1998 partially offsetting the
increase in wholesale sales. The Company believes the decline in same store
pounds purchased from the factory resulted primarily from increased retail sales
of store-made product and product purchased from authorized vendors relative to
factory-made products. Same store pounds purchased is a comparison of pounds
purchased from the factory by franchised stores open for 12 months in each
fiscal year.
In response to the trend of decreasing same store pounds purchased from the
factory and the limited number of suitable locations available for new
Company-owned and franchised stores, the Company is focusing on developing
new distribution channels, and new product introductions that replace
products from authorized outside vendors, to improve factory sales trends.
Retail Sales
Retail sales increased $1.3 million or 12.4% to $11.8 million in fiscal 1999,
compared to $10.5 million in fiscal 1998. This increase resulted primarily from
an increase in the number of Company-owned stores from 37 as of February 28,
1998 to 42 as of February 28, 1999 and a 2.4% increase in same store sales.
16
<PAGE>
During fiscal 1999 the Company bought 5 stores from franchisees. During fiscal
2000 the Company plans to begin a program of selective divestiture of lower
volume Company-owned stores.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $172,000 or 6.3% to $2.9 million in
fiscal 1999, compared to $2.7 million in fiscal 1998. This increase resulted
from an increase in same store sales at franchised stores of 7.7%. Franchise fee
revenues decreased $237,000 in fiscal 1999 compared to fiscal 1998 due to a
decrease in the number of new franchises sold.
The Company is currently experiencing a constraint in the number of viable new
locations available for establishment of its Rocky Mountain Chocolate Factory
stores due to a lack of quality locations in environments where the concept has
proven successful.
The Company is currently examining alternatives to stand-alone Rocky Mountain
Chocolate Factory stores to further penetrate established operating environments
and venues that have yet to be exploited.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 56.7% in fiscal 1999 versus
53.1% in fiscal 1998. This deterioration resulted from decreased factory and
Company-owned store margins. Factory margins decreased to 26.8% in fiscal 1999
from 32.5% in fiscal 1998. Company-owned store margins for fiscal 1999 decreased
to 59.3% from 61.0% in fiscal 1998. Factors contributing to the decrease in
factory margins include: (1) incremental costs associated with the start-up (due
to labor shortages and facility space constraints) and ultimate closure (due to
less than anticipated demand) of a remote packaging facility; (2) production
inefficiencies caused by facility space constraints and the lack of a sufficient
seasonal workforce; (3) higher than expected third party shipping costs; (4)
provisions for returns and allowances relating to products sold to outside
distribution channels and (5) a non-recurring charge to factory cost of sales of
approximately $398,000 representing write-down provisions for spoiled, excess
and obsolete inventory resulting primarily from product over-production. The
reduction in Company-owned store margins was due primarily to a product mix
shift from store made product to product produced by the factory.
The Company has implemented certain changes to its manufacturing processes and
cost structure in order to improve factory gross margin and address facility
space constraints and seasonal labor shortages. The Company believes these
efforts will ultimately restore manufacturing profitability to levels achieved
in fiscal 1998.
Franchise Costs
Franchise costs increased $42,000 or 3.8% in fiscal 1999 compared to fiscal 1998
due to increased support costs. As a percentage of total royalty and marketing
fees and franchise fee revenue, franchise costs increased to 37.8% in fiscal
1999 from 35.6% in fiscal 1998 due to increased support costs and a 66.4%
decrease in franchise fee revenue.
Sales & Marketing
Sales and Marketing costs increased 40% to $1.8 million in fiscal 1999 from
$1.3 million in fiscal 1998. This increase is due to: (1) expansion of the
Company's sales and marketing group to support a larger base of franchised
and Company-owned stores; (2) expansion of promotional programs and marketing
materials available to franchised and Company-owned stores; (3) establishment
of a sales force focused on new distribution opportunities; (4) enhanced
customer service and new product marketing programs and (5) costs associated
with certain new distribution channel customers.
17
<PAGE>
General and Administrative
General and administrative expenses increased 6.8% from $1.9 million in fiscal
1998 to $2.0 million in fiscal 1999, primarily as a result of increased bad debt
expense related to new distribution channel customers. As a percentage of total
revenues, general and administrative expense declined from 7.9% in fiscal 1998
to 7.6% in fiscal 1999.
Retail Operating Expenses
Retail operating expenses increased from $5.9 million in fiscal 1998 to $6.7
million in fiscal 1999; an increase of 12.6%. This increase resulted primarily
from an increase in the number of Company-owned stores from 37 at February 28,
1998 to 42 at February 28, 1999. Retail operating expenses, as a percentage of
retail sales, remained relatively constant at 56.7% in fiscal 1998 compared to
56.8% in fiscal 1999.
Provision for Store Closures, Impairment Loss and Loss on Write-down of Assets
In the fourth quarter of fiscal 1999, a non-recurring charge of approximately
$124,000 was recorded representing the loss expected to result from the closure
of two Company-owned stores.
Other Expense
Other expense of $631,000 incurred in fiscal 1999 increased 14.8% from the
$550,000 incurred in fiscal 1998. This increase resulted from decreased interest
income on excess cash balances in fiscal 1999 and increased interest expense
related to borrowings on the Company's line of credit facility.
Income Tax Expense
The Company's effective income tax rate in fiscal 1999 was 38.7% in comparison
with the 38.5% in 1998.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations. On June 5, 1998,
the Company entered into a definitive agreement to sell substantially all the
assets of its Fuzziwig's segment for $1.6 million. This transaction closed on
July 31, 1998.
The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of
estimated losses during the phase out period of $250,000), net of applicable
income tax benefit of $587,000, has been recorded in the accompanying statement
of operations for the year ending February 28, 1998.
The operating results of Fuzziwig's, including disposition costs, and operating
losses during the phase-out period totaling $1.5 million have been segregated
from continuing operations and reported as separate line items net of applicable
income taxes in the statements of operations for all applicable periods
reported.
Loss from discontinued operations was $.35 per diluted share in fiscal 1998
versus nil in fiscal 1999.
Net Income
Net Income including discontinued operations was $.08 per diluted share in
fiscal 1998 versus $.16 per diluted share in fiscal 1999.
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<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997
Continuing Operations Results Summary
The Company posted record revenues and operating income in fiscal 1998.
Revenues rose 6.7% from 1997 to 1998, operating income increased $3.6 million
from a loss of $1.0 million in 1997 to $2.6 million in 1998 and income from
continuing operations increased $2.3 million from a loss of $1.0 million in
1997 to income of $1.3 million in 1998. Diluted earnings per share from
continuing operations increased from a loss of $.35 per share in 1997 to
income of $.43 per share in 1998.
Revenues
<TABLE>
<CAPTION>
($'s in thousands) 1998 1997 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $10,198.6 $9,188.2 $1,010.4 11.0%
Retail Sales 10,460.5 10,494.4 (33.9) (.3%)
Royalty and Marketing Fees 2,747.6 2,342.4 405.2 17.3%
Franchise Fees 357.3 255.6 101.7 39.8%
Total $23,764.0 $22,280.6 $1,483.4 6.7%
</TABLE>
Factory Sales
Factory sales increased $1.0 million or 11% to $10.2 million in fiscal 1998,
compared to $9.2 million in 1997. This increase was due to: (1) an increase in
the number of franchised stores from 170 as of February 28, 1997 to 183 as of
February 28, 1998; (2) the commencement in fiscal 1998 of wholesale sales of
product to alternative distribution channels and (3) a 2.6% price increase in
April of 1997. Same store pounds purchased from the factory by franchised stores
declined 2.2% in fiscal 1998 versus fiscal 1997 partially offsetting the above
increases. The Company believes the decline in same store pounds purchased from
the factory resulted primarily from increased retail sales of store-made product
and product purchased from authorized vendors relative to factory-made products.
Same store pounds purchased is a comparison of pounds purchased from the factory
by franchised stores open for 12 months in each fiscal year.
Retail Sales
Retail sales decreased $34,000 or 0.3% to $10.46 million in fiscal 1998,
compared to $10.49 million in fiscal 1997. This decrease resulted primarily from
the closure and sale of certain under-performing stores in fiscal 1998 and was
substantially offset by an increase of 7.1% in comparable store retail sales in
1998 versus fiscal 1997.
During fiscal 1998 the Company sold 7 and closed 6 Company-owned stores.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $405,000 or 17.3% to $2.7 million in
fiscal 1998, compared to $2.3 million in fiscal 1997. This increase resulted
from an increase in the number of franchised stores operating to 183 in fiscal
1998 compared to 170 in fiscal 1997 and an increase in same store sales at
franchised stores of 7.4%. Franchise fee revenues increased $102,000 in fiscal
1998 compared to fiscal 1997 due to an increase in the number of new franchises
sold.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 53.1% in fiscal 1998 versus
56.0% in fiscal 1997. This improvement resulted from increased margins on both
factory and retail sales. Company-owned store margins for fiscal 1998 improved
to 61.0% in fiscal 1998 from 57.8% in fiscal 1997 as a result of an increase in
retail prices, a focus on
19
<PAGE>
higher margin products and reduced inventory shrinkage. Factory margins improved
to 32.5% in fiscal 1998 from 28.3% in fiscal 1997 as a result of improved
manufacturing efficiencies and a 2.6% price increase in April of 1997.
Franchise Costs
Franchise costs decreased $152,000 or 12.1% in fiscal 1998 compared to fiscal
1997. As a percentage of total royalty and marketing fees and franchise fee
revenue, franchise costs decreased to 35.6% in fiscal 1998 from 48.4% in
fiscal 1997. This decrease is due primarily to reductions in design and
construction staffing.
Sales & Marketing
Sales and Marketing increased 74% to $1.3 million in fiscal 1998 from $742,000
in fiscal 1997. This increase is due to: (1) expansion of the Company's sales
and marketing group to support a larger base of franchised and Company-owned
stores; (2) expansion of promotional programs and marketing materials available
to franchised and Company-owned stores; (3) establishment of a sales force
focused on alternative distribution opportunities; and (4) enhanced customer
service and new product marketing programs.
General and Administrative
General and administrative expenses decreased 6.0% from $2.0 million in fiscal
1997 to $1.9 million in fiscal 1998, primarily as a result of reduced bad debt
expense. As a percentage of total revenues, general and administrative expense
declined from 9% in fiscal 1997 to 7.9% in fiscal 1998.
Retail Operating Expenses
Retail operating expenses decreased from $6.4 million in fiscal 1997 to $5.9
million in fiscal 1998; a decrease of 7.0%. This decrease resulted from closing
and selling certain under-performing Company-owned stores. As a result of this
decrease and the improvement in same store retail sales, retail operating
expenses, as a percentage of retail sales, decreased from 60.7% in fiscal 1997
to 56.7% in fiscal 1998.
Provision for Store Closures, Impairment Loss and Loss on Write-down of Assets
In fiscal 1997, a non-recurring restructuring charge of $1.8 million was
recorded representing the loss expected to result from the sale or closure of
certain Company-owned stores and from write-down of certain other store assets
considered impaired under provisions of Financial Accounting Standard (FAS) 121
"Accounting for the Impairment of Long-Lived Assets."
Other Expense
Other expense of $550,000 incurred in fiscal 1998 decreased 8.2% from the
$599,000 incurred in fiscal 1997. This decrease resulted from a non-recurring
litigation settlement charge of $154,000 in fiscal 1997 for early lease
terminations on certain Company-owned stores, and increased interest income on
excess cash balances in fiscal 1998, offset by increased interest expense
related to borrowings in support of the Company's fiscal 1996 and 1997
Company-owned store expansion.
Income Tax Expense
The Company's effective income tax rate in fiscal 1997 was 37.9% in comparison
with the 38.5% in 1998. The increase resulted from utilization of remaining
available state net operating loss carryforwards in fiscal 1997.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly,
20
<PAGE>
adopted a plan to discontinue its operations. On June 5, 1998, the Company
entered into a definitive agreement to sell substantially all the assets of its
Fuzziwig's segment for $1.6 million. This transaction closed on July 31, 1998.
The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of
estimated losses during the phase out period of $250,000), net of applicable
income tax benefit of $587,000, has been recorded in the accompanying statement
of operations for the year ending February 28, 1998.
The operating results of Fuzziwig's, including disposition costs and operating
losses during the phase-out period totaling $1.5 million have been segregated
from continuing operations and reported as separate line items net of applicable
income taxes in the statements of operations for all periods reported.
Loss from discontinued operations was $.35 per diluted share in fiscal 1998
versus $.12 in fiscal 1997.
Net Income
Net Income including discontinued operations was $.08 per diluted share in
fiscal 1998 versus a loss of $.47 per diluted share in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1999, working capital was $1.5 million compared with $3.9
million as of February 28, 1998, a $2.4 million decrease. This decrease is
primarily the result of the use of $1.8 million of working capital to repurchase
336,000 shares of the Company's common stock at $5.15 per share, related
transaction expenses and loans to certain officers and directors of $249,000 to
acquire an additional 54,000 shares.
Cash and cash equivalent balances decreased from $1.8 million as of February 28,
1998 to $.3 million as of February 28, 1999 as a result of cash flows used in
investing activities in excess of cash flows generated by operating and
financing activities. The Company's current ratio was 1.3 to 1 at February 28,
1999 in comparison with 2.1 to 1 at February 29, 1998.
The Company's long-term debt is comprised primarily of a real estate mortgage
facility used to finance the Company's factory expansion (unpaid balance as of
February 28, 1999, $1.9 million), and chattel mortgage notes (unpaid balance as
of February 28, 1999, $5.2 million) used to fund the fiscal 1996 and 1997
Company-owned store expansion.
The Company has a $3.0 million credit line, of which $2.1 million was available,
secured by substantially all of the Company's assets except retail store assets
and is subject to renewal in July, 1999.
For fiscal 2000, the Company anticipates making capital expenditures of
approximately $700,000, which will be used to maintain and improve existing
factory and administrative infrastructure and for store remodels. The Company
believes that cash flow from operations and available bank lines of credit will
be sufficient to fund capital expenditures and working capital requirements for
fiscal 2000.
YEAR 2000 MATTERS
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of systems to recognize the date change from
December 31, 1999 to January 1, 2000. The year 2000 issue could result, at the
Company and elsewhere, in system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions or to engage in other normal business activities. The Company has
assessed its computer and business processes and is reprogramming and upgrading
its computer applications to provide for their continued functionality. An
assessment of the readiness of the external entities with which it interfaces is
ongoing.
21
<PAGE>
The Company has developed a detailed year 2000 Conversion Project Plan
("Plan") to address the methods to correct possible disruptions of operations
due to the year 2000 issue. The Plan takes into consideration the following
items: (i) identification and inventorying of hardware, application software,
and equipment utilizing programmable logic chips to control aspects of the
Company's operation, with potential year 2000 problems; (ii) assessment of
scope of year 2000 issues for, and assigning priorities to, each item based
on its importance to the Company's operations; (iii) remediation of year 2000
issues in accordance with assigned priorities, by correction, upgrade,
replacement or retirement; (iv) testing for and validation of year 2000
compliance; and (v) determination of key vendor and customers and their year
2000 compliance. Because the Company uses a variety of information technology
systems, internally-developed and third-party provided software and embedded
chip equipment, depending upon business function and location, various
aspects of the Company's year 2000 efforts are in different phases and are
proceeding in parallel. The task of identifying and inventorying hardware and
application software with year 2000 issues and developing specific strategies
for compliance has been completed. The Company is in the process of upgrading
its main systems and hardware for year 2000 compliance. This critical
remediation work is approximately 70% complete and is scheduled to be tested
and installed by June 1999. Non-critical system conversions have been
identified and are scheduled for completion by October 1999. This remediation
process has commenced and encompasses all areas of operations of the Company,
from verification of the year 2000 compliance of email systems to telephone
systems.
The Company's operations are also dependent on the year 2000 readiness of third
parties who do business with the Company. In particular, the Company's
information technology systems interact with commercial electronic transaction
processing systems to handle customer credit card purchases and other point of
sale transactions, and the Company is also dependent on third-party suppliers of
such infrastructure elements as telephone services, electric power, water, and
banking facilities. The Plan includes identifying and initiating formal
communications with key third parties and suppliers and with significant vendors
to determine the extent to which the Company will be vulnerable to such parties'
failure to resolve their own year 2000 issues. The Company has contacted its
relevant third parties. Although the Company has not been put on notice that any
known third party problem will not be resolved, the Company has limited
information and no assurance of additional information concerning the year 2000
readiness of third parties. The resulting risks to the Company's business are
very difficult to assess.
The estimated cost for implementing the plan including all required remediation
and testing activities is between $100,000 and $150,000 and is being funded
through operating cash flows. The Company anticipates that approximately 15% of
these costs will relate to identification and assessment efforts, approximately
55% to the replacement of noncompliant software and equipment, approximately 5%
to the correction of existing systems and approximately 25% to the testing of
corrections implemented under the Plan. Costs incurred in connection with the
Plan are not expected to result in significant delays or revisions to any of the
Company's other pending or proposed information technology programs. Operating
costs related to year 2000 compliance projects will be incurred over several
quarters and will be expensed as incurred. To date, the Company has incurred
approximately $47,000 of expenses in connection with the Plan.
Based upon the planning completed to date, the Company believes that, with
modifications to existing software, conversions to new software, and appropriate
remediation of embedded chip equipment, the year 2000 issue is not reasonably
likely to pose significant operational problems for the Company's information
technology systems and embedded chip equipment as so modified and converted.
The Company is presently unable to assess the likelihood that the Company will
experience operational problems due to unresolved year 2000 problems of third
parties who do business with the Company. There can be no assurance that other
entities will achieve timely year 2000 compliance; if they do not, year 2000
problems could have a material impact on the Company's operations. Where
22
<PAGE>
commercially reasonable to do so, the Company intends to assess its risks with
respect to failure by third parties to be year 2000 compliant and to seek to
mitigate those risks. If such mitigation is not achievable, year 2000 problems
could have a material impact on the Company's operations.
The Company's estimates of the costs of achieving year 2000 compliance and the
date by which year 2000 compliance will be achieved are based on management's
best estimates, which were derived using numerous assumptions about future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in year 2000 remediation work, the ability to locate and
correct all computer codes, the success achieved by the Company's suppliers in
reaching year 2000 readiness, the timely availability of necessary replacement
items and similar uncertainties.
The Company presently believes that the most reasonably likely worst-case
scenarios that the Company might confront with respect to year 2000 issues have
to do with third parties not being year 2000 compliant. The Company is presently
evaluating vendor and customer compliance and will develop contingency plans,
such as alternate vendor opportunities, after obtaining compliance evaluations,
if necessary, from the balance of vendors who have yet to respond (83%).
However, alternative vendors may not be available for certain services, such as
electrical power, water and local telephone services. The Company's timeline is
to finalize these contingency plans by October 1999.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and labor
directly affect the Company's operations. Most of the Company's leases provide
for cost-of-living adjustments and require it to pay taxes, insurance and
maintenance expenses, all of which are subject to inflation. Additionally the
Company's future lease cost for new facilities may include potentially
escalating costs of real estate and construction. There is no assurance that the
Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed
assets, and is therefore potentially less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior years
will ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday and
summer vacation seasons. In addition, quarterly results have been, and in the
future are likely to be, affected by the timing of new store openings and sales
of franchises. Because of the seasonality of the Company's business and the
impact of new store openings and sales of franchises, results for any quarter
are not necessarily indicative of results that may be achieved in other quarters
or for a full fiscal year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in commodity futures trading or hedging
activities and does not enter into derivative financial instrument
transactions for trading or other speculative purposes. The Company also does
not engage in transactions in foreign currencies or in interest rate swap
transactions that could expose the Company to market risk. However, the
Company is exposed to some commodity price and interest rate risks.
23
<PAGE>
The Company frequently enters into purchase contracts for chocolate and, to a
lesser extent, certain nuts having durations ranging from six to 18 months.
These contracts permit the Company to purchase the specified commodity at a
fixed price on an as-needed basis during the term of the contract. Because
prices for these products may fluctuate, the Company may benefit if prices
rise during the terms of these contracts, but it may be required to pay
above-market prices if prices fall and it is unable to renegotiate the terms
of the contract.
As of February 28, 1999, $1.2 million of the Company's long-term debt was
subject to a variable interest rate. Assuming that this principal amount did
not change during fiscal 2000, other than as a result of scheduled
principal reductions, and assuming that the average effective interest rate
on this debt for 2000 increased by one percent as compared to the average
effective interest rate in effect during 1999, the Company would incur an
additional $10,000 in interest expense in 2000, as compared to 1999, and
would experience a corresponding reduction in cash flow. A decrease in the
average interest rate in effect on this debt during 2000 would result in a
corresponding decrease in interest expense and an increase in cash flow.
The Company also has a $3.0 million bank line of credit that bears interest
at a variable rate. As of February 28, 1999, $900,000 was outstanding under
the line of credit. However, this line of credit is used primarily for
working capital purposes, and the Company expects the outstanding principal
balance to be significantly lower during most of fiscal 2000. As of May 28,
1999, the outstanding principal balance under the line of credit was
$100,000. The outstanding principal balance as of February 28, 1999 was
impacted by, among other things, the expenditure during fiscal 1999 of more
than $1.7 million for the repurchase of Common Stock. The Company does not
believe that it is exposed to any material interest rate risk related to the
line of credit.
The Chief Financial Officer and Chief Operating Officer of the Company has
primary responsibility over the Company's long-term and short-term debt and
has primary responsibility for determining the timing and duration of
commodity purchase contracts and negotiating the terms and conditions of
those contracts.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 26
Statements of Operations 27
Balance Sheets 29
Statements of Changes in Stockholders Equity 30
Statements of Cash Flows 31
Notes to Financial Statements 32
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
We have audited the accompanying balance sheets of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 1999 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended February 28, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
February 28, 1998, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
May 12, 1999
26
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28,
1999 1998 1997
<S> <C> <C> <C>
REVENUES
Sales $23,193,011 $20,659,076 $19,682,622
Franchise and royalty fees 3,039,517 3,104,906 2,597,985
Total revenues 26,232,528 23,763,982 22,280,607
COSTS AND EXPENSES
Cost of sales 13,153,614 10,960,966 11,017,119
Franchise costs 1,147,862 1,106,172 1,258,361
Sales & marketing 1,809,077 1,290,516 741,603
General and administrative 2,004,970 1,877,528 2,076,196
Retail operating expenses 6,674,472 5,930,039 6,375,279
Provision for store closures 123,903 -- 1,358,398
Impairment loss -- -- 149,000
Loss on write-down of assets -- -- 330,587
Total costs and expenses 24,913,898 21,165,221 23,306,543
OPERATING INCOME (LOSS) 1,318,630 2,598,761 (1,025,936)
OTHER INCOME (EXPENSE)
Interest expense (698,557) (664,852) (473,618)
Litigation settlements -- -- (154,300)
Interest income 67,080 114,732 28,637
Other, net (631,477) (550,120) (599,281)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 687,153 2,048,641 (1,625,217)
INCOME TAX EXPENSE (BENEFIT) 265,725 788,640 (615,506)
INCOME (LOSS) FROM CONTINUING OPERATIONS 421,428 1,260,001 (1,009,711)
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations
(net of income taxes) -- (90,849) (355,991)
Provision for estimated loss on disposition, including provision for
operating losses during phase out period of $153,250 (net of income taxes) -- (929,234) --
Total -- (1,020,083) (355,991)
NET INCOME (LOSS) $421,428 $239,918 $(1,365,702)
</TABLE>
(CONTINUED)
The accompanying notes are an integral part of these statements.
27
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28,
1999 1998 1997
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $.16 $.43 $(.35)
Discontinued Operations -- (.35) (.12)
Net Income (Loss) $.16 $.08 $(.47)
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $.16 $.43 $(.35)
Discontinued Operations -- (.35) (.12)
Net Income (Loss) $.16 $.08 $(.47)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,665,567 2,912,387 2,908,492
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 11,776 17,158 --
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,677,343 2,929,545 2,908,492
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF FEBRUARY 28,
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $317,155 $1,795,381
Accounts and notes receivable, less allowance for doubtful accounts of
$259,408 and $214,152 1,874,286 2,174,618
Refundable income taxes 383,511 483,448
Inventories 3,276,550 2,567,966
Deferred income taxes 433,229 257,176
Other 73,827 103,195
Net current assets of discontinued operations -- 44,351
Total current assets 6,358,558 7,426,135
PROPERTY AND EQUIPMENT, NET 10,238,671 9,672,443
OTHER ASSETS
Net non-current assets of discontinued operations -- 1,555,681
Accounts and notes receivable 291,648 279,122
Goodwill, less accumulated amortization of $441,246 and 325,848 1,420,754 596,152
Other 342,469 338,359
Total other assets 2,054,871 2,769,314
Total assets $18,652,100 $19,867,892
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $1,831,000 $1,132,900
Line of credit 900,000 --
Accounts payable 1,066,986 1,296,769
Accrued salaries and wages 548,745 707,737
Other accrued expenses 453,407 339,481
Total current liabilities 4,800,138 3,476,887
LONG-TERM DEBT, LESS CURRENT MATURITIES 5,249,769 5,993,273
DEFERRED INCOME TAXES 93,007 378,272
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.03 par value; 7,250,000 shares authorized; 2,599,599 and
2,912,449 shares issued and outstanding 77,988 87,373
Additional paid-in capital 7,046,032 8,719,604
Retained earnings 1,633,911 1,212,483
Less notes receivable from officers and directors (248,745) --
Total stockholders' equity 8,509,186 10,019,460
Total liabilities and stockholders' equity $18,652,100 $19,867,892
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28,
1999 1998 1997
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $87,373 $87,369 $87,155
Repurchase and retirement of common stock (10,080) -- --
Issuance of common stock 5 4 4
Exercise of stock options 690 -- 210
Balance at end of year 77,988 87,373 87,369
NOTES RECEIVABLE-OFFICERS AND DIRECTORS
Balance at beginning of year -- -- --
Issuance of notes (248,745) -- --
Balance at end of year (248,745) -- --
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 8,719,604 8,719,008 8,691,960
Repurchase and retirement of common stock (1,754,331) -- --
Issuance of common stock 699 596 1,008
Exercise of stock options 80,060 -- 26,040
Balance at end of year 7,046,032 8,719,604 8,719,008
RETAINED EARNINGS
Balance at beginning of year 1,212,483 972,565 2,338,267
Net income (loss) for the year 421,428 239,918 (1,365,702)
Balance at end of year 1,633,911 1,212,483 972,565
TOTAL STOCKHOLDERS' EQUITY $8,509,186 $10,019,460 $9,778,942
COMMON SHARES
Balance at beginning of year 2,912,449 2,912,299 2,905,149
Repurchase and retirement of common stock (336,000) -- --
Issuance of common stock 150 150 150
Exercise of stock options 23,000 -- 7,000
Balance at end of year 2,599,599 2,912,449 2,912,299
</TABLE>
The accompanying notes are an integral part of these statements
30
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28,
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $421,428 $239,918 $(1,365,702)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss from discontinued operations -- 90,849 355,991
Provision for estimated loss on disposition of business -- 929,234 --
Depreciation and amortization 1,508,111 1,335,715 1,383,212
Asset impairment and store closure losses 123,903 -- 1,781,985
Gain on sale of assets (11,420) (76,474) (72,707)
Changes in operating assets and liabilities:
Accounts and notes receivable 237,806 (158,353) 232,733
Refundable income taxes 99,937 (250,159) (233,289)
Inventories (708,584) (485,400) 378,020
Other assets 29,368 74,872 45,934
Accounts payable (229,783) 497,098 (198,849)
Income taxes payable -- -- (287,518)
Deferred income taxes (461,318) 767,666 (856,020)
Accrued liabilities (223,533) (286,081) 220,270
Deferred income -- (93,000) 93,000
Net cash provided by operating activities of continuing
operations 785,915 2,585,885 1,477,060
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 39,300 8,602 310,690
Sale (purchase) of other assets 58,054 (233,380) (328,940)
Loans to officers and directors (248,745) -- --
Purchase of property and equipment (1,383,718) (1,984,940) (2,251,598)
Net cash used in investing activities (1,535,109) (2,209,718) (2,269,848)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit 900,000 -- (1,000,000)
Proceeds from long-term debt 2,022,456 1,522,043 7,071,852
Payments on long-term debt (2,067,860) (981,063) (2,805,074)
Proceeds from issuance of common stock -- 600 1,012
Proceeds from exercise of stock options 80,750 -- 26,250
Repurchase and redemption of common stock (1,764,410) -- --
Net cash provided by (used in) financing activities (829,064) 541,580 3,294,040
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 100,032 85,028 (2,237,433)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,478,226) 1,002,775 263,819
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,795,381 792,606 528,787
CASH AND CASH EQUIVALENTS AT END OF YEAR $317,155 $1,795,381 $792,606
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a manufacturer of an extensive line of premium chocolate candy
for sale to its franchised and Company-owned Rocky Mountain Chocolate Factory
stores located throughout the United States and in Guam and Canada. The
Company is also a retail operator and international franchiser. The majority
of the Company's revenues are generated from wholesale and retail 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 using 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.
The Company reviews its long-lived assets, including identifiable intangible
assets, whenever events or changes indicate the carrying amount of such assets
may not be recoverable. The Company's policy is to review the recoverability of
all assets, at a minimum, on an annual basis. See Note 10.
Amortization of Goodwill
Goodwill is amortized on the straight-line method over ten to 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.
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.
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.
Vulnerability Due to Certain Concentrations
The Company's stores are concentrated (47%) in the factory outlet mall
environment. At April 30, 1999, 32 Company-owned stores and 74 franchise stores
of 227 total stores are located in this environment. The Company is, therefore,
vulnerable to changes in consumer traffic in this market environment and to
changes in the level of
32
<PAGE>
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.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and provides the required
pro forma disclosures prescribed by SFAS 123.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed as net earnings (loss) divided by
the weighted average number of common shares outstanding during each year of
2,665,567, 2,912,387 and 2,908,492, for the fiscal years ended February 28,
1999, 1998 and 1997. Diluted earnings per share reflects the potential dilution
that could occur from common shares issuable through stock options. Incremental
shares assumed issued on the exercise of common stock options during the fiscal
years ended February 28, 1999 and 1998 were 11,776 and 17,158. The effect of
stock options in 1997 would be antidilutive.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments in money market funds, other liquid assets, trade
receivables, payables, notes receivable, and debt. The fair value of all
instruments approximates the carrying value.
Reclassifications
Certain reclassifications have been made to prior years' financial statements in
order to conform with the presentation of the February 28, 1999 financial
statements.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure these instruments at fair value. This statement
is effective for years beginning after June 15, 1999 and is not applied
retroactively to financial statements for prior periods. The Company believes
that this statement will not have a material effect on its financial statements.
NOTE 3 - INVENTORIES
Inventories consist of the following at February 28:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Ingredients and supplies $1,594,579 $1,153,433
Finished candy 1,681,971 1,414,533
$3,276,550 $2,567,966
</TABLE>
33
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 513,618 $ 513,618
Building 3,672,870 3,665,581
Machinery and equipment 7,147,833 6,023,347
Furniture and fixtures 2,408,807 2,072,208
Leasehold improvements 1,876,223 1,389,608
Transportation equipment 199,639 293,357
15,818,990 13,957,719
Less accumulated depreciation 5,580,319 4,285,276
Property and equipment, net $10,238,671 $ 9,672,443
</TABLE>
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 1999 the Company had a $3,000,000 line of credit from a bank,
collateralized by substantially all of the Company's assets with the exception
of the Company's retail store assets. Draws may be made under the line at 75% of
eligible accounts receivable plus 50% of eligible inventory. Interest on
borrowings is at prime (7.75% at February 28, 1999). Terms of the line require
that the line be rested (that is, that there be no outstanding balance) for a
period of 30 consecutive days during the term of the loan. The credit line is
subject to renewal in July, 1999.
On May 15, 1998, the Company used its line of credit to fund the purchase of
336,000 shares and to lend certain officers and directors funds to acquire
40,000 shares of its issued and outstanding common stock. See Note 8.
Long-Term Debt
Long-term debt consists of the following
at February 28:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
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. $ 210,731 $ 320,793
Real estate mortgage note payable in
monthly installments of $17,490 through
April, 2011 including interest at 8.25%
per annum, collateralized by land and
factory building. Interest adjusted to
prime in May, 2001 and every five years
thereafter until maturity in April 2016. 1,925,405 1,969,930
Chattel mortgage note payable in monthly
installments of $12,359 through April,
2002 including interest at 8.25% per
annum, collateralized by equipment. 412,064 521,427
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. 1,052,241 1,251,663
</TABLE>
34
<PAGE>
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
Long-Term Debt - Continued
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Chattel mortgage note payable in monthly
installments of $5,472 through January,
2002 including interest at 10.36% per
annum, collateralized by machinery,
equipment, furniture and fixtures. 164,686 210,669
Chattel mortgage note payable in monthly
installments of $27,632 through April,
2001 including interest at 7.9% per
annum, collateralized by machinery,
equipment, furniture and fixtures. 658,322 --
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. 283,500 371,265
Chattel mortgage notes payable in
monthly principal installments of
$37,881 through April, 2002 plus
interest at LIBOR plus 2.85% (7.79% at
February 28, 1999), collateralized by
equipment, furniture and fixtures. 1,215,375 --
Chattel mortgage note payable in monthly
installments of $7,828 through November,
2001 including interest at 7.95% per
annum, collateralized by equipment,
furniture and fixtures. 231,361 --
Chattel mortgage note payable in monthly
installments of $454 through October,
2003 including interest at 7.91% per
annum, collateralized by equipment. 21,219 --
Chattel mortgage note payable in
quarterly installments of $105,000
through October, 1999, $90,000 through
October, 2000, $57,150 through January,
2002, and a final installment of $38,100
in April, 2002, including interest at
6.73% per annum collateralized by
equipment, furniture and fixtures. 905,865 --
Chattel mortgage notes payable (retired
in fiscal 1999), interest rates ranging
from 8.75 to 10.5%. -- 2,480,426
$7,080,769 $7,126,173
Less current maturities 1,831,000 1,132,900
$5,249,769 $5,993,273
</TABLE>
Maturities of long-term debt are as follows for the years ending February 28 or
29:
<TABLE>
<S> <C>
2000 $1,831,000
2001 1,842,580
2002 1,239,879
2003 428,892
2004 128,393
Thereafter 1,610,025
$7,080,769
</TABLE>
35
<PAGE>
NOTE 6 - OPERATING LEASES
The Company conducts its retail operations in facilities leased under five to
ten year noncancelable operating leases. Certain leases contain renewal options
for between two and ten additional years at increased monthly rentals. The
majority of the leases provide for contingent rentals based on sales in excess
of predetermined base levels.
The following is a schedule by year of future minimum rental payments required
under such leases for the year ending February 28 or 29:
<TABLE>
<S> <C>
2000 $ 900,741
2001 775,630
2002 508,195
2003 340,564
2004 176,627
Thereafter 157,683
$2,859,440
</TABLE>
In some instances, in order to retain the right to site selection or because of
requirements imposed by the lessor, the Company has leased space for its
proposed franchise outlets. When a franchise was sold, the store was subleased
to the franchisee who is responsible for the monthly rent and other obligations
under the lease. The Company's liability as primary lessee on sublet franchise
outlets, all of which is offset by sublease rentals, is as follows for the years
ending February 28 or 29:
<TABLE>
<S> <C>
2000 $1,336,496
2001 1,127,867
2002 780,781
2003 505,057
2004 316,818
Thereafter 499,358
$4,566,377
</TABLE>
The following is a schedule of lease expense for all operating leases for the
three years ended February 28:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Minimum rentals $ 2,316,508 $ 2,454,744 $ 2,278,591
Less sublease rentals (1,239,663) (1,294,202) (1,184,301)
Contingent rentals 35,150 100,771 47,116
$ 1,111,995 $ 1,261,313 $ 1,141,406
</TABLE>
NOTE 7 - INCOME TAXES
Income tax expense (benefit) relating to continuing operations is comprised of
the following for the years ending February 28:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current
Federal $ 240,834 $ 18,520 $ 230,618
State 25,183 2,454 9,896
Total Current 266,017 20,974 240,514
Deferred
Federal (264) 677,849 (768,992)
State (28) 89,817 (87,028)
Total Deferred (292) 767,666 (856,020)
Total $ 265,725 $ 788,640 $(615,506)
</TABLE>
36
<PAGE>
NOTE 7 - INCOME TAXES - CONTINUED
A reconciliation of the statutory federal income tax rate and the effective rate
as a percentage of pretax income is as follows for the years ending February 28:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Goodwill amortization 1.2% .4% .4%
State income taxes, net of federal benefit 2.4% 3.1% 3.0%
Other 1.1% 1.0% .5%
Effective Rate 38.7% 38.5% 37.9%
</TABLE>
The components of deferred income taxes at February 28, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Deferred Tax Assets 1999 1998
<S> <C> <C>
Allowance for doubtful accounts $ 100,313 $ 82,877
Inventories 28,742 --
Accrued compensation 67,279 70,774
Contribution carryover 37,249 26,511
Loss provisions 597,422 206,902
Alternative minimum tax carryforward 150,402 85,689
Deferred lease rentals 18,333 26,167
Other 7,781 --
1,007,521 498,920
Deferred Tax Liabilities - Depreciation (667,299) (620,016)
Net deferred tax asset (liability) $ 340,222 $ (121,096)
</TABLE>
NOTE 8 - STOCK REPURCHASE
On May 15, 1998, the Company purchased 336,000 shares and certain of its
directors and executive officers purchased 104,000 shares of the Company's
issued and outstanding common stock at $5.15 per share from La Salle National
Bank of Chicago, Illinois, which obtained these shares through foreclosure from
certain shareholders unrelated to any transactions of the Company. The Company
loaned certain officers and directors the funds to acquire 40,000 of the 104,000
shares purchased by them. The loans are secured by the related shares, bear
interest payable annually at 7.5% and are due May 15, 2003.
NOTE 9 - 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. Options representing the right to purchase 54,000 shares of
the Company's common stock remained outstanding under the 1985 Plan at February
28, 1999.
Under the 1995 Stock Option Plan (the "1995 Plan") and the Nonqualified Stock
Option Plan for Non-employee Directors (the "Director's Plan"), options to
purchase up to 250,000 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. Options representing
the right to purchase 147,000 and 40,000 shares of the Company's common stock
were outstanding under the 1995 Plan and Director's Plan, respectively, at
February 28, 1999.
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 May 2000 through January 2008.
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
37
<PAGE>
NOTE 9 - STOCK OPTION PLANS - CONTINUED
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 diluted income (loss) per share would have been
reduced to the pro-forma amounts indicated in the table below for the years
ending February 28 (in 000's except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net Income (Loss)-as reported $ 421 $ 240 $ (1,366)
Net Income (Loss)-pro forma $ 362 $ 177 $ (1,530)
Basic Income (Loss) per Share-as reported $ .16 $ .08 $ (.47)
Diluted Income (Loss) per Share-as reported $ .16 $ .08 $ (.47)
Basic Income (Loss) per Share-pro forma $ .14 $ .06 $ (.53)
Diluted Income (Loss) per Share-pro forma $ .14 $ .06 $ (.53)
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 65% 65% 50%
Risk-free interest rate 6.0% 6.0% 6.5%
Expected life of options 7 years 7 years 7 years
</TABLE>
Additional information with respect to options outstanding under the Plans at
February 28, 1999, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
1999
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 290,000 $ 7.81
Exercised (23,000) 3.51
Forfeited (26,000) 10.63
Outstanding at end of year 241,000 7.91
Options exercisable at February 28, 1999 141,800 9.18
</TABLE>
<TABLE>
<CAPTION>
1998
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 272,000 $ 9.01
Granted 55,000 4.55
Forfeited (37,000) 11.80
Outstanding at end of year 290,000 7.81
Options exercisable at February 28, 1998 151,000 9.22
Weighted average fair value per share
of options granted during 1998
was $3.44.
</TABLE>
38
<PAGE>
NOTE 9 - STOCK OPTION PLANS - CONTINUED
<TABLE>
<CAPTION>
1997
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 224,000 $11.95
Granted 111,000 7.05
Exercised (7,000) 3.75
Canceled (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
was $4.04.
</TABLE>
Information about stock options outstanding at February 28, 1999 is summarized
as follows:
<TABLE>
<CAPTION>
Options Outstanding
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
<S> <C> <C> <C>
$3.125 to 4.50 82,000 6.49 years $ 4.21
$5.125 to 7.75 104,000 7.04 years 7.03
$11.50 to 18.00 55,000 5.52 years 15.10
241,000
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Weighted
Number average
Range of exercise prices exercisable exercise price
<S> <C> <C>
$3.125 to 4.50 40,400 $ 3.91
$5.125 to 7.75 47,000 6.80
$11.50 to 18.00 54,400 15.14
141,800
</TABLE>
NOTE 10 - LOSS PROVISIONS
Loss provisions were provided as follows:
Store Closures
In February 1999, the Company adopted a plan to close two underperforming
Company-owned stores. The Company made a loss provision in February 1999 for
closure of these stores in the total amount of approximately $123,000 including
$86,000 for estimated operating losses to date of closure and $37,000 for
writedown of store assets to their estimated recoverable values.
In February 1997, the Company adopted a plan to close eight underperforming
Company-owned stores. 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.
39
<PAGE>
NOTE 10 - LOSS PROVISIONS - CONTINUED
Long-Lived Asset Impairments
In February 1997, 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
In February 1999, a loss provision was made in the amount of $398,000 to reduce
certain inventories to the lower of cost or market. This charge is included in
cost of sales in the accompanying statement of operations.
In fiscal 1997, 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.
NOTE 11 - OPERATING SEGMENTS
Effective May 31, 1998 the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information which changes the way the
Company reports information about its operating segments.
The Company classifies its business interests into three reportable segments:
Franchising, Retail stores and Manufacturing. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note 1). The Company evaluates performance and allocates
resources based on operating contribution, which excludes unallocated corporate
general and administrative costs and income tax expense or benefit. The
Company's reportable segments are strategic businesses that utilize common
merchandising, distribution, and marketing functions, as well as common
information systems and corporate administration. All intersegment sales prices
are market based. Each segment is managed separately because of the differences
in required infrastructure and the difference in products and services:
<TABLE>
<CAPTION>
Franchising Manufacturing Retail Other Total
<S> <C> <C> <C> <C> <C>
FY 1999
Total revenues 3,039,517 14,737,115 11,759,655 -- 29,536,287
Intersegment revenues -- (3,303,759) -- -- (3,303,759)
Revenue from external
customers 3,039,517 11,433,356 11,759,655 -- 26,232,528
Segment profit (loss) 806,106 2,990,147 48,936 (3,158,036) 687,153
Total assets 889,713 8,947,006 6,507,865 2,307,516 18,652,100
Capital expenditures 38,666 720,670 529,172 95,210 1,383,718
Total depreciation &
amortization 178,575 447,140 666,056 216,340 1,508,111
</TABLE>
40
<PAGE>
NOTE 11 - OPERATING SEGMENTS - CONTINUED
<TABLE>
Franchising Manufacturing Retail Other Total
<S> <C> <C> <C> <C> <C>
FY 1998
Total revenues 3,104,906 13,276,949 10,460,518 -- 26,842,373
Intersegment revenues -- (3,078,391) -- -- (3,078,391)
Revenue from external
customers 3,104,906 10,198,558 10,460,518 -- 23,763,982
Segment profit (loss) 1,148,989 3,074,658 252,642 (2,427,648) 2,048,641
Total assets 1,217,689 8,388,569 4,864,567 5,397,067 19,867,892
Capital expenditures 38,749 565,711 857,974 522,506 1,984,940
Total depreciation &
amortization 83,100 426,770 631,121 194,724 1,335,715
FY 1997
Total Revenues 2,597,985 12,273,039 10,494,396 -- 25,365,420
Intersegment revenues -- (3,084,813) -- -- (3,084,813)
Revenue from external
customers 2,597,985 9,188,226 10,494,396 -- 22,280,607
Segment profit (loss) 784,734 2,649,432 (396,537) (4,662,846) (1,625,217)
Total assets 713,444 7,342,938 5,529,304 5,080,444 18,666,130
Capital expenditures 140,117 589,471 1,600,410 (78,400) 2,251,598
Total depreciation &
amortization 68,909 365,884 777,754 170,665 1,383,212
</TABLE>
NOTE 12 - DISCONTINUED OPERATION
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations.
On June 5, 1998, the Company entered into a definitive agreement to sell
substantially all the assets of its Fuzziwig's segment for $1.6 million. This
transaction closed on July 31, 1998 (the "Closing Date"). The purchase price
included $180,000 cash, $100,000 of which was paid at the Closing Date and the
remaining $80,000 paid six months from the Closing Date. Pursuant to the
agreement, the Company also received four Rocky Mountain Chocolate Factory
stores previously operated as franchised stores by one of the purchasers and
valued at approximately $1.42 million.
The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of
estimated losses during the phase out period of $250,000), net of applicable
income tax benefit of $587,000, has been recorded in the accompanying statement
of operations for the year ending February 28, 1998.
Operating results of the discontinued operation have been reclassified from
amounts previously reported and have been reported separately in the statements
of operations.
Summarized financial information for the discontinued operation for the years
ended February 28 follow:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues $ 1,095,431 $ 2,928,403 $ 1,991,863
Loss from the discontinued operation, net
of income tax benefit of $57,235 and $217,008 -- (90,849) (355,991)
Provision for loss on disposal, net of
income tax benefit of $586,766 -- (929,234) --
</TABLE>
41
<PAGE>
NOTE 12 - DISCONTINUED OPERATION - CONTINUED
The net assets of the discontinued operation have been segregated in the
February 28, 1998 balance sheet as follows:
1998
Net current assets:
Inventories $ 178,765
Other current assets 29,803
Deferred income taxes 103,673
Current liabilities (267,890)
$ 44,351
Net non-current assets:
Net property, plant and equipment $ 1,159,969
Other assets 38,067
Deferred income taxes 357,645
$ 1,555,681
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest paid $ 703,953 $ 658,700 $ 469,237
Income taxes paid (received) 165,788 (30,619) 436,932
Non-Cash Financing Activities:
Company financed sales of retail store assets -- 715,931 110,000
</TABLE>
NOTE 14 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc.
401(k) Plan. Eligible participants are permitted to make contributions up to 15%
of compensation. The Company makes a matching contribution, which vests ratably
over a 5 year period, and is 50% of the employee's contribution up to a maximum
of 1.5% of the employee's compensation. During the years ended February 28,
1999, 1998, and 1997, the Company contribution was approximately $36,000,
$33,000 and $27,000, respectively, to the plan.
NOTE 15 - SUBSEQUENT EVENT (UNAUDITED)
On May 10, 1999, Whitman's Candies, Inc. commenced an unsolicited tender
offer for all of the outstanding shares of common stock of the Company at a
price of $5.75 per share in cash. The Board of Directors of the Company, in a
May 21, 1999 letter to shareholders, indicated that the tender offer is
inadequate and not in the best interests of either the Company or its
shareholders and recommended that the shareholders reject the tender offer.
Unless extended or earlier withdrawn by the offeror, the tender offer will
expire on June 16, 1999.
Additionally, the Company adopted a Rights Plan (the "Plan") on May 18, 1999.
In connection with the adoption of the Plan, the Board authorized and
declared a dividend of one right (a "Right") for each outstanding share of
Common Stock, par value $0.03 per share ("Common Stock"), of the Company. The
dividend is payable on May 28, 1999 (the "Record Date") to the holders of
record of the Common Stock at the close of business on that date. When
exercisable each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $0.10 per share ("Preferred Stock"), of the
Company at a price of $30 per one one-hundredth of a share of Preferred
Stock, subject to adjustment. The Rights will become exercisable upon the
earlier to occur of ten (10) days after the first public announcement that a
person or group has acquired beneficial ownership of 15% or more, or ten (10)
business days after a person or group announces a tender offer that would
result in beneficial ownership of 15% or more, of
42
<PAGE>
NOTE 15 - SUBSEQUENT EVENT (UNAUDITED) - CONTINUED
the Company's outstanding Common Stock. The holder of each one one-hundredth
of a share of Preferred Stock would have voting, dividend and certain other
rights substantially equivalent to the rights of a holder of one share of
Common Stock. The Board resolved to delay the exercisability of the Rights
under the Plan with respect to the unsolicited tender offer by Whitman's
Candies, Inc. until June 15, 1999 or such later date as may be determined by
the Board.
If the Company is acquired in a business combination transaction while the
Rights are outstanding, each Right will entitle its holder to purchase, for
$30, in lieu of Preferred Stock, common shares of the acquiring company
having a market value of $60. In addition, if a person or group acquires
beneficial ownership of 15% or more of the Company's outstanding Common
Stock, each Right will entitle its holder (other than such person or members
of such group) to purchase, for $30, a number of shares of the Company's
Common Stock having a market value of $60. Furthermore, at any time after a
person or group acquires beneficial ownership of !5% or more (but less than
50%) of the Company's outstanding Common Stock, the Board of Directors may,
at its option, exchange part or all of the Rights (other than Rights held by
the acquiring person or group) for shares of the Company's Common Stock on a
one-for-one basis.
At any time prior to the acquisition of 15% of the Company's outstanding
Common Stock, the Company can redeem the Rights for $0.01 per Right. Unless
earlier redeemed or extended, the Rights will expire on May 28, 2009.
43
<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
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Franklin E. Crail............. 57 Chairman of the Board, President, Treasurer and Director
Bryan J. Merryman............. 38 Chief Operating Officer, Chief Financial Officer and Director
Edward L. Dudley.............. 35 Vice President - Sales and Marketing
Gary S. Hauer................. 54 Vice President - Manufacturing
Clifton W. Folsom............. 45 Vice President - Franchise Support
Jay B. Haws................... 48 Vice President - Creative Services
Virginia M. Perez............. 61 Corporate Secretary
Lee N. Mortenson.............. 63 Director
Fred M. Trainor............... 60 Director
Gerald A. Kien................ 68 Director
</TABLE>
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.
Bryan J. Merryman
Mr. Merryman joined the Company in December 1997 as Vice President - Finance
and Chief Financial Officer. Since April 1999 Mr. Merryman has also served
the Company as the Chief Operating Officer and as a Director. Prior to
joining the Company, Mr. Merryman was a principal in Knightsbridge Holdings,
Inc. (a leveraged buyout firm) from January 1997 to December 1997. Mr.
Merryman also served as Chief Financial Officer of Super Shops, Inc., a
retailer and manufacturer of aftermarket auto parts from July 1996 to
November 1997 and was employed for more than eleven years by Deloitte and
Touche LLP, most recently as a senior manager.
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 - Sales and
Marketing, with the goal of increasing the Company's factory and retail sales.
During his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served
in a number of senior marketing and sales management capacities, including most
recently that of Director, Distribution Services from March 1996 to January
1997. Mr. Dudley holds B.S. degrees in Finance and Accounting from the
University of Colorado.
Gary S. Hauer
Mr. Hauer joined the Company in May 1996 as Vice President of Manufacturing.
Mr. Hauer has served in a number of manufacturing management capacities over
a 28 year career in the chocolate candy and confectionery industries,
including 18 years with See'S Candies, 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.
44
<PAGE>
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.
Jay B. Haws
Mr. Haws joined the Company in August 1991 as Vice President of Creative
Services. Since 1981, Mr. Haws had been closely associated with the Company both
as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he
operated two Rocky Mountain Chocolate Factory franchises located in San
Francisco, California. From 1983 to 1989 he served as Vice President of
Marketing for Image Group, Inc., a marketing communications firm based in
Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky
Mountain Chocolate Factory franchises located in Sacramento and Walnut Creek,
California. From 1973 to 1983 he was principal of Jay Haws and Associates, an
advertising and graphic design agency. Mr. Haws holds a B.A. in graphics design
and communication from California State University.
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
Dr. Kien was first elected as a Director of the Company in August 1995. From
1993 to 1995 Dr. 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 Dr. 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 Dr. Kien remained as President of the Sun Electric division of Snap-On
Tools until his retirement in 1994. Dr. 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. Dr. 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.
Mr. Mortenson has served as President, Chief Operating Officer and a Director of
Telco Capital Corporation of Chicago, Illinois since January 1984. Telco Capital
Corporation is principally engaged in the manufacturing and real estate
businesses. He was President, Chief Executive Officer and a Director of
Sunstates Corporation (formerly Acton Corporation) from May 1988 to December
1990 and he has been President, Chief Operating Officer and a Director of
Sunstates Corporation since December 1990. Sunstates Corporation is a publicly
traded company primarily engaged in real estate development and manufacturing.
Mr. Mortenson has been a Director of Alba-Waldensian, Inc., which is principally
engaged in the manufacturing of apparel and medical products, since 1984 and has
served as its President and Chief Executive Officer since
45
<PAGE>
February 1997. Mr. Mortenson has also served as a Director of NRG Inc., a
leasing company, since 1987. On December 24, 1996, an Agreed Order of
Liquidation with a finding of insolvency was entered under the Illinois
Insurance Code against the principal subsidiary of Sunstates Corporation,
Coronet Insurance Company ("Coronet"), and Coronet's subsidiaries, National
Assurance Indemnity Company ("National Assurance") and Crown Casualty Company
("Crown"), pursuant to which, among other things, all of the assets of
Coronet, National Assurance and Crown were transferred to the Office of the
Special Deputy for the purposes of winding up the affairs of such companies.
On February 27, 1997, a consent order appointing the Florida Department of
Insurance as Receiver for purposes of liquidation was entered under the
Florida Insurance Code against Casualty Insurance Company of Florida
("Casualty"), a subsidiary of Coronet. Mr. Mortenson, prior to March 14,
1997, was a Director and President of each of Coronet, National Assurance,
Crown and Casualty. On January 24, 1997, Hickory White Company, a furniture
manufacturing subsidiary of Sunstates Corporation, filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code. All of the assets of Hickory
White Company were sold to an unrelated party on March 11, 1997. Mr.
Mortenson is Vice President and a Director of Hickory White Company.
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 13 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 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) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company has no knowledge that any Director, executive officer or 10%
stockholder was required to file a Form 5 for fiscal 1998 and failed to do so,
and the Company has received a written representation that a Form 5 was not
required from each such person. 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.
46
<PAGE>
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 "Named Officers". No
other executive officers of the Company met the minimum compensation threshold
of $100,000 for inclusion in the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS-
ANNUAL COMPENSATION SECURITIES
UNDERLYING
NAME AND PRINCIPAL OPTIONS ALL OTHER
POSITION YEAR SALARY(1) BONUS (#)(2) COMPENSATION(3)
<S> <C> <C> <C> <C> <C>
Franklin E. Crail,
Chairman of the Board and
President 1999 $161,250 $67,500 -- $2,500
1998 $150,000 -- -- $2,250
1997 $150,000 -- -- $2,250
Bryan J. Merryman
Chief Operating Officer, Chief
Financial Officer and Director 1999 $107,500 $20,000 -- --
1998 (4) $25,000 -- 30,000 --
1997 -- -- -- --
Gary S. Hauer,
Vice President-
Manufacturing (5) 1999 $107,000 $20,000 -- $1,500
1998 $100,000 $12,500 -- $ 750
1997 (4) $ 75,071 -- 30,000 --
Jay B. Haws, Vice President--
Creative Services 1999 $98,500 $23,500 -- $1,830
1998 $94,000 -- -- $1,410
1997 $94,000 -- 10,000 $1,410
Clifton W. Folsom, Vice President--
Franchise Support 1999 $97,500 $22,500 -- --
1998 $90,000 -- -- $104
1997 $90,000 -- 10,000 $1,350
</TABLE>
(1) Includes amounts deferred at the Named Officers' election pursuant to the
Company's 401(k) Plan.
(2) Options to acquire shares of Common Stock under the 1995 Stock Option
Plan. All options have ten-year terms. The options granted vest with
respect to one-fifth of the shares covered thereby annually beginning on
the date of grant.
(3) Represents Company contributions on behalf of the Named Officers under the
Company's 401(k) Plan.
(4) Mr. Hauer joined the Company as an officer in May 1996. Mr. Merryman
joined the Company as an officer in December 1997.
(5) Mr. Hauer resigned as an officer of the Company on May 21, 1999.
Additional columns required by Securities and Exchange Commission rules to be
included in the foregoing table, and certain additional tables required by such
rules, have been omitted because no compensation required to be disclosed
therein was paid or awarded to the Named Officers.
47
<PAGE>
OPTION GRANTS DURING FISCAL 1999
None of the Named Officers received grants in fiscal 1999.
AGGREGATED OPTION EXERCISES DURING FISCAL 1999 AND FISCAL YEAR END OPTION VALUES
The following table provides information regarding the number and value of
options held by the Named Officers at fiscal year end. The Company does not have
any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options at Fiscal In-the-Money Options at Fiscal
Exercise Realized Year End (#) Year End ($) (1)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Franklin E. Crail -- -- -- -- -- --
Bryan J. Merryman -- -- 6,000 24,000 -- --
Gary S. Hauer -- -- 12,000 18,000 -- --
Jay B. Haws 15,000 $48,750 27,000 4,000 $4,000 --
Clifton W. Folsom -- -- 29,000 4,000 $4,000 --
</TABLE>
(1) The closing bid price of the Common Stock on the Nasdaq Stock Market
on February 26, 1999, was $4.50 per share. Value of unexercised in
the money options at fiscal year end was determined by the difference
between the closing bid price and option strike price multiplied by
the number of option shares.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any compensation for serving on the
Board or on committees. Directors who are not officers or employees are entitled
to receive stock option awards under the Company's 1990 Nonqualified Stock
Option Plan for Nonemployee Directors (the "Director's Plan").
The Director's 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 Director's 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. No
options were granted under the Director's Plan during fiscal 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors consists of Lee
N. Mortenson, Fred M. Trainor and Gerald A. Kien. None of the foregoing persons
is or has been an officer of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, at May 24, 1999, with respect to
the shares of the Company's common stock beneficially owned by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
Company's Common Stock, (ii) each Director and nominee, (iii) each Named
Officer and (iv) 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
48
<PAGE>
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 is deemed to be
outstanding for the purpose of computing the percentage of Common Stock
beneficially owned by the person holding such options, but is not deemed to be
outstanding for the purpose of computing the percentage of Common Stock
beneficially owned by any other person.
Common Stock
<TABLE>
<CAPTION>
Amount and
Name of Nature of Percent
Beneficial Beneficial of
Owner Ownership Class
<S> <C> <C> <C>
Franklin E. Crail (1) 298,924 11.5%
Clyde Wm. Engle et al. (1) 219,357 (2) 8.4%
Fred M. Trainor 70,000 (3) 2.7%
Jay B. Haws 57,216 (4) 2.2%
Clifton W. Folsom 54,716 (5) 2.1%
Gary S. Hauer 37,991 (6) 1.5%
Lee N. Mortenson 27,000 (3) 1.0%
Bryan J. Merryman 20,000 (7) .8%
Gerald A. Kien 10,000 (3) .4%
All executive officers
and directors as a
group (9 persons) 597,847 (8) 23.0%
</TABLE>
(1) Mr. Engle's address is 4433 West Touhy Avenue, Lincolnwood, Illinois
60646. Mr. Crail's address is the same as the Company's address.
(2) The following information was provided to the Company by Mr. Engle. Of the
219,357 shares indicated as being beneficially owned by Mr. Engle, 115,000
shares are owned by GSC Enterprises, Inc., 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. Engle disclaims beneficial
ownership of the shares owned by his family members.
(3) Includes 10,000 shares that Messrs. Mortenson, Trainor and Kien each has
the right to acquire within 60 days through the exercise of options
granted pursuant to the Director's Plan. Mr. Mortenson has pledged 8,000
shares owned by him to the Company to secure payment of certain
indebtedness to the Company incurred by Mr. Mortenson in connection with
his purchase of such shares.
(4) Includes 27,000 shares Mr. Haws has the right to acquire within 60 days
through the exercise of employee stock options previously granted to him.
Mr. Haws has pledged 15,000 shares owned by him to the Company to secure
payment of certain indebtedness to the Company incurred by Mr. Haws in
connection with his purchase of such shares.
(5) Includes 29,000 shares Mr. Folson has the right to acquire within 60
days through the exercise of employee stock options previously granted
to him. Mr. Folsom has pledged 8,000 shares owned by him to the Company
to secure payment of certain indebtedness to the Company incurred by
Mr. Folsom in connection with his purchase of such shares.
(6) Includes 18,000 shares Mr. Hauer has the right to acquire within 60 days
through the exercise of employee stock options previously granted to him
and 5,991 shares beneficially owned by his wife. Mr. Hauer disclaims
beneficial ownership of the shares owned by his wife. Mr. Hauer has
pledged 8,000 shares owned by him to the Company to secure payment of
certain indebtedness to the Company incurred by Mr. Hauer in connection
with his purchase of such shares.
49
<PAGE>
(7) Includes 6,000 shares Mr. Merryman has the right to acquire within 60 days
through the exercise of employee stock options previously granted to him.
Mr. Merryman has pledged 8,000 shares owned by him to the Company to
secure payment of certain indebtedness to the Company incurred by Mr.
Merryman in connection with his purchase of such shares.
(8) 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.
POTENTIAL CHANGE IN CONTROL
On May 10, 1999, Whitman's Candies, Inc. commenced an unsolicited tender
offer for all of the outstanding shares of Common Stock of the Company at a
price of $5.75 per share in cash. The Board of Directors of the Company, in a
May 21, 1999 letter to shareholders, indicated that the tender offer is
inadequate and not in the best interests of either the Company or its
shareholders and recommended that the shareholders reject the tender offer.
Unless extended or earlier withdrawn by the offeror, the tender offer will
expire on June 16, 1999. See Note 15 to the Financial Statements included
elsewhere in this Report. If such tender offer is successful, it will result
in a change in control of the Company.
50
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
PART IV.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 26
Statements of Operations 27
Balance Sheets 29
Statements of Changes in Stockholders' Equity 30
Statements of Cash Flows 31
Notes to Financial Statements 32
</TABLE>
2. Financial Statement Schedules
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants on Schedules 51
SCHEDULE II - Valuation and Qualifying Accounts 51
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
In connection with our audit of the financial statements of Rocky Mountain
Chocolate Factory, Inc. referred to in our report dated May 12, 1999, which is
included in Part II of this form, we have also audited Schedule II for each of
the three years in the period ended February 28, 1999. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
GRANT THORNTON LLP
Dallas, Texas
May 12, 1999
SCHEDULE II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions Charged Balance at End of
Beginning of Period to Costs & Exp. Deductions Period
<S> <C> <C> <C> <C>
Year Ended February 28, 1999
Accounts Receivable Allowance 214,152 120,000 74,744 259,408
Year Ended February 28, 1998
Accounts Receivable Allowance 202,029 49,525 37,402 214,152
Year Ended February 28, 1997
Accounts Receivable Allowance 28,196 295,000 121,167 202,029
</TABLE>
51
<PAGE>
3. Exhibits
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant, Exhibit 3.1 to Current Report on Form 8-K
as amended of the Registrant filed on August 1, 1988.
3.2 By-laws of the Registrant, as amended on Exhibit 3.2 to the Annual Report on Form
November 25, 1997 10-K of the Registrant for the fiscal year
ended February 28, 1998.
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K
of the Registrant filed on August 1, 1988.
4.2 Term Loan and Credit Agreement dated April Exhibit 4.18 to the Annual Report on Form
5, 1996 in the amount of $2,000,000 between 10-K of the Registrant for the fiscal year
Norwest Banks and the Registrant ended February 29, 1996.
4.3 Amendments dated February 5, 1997, May 2, Exhibit 4.12 to the Annual Report on Form
1997, and May 22, 1997 to Term Loan and 10-K of the Registrant for the fiscal year
Credit Agreement dated April 5, 1996 in the ended February 28, 1997.
amount of $2,000,000 between Norwest Banks
and the Registrant
4.4 Amendments dated December 23, 1997, March 9, Exhibit 4.4 to the Annual Report on Form
1998 & May 6, 1998 to Term Loan and Credit 10-K of the Registrant for the fiscal year
Agreement dated April 5, 1996 in the amount ended February 28, 1998.
of $2,000,000 between Norwest Banks and the
Registrant
4.5 Instruments with respect to long-term debt
not exceeding 10% of the total assets of the
Company have not been filed. The Company
agrees to furnish a copy of such instruments
to the Securities and Exchange Commission
upon request.
10.1 Form of Stock Option Agreement for Incentive Exhibit 10.3 to the Annual Report on Form
Stock Option Plan of the Registrant * 10-K of the Registrant for the fiscal year
ended February 28, 1986.
10.2 Incentive Stock Option Plan of the Exhibit 10.2 to the Annual Report on Form
Registrant as amended July 27, 1990 * 10-K of the Registrant for the fiscal year
ended February 28, 1991.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9
Registrant and its officers * of the Registrant filed on May 21, 1999.
10.4 Current form of franchise agreement used by Filed herewith.
the Registrant
10.5 Form of Real Estate Lease between the Exhibit 10.7 to Registration Statement on
Registrant as Lessee and franchisee as Form S-18 (Registration No. 33-2016-D).
Sublessee
10.6 Form of Nonqualified Stock Option Agreement Exhibit 10.8 to the Annual Report on Form
for Nonemployee Directors of the Registrant * 10-K of the Registrant for the fiscal year
ended February 28, 1991.
10.7 Nonqualified Stock Option Plan for Exhibit 10.9 to the Annual Report on Form
Nonemployee Directors dated March 20, 1990 * 10-K of the Registrant for the fiscal year
ended February 28, 1991.
10.8 1995 Stock Option Plan of the Registrant* Exhibit 10.9 to Registration Statement on
Form S-1 (Registration No. 33-62149) filed
August 25, 1995.
10.9 Forms of Incentive Stock Option Agreement Exhibit 10.10 to Registration Statement on
for 1995 Stock Option Plan* Form S-1 (Registration No. 33-62149) filed
on August 25, 1995.
10.10 Forms of Nonqualified Stock Option Agreement Exhibit 10.11 to Registration Statement on
for 1995 Stock Option Plan* Form S-1 (Registration No. 33-62149) filed
on August 25, 1995.
10.11 Form of Indemnification Agreement between Exhibit 10.12 to the Annual Report on Form
the Registrant and its directors 10-K of the Registrant for the fiscal year
ended February 28, 1998.
10.12 Form of Indemnification Agreement between Exhibit 10.13 to the Annual Report on Form
the Registrant and its officers 10-K of the Registrant for the fiscal year
ended February 28, 1998.
10.13 Form of Promissory Note and Stock Pledge Exhibit 10.14 to the Annual Report on Form
Agreement between the Registrant and certain 10-K of the Registrant for the fiscal year
of its officers and directors ended February 28, 1998.
10.14 Asset Purchase Agreement dated June 5, 1998 Exhibit 10.15 to the Annual Report on Form
between the Registrant as seller and Resort 10-K of the Registrant for the fiscal year
Confections, Inc. et al., as purchasers ended February 28, 1998.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
11.1 Statement re: computation of per share Filed herewith.
earnings
23.1 Consent of Independent Public Accountants Filed herewith.
27.1 Fiscal 1999 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, 1999.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
By/S/ Bryan J. Merryman
--------------------------------
BRYAN J. MERRYMAN
Vice-President - Finance,
Chief Operating Officer,
Chief Financial Officer and
Director
Date: May 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: May 28, 1999 /S/ Franklin E. Crail
--------------------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President,
Treasurer and Director
(principal executive officer)
Date: May 28, 1999 /S/ Bryan J. Merryman
--------------------------------
BRYAN J. MERRYMAN
Vice President - Finance
Chief Financial Officer
(principal financial and
accounting officer)
Date: May 28, 1999 /S/ Gerald A Kien
--------------------------------
GERALD A. KIEN, Director
Date: May 28, 1999 /S/ Lee N. Mortenson
--------------------------------
LEE N. MORTENSON, Director
Date: May 28, 1999 /S/ Fred M. Trainor
--------------------------------
FRED M. TRAINOR, Director
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
3.1 Articles of Incorporation of the Exhibit 3.1 to Current Report on Form 8-K of the
Registrant, as amended Registrant filed on August 1, 1988.
3.2 By-laws of the Registrant, as amended Exhibit 3.2 to the Annual Report on Form 10-K of
on November 25, 1997 the Registrant for the fiscal year ended February
28, 1998.
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K of the
Registrant filed on August 1, 1988.
4.2 Term Loan and Credit Agreement dated Exhibit 4.18 to the Annual Report on Form 10-K of
April 5, 1996 in the amount of the Registrant for the fiscal year ended February
$2,000,000 between Norwest Banks and 29, 1996.
the Registrant
4.3 Amendments dated February 5, 1997, May Exhibit 4.12 to the Annual Report on Form 10-K of
2, 1997, and May 22, 1997 to Term Loan the Registrant for the fiscal year ended February
and Credit Agreement dated April 5, 28, 1997.
1996 in the amount of $2,000,000
between Norwest Banks and the Registrant
4.4 Amendments dated December 23, 1997, Exhibit 4.4 to the Annual Report on Form 10-K of
March 9, 1998 & May 6, 1998 to Term the Registrant for the fiscal year ended February
Loan and Credit Agreement dated April 28, 1998.
5, 1996 in the amount of $2,000,000
between Norwest Banks and the Registrant
4.5 Instruments with respect to long-term
debt not exceeding 10% of the total
assets of the Company have not been
filed. The Company agrees to furnish a
copy of such instruments to the
Securities and Exchange Commission upon
request.
10.1 Form of Stock Option Agreement for the Exhibit 10.3 to The Annual Report on Form 10-K of
Registrant * the Registrant for the fiscal year ended February
28, 1986.
10.2 Incentive Stock Option Plan of the Exhibit 10.2 to the Annual Report on Form 10-K of
Registrant as amended July 27, 1990 * the Registrant for the fiscal year ended
February 28, 1991.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Incorporated by
Description Reference to
<S> <C> <C>
10.3 Form of Employment Agreement between the Exhibit 99.2 to Schedule on Form 14D9 of
Registrant and its officers * the Registrant filed on May 21, 1999.
10.4 Current form of franchise agreement Filed herewith.
used by the Registrant
10.5 Form of Real Estate Lease between the Exhibit 10.7 to Registration Statement on Form S-18
Registrant as Lessee and franchisee as (Registration No. 33-2016-D).
Sublessee
10.6 Form of Nonqualified Stock Option Exhibit 10.8 to the Annual Report on Form 10-K of
Agreement for Nonemployee Directors for the Registrant for the fiscal year ended February
the Registrant * 28, 1991.
10.7 Nonqualified Stock Option Plan for Exhibit 10.9 to the Annual Report on Form 10-K of
Nonemployee Directors dated March 20, the Registrant for the fiscal year ended February
1990 * 28, 1991.
10.8 1995 Stock Option Plan of the Exhibit 10.9 to Registration Statement on Form S-1
Registrant* (Registration No. 33-62149) filed August 25, 1995.
10.9 Forms of Incentive Stock Option Exhibit 10.10 to Registration Statement on Form S-1
Agreement for 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25,
1995.
10.10 Forms of Nonqualified Stock Option Exhibit 10.11 to Registration Statement on Form S-1
Agreement for 1995 Stock Option Plan* (Registration No. 33-62149) filed on August 25,
1995.
10.11 Form of Indemnification Agreement Exhibit 10.12 to the Annual Report on Form 10-K of
between the Registrant and its directors the Registrant for the fiscal year ended February 28, 1998.
10.12 Form of Indemnification Agreement Exhibit 10.13 to the Annual Report on Form 10-K of
between the Registrant and its officers the Registrant for the fiscal year ended February 28, 1998.
10.13 Form of Promissory Note and Stock Exhibit 10.14 to the Annual Report on Form 10-K of
Pledge Agreement between the Registrant the Registrant for the fiscal year ended February
and certain of its officers and 28, 1998.
directors
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Incorporated by
Description Reference to
<S> <C> <C>
10.14 Asset Purchase Agreement dated June 5, Exhibit 10.15 to the Annual Report on Form 10-K of
1998 between the Registrant as seller the Registrant for the fiscal year ended February
and Resort Confections, Inc. et al., as 28, 1998.
purchasers
11.1 Statement re: computation of per share Filed herewith.
earnings
23.1 Consent of Independent Public Filed herewith.
Accountants
27.1 Fiscal 1999 Financial Data Schedule Filed herewith.
</TABLE>
58
<PAGE>
Exhibit 10.4
ROCKY MOUNTAIN CHOCOLATE FACTORY
FRANCHISE AGREEMENT
Franchisee:_________________________
Date:_______________________________
Franchised Location:________________
(7/1/98)
<PAGE>
<TABLE>
<S> <C>
10. FRANCHISEE'S OPERATIONAL COVENANTS.......................................................................9
10.1. Store 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 Store 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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
22.6. Review of Agreement........................................................................34
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.................................................................................35
22.12. Notices....................................................................................35
22.13. Acknowledgement............................................................................35
</TABLE>
EXHIBITS
I. Addendum to Franchise Agreement - Location Approval
II. Personal Guaranty
III. Statement of Ownership
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FRANCHISE AGREEMENT
THIS AGREEMENT (the "Agreement") is made this ____ day of ________,
199__, by and between ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado
corporation, located at 265 Turner Drive, Durango, Colorado 81301 (the
"Franchisor") and _______________, located at __________________ (the
"Franchisee"), who, on the basis of the following understandings and
agreements, agree as follows:
1. PURPOSE
1.1. The Franchisor has developed methods for establishing, operating
and promoting retail stores selling gourmet chocolates and other premium
confectionery products ("ROCKY MOUNTAIN CHOCOLATE FACTORY Stores" or "Stores")
using the service mark "ROCKY MOUNTAIN CHOCOLATE FACTORY" and related trade
names and trademarks ("Marks") and the Franchisor's proprietary methods of doing
business (the "Licensed Methods").
1.2. The Franchisor grants the right to others to develop and operate a
ROCKY MOUNTAIN CHOCOLATE FACTORY Store, under the Marks and pursuant to the
Licensed Methods.
1.3. The Franchisee desires to establish a ROCKY MOUNTAIN CHOCOLATE
FACTORY Store at a location identified herein or to be later identified, and the
Franchisor desires to grant the Franchisee the right to operate a ROCKY MOUNTAIN
CHOCOLATE FACTORY Store at such location under the terms and conditions which
are contained in this Agreement.
2. GRANT OF FRANCHISE
2.1. GRANT OF FRANCHISE. The Franchisor grants to the Franchisee, and
the Franchisee accepts from the Franchisor, the right to use the Marks and
Licensed Methods in connection with the establishment and operation of a ROCKY
MOUNTAIN CHOCOLATE FACTORY Store, at the location described in Article 3 of this
Agreement. The Franchisee agrees to use the Marks and Licensed Methods, as they
may be changed, improved, and further developed by the Franchisor from time to
time, only in accordance with the terms and conditions of this Agreement.
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
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FACTORY Store. 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 Store 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 assorted bulk
chocolates and boxed and packaged candies. The Franchisee's ROCKY MOUNTAIN
CHOCOLATE FACTORY Store 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 Store 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 Store 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 ROCKY MOUNTAIN CHOCOLATE FACTORY Store within a
certain geographic area as set forth in EXHIBIT I ("Protected Territory").
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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 Store 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, in
which case the Franchisor and the Franchisee shall execute EXHIBIT IV or EXHIBIT
V to this Agreement, whichever is applicable, relating to the operation of
"Satellite Stores" (if this Agreement governs the operation of a traditional
Store, any Satellite Store(s) shall be governed by separate Franchise
Agreements) or "Temporary Stores."
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
Stores, Satellite Stores and Temporary Stores, at any location other than in the
Protected Territory; (2) to use the Marks and Licensed Methods to identify
services and products, promotional and marketing efforts or related items, and
to identify products and services similar to those which the Franchisee will
sell, but made available through alternative channels of distribution other than
through traditional ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, at any location,
including, but not limited to, through Satellite Stores, Temporary Stores, by
way of mail order, (including electronic mail order), catalog, television,
retail store kiosk or display or through the wholesale sale of its products to
unrelated retail outlets or to candy distributors or outlets located in
stadiums, arenas, airports, turnpike rest stops or supermarkets in the
Franchisee's Protected Territory; and (3) to use and license the use of other
proprietary marks or methods in connection with the sale of products and
services similar to those which the Franchisee will sell or in connection with
the operation of retail stores selling gourmet chocolates or other premium
confectionery products, at any location, which stores are the same as, or
similar to, or different from a traditional ROCKY MOUNTAIN CHOCOLATE FACTORY
Store or a Satellite Store or a Temporary Store, 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 Store, 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
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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.
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
Stores 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 Store signs which comply with the standards and specifications of the
Franchisor as
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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.
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 Store 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 Store. 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 Store.
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 Store 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 Store 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 Store 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.
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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 Store. 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 ROCKY MOUNTAIN CHOCOLATE
FACTORY Store 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 Store,
("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 Store.
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.
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7. DEVELOPMENT ASSISTANCE
7.1. FRANCHISOR'S DEVELOPMENT ASSISTANCE. The Franchisor shall provide
the Franchisee with assistance in the initial establishment of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store 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 Store 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 Store. 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 Store a representative ("Site
Representative") to be present during the opening of the Franchisee's
ROCKY MOUNTAIN CHOCOLATE FACTORY Store. There will be no charge to the
Franchisee for this service provided by the Franchisor.
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The Site Representative will assist the Franchisee's employees in
opening the Store, 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, 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 Store. 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 Store, the
Franchisor shall make available to the Franchisee the following services:
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a. Upon the reasonable request of the Franchisee, consultation
by telephone regarding the continued operation and management of a
ROCKY MOUNTAIN CHOCOLATE FACTORY Store 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 on-going operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store 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.
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10. FRANCHISEE'S OPERATIONAL COVENANTS
10.1. STORE OPERATIONS. The Franchisee acknowledges that it is solely
responsible for the successful operation of its ROCKY MOUNTAIN CHOCOLATE FACTORY
Store 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 ROCKY MOUNTAIN CHOCOLATE FACTORY Store 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 Store 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 Store. 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 Store 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 Store after
commencement of Store operations and be present at the Franchised
Location during operation of the Store.
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 Store, including,
without limitation, filling "Wholesale Orders", defined below, any
catering or off-premises sales, without the prior written consent of
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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, 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 Store, 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 Store. 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 Store at the Franchised Location, both of which shall be listed
and identified exclusively with the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store 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 Store
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
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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
Store, 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.
j. The Franchisee shall be responsible for training all of its
employees who work in any capacity in the ROCKY MOUNTAIN CHOCOLATE
FACTORY Store. 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 Store.
k. The Franchisee shall at all times during the term of this
Agreement own and control the ROCKY MOUNTAIN CHOCOLATE FACTORY Store
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 Store 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 Store 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
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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.
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 Store.
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 Store, 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
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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 advertising or other marketing or
promotional programs published by any method, including print, broadcast or
electronic media, regarding the ROCKY MOUNTAIN CHOCOLATE FACTORY Store,
including, without limitation, "Yellow Pages" advertising, newspaper ads,
flyers, brochures, coupons, direct mail pieces, specialty and novelty items,
radio, television, Internet and World Wide Web 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 Store 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 Store in the manner
prescribed by the Franchisor. The Franchisee shall not, under any circumstances,
use handwritten signs in the operation of its Store.
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 Store. 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 Stores will be
required to spend money for local advertising on an equal percentage basis with
all franchised Stores. 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
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("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 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 up to 50% 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
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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. 1.1.
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 Store 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 Store and specifically, for
the candy processing recipes, uniforms, materials, forms, menu boards, items and
supplies used in connection with the Store. The Franchisor reserves the right to
change standards and specifications for services and products offered at or
through the ROCKY MOUNTAIN CHOCOLATE FACTORY Store and for the candy processing
recipes, uniforms, materials, forms, items and supplies used in connection with
the Store 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 Store 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.
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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 Store 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 ROCKY MOUNTAIN CHOCOLATE FACTORY Store. 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 Store 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. 1.1.
13.39. APPROVED SUPPLIERS. The Franchisee shall purchase all products,
services, supplies and materials required for the operation of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store 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.
13.5. 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
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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.
13.6. 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.
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 Store as it is governed by this Agreement. Except as
permitted in the Operations Manual, the Franchisee agrees not to use any of the
Marks as part of an electronic mail address, or on any sites on the Internet or
World Wide Web and the Franchisee agrees not to use or register any of the Marks
as a domain name on the Internet.
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 Store.
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 Store 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
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or interest in the Licensed Methods except for the right to use the Licensed
Methods in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store 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 Store, 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 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 STORE 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
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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 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 Store, 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
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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 Store 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 ROCKY MOUNTAIN
CHOCOLATE FACTORY Store 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 Store 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 Store.
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 Store, 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 Store at any time at the Franchisor's expense,
without prior notification to the Franchisee. The Franchisor may make
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the results of any such service evaluation available to the Franchisee, in the
Franchisor's sole discretion.
16. TRANSFER
16.1. TRANSFER 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. As used in this Agreement, the term "transfer" includes
the Franchisee's voluntary, involuntary, direct or indirect assignment, sale,
gift or other disposition of any interest in: (1) this Agreement; (2) the
Franchisee entity; (3) the Store governed by this Agreement; or (4) all or a
substantial portion of the assets of the Store.
16.2. PRE-CONDITIONS TO FRANCHISEE'S TRANSFER. The Franchisee shall not
engage in a transfer unless the Franchisee obtains the Franchisor's written
consent and the Franchisee and the proposed transferee comply with the following
requirements:
a. 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, are paid in full;
b. The proposed transferee agrees to operate the Store as a
ROCKY MOUNTAIN CHOCOLATE FACTORY Store and agrees 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 the transfer is effective;
c. The proposed transferee agrees to execute the then current
form of Franchise Agreement 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 initial franchise fee;
d. The Franchisee provides written notice to the Franchisor 30
days' prior to the proposed effective date of the transfer, and
includes information reasonably detailed to enable the Franchisor to
evaluate the terms and conditions of the proposed transfer and which at
a minimum includes a written offer from the proposed transferee;
e. The proposed transferee provides information to the
Franchisor sufficient for the Franchisor to assess the proposed
transferee's business experience, aptitude and financial qualification,
and the Franchisor approves the proposed transferee as a franchisee;
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f. The Franchisee executes 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. The Franchisee or the proposed transferee pay a transfer
fee of $2,500; provided, however, that no transfer fee will be charged
for a transfer by the Franchisee to a corporation wholly-owned by the
Franchisee, between partners of a partnership Franchisee or to a spouse
of a Franchisee upon the death or disability of the Franchisee; and
h. The Franchisee agrees to abide by all post-termination
covenants set forth herein, including, without limitation, the covenant
not to compete 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 transfer. 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 transfer 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
engage in a transfer, 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 notice set forth in Section
16.2(d); provided, however, the following additional terms and conditions shall
apply:
a. 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;
b. The right of first refusal will be 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 the
Franchisor shall have a new 30 day right of first refusal;
c. If the consideration or manner of payment offered by a
proposed transferee 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
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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
d. If the Franchisor chooses not to exercise its right of
first refusal, the Franchisee shall be free to complete the transfer
subject to compliance with Sections 16.2 and 16.3 above. Absence of a
reply to the Franchisee's notice of a proposed transfer within the 30
day period may be 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 transfer as provided
for above, shall apply (1) if the Franchisee is a partnership, corporation or
other business association, (i) to the addition or deletion of a partner,
shareholder or members of the association or the transfer of any ownership
interest among existing partners, shareholders or members; (ii) to any proposed
transfer of 25% or more of the interest (whether stock, partnership interest or
membership interest) to a third party, whether such transfer occurs in a single
transaction or several transactions; and (2) if the Franchisee is an individual,
to the transfer from such individual or individuals to a corporation or other
entity 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; and (ii) a
limitation on the corporation's or other entity's business activity to that of
operating the ROCKY MOUNTAIN CHOCOLATE FACTORY Store and related activities
provided that with respect to such transfer, the Franchisor's right of first
refusal to purchase shall not apply and the Franchisor will not charge any
transfer fee.
16.6. TRANSFER 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 individual owning 25% or more of, or
controlling the Franchisee entity), the 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 (unless extended by probate
proceedings), 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 transfer fee charged by the Franchisor.
Failure to transfer the interest 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 25% or more of, or controlling, the Franchisee entity) from
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supervising the management and operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store for a period of 120 days from the onset of such disability, impairment or
condition.
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TERM AND EXPIRATION
17.1. TERM. The term of this Agreement begins on the date this
Agreement is fully executed and ends five years from the date the Store opens,
as set forth in EXHIBIT I-2, 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 Store 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 $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 execute the then current Franchise
Agreement or pay the successor franchise fee, the Franchisor shall
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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 Store or otherwise abandons the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store 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 Store,
unless and only to the extent that full operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store 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. ss.ss. 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 Store 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
Store or a substantial portion of the assets of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store 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 ROCKY MOUNTAIN CHOCOLATE
FACTORY Store 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.
Additionally, in the event this Agreement is terminated by the
Franchisor prior to its expiration as set forth in Sections 18.1 or
18.2 above, the Franchisee acknowledges and agrees that in addition to
all other available remedies, the Franchisor shall have the right to
recover lost future Royalties during any period in which the Franchisee
fails to pay such Royalties through and including the remainder of the
then current term of this Agreement.
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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 Agreement by
failing to maintain and adhere to the Franchisor's standards and
specifications for the operation of the Franchisee's Store.
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 Store, 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 Store 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 Store 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
Store, 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 Store. 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 Store 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
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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 ROCKY MOUNTAIN CHOCOLATE
FACTORY Store 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 Store 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 Store; 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 Store 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;
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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 ROCKY MOUNTAIN
CHOCOLATE FACTORY Store 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.
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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 ROCKY MOUNTAIN CHOCOLATE FACTORY
Store 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 Store 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 Store 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 Store, 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
Stores and which constitutes 5% or more of the Gross Retail Sales of any ROCKY
MOUNTAIN CHOCOLATE FACTORY Store; 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 a 10 mile radius of any other franchised or company-owned
ROCKY MOUNTAIN CHOCOLATE FACTORY Store. 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 Store 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 Store. 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 ROCKY
MOUNTAIN CHOCOLATE FACTORY Store. 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 with the insurance provisions set forth
herein
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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 Stores 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 shall be
interpreted under the laws of the state of Colorado and any disputes between the
parties shall be governed by and determined in accordance with the substantive
laws of the state of Colorado, which laws shall prevail in the event of any
conflict of law. The Franchisee and the Franchisor have negotiated regarding a
forum in which to resolve any disputes which may arise between them and have
agreed to select a forum in order to promote stability in their relationship.
Therefore, if a claim is asserted in a legal proceeding involving the
Franchisee, its officers, directors, partners or managers (collectively,
"Franchisee Affiliates") and the Franchisor, its officers, directors or sales
employees (collectively, "Franchisor Affiliates") all parties agree that the
exclusive venue for disputes between them shall be in the state and federal
courts of Colorado and each waive any objections they may have to the personal
jurisdiction of or venue in the state and federal courts of Colorado. The
Franchisor, the Franchisor Affiliates, the Franchisee and the Franchisee
Affiliates each waive their rights to a trial by jury.
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, including all exhibits and
addenda hereto, 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 or for claims of negligent or fraudulent misrepresentation
based on any such oral representations or commitments 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
36
<PAGE>
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 Store, or operational assistance other than as stated in this
Agreement or in any disclosure document provided by the Franchisor or its
representatives.
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. If the Franchisor seeks an injunction, the
Franchisor will not be required to post a bond in excess of $500.
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
37
<PAGE>
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 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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above set forth.
38
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY,
INC.
Date: By:
----------------------------- ---------------------------------
Title:
------------------------------
FRANCHISEE:
Date:
----------------------------- ------------------------------------
------------------------------------
Individually
AND:
(if a corporation or partnership)
------------------------------------
Company Name
Date: By:
----------------------------- ---------------------------------
Title:
------------------------------
(7/1/98)
39
<PAGE>
EXHIBIT I
TO FRANCHISE AGREEMENT
ADDENDUM TO ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FRANCHISE AGREEMENT
1. FRANCHISED LOCATION AND PROTECTED TERRITORY. The Franchised
Location, set forth in Section 3.1 of the Agreement shall be:
, and the Protected Territory described in
Section 3.2 of the Agreement, shall be: .
2. DESIGNATED AREA. The Franchisor and the Franchisee acknowledge that
the Franchised Location cannot be designated in Section 1 above as a specific
address because the location has not been selected and approved; therefore,
within 120 days following the date of the Agreement, the Franchisee shall take
steps to choose and acquire a location for its ROCKY MOUNTAIN CHOCOLATE FACTORY
Store within the following geographic area ("Designated Area"):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------.
3. OPENING DATE. The parties agree that the Opening Date of the Store
which is the subject of the Agreement cannot be designated because the Store has
not yet opened for business, but within 30 days after the Store opens for
business, the parties shall sign the Rider to this Addendum specifying the
Opening Date of the Store.
Fully executed this day of , 19 .
------ ----------------- ----
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By:
-------------------------------------
Title:
-------------------------------------
FRANCHISEE
By:
-------------------------------------
Title:
-------------------------------------
<PAGE>
EXHIBIT II
TO FRANCHISE AGREEMENT
GUARANTY AND ASSUMPTION OF FRANCHISEE'S OBLIGATIONS
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 defined 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;
<PAGE>
3. Such liability shall not be contingent or conditioned upon
pursuit by the Franchisor of any remedies against Franchisee
or any other person; and
4. Such liability shall not be diminished, relieved or otherwise
affected by any extension of time, credit or other indulgence
which the Franchisor may from time to time grant to Franchisee
or to any other person, including without limitation the
acceptance of any partial payment or performance, or the
compromise or release of any claims, none of which shall in
any way modify or amend this guaranty, which shall be
continuing and irrevocable during the term of the Agreement,
including renewals thereof.
IN WITNESS WHEREOF, each of the undersigned has affixed his or her
signature effective on the same day and year as the Agreement was executed.
WITNESS GUARANTOR(S)
- ---------------------------------- ----------------------------------------
- ---------------------------------- ----------------------------------------
- ---------------------------------- ----------------------------------------
- ---------------------------------- ----------------------------------------
2
<PAGE>
EXHIBIT III
TO FRANCHISE AGREEMENT
STATEMENT OF OWNERSHIP
FRANCHISEE:
TRADE NAME (if different from above):
Form of Ownership
(Check One)
Limited
______ Individual ______ Partnership ______ Corporatio ______ Liability
Company
If a Partnership, provide name and address of each partner showing
percentage owned, whether active in management, and indicate the state in which
the partnership was formed.
If a Limited Liability Company, provide name and address of each member
and each manager showing percentage owned and indicate the state in which the
Limited Liability Company was formed.
If a Corporation, give the state and date of incorporation, THE NAMES
AND ADDRESSES OF EACH OFFICER AND DIRECTOR, and list the names and addresses of
every shareholder showing what percentage of stock is owned by each.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Franchisee acknowledges that this Statement of Ownership applies to the
ROCKY MOUNTAIN CHOCOLATE FACTORY Store authorized under the Franchise Agreement.
Use additional sheets if necessary. Any and all changes to the above
information must be reported to the Franchisor in writing.
- -------------------------------- -----------------------------------
Date Name
<PAGE>
Exhibit 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For Years Ended February 28,
1999 1998 1997
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
INCOME (LOSS) FROM CONTINUING OPERATIONS 421,428 1,260,001 ($ 1,009,711)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (1,020,083) (355,991)
NET INCOME (LOSS) 421,428 239,918 (1,365,702)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,665,567 2,912,387 2,908,492
DILUTIVE EFFECT OF EMPLOYEE STOCK OPTIONS 11,776 17,158 --
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION 2,677,343 2,929,545 2,908,492
BASIC EARNINGS (LOSS) PER COMMON SHARE
CONTINUING OPERATIONS $ .16 $ .43 $ (.35)
DISCONTINUED OPERATIONS -- (.35) (.12)
NET INCOME (LOSS) $ .16 $ .08 $ (.47)
DILUTED EARNINGS (LOSS) PER COMMON SHARE
CONTINUING OPERATIONS $ .16 $ .43 $ (.35)
DISCONTINUED OPERATIONS -- (.35) (.12)
NET INCOME (LOSS) $ .16 $ .08 $ (.47)
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated May 12, 1999, accompanying the financial
statements included in the Annual Report of Rocky Mountain Chocolate Factory,
Inc. on Form 10-K for the year ended February 28, 1999. 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, File No. 33-62689, effective September 15, 1995, File
No. 33-63177, effective October 3, 1995, File No. 33-64651, effective
November 30, 1995, File No. 33-64653, effective November 30, 1995, and File
No. 333-8739, effective July 24, 1996).
GRANT THORNTON LLP
Dallas, Texas
May 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 317,155
<SECURITIES> 0
<RECEIVABLES> 2,133,694
<ALLOWANCES> 259,408
<INVENTORY> 3,276,550
<CURRENT-ASSETS> 6,358,558
<PP&E> 15,818,990
<DEPRECIATION> 5,580,319
<TOTAL-ASSETS> 18,652,100
<CURRENT-LIABILITIES> 4,800,138
<BONDS> 5,249,769
0
0
<COMMON> 77,988
<OTHER-SE> 8,431,198
<TOTAL-LIABILITY-AND-EQUITY> 18,652,100
<SALES> 23,193,011
<TOTAL-REVENUES> 26,232,528
<CGS> 13,153,614
<TOTAL-COSTS> 24,913,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 631,477
<INCOME-PRETAX> 687,153
<INCOME-TAX> 265,725
<INCOME-CONTINUING> 421,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 421,428
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
