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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Name of Subject Company)
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $0.03
(Title of Class of Securities)
774678403
(CUSIP Number of Class of Securities)
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FRANKLIN E. CRAIL
CHAIRMAN OF THE BOARD,
PRESIDENT AND TREASURER
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
265 TURNER DRIVE
DURANGO, COLORADO 81301
(970) 259-0554
(Name, Address and Telephone Number of Person
Authorized to Receive Notice and Communications on Behalf
of the Person(s) Filing Statement)
COPY TO:
STEVEN K. COCHRAN, ESQ.
THOMPSON & KNIGHT, P.C.
1700 PACIFIC AVENUE, SUITE 3300
DALLAS, TEXAS 75201
(214) 969-1387
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is Rocky Mountain Chocolate Factory,
Inc., a Colorado corporation (the "Company"). The principal executive offices of
the Company are located at 265 Turner Drive, Durango, Colorado 81301. The class
of equity securities to which this statement relates is the common stock of the
Company, par value $0.03 per share (the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER.
This statement relates to the tender offer disclosed in the Schedule
14D-1, dated May 10, 1999 (the "Schedule 14D-1"), of WC-RMA Corp. ("Purchaser"),
a Delaware corporation and a wholly owned subsidiary of Whitman's Candies, Inc.,
a Missouri corporation ("Parent" and together with Purchaser, the "Bidder"), to
purchase all of the outstanding Shares at a price per share of $5.75 (the "Offer
Price") net to the seller in cash, without interest thereon, upon the terms and
subject to the conditions set forth in the Bidder's Offer to Purchase dated May
10, 1999 and in the related Letter of Transmittal (together, the "Offer"). The
Schedule 14D-1 was filed with the Securities and Exchange Commission on the same
day the Bidder first publicly disclosed its intention to commence the Offer. The
Bidder's Offer to Purchase states that the principal executive offices of Parent
and Purchaser are located at 1000 Walnut St., Suite 900, Kansas City, Missouri
64106. According to the Offer to Purchase, effective August 1, 1999, the
principal executive offices of Parent and Purchaser will be located at 4900 Oak
Street, Kansas City, Missouri 64112.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and business address of the Company, which is the entity
filing this statement, are set forth in Item 1 above.
(b)(1) Certain contracts, agreements, arrangements, or understandings
between the Company and its executive officers, directors or affiliates are
described in the sections entitled "Beneficial Ownership of the Company's Equity
Securities," "Executive Compensation," "Certain Transactions" and "Proposal to
Approve an Amendment to the 1995 Stock Option Plan" in the Company's proxy
statement for the Annual Meeting of Stockholders held on October 30, 1998 (the
"Proxy Statement"). A copy of the relevant portions of the Proxy Statement is
filed as Exhibit 1 hereto and the portions of such Proxy Statement referred to
above are incorporated herein by reference.
The Company has entered into employment agreements with certain
executives of the Company which contain, among other things, "change in control"
severance provisions. Specifically, the Company has entered into employment
agreements with Franklin E. Crail, Edward L. Dudley, Clifton W. Folsom, Jay B.
Haws and Bryan J. Merryman. The employment agreements generally provide that, if
the Company terminates the executive's employment under circumstances
constituting a "Triggering Termination" (as defined in the employment
agreements) during a specified period preceding a "Change in Control" (as
defined in the employment agreements) of the Company, or if the executive or the
Company terminates the
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executive's employment under circumstances constituting a Triggering
Termination during a specified period after a Change in Control, the executive
will be entitled to receive, among other benefits, 2.99 times the sum of (i) the
executive's annual salary and (ii) two times the bonus that would be payable to
the executive for the bonus period in which the Change in Control occurred. A
Triggering Termination also includes a voluntary termination by the executive
within five business days before an anticipated Change in Control with the
concurrence of two "Concurring Persons" (as defined in the employment
agreements) that the Change in Control is likely to occur during such
five-business day period. In such event, the executive must agree to continue to
work on an at-will basis, without compensation, until the Change in Control
occurs. If the Change in Control does not occur within 10 business days, the
executive must refund the severance payment to the Company. The foregoing
description of the employment agreements does not purport to be complete and is
qualified in its entirety by reference to the form of employment agreement,
which is filed as Exhibit 2 hereto and is incorporated herein by reference.
The Company has entered into indemnification agreements with each of the
executives and directors of the Company, which supplement the indemnification
provisions set forth in the Company's bylaws. The indemnification agreements
generally provide that the Company will indemnify each executive or director to
the fullest extent permitted by the Colorado Business Corporation Act and shall
advance to the executive or director expenses incurred by such person in
connection with the investigation or defense of a proceeding or acting as a
witness in a proceeding. The foregoing description of the indemnification
agreements does not purport to be complete and is qualified in its entirety by
reference to the form of indemnification agreement, which is filed as Exhibit 3
hereto and is incorporated herein by reference.
(b)(2) To the best knowledge of the Company, there are no material
contracts, agreements, arrangements or understandings or any actual or potential
conflicts of interest between the Company, its executive officers, directors or
affiliates, on the one hand, and the Bidder, its executive officers, directors
or affiliates, on the other hand.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) In an effort to maximize shareholder value, the Company, like other
companies in the candy and confectionery industry, continually explores the
possibility of business relationships and cooperative efforts with other
participants in its industry. At two separate meetings of the Board of Directors
of the Company (the "Board") held on May 18, 1999, the Board carefully
considered the terms and conditions of the Offer, the Company's business,
financial condition and prospects, a proposal to adopt a shareholder rights plan
(the "Rights Plan") and other related matters, including presentations by its
legal and financial advisors. At its second meeting on May 18, the Board
unanimously determined to reject the Bidder's unsolicited Offer and to adopt the
Rights Plan. The Rights Plan is more fully described in Item 8 hereof.
AT ITS SECOND MEETING ON MAY 18, THE BOARD, AFTER RECEIVING ADVICE FROM
ITS LEGAL AND FINANCIAL ADVISORS AND THE COMPANY'S MANAGEMENT, UNANIMOUSLY
CONCLUDED, AMONG OTHER THINGS, THAT
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THE OFFER IS INADEQUATE, OPPORTUNISTIC AND NOT IN THE BEST INTERESTS OF THE
COMPANY OR ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT
THE COMPANY'S STOCKHOLDERS REJECT THE OFFER AND NOT TENDER THEIR SHARES PURSUANT
TO THE OFFER.
A copy of a letter to stockholders communicating the Board's
recommendation is filed as Exhibit 4 hereto and is incorporated herein by
reference.
(b) In reaching its conclusion and recommendation referred to in Item
4(a), the Board considered its familiarity with, and management's view of, the
Company's business, financial condition, results of operations, business
strategy and future prospects, the nature of the markets in which the Company
operates and the Company's position in such markets, the historical and current
market prices for the Shares and the Board's belief, based on the factors
described herein, that the Offer is inadequate. In this regard, the Board
particularly considered the following:
(i) The presentation by George K. Baum & Company ("GKB"),
financial advisor to the Company, concerning the Company and the
financial aspects of the Offer, as well as the oral opinion of GKB
stating that the Offer is inadequate, from a financial point of view, to
the holders of Shares other than the Bidder and its affiliates. GKB's
opinion was based on, among other things, a valuation study of the
Company prepared by GKB. GKB's valuation study employed five different
valuation methodologies, including a review of selected comparable
company multiples, an analysis of the incremental earnings impact to an
aquiror at various acquisition prices, a discounted cash flow analysis,
a review of selected comparable mergers and acquisitions and an analysis
of certain strategic alternatives that may be available to the Company.
(ii) The fact that acquisitions of companies of comparable size
in the candy and confectionery markets, the small-cap branded food
markets and the specialty retail markets have been at multiples
considerably higher than the multiples implied by the Offer.
(iii) The historical trading prices of the Shares, including the
Board's belief, based in part on the factors referred to herein, that
the trading price for the Shares immediately prior to the announcement
of the Offer did not fully reflect the long-term value inherent in the
Company. As of May 19, 1999, the 52-week high for the market price of
the Shares is $7.75. In this regard, the Board noted that the Offer
Price represents a 26% discount from the 52-week high and less than a
12% premium over the weighted average market price of the Shares during
the same period.
(iv) The Board's belief that the market price of the Shares has
been adversely affected in the near-term primarily by nonrecurring
events. Specifically, the market price of the Shares was adversely
affected by the Company's announcement on March 12, 1999 that its
earnings per share for the fiscal year ended February 28, 1999 will be
significantly lower than previously anticipated. The factors
contributing to the less than expected fiscal 1999 earnings per share
included certain nonrecurring events.
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(v) The fact that the Company is continuing to take steps to
improve its near-term operating efficiency and profitability and is in
the process of evaluating further distribution and marketing programs as
part of its strategic plan to enhance stockholder value. As announced in
March 1999, the Company is in the process of implementing a
restructuring program to improve profitability. The program includes (A)
reengineering certain of the Company's manufacturing processes, (B)
implementing a cost structure reduction and containment program and (C)
creating new and distinct packaging for sales to distribution channels
outside the Company's system of retail stores. The Board believes that
these efforts will improve operating margins and restore the Company to
an acceptable level of profitability and that the Offer Price does not
reflect the potential economic benefits to the Company if such efforts
are successful.
(vi) The Board's belief that the Bidder and its affiliates lack
experience in managing a franchise business.
(vii) The opinion of the Company's management as to the
Company's prospects for future growth and profitability, based on its
knowledge of the Company's business, its views as to the long-term
strategic plans of the Company, the restructuring program that was
recently implemented and other opportunities available to the Company in
the future, as well as management's view that the Offer Price is
inadequate and that the Offer is an opportunistic attempt to take
advantage of short-term business and market factors.
(viii) The Board's determination to explore strategic
alternatives that have the potential of resulting in a value for the
Shares in excess of the Offer Price and that, in pursuit of these
strategic alternatives, the interests of the Company and its
stockholders would best be served by the Company continuing as an
independent entity. However, the Board also noted the Bidder's
willingness to prepare the Offer, expend funds to retain legal counsel
and other advisors to effectuate the Offer and take other actions and
determined that it should also explore further negotiations with the
Bidder to better determine the Bidder's plans for the Company and to
determine whether the Bidder would be willing to increase the Offer
Price.
(ix) The disruption that consummation of the Offer could have on
the Company's employees, franchisees, suppliers and customers and the
communities where the Company operates, as well as concerns expressed by
certain of these constituencies to the Company. Specifically, the Board
expressed concern that the quality of the Company's products and
operations could be adversely affected if the Bidder proceeded to
produce the Company's products at the Bidder's plants or proceeded to
sell the Bidder's products through the Company's system of retail
stores. The Board believes that any such actions by the Bidder could
have a substantial adverse impact on the Company's employees and
franchisees.
(x) The significant uncertainties and contingencies associated
with the Offer, including conditions that are in the discretion of the
Bidder or are subject to external
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events not directly related to the Company, such as (A) a 10% decline in
the stock market, (B) the commencement of armed hostilities or other
international calamity directly or indirectly involving the United
States (a situation that currently exists) and (C) the institution by
any person of any action that the Bidder in its sole discretion
determines might adversely affect the Company's business, operations,
properties, condition, assets, liabilities or prospects.
(xi) The coercive effect the Offer may have on holders of Shares
who would like to reject the Offer and not have their equity interests
in the Company terminated, but who may feel forced to tender their
Shares to the Bidder to protect against the possibility of being left as
a minority stockholder in the Company with less, possibly significantly
less, liquidity in the public trading market for the Shares, especially
if the Bidder is able to purchase a substantial percentage of the
outstanding Shares pursuant to the Offer and in any subsequent purchases
and without any binding obligation on the Bidder to undertake a
second-step merger.
(xii) The Board's commitment to protecting the best interests of
the Company and enhancing the value of the Company for the benefit of
its stockholders and other relevant constituencies.
The foregoing discussion of the information and factors considered by
the Board is not intended to be exhaustive but includes all material factors
considered by the Board. In reaching its determination to recommend rejection of
the Offer, the Board did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given differing weights to
different factors. The determination of the Board to recommend to the
stockholders of the Company to reject the Offer was made after consideration of
all the factors taken as a whole. Throughout its deliberations, the Board
received the advice of its legal and financial advisors who were retained to
advise the Board in connection with the Offer.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The Company has retained GKB as the Company's financial advisor in
connection with the evaluation and response to the Offer and other matters
arising in connection therewith. Pursuant to a letter agreement dated May 8,
1999 (the "Letter Agreement"), the Company retained GKB as its financial advisor
to assist the Company in its determination of appropriate values to be realized
in a takeover and to provide the Company with strategic alternatives relating to
takeover defense. Pursuant to the Letter Agreement, the Company has agreed to
pay GKB (i) beginning May 8, 1999, a base fee equal to $5,000 per month, with
the minimum fee being $25,000, (ii) a transaction fee equal to two percent (2%)
of the aggregate consideration paid upon consummation of (A) a sale or exchange
of all or substantially all of the Company's securities or (B) a sale of all or
substantially all of the Company's assets and (iii) a transaction fee equal to
five percent (5%) of that portion of the aggregate consideration of a sale of
all or substantially all of the Company's securities or assets represented by
the difference between the price per share realized in such transaction and
$5.75. If the Company requests that GKB issue a written opinion as to the
fairness of the financial consideration to be received by stockholders of the
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Company or by the Company in connection with a takeover, the fee for such
written opinion will be $75,000, which amount shall be applied against any
transaction fee that may become payable pursuant to the Letter Agreement. All
base fees paid by the Company shall be applied against any transaction fee which
may be payable pursuant to the Letter Agreement.
The term "aggregate consideration" includes all amounts paid to holders
of options, warrants, convertible securities, amounts paid in escrow and
contingent payments. The term "aggregate consideration" also includes (i) the
aggregate amount of dividends or other distributions, other than normal
recurring cash dividends, declared by the Company with respect to its capital
stock after the date of the Letter Agreement, (ii) the principal amount of all
debt as set forth in the Company's most recent consolidated balance sheet prior
to the consummation of such sale of securities or, in the event of a sale of
assets, the principal amount of debt assumed by the purchaser and (iii) amounts
paid by the Company to repurchase any of the Company's securities outstanding as
of the date of the Letter Agreement other than amounts paid to acquire shares of
the Company's capital stock pursuant to the terms of existing compensation
programs, stock repurchase programs or in the normal course of business.
If any portion of the aggregate consideration is paid in the form of
securities, the value of such securities, for purposes of calculating the
transaction fee, will be determined by the average of the last sales prices for
such securities on the five trading days ending five days prior to the
consummation of the transaction. If such securities do not have an existing
public trading market, the value of the securities shall be the mutually agreed
upon fair market value on the day prior to the consummation of the transaction.
The Company has also agreed to reimburse GKB periodically for its
reasonable out-of-pocket expenses, including the fees and disbursements of legal
counsel arising in connection with GKB's engagement by the Company plus any
sales, use or similar taxes arising in connection with GKB's engagement by the
Company. In addition, the Company has agreed to indemnify GKB against any
action, proceeding or investigation brought by or against any person, including
stockholders of the Company, except to the extent such action, proceeding or
investigation results from the gross negligence, willful misconduct or bad faith
of GKB or from acts outside the scope of the Letter Agreement.
The services of GKB may be terminated by GKB or by the Company, with or
without cause, upon receipt of written notice to that effect. The services of
GKB automatically terminate on May 8, 2000, unless the Company and GKB mutually
agree in writing to extend the terms of the Letter Agreement for a specified
period of time. GKB is entitled to the applicable transaction fee set forth
above in the event that at any time prior to the second anniversary date of the
date the Letter Agreement is terminated, (i) the Company enters into an
agreement with respect to a sale of all or substantially all the securities or
assets of the Company which is eventually consummated and (any of) the
purchasers of such securities or assets were included on a mutually agreed upon
list of prospective buyers provided by GKB to the Company, (ii) GKB, the Company
or its affiliates had contact with the acquiring party or any affiliate thereof
regarding such transaction during the term of the Letter Agreement or (iii) any
of the purchasers (or their affiliates) of all or substantially all of the
Company's securities or assets were on a list of
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prospective buyers that GKB proposed to contact on behalf of the Company, but
did not so contact due to the Company's lack of consent.
Other than as set forth in response to this Item 5, as of the date
hereof, neither the Company nor any person acting on its behalf has employed,
retained or compensated any other person to make solicitations or
recommendations to the Company's stockholders on its behalf concerning the
Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) To the best of the Company's knowledge, no transactions in Shares
have been effected during the past 60 days by the Company or by any executive
officer, director, affiliate or subsidiary of the Company.
(b) To the best of the Company's knowledge, none of the Company's
executive officers, directors, affiliates or subsidiaries presently intends to
tender to the Bidder pursuant to the Offer or sell any Shares that are held of
record or beneficially owned by such persons, but rather such persons presently
intend to continue to hold such securities.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) For the reasons discussed in Item 4 above, the Board has concluded
that the Offer is inadequate and not in the best interests of the Company or its
stockholders. The Board also has instructed management, with the assistance of
the Company's financial and legal advisors, to seek to develop financial or
other alternatives, on a basis consistent with the pursuit of the Company's
business strategy, for enhancing value in the nearer term. There can be no
assurance, however, that these activities will result in any transaction being
recommended to the Board or that any transaction that may be recommended will be
authorized or consummated. Except as described herein, the Company is not
engaged in any negotiation in response to the Offer that relates to or would
result in (i) an extraordinary transaction, such as a merger or reorganization,
involving the Company or any subsidiary of the Company; (ii) a purchase, sale or
transfer of a material amount of assets by the Company or any subsidiary of the
Company; (iii) a tender offer for or other acquisition of securities by or of
the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
Notwithstanding the foregoing, the Board could in the future engage in
negotiations in response to the Offer that could have one of the effects
specified in the preceding sentence, and the Board has determined that
disclosure with respect to the parties to, and the possible terms of, any
transactions or proposals of the type referred to in the preceding paragraph
might jeopardize any discussions or negotiations that the Company might conduct.
Accordingly, the Board has adopted a resolution instructing management not to
disclose the possible terms of any such transactions or proposals, or the
parties thereto, unless and until an agreement in principle relating thereto has
been reached or, upon the advice of counsel, as may be required by law.
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(b) To the best of the Company's knowledge, there are currently no
transactions, board resolutions, agreements in principle or signed contracts in
response to the Offer, other than as described herein, that relate to or would
result in one or more of the matters referred to in Item 7(a).
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Adoption of Rights Plan
At its meetings on May 18, 1999, the Board considered a proposal to
adopt, and adopted by unanimous vote, the Rights Plan. The Board adopted the
Rights Plan after considering (i) presentations made by the Company's legal and
financial advisors concerning shareholders rights plans, (ii) the Board's belief
that the Rights Plan will help maximize shareholder value for the reasons
described below and (iii) the inadequacy of the Offer Price offered to the
Company's stockholders in the Offer. The Board believes that the Rights Plan
will provide the Company with additional time to negotiate with potential third
party acquirors, including the Bidder, to consider alternatives to unsolicited
proposed takeover transactions, including the Offer, and to insure that any
acquisition occurs on terms that provide fair value to the Company's
stockholders. The Rights Plan is designed to assure that all of the Company's
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company and to guard against partial tender offers, open market
accumulations and other abusive tactics to gain control of the Company without
paying all the stockholders a control premium.
The Offer is conditioned upon, among other things, the Company not
having entered into or effectuated any agreement or transaction with any person
or entity or taken any action having the effect of impairing the Bidder's
ability to acquire the Company or otherwise diminishing the expected economic
value to the Bidder of the acquisition of the Company. The adoption by the Board
of the Rights Plan makes this condition incapable of being satisfied.
In connection with the adoption of the Rights Plan, on May 18, 1999, 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 "Common Shares"). The dividend is payable on May 28, 1999
(the "Record Date") to the holders of record of the Common Shares at the close
of business on that date. In addition, the Company has authorized the issuance
of one Right with respect to each share of Common Stock that shall become
outstanding between the Record Date and the earliest of the Distribution Date,
the Redemption Date and the Final Expiration Date (as such terms are hereinafter
defined). 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, of the Company (the "Preferred
Shares"), at a price of $30.00 per one one-hundredth of a Preferred Share (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between the
Company and American Securities Transfer & Trust, Inc., as Rights Agent. The
description of the Rights Plan set forth herein does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement.
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Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 15 percent or more of
the outstanding Common Shares and (ii) 10 business days (or such later date as
may be determined by action of the Board prior to such time as any person or
group of affiliated or associated persons becomes an Acquiring Person) following
the commencement of, or first public announcement of an intention to commence, a
tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of affiliated or associated persons of
15 percent or more of the outstanding Common Shares (the earlier of such dates
being herein referred to as the "Distribution Date"), the Rights will be
evidenced, with respect to any of the Common Share certificates outstanding as
of the Record Date, by such Common Share certificate with a copy of the Summary
of Rights to Purchase Preferred Shares (the "Summary of Rights"), in
substantially the form attached to the Rights Agreement as Exhibit C, attached
thereto. No person who is the beneficial owner of 15 percent or more of the
Common Shares on the date of the Rights Agreement shall be deemed to be an
Acquiring Person unless and until such person becomes the beneficial owner of
any additional Common Shares and, immediately after the acquisition of such
additional shares, is the beneficial owner of 15 percent or more of the Common
Shares. At its meetings on May 18, 1999, the Board resolved to delay the
Distribution Date with respect to the Offer until June 15, 1999 or such later
date as may be determined by the Board.
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the Common Shares. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Share certificates issued
after the Record Date, upon transfer or new issuance of Common Shares, will
contain a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for Common Shares outstanding on or
after the Record Date, even without such notation or a copy of the Summary of
Rights being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Shares as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on May 28, 2009 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of
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evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in Preferred
Shares) or of subscription rights or warrants (other than those referred to
above).
The number of outstanding Rights and the number of one one-hundredths of
a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
subject to redemption by the Company. Each Preferred Share will be entitled to a
minimum preferential quarterly dividend payment of $.01 per share but will be
entitled to an aggregate dividend of 100 multiplied times the dividend declared
per Common Share. In the event of liquidation, the holder of the Preferred
Shares will be entitled to a minimum preferential liquidation payment of $1.00
per share but will be entitled to an aggregate payment of 100 multiplied times
the payment made per Common Share. Each Preferred Share will have 100 votes,
voting together with the Common Shares. Finally, in the event of any merger,
consolidation or other transaction in which Common Shares are exchanged, each
Preferred Share will be entitled to receive 100 multiplied times the amount
received per Common Share. These rights are protected by customary antidilution
provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
Common Share.
In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person, proper provision will be made so that each
holder of a Right, other than Rights beneficially owned by the Acquiring Person
(which will thereafter be null and void and nontransferable), will thereafter
have the right to receive upon exercise that number of Common Shares of the
Company having a market value of two times the exercise price of the Right. In
the event that the Company is acquired in a merger or other business combination
transaction or 50 percent or more of its consolidated assets or earning power
are sold after a person or group of affiliated or associated persons has become
an Acquiring Person, proper provision will be made so that each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right.
At any time after any person or group of affiliated or associated
persons becomes an Acquiring Person and prior to the acquisition by such person
or group of 50 percent or more of the outstanding Common Shares, the Board may
exchange the Rights (other than Rights owned by such person or group which will
have become null and void and nontransferable), in whole or in part, at an
exchange ratio of one Common Share, or one one-hundredth of a Preferred Share
(or of a share of a class or series of the Company's preferred stock having
equivalent rights, preferences and privileges), per Right (subject to
adjustment).
11
<PAGE> 12
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. The Company may, but shall not be required to,
issue fractions of a Preferred Share (other than one one-hundredth of a
Preferred Share or any integral multiple thereof, which may, at the election of
the Company, be evidenced by depositary receipts) and in lieu thereof, an
adjustment in cash will be made based on the market price of the Preferred
Shares on the last trading day prior to the date of exercise.
At any time prior to the close of business on the tenth day following a
public announcement that an Acquiring Person has become such an Acquiring
Person, the Board may redeem the Rights in whole, but not in part, at a price of
$.01 per Right (the "Redemption Price"). The redemption of the Rights may be
made effective at such time, on such basis and with such conditions as the Board
in its sole discretion may establish. The time at which the Rights are redeemed
by the Company is herein referred to as the "Redemption Date." Immediately upon
any redemption of the Rights, the right to exercise the Rights will terminate
and the only right thereafter of the holders of Rights will be to receive the
Redemption Price.
At any time prior to the Distribution Date and subject to the last
sentence of this paragraph, the terms of the Rights may be amended by the Board
without the consent of the holders of the Rights, including without limitation
an amendment to lower certain thresholds described above to not less than the
greater of (i) the sum of 0.001 percent and the largest percentage of the
outstanding Common Shares then known by the Company to be beneficially owned by
any person or group of affiliated or associated persons and (ii) 10 percent.
From and after the Distribution Date and subject to applicable law, the terms of
the Rights may be amended by the Board without the consent of the holders of the
Rights to, among other things, make any other provisions in regard to matters
under the Rights Agreement that the Company may deem necessary or desirable and
that shall not adversely affect the interests of the holders of the Rights
(other than an Acquiring Person or an affiliate or associate of an Acquiring
Person). The terms of the Rights may not be amended to (i) reduce the Redemption
Price (except as required by antidilution provisions) or (ii) provide for an
earlier Final Expiration Date.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The Preferred Shares shall rank, with respect to the payment of
dividends and as to distributions of assets upon liquidation, dissolution or
winding up of the Company, junior to all other series of preferred stock of the
Company, unless the Board shall specifically determine otherwise in fixing the
powers, preferences and relative, participating, optional and other special
rights of the shares of any such other series and the qualifications,
limitations and restrictions thereof.
12
<PAGE> 13
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 99.1 -- Excerpts from the Company's Proxy Statement for the Annual
Meeting of Stockholders held on October 30, 1998.
Exhibit 99.2 -- Form of Employment Agreement.
Exhibit 99.3 -- Form of Indemnification Agreement.
Exhibit 99.4 -- Letter to Stockholders, dated May 21, 1999.
This document and the exhibits attached hereto may contain certain
statements that are not strictly historical and are considered "forward-
looking" statements under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Although the Company believes the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, it can give no assurance that its expectations will be realized.
Forward-looking statements involve known and unknown risks which may cause the
Company's actual results and corporate developments to differ materially from
those expected. Factors that could cause results and developments to differ
materially from the Company's expectations include, without limitation, changes
in manufacturing and shipment schedules, delays in completing plant construction
and acquisitions, currency exchange rates, new product and technology
developments, competition within each business segment, cyclicity of the markets
for the products of a major segment, litigation, significant cost variances, the
effects of acquisitions and divestitures, and other risks described from time to
time in the Company's reports filed with the Securities and Exchange Commission
including quarterly reports on Form 10-Q, annual reports on Form 10-K and
reports on Form 8-K.
13
<PAGE> 14
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By: /s/ Franklin E. Crail
Name: Franklin E. Crail
Title: President and Chairman of the Board
Dated: May 21, 1999
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
99.1 Excerpts from the Company's Proxy Statement for the Annual
Meeting of Stockholders held on October 30, 1998.
99.2 Form of Employment Agreement.
99.3 Form of Indemnification Agreement.
99.4 Letter to Stockholders, dated May 21, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
EXCERPTS FROM THE PROXY STATEMENT RELATED TO THE
OCTOBER 30, 1998 ANNUAL MEETING OF SHAREHOLDERS
BENEFICIAL OWNERSHIP OF THE COMPANY'S EQUITY SECURITIES
The following table sets forth information, as of September 23, 1998,
with respect to the shares of Common Stock beneficially owned (i) by each person
known to the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, (ii) by each director or nominee for election as a director and
each executive officer named in the Summary Compensation Table, and (iii) by all
current directors and executive officers of the Company as a group.
The number of shares beneficially owned includes shares of Common Stock
with respect to which the persons named below have either investment or voting
power. A person is also deemed to be the beneficial owner of a security if that
person has the right to acquire beneficial ownership of that security within 60
days through the exercise of an option or through the conversion of another
security. Except as noted, each beneficial owner has sole investment and voting
power with respect to the Common Stock.
Common Stock not outstanding that is subject to options or conversion
privileges is deemed to be outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by the person holding such options
or conversion privileges, but is not deemed to be outstanding for the purpose of
computing the percentage of Common Stock beneficially owned by any other person.
<TABLE>
<CAPTION>
Name of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- ---------------- -------------------- ----------------
<S> <C> <C>
Franklin E. Crail (1) 298,107 11.5%
Clyde Wm. Engle et al. (1) 219,357 (2) 8.4%
Fred M. Trainor 70,000 (3) 2.7%
Gary S. Hauer 31,991 (4) 1.2%
Everett A. Sisson 10,000 (3) .4%
Gerald A. Kien 10,000 (3) .4%
Lee N. Mortenson 21,000 (3) .8%
Edward L. Dudley 18,000 (5) .7%
Clifton W. Folsom 52,716 (5) 2.0%
Jay B. Haws 41,688 (5) 1.6%
All executive officers and
directors as a group
(10 persons) 573,502 (6) 22.1%
</TABLE>
1
<PAGE> 2
- ---------------------
(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. Trainor, Sisson, Kien and Mortenson
each has the right to acquire within 60 days through the exercise of
options granted pursuant to the Company's 1990 Nonqualified Stock Option
Plan for Nonemployee Directors (the "Directors' 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 12,000 shares that 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.
(5) Includes shares that these officers have the right to acquire within 60
days through the exercise of options granted pursuant to the Company's
1985 Incentive Stock Option Plan and 1995 Stock Option Plan as follows:
Mr. Dudley, 6,000 shares; Mr. Folsom, 27,000 shares; and Mr. Haws,
25,000 shares. Mr. Dudley and Mr. Folsom each has pledged 8,000 shares
owned by him, and Mr. Haws has pledged 15,000 shares owned by him, to
the Company to secure payment of certain indebtedness to the Company
incurred by each of them in connection with his purchase of such
shares.
(6) Includes 116,000 shares that officers and directors as a group have the
right to acquire within 60 days 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. The officers and directors have
pledged an aggregate of 55,000 shares owned by them to the Company to
secure payment of certain indebtedness to the Company incurred by them in
connection with the purchase of such shares.
2
<PAGE> 3
EXECUTIVE COMPENSATION
Report of Compensation Committee
The following is a report of the Compensation Committee of the Board of
Directors (the "Committee") on executive compensation policies for the fiscal
year ended February 28, 1998. The Committee administers the compensation program
for executive officers of the Company and makes all related decisions.
The principal elements of the compensation program for executive officers
are base salary, performance-based annual bonuses and options granted under the
Company's stock option plan. The goals of the program are to ensure that a
strong relationship exists between executive compensation and the creation of
shareholder value and that executive officers are strongly motivated and
retained. The Company's compensation philosophy is to create a direct
relationship between the level of total executive officer compensation and the
Company's success in meeting its annual performance goals as represented by its
annual business plan. An additional element of this philosophy is to reward
equitably relative contribution and job performance of individual executive
officers.
Base Salary
Annual salaries for the Company's executive officers, including the
Chairman of the Board and President ("CEO"), are reviewed in May of each year
based on a number of factors, both objective and subjective, with any change to
be effective on June 1 of that year. Objective factors considered include
Company financial performance relative to plan in the immediately preceding
fiscal year, although no specific formulas based on such factors are used to
determine salaries. Salary decisions are based primarily on the Committee's
subjective analysis of the factors contributing to the Company's success and of
the executive's individual contributions to that success. No executive officer's
salary was increased during the fiscal year ended February 28, 1998. The
Committee's decision not to increase salaries of executive officers was a
reflection of the Company's fiscal 1997 financial performance.
Performance-Based Annual Bonuses
Cash bonuses based on the Company's performance are awarded to the
executive officers under an incentive compensation plan. Under the plan that
served as the basis for bonuses paid for fiscal 1998, executive officers
received 20% of their base pay (30% for the CEO) as a bonus if Company business
plan profit objectives for fiscal 1998 were achieved, and up to 10% of base pay
(up to 15% for the CEO) if individual executive officer job performance goals
were achieved in fiscal 1998. Additional bonuses may be awarded at the
discretion of the Committee in recognition of special accomplishments. Thus,
whether the executive officers' total pay is comparable to the compensation of
executives with similar responsibilities at comparable companies may vary from
year to year depending upon the Company's performance. The CEO's performance
goals for fiscal year 1998 included the development and achievement of a
business plan that reflected
3
<PAGE> 4
specified increases in net profit and in net profit of Company-owned stores over
the prior year and a specified level of sales through new distribution channels.
Stock Options
Awards of stock options strengthen the ability of the Company to attract,
motivate and retain executives of superior capability and more closely align the
interests of management with those of shareholders. The Committee considers on
an annual basis the grant of options to executive officers and key managers
under the Company's 1995 Stock Option Plan. The number of options granted is
generally based upon the position held by a participant and the Committee's
subjective evaluation of such participant's contribution to the Company's future
growth and profitability. The grant of options is an annual determination, but
the Committee may consider the size of past awards and the total amounts
outstanding in making such a determination.
Unlike cash, the value of a stock option will not immediately be realized
and does not result in a current expense to the Company. Stock options are
granted with an exercise price equal to the current market price of the
Company's stock and will have value only if the Company's stock price increases,
resulting in a commensurate benefit for the Company's shareholders. Although the
plan does not provide for a required vesting period, the Committee's current
practice is to require that options granted to employees vest pro rata 20% per
year over five years.
Stock options covering a total of 40,000 shares of Common Stock were
awarded to two executive officers in fiscal 1998. No other options were granted
to officers under the 1995 Stock Option Plan in fiscal year 1998. Options
currently held by current executive officers under the Company's option plans
cover a total of 154,000 shares. The CEO has never been granted options under
the Company's stock option plans.
Other Compensation
An additional element of the executive officer's compensation, which is
not performance-based, is the matching of contributions by the Company under the
Company's 401(k) plan.
The Compensation Committee believes that linking executive compensation
to corporate performance results in a better alignment of compensation with
corporate goals and shareholder interests. As performance goals are met or
exceeded, resulting in increased value to shareholders, executives are rewarded
commensurately. The Committee believes that compensation levels during 1998
adequately reflect the Company's compensation goals and policies.
4
<PAGE> 5
Compensation Committee for Fiscal 1998:
Lee Mortenson Everett A. Sisson
Gerald A. Kien Fred M. Trainor
5
<PAGE> 6
Summary Compensation Table
The following table sets forth certain information with respect to annual
compensation for the years indicated for each executive officer of the Company
who met the minimum compensation threshold of $100,000 for inclusion in the
table (the "Named Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Securities
Underlying
Options/SARs All Other
Annual Compensation (#)(3) Compensation(4)
-------------------------------- ------------ --------------
Name and Principal Position Year Salary(1) Bonus(2)
- --------------------------- ---- -------- -------
<S> <C> <C> <C> <C> <C>
Franklin E. Crail, 1998 $150,000 $67,500 -0- $2,250
Chairman of the Board and 1997 $150,000 $ -0- -0- $2,250
President 1996 $146,538 $ -0- -0- $1,833
Gary S. Hauer, 1998 $100,000 $20,000 -0- $2,250
Vice President- 1997(5) $ 75,000 $12,500 30,000 -0-
Manufacturing 1996 -- -- -- --
Edward L. Dudley, 1998 $ 85,000 $21,250 10,000 -0-
Vice President-Sales 1997(6) $ 11,442 -0- 20,000 -0-
and Marketing 1996 -- -- -- --
Clifton W. Folsom, 1998 $ 90,000 $22,500 -0- $ 104
Vice President- 1997 $ 85,000 -0- 10,000 $1,350
Franchise Support 1996 $ 85,000 -0- -0- $1,350
Jay B. Haws, 1998 $ 94,000 $23,500 -0- $1,410
Vice President- 1997 $ 91,750 -0- 10,000 $1,410
Creative Services 1996 $ 90,000 -0- -0- $1,350
</TABLE>
- ------------------
(1) Includes amounts deferred at the Named Officers' election pursuant to
the Company's 401(k) Plan.
(2) Represents amounts paid as bonuses based on performance for the
indicated fiscal year, paid in the following fiscal year.
(3) Options to acquire shares of Common Stock under the 1995 Stock Option
Plan. All options have ten-year terms and vest with respect to
one-fifth of the shares covered thereby annually beginning on the date
of grant.
(4) Represents Company contributions on behalf of the Named Officers under
the Company's 401(k) Plan.
(5) Mr. Hauer joined the Company as an officer in May 1996.
(6) Mr. Dudley joined the Company as an officer in January 1997.
6
<PAGE> 7
Option Grants During Fiscal 1998
The following table sets forth information regarding stock options
granted to Named Officers during fiscal 1998 pursuant to the 1995 Stock Option
Plan.
<TABLE>
<CAPTION>
Individual Grants (1)
-----------------------------------------------------------------
Potential Realizable Value at
Number of Percent of Assumed Annual Rates of
Securities Total Options/ Stock Price Appreciation
Underlying SARs Granted Exercise or for Option Term
Options/SARs to Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ----------------- --------------- --------------- ----------------- -------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Franklin E. Crail -- -- -- -- -- --
Gary S. Hauer -- -- -- -- -- --
Edward L. 10,000 18.2% $4.50 11/12/07 $28,300 $71,700
Dudley
Clifton W. -- -- -- -- -- --
Folsom
Jay B. Haws -- -- -- -- -- --
</TABLE>
(1) All options are incentive stock options, have ten-year terms and vest
with respect to one-fifth of the shares covered thereby annually
beginning on the date of grant.
Aggregated Option Exercises During Fiscal 1998 and Fiscal Year End Option Values
The following table provides information regarding the number and value
of options held by the Named Officers at fiscal year end. No options were
exercised by the Named Officers during fiscal 1998. The Company does not have
any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Shares Number of Securities
Acquired on Value Underlying Unexercised Value of Unexercised In-
Exercise Realized Options at Fiscal the-Money Options at Fiscal
Name (#) (#) Year End (#) Year End ($) (1)
- --------------------- ------------ --------- ------------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Franklin E. Crail -- -- -- -- -- --
Gary S. Hauer -- -- 6,000 24,000 -- --
Edward L. Dudley -- -- 4,000 26,000 -- --
Clifton W. Folsom -- -- 25,000 8,000 $ 6,000 --
Jay B. Haws -- -- 38,000 8,000 $28,500 --
</TABLE>
(1) The closing bid price of the Common Stock on The Nasdaq Stock Market on
February 27, 1998, was $4.75 per share. None of the options held by the
Named Officers were in the money on that date, except as indicated for
Mr. Folsom and Mr. Haws.
7
<PAGE> 8
Compensation of Directors
Directors of the Company do not receive any compensation for serving on
the Board or on committees. Directors who are not also officers or employees of
the Company are entitled to receive stock option awards under the Directors'
Plan.
The Directors' Plan, as amended, provides for automatic grants of
nonqualified stock options covering a maximum of 90,000 shares of Common Stock
of the Company to directors of the Company who are not also employees or
officers of the Company and who have not made an irrevocable, one-time election
to decline to participate in the plan. The Directors' Plan provides that during
the term of the Directors' Plan options will be granted automatically to new
nonemployee directors upon their election. Each such option permits the
nonemployee director to purchase 10,000 shares of Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of grant of
the option. Each nonemployee director's option may be exercised in full during
the period beginning one year after the grant date of such option and ending ten
years after such grant date, unless the option expires sooner due to termination
of service or death.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board of Directors consists
of Lee N. Mortenson, Fred M. Trainor, Gerald A. Kien and Everett A. Sisson. None
of the foregoing persons is or has been an officer of the Company.
CERTAIN TRANSACTIONS
On May 15, 1998, the Company purchased 336,000 shares of its
outstanding Common Stock from LaSalle National Bank for an aggregate purchase
price of $1,730,400, or $5.15 per share. LaSalle National Bank sold
approximately 799,000 shares of the Company's Common Stock, which it had
obtained through foreclosure unrelated to any Company transactions, on that date
to several purchasers, including the Company and certain of its executive
officers and directors. The 336,000 shares purchased by the Company represented
approximately 11.5% of the issued and outstanding Common Stock immediately prior
to the transaction. On May 15, 1998, the closing sale price of the Common Stock
on The Nasdaq Stock Market was $5.75. Messrs. Hauer, Mortenson, Dudley, Folsom
and Haws and Bryan J. Merryman, Vice President-Finance and Chief Financial
Officer of the Company, each purchased 8,000 of the shares of Common Stock sold
by LaSalle National Bank, and in connection with such purchases, each of these
directors and officers borrowed $39,999 from the Company to fund a portion of
the purchase price for such shares. Each of the loans by the Company to these
directors and officers is secured by a pledge of the purchased shares and bears
interest at a market rate, and the Company believes that the terms of the loans
are comparable to the terms that the directors and officers could have obtained
from a third-party lender.
8
<PAGE> 9
ITEM 2. PROPOSAL TO APPROVE AN AMENDMENT OF THE 1995 STOCK OPTION PLAN
At the Annual Meeting, holders of Common Stock will also be asked to
consider and approve the adoption of an amendment to increase from 150,000 to
200,000 the number of shares of Common Stock reserved for issuance under the
Company's 1995 Stock Option Plan (the "Option Plan"). This amendment was
adopted, subject to shareholder approval, by the Board of Directors on September
17, 1998.
Reasons for the Amendments to the Option Plan
As of September 30, 1998, there were outstanding stock options covering
147,000 shares of Common Stock and 3,000 shares remained available for future
awards under the Option Plan. The purpose of the proposal is to continue the
Option Plan by increasing by 50,000 shares the aggregate number of shares of
Common Stock that may be issued under the Option Plan. The purpose of the Option
Plan is to promote the interests of the Company and its shareholders by
attracting, retaining and stimulating the performance of selected officers and
other key employees by giving such employees the opportunity to acquire a
proprietary interest in the Company and an increased personal interest in its
continued success and progress.
Description of Option Plan as Currently in Effect
Administration of the Plan. A Committee of two or more members of the
Board of Directors (the "Committee") must be designated to administer the Option
Plan. The Committee must be composed of disinterested directors, as defined by
Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or any similar
rule or regulation promulgated thereunder. The Committee has full authority
subject to the express provisions of the Option Plan to grant options under the
Option Plan, to interpret the Option Plan and any option granted hereunder, to
determine the terms of each option granted under the Option Plan and to make all
other determinations and perform such actions as the Committee deems necessary
or advisable to administer the Option Plan. The Board of Directors has
designated the Compensation Committee to perform the functions of the Committee.
Shares Available. The Option Plan provides that the Committee may grant
to employees such number of shares of Common Stock as the Committee in its
discretion shall deem to be in the best interest of the Company. All grants
under the Option Plan are subject to adjustments in certain circumstances as
hereinafter described.
Eligibility and Participation. Awards made pursuant to the Option Plan
may be granted only to individuals who, at the time of the grant, are key
employees or officers of the Company. There are presently approximately 27 such
persons. Awards may not be made to any director who is not also an employee of
the Company, nor to any member of the Committee. Grants of options are made at
the discretion of the Committee and are based on
9
<PAGE> 10
the employee's present and potential contributions to the success of the Company
and such other factors as the Committee deems appropriate to carry out the
purposes of the Option Plan.
Types of Grants Under the Option Plan. The Option Plan provides that
the Committee may designate any option granted as either a nonqualified stock
option or an incentive stock option, except that the aggregate fair market value
of the Common Stock with respect to which incentive stock options are
exercisable for the first time by such employee during any calendar year may not
exceed $100,000, determined as of the date the incentive stock option is
granted. If, however, such option is intended to be an incentive stock option
and its fair market value exceeds $100,000, such option will be deemed to be an
incentive stock option to the extent it does not exceed $100,000 and a
nonqualified stock option to the extent it exceeds that limit.
Option Price. The purchase price of options is determined by the
Committee in its discretion at the time of the grant. The purchase price of
incentive stock options must not be less than 100% of the fair market value per
share of the Common Stock on the date the option is granted, except that the
purchase price shall be at least 110% of the fair market value per share of the
Common Stock on the date of grant if the optionee, on the date of such grant,
possesses more than 10% of the total combined voting power of all classes of
stock of the Company or any affiliate. The purchase price of a nonqualified
stock option must be greater than the par value of the stock on either the date
the option is granted or the date it is exercised, whichever is greater.
Exercise of Options. An option may be exercised in whole or in part in
accordance with procedures established by the Committee. Such procedures may
include a limitation on the number of shares purchasable in any period of time,
or any other terms and conditions not inconsistent with the terms of the Option
Plan. The Committee, in its discretion, may accelerate the exercise date of any
option.
Payment of Exercise Price. Common Stock purchased upon the exercise of
an option must be paid for in full at the time of purchase. Payment must be made
in cash or, if accepted by the Committee, in its discretion, shares of Common
Stock owned by the optionee (valued at the fair market value on the date of
exercise). Furthermore, the Committee may, in its discretion, approve the
extension of a loan to an optionee to assist in the payment of the exercise
price. If the loan is to an employee who is also a director, the Committee must
first have determined in good faith that the such loan is fair to the Company
and the loan must otherwise comply with applicable law.
Nontransferability of Options. Option awards are not transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the optionee only by the optionee.
Expiration of Options. Options granted under the Option Plan will
generally be exercisable for a period of ten years after the date of grant.
Options will expire, however, upon an earlier termination of the optionee's
employment, subject to certain grace periods. If, however, the optionee's
employment is terminated by reason of such optionee's fraud,
10
<PAGE> 11
dishonesty or performance of other acts detrimental to the Company or an
affiliate, such optionee's options will immediately become null and void.
Any incentive stock option granted to an optionee who possesses more
than 10% of the total combined voting power of all classes of stock of the
Company or any affiliate shall not be exercisable after the expiration of five
years from the date of its grant.
Adjustments to Awards Upon Changes in Common Stock. The number of
shares as to which options may be granted under the Option Plan will be
decreased or increased proportionally to account for any stock split or any
dividend payable in shares of Common Stock. In the event of any other
reclassification of Common Stock, or in the event of a liquidation or
reorganization of the Company or an affiliate, the Board will make any necessary
adjustments to any unexercised options granted under the Option Plan. If the
Company is merged into or consolidated with another corporation and the Company
is not the surviving corporation, or if the Company disposes of all or
substantially all of its assets to another corporation, then all outstanding
options may be canceled by the Board, but all optionees must receive notice of
such cancellation and would have the right to exercise such option in full
during the 30-day period preceding the effective date of such action.
Amendment and Termination of the Option Plan. The Option Plan will
terminate, unless previously terminated by the Board, ten years from August 24,
1995. No options may be granted after that date.
The Board may alter or amend the Option Plan but may not, without
shareholder approval, (i) abolish the Committee, change the qualifications of
its members or withdraw the administration of the Option Plan from its
supervision, (ii) increase the total number of shares of Common Stock which may
be granted under the Option Plan, (iii) extend the term of the Option Plan or
the maximum exercise period provided in the Option Plan, (iv) decrease the
minimum purchase price of Common Stock provided in the Option Plan, (v)
materially increase the benefits accruing to participants under the Option Plan,
or (vi) materially modify the requirements as to eligibility for participation
in the Option Plan.
No termination or amendment of the Option Plan may adversely affect the
rights of an optionee under a previously granted option, except with the consent
of the optionee.
Modifications of Options. Subject to the terms of the Option Plan, the
Committee may modify or extend outstanding options, or accept the surrender of
options granted under the Option Plan and authorize the granting of new options
in substitution, except that no such modification may, without the consent of
the optionee, impair any rights under any option, except as necessary to comply
with Section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code").
11
<PAGE> 12
Grants Under the Option Plan
Since the inception of the Option Plan, the Compensation Committee has
awarded options covering 147,000 shares of Common Stock (excluding options
canceled or that expired without exercise) to 27 employees of the Company,
including five current executive officers.
<TABLE>
<CAPTION>
AGGREGATE OPTION AWARDS
1995 STOCK OPTION PLAN, AS AMENDED
NUMBER OF SHARES % OF TOTAL OPTIONS AVERAGE
UNDERLYING GRANTED EXERCISE PRICE
NAME AND POSITION OPTIONS GRANTED TO EMPLOYEES ($/SHARE)
- ----------------- --------------- ------------ ---------
<S> <C> <C> <C>
Edward L. Dudley 30,000* 20.4% $5.42
Vice President-sales
and Marketing
Clifton W. Folsom 10,000 6.8% $7.75
Vice President-
Franchise Support
Gary S. Hauer 30,000 20.4% $7.75
Vice President-
Manufacturing
Jay B. Haws 10,000 6.8% $7.75
Vice President-
Creative Services
Executive Group 110,000 74.8% $6.783
(6 Persons)
Non-executive
Officer Employee
Group 37,000 25.2% $6.49
</TABLE>
* Includes options covering 10,000 shares granted to Mr. Dudley during
the fiscal year ended February 28, 1998.
Except as indicated above, no person received more than 5% of the total
options granted under the Option Plan.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE AMENDMENT TO THE OPTION PLAN DESCRIBED ABOVE.
12
<PAGE> 1
EXHIBIT 99.2
FORM OF EMPLOYMENT AGREEMENT
This Restated Employment Agreement ("Agreement"), dated as of
__________, 1999 is between Rocky Mountain Chocolate Factory, Inc., a Colorado
corporation ("Employer"), and ______________ ("Employee").
R E C I T A L S:
A. Employee is employed by Employer, and Employer and Employee have
entered into a written agreement dated as of April 8, 1998 (the "Prior
Agreement"), to specify the terms and conditions of Employee's employment with
Employer.
B. Employer and Employee desire to replace the Prior Agreement with
this Agreement.
C. Employer considers the maintenance of a sound management team
essential to protecting and enhancing its best interests and those of its
stockholders, and Employee is a key executive of Employer and an integral member
of its management team.
NOW, THEREFORE, in consideration of Employee's past and future
employment with Employer and other good and valuable consideration, the parties
agree as follows:
SECTION 1. Employment. Employer hereby employs Employee, and Employee
hereby accepts employment, upon the terms and subject to the conditions
hereinafter set forth.
SECTION 2. Duties. Employee shall be employed as
______________________________, or such other position to which he may be
appointed by the Board of Directors. Employee agrees to devote his full time and
best efforts to the performance of the duties attendant to his executive
position with Employer. Such duties shall include, but not be limited to, those
set forth on Exhibit A hereto.
SECTION 3. Term. The initial term of employment of Employee hereunder
shall commence on the date of this Agreement (the "Commencement Date") and
continue until ________, 2000, unless earlier terminated pursuant to Section 6
or Section 10. The term of employment of Employee hereunder will be
automatically extended on a month-to-month basis after the end of the initial
term unless either Employer or Employee shall give the other written notice of
its election not to renew this Agreement at least 30 days prior to the end of
the initial one-year term or at least 20 days prior to the end of any calendar
month thereafter.
SECTION 4. Compensation and Benefits. In consideration for the services
of Employee hereunder, Employer shall compensate Employee as follows:
(a) Base Salary. Until the termination of Employee's employment
hereunder, Employer shall pay Employee, semi-monthly in arrears, a base salary
at an annual rate of not less than $____________________ (as it may be increased
from time to time, the "Base Salary"). The Base
<PAGE> 2
Salary as then in effect may not be decreased at any time during the term of
Employee's employment hereunder and shall be reviewed annually by Employer. Any
increase in the Base Salary shall be in the sole discretion of the Compensation
Committee of the Board of Directors of the Company.
(b) Management Incentive Bonus. Employee shall be eligible to receive
from Employer such annual incentive bonuses as may be determined by the
Compensation Committee of the Board of Directors or as may be provided in
incentive bonus plans adopted from time to time by Employer.
(c) Vacation. Employee shall be entitled to 10 days of paid vacation
per year at the reasonable and mutual convenience of Employer and Employee.
Unless otherwise approved by the Compensation Committee of the Board of
Directors of the Company, accrued vacation not taken in any calendar year shall
not be carried forward or used in any subsequent calendar year.
(d) Insurance Benefits. Employer shall provide accident, health,
dental, disability and life insurance for Employee under the group accident,
health, dental, disability and life insurance plans maintained by Employer for
its full-time, salaried employees.
SECTION 5. Expenses. The parties anticipate that in connection with the
services to be performed by Employee pursuant to the terms of this Agreement,
Employee will be required to make payments for travel, entertainment of business
associates and similar expenses. Employer shall reimburse Employee for all
reasonable expenses of types authorized by Employer and incurred by Employee in
the performance of his duties hereunder. Employee shall comply with such budget
limitations and approval and reporting requirements with respect to expenses as
Employer may establish from time to time.
SECTION 6. Termination.
(a) General. Employee's employment hereunder shall commence on the
Commencement Date and continue until the end of the term specified in Section 3,
except that the employment of Employee hereunder shall terminate prior to such
time in accordance with the following:
(i) Death or Disability. Upon the death of Employee during the
term of his employment hereunder or, at the option of Employer, in the
event of Employee's Disability, upon 30 day' notice to Employee.
(ii) For Cause. For "Cause" immediately upon written notice by
Employer to Employee. A termination shall be for Cause if
(1) Employee commits a criminal act involving moral
turpitude;
(2) Employee commits a material breach of any of the
covenants, terms and provisions hereof or an act of gross
negligence or willful misconduct resulting in a material loss
or detriment to Employer; or
(3) Employee fails on a continuing basis, in the
judgment of the President of Employer, adequately to perform
his duties as an officer of Employer, and such
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<PAGE> 3
failure is not cured within 20 days after he receives notice
of such failure from the President of Employer.
(iii) Without Cause. Without Cause upon notice by Employer to
Employee. Without limiting the foregoing, for purposes of Section
6(b)(ii) Employee's employment hereunder shall be deemed to have been
terminated by Employer without Cause pursuant to this Section 6(a)(iii)
(a) upon the expiration of the term of Employee's employment specified
in Section 3, if Employer has given the notice of nonrenewal
contemplated by the last sentence of Section 3, or (b) if Employee's
employment is Constructively Terminated by Employer.
(b) Severance Pay and Bonuses.
(i) Termination Upon Death or Disability. Employee shall not
be entitled to any severance pay or other compensation upon termination
of his employment hereunder pursuant to Section 6(a)(i) except for the
following (which shall be paid promptly after termination, except as
specified in subsection (4) below):
(1) his Base Salary accrued but unpaid as of the date
of termination;
(2) unpaid expense reimbursements under Section 5 for
expenses incurred in accordance with the terms hereof prior to
termination;
(3) compensation for accrued, unused vacation as of
the date of termination, determined in accordance with
Employer's policies and procedures then in effect; and
(4) any bonus to which Employee would have been
entitled for the Bonus Period if he were still employed
hereunder on the last day of the Bonus Period. Any such bonus
shall be paid to Employee (or to his estate, as the case may
be) at the same time bonuses are paid in respect of the Bonus
Period to other employees of Employer entitled to receive
bonuses for the Bonus Period. In the event the determination
of Employee's bonus in respect of the Bonus Period involves
any subjective assessment, such assessment shall be made in a
manner most favorable to Employee. The term "Bonus Period"
means the full fiscal year or other applicable bonus period
during which Employee's employment hereunder was terminated
(or during which Employee became Disabled, in the event of a
termination for Disability).
(ii) Termination Without Cause, Separation Payments. In the
event Employee's employment hereunder is terminated pursuant to Section
6(a)(iii), Employer shall pay Employee Separation Payments as
Employee's sole remedy in connection with such termination. "Separation
Payments" are payments made at the monthly rate of Employee's Base
Salary in effect immediately preceding the date of termination.
Separation Payments shall be made for 12 months after the date of
termination (the "Separation Payment Period") and shall be paid by
Employer in equal monthly payments in arrears. Separation Payments
shall be reduced by the amount of any personal services income earned
by Employee from
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<PAGE> 4
other sources during the Separation Payment Period. Separation Payments
shall be made for the number of months specified above without regard
to the number of months remaining in the term of this Agreement.
Notwithstanding the foregoing, Employer's obligation to make, and
Employee's right to receive, Separation Payments shall terminate
immediately upon any violation by Employee of any covenant contained in
Section 8 or 9 hereof. Employer shall also promptly pay Employee the
following:
(1) his Base Salary accrued but unpaid as of the date
of termination;
(2) unpaid expense reimbursements under Section 5 for
expenses incurred in accordance with the terms hereof prior to
termination; and
(3) compensation for accrued, unused vacation as of
the date of termination, determined in accordance with
Employer's policies and procedures then in effect.
This Section 6(b)(ii) is subject to the provisions of Section 10(j)
dealing with the coordination of payments in the event of a Change In
Control.
(iii) Termination For Cause, Voluntary Termination. Employee
shall not be entitled to Separation Payments or any other severance pay
or other compensation upon termination of his employment hereunder
pursuant to Section 6(a)(ii), or upon Employee's voluntary termination
of his employment hereunder, except for the following (which shall be
paid promptly after termination):
(1) his Base Salary accrued but unpaid as of the date
of termination;
(2) unpaid expense reimbursements under Section 5 for
expenses incurred in accordance with the terms hereof prior to
termination; and
(3) compensation for accrued, unused vacation as of
the date of termination, determined in accordance with
Employer's policies and procedures then in effect.
(c) Acceleration of Options. In the event Employee's employment
hereunder is terminated pursuant to Section 6(a)(iii), all Options granted to
Employee under the Option Plan and outstanding at the time of such termination
shall be fully vested and shall become immediately exercisable upon such
termination, and shall thereafter be exercisable by Employee in accordance with
the terms thereof and the applicable provisions of the Plan. The Board of
Directors or the Compensation Committee of the Board of Directors of the Company
shall take such action as shall be necessary to authorize and provide for the
foregoing.
SECTION 7. Inventions; Assignment.
(a) Inventions Defined. All rights to discoveries, inventions,
improvements, designs, work product and innovations (including without
limitation all data and records pertaining thereto) that
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<PAGE> 5
relate to the business of Employer, whether or not specifically within
Employee's duties or responsibilities and whether or not patentable,
copyrightable or reduced to writing, that Employee may discover, invent, create
or originate during the term of his employment hereunder or otherwise, and for a
period of six months thereafter, either alone or with others and whether or not
during working hours or by the use of the facilities of Employer ("Inventions"),
shall be the exclusive property of Employer. Employee shall promptly disclose
all Inventions to Employer, shall execute at the request of Employer any
assignments or other documents Employer may deem necessary to protect or perfect
its rights therein, and shall assist Employer, at Employer's expense, in
obtaining, defending and enforcing Employer's rights therein. Employee hereby
appoints Employer as his attorney-in-fact to execute on his behalf any
assignments or other documents deemed necessary by Employer to protect or
perfect its rights to any Inventions.
(b) Covenant to Assign and Cooperate. Without limiting the generality
of the foregoing, Employee shall assign and transfer, and does hereby assign and
transfer, to Employer the world-wide right, title and interest of Employee in
the Inventions. Employee agrees that Employer may file copyright registrations
and apply for and receive patents (including without limitation Letters Patent
in the United States) for the Inventions in Employer's name in such countries as
may be determined solely by Employer. Employee shall communicate to Employer all
facts known to Employee relating to the Inventions and shall cooperate with
Employer's reasonable requests in connection with vesting title to the
Inventions and related copyrights and patents exclusively in Employer and in
connection with obtaining, maintaining, protecting and enforcing Employer's
exclusive copyrights and patent rights in the Inventions.
(c) Successors and Assigns. Employee's obligations under this Section 7
shall inure to the benefit of Employer and its successors and assigns and shall
survive the expiration of the term of this Agreement for such time as may be
necessary to protect the proprietary rights of Employer in the Inventions.
(d) Consideration and Expenses. Employee shall perform his obligations
under this Section 7 at Employer's expense, but without any additional or
special compensation therefor.
SECTION 8. Confidential Information.
(a) Acknowledgment of Proprietary Interest. Employee acknowledges that
all Confidential Information is a valuable, special and unique asset of
Employer's business, access to and knowledge of which are essential to the
performance of Employee's duties hereunder. Employee acknowledges the
proprietary interest of Employer in all Confidential Information. Employee
agrees that all Confidential Information learned by Employee during his
employment with Employer or otherwise, whether developed by Employee alone or in
conjunction with others or otherwise, is and shall remain the exclusive property
of Employer. Employee further acknowledges and agrees that his disclosure of any
Confidential Information will result in irreparable injury and damage to
Employer.
(b) Confidential Information Defined. "Confidential Information" means
all confidential and proprietary information of Employer, written, oral or
computerized, as it may exist from time to time, including without limitation
(i) information derived from reports, investigations, experiments,
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<PAGE> 6
research and work in progress, (ii) methods of operation, (iii) market data,
(iv) proprietary computer programs and codes, (v) drawings, designs, plans and
proposals, (vi) marketing and sales programs, (vii) franchisee and supplier
lists and any other information about Employer's relationships with others,
(viii) historical financial information and financial projections, (ix) pricing,
product rotation and similar formulae and policies, (x) all other concepts,
ideas, materials and information prepared or performed for or by Employer and
(xi) all information related to the business, products, purchases or sales of
Employer or any of its franchisees, suppliers and customers, other than
information that is made publicly available by Employer.
(c) Covenant Not To Divulge Confidential Information. Employer is
entitled to prevent the disclosure of Confidential Information. As a portion of
the consideration for the employment of Employee and for the compensation being
paid to Employee by Employer, Employee agrees at all times during the term of
his employment hereunder and thereafter to hold in strict confidence and not to
disclose or allow to be disclosed to any person, firm or corporation, other than
to persons engaged by Employer to further the business of Employer, and not to
use except in the pursuit of the business of Employer, the Confidential
Information, without the prior written consent of Employer. This Section 8 shall
survive and continue in full force and effect in accordance with its terms
after, and will not be deemed to be terminated by, any termination of this
Agreement or of Employee's employment with Employer for any reason.
(d) Return of Materials at Termination. In the event of any termination
or cessation of his employment with Employer for any reason, Employee shall
promptly deliver to Employer all property of Employer, including without
limitation all documents, data and other information containing, derived from or
otherwise pertaining to Confidential Information. Employee shall not take or
retain any property of Employer, including without limitation any documents,
data or other information, or any reproduction or excerpt thereof, containing,
derived from or pertaining to any Confidential Information. The obligation of
confidentiality set forth in this Section 8 shall continue notwithstanding
Employee's delivery of such documents, data and information to Employer.
SECTION 9. Noncompetition.
(a) Covenant Not To Compete. Employee acknowledges that during the term
of his employment Employer has agreed to provide to him, and he shall receive
from Employer, special training and knowledge, including without limitation the
Confidential Information. Employee acknowledges that the Confidential
Information is valuable to Employer and, therefore, its protection and
maintenance constitutes a legitimate interest to be protected by Employer by the
enforcement of the covenant not to compete contained in this Section 9. Employee
also acknowledges that such covenant not to compete is ancillary to other
enforceable agreements of the parties, including without limitation the
agreements regarding Confidential Information in Section 8 and the agreements
regarding the payment of Separation Payments and other severance pay and of the
Termination Payment in Section 6 and Section 10, respectively. Therefore, during
the term of this Agreement and for a period of two years (unless extended
pursuant to the terms of this Section 9) after termination of Employee's
employment hereunder (including, without limitation, a Triggering Termination as
defined in Section 10), Employee shall not directly or indirectly
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<PAGE> 7
(i) engage, alone or as a shareholder, partner, member,
manager, director, officer, employee of or consultant to any other
business organization that engages or is planning to engage, anywhere
in the United States or Canada or in any other geographic area in or
with respect to which Employee has any duties or responsibilities
during the term of his employment with Employer, in any business
activities that relate to the manufacture or retail sale of chocolate
candy, including but not limited to the sale through franchisees (the
"Designated Industry"); or
(ii) solicit or encourage any director, officer, employee of
or consultant to Employer to end his relationship with Employer or
commence any such relationship with any competitor of Employer.
Notwithstanding the foregoing, (1) Employee's noncompetition
obligations hereunder shall not preclude Employee from owning less than five
percent of the voting power or economic interest in any publicly traded
corporation conducting business activities in the Designated Industry and (2) an
entity shall not be deemed to be engaged in the Designated Industry unless its
revenue from the manufacture and/or retail sale of chocolate candy (including
sales through franchisees) represents 25% or more of its total revenue for its
full fiscal quarter immediately preceding the date of termination of Employee's
employment hereunder (or the date of his association with such entity, if
earlier) or any of the eight immediately subsequent fiscal quarters of such
entity.
(b) Extension of Duration; Survival. If Employee violates any covenant
contained in this Section 9, Employer shall not, as a result of such violation
or the time involved in obtaining legal or equitable relief therefor, be
deprived of the benefit of the full period of any such covenant. Accordingly,
the covenants of Employee contained in this Section 9 shall be deemed to have
the duration specified in Section 9(a), which period shall be extended by a
number of days equal to the sum of (i) the total number of days Employee is in
violation of any of the covenants contained in this Section 9 prior to the
commencement of any litigation relating thereto and (ii) the total number of
days the parties are involved in such litigation, through the date of entry by a
court of competent jurisdiction of a final judgment enforcing the covenants of
Employee in this Section 9. This Section 9 shall survive and continue in full
force and effect in accordance with its terms after, and will not be deemed to
be terminated by, any termination of this Agreement or of Employee's employment
with Employer for any reason.
(c) Severability. If at any time the provisions of this Section 9 are
determined to be invalid or unenforceable by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 9 shall be
considered divisible and shall be immediately amended to only such area,
duration and scope of activity as shall be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter, and
Employee agrees that this Section 9 as so amended shall be valid and binding as
though any invalid or unenforceable provision had not been included herein.
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<PAGE> 8
SECTION 10. Termination of Employment in Connection With a Change In
Control.
(a) Applicability. Employer recognizes that the possibility of a Change
In Control of Employer may result in the departure or distraction of management
to the detriment of Employer and its stockholders, and Employer has determined
that appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of key members of Employer's management team, including
Employee, to their assigned duties. Accordingly, the provisions of this Section
10 shall apply in lieu of all conflicting provisions in this Agreement in the
event Employee's employment with Employer is terminated in a Triggering
Termination. Each of the following events constitutes a "Triggering Termination"
when Employee's employment with Employer is:
(i) terminated by Employer or Employee for any reason other
than death, or for no reason, or terminated upon the expiration of
Employee's initial or any renewal term of employment specified in
Section 3, within the 12-month period following a Change In Control;
(ii) terminated by Employer for any reason other than the
commission of a felony by Employee, or terminated upon the expiration
of Employee's initial or any renewal term of employment specified in
Section 3, during an Applicable Period;
(iii) Constructively Terminated by Employer during an
Applicable Period; or
(iv) terminated in an Agreement Termination pursuant to this
Section 10(a)(iv).
(1) An "Agreement Termination" shall occur when
Employee's employment hereunder is terminated by Employee in
anticipation of a Change In Control to the extent that his
continued employment with Employer is not pursuant to the
terms of this Agreement (other than as provided herein with
respect to an Agreement Termination) and thereafter is only on
an at-will basis. Employee's determination to effect an
Agreement Termination must be based on a good faith judgment
of Employee and any two or more Concurring Persons, in light
of the circumstances as then known or understood by them, that
a Change In Control is going to occur within five business
days, but it is not required as a condition to such good faith
judgment that:
(I) Employee or any Concurring Person
conduct any investigation or consult with any other
person or group (except only for Employee's
requirement to obtain the concurrence or approval of
Concurring Persons);
(II) no condition remains to be satisfied
before the Change In Control can occur; or
(III) the Board of Directors of Employer has
taken any action to approve or facilitate the Change
In Control.
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<PAGE> 9
(2) The concurrence or approval of the Concurring
Persons is limited to the occurrence and timing of the Change
In Control and is not made regarding the propriety of
Employee's effecting an Agreement Termination.
(3) In consideration of the right to effect an
Agreement Termination and receive a Termination Payment and
Gross Up Payment prior to a Change In Control, Employee agrees
that, upon (and notwithstanding) his exercise of such right
and the payment to him of the Termination Payment and Gross Up
Payment, he shall continue, without interruption until such
Change In Control occurs (unless his at-will employment with
Employer is sooner terminated or Constructively Terminated by
Employer, as described in Sections 10(a)(ii) and (iii), or
Employee dies or his employment with Employer is terminated
due to Disability), to devote his full time and best efforts
as an at-will employee of Employer to the performance of the
same duties that he performed for Employer, holding the same
office or position with Employer as he held before the
Agreement Termination, but without the right to any
compensation from Employer for such continued performance
(except as provided below in Section 10(a)(iv)(4)(I)).
Employee's obligation set forth in the preceding sentence is
referred to herein as the "Continued Performance Obligation."
(4) Employee shall have no obligation to comply with
Section 8(d) until he has no further Continued Performance
Obligation. If the anticipated Change In Control does not
occur within ten business days after Employee's receipt of a
Termination Payment and Gross Up Payment following the
exercise of his right to effect an Agreement Termination, then
(I) such Agreement Termination shall be void
and ineffective, and Employee's employment under all
the terms of this Agreement (including without
limitation his compensation and benefits, duties,
position and rights regarding any other actual or
expected Change In Control) shall be deemed to have
continued without interruption; and
(II) Employee shall, and Employee hereby
agrees to, repay to Employer within two business days
the full Termination Payment and Gross Up Payment
received by Employee (together with interest, if any,
actually earned on the funds while in Employee's
control).
(5) If Employee fails to satisfy his Continued
Performance Obligation, and such failure continues for more
than one business day after receipt by Employee of written
notice from Employer of such failure, then
(I) such Agreement Termination shall be void
and ineffective, and Employee shall be deemed to have
voluntarily terminated his employment hereunder
before a Change In Control; and
(II) Employee shall repay to Employer within
one business day after his receipt of such notice the
full Termination Payment and Gross Up
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<PAGE> 10
Payment received by Employee (together with interest,
if any, actually earned on the funds while in
Employee's control).
(b) Termination Payment.
(i) Amount.
(1) Upon the occurrence of a Triggering Termination,
Employer shall pay Employee a lump sum payment in cash equal
to 2.99 times the sum of the following items:
(I) Employee's annualized base compensation
determined by using the highest annual base
compensation rate in effect at any time during
Employee's employment with Employer; and
(II) two times the Target Bonus that would
be payable to Employee by Employer for the bonus
period in which the Change In Control occurred;
provided that the amount determined under this
Section 10(b)(i)(l)(II) shall not be less than 25% of
the amount determined under Section 10(b)(i)(l)(I);
(2) The term "Termination Payment" shall include the
amounts described above in Section 10(b)(i)(1) plus the
following amounts described in this Section 10(b)(i)(2):
(I) Employee's Base Salary accrued but
unpaid as of the date of the Triggering Termination;
(II) reimbursement under Section 5 for
unpaid expenses incurred in the performance of his
duties hereunder prior to the date of the Triggering
Termination;
(III) any other benefit accrued but unpaid
as of the date of the Triggering Termination; and
(IV) $18,000, which represents the estimated
cost to Employee of obtaining accident, health,
dental, disability and life insurance coverage for
the 18-month period following the expiration of his
continuation (COBRA) rights; provided that this
Section 10(b)(i)(2)(IV) shall be applied without
regard to, and the amount payable under this Section
10(b)(i)(2)(IV) is in addition to, any continuation
(COBRA) rights or conversion rights under any plan
provided by Employer, which rights are not affected
by any provision hereof.
(ii) Time for Payment; Interest. Employer shall pay the
Termination Payment to Employee concurrently with the Triggering
Termination or, if the Triggering Termination occurs before the Change
In Control, concurrently with the Change In Control. Employer's
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<PAGE> 11
obligation to pay to Employee any amounts under this Section 10,
including without limitation the Termination Payment and any Gross Up
Payment due under Section 10(d), shall bear interest at the rate of 18%
per annum or, if different, the maximum rate allowed by law until paid
by Employer, and all accrued and unpaid interest shall bear interest at
the same rate, all of which interest shall be compounded daily.
(iii) Payment Authority. Any officer of Employer (other than
Employee) is authorized to issue and execute a check, initiate a wire
transfer or otherwise effect payment on behalf of Employer to satisfy
Employer's obligations to pay all amounts due to Employee under this
Section 10.
(iv) Termination. Employer's obligation to pay the Termination
Payment shall not be affected by the manner in which Employee's
employment hereunder is terminated. Without limiting the generality of
the foregoing, Employer shall be obligated to pay the Termination
Payment and any Gross Up Payment regardless of whether Employee's
termination of employment is voluntary, involuntary, for cause, without
cause, in violation of any employment agreement or other agreement in
effect at the time of the Change In Control (except as provided in
Section 10(a)(iv)(5)(I) with respect to Employee's failure to satisfy
his Continued Performance Obligation in the event of an Agreement
Termination) or due to Employee's retirement or Disability. Employee's
notice of his termination of employment hereunder in connection with a
Change In Control may be made by any means and to any officer of
Employer (other than Employee).
(c) Change In Control. A "Change In Control" means a change in control
of Employer after the date of this Agreement in any one of the following
circumstances: (i) there shall have occurred an event that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether
or not Employer is then subject to such reporting requirement; (ii) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
(an "Acquiring Person") shall have become the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
Employer representing 20% or more of the combined voting power of Employer's
then outstanding voting securities (a "Share Acquisition"); (iii) Employer is a
party to a merger, consolidation, sale of assets or other reorganization, or a
proxy contest, as a consequence of which members of the Board of Directors in
office immediately prior to such transaction or event constitute less than a
majority of the Board of Directors thereafter; or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (including for this purpose any new director whose
election or nomination for election by Employer's stockholders was approved by
a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that an event
described in clause (i) or (ii) shall not be deemed a Change In Control if such
event is approved, prior to its occurrence or within 60 days thereafter by at
least two-thirds of the members of the Board of Directors in office immediately
prior to such occurrence. In addition to the foregoing, a Change In Control
shall be deemed to have occurred if, after the occurrence of a Share
Acquisition that has been approved by a two-thirds vote of the Board as
contemplated in the proviso to the preceding sentence, the Acquiring Person
shall
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<PAGE> 12
have become the beneficial owner, directly or indirectly, of securities of
Employer representing an additional 5% or more of the combined voting power of
Employer's then outstanding voting securities (a "Subsequent Share Acquisition")
without the approval prior thereto or within 60 days thereafter of at least
two-thirds of the members of the Board of Directors who were in office
immediately prior to such Subsequent Share Acquisition and were not appointed,
nominated or recommended by, and do not otherwise represent the interests of,
the Acquiring Person on the Board. Each subsequent acquisition by an Acquiring
Person of securities of Employer representing an additional 5% or more of the
combined voting power of Employer's then outstanding voting securities shall
also constitute a Subsequent Share Acquisition (and a Change In Control unless
approved as contemplated by the preceding sentence) if the approvals
contemplated by this paragraph were given with respect to the initial Share
Acquisition and all prior Subsequent Share Acquisitions by such Acquiring
Person. The Board approvals contemplated by the two preceding sentences and by
the proviso to the first sentence of this paragraph may contain such conditions
as the members of the Board granting such approval may deem advisable and
appropriate, the subsequent failure or violation of which shall result in the
rescission of such approval and cause a Change In Control to be deemed to have
occurred as of the date of the Share Acquisition or Subsequent Share
Acquisition, as the case may be. Notwithstanding the foregoing, a Change In
Control shall not be deemed to have occurred for purposes of clause (ii) of the
first sentence of this paragraph with respect to any Acquiring Person meeting
the requirements of clauses (i) and (ii) of Rule 13d-l(b)(1) promulgated under
the Exchange Act.
(d) Gross Up Payment.
(i) Excess Parachute Payment. If Employee incurs the tax (the
"Excise Tax") imposed by Section 4999 of the Code on "excess parachute
payments" within the meaning of Section 280G(b)(1) of the Code as the
result of any payments or distributions by Employer to or for the
benefit of Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) or
as a result of the acceleration of vesting of Options, Restricted Stock
or other rights (collectively, the "Payments"), or if Employee would
incur the Excise Tax if the Change In Control satisfied the
requirements of Section 280G(b)(2)(A)(i) of the Code, then without
regard to whether the Change In Control in fact satisfies the
requirements of Section 280G(b)(2)(A)(i) of the Code, Employer shall
pay to Employee an amount (the "Gross Up Payment") such that the net
amount retained by Employee, after deduction of (1) any Excise Tax
owed, or that would be owed if the Change In Control satisfied the
requirements of Section 280G(b)(2)(A)(i) of the Code, upon any Payments
(other than payments provided by this Section 10(d)(i)) and (2) any
federal, state and local income and employment taxes owed (together
with penalties and interest) and Excise Tax owed, or that would be owed
if the Change In Control satisfied the requirements of Section
280G(b)(2)(A)(i) of the Code, upon the payments provided by this
Section 10(d)(i), shall be equal to the amount of the Payments (other
than payments provided by this Section 10(d)(i)).
(ii) Applicable Rates. For purposes of determining the Gross
Up Payment amount, Employee shall be deemed:
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<PAGE> 13
(1) to pay federal income taxes at the highest
marginal rate of federal income taxation applicable to
individual taxpayers in the calendar year in which the Gross
Up Payment is made (which rate shall be adjusted as necessary
to take into account the effect of any reduction in
deductions, exemptions or credits otherwise available to
Employee had the Gross Up Payment not been received);
(2) to pay additional employment taxes as a result of
the receipt of the Gross Up Payment in an amount equal to the
highest marginal rate of employment taxes applicable to wages;
provided that if any employment tax is applied only up to a
specified maximum amount of wages, such limit shall be taken
into account for purposes of such calculation; and
(3) to pay state and local income taxes at the
highest marginal rates of taxation in the state and locality
of Employee's residence on the date of the Triggering
Termination, net of the maximum reduction in federal income
taxes that could be obtained from deduction of such state and
local taxes.
(iii) Determination of Gross Up Payment Amount. The
determination of the Gross Up Payment amount shall be made, at
Employer's expense, by Grant Thornton LLP or another nationally
recognized public accounting firm selected by Employee (in either case,
the "Accountants"). If the Excise Tax amount payable by Employee, based
upon a "Determination," is different from the Excise Tax amount
computed by the Accountants for purposes of determining the Gross Up
Payment amount, then appropriate adjustments to the Gross Up Payment
amount shall be made in the manner provided in Section 10(d)(iv). For
purposes of determining the Gross Up Payment amount prior to any
Determination of the Excise Tax amount, the following assumptions shall
be utilized:
(1) that portion of the Termination Payment that is
attributable to the items described in Sections
10(b)(i)(1)(I), (II), (III) and Section 10(b)(i)(2)(IV), and
the Gross Up Payment, shall be treated as Parachute Payments;
(2) no portion of any payment made pursuant to
Sections 10(b)(i)(2)(I), (II) or (III) or Section 11(c) shall
be treated as a Parachute Payment;
(3) the amount payable to Employee pursuant to
Section 10(l) shall be
(I) deemed to be equal to 15% of the amount
determined under Section 10(b)(i)(1)(I);
(II) deemed to have been paid immediately
following the Change In Control;
(III) deemed to include the additional
amount payable under Section 10(l), if any, for
additional taxes payable by Employee as a result of
the receipt of the payment described in Section
10(l); and
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<PAGE> 14
(IV) treated 100% as a Parachute Payment;
(4) it shall be assumed that all of the payments that
could potentially be made to Employee pursuant to the
Consulting Agreement shall be made, and all of such payments
shall be treated as Parachute Payments; provided that nothing
in this Section 10(d)(iii)(4) shall limit or reduce the
payment of any amount similar to the Gross Up Payment under
the Consulting Agreement;
(5) the "ascertainable fair market value" (as set
forth in Prop. Treas. Reg. Section 1.280G-1, Q&A 13) of the
Options, the vesting of which was accelerated by the Change In
Control as provided in the Option Plan and as further provided
in Section 10(j), shall be equal to the product of (I) and
(II) as set forth below:
(I) the number of shares covered by such
Options; and
(II) the difference between:
a. the fair market value per share
of the underlying common stock as of the
date of the Change In Control; and
b. the exercise price per share of
stock subject to such Options; and
(6) for purposes of applying the rules set forth in
Prop. Treas. Reg. Section 1.280G-1, Q&A 24(c) to a payment
described in Prop. Treas. Reg. Section 1.280G-1, Q&A 24(b),
the amount reflecting the lapse of the obligation to continue
performing services shall be equal to the minimum amount
allowed for such payment as set forth in Prop. Treas. Reg.
Section 1.280G-1, Q&A 24(c)(2) (or if Prop. Treas. Reg.
Section 1.280G-1 has been superseded by temporary or final
regulations, the minimum amount provided for in any temporary
or final regulations that supersede Prop. Treas. Reg. Section
1.280G-1 and that are applicable to the Termination Payment,
Gross Up Payment, or both).
(iv) Time For Payment. Employer shall pay the estimated Gross
Up Payment amount in cash to Employee concurrent with the payment of
the Termination Payment. Employee and Employer agree to reasonably
cooperate in the determination of the actual Gross Up Payment amount.
Further, Employee and Employer agree to make such adjustments to the
estimated Gross Up Payment amount as may be necessary to equal the
actual Gross Up Payment amount based upon a Determination, which in the
case of Employee shall refer to refunds of prior overpayments and in
the case of Employer shall refer to makeup of prior underpayments.
(e) Term. Notwithstanding the provisions of Section 3, if a Change In
Control occurs prior to the date on which Employee's employment hereunder is
terminated pursuant to Section 3, Sections 10, 11 and 12 shall continue in
effect until the date of termination pursuant to Section 3 or the date that is
12 months after the date of the Change In Control, whichever is later.
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<PAGE> 15
(f) Consulting Agreement. To preserve a sound and vital management team
for the Company during the period immediately following a Change In Control,
Employee agrees that, in the event of a Triggering Termination, Employee shall
enter into a Consulting Agreement (the "Consulting Agreement") in the form
attached hereto as Exhibit B if requested by the Board of Directors of the
Company within 30 days after the Change In Control. If Employee breaches his
obligation under the preceding sentence by declining to enter into a Consulting
Agreement, as liquidated damages for such breach and not as a penalty, Employee
shall pay to Employer the amount that Employee otherwise would have received as
compensation from Employer under the Consulting Agreement assuming Employee
fully performed his obligations thereunder.
(g) No Duty to Mitigate Damages. Employee's rights and privileges under
this Section 10 shall be considered severance pay in consideration of his past
service and his continued service to Employer from the Commencement Date, and
his entitlement thereto shall neither be governed by any duty to mitigate his
damages by seeking further employment nor offset by any compensation that he may
receive from future employment.
(h) No Right To Continued Employment. This Section 10 shall not give
Employee any right of continued employment or any right to compensation or
benefits from Employer except the rights specifically stated herein.
(i) Exercise of Stock Options. Employee may hold options ("Options")
issued under the Option Plan that become immediately exercisable upon a Change
In Control. Employer shall take no action to facilitate a transaction involving
a Change In Control unless it has taken such action as may be necessary to
ensure that Employee has the opportunity to exercise all Options he may then
hold, at a time and in a manner that shall give Employee the opportunity to sell
or exchange the securities of Employer acquired upon exercise of his Options, if
any (the "Acquired Securities"), at the earliest time and in the most
advantageous manner any holder of the same class of securities as the Acquired
Securities is able to sell or exchange such securities in connection with such
Change In Control. Employer acknowledges that its covenants in the preceding
sentence (the "Covenants") are reasonable and necessary in order to protect the
legitimate interests of Employer in maintaining Employee as one of its employees
and that any violation of the Covenants by Employer would result in irreparable
injuries to Employee, and Employer therefore acknowledges that in the event of
any violation of the Covenants by Employer or its directors, officers or
employees, or any of their respective agents, Employee shall be entitled to
obtain from any court of competent jurisdiction temporary, preliminary and
permanent injunctive relief in order to (i) obtain specific performance of the
Covenants, (ii) obtain specific performance of the exercise of his Options and
the sale or exchange of the Acquired Securities in the advantageous manner
contemplated above or (iii) prevent violation of the Covenants; provided that
nothing in this Agreement shall be deemed to prejudice Employee's rights to
damages for violation of the Covenants.
(j) Coordination With Other Payments.
(i) After the termination of Employee's employment hereunder:
(1) if Employee is entitled to receive Separation
Payments; and
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<PAGE> 16
(2) Employee subsequently becomes entitled to receive
a Termination Payment, Gross Up Payment or both, then
(ii) prior to the disbursement of the Termination Payment and
Gross Up Payment:
(1) the payment date of all unpaid Separation
Payments shall be accelerated to the payment date of the
Termination Payment and such Separation Payments shall be made
(in this event, Employer waives any requirement that Employee
reduce the Separation Payments by the amount of any income
earned by Employee thereafter); and
(2) the Termination Payment shall be reduced by the
amount of the Separation Payments so accelerated and made.
(k) Outplacement Services. If Employee becomes entitled to receive a
Termination Payment under this Section 10, Employer agrees to reimburse Employee
for any outplacement consulting fees and expenses incurred by Employee during
any Applicable Period and during the two-year period following the Change In
Control; provided that the aggregate amount reimbursed by Employer shall not
exceed 15% of Employee's Base Salary in effect immediately prior to the
Triggering Termination. In addition and as to each reimbursement payment, to the
extent that any reimbursement under this Section 10(l) is subject to federal,
state or local income taxes, Employer shall pay Employee an additional amount
such that the net amount retained by Employee, after deduction of any federal,
state and local income tax on the reimbursement and such additional amount,
shall be equal to the reimbursement payment. All amounts under this Section
10(l) shall be paid by Employer within 15 days after Employee's presentation to
Employer of any statements of such amounts and thereafter shall bear interest at
the rate of 18% per annum or, if different, the maximum rate allowed by law
until paid by Employer, and all accrued and unpaid interest shall bear interest
at the same rate, all of which interest shall be compounded daily.
SECTION 11. General.
(a) Notices. Except as provided in Section 10(b)(iv), all notices and
other communications hereunder shall be in writing or by written
telecommunication, and shall be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested or by
written telecommunication, to the relevant address set forth below, or to such
other address as the recipient of such notice or communication shall have
specified to the other party in accordance with this Section 11(a):
<TABLE>
<S> <C>
If to Employer, to: with a copy to:
Rocky Mountain Chocolate Factory, Inc. Thompson & Knight, P.C.
265 Turner Drive 1700 Pacific Avenue, Suite 3300
Durango, Colorado 81301 Dallas, Texas 75201
Attention: President Attention: Kenn W. Webb
Facsimile Number: (970) 382-7366 Facsimile Number: (214) 969-1751
</TABLE>
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<PAGE> 17
If to Employee, to:
53 Silver Mountain Road
P. O. Box 3671
Durango, Colorado 81302
(b) Withholding; No Offset. All payments required to be made to
Employee by Employer shall be subject to the withholding of such amounts, if
any, relating to federal, state and local taxes as may be required by law. No
payments under Section 10 shall be subject to offset or reduction attributable
to any amount Employee may owe to Employer or any other person.
(c) Legal and Accounting Costs. Employer shall pay all attorney' and
accountant' fees and costs incurred by Employee as a result of any breach by
Employer of its obligations under this Agreement, including without limitation
all such costs incurred in contesting or disputing any determination made by
Employer under Section 10 or in connection with any tax audit or proceeding to
the extent attributable to the application of Section 4999 of the Code to any
payment under Section 10. Reimbursements of such costs shall be made by Employer
within 15 days after Employee's presentation to Employer of any statements of
such costs and thereafter shall bear interest at the rate of 18% per annum or,
if different, the maximum rate allowed by law until paid by Employer, and all
accrued and unpaid interest shall bear interest at the same rate, all of which
interest shall be compounded daily.
(d) Equitable Remedies. Each of the parties hereto acknowledges and
agrees that upon any breach by Employee of his obligations under any of Sections
7, 8 and 9, Employer shall have no adequate remedy at law and accordingly shall
be entitled to specific performance and other appropriate injunctive and
equitable relief.
(e) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof, and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
(f) Waivers. No delay or omission by either party in exercising any
right, power or privilege hereunder shall impair such right, power or privilege,
nor shall any single or partial exercise of any such right, power or privilege
preclude any further exercise thereof or the exercise of any other right, power
or privilege.
(g) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
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<PAGE> 18
(h) Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
(i) Reference to Agreement. Use of the words "herein," "hereof,"
"hereto," "hereunder" and the like in this Agreement refer to this Agreement
only as a whole and not to any particular section or subsection of this
Agreement, unless otherwise noted.
(j) Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties and shall be enforceable by the personal
representatives and heirs of Employee and the successors and assigns of
Employer. This Agreement may be assigned by Employer to a legal
successor-in-interest of Employer or to a wholly owned subsidiary to which
substantially all the business and operations of Employer are transferred. If
Employee dies while any amounts would still be payable to him hereunder, such
amounts shall be paid to Employee's estate. This Agreement is not otherwise
assignable by Employee or Employer.
(k) Entire Agreement. This Agreement contains the entire understanding
of the parties, and supersedes all prior agreements and understandings, relating
to the subject matter hereof and may not be amended except by a written
instrument hereafter signed by each of the parties hereto.
(1) Governing Law. This Agreement and the performance hereof shall be
construed and governed in accordance with the laws of the State of Colorado,
without regard to its choice of law principles.
(m) Gender and Number. The masculine gender shall be deemed to denote
the feminine or neuter genders, the singular to denote the plural, and the
plural to denote the singular, where the context so permits.
(n) Assistance in Litigation. During the term of this Agreement and for
a period of two years thereafter, Employee shall, upon reasonable notice,
furnish such information and proper assistance to Employer as may reasonably be
required by Employer in connection with any litigation in which Employer is, or
may become, a party and with respect to which Employee's particular knowledge or
experience would be useful. Employer shall reimburse Employee for all reasonable
out-of-pocket expenses incurred by Employee in rendering such assistance. The
provisions of this Section 11(n) shall continue in effect notwithstanding
termination of Employee's employment hereunder for any reason.
(o) Legal Fees. Employer shall pay and be responsible for all legal
fees, costs of litigation and other expenses that Employee may incur as a result
of Employer's failure to perform under this Agreement or as a result of
Employer, any Acquiring Person or any affiliate of Employer seeking to terminate
this Agreement other than in accordance with the terms hereof or contesting the
validity or enforceability of this Agreement.
SECTION 12. Definitions. As used in this Agreement, the following terms
will have the following meanings:
(a) Accountants has the meaning ascribed to it in Section 10(d)(iii).
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<PAGE> 19
(b) Acquired Securities has the meaning ascribed to it in Section
10(i).
(c) Acquiring Person has the meaning ascribed to it in Section 10(c).
(d) Agreement has the meaning ascribed to it in the introductory
paragraph of this document.
(e) Agreement Termination has the meaning ascribed to it in Section
10(a)(iv)(1). References in this Agreement to termination of Employee's
employment with Employer, in any form, shall be deemed to include (whether or
not so expressed) an Agreement Termination.
(f) Applicable Period means, with respect to any Change In Control, the
period of 90 days immediately preceding the Change In Control.
(g) Base Salary has the meaning ascribed to it in Section 4(a).
(h) Cause has the meaning ascribed to it in Section 6(a)(ii).
(i) Change In Control has the meaning ascribed to it in Section 10(c).
(j) Code means the Internal Revenue Code of 1986, as amended.
(k) Commencement Date has the meaning ascribed to it in Section 3.
(l) A Concurring Person is an individual who is the Chairman of the
Board of Directors of the Company or a member of the Compensation Committee of
the Board of Directors of the Company (or, if no Compensation Committee exists,
or there are fewer than two members of the Compensation Committee, a nonemployee
member of the Board of Directors of the Company) at the time in question.
(m) Confidential Information has the meaning ascribed to it in Section
8(b).
(n) Constructively Terminated with respect to an Employee's employment
with Employer will be deemed to have occurred if Employer
(i) demotes Employee to a lesser position, either in title or
responsibility (whether or not there is a change in title), than the
highest position held by Employee with Employer at any time during
Employee's employment with Employer;
(ii) decreases Employee's compensation below the highest level
in effect at any time during Employee's employment with Employer or
reduces Employee's benefits and perquisites below the highest levels in
effect at any time during Employee's employment with Employer (other
than as a result of any amendment or termination of any employee or
group or other executive benefit plan, which amendment or termination
is applicable to all executives of Employer);
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<PAGE> 20
(iii) requires Employee to relocate to a principal place of
business more than 25 miles from the principal place of business
occupied by Employer on the first day of an Applicable Period; or
(iv) requests or proposes to amend this Agreement, if the
proposed amendment would have any of the effects contemplated by
clauses (i), (ii) or (iii) above or otherwise impose any additional
burdens or obligations on, or diminish any rights of, Employee.
(o) Consulting Agreement has the meaning ascribed to it in Section
10(f).
(p) Continued Performance Obligation has the meaning ascribed to it in
Section 10(a)(iv)(3).
(q) Covenants has the meaning ascribed to it in Section 10(i).
(r) Designated Industry has the meaning ascribed to it in Section
9(a)(i)(1).
(s) Determination has the meaning ascribed to such term in Section
1313(a) of the Code.
(t) Disability with respect to Employee shall be deemed to have
occurred whenever Employee is rendered unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment that can be expected to result in death or that has lasted or can be
expected to last for a continuing period of not less than 12 months. In the case
of any dispute, the determination of Disability will be made by a licensed
physician selected by Employer, which physician's decision will be final and
binding.
(u) Employee has the meaning ascribed to it in the introductory
paragraph of this Agreement.
(v) Employer has the meaning ascribed to it in the introductory
paragraph of this Agreement.
(w) Exchange Act has the meaning ascribed to it in Section 10(c).
(x) Excise Tax has the meaning ascribed to it in Section 10(d)(i).
(y) Gross Up Payment has the meaning ascribed to it in Section
10(d)(i).
(z) Inventions has the meaning ascribed to it in Section 7(a).
(aa) Option Plan means, collectively, the Incentive Stock Option Plan
of Rocky Mountain Chocolate Factory, Inc. and the Rocky Mountain Chocolate
Factory, Inc. 1995 Stock Option Plan, as amended from time to time.
(bb) Options has the meaning ascribed to it in Section 10(i).
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<PAGE> 21
(cc) Parachute Payments has the meaning ascribed to it in Section
280G(b)(2) of the Code.
(dd) Payments has the meaning ascribed to it in Section 10(d)(i).
(ee) Separation Payment Period has the meaning ascribed to it in
Section 6(b)(ii).
(ff) Separation Payments has the meaning ascribed to it in Section
6(b)(ii).
(gg) Share Acquisition has the meaning ascribed to it in Section 10(c).
(hh) Subsequent Share Acquisition has the meaning ascribed to it in
Section 10(c).
(ii) Target Bonus means, with respect to each Employee, the dollar
amount that is equal to the established percentage of such Employee's Base
Salary that would be paid to Employee under any incentive bonus plan of Employer
assuming the measurement criteria contained in such plan with respect to
Employee were achieved for the bonus period in which the Change In Control
occurred.
(jj) Termination Payment has the meaning ascribed to it in Section
10(b)(i)(2).
(kk) Triggering Termination has the meaning ascribed to it in Section
10(a).
EXECUTED as of the date and year first above written.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By
------------------------------------------------
Franklin E. Crail, President and
Chief Executive Officer
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<PAGE> 22
Exhibit A
The duties to be performed by Employee pursuant to this Agreement
include the following:
[To be supplied by Company]
<PAGE> 23
Exhibit B
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement"), dated as of __________ _____,
_____ ("Effective Date"), is between Rocky Mountain Chocolate Factory, Inc., a
Colorado corporation (the "Company"), and _____________________ ("Consultant").
R E C I T A L S:
A. Consultant was formerly employed by the Company as an executive
officer.
B. Consultant and the Company previously entered into an Employment
Agreement, dated as of April 8, 1998 (" Employment Agreement "), under which
Consultant is obligated to enter into this Agreement at the request of the Board
of Directors of the Company under certain circumstances.
C. The Board of Directors of the Company has requested that Consultant
enter into this Agreement and Consultant is willing to do so.
NOW, THEREFORE, for and in consideration of the mutual promises
contained in this Agreement, and on the terms and subject to the conditions set
forth in this Agreement, the parties agree as follows:
SECTION 1. Duties. The Company retains Consultant to provide, and
Consultant agrees to render, such consulting and advisory services as may be
requested from time to time by the Company's Board of Directors. Consultant
agrees to devote his attention, skills and best efforts to the performance of
his duties under this Agreement. Consultant shall not be obligated, however, to
devote more than 30 hours per month to the discharge of his responsibilities
under this Agreement. Consultant shall be an independent contractor, not an
employee of the Company, during the term of this Agreement.
SECTION 2. Term. The term for providing consulting services under this
Agreement commences on the Effective Date and continues, unless earlier
terminated pursuant to Section 5, until 180 days after the date of the Change In
Control, as defined in the Employment Agreement.
SECTION 3. Compensation. In consideration for the services provided by
Consultant, the Company shall pay to Consultant an amount equal to one-half of
his annual base compensation considered for purposes of Section 10(b)(i)(l)(I)
of the Employment Agreement, which amount shall be paid in six equal monthly
installments, with the first installment due and payable on the Effective Date.
SECTION 4. Expenses. The parties anticipate that Consultant, in
connection with the services to be performed by him under this Agreement, will
incur expenses for travel, lodging and similar items. The Company shall advance
the estimated amount of such expenses to Consultant and shall, within 15 days
after Consultant's presentation to the Company of reasonable documentation
<PAGE> 24
of the actual expenses, reimburse Consultant for all expenses incurred by
Consultant in the performance of his duties under this Agreement that have not
been so advanced.
SECTION 5. Early Termination.
(a) Events of Early Termination. This Agreement may terminate prior to
the expiration of the term specified in Section 2 as follows:
(i) Death. Upon the death of Consultant during the term
hereof.
(ii) For Cause. For "Cause" immediately upon written notice by
the Company to Consultant. For purposes of this Agreement, a
termination shall be for Cause if:
(I) Consultant commits an unlawful or criminal act
involving moral turpitude; or
(II) Consultant (A) fails to obey lawful and proper
written directions delivered to Consultant by the Company's
Board of Directors; or (B) commits a material breach of any of
the covenants, terms and provisions of this Agreement and such
failure or breach continues uncured for more than 30 days
after receipt by Consultant of written notice from the Company
of such failure or breach.
(b) Payments Upon Early Termination. Consultant shall not be entitled
to any compensation upon termination of this Agreement pursuant to this Section
5 except for his compensation accrued but unpaid as of the date of such
termination and unpaid expense reimbursements under Section 4 for expenses
incurred in accordance with the terms hereof prior to such termination.
SECTION 6. General.
(a) Notices. All notices and other communications hereunder shall be in
writing or by written telecommunication and shall be deemed to have been duly
given if delivered personally or if mailed by certified mail, return receipt
requested or by written telecommunication, to the relevant address set forth
below, or to such other address as the recipient of such notice or communication
shall have specified to the other party hereto in accordance with this Section
6(a):
If to the Company, to: with a copy to:
Rocky Mountain Chocolate Factory, Inc. Thompson & Knight, P.C.
265 Turner Drive 1700 Pacific Avenue, Suite 3300
Durango, Colorado 81301 Dallas, Texas 75201
Attention: President Attention: Kenn W. Webb
Facsimile Number: (970) 382-7366 Facsimile Number: (214) 969-1751
-2-
<PAGE> 25
If to Consultant, to:
53 Silver Mountain Road
P. O. Box 3671
Durango, Colorado 81302
(b) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof, and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
(c) Waivers. No delay or omission by either party hereto in exercising
any right, power or privilege hereunder shall impair such right, power or
privilege, nor shall any single or partial exercise of any such right, power or
privilege preclude any further exercise thereof or the exercise of any other
right, power or privilege.
(d) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
(e) Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
(f) Reference to Agreement. Use of the words "hereof," "hereto,"
"hereunder" and the like in this Agreement refer to this Agreement as a whole
and not to any particular section or subsection of this Agreement, unless
otherwise noted.
(g) Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties and shall be enforceable by the personal
representatives and heirs of Consultant and the successors of the Company. If
Consultant dies while any amounts would still be payable to him hereunder, such
amounts shall be paid to Consultant's estate. This Agreement is not otherwise
assignable by Consultant or by the Company.
(h) Entire Agreement. This Agreement contains the entire understanding
of the parties, supersedes all prior agreements and understandings relating to
the subject matter hereof and may not be amended except by a written instrument
hereafter signed by each of the parties hereto.
(i) Governing Law. This Agreement and the performance hereof shall be
construed and governed in accordance with the laws of the State of Colorado,
without regard to its choice of law principles.
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(j) Gender and Number. The masculine gender shall be deemed to denote
the feminine or neuter genders, the singular to denote the plural, and the
plural to denote the singular, where the context so permits.
EXECUTED as of the date and year first above written.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By
-------------------------------------
---------------------------------------
Bryan J. Merryman
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EXHIBIT 99.3
FORM OF INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement"), made and entered
into as of the day of April, 1998, by and between ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC., a Colorado corporation (the "Corporation"), and ________________
("Officer").
W I T N E S S E T H:
WHEREAS, it is essential to the Corporation to retain and attract as
officers the most capable persons available;
WHEREAS, Officer is an officer of the Corporation;
WHEREAS, both the Corporation and Officer recognize the risk of
litigation and other claims being asserted against officers of public companies;
and
WHEREAS, in recognition of Officer's need for substantial protection
against personal liability in order to maintain continued service to the
Corporation in an effective manner and to provide Officer with specific
contractual assurance that the protection will be available to Officer, the
Corporation desires to provide in this Agreement for the indemnification of and
the advancement of expenses to Officer to the full extent permitted by law, as
set forth in this Agreement;
NOW THEREFORE, in consideration of the premises and mutual agreements
contained herein, including Officer's continued service to the Corporation, the
Corporation and Officer hereby agree as follows:
Section 1. Definitions. The following terms, as used herein, shall have
the following respective meanings:
"C.B.C.A." means the Colorado Business Corporation Act, as currently in
effect or as amended from time to time.
"Change In Control" means a change in control of the Corporation after
the date of this Agreement in any one of the following circumstances: (a) there
shall have occurred an event that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar
item on any similar schedule or form) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is
then subject to such reporting requirement; (b) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) (an "Acquiring Person")
shall have become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 20% or more of the combined voting power of the Corporation's then
outstanding
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<PAGE> 2
voting securities (a "Share Acquisition"); (c) the Corporation is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a majority
of the Board of Directors thereafter; or (d) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (including for this purpose any new director whose
election or nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board of Directors; provided, however,
that an event described in clause (a) or (b) shall not be deemed a Change In
Control if such event is approved, prior to its occurrence or within 60 days
thereafter, by at least two-thirds of the members of the Board of Directors in
office immediately prior to such occurrence. In addition to the foregoing, a
Change In Control shall be deemed to have occurred if, after the occurrence of a
Share Acquisition that has been approved by a two-thirds vote of the Board as
contemplated in the proviso to the preceding sentence, the Acquiring Person
shall have become the beneficial owner, directly or indirectly, of securities of
the Corporation representing an additional 5% or more of the combined voting
power of the Corporation's then outstanding voting securities (a "Subsequent
Share Acquisition") without the approval prior thereto or within 60 days
thereafter of at least two-thirds of the members of the Board of Directors who
were in office immediately prior to such Subsequent Share Acquisition and were
not appointed, nominated or recommended by, and do not otherwise represent the
interests of, the Acquiring Person on the Board. Each subsequent acquisition by
an Acquiring Person of securities of the Corporation representing an additional
5% or more of the combined voting power of the Corporation's then outstanding
voting securities shall also constitute a Subsequent Share Acquisition (and a
Change In Control unless approved as contemplated by the preceding sentence) if
the approvals contemplated by this paragraph were given with respect to the
initial Share Acquisition and all prior Subsequent Share Acquisitions by such
Acquiring Person. The Board approvals contemplated by the two preceding
sentences and by the proviso to the first sentence of this paragraph may contain
such conditions as the members of the Board granting such approval may deem
advisable and appropriate, the subsequent failure or violation of which shall
result in the rescission of such approval and cause a Change In Control to be
deemed to have occurred as of the date of the Share Acquisition or Subsequent
Share Acquisition, as the case may be. Notwithstanding the foregoing, a Change
In Control shall not be deemed to have occurred for purposes of clause (b) of
the first sentence of this paragraph with respect to any Acquiring Person
meeting the requirements of clauses (i) and (ii) of Rule 13d-l(b)(1) promulgated
under the Exchange Act.
"Expenses" shall include reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating or being or preparing to be a witness in a
Proceeding.
"Independent Counsel" means a law firm, or member of a law firm, that
is experienced in matters of corporation law and neither presently is, nor in
the five years previous to his or her selection or appointment has been,
retained to represent: (a) the Corporation or Officer in any matter material to
either such party, (b) any other party to the Proceeding giving rise to a claim
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<PAGE> 3
for indemnification hereunder or (c) the beneficial owners, directly or
indirectly, of securities of the Corporation representing 5% or more of the
combined voting power of the Corporation's then outstanding voting securities.
"Matter" is a claim, a material issue, or a substantial request for
relief.
"Proceeding" includes any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other proceeding, whether civil, criminal,
administrative or investigative, and whether formal or informal, including
without limitation one initiated by Officer pursuant to Section 10 of this
Agreement to enforce his rights under this Agreement.
Section 2. Indemnification. The Corporation shall indemnify, and
advance Expenses to, Officer to the fullest extent permitted by applicable law
in effect on the date of the effectiveness of this Agreement, and to such
greater extent as applicable law may thereafter permit. The rights of Officer
provided under the preceding sentence shall include, but not be limited to, the
right to be indemnified to the fullest extent permitted by ss. 7-109-102(4) and
(5) of the C.B.C.A. in Proceedings by or in the right of the Corporation and to
the fullest extent permitted by ss. 7-109- 102(1)-(3) of the C.B.C.A. in all
other Proceedings, in each case as permitted by ss. 7-109-107(b) of the C.B.C.A.
To the fullest extent permitted by applicable law, such right to be indemnified
shall survive and continue following the termination of Officer's service as an
officer of the Corporation, with respect to conduct and actions taken, and
decisions made, by Officer in his capacity as an officer of the Corporation. The
provisions set forth below in this Agreement are provided in furtherance, and
not by way of limitation, of the obligations expressed in this Section 2.
Section 3. Expenses Related to Proceedings. If Officer is, by reason of
his status as an officer of the Corporation, a witness in or a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually and reasonably incurred by him or on
his behalf in connection therewith. If Officer is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to any Matter in
such Proceeding, the Corporation shall indemnify Officer against all Expenses
actually and reasonably incurred by him or on his behalf relating to each
Matter. The termination of any Matter in such a Proceeding by dismissal, with or
without prejudice, shall be deemed to be a successful result as to such Matter.
Section 4. Advancement of Expenses. The Corporation shall pay or
reimburse Officer for the Expenses incurred by Officer in advance of the final
disposition of a Proceeding within ten days after Officer requests such payment
or reimbursement, to the fullest extent permitted by, and subject to compliance
with, ss.ss. 7-109-104 and 7-109-107(b) of the C.B.C.A.
Section 5. Request for Indemnification. To obtain indemnification
Officer shall submit to the Corporation a written request with such information
as is reasonably available to Officer. The Secretary of the Corporation shall
promptly advise the Board of Directors of such request.
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<PAGE> 4
Section 6. Determining Entitlement to Indemnification if No Change In
Control. If there has been no Change In Control at the time the request for
Indemnification is sent, Officer's entitlement to indemnification shall be
determined in accordance with ss.ss. 7-109-106 and 7-109- 107(b) of the C.B.C.A.
If entitlement to indemnification is to be determined by Independent Counsel,
the Corporation shall furnish notice to Officer within ten days after receipt of
the request for indemnification, specifying the identity and address of
Independent Counsel. Officer may, within 14 days after receipt of such written
notice of selection, deliver to the Corporation a written objection to such
selection. Such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of Independent
Counsel and the objection shall set forth with particularity the factual basis
of such assertion. If there is an objection to the selection of Independent
Counsel, either the Corporation or Officer may petition any court of competent
jurisdiction for a determination that the objection is without a reasonable
basis and/or for the appointment of Independent Counsel selected by the court.
Section 7. Determining Entitlement to Indemnification if Change In
Control. If there has been a Change In Control at the time the request for
indemnification is sent, Officer's entitlement to indemnification shall be
determined in a written opinion by Independent Counsel selected by Officer.
Officer shall give the Corporation written notice advising of the identity and
address of the Independent Counsel so selected. The Corporation may, within
seven days after receipt of such written notice of selection, deliver to Officer
a written objection to such selection. Officer may, within five days after the
receipt of such objection from the Corporation, submit the name of another
Independent Counsel and the Corporation may, within seven days after receipt of
such written notice of selection, deliver to Officer a written objection to such
selection. Any objection is subject to the limitations in Section 6 of this
Agreement. Officer may petition any court of competent jurisdiction for a
determination that the Corporation's objection to the first and/or second
selection of Independent Counsel is without a reasonable basis and/or for the
appointment as Independent Counsel of a person selected by the court.
Section 8. Procedures of Independent Counsel. If there has been a
Change In Control before the time the request for indemnification is sent by
Officer, Officer shall be presumed (except as otherwise expressly provided in
this Agreement) to be entitled to indemnification upon submission of a request
for indemnification in accordance with Section 5 of this Agreement, and
thereafter the Corporation shall have the burden of proof to overcome the
presumption in reaching a determination contrary to the presumption. The
presumption shall be used by Independent Counsel as a basis for a determination
of entitlement to indemnification unless the Corporation provides information
sufficient to overcome such presumption by clear and convincing evidence or the
investigation, review and analysis of Independent Counsel convinces him or her
by clear and convincing evidence that the presumption should not apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under Section 6 or 7 of this Agreement to determine entitlement to
indemnification shall not have made and furnished to Officer in writing a
determination within 60 days after receipt by the Corporation of the request
therefor, the requisite determination of entitlement to indemnification shall be
deemed to have been made and Officer shall be entitled to such indemnification
unless Officer knowingly
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<PAGE> 5
misrepresented a material fact in connection with the request for
indemnification or such indemnification is prohibited by law. The termination of
any Proceeding or of any Matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of Officer to indemnification or create a presumption that (a)
Officer did not act in good faith and in a manner that he reasonably believed,
in the case of conduct in his official capacity as an officer of the
Corporation, to be in the best interests of the Corporation or in all other
cases that his conduct was at least not opposed to the Corporation's best
interests, or (b) with respect to any criminal Proceeding, that Officer had
reasonable cause to believe that his conduct was unlawful.
Section 9. Expenses of Independent Counsel. The Corporation shall pay
any and all reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Agreement and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay all
reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may serve
if a timely objection has been made to his or her selection until a court has
determined that such objection is without a reasonable basis.
Section 10. Trial De Novo. In the event that (a) a determination is
made pursuant to Section 6 or 7 of this Agreement that Officer is not entitled
to indemnification under this Agreement, (b) advancement of Expenses is not
timely made pursuant to Section 4 of this Agreement, (c) Independent Counsel has
not made and delivered a written opinion determining the request for
indemnification (i) within 90 days after being appointed by a court, (ii) within
90 days after objections to his or her selection have been overruled by a court
or (iii) within 90 days after the time for the Corporation or Officer to object
to his or her selection or (d) payment of indemnification is not made within
five days after a determination of entitlement to indemnification has been made
or deemed to have been made pursuant to Section 6, 7 or 8 of this Agreement,
Officer shall be entitled to an adjudication in any court of competent
jurisdiction of his entitlement to such indemnification or advancement of
Expenses. In the event that a determination shall have been made that Officer is
not entitled to indemnification, any judicial proceeding (including any
arbitration) commenced pursuant to this Section 10 shall be conducted in all
respects as a de novo trial on the merits, and Officer shall not be prejudiced
by reasons of that adverse determination. If a Change In Control shall have
occurred, in any judicial proceeding commenced pursuant to this Section 10, the
Corporation shall have the burden of proving that Officer is not entitled to
indemnification or advancement of Expenses, as the case may be. If a
determination shall have been made or deemed to have been made that Officer is
entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding commenced pursuant to this Section 10,
or otherwise, unless Officer knowingly misrepresented a material fact in
connection with the request for indemnification, or such indemnification is
prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 10 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Corporation is bound by all provisions of
this Agreement. In the event that Officer, pursuant to this Section 10, seeks a
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<PAGE> 6
judicial adjudication to enforce his rights under, or to recover damages for
breach of, this Agreement, Officer shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any and all
Expenses actually and reasonably incurred by him in such judicial adjudication,
but only if he prevails therein. If it shall be determined in such judicial
adjudication that Officer is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Officer in connection with such judicial adjudication shall nevertheless be paid
by the Corporation.
Section 11. Non-Exclusivity. The rights of indemnification and to
receive advancement of Expenses as provided by this Agreement shall not be
deemed exclusive of any other rights to which Officer may at any time be
entitled under applicable law, the Certificate of Incorporation, Bylaws, a vote
of stockholders, a resolution of the Board of Directors or otherwise. No
amendment or modification of this Agreement or any provision hereof shall be
effective as to Officer for acts, events and circumstances that occurred, in
whole or in part, before such amendment or modification. The provisions of this
Agreement shall continue as to Officer notwithstanding any termination of his
status as an officer of the Corporation and shall inure to the benefit of his
heirs, executors and administrators.
Section 12. Insurance and Subrogation. To the extent the Corporation
maintains an insurance policy or policies providing liability insurance for
directors or officers of the Corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Corporation, Officer shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of coverage available for any such director or officer under such
policy or policies.
In the event of any payment hereunder, the Corporation shall be
subrogated to the extent of such payment to all the rights of recovery of
Officer, who shall execute all papers required and take all action necessary to
secure such rights, including execution of such documents as are necessary to
enable the Corporation to bring suit to enforce such rights.
The Corporation shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if, and to the extent that,
Officer has otherwise actually received such payment under any insurance policy,
contract, agreement or otherwise.
Section 13. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Agreement shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
Section 14. Circumstances When Officer is Not Entitled to
Indemnification. Officer shall not be entitled to indemnification or advancement
of Expenses under this Agreement with respect to any Proceeding, or any Matter
therein, brought or made by Officer against the Corporation, other than a
Proceeding, or Matter therein, brought by Officer to enforce his rights under
this Agreement and in which Officer is successful, in whole or in part.
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Section 15. Notices. Any communication required or permitted to the
Corporation shall be addressed to the Secretary of the Corporation and any such
communication to Officer shall be given in writing by depositing the same in the
United States mail, with postage thereon prepaid, addressed to the person to
whom such notice is directed at the address of such person on the records of the
Corporation, and such notice shall be deemed given at the time when the same
shall be so deposited in the United States mail.
Section 16. Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO,
WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
Section 17. Consent to Jurisdiction. THE CORPORATION AND OFFICER EACH
HEREBY IRREVOCABLY CONSENT TO THE JURISDICTION OF THE COURTS OF THE STATE OF
COLORADO FOR ALL PURPOSES IN CONNECTION WITH ANY ACTION OR PROCEEDING WHICH
ARISES OUT OF OR RELATES TO THIS AGREEMENT AND AGREE THAT ANY ACTION INSTITUTED
UNDER THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF THE STATE OF
COLORADO.
Section 18. Amendment. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto.
IN WITNESS WHEREOF, the Corporation and Officer have executed this
Agreement as of the day and year first above written.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By:
----------------------------------------------
Franklin E. Crail
President and Chief Executive Officer
-------------------------------------------------
(Officer)
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EXHIBIT 99.4
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
265 TURNER DRIVE
DURANGO, COLORADO
To Our Shareholders:
On May 10, 1999, Whitman's Candies, Inc. commenced an unsolicited tender offer
for all of the outstanding shares of common stock of Rocky Mountain Chocolate
Factory, Inc. at a price of $5.75 per share in cash.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT WHITMAN'S CANDIES' TENDER OFFER IS
INADEQUATE AND NOT IN THE BEST INTERESTS OF ROCKY MOUNTAIN OR ITS SHAREHOLDERS.
ACCORDINGLY, WE RECOMMEND THAT YOU REJECT THE TENDER OFFER AND NOT TENDER YOUR
SHARES TO WHITMAN'S CANDIES.
Our recommendation that you REJECT Whitman's Candies' tender offer is based
upon:
A. A presentation by George K. Baum & Company ("GKB"), financial
advisor to the Company, concerning the Company and the
financial aspects of the offer, as well as the oral opinion of
GKB stating that the offer is inadequate, from a financial
point of view, to the Rocky Mountain shareholders.
B. The fact that the Company is continuing to take steps to
improve its near-term operating efficiency and profitability
and is in the process of evaluating further distribution and
marketing programs as part of a strategic plan to enhance
shareholder value. As announced in March 1999, the Company is
in the process of implementing a restructuring program to
improve profitability.
C. The Board's belief that the market price of the Company's
shares has been adversely affected in the near-term primarily
by nonrecurring events. Specifically, the market price for the
Shares was adversely affected by the Company's announcement in
March 1999 that its earnings per share for the fiscal year
ended February 28, 1999 will be significantly lower than
previously anticipated primarily as a result of nonrecurring
events.
D. The historical trading prices of the Company's shares,
including the Board's belief that the trading price for the
shares immediately prior to the announcement of the offer did
not fully reflect the long-term value inherent in the Company.
The offer represents a discount to Rocky Mountain's historic
trading prices and multiples.
<PAGE> 2
IN SHORT, THE OFFER IS FINANCIALLY INADEQUATE. DO NOT LET WHITMAN'S CANDIES GAIN
THE VALUE OF YOUR INVESTMENT FOR ITS SHAREHOLDERS. We urge you to read carefully
the Company's attached Schedule 14D-9 in its entirety, including the discussion
of the reasons for your Board's recommendation and the analysis of George K.
Baum & Company, the Company's financial advisor.
WE AGAIN URGE YOU TO REJECT WHITMAN'S CANDIES' INADEQUATE OFFER. Any shares
tendered into the tender offer may be withdrawn at any time before its
expiration.
Your Board has also adopted a shareholder rights plan. The Board believes that
the rights plan will provide the Company with additional time to negotiate with
potential third-party acquirers, including Whitman's Candies, to consider
alternatives to unsolicited proposed takeovers, and to ensure that any
acquisition occurs on terms that provide fair value to the Company's
shareholders. The rights plan is designed to assure that all of the Company's
shareholders receive fair and equal treatment in the event of any proposed
takeover. The rights plan is described in detail in the attached Schedule 14D-9.
Your Board of Directors thanks you for your continued support.
Sincerely,
/s/ Franklin E. Crail
-----------------------------------------
Franklin E. Crail
Chairman of the Board
On behalf of the Board of Directors
