ROCKY MOUNTAIN CHOCOLATE FACTORY INCfilings.irdirect.net/data/785815/000103570407000395/d46614e10vk.… · table of contents securities and exchange commission washington, d.c. 20549

SECURITIES & EXCHANGE COMMISSION EDGAR FILING

ROCKY MOUNTAIN CHOCOLATE FACTORY INC

Form: 10-K

Date Filed: 2007-05-14

Corporate Issuer CIK: 785815Symbol: RMCFSIC Code: 2060

© Copyright 2014, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to theterms of use.

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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K(Mark One)

☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

For the fiscal year ended February 28, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-14749

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

Colorado

(State of Incorporation) 84-0910696

(I.R.S. Employer Identification No.)

265 Turner Drive, Durango, CO 81303(Address of principal executive offices)

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

Securities Registered Pursuant To Section 12(b) Of The Act:

Title of each class Name of each exchange on which registered

Common Stock $.03 Par Value per Share The NASDAQ Stock Market LLC

Securities Registered Pursuant To Section 12(g) Of The Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o No ☑

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definitionof “accelerated filer and larger accelerated filer” in Rule 12b of the Act. (Check one):

Large accelerated filer o Accelerated filer ☑ Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ☑

On April 30, 2007, there were 6,071,043 shares of Common Stock outstanding. The aggregate market value of the Common Stock(based on the average of the closing bid and ask prices as quoted on the Nasdaq Global Market on April 30, 2007) held by non-affiliates was $66,068,406.

As of March 31, 2007 Hodges Capital Management, Inc. held 680,560 shares of outstanding Common Stock. These shares havebeen included in the dollar value of Common Stock held by non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement furnished to stockholders in connection with the 2007 Annual Meeting of Stockholders

EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.

(the “Proxy Statement”) are incorporated by reference in Part III of this Report. The Proxy Statement will be filed with the Securitiesand Exchange Commission within 120 days of the close of the registrant’s fiscal year.


ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.FORM 10-K

TABLE OF CONTENTS Page No. PART I. Item 1 Business 3 Item 1A Risk Factors 13 Item 1B Unresolved Staff Comments 14 Item 2 Properties 14 Item 3 Legal Proceedings 15 Item 4 Submission of Matters to a Vote of Security Holders 15 PART II.

Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities

15

Item 6 Selected Financial Data 17 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A Quantitative and Qualitative Disclosures About Market Risk 27 Item 8 Financial Statements and Supplementary Data 28 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45 Item 9A Controls and Procedures 45 Item 9B Other Information 47 PART III. Item 10 Directors, Executive Officers and Corporate Governance 47 Item 11 Executive Compensation 47 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 47 Item 13 Certain Relationships and Related Transactions, and Director Independence 47 Item 14 Principal Accountant Fees and Services 47 PART IV. Item 15 Exhibits, Financial Statement Schedules 48 Articles of Incorporation Bylaws Specimen Common Stock Certificate Form of Employment Agreement Form of Indemnification Agreement Form of Indemnification Agreement Commodity Contract Consent of Independent Registered Public Accounting Firm


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Certification of CEO Pursuant to Section 302 Certification of CFO Pursuant to Section 302 Certification of CEO Pursuant to Section 906 Certification of CFO Pursuant to Section 906

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PART I.

ITEM 1. BUSINESS

General

Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain Chocolate Factory, Inc. (the “Company”, and sometimesreferred to herein with the pronouns “we,” “us,” or “our”) is an international franchiser and confectionery manufacturer. The Companyis headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectioneryproducts. As of March 31, 2007 there were 5 Company-owned and 316 franchised Rocky Mountain Chocolate Factory storesoperating in 38 states, Canada, Guam and the United Arab Emirates.

On average, approximately 50% of the products sold at Rocky Mountain Chocolate Factory stores are prepared on the premises. TheCompany believes this in-store preparation creates a special store ambiance and the aroma and sight of products being madeattracts foot traffic and assures customers that products are fresh.

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

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

The Company’s revenues are currently derived from three principal sources: (i) sales to franchisees and others of chocolates andother confectionery products manufactured by the Company (72-69-68%); (ii) sales at Company-owned stores of chocolates andother confectionery products (including product manufactured by the Company) (8-11-11%) and (iii) the collection of initial franchisefees and royalties from franchisees (20-20-21%). The figures in parentheses show the percentage of total revenues attributable toeach source for fiscal years ended February 28, 2007, 2006 and 2005, respectively.

According to the National Confectioners Association, the total U.S. candy market approximated $27.9 billion of retail sales in 2005with chocolate generating sales of approximately $15.7 billion. According to the Department of Commerce, per capita consumption ofchocolate in 2005 was approximately 14 pounds per year nationally and increased 5% when compared to 2004.

Business Strategy

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

Product Quality and Variety

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

Store Atmosphere and Ambiance

The Company seeks to establish an enjoyable and inviting atmosphere in each Rocky Mountain Chocolate Factory store. Each storeprepares numerous products, including fudge, barks and caramel apples, in the store. In-store preparation is designed both to be funand entertaining for customers and to convey an image of freshness and homemade quality. The Company’s design staff hasdeveloped easily replicable designs and specifications to ensure that the Rocky Mountain Chocolate Factory concept is consistentlyimplemented throughout the system.

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In February 2000, the Company retained a nationally recognized design firm to evaluate and update its existing store design. Theobjective of the store design project is threefold: (1) increase average revenue per unit thereby opening untapped real estateenvironments; (2) further emphasize the entertainment and freshness value of the Company’s in-store confectionery factory; and (3)improve operational efficiency through optimal store layout. The Company completed the store redesign project and the testing of thenew design in fiscal 2002. Through March 31, 2007, 159 stores incorporating the new design have been opened.

Site Selection

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

Customer Service Commitment

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

Increase Same Store Retail Sales at Existing Locations

The Company seeks to increase profitability of its store system through increasing sales at existing store locations. Changes insystem wide domestic same store retail sales are as follows: 2003 (3.4%)2004 (0.6%)2005 4.8%2006 2.4%2007 0.3%

The Company believes that the negative trend in fiscal 2003 and through the third fiscal quarter of 2004 was due to the overall weakeconomy and retail environment, especially in tourist areas where many of the stores operate. The Company experienced positivesame store sales of 5.4% in its fiscal fourth quarter of 2004 and believes the positive trend is due primarily to a recovery in the UnitedStates economy through fiscal 2006.

In February 2000, the Company retained a nationally recognized packaging design firm to completely redesign the packagingfeatured in the Company’s retail stores. The Company has designed a contemporary and coordinated line of packaged products thatcapture and convey the freshness, fun and excitement of the Rocky Mountain Chocolate Factory retail store experience. TheCompany completed the packaging redesign project during 2002. The Company also believes that the successful launch of newpackaging has had a positive impact on same store sales.

Increase Same Store Pounds Purchased by Existing Locations

In fiscal 2007, same store pounds purchased by franchisees decreased 2.6% compared to the prior fiscal year. The Companycontinues to add new products and focus its existing product lines in an effort to increase same store pounds purchased by existinglocations.

Enhanced Operating Efficiencies

The Company seeks to improve its profitability by controlling costs and increasing the efficiency of its operations. Efforts in the lastseveral years include the purchase of additional automated factory equipment, implementation of a comprehensive MRP IIforecasting, planning, scheduling and reporting system, implementation of alternative manufacturing strategies and installation ofenhanced Point-of-Sale (POS) systems in all of its Company-owned and 162 of its franchised stores through March 31, 2007. Thesemeasures have significantly improved the Company’s ability to deliver its products to its stores safely, quickly and cost-effectively andimpact store operations. Additionally, the divestiture of substantially all of the Company-owned stores in fiscal 2002 has reduced theCompany’s exposure to real estate risk, improved the Company’s operating margins and allowed the Company to increase its focuson franchising.

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Expansion Strategy

Key elements of the Company’s expansion strategy include:

Unit Growth

The cornerstone of the Company’s growth strategy is to aggressively pursue unit growth opportunities in locations where theCompany has traditionally been successful, to pursue new and developing real estate environments for franchisees which appearpromising based on early sales results, and to improve and expand the retail store concept, such that previously untapped andunfeasible environments (such as most regional centers) generate sufficient revenue to support a successful Rocky MountainChocolate Factory location.

High Traffic Environments

The Company currently establishes franchised stores in the following environments: outlet centers, tourist environments, regionalcenters, street fronts, airports and other entertainment oriented environments. The Company, over the last several years, has had aparticular focus on regional center locations. The Company is optimistic that its exciting new store design will allow it to continuetargeting the over 1,400 regional centers in the United States. The Company has established a business relationship with most of themajor developers in the United States and believes that these relationships provide it with the opportunity to take advantage ofattractive sites in new and existing real estate environments.

Name Recognition and New Market Penetration

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

Store Concept

The Company seeks to establish a fun and inviting atmosphere in its Rocky Mountain Chocolate Factory store locations. Unlike mostother confectionery stores, each Rocky Mountain Chocolate Factory store prepares certain products, including fudge and caramelapples, in the store. Customers can observe store personnel making fudge from start to finish, including the mixing of ingredients inold-fashioned copper kettles and the cooling of the fudge on large granite or marble tables, and are often invited to sample the store’sproducts. The Company believes that an average of approximately 50% of the revenues of franchised stores are generated by salesof products prepared on the premises. The Company believes the in-store preparation and aroma of its products enhance theambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for its customers and convey an image of freshnessand homemade quality.

Rocky Mountain Chocolate Factory stores opened prior to fiscal 2002 have a distinctive country Victorian decor, which furtherenhances their friendly and enjoyable atmosphere. Each store includes finely crafted wood cabinetry, copper and brass accents,etched mirrors and large marble tables on which fudge and other products are made. To ensure that all stores conform to the RockyMountain Chocolate Factory image, the Company’s design staff provides working drawings and specifications and approves theconstruction plans for each new store. The Company also controls the signage and building materials that may be used in the stores.

In fiscal 2002, the Company launched its revised store design concept intended specifically for high foot traffic regional shoppingcenters. The revised store design concept is modern with crisp and clean site lines and an even stronger emphasis on theCompany’s unique upscale kitchen. Based on results, the Company is requiring that all new Rocky Mountain Chocolate Factorystores incorporate the revised store design concept.

The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores areopen seven days a week. Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays. Storehours in tourist areas may vary depending upon the tourist season.

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Kiosk Concept

In fiscal 2002, the Company opened its first full service retail kiosk concept. The kiosk is a vehicle for retail environments where in-line real estate is unavailable or build-out costs and/or rent factors do not meet the Company’s financial criteria. The kiosk, whichranges from 150 to 250 square feet, incorporates the Company’s trademark cooking area where caramel apples, fudge and otherpopular confections are prepared in front of customers using traditional cooking utensils. The kiosk also includes the Company’s coreproduct and gifting lines in order to provide the customer with a full Rocky Mountain Chocolate Factory experience.

The Company believes the kiosk concept enhances its franchise opportunity by providing more flexibility in support of existingfranchisees’ expansion programs and allows new franchisees that otherwise would not qualify for an in-line location an opportunity tojoin the Rocky Mountain Chocolate Factory system. As of March 31, 2007 there were 24 kiosks in operation.

Products and Packaging

The Company typically produces approximately 300 chocolate candies and other confectionery products, using proprietary recipesdeveloped primarily by the Company’s master candy makers. These products include many varieties of clusters, caramels, creams,mints and truffles. The Company continues to engage in a major effort to expand its product line by developing additional exciting andattractive new products. During the Christmas, Easter and Valentine’s Day holiday seasons, the Company may make as many as100 additional items, including many candies offered in packages specially designed for the holidays. A typical Rocky MountainChocolate Factory store offers up to 100 of these candies throughout the year and up to an additional 100 during holiday seasons.Individual stores also offer more than 15 premium fudges and other products prepared in the store. The Company believes that, onaverage, approximately 40% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufacturedat the Company’s factory, 50% by products made in the store using Company recipes and ingredients purchased from the Companyor approved suppliers and the remaining 10% by products, such as ice cream, coffee and other sundries, purchased from approvedsuppliers.

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

Chocolate candies manufactured by the Company are sold at prices ranging from $14.90 to $24.00 per pound, with an average priceof $18.30 per pound. Franchisees set their own retail prices, though the Company does recommend prices for all of its products.

Operating Environment

The Company currently establishes Rocky Mountain Chocolate Factory stores in five primary environments: regional centers, touristareas, outlet centers, street fronts, airports and other entertainment oriented shopping centers. Each of these environments has anumber of attractive features, including high levels of foot traffic.

Outlet Centers

There are approximately 110 factory outlet centers in the United States, and as of February 28, 2007, there were Rocky MountainChocolate Factory stores in approximately 65 of these centers in over 25 states. The Company has established businessrelationships with most of the major outlet center developers in the United States. Although not all factory outlet centers providedesirable locations for the Company’s stores, management believes the Company’s relationships with these developers will provide itwith the opportunity to take advantage of attractive sites in new and existing outlet centers.

Tourist Areas, Street Fronts and Other Entertainment Oriented Shopping Centers

As of February 28, 2007, there were approximately 45 Rocky Mountain Chocolate Factory stores in locations considered to be touristareas, including Fisherman’s Wharf in San Francisco, California and the Riverwalk in San Antonio, Texas. Tourist areas are veryattractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increasethe Company’s visibility and name recognition. The Company believes significant opportunities exist to expand into additional touristareas with high levels of foot traffic.

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Regional Centers

There are approximately 1,400 regional centers in the United States, and as of February 28, 2007, there were Rocky MountainChocolate Factory stores in approximately 100 of these centers, including locations in the Mall of America in Bloomington, Minnesota;and Fort Collins, Colorado. Although often providing favorable levels of foot traffic, regional centers typically involve more expensiverent structures and competing food and beverage concepts. The Company’s new store concept is designed to unlock the potential ofthe regional center environment.

The Company believes there are a number of other environments that have the characteristics necessary for the successful operationof Rocky Mountain Chocolate Factory stores such as airports and sports arenas. Nine franchised Rocky Mountain Chocolate Factorystores exist at airport locations: two at Denver International Airport, one at Charlotte International Airport, one at MinneapolisInternational Airport, one at Phoenix Sky Harbor Airport, one at Salt Lake City International Airport, and three in Canada; one atEdmonton International Airport, one at Toronto Pearson International Airport and one at Vancouver International Airport.

Franchising Program

General

The Company’s franchising philosophy is one of service and commitment to its franchise system, and the Company continuouslyseeks to improve its franchise support services. The Company’s concept has consistently been rated as an outstanding franchiseopportunity by publications and organizations rating such opportunities. In February 2007, Rocky Mountain Chocolate Factory wasrated the number one franchise opportunity in the candy category by Entrepreneur Magazine. As of March 31, 2007, there were 316franchised stores in the Rocky Mountain Chocolate Factory system. See the audited financial statements and the related notesthereto included elsewhere in the report for a discussion of the revenues, profits or losses and total assets related to the franchisingsegment of the Company’s business.

Franchisee Sourcing and Selection

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

In fiscal 1992, the Company entered into a franchise development agreement covering Canada with Immaculate Confections, Ltd. ofVancouver, British Columbia. Pursuant to this agreement, Immaculate Confections purchased the exclusive right to franchise andoperate Rocky Mountain Chocolate Factory stores in Canada. Immaculate Confections, as of March 31, 2007, operated 35 storesunder the agreement.

In fiscal 2000, the Company entered into a franchise development agreement covering the Gulf Cooperation Council States of UnitedArab Emirates, Qatar, Bahrain, Saudi Arabia, Kuwait and Oman with Al Muhairy Group of United Arab Emirates. Pursuant to thisagreement, Al Muhairy Group purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in theGulf Cooperation Council States. Al Muhairy Group, as of March 31, 2007, operated 3 stores under this agreement.

Training and Support

Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a 7-daycomprehensive training program in store operations and management. The Company has established a training center at its Durangoheadquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store.Topics covered in the training course include the Company’s philosophy of store operation and management, customer service,merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnelmanagement. Training is based on standard operating policies and procedures contained in an operations manual provided to allfranchisees, which the franchisee is required to follow by terms of the franchise agreement. Additionally, and importantly, trainees areprovided with a complete orientation to Company operations by working in key factory operational areas and by meeting withmembers of the senior management of the Company.

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

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

Quality Standards and Control

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

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

The Franchise Agreement: Terms and Conditions

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

Under the current form of domestic Rocky Mountain Chocolate Factory franchise agreement, franchisees pay the Company (i) aninitial franchise fee for each store, (ii) royalties based on monthly gross sales, and (iii) a marketing fee based on monthly gross sales.Franchisees are generally granted exclusive territory with respect to the operation of Rocky Mountain Chocolate Factory stores onlyin the immediate vicinity of their stores. Chocolate products not made on the premises by franchisees must be purchased from theCompany or approved suppliers. The franchise agreements require franchisees to comply with the Company’s procedures ofoperation and food quality specifications, to permit inspections and audits by the Company and to remodel stores to conform withstandards in effect. The Company may terminate the franchise agreement upon the failure of the franchisee to comply with theconditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or thecommission by the franchisee of any unlawful or deceptive practice, which in the judgment of the Company is likely to adverselyaffect the Rocky Mountain Chocolate Factory system. The Company’s ability to terminate franchise agreements pursuant to suchprovisions is subject to applicable bankruptcy and state laws and regulations. See “Business — Regulation.”

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

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

Franchise Financing

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

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Company Store Program

As of March 31 2007, there were 5 Company-owned Rocky Mountain Chocolate Factory stores. Company-owned stores provide atraining ground for Company-owned store personnel and district managers and a controllable testing ground for new products andpromotions, operating and training methods and merchandising techniques, which may then be incorporated into the franchise storeoperations.

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

Manufacturing Operations

General

The Company manufactures its chocolate candies at its factory in Durango, Colorado. All products are produced consistent with theCompany’s philosophy of using only the finest, highest quality ingredients with no artificial preservatives to achieve its marketingmotto of “the Peak of Perfection in Handmade Chocolates®.”

It has always been the belief of management that the Company should control the manufacturing of its own chocolate products. Bycontrolling manufacturing, the Company can better maintain its high product quality standards, offer unique, proprietary products,manage costs, control production and shipment schedules and potentially pursue new or under-utilized distribution channels. See theaudited financial statements and the related notes thereto included elsewhere in this report for a discussion of the revenues, profits orlosses and total assets related to the manufacturing segment of the Company’s business.

Manufacturing Processes

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

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

Ingredients

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

Trucking Operations

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

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Marketing

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

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

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

Competition

The retailing of confectionery products is highly competitive. The Company and its franchisees compete with numerous businessesthat offer confectionery products. Many of these competitors have greater name recognition and financial, marketing and otherresources than the Company. In addition, there is intense competition among retailers for real estate sites, store personnel andqualified franchisees. Competitive market conditions could adversely affect the Company and its results of operations and its ability toexpand successfully.

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

Trade Name and Trademarks

The trade name “Rocky Mountain Chocolate FactoryÒ,” the phrases, “The Peak of Perfection in Handmade ChocolatesÒ”, “America’sChocolatierÒ”, “The World’s Chocolatierâ” as well as all other trademarks, service marks, symbols, slogans, emblems, logos anddesigns used in the Rocky Mountain Chocolate Factory system, are proprietary rights of the Company. All of the foregoing arebelieved to be of material importance to the Company’s business. The registration for the trademark “Rocky Mountain ChocolateFactory” has been granted in the United States and Canada. Applications have been filed to register the Rocky Mountain ChocolateFactory trademark and/or obtained in certain foreign countries.

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

Employees

At February 28, 2007, the Company employed approximately 200 people. Most employees, with the exception of store, factory andcorporate management, are paid on an hourly basis. The Company also employs some people on a temporary basis during peakperiods of store and factory operations. The Company seeks to assure that participatory management processes, mutual respect andprofessionalism and high performance expectations for the employee exist throughout the organization.

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

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Executive Officers

The executive officers of the Company and their ages at April 28, 2007 are as follows: Name Age PositionFranklin E. Crail 65 Chairman of the Board, President and DirectorBryan J. Merryman 46 Chief Operating Officer, Chief Financial Officer, Treasurer and DirectorGregory L. Pope 40 Sr. Vice President - Franchise Development and OperationsEdward L. Dudley 43 Sr. Vice President - Sales and MarketingWilliam K. Jobson 51 Chief Information OfficerJay B. Haws 57 Vice President - Creative ServicesVirginia M. Perez 69 Corporate Secretary

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

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

Mr. Pope became Sr. Vice President of Franchise Development and Operations in May 2004. Since joining the Company inOctober 1990, he has served in various positions including store manager, new store opener and franchise field consultant. InMarch 1996 he became Director of Franchise Development and Support. In June 2001 he became Vice President of FranchiseDevelopment, a position he held until he was promoted to his present position.

Mr. Dudley joined the Company in January 1997 to spearhead the Company’s newly formed Product Sales Development function asVice President — Sales and Marketing, with the goal of increasing the Company’s factory and retail sales. He was promoted to SeniorVice President in June 2001. During his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served in a number of seniormarketing and sales management capacities, including most recently that of Director, Distribution Services from March 1996 toJanuary 1997.

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

Mr. Haws joined the Company in August 1991 as Vice President of Creative Services. Since 1981, Mr. Haws had been closelyassociated with the Company both as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he operated twoRocky Mountain Chocolate Factory franchises located in San Francisco, California. From 1983 to 1989 he served as Vice Presidentof Marketing for Image Group, Inc., a marketing communications firm based in Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky Mountain Chocolate Factory franchises located in Sacramento, and Walnut Creek California. From 1973 to1983 he was principal of Jay Haws and Associates, an advertising and graphic design agency.

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

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Seasonal Factors

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

Regulation

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

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

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

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

Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by variousgovernmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions,including the closing of all or a portion of the Company’s facilities for an indeterminate period of time. The Company’s product labelingis subject to and complies with the Nutrition Labeling and Education Act of 1990 and the Food Allergen Labeling and ConsumerProtection Act of 2004.

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

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

The Internet address of the Company’s website is www.rmcf.com.

The Company makes available free of charge, through the Company’s Internet website, our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or15 (d) of the Exchange act, as soon as reasonably practicable after we file such material with, or furnish it to, the Securities andExchange Commission (the “SEC”).

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Item 1A. Risk Factors

Ingredients Subject to the Price Fluctuations

Several of the principal ingredients used in our products, including chocolate and nuts, are subject to significant price fluctuations.Although cocoa beans, the primary raw material used in the production of chocolate, are grown commercially in Africa, Brazil andseveral other countries around the world, cocoa beans are traded in the commodities market, and their supply and price are thereforesubject to volatility. We believe our principal chocolate supplier purchases most of its beans at negotiated prices from African growers,often at a premium to commodity prices. Although the price of chocolate has been relatively stable in recent years, the supply andprice of cocoa beans, and in turn of chocolate, are affected by many factors, including monetary fluctuations and economic, politicaland weather conditions in countries in which cocoa beans are grown. We purchase most of our nut meats from domestic supplierswho procure their products from growers around the world. The price and supply of nuts are also affected by many factors, includingweather conditions in the various regions in which the nuts we use are grown. Although we often enter into purchase contracts forthese products, significant or prolonged increases in the prices of chocolate or of one or more types of nuts, or the unavailability ofadequate supplies of chocolate or nuts of the quality sought by us, could have a material adverse effect on us and our results ofoperations.

Suitable Sites for Franchised Stores at Reasonable Occupancy Costs

Our expansion plans are critically dependent on our ability to obtain suitable sites at reasonable occupancy costs for our franchisedstores and kiosks in the regional center environment. There is no assurance that we will be able to obtain suitable locations for ourfranchised stores and kiosks in this environment at a cost that will allow such stores to be economically viable.

Growth Dependent Upon Attracting and Retaining Qualified Franchisees

Our continued growth and success is dependent in part upon our ability to attract, retain and contract with qualified franchisees andthe ability of those franchisees to operate their stores successfully and to promote and develop the Rocky Mountain ChocolateFactory store concept and our reputation for an enjoyable in-store experience and product quality. Although we have establishedcriteria to evaluate prospective franchisees and have been successful in attracting franchisees, there can be no assurance thatfranchisees will be able to operate successfully Rocky Mountain Chocolate Factory stores in their franchise areas in a mannerconsistent with our concepts and standards.

Federal, State and Local Regulation

We are subject to regulation by the Federal Trade Commission and must comply with certain state laws governing the offer, sale andtermination of franchises and the refusal to renew franchises. Many state laws also regulate substantive aspects of the franchisor-franchisee relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference withthe right of free association among franchisees and regulating discrimination among franchisees in charges, royalties or fees.Franchise laws continue to develop and change, and changes in such laws could impose additional costs and burdens onfranchisors. Our failure to obtain approvals to sell franchises and the adoption of new franchise laws, or changes in existing laws,could have a material adverse effect on us and our results of operations.

Each of our Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building andfire agencies in the state or municipality where located. Difficulties or failures in obtaining required licenses or approvals from suchagencies could delay or prevent the opening of a new store. We and our franchisees are also subject to laws governing ourrelationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenshiprequirements. Because a significant number of our employees are paid at rates related to the federal minimum wage, increases in theminimum wage would increase our labor costs. The failure to obtain required licenses or approvals, or an increase in the minimumwage rate, employee benefits costs (including costs associated with mandated health insurance coverage) or other costs associatedwith employees, could have a material adverse effect on us and our results of operations.

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Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by variousgovernmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions,including the closing of all or a portion of our facilities for an indeterminate period of time, and could have a material adverse effect onus and our results of operations.

Competition

The retailing of confectionery products is highly competitive. We and our franchisees compete with numerous businesses that offerconfectionery products. Many of these competitors have greater name recognition and financial, marketing and other resources thanwe do. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees.Competitive market conditions could have a material adverse effect on us and our results of operations and our ability to expandsuccessfully.

Consumer Tastes and Trends

The sale of our products is affected by changes in consumer tastes and eating habits, including views regarding consumption ofchocolate. Numerous other factors that we cannot control, such as economic conditions, demographic trends, traffic patterns andweather conditions, influence the sale of our products. Changes in any of these factors could have a material adverse effect on usand our results of operations.

Company Manufactured Products

We believe that approximately 40% of franchised stores’ revenues are generated by sales of products manufactured by andpurchased from us, 50% by sales of products made in the stores with ingredients purchased from us or approved suppliers and 10%by sales of products purchased from approved suppliers for resale in the stores. Franchisees’ sales of products manufactured by usgenerate higher revenues to us than sales of store-made or other products. A significant decrease in the amount of productsfranchisees purchase from us, therefore, could adversely affect our total revenues and results of operations. Such a decrease couldresult from franchisees’ decisions to sell more store-made products or products purchased from third party suppliers.

Inflation – Costs of Ingredients and Labor

Inflationary factors such as increases in the costs of ingredients, energy and labor directly affect our operations. Most of our leasesprovide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject toinflation. Additionally, our future lease costs for new facilities may reflect potentially escalating costs of real estate and construction.There is no assurance that we will be able to pass on our increased costs to our customers.

Seasonality of Sales

Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during the Christmas and summervacation seasons than at other times of the year, which causes fluctuations in our quarterly results of operations. In addition,quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale of franchises.Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter arenot necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations”

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company’s manufacturing operations and corporate headquarters are located at its 53,000 square foot manufacturing facility,which it owns, in Durango, Colorado. During fiscal 2007, the Company’s factory produced approximately 2.73 million pounds ofchocolate candies, an increase of 11% from the approximately 2.46 million pounds produced in fiscal 2006. The factory has thecapacity to produce approximately 3.5 million pounds per year. In January 1998, the Company acquired a two-acre parcel adjacent toits factory to ensure the availability of adequate space to expand the factory as volume demands.

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As of March 31, 2007, all of the 5 Company-owned stores were occupied pursuant to non-cancelable leases of five to ten yearshaving varying expiration dates from August 2008 to January 2011, some of which contain optional five-year renewal rights. TheCompany does not deem any individual store lease to be significant in relation to its overall operations.

The Company acts as primary lessee of some franchised store premises, which it then subleases to franchisees, but the majority ofexisting locations are leased by the franchisee directly. Current Company policy is not to act as primary lessee on any furtherfranchised locations. At March 31, 2007, the Company was the primary lessee at 3 of its 316 franchised stores. The subleases forsuch stores are on the same terms as the Company’s leases of the premises. For information as to the amount of the Company’srental obligations under leases on both Company-owned and franchised stores, see Note 5 of Notes to financial statements.

ITEM 3. LEGAL PROCEEDINGS

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

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

None

Part II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company’s Common Stock trades on the National Global Market which is part of The Nasdaq Stock Market under the tradingsymbol “RMCF”. On May 18, 2005 the Board of Directors approved a four-for-three stock split payable on June 13, 2005 toshareholders of record as of May 31, 2005. On February 15, 2005 the Board of Directors declared a 5% stock dividend payable onMarch 10, 2005 to shareholders of record as of February 28, 2005. On May 4, 2004 the Board of Directors declared a 10 percentstock dividend payable on May 27, 2004 to shareholders of record as of May 13, 2004. On February 15, 2007, the Board of Directorsdeclared a fourth quarter cash dividend of $0.09 cents per common share outstanding. The cash dividend was paid March 16, 2007to shareholders of record as of March 2, 2007.

The Company declared these stock dividends and these stock splits because the Company felt that its Common Stock lackedsufficient shares and related liquidity to satisfy an increasing number of investors interested in purchasing the Company’s CommonStock. All of the following items in this Item 5. have been adjusted, where necessary, for the effects of the dividend and splits.

Between March 1, 2007 and April 9, 2007 the Company repurchased 42,200 shares at an average price of $13.77 per share.Between May 1, 2006 and February 28, 2007 the Company repurchased 241,087 shares at an average price of $13.58 per share.Between March 24, 2006 and April 28, 2006 the Company repurchased 70,713 shares at an average price of $15.65 per share.Between October 7, 2005 and February 3, 2006 the Company repurchased 176,599 Company shares at an average price of $15.36per share. Between April 18 and April 20, 2005, the Company repurchased 17,647 Company shares at an average price of $13.94per share. Between March 11, 2004 and June 14, 2004 the Company repurchased 125,216 Company shares at an average price of$6.74 per share.

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

The table below sets forth high and low price information for the Common Stock for each quarter of fiscal years 2007 and 2006, anddividend information. Dividends Fiscal Year Ended February 28, 2007 HIGH LOW declared Fourth Quarter 15.49 13.28 .0900 Third Quarter 14.97 12.45 .0900 Second Quarter 14.50 11.67 .0800 First Quarter 16.00 12.75 .0800

In addition to the above, the Company issued 250 registered shares on June 22, 2006 to franchisees in recognition of excellencethrough its Franchise of the Year program.

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Dividends Fiscal Year Ended February 28, 2006 HIGH LOW declared Fourth Quarter $ 17.76 $ 13.40 .0800 Third Quarter $ 18.56 $ 13.76 .0700 Second Quarter $ 25.70 $ 16.50 .0675 First Quarter $ 18.75 $ 12.89 .0675

On April 30, 2007 the closing price for the Common Stock was $13.49.

Holders

On April 30, 2007 there were approximately 400 record holders of the Company’s Common Stock. The Company believes that thereare more than 800 beneficial owners of its Common Stock.

Repurchases

Issuer Purchases of Equity Securities (c) Total Number of Shares Purchased as (d) Approximate Dollar (a) Total Number Part of Publicly Value of Shares that May of Shares (b) Average Price Announced Plans or Yet Be Purchased Under the

Period Purchased Paid per Share Programs (1) Plans or Programs (2)

December 2006 — — — $ 1,492,610 January 2007 32,800 13.71 32,800 1,043,039 February 2007 9,888 13.81 9,888 906,473

Total 42,688 $ 13.73 42,688 $ 906,473

(1) During the fourth quarter of Fiscal 2007 ending February 28, 2007, the Company purchased 42,688 shares in the open market.

(2) On May 4, 2006 and May 25, 2006 the Company announced plans to repurchase up to $2,000,000 of the Company’s commonstock in the open market or in private transactions, whenever deemed appropriate by management. The plans were only toexpire once the designated amounts were reached. The May 4, 2006 plan was completed in July 2006. The Company plans tocontinue the May 25, 2006 plan until it has been fulfilled.

The following table provides information with respect to the Company’s equity compensation plans as of February 28, 2007.

Equity Compensation Plan Information Number of securities to be issued upon exercise Weighted average Number of of outstanding exercise price of securities remaining options, warrants outstanding options, available for future

Plan category and rights warrants and rights issuance

Equity compensation plans approved by security holders 419,087 $ 10.29 97,660 Equity compensation plans not approved by security

holders -0- -0- -0- Total 419,087 $ 10.29 97,660

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Comparison of Return on Equity

The following graph reflects the total return, which assumes reinvestment of dividends, of a $100 investment in the Company’sCommon Stock, in the Nasdaq U.S. Index, in the Russell 2000 Index and in a Peer Group Index of companies in the confectioneryindustry, on February 28, 2002.

Base Period Return Return Return Return Return Company/Index Name 2/2002 2/2003 2/2004 2/2005 2/2006 2/2007

Rocky Mountain Chocolate Factory, Inc. 100.00 68.48 147.89 370.30 377.47 343.88 Nasdaq Index — US 100.00 77.98 117.44 119.24 133.56 141.45 Russell 2000 Index 100.00 77.90 128.08 140.28 163.55 179.70 Peer Group(l) 100.00 93.03 109.61 140.87 131.59 138.15

(1) Comprised of the following companies: The Hershey Company, Imperial Sugar Company, Monterey Gourmet Foods, Inc.,Paradise, Inc., Tootsie Roll Industries, Inc., Valhi, Inc. and Wrigley (Wm.), Jr. Company.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for the fiscal years ended February 28 or 29, 2003 through 2007, are derived from theFinancial Statements of the Company, which have been audited by Ehrhardt Keefe Steiner & Hottman PC or Grant Thornton LLP,independent registered public accounting firms. The selected financial data should be read in conjunction with the FinancialStatements and related Notes thereto included elsewhere in this Report and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

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(Amounts in thousands, except per share data) YEARS ENDED FEBRUARY 28 2007 2006 2005 2004 2003Selected Statement of Operations Data

Total revenues $31,573 $28,074 $24,524 $21,133 $19,461 Operating income 7,561 6,459 5,339 3,779 1,496 Net income 4,745 $ 4,065 $ 3,317 $ 2,319 $ 852

Basic Earnings per Common Share $ .77 $ .65 $ .55 $ .40 $ .15 Diluted Earnings per Common Share $ .75 $ .61 $ .51 $ .37 $ .14

Weighted average common sharesoutstanding 6,126 6,268 6,007 5,854 5,764

Weighted average common sharesoutstanding, assuming dilution 6,342 6,676 6,481 6,304 6,249

Selected Balance Sheet Data

Working capital $ 7,503 $ 7,533 $ 8,008 $ 6,394 $ 4,765 Total assets 18,456 19,057 19,248 17,967 16,084 Long-term debt — — 1,539 1,986 3,073 Stockholders’ equity 14,515 15,486 13,894 11,590 9,891

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

A Note About Forward Looking Statements

The following discussion and analysis of the financial condition and results of operations of the Company should be read inconjunction with the audited financial statements and related Notes of the Company included elsewhere in this report. ThisManagement’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report onForm 10-K contain forward-looking statements that involve risks and uncertainties. The nature of the Company’s operations and theenvironment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks anduncertainties. The statements, other than statements of historical fact, included in this report are forward-looking statements. Many ofthe forward-looking statements contained in this document may be identified by the use of forward-looking words such as “will,”“intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate” and “potential,” or similar expressions. Factors which could causeresults to differ include, but are not limited to: changes in the confectionery business environment, seasonality, consumer interest inthe Company’s products, general economic conditions, consumer trends, costs and availability of raw materials, competition and theeffect of government regulation. Government regulation which the Company and its franchisees either are or may be subject to andwhich could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal lawsregarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution offood products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause the Company’s actual resultsto differ from the forward-looking statements contained herein, please see the “Risk Factors” contained in this document at 1A. Theseforward-looking statements apply only as of the date of this report. As such they should not be unduly relied upon for more currentcircumstances. Except as required by law, the Company is not obligated to release publicly any revisions to these forward-lookingstatements that might reflect events or circumstances occurring after the date of this report or those that might reflect the occurrenceof unanticipated events.

The Company is a product-based international franchisor. The Company’s revenues and profitability are derived principally from itsfranchised system of retail stores that feature chocolate and other confectionery products. The Company also sells its candy inselected locations outside its system of retail stores to build brand awareness. The Company operates five retail units as a laboratoryto test marketing, design and operational initiatives.

The Company is subject to seasonal fluctuations in sales because of the location of its franchisees, which have traditionally beenlocated in resort or tourist locations. As the Company expands its geographical diversity to include regional centers, it has seen some

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moderation to its seasonal sales mix. Seasonal fluctuation in sales causes fluctuations in quarterly results of operations. Historically,the strongest sales of the Company’s products have occurred during the Christmas holiday and summer vacation seasons.Additionally, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales offranchises. Because of the seasonality of the Company’s business and the impact of new store openings and sales of franchises,results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.

The most important factors in continued growth in the Company’s earnings are ongoing unit growth, increased same store sales andincreased same store pounds purchased from the factory. Historically, unit growth has more than offset decreases in same storesales and same store pounds purchased.

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

Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory salesdepend on many factors, including new store openings and the receptivity of the Company’s franchise system to the Company’sproduct introductions and promotional programs. Same store pounds purchased from the factory by franchised stores wereapproximately the same as the prior year period in the first quarter, and declined 7.3% in the second quarter, 1.5% in the thirdquarter, 6.1% in the fourth quarter and 2.6% overall in Fiscal 2007.

Critical Accounting Policies and Estimates

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

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

Accounts and Notes Receivable — In the normal course of business, the Company extends credit to customers, primarilyfranchisees, that satisfy pre-defined credit criteria. The Company believes that it has limited concentration of credit risk primarilybecause its receivables are often secured by the assets of the franchisees to which the Company ordinarily extends credit, including,but not limited to, their franchise rights and inventories. An allowance for doubtful accounts is determined through analysis of theaging of accounts receivable, assessments of collectibility based on historical trends, and an evaluation of the impact of current andprojected economic conditions. The process by which the Company performs its analysis is conducted on a customer by customer,or franchisee by franchisee, basis and takes into account, among other relevant factors, sales history, outstanding receivables,customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. TheCompany monitors the collectibility of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customersand evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard tothe collectibility of accounts receivable are reasonably likely to change in the future.

The Company recorded expense of approximately $32,000 per year for potential uncollectible accounts over the three-year periodended February 28, 2007. Write-offs of uncollectible accounts net of recoveries averaged approximately $9,400 over the same period.The provision for uncollectible accounts is recognized as general and administrative expense in the Statements of Income. Over thepast three years, the allowances for doubtful notes and accounts have ranged from 2.6% to 4.4% of gross receivables.

Revenue Recognition — The Company recognizes revenue on sales of products to franchisees and other customers at the time ofdelivery. Through fiscal 2006, franchise fee revenue was recognized upon completion of all significant initial services provided to thefranchisee and

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upon satisfaction of all material conditions of the franchise agreement. The initial $5,000 portion of the fee was recognized uponsigning of the franchise agreement. The balance of the fee was recognized upon the franchisee’s commitment to a property lease.Beginning in fiscal 2007, franchise fee revenue is recognized upon the opening of the store. The Company also recognizes a royaltyfee of approximately five percent (5%) and a marketing and promotion fee of one percent (1%) of the Rocky Mountain ChocolateFactory franchised stores’ gross retail sales. Sales of products at retail stores are recognized at the time of sale.

Inventories — The Company’s inventories are stated at the lower of cost or market value and are reduced by an allowance for slow-moving, excess, discontinued and shelf-life expired inventories. Our estimate for such allowance is based on our review ofinventories on hand compared to estimated future usage and demand for our products. Such review encompasses not onlypotentially perishable inventories but also specialty packaging, much of it specific to certain holiday seasons. If actual future usageand demand for our products are less favorable than those projected by our review, inventory write-downs may be required. Weclosely monitor our inventory, both perishable and non-perishable, and related shelf and product lives. Historically we haveexperienced low levels of obsolete inventory or returns of products that have exceeded their shelf life. Over the three-year periodended February 28, 2007, the Company recorded expense averaging approximately $68,000 per year for potential inventory losses,or approximately 0.5% of total cost of sales for that period.

Goodwill – Goodwill consists of the excess of purchase price over the fair market value of acquired assets and liabilities. EffectiveMarch 1, 2002, under SFAS 142 all goodwill with indefinite lives is no longer subject to amortization. SFAS 142 requires that animpairment test be conducted annually or in the event of an impairment indicator. Our test conducted in fiscal 2007 showed noimpairment of our goodwill.

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

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

Results of Operations

Fiscal 2007 Compared To Fiscal 2006

Results Summary

Basic earnings per share increased 18.5% from $.65 in fiscal 2006 to $.77 in fiscal 2007. Revenues increased 12.5% from fiscal 2006to fiscal 2007. Operating income increased 17.1% from $6.5 million in fiscal 2006 to $7.6 million in fiscal 2007. Net income increased16.7% from $4.1 million in fiscal 2006 to $4.7 million in fiscal 2007. The increase in revenue, earnings per share, operating income,and net income in fiscal 2007 compared to fiscal 2006 was due primarily to increased number of franchised stores in operation,increased sales to speciality markets and the corresponding increases in revenue.

Revenues ($’s in thousands) 2007 2006 Change % ChangeFactory sales $22,709.0 $19,297.2 $3,411.8 17.7%Retail sales 2,626.7 3,046.0 (419.3) (13.8%)Royalty and marketing fees 5,603.8 5,047.9 555.9 11.0%Franchise fees 633.8 682.5 (48.7) (7.1%)Total $31,573.3 $28,073.6 $3,499.7 12.5%

Factory Sales

The increase in factory sales was due to the growth in the average number of franchised stores in operation to 302 in fiscal 2007 from285 in fiscal 2006 and an increase of 53.3% in sales to specialty markets. Partially offsetting this increase was a 2.6% decrease insame store pounds

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purchased from the factory by franchised stores when compared to the same period in the prior year. The Company believes that thissame store pounds decrease reflects an unseasonably hot summer in many regions of the country. Historically, retail sales ofchocolate products suffer when weather conditions are unusually hot in particular markets.

Retail Sales

The decrease in retail sales resulted primarily from a decrease in the average number of Company-owned stores in operation from 9in fiscal 2006 to 7 in fiscal 2007. Same store sales at Company-owned stores increased 6.9% from fiscal 2006 to fiscal 2007.

Royalties, Marketing Fees and Franchise Fees

The increase in royalties and marketing fees resulted from growth in the average number of domestic units in operation from 251 infiscal 2006 to 266 in fiscal 2007 plus an increase in same store sales of 0.3%. Franchise fee revenues decreased due to a decreasein the number of franchises sold during the same period last year.

Costs and Expenses %($’s in thousands) 2007 2006 Change ChangeCost of sales — factory adjusted $14,942.9 $12,732.3 $2,210.6 17.4%Cost of sales — retail 1,045.7 1,224.3 (178.6) (14.6%)Franchise costs 1,570.0 1,466.3 103.7 7.1%Sales and marketing 1,538.5 1,321.0 217.5 16.5%General and administrative 2,538.7 2,239.1 299.6 13.4%Retail operating 1,502.1 1,755.7 (253.6) (14.4%)

Total $23,137.9 $20,738.7 $2,399.2 11.6%

Adjusted Gross margin %($’s in thousands) 2007 2006 Change ChangeFactory adjusted gross margin $7,766.1 $6,564.9 $1,201.2 18.3%Retail 1,581.0 1,821.7 (240.7) (13.2%)

Total $9,347.1 $8,386.6 $ 960.5 11.5% (Percent) Factory adjusted gross margin 34.2% 34.0% 0.2 0.6%Retail 60.2% 59.8% 0.4 0.7%

Total 36.9% 37.5% (0.6) (1.6%)

Adjusted gross margin is equal to gross margin minus depreciation and amortization expense. We believe adjusted gross margin ishelpful in understanding our past performance as a supplement to gross margin and other performance measures calculated inconformity with accounting principles generally accepted in the United States (“GAAP”). We believe that adjusted gross margin isuseful to investors because it provides a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin rather than gross margin to make incremental pricingdecisions. Adjusted gross margin has limitations as an analytical tool because it excludes the impact of depreciation and amortizationexpense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capitalassets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due tothese limitations, we use adjusted gross margin as a measure of performance only in conjunction with GAAP measures ofperformance such as gross margin. The following table provides a reconciliation of adjusted gross margin to gross margin, the mostcomparable performance measure under GAAP: ($’s in thousands) 2007 2006Factory adjusted gross margin $7,766.1 $6,564.9 Less: Depreciated and Amortization 412.6 381.1 Factory GAAP gross margin $7,353.5 $6,183.8

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Cost of Sales

Factory margins were consistent from fiscal 2006 to fiscal 2007. Higher commodity and labor costs were offset by increasedproduction volume, which lowered fixed costs per unit of production. Increases in Company-owned store margin is due to changes inmix of product sold.

Franchise Costs

The increase in franchise costs is due to increased professional fees and incentive compensation costs. As a percentage of totalroyalty and marketing fees and franchise fee revenue, franchise costs decreased to 25.2% in fiscal 2007 from 25.6% in fiscal 2006.This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of higher franchise revenues relative tocosts.

Sales and Marketing

The increase in sales and marketing was due primarily to increased incentive compensation costs and expenses related to a 53.3%increase in sales to specialty markets.

General and Administrative

The increase in general and administrative costs is due primarily to increased incentive compensation costs related to Companyperformance. As a percentage of total revenues, general and administrative expenses were unchanged at 8.0% in fiscal 2007compared to 8.0% in fiscal 2006.

Retail Operating Expenses

The decrease in retail operating expenses was due primarily to a decrease in the average number of Company-owned stores duringfiscal 2007 versus fiscal 2006. Retail operating expenses, as a percentage of retail sales, decreased from 57.6% in fiscal 2006 to57.2% in fiscal 2007 due to a larger decrease in costs relative to the increase in revenues.

Depreciation and Amortization

Depreciation and amortization of $874,000 in fiscal 2007 was essentially unchanged from the $876,000 incurred in fiscal 2006.

Other, Net

Other, net of $67,000 realized in fiscal 2007 represents a decrease of $9,000 from the $76,000 realized in fiscal 2006, due primarilyto lower interest income on lower average outstanding balances of notes receivable and invested cash. Notes receivable balancesare declining due to payments and the Company has been using its excess cash to repurchase stock. The Company also incurredless interest expense on lower average balances of long-term debt. The Company paid its long-term debt in full during the firstquarter of fiscal 2006.

Income Tax Expense

The Company’s effective income tax rate in fiscal 2007 was 37.8%, which is the same as the effective rate in fiscal 2006.

Fiscal 2006 Compared To Fiscal 2005

Results Summary

Basic earnings per share increased 18.2% from $.55 in fiscal 2005 to $.65 in fiscal 2006. Revenues increased 14.5% from fiscal 2005to fiscal 2006. Operating income increased 21.0% from $5.3 million in fiscal 2005 to $6.5 million in fiscal 2006. Net income increased22.6% from $3.3 million in fiscal 2005 to $4.1 million in fiscal 2006. The increase in revenue, earnings per share, operating income,and net income in fiscal 2006 compared to fiscal 2005 was due primarily to increased number of franchised stores in operation,increased same store sales at franchised units and increased sales to customers outside the Company’s system of franchised retailstores.

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Revenues ($’s in thousands) 2006 2005 Change % ChangeFactory sales $19,297.2 $16,654.4 $2,642.8 15.9%Retail sales 3,046.0 2,726.4 319.6 11.7%Royalty and marketing fees 5,047.9 4,577.5 470.4 10.3%Franchise fees 682.5 565.3 117.2 20.7%Total $28,073.6 $24,523.6 $3,550.0 15.5%

Factory Sales

The increase in factory sales was due to an increase in the average number of franchised stores in operation to 285 in fiscal 2006from 263 in fiscal 2005 and an increase in factory sales to customers outside the Company’s system of franchised retail stores of46.3% in fiscal 2006 versus a 17% increase in fiscal 2005. Same store pounds purchased by franchised stores in fiscal 2006 wereapproximately the same as the prior fiscal year.

Retail Sales

The increase in retail sales resulted primarily from an increase in the average number Company-owned stores in operation from 8 infiscal 2005 to 9 in fiscal 2006 plus an increase in same-store sales at Company-owned stores of 0.3%.

Royalties, Marketing Fees and Franchise Fees

This increase in royalties and marketing fees resulted from growth in the average number of domestic units in operation from 233 infiscal 2006 to 251 in fiscal 2006 plus an increase in same store sales of 2.5%. Franchise fee revenues increased due to an increasein the franchise fee of approximately 25% partially offset by a decrease in the number of franchises sold during the same period lastyear.

Costs and Expenses %($’s in thousands) 2006 2005 Change ChangeCost of sales — factory $12,732.3 $10,704.8 $2,027.5 18.9%Cost of sales — retail 1,224.3 1,036.4 187.9 18.1%Franchise costs 1,466.3 1,411.9 54.4 3.9%Sales and marketing 1,321.0 1,294.7 26.3 2.0%General and administrative 2,239.1 2,497.7 (258.6) (10.4%)Retail operating 1,755.7 1,453.8 301.9 20.8%

Total $20,738.7 $18,399.3 $2,339.4 12.7%

Adjusted Gross margin %($’s in thousands) 2006 2005 Change ChangeFactory adjusted gross margin $6,564.9 $5,949.6 $615.3 10.3%Retail 1,821.7 1,690.0 131.7 7.8%

Total $8,386.6 $7,639.6 $747.0 9.8% (Percent) Factory adjusted gross margin 34.0% 35.7% (1.7%) (4.8%)Retail 59.8% 62.0% (2.2%) (3.5%)

Total 37.5% 39.4% (1.9%) (4.8%)

Adjusted gross margin is equal to gross margin minus depreciation and amortization expense. We believe adjusted gross margin ishelpful in understanding our past performance as a supplement to gross margin and other performance measures calculated inconformity with accounting principles generally accepted in the United States (“GAAP”). We believe that adjusted gross margin isuseful to investors because it provides a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin rather than gross margin to make incremental pricingdecisions. Adjusted gross margin has limitations as an analytical tool because it excludes the impact of depreciation and amortizationexpense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capitalassets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income.

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Due to these limitations, we use adjusted gross margin as a measure of performance only in conjunction with GAAP measures ofperformance such as gross margin. The following table provides a reconciliation of adjusted gross margin to gross margin, the mostcomparable performance measure under GAAP: ($’s in thousands) 2006 2005Factory adjusted gross margin $6,564.9 $5,949.6 Less: Depreciation and amortization 381.1 359.7 Factory GAAP gross margin $6,183.8 $5,589.9

Cost of Sales

Factory margins declined 170 basis points from fiscal 2005 to fiscal 2006 due to a shift in product mix sold, increased fuel andcommodity prices, and slightly lower factory efficiencies. Reduction in Company-owned store margin is due to changes in mix ofproduct sold and increased promotional cost.

Franchise Costs

The increase in franchise costs is due to a planned increase in personnel costs and related support expenditures. As a percentage oftotal royalty and marketing fees and franchise fee revenue, franchise costs decreased to 25.6% in fiscal 2006 from 27.5% in fiscal2005. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of higher franchise revenuesrelative to costs.

Sales & Marketing

The increase in sales and marketing was due primarily to increased promotional costs.

General and Administrative

The decrease in general and administrative costs is due primarily to decreased incentive compensation costs. An increase inprofessional fees partially offset this decrease. As a percentage of total revenues, general and administrative expenses decreased to8.0% in fiscal 2006 compared to 10.2% in fiscal 2005. This decrease resulted from a higher increase in total revenues relative to thedecrease in general and administrative costs.

Retail Operating Expenses

This increase in retail operating expenses was due primarily to an increase in the average number of Company-owned stores duringfiscal 2006 versus fiscal 2005. Retail operating expenses, as a percentage of retail sales, increased from 53.3% in fiscal 2005 to57.6% in fiscal 2006 due to a larger increase in costs relative to the increase in revenues.

Depreciation and Amortization

Depreciation and amortization of $876,000 in fiscal 2006 increased 11.6% from the $785,000 incurred in fiscal 2005 due primarily toincreased capital expenditures related to the remodel of the Company’s manufacturing and administrative facilities.

Other, Net

Other expense, net of $76,000 income realized in fiscal 2006 represents an increase of $83,000 from the $7,000 incurred in fiscal2005, due primarily to lower interest expense on lower average outstanding balances of long-term debt plus interest income oninvested cash and lower average outstanding amounts of notes receivable.

Income Tax Expense

The Company’s effective income tax rate in fiscal 2006 was 37.8%, which is the same as the effective rate in fiscal 2005.

Liquidity and Capital Resources

As of February 28, 2007, working capital was $7.5 million compared with $7.5 million as of February 28, 2006. The lack of change inworking capital was due primarily to operating results less the payment of $2.0 million in cash dividends and the repurchase andretirement of $4.4 million of the Company’s common stock.

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Cash and cash equivalent balances decreased from $3.5 million as of February 28, 2006 to $2.8 million as of February 28, 2007 as aresult of cash flows generated by operating and investing activities being less than cash flows used in financing activities. TheCompany’s current ratio was 3.38 to 1 at February 28, 2007 in comparison with 3.39 to 1 at February 28, 2006. The Companymonitors current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing andinvesting requirements.

The Company has a $5.0 million credit line, of which $5.0 million was available (subject to certain borrowing base limitations) as ofFebruary 28, 2007, secured by substantially all of the Company’s assets except retail store assets. The credit line is subject torenewal in July, 2007.

The table below presents significant contractual obligations of the Company at February 28, 2007. (Amounts in thousands) Less than After Contractual Obligations 1 year 1-3 Years 4-5 years 5 years TotalLine of credit — — — — — Notes payable — — — — — Operating leases 415 490 123 — 1,028 Other long-term obligations 101 157 146 462 866 Total Contractual cash obligations 516 647 269 462 1,894

For fiscal 2008, the Company anticipates making capital expenditures of approximately $750,000, which will be used to maintain andimprove existing factory and administrative infrastructure and update certain Company-owned stores. The Company believes thatcash flow from operations will be sufficient to fund capital expenditures and working capital requirements for fiscal 2008. If necessary,the Company has available bank lines of credit to help meet these requirements.

Impact of Inflation

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

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

Seasonality

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

New Accounting Pronouncements

In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFASNo. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in accordance withStatement 109 and requires a more-likely-than-not recognition threshold. A tax position that meets the more-likely-than-notrecognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likelyof being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Subsequentrecognition, derecognition, and measurement is based on management’s best judgment given the facts, circumstances andinformation available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006. Early adoption ispermitted as of the beginning of an enterprise’s fiscal year, provided the enterprise has not yet issued financial statements, including

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financial statements for any interim period, for that fiscal year. Our effective date for adopting FIN No. 48 is as of March 1, 2007, withthe cumulative effect of the change in accounting principle recorded as an adjustment to opening accumulated deficit. Based uponthe Company’s evaluation of the effects of this guidance, we do not believe that it will have a significant impact on the Company’sfinancial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fairvalue under GAAP and expands disclosures about fair value measurement. SFAS 157 also creates consistency and comparability infair value measurements among the many accounting pronouncements that require fair value measurements but does not requireany new fair value measurements. SFAS 157 is effective for fiscal years (including interim periods) beginning after November 15,2007. The Company will adopt SFAS No. 157 in fiscal 2009 and does not expect it to have a significant impact on the Company’sfinancial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. 115. This standard amends SFAS 115, Accounting for Certain Investment in Debt and EquitySecurities, with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securitieselecting the fair value option. This standard allows companies to elect fair value accounting for many financial instruments and otheritems that currently are not required to be accounted as such, allows different applications for electing the option for a single item orgroups of items, and requires disclosures to facilitate comparisons of similar assets and liabilities that are accounted for differently inrelation to the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company will adoptSFAS No. 159 in fiscal 2009 and does not expect it to have a significant impact on the Company’s financial statements.

In December 2006, the FASB issued EITF 00-19-2, “Accounting for Registration Payment Arrangements.” This FASB Staff Position(FSP) addresses an issuer’s accounting for registration payment arrangements. This FSP specifies that the contingent obligation tomake future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separateagreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured inaccordance with FASB Statement No. 5, “Accounting for Contingencies.” The guidance in this FSP amends FASB StatementsNo. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity,” and FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to include scope exceptions for registrationpayment arrangements. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should beaccounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingentobligation to transfer consideration pursuant to the registration payment arrangement. Based upon the Company’s preliminaryevaluation of the effects of this guidance, we do not believe that it will have a significant impact on the Company’s financialstatements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying acurrent year misstatement for the purpose of the materiality assessment. Application of SAB 108 is encouraged in any report for aninterim period of the first fiscal year ending after November 15, 2006. Previously filed interim reports need not be amended. However,comparative information presented in reports for interim periods of the first year subsequent to initial application should be adjustedto reflect the cumulative effect adjustment as of the beginning of the year of initial application. We took the provisions of SAB 108 intoaccount in restating our financial statements as set forth in this Form 10-K. See Note 14 to the Consolidated Financial Statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The Company has a $5.0 million bank line of credit that bears interest at a variable rate. As of February 28, 2007, no amount wasoutstanding under the line of credit. The Company does not believe that it is exposed to any material interest rate risk related to theline of credit.

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm 29 Statements of Income 30 Balance Sheets 31 Statements of Changes in Stockholders’ Equity 32 Statements of Cash Flows 33 Notes to Financial Statements 34

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and StockholdersRocky Mountain Chocolate Factory, Inc.Durango, Colorado

We have audited the accompanying balance sheets of Rocky Mountain Chocolate Factory, Inc. (the “Company”) as of February 28,2007 and 2006, and the related statements of income, changes in stockholders’ equity and cash flows for the years endedFebruary 28, 2007, 2006 and 2005. These financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RockyMountain Chocolate Factory, Inc. as of February 28, 2007 and 2006, and the results of their operations and their cash flows for eachof the years ended February 28, 2007, 2006 and 2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of February 28, 2007, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),and our report dated May 14, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of,internal control over financial reporting.

Ehrhardt Keefe Steiner & Hottman PC

May 14, 2007Denver, Colorado

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.STATEMENTS OF INCOME

FOR THE YEARS ENDED FEBRUARY 28 2007 2006 2005Revenues

Sales $25,335,739 $22,343,209 $19,380,861 Franchise and royalty fees 6,237,594 5,730,403 5,142,758 Total revenues 31,573,333 28,073,612 24,523,619

Costs and Expenses

Cost of sales, exclusive of depreciation and amortizationexpense of $412,546, $381,141 and $359,633 15,988,620 13,956,550 11,741,205

Franchise costs 1,570,026 1,466,322 1,411,901 Sales & marketing 1,538,476 1,320,979 1,294,702 General and administrative 2,538,667 2,239,109 2,497,718 Retail operating 1,502,134 1,755,738 1,453,740 Depreciation and amortization 873,988 875,940 785,083

Total costs and expenses 24,011,911 21,614,638 19,184,349

Operating Income 7,561,422 6,458,974 5,339,270 Other Income (Expense)

Interest expense — (19,652) (99,988)Interest income 67,071 95,360 92,938 Other, net 67,071 75,708 (7,050)

Income Before Income Taxes 7,628,493 6,534,682 5,332,220 Income Tax Expense 2,883,575 2,470,110 2,015,580 Net Income $ 4,744,918 $ 4,064,572 $ 3,316,640 Basic Earnings per Common Share $ .77 $ .65 $ .55 Diluted Earnings per Common Share $ .75 $ .61 $ .51 Weighted Average Common Shares Outstanding 6,125,831 6,268,202 6,006,883 Dilutive Effect of Employee Stock Options 216,524 407,411 474,499 Weighted Average Common Shares Outstanding, Assuming

Dilution 6,342,355 6,675,613 6,481,382

The accompanying notes are an integral part of these statements.

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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.BALANCE SHEETS

AS OF FEBRUARY 28 2007 2006Assets Current Assets

Cash and cash equivalents $ 2,830,175 $ 3,489,750 Accounts receivable, less allowance for doubtful accounts of $187,519 and $46,920 3,756,212 3,296,690 Notes receivable 50,600 116,997 Inventories, less reserve for slow moving inventory of $147,700 and $61,032 3,482,139 2,938,234 Deferred income taxes 272,871 117,715 Other 367,420 481,091 Total current assets 10,759,417 10,440,477

Property and Equipment, Net 5,754,122 6,698,604 Other Assets

Notes receivable, less valuation allowance of $-0- and $52,005 310,453 278,741 Goodwill, net 939,074 1,133,751 Intangible assets, net 349,358 402,469 Other 343,745 103,438 Total other assets 1,942,630 1,918,399

Total assets $18,456,169 $19,057,480

Liabilities and Stockholders’ Equity Current Liabilities

Accounts payable $ 898,794 $ 1,145,410 Accrued salaries and wages 931,614 507,480 Other accrued expenses 585,402 750,733 Dividend payable 551,733 504,150 Deferred income 288,500 — Total current liabilities $ 3,256,043 $ 2,907,773

Deferred Income Taxes 685,613 663,889 Commitments and Contingencies Stockholders’ Equity

Common stock, $.03 par value; 100,000,000 shares authorized; 100,000,000 and6,113,243, 6,281,920 shares issued and outstanding 183,397 188,458

Additional paid-in capital 6,996,728 10,372,530 Retained earnings 7,334,388 4,924,830 Total stockholders’ equity 14,514,513 15,485,818

Total liabilities and stockholders’ equity $18,456,169 $19,057,480


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

FOR THE YEARS ENDED FEBRUARY 28 2007 2006 2005Common Stock

Balance at beginning of year $ 188,458 $ 184,096 $ 179,458 Repurchase and retirement of common stock (9,354) (5,827) (3,756)Issuance of common stock 25 53 18 Exercise of stock options and other 4,268 10,136 8,376 Balance at end of year 183,397 188,458 184,096

Additional Paid-In Capital

Balance at beginning of year 10,372,530 11,051,176 2,631,358 Repurchase and retirement of common stock (4,371,736) (2,952,614) (840,450)Stock dividends declared — — 8,156,857 Costs related to stock splits and dividends — (8,902) (15,638)Issuance of common stock 15,798 37,447 4,939 Exercise of stock options and other 820,206 1,062,593 582,750 Tax benefit from employee stock transactions 159,930 1,182,830 531,360 Balance at end of year 6,996,728 10,372,530 11,051,176

Retained Earnings

Balance at beginning of year 4,924,830 2,658,298 8,779,136 Net income 4,744,918 4,064,572 3,316,640 Stock dividends declared — — (8,156,857)Cash dividends declared (2,078,208) (1,798,040) (1,280,621)Adoption of SAB 108 (257,152) — — Balance at end of year 7,334,388 4,924,830 2,658,298

Total Stockholders’ Equity $14,514,513 $15,485,818 $13,893,570 Common Shares

Balance at beginning of year 6,281,920 6,136,528 5,981,948 Repurchase and retirement of common stock (311,800) (194,246) (125,216)Issuance of common stock 834 1,752 616 Exercise of stock options and other 142,289 337,886 279,180 Balance at end of year 6,113,243 6,281,920 6,136,528


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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED FEBRUARY 28 2007 2006 2005Cash Flows From Operating Activities:

Net income $ 4,744,918 $ 4,064,572 $ 3,316,640 Adjustments to reconcile net income to net cash provided by operating

activities: Depreciation and amortization 873,988 875,940 785,083 Provision for loss on accounts and notes receivable and related

foreclosure costs 70,000 — 25,000 Provision for inventory loss 70,000 45,000 90,000 Loss on sale of assets 101 37,411 44,789 Expense recorded for stock options 201,269 — — Deferred income taxes (133,432) 4,195 135,716 Changes in operating assets and liabilities: Accounts receivable (711,456) (445,921) (453,255)Refundable income taxes — 364,630 (364,630)Inventories (613,905) (461,207) (136,402)Other assets 104,843 (236,640) 89,661 Accounts payable (246,616) 56,934 135,934 Income taxes payable (33,729) (824,860) (121,403)Accrued liabilities 452,255 602,187 23,726 Deferred income 5,000 — — Net cash provided by operating activities 4,783,236 4,082,241 3,570,859

Cash Flows From Investing Activities:

Additions to notes receivable (124,452) — (236,142)Proceeds received on notes receivable 211,143 345,442 172,776 Proceeds (expense) from sale or distribution of assets 434,335 (4,395) 23,834 Decrease in other assets (134,221) 15,748 451 Purchase of property and equipment (201,037) (1,300,314) (1,406,698)Net cash provided by (used in) investing activities 185,768 (943,519) (1,445,779)

Cash Flows From Financing Activities:

Payments on long-term debt — (1,665,084) (1,401,490)Costs of stock split or dividend — (8,902) (15,638)Issuance of common stock 623,206 1,072,729 591,126 Tax benefit of stock option exercise 159,930 1,182,830 531,360 Repurchase and redemption of common stock (4,381,090) (2,958,441) (844,206)Dividends paid (2,030,625) (1,710,980) (1,099,639)Net cash used in financing activities (5,628,579) (4,087,848) (2,238,487)

Net Decrease In Cash And Cash Equivalents (659,575) (949,126) (113,407)

Cash And Cash Equivalents At Beginning Of Year 3,489,750 4,438,876 4,552,283

Cash And Cash Equivalents At End Of Year $ 2,830,175 $ 3,489,750 $ 4,438,876


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

Nature of Operations

Rocky Mountain Chocolate Factory, Inc. is an international franchiser, confectionery manufacturer and retail operator in the UnitedStates, Guam, Canada, and the United Arab Emirates. The Company manufactures an extensive line of premium chocolate candiesand other confectionery products. The Company’s revenues are currently derived from three principal sources: sales to franchiseesand others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees androyalties from franchisees’ sales; and sales at Company-owned stores of chocolates and other confectionery products. The followingtable summarizes the number of Rocky Mountain Chocolate Factory stores at February 28, 2007: Sold, Not Yet Open Open TotalCompany owned stores — 5 5 Franchise stores – Domestic stores 13 255 268 Franchise stores – Domestic kiosks 2 24 26 Franchise stores – International — 38 38 15 322 337

Cash Equivalents

The Company considers all highly liquid instruments purchased with an original maturity of six months or less to be cash equivalents.The Company continually monitors its positions with, and the credit quality of, the financial institutions it invests with. As of thebalance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts inexcess of federally insured limits, approximately $2.7 million at February 28, 2007.

Insurance and Self-Insurance Reserves

The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health carebenefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claimsexperience, demographic factors, severity factors and other assumptions. While the Company believes that its assumptions areappropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from theseassumptions and historical trends.

Accounts and Notes Receivable

At the time that accounts, notes and royalties receivable are originated, the Company considers a reserve for doubtful accounts. Theprovision for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate tocover future losses. The allowance is management’s best estimate of uncollectible amounts and is determined based on historicalperformance that is tracked by the Company on an ongoing basis. The losses ultimately incurred could differ materially in the nearterm from the amounts estimated in determining the allowance. At February 28, 2007, the Company has $361,000 of notes receivableoutstanding. The notes require monthly payments and bear interest at rates ranging from 8.0% to 12.5%. The notes mature throughFebruary 2012 and are secured by the assets financed.

Inventories

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

Property and Equipment and Other Assets

Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based uponthe estimated useful life of the asset, which range from five to thirty-nine years. Leasehold improvements are amortized on thestraight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.

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NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED

The Company reviews its long-lived assets through analysis of estimated fair value, including identifiable intangible assets, wheneverevents or changes indicate the carrying amount of such assets may not be recoverable. The Company’s policy is to review therecoverability of all assets, at a minimum, on an annual basis.

Income Taxes

The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilitiesand their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The Company’stemporary differences are listed in Note 6.

Goodwill

Goodwill arose from two transaction types. The first type was the result of the incorporation of the Company after its inception as apartnership. The goodwill recorded was the excess of the purchase price of the Company over the fair value of its assets. TheCompany has allocated this goodwill equally between its Franchising and Manufacturing operations. The second type was thepurchase of various retail stores, either individually or as a group, for which the purchase price was in excess of the fair value of theassets acquired.

Sales

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

Shipping Fees

Shipping fees charged to customers by the Company’s trucking department are reported as sales. Shipping costs incurred by theCompany for inventory are reported as cost of sales or inventory.

Franchise and Royalty Fees

Franchise fee revenue is recognized upon opening of the franchise store. Also see Note 14 to these financial statements. In additionto the initial franchise fee, the Company receives a royalty fee of approximately five percent (5%) and a marketing and promotion feeof one percent (1%) of the Rocky Mountain Chocolate Factory franchised stores’ gross sales.

Use of Estimates

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

Vulnerability Due to Certain Concentrations

As of February 28, 2007, the Company had notes receivable of approximately $360,000 due from four franchisees. The notes arecollateralized by the underlying store assets. The Company is, therefore, vulnerable to changes in the cash flow from these locations.

Stock-Based Compensation

At February 28, 2007, the Company had stock-based compensation plans for employees and nonemployee directors whichauthorized the granting of stock options.

Prior to March 1, 2006, the Company accounted for the plans under the measurement and recognition provisions of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, permitted under Statementof Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). As a result, employeestock option-based compensation was included as a pro forma disclosure in the Notes to the Company’s Financial Statements forprior year periods.

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Effective March 1, 2006, the Company adopted the recognition provisions of Statement of Financial Accounting Standard No. 123R,“Share-Based Payment” (“SFAS No. 123R”), using the modified-prospective transition method. Under this transition method,compensation cost in 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested,as of March 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and(2) all share-based payments granted subsequent to March 1, 2006, based on the grant date fair value estimated in accordance withthe provisions of SFAS No. 123R. Results for the prior periods have not been restated.

The Company did not issue stock options and recorded $0 related equity-based compensation expense during the year endedFebruary 28, 2007. Compensation costs related to share-based compensation are generally amortized over the vesting period inselling, general and administrative expenses in the statement of operations.

On February 21, 2006, the Company accelerated the vesting of all outstanding stock options and recognized a share-basedcompensation charge related to this acceleration. The Company recognized an additional share-based compensation charge of$131,000 for the year ended February 28, 2007 related to this acceleration due to changes in certain estimates and assumptionsrelated to employee turnover since the acceleration date. Adjustments in future periods may be necessary as actual results coulddiffer from these estimates and assumptions.

Prior to adopting SFAS No. 123R, the Company presented all benefits from tax deductions arising from equity-based compensationas a non-cash transaction in the Statement of Cash Flows. SFAS No. 123R requires that the tax benefits in excess of thecompensation cost recognized for those exercised options be classified as cash provided by financing activities. The excess taxbenefit included in net cash provided by financing activities for the years ended February 28, 2007, 2006 and 2005 was $159,930,$1,182,830 and $531,360, respectively.

The weighted-average fair value of stock options granted during the years ended February 28, 2007 and 2006 was $0 and $3.03 pershare, respectively. As of February 28, 2007, there was $0 (before any related tax benefit) of unrecognized compensation cost relatedto non-vested share-based compensation. 2007 2006 2005Net Income – as reported $4,745 $4,065 $3,317 Stock-based compensation expense included in reported net income, net of

tax — 43 — Deduct stock-based compensation expense determined under fair value

based method, net of tax — (676) (120)Net Income – pro forma 4,745 3,432 3,197 Basic Earnings per Share-as reported .77 .65 .55 Diluted Earnings per Share-as reported .75 .61 .51 Basic Earnings per Share-pro forma .77 .55 .53 Diluted Earnings per Share-pro forma .75 .51 .50

Earnings Per Share

Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding duringeach year. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stockoptions. During 2007, 2006 and 2005, 133,704, 137,320 and 0 stock options were excluded from diluted shares as their affect wasanti-dilutive.

Advertising and Promotional Expenses

The Company expenses advertising costs as incurred. Total advertising expense amounted to $308,052, $354,367 and $296,985 forthe fiscal years ended February 28, 2007, 2006 and 2005, respectively.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, payables, notes receivable, and debt.The fair value of all instruments approximates the carrying value.

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Reclassifications

Certain reclassifications have been made to the prior years’ financial statements in order to conform to the current year presentation.

NOTE 2 — INVENTORIES

Inventories consist of the following at February 28: 2007 2006Ingredients and supplies $1,730,850 $1,507,193 Finished candy 1,751,289 1,431,041 $3,482,139 $2,938,234

NOTE 3 — PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following at February 28: 2007 2006Land $ 513,618 $ 513,618 Building 4,717,230 4,705,242 Machinery and equipment 6,284,433 6,252,011 Furniture and fixtures 673,194 817,137 Leasehold improvements 418,764 641,637 Transportation equipment 350,714 331,640 12,957,953 13,261,285 Less accumulated depreciation 7,203,831 6,562,681 Property and equipment, net $ 5,754,122 $ 6,698,604

NOTE 4 — LINE OF CREDIT AND LONG-TERM DEBT

Line of Credit

At February 28, 2007 the Company had a $5.0 million line of credit from a bank, collateralized by substantially all of the Company’sassets with the exception of the Company’s retail store assets. Draws may be made under the line at 75% of eligible accountsreceivable plus 50% of eligible inventories. Interest on borrowings is at prime less 50 basis points (7.75% at February 28, 2007). AtFebruary 28, 2007, $5.0 million was available for borrowings under the line of credit, subject to borrowing base limitations. Terms ofthe line require that the line be rested (that is, that there be no outstanding balance) for a period of 30 consecutive days during theterm of the loan. Additionally, the line of credit is subject to various financial ratio and leverage covenants. At February 28, 2007 theCompany was in compliance with all such covenants. The credit line is subject to renewal in July, 2007.

NOTE 5 — COMMITMENTS AND CONTINGENCIES

Operating leases

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

The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28or 29: 2008 $208,900 2009 162,000 2010 113,000 2011 74,100 $558,000

In some instances, in order to retain the right to site selection or because of requirements imposed by the lessor, the Company hasleased space for its proposed franchise outlets. When a franchise was sold, the store was subleased to the franchisee who isresponsible for the monthly rent and other obligations under the lease. The Company’s liability as primary lessee on sublet

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NOTE 5 — COMMITMENTS AND CONTINGENCIES — CONTINUED

franchise outlets, all of which is offset by sublease rentals, is as follows for the years ending February 28 or 29: 2008 $100,900 2009 87,300 2010 69,700 2011 71,800 2012 73,900 Thereafter 462,400 $866,000

The following is a schedule of lease expense for all retail operating leases for the three years ended February 28: 2007 2006 2005Minimum rentals $ 438,797 $ 611,535 $ 616,669 Less sublease rentals (108,200) (239,300) (313,800)Contingent rentals 26,640 23,921 28,949 $ 357,237 $ 396,156 $ 331,818

The Company also leases trucking equipment under operating leases. The following is a schedule by year of future minimum rentalpayments required under such leases for the years ending February 28 or 29: 2008 $206,400 2009 157,000 2010 58,200 2011 48,500 $470,100

The following is a schedule of lease expense for trucking equipment operating leases for the three years ended February 28 or 29: 2007 2006 2005 187,599 308,719 304,515

Purchase contracts

The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. Thesecontracts permit the Company to purchase the specified commodity at a fixed price on an as-needed basis during the term of thecontract. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts,but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. Currently theCompany has contracted for approximately $1,555,500 of raw materials under such agreements.

Contingencies

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

NOTE 6 — INCOME TAXES

Income tax expense is comprised of the following for the years ending February 28 or 29: 2007 2006 2005Current

Federal $2,533,401 $2,147,826 $1,586,493 State 483,605 318,089 293,371

Total Current 3,017,007 2,465,915 1,879,864 Deferred

Federal (120,018) 3,774 122,072 State (13,414) 421 13,644

Total Deferred (133,432) 4,195 135,716 Total $2,883,575 $2,470,110 $2,015,580

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NOTE 6 — INCOME TAXES — CONTINUED

A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows for theyears ending February 28 or 29: 2007 2006 2005Statutory rate 34.0% 34.0% 34.0%State income taxes, net of federal benefit 4.1% 3.2% 3.8%Other (0.3%) .6% — Effective Rate 37.8% 37.8% 37.8%

The components of deferred income taxes at February 28 are as follows: 2007 2006Deferred Tax Assets

Allowance for doubtful accounts and notes $ 70,882 $ 37,394 Inventories 55,831 23,070 Accrued compensation 42,701 49,632 Loss provisions and deferred income 143,925 49,173 Self insurance accrual 15,368 15,370 Amortization, design costs 67,208 60,355

395,915 234,994 Deferred Tax Liabilities

Depreciation and amortization (808,657) (781,168)Net deferred tax liability $(412,742) $(546,174) Current deferred tax assets $ 272,871 $ 117,715 Non-current deferred tax liabilities (685,613) (663,889)Net deferred tax liability $(412,742) $(546,174)

NOTE 7 — STOCKHOLDERS’ EQUITY

Stock Issuance

In March 2006, the Company issued 584 shares of stock, valued at $12,500, for partial payment of certain sales services for one year.In June 2006 the Company issued 250 shares of stock valued at $3,322 for franchise recognition at the Company’s NationalConvention.

In September 2005, the Company issued 1,752 shares of stock, valued at $37,500, for certain licensing rights for five years andpartial payment of certain sales services for one year.

Stock Dividends

On February 15, 2005 the Board of Directors declared a 5 percent stock dividend payable on March 10, 2005 to shareholders ofrecord as of February 28, 2005. Shareholders received one additional share of Common Stock for every twenty shares owned prior tothe record date. Subsequent to the dividend there were 4,602,135 shares outstanding.

On May 4, 2004 the Board of Directors declared a 10 percent stock dividend payable on May 27, 2004 to shareholders of record as ofMay 13, 2004. Shareholders received one additional share of Common Stock for every ten shares owned prior to the record date.Subsequent to the dividend there were 4,286,722 shares outstanding.

Stock Splits

On May 18, 2005 the Board of Directors approved a four-for-three stock split payable June 13, 2005 to shareholders of record at theclose of business on May 31, 2005. Shareholders received one additional share of common stock for every three shares owned priorto the record date. Immediately prior to the split there were 4,639,244 shares outstanding. Subsequent to the split there were6,186,007 shares outstanding.

All share and per share data have been restated in all years presented to give effect to the stock dividends and stock splits.

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NOTE 7 — STOCKHOLDERS’ EQUITY — CONTINUED

Stock Repurchases

Between March 1, 2007 and April 9, 2007 the Company repurchased 42,200 shares at an average price of $13.77 per share.Between May 1, 2006 and February 28, 2007 the Company repurchased 241,087 shares at an average price of $13.58 per share.Between March 24, 2006 and April 28, 2006 the Company repurchased 70,713 shares at an average price of $15.65 per share.Between October 7, 2005 and February 3, 2006 the Company repurchased 176,599 Company shares at an average price of $15.36per share. Between April 18 and April 20, 2005 the Company repurchased 17,647 shares at an average price of $13.94 per share.Between March 11, 2004 and June 14, 2004 the Company repurchased 125,216 Company shares at an average price of $6.74 pershare.

Cash Dividend

The Company paid a quarterly cash dividend of $0.0429 per common share on June 16, 2004 and September 16, 2004 toshareholders of record on June 3, 2004 and September 2, 2004, respectively. The Company paid a quarterly cash dividend of$0.0571 per common share on December 16, 2004 to shareholders of record on December 2, 2004. The Company paid a quarterlycash dividend of $0.0675 per common share on March 16, 2005, June 16, 2005 and September 16, 2005 to shareholders of recordon March 11, 2005, June 3, 2005 and September 1, 2005 respectively. The Company paid a quarterly cash dividend of $0.07 percommon share on December 16, 2005 to shareholders of record on December 1, 2005. The Company paid a quarterly cash dividendof $0.08 per common share on March 16, 2006, June 16, 2006 and September 16, 2006 to shareholders of record on March 8, 2006,June 2, 2006 and September 1, 2006, respectively. The Company paid a quarterly cash dividend of $0.09 per common share onDecember 15, 2006 and March 16, 2007 to shareholders of record on December 1, 2006 and March 2, 2007.

Future declaration of dividends will depend on, among other things, the Company’s results of operations, capital requirements,financial condition and on such other factors as the Company’s Board of Directors may in its discretion consider relevant and in thebest long term interest of the shareholders.

NOTE 8 — STOCK OPTION PLANS

Under the 1995 Stock Option Plan (the “1995 Plan”), the 2004 Stock Option Plan (the “2004 Plan”)the Nonqualified Stock Option Planfor Nonemployee Directors (the “Director’s Plan”) and the 2000 Nonqualified Stock Option Plan for Nonemployee Directors (the “2000Director’s Plan”), options to purchase up to 924,000, 420,000, 277,200 and 266,400 shares, respectively, of the Company’s commonstock may be granted at prices not less than market value at the date of grant. Options granted may not have a term exceeding tenyears under the 1995 plan, the 2004 plan and the Director’s Plan. Options granted may not have a term exceeding five years underthe 2000 Director’s Plan. Options representing the right to purchase 70,216, 321,151, 0 and 27,720 shares of the Company’scommon stock were outstanding under the 1995 Plan, the 2004 Plan, the Director’s Plan, and the 2000 Director’s Plan, respectively,at February 28, 2007. On February 21, 2006, the Company accelerated the vesting of all outstanding stock options in order to preventpast option grants from having an impact on future results. The options outstanding under these plans will expire, if not exercisedthrough February 2016.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model utilizing thefollowing weighted average assumptions: 2007 2006 2005Expected dividend yield n/a 2.18% 2.16%Expected stock price volatility n/a 30% 30%Risk-free interest rate n/a 4.5% 3.8%Expected life of options n/a 5 years 5 years

Information with respect to options outstanding under the Plans at February 28, 2007, and changes for the three years then endedwas as follows: 2007 Weighted Average Shares Exercise PriceOutstanding at beginning of year 575,876 $ 9.04 Granted — — Exercised (142,289) 4.38 Forfeited (14,500) 18.72 Outstanding at end of year 419,087 $ 10.29 Options exercisable at February 28, 2007 419,087 $ 10.29

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NOTE 8 — STOCK OPTION PLANS — CONTINUED 2006 Weighted Average Shares Exercise PriceOutstanding at beginning of year 770,000 $ 4.69 Granted 149,640 18.14 Exercised (337,884) 3.17 Forfeited (5,880) 7.78 Outstanding at end of year 575,876 $ 9.04 Options exercisable at February 28, 2006 575,876 $ 9.04 2005 Weighted Average Shares Exercise PriceOutstanding at beginning of year 758,142 $ 2.52 Granted 300,720 7.71 Exercised (278,542) 2.12 Forfeited (10,320) 2.54 Outstanding at end of year 770,000 $ 4.69 Options exercisable at February 29, 2005 284,020 $ 2.76 Weighted average fair value per share of options granted during 2007, 2006 and 2005

were $0, $3.03 and $2.05, respectively.

Additional information about stock options outstanding at February 28, 2007 is summarized as follows: Options Outstanding Number Weighted average Weighted average exercisable remaining contractual life exercise priceRange of exercise prices $1.603 to 3.935 73,296 5.00 3.52 $6.149 to 7.807 213,731 7.23 7.76 $14.955 to 21.600 132,060 8.10 18.15

NOTE 9 — OPERATING SEGMENTS

The Company classifies its business interests into two reportable segments: Franchising and Manufacturing. The Company has fiveCompany-owned stores. Company-owned stores provide an environment for testing new products and promotions, operating andtraining methods and merchandising techniques. Company management evaluates these stores in relation to their contribution tofranchising efforts. The accounting policies of the segments are the same as those described in the summary of significantaccounting policies in Note 1. The Company evaluates performance and allocates resources based on operating contribution, whichexcludes unallocated corporate general and administrative costs, provision for loss on accounts and notes receivable and relatedforeclosure costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilizecommon merchandising, distribution, and marketing functions, as well as common information systems and corporate administration.All inter-segment sales prices are market based. Each segment is managed separately because of the differences in requiredinfrastructure and the difference in products and services: Franchising Manufacturing Other TotalFY 2007 Total revenues $8,864,314 $24,656,272 $ — $33,520,596 Intersegment revenues — (1,947,253) — (1,947,253)Revenue from external customers 8,864,314 22,709,019 — 31,573,333 Segment profit (loss) 3,222,840 7,084,812 (2,679,159) 7,628,493 Total assets 2,438,225 10,660,079 5,357,865 18,456,169 Capital expenditures 32,703 108,372 59,962 201,037 Total depreciation & amortization 233,346 434,398 206,244 873,988 FY 2006 Total revenues $8,776,429 $21,035,748 $ — $29,812,177 Intersegment revenues — (1,738,565) — (1,738,565)Revenue from external customers 8,776,429 19,297,183 — 28,073,612 Segment profit (loss) 2,986,944 5,884,990 (2,337,252) 6,534,682 Total assets 2,964,486 10,209,790 5,883,204 19,057,480


Capital expenditures 90,757 878,871 330,686 1,300,314

Total depreciation & amortization 264,658 406,494 204,788 875,940

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NOTE 9 — OPERATING SEGMENTS — CONTINUED Franchising Manufacturing Other TotalFY 2005 Total revenues $7,869,207 $18,058,455 $ — $25,927,662 Intersegment revenues — (1,404,043) — (1,404,043)Revenue from external customers 7,869,207 16,654,412 — 24,523,619 Segment profit (loss) 2,714,261 5,256,713 (2,638,754) 5,332,220 Total assets 2,809,651 9,043,385 7,394,938 19,247,974 Capital expenditures 462,088 687,632 256,978 1,406,698 Total depreciation & amortization 223,561 384,291 177,231 785,083

NOTE 10 — SUPPLEMENTAL CASH FLOW INFORMATION

For the three years ended February 28: 2007 2006 2005Interest paid $ — $ 19,872 $ 100,067 Income taxes paid 2,890,807 560,485 1,834,536 Non-Cash Operating Activities: Revenue Recognition Changes (Note 14)

Accounts receivable $ (129,928) $ — $ — Income taxes payable 156,276 — — Deferred income (283,500) — — Retained earnings 257,152 — —

Non-Cash Investing Activities: Dividend payable $ 47,583 $ 87,060 $ 180,982 Issue stock for rights and services 15,822 37,500 — Fair value of assets received upon settlement of notes and accounts

receivable: Store to be operated — 200,000 — Inventory — 3,815 — Note receivable — 153,780 —

NOTE 11 — EMPLOYEE BENEFIT PLAN

The Company has a 401(k) plan called the Rocky Mountain Chocolate Factory, Inc. 401(k) Plan. Eligible participants are permitted tomake contributions up to statutory limits. The Company makes a matching contribution, which vests ratably over a 3-year period, andis 25% of the employee’s contribution up to a maximum of 1.5% of the employee’s compensation. For fiscal 2006 and 2005, theCompany made an additional discretionary contribution by doubling the normal matching. During the years ended February 28, 2007,2006 and 2005, the Company’s contribution was approximately $40,000, $46,000 and $74,000, respectively, to the plan.

NOTE 12 — SUMMARIZED QUARTERLY DATA (UNAUDITED)

Following is a summary of the quarterly results of operations for the fiscal years ended February 28, 2007 and 2006: Fiscal Quarter First Second Third Fourth Total2007 Total revenue $6,768,412 $6,779,569 $9,094,436 $8,930,916 $31,573,333 Gross margin before depreciation 2,012,762 2,071,381 2,622,621 2,640,355 9,347,119 Net income 930,541 1,039,790 1,331,795 1,442,792 4,744,918 Basic earnings per share .15 .17 .22 .24 .77 Diluted earnings per share .14 .17 .21 .23 .75 Fiscal Quarter First Second Third Fourth Total2006 Total revenue $5,366,801 $6,583,160 $7,997,547 $8,126,104 $28,073,612 Gross margin before depreciation 1,633,931 2,091,825 2,444,166 2,216,737 8,386,659 Net income 752,585 1,123,538 1,115,740 1,072,709 4,064,572


Basic earnings per share .12 .18 .18 .17 .65

Dilute earnings per share .11 .17 .17 .16 .61

The Company has evaluated the impact of changes to revenue recognition on a quarterly basis and determined that the change isnot significant to the results of any quarter. See Note 14 to the Consolidated Financial Statements.

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NOTE 13 — GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following at February 28: 2007 2006 Gross Gross Amortization Carrying Accumulated Carrying Accumulated Period Value Amortization Value AmortizationIntangible assets subject to

amortization Store design 10 Years 205,777 106,204 $ 205,777 $ 85,093 Packaging licenses 3-5 Years 120,830 104,164 120,830 99,164 Packaging design 10 Years 430,973 217,854 430,973 170,854 Trademark — 20,000 — Total 777,580 428,222 757,580 355,111

Intangible assets not subject toamortization Franchising segment-Company stores goodwill 1,011,458 267,020 1,275,962 336,847

Franchising goodwill 295,000 197,682 295,000 197,682 Manufacturing segment-Goodwill 295,000 197,682 295,000 197,682 Total Goodwill 1,601,458 662,384 1,865,962 732,211

Total intangible assets $2,379,038 $1,090,606 $2,623,542 $1,087,322

Amortization expense related to intangible assets totaled $73,111, $77,092 and $72,058 during the fiscal year ended February 28,2007, 2006 and 2005. The aggregate estimated amortization expense for intangible assets remaining as of February 28, 2007 is asfollows: 2008 73,100 2009 73,100 2010 73,100 2011 64,400 2012 40,300 Thereafter 5,358 Total 329,358

During fiscal year 2007 the Company sold or closed four Company stores. The sale and closures resulted in the reduction ofCompany store goodwill and related accumulated amortization of $264,504 and $69,827, respectively, for a net decrease in goodwillof $194,677.

NOTE 14 — REVENUE RECOGNITION CHANGES

Historically the Company has recognized franchise fees upon completion of all significant initial services provided to the franchiseeand upon satisfaction of all material conditions of the franchise agreement. Effective with the fourth quarter of fiscal 2007, theCompany decided to change that policy to more closely coincide with industry practice, that is, to recognize franchise fees when thefranchise store opens. Due to the change the Company recorded adjustments to its March 1, 2006 balance sheet as follows: Increase in deferred income $283,500 Decrease in income taxes payable 107,163 Decrease in retained earnings 176,337

Historically the Company has recognized factory revenue upon shipment of candy to franchisees on Company trucks. Effective withthe fourth quarter of fiscal 2007, the Company decided to change that policy to recognize factory revenue upon delivery of candy tofranchisees. Due to the change the Company recorded adjustments to its March 1, 2006 balance sheet as follows: Decrease in accounts receivable $379,636 Increase in inventory 249,708 Decrease in income taxes payable 49,113 Decrease in retained earnings 80,815

NOTE 15 — RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFASNo. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in accordance withStatement 109 and requires a more-likely-than-not recognition threshold. A tax position that meets the more-likely-than-not


recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likelyof being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Subsequentrecognition, derecognition, and measurement is based on management’s best judgment given the facts, circumstances andinformation available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006. Early adoption ispermitted as of the beginning of an enterprise’s fiscal year, provided the enterprise has not yet issued financial statements, includingfinancial statements for any interim period, for that fiscal year. Our effective date for adopting FIN No. 48 is as of March 1, 2007, withthe cumulative effect of the change in accounting principle recorded as an adjustment to opening accumulated deficit. Based uponthe Company’s evaluation of the effects of this guidance, we do not believe that it will have a significant impact on the Company’sfinancial statements.

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NOTE 15 — RECENT ACCOUNTING PRONOUNCEMENTS—CONTINUED

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fairvalue under GAAP and expands disclosures about fair value measurement. SFAS 157 also creates consistency and comparability infair value measurements among the many accounting pronouncements that require fair value measurements but does not requireany new fair value measurements. SFAS 157 is effective for fiscal years (including interim periods) beginning after November 15,2007. The Company will adopt SFAS No. 157 in fiscal 2009 and does not expect it to have a significant impact on the Company’sfinancial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. 115. This standard amends SFAS 115, Accounting for Certain Investment in Debt and EquitySecurities, with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securitieselecting the fair value option. This standard allows companies to elect fair value accounting for many financial instruments and otheritems that currently are not required to be accounted as such, allows different applications for electing the option for a single item orgroups of items, and requires disclosures to facilitate comparisons of similar assets and liabilities that are accounted for differently inrelation to the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company will adoptSFAS No. 159 in fiscal 2009 and does not expect it to have a significant impact on the Company’s financial statements.

In December 2006, the FASB issued EITF 00-19-2, “Accounting for Registration Payment Arrangements.” This FASB Staff Position(FSP) addresses an issuer’s accounting for registration payment arrangements. This FSP specifies that the contingent obligation tomake future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separateagreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured inaccordance with FASB Statement No. 5, “Accounting for Contingencies.” The guidance in this FSP amends FASB StatementsNo. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity,” and FASB

Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others,” to include scope exceptions for registration payment arrangements. This FSP further clarifies that a financialinstrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generallyaccepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to theregistration payment arrangement. Based upon the Company’s preliminary evaluation of the effects of this guidance, we do notbelieve that it will have a significant impact on the Company’s financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying acurrent year misstatement for the purpose of the materiality assessment. Application of SAB 108 is encouraged in any report for aninterim period of the first fiscal year ending after November 15, 2006. Previously filed interim reports need not be amended. However,comparative information presented in reports for interim periods of the first year subsequent to initial application should be adjustedto reflect the cumulative effect adjustment as of the beginning of the year of initial application. We took the provisions of SAB 108 intoaccount in restating our financial statements as set forth in this Form 10-K. See Note 14 to the Consolidated Financial Statements.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting

Limitations on Controls and Procedures — Because of their inherent limitations, disclosure controls and procedures and internalcontrol over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the typesought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of the Company’s Control Systemsto future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer (the“CEO”) and Chief Financial Officer (the “CFO”), does not expect that the Company’s Control Systems will prevent all error or all fraud.A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that theobjectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all ControlSystems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Companyhave been detected. These reports by management, including the CEO and CFO, on the effectiveness of the Company’s ControlSystems express only reasonable assurance of the conclusions reached.

Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicatedto management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2007, of the Company’sdisclosure controls and procedures (as defined in Rule 13a—15(e) and 15d—15(e) under the Exchange Act). Based on thatevaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as ofFebruary 28, 2007.

Management’s Annual Report on Internal Control over Financial Reporting — Management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of February 28, 2007, of the Company’sinternal control over financial reporting. In making this evaluation, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission in its publication Internal Control-Integrated Framework. Based on thatevaluation, the CEO and CFO have concluded that the Company’s internal control over financial reporting was effective as ofFebruary 28, 2007.

Changes in Internal Control over Financial Reporting — There were no changes in the Company’s internal control over financialreporting identified in connection with the evaluation required by paragraph (d) of Section 240.13a-15 of the Exchange Act thatoccurred during the Company’s last fiscal quarter (the Company’s fourth quarter in the case of an annual report) that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm — The Company’s independent registered public accounting firm,Ehrhardt Keefe Steiner & Hottman PC has issued the following attestation report on the Company’s assessment and opinion on theeffectiveness of the Company’s internal control over financial reporting:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control overFinancial Reporting, that Rocky Mountain Chocolate Factory, Inc. (the “Company”) maintained effective internal control over financialreporting as of February 28, 2007 based on criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control overfinancial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesa reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets ofthe company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that couldhave a material effect on the financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion,management’s assessment that the Company maintained effective internal control over financial reporting as of February 28, 2007, isfairly stated, in all material respects, based upon the criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of February 28, 2007, based upon the criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), thefinancial statements as of and for the year ended February 28, 2007, of the Company and our report dated May 14, 2007 expressedan unqualified opinion on those financial statements.


Denver, COMay 14, 2007

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ITEM 9B. OTHER INFORMATION

None

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

The information required by this item with respect to directors is incorporated by reference from the information under the caption“Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Company’s Proxy Statementfor the Company’s Annual Meeting of Shareholders expected to be held on July 13, 2007 (the “Proxy Statement”).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the information appearing under the caption “ExecutiveCompensation” in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The information required by this item is incorporated by reference to the information appearing under the caption “Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters” in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the information appearing under the caption “CertainTransactions” in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the information appearing under the caption “PrincipalAccountant Fees and Services” in the Proxy Statement.

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Table of Contents

PART IV.

ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES

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

1. Financial Statements PageReport of Independent Registered Public Accounting Firms 29 Statements of Income 30 Balance Sheets 31 Statements of Changes in Stockholders’ Equity 32 Statements of Cash Flows 33 Notes to Financial Statements 34

2. Financial Statement Schedules PageReport of Independent Registered Public Accounting Firm 48 SCHEDULE II — Valuation and Qualifying Accounts 48

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES

Board of Directors and StockholdersRocky Mountain Chocolate Factory, Inc.Durango, Colorado

In connection with our audit of the financial statements of Rocky Mountain Chocolate Factory, Inc. referred to in our report datedMay 14, 2007, which is included in Part II of this Form 10-K, we have also audited Schedule II for the year ended February 28, 2007.In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.



SCHEDULE II — Valuation and Qualifying Accounts Balance at Additions Beginning of Charged to Balance at End Period Costs & Exp. Deductions of PeriodYear Ended February 28, 2007 Valuation Allowance

for Accounts and Notes Receivable 98,925 70,000 (18,594) 187,519 Year Ended February 28, 2006 Valuation Allowance

for Accounts and Notes Receivable 132,646 -0- 33,721 98,925 Year Ended February 29, 2005 Valuation Allowance

for Accounts and Notes Receivable 120,635 25,000 12,989 132,646

48


Table of Contents

3. Exhibits Exhibit Number Description Incorporated by Reference to 3.1

Articles of Incorporation of the Registrant, asamended

Filed herewith.

3.2

By-laws of the Registrant, as amended onNovember 25, 1997

Filed herewith.

4.1 Specimen Common Stock Certificate Filed herewith. 4.2

Business Loan Agreement dated July 31, 2006between Wells Fargo Bank and the Registrant

Exhibit 4.2 to the Quarterly Report on Form 10-Q of theRegistrant for the quarter ended August 31, 2006.

4.3

Promissory Note dated July 31, 2006 in theamount of $5,000,000 between Wells Fargo Bankand the Registrant


10.1

Form of Employment Agreement between theRegistrant and its officers

Filed herewith.

10.2

Current form of franchise agreement used by theRegistrant

Exhibit 10.4 to the Quarterly Report on form 10-Q of theRegistrant for the quarter ended May 31, 2005.

10.3

Form of Real Estate Lease between the Registrantas Lessee and franchisee as Sublessee

Exhibit 10.7 to Registration Statement on Form S-18(Registration No. 33-2016-D).

10.4

1995 Stock Option Plan of the Registrant

Exhibit 10.9 to Registration Statement on Form S-1(Registration No. 33-62149) filed August 25, 1995.

10.5

Forms of Incentive Stock Option Agreement for1995 Stock Option Plan

Exhibit 10.10 to Registration Statement on Form S-1(Registration No. 33-62149) filed on August 25, 1995.

10.6

Forms of Nonqualified Stock Option Agreement for1995 Stock Option Plan


10.7

Form of Indemnification Agreement between theRegistrant and its directors

Filed herewith.

10.8

Form of Indemnification Agreement between theRegistrant and its officers

Filed herewith.

10.9

2000 Nonqualified Stock OptionPlan for Nonemployee DirectorsOf the Registrant

Exhibit 99.1 to Registration Statement on Form S-8(Registration No. 333-109936 filed on October 23, 2003.

10.10


Exhibit 99.1 to Registration Statement on Form S-8(Registration No. 333-119107) filed September 17, 2004.

10.11

Commodity Contract withGuittard Chocolate Company*

Filed herewith.

23.1

Consent of Independent Registered PublicAccounting Firm

Filed herewith.

31.1

Certification Pursuant To Section 302 of theSarbanes-Oxley Act of 2002, Chief ExecutiveOfficer

Filed herewith.

49


Table of Contents

3. Exhibits — CONTINUED Exhibit Number Description Incorporated by Reference to 31.2

Certification Pursuant TO Section 302 of theSarbanes-Oxley Act of 2002, Chief FinancialOfficer

Filed herewith.

32.1

Certification Pursuant To Section 906 Of TheSarbanes-Oxley Act of 2002, Chief ExecutiveOfficer

Filed herewith.

32.2

Certification Pursuant To Section 906 Of TheSarbanes-Oxley Act of 2002, Chief FinancialOfficer

Filed herewith

* Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filedseparately with the Commission.

50


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. Date: May 14, 2007

/S/ Bryan J. Merryman

BRYAN J. MERRYMAN

Chief Operating Officer, Chief Financial Officer, Treasurer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated. Date: May 14, 2007

/S/ Franklin E. Crail

FRANKLIN E. CRAIL

Chairman of the Board of Directors, President, andDirector

(principal executive officer) Date: May 14, 2007 /S/ Bryan J. Merryman

BRYAN J. MERRYMAN

Chief Operating Officer, Chief Financial Officer,Treasurer and Director

(principal financial and accounting officer) Date: May 14, 2007 /S/ Gerald A. Kien

GERALD A. KIEN, Director Date: May 14, 2007 /S/ Lee N. Mortenson

LEE N. MORTENSON, Director Date: May 14, 2007 /S/ Fred M. Trainor

FRED M. TRAINOR, Director Date: May 14, 2007 /S/ Clyde Wm. Engle

CLYDE Wm. ENGLE, Director

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Table of Contents

EXHIBIT INDEX Exhibit Number Description Incorporated by Reference to 3.1

Articles of Incorporation of the Registrant, asamended

Filed herewith.

3.2

By-laws of the Registrant, as amended onNovember 25, 1997

Filed herewith.

4.1 Specimen Common Stock Certificate Filed herewith. 4.2

Business Agreement dated July 31, 2006 betweenWells Fargo Bank and the Registrant


4.3

Promissory Note dated July 31, 2006 in theamount of $5,000,000 between Wells Fargo Bankand the Registrant.


10.1

Form of Employment Agreement between theRegistrant and its officers

Filed herewith.

10.2

Current form of franchise agreement used by theRegistrant

Exhibit 10.4 to the Quarterly Report on form 10-Q of theRegistrant for the quarter ended May 31, 2005.

10.3

Form of Real Estate Lease between the Registrantas Lessee and franchisee as Sublessee

Exhibit 10.7 to Registration Statement on Form S-18(Registration No. 33-2016-D).

10.4


Exhibit 10.9 to Registration Statement on Form S-1(Registration No. 33-62149) filed August 25, 1995.

10.5

Forms of Incentive Stock Option Agreement for1995 Stock Option Plan


10.6

Forms of Nonqualified Stock Option Agreement for1995 Stock Option Plan


10.7

Form of Indemnification Agreement between theRegistrant and its directors

Filed herewith.

10.8

Form of Indemnification Agreement between theRegistrant and its officers

Filed herewith.

10.9

2000 Nonqualified Stock Option Plan forNonemployee Directors Of the Registrant

Exhibit 99.1 to Registration Statement on Form S-8(Registration No. 333-109936 filed on October 23, 2003.

10.10


Exhibit 99.1 to Registration Statement on Form S-8(Registration No. 333-119107) filed September 17, 2004.

10.11

Commodity Contract with Guittard ChocolateCompany*

Filed herewith.

23.1

Consent of Independent Registered PublicAccounting Firm

Filed herewith.


Table of Contents

3. EXHIBIT INDEX — CONTINUED Exhibit Number Description Incorporated by Reference to 31.1

Certification Pursuant To Section 302 of theSarbanes-Oxley Act of 2002, Chief ExecutiveOfficer

Filed herewith.

31.2

Certification Pursuant To Section 302 of theSarbanes-Oxley Act of 2002, Chief FinancialOfficer

Filed herewith.

32.1

Certification Pursuant To Section 906 Of TheSarbanes-Oxley Act of 2002, Chief ExecutiveOfficer

Filed herewith.

32.2

Certification Pursuant To Section 906 Of TheSarbanes-Oxley Act of 2002, Chief FinancialOfficer

Filed herewith

* Contains material that has been omitted pursuant to a request for confidential treatment and such material has been filedseparately with the Commission.


Exhibit 3.1

ARTICLES OF INCORPORATION

The undersigned, for the purpose of organizing a corporation, for profit, pursuant to the laws .of the State of Colorado, does herebyadopt the following Articles of Incorporation:

ARTICLE I

The name of the corporation shall be:

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

ARTICLE II

This corporation shall have perpetual existence.

ARTICLE III

In addition to, and not in limitation of, those provided by statute in the State of Colorado, the nature of the business, the purposes,and the general powers for which the corporation is organized are:

1. The transaction of all lawful business for which corporations may be incorporated pursuant to the Colorado Corporation Code.

2. To buy, exchange, contract for, lease and in any and all other ways acquire, hold and own, and deal in, sell, mortgage, lease, orotherwise dispose of real and personal property of every kind and description, as may be desirable for use by the company in theoperation of any business conducted by it.

3. To buy, sell, and deal in its own stock and other securities, and in the stock and other securities of any other corporation, and tolend either with or without security.

4. To borrow money for the conduct of its business and in furtherance of the objects, purposes and powers herein set forth, and toissue debentures, bonds, certificates of indebtedness, notes and other instruments of like character evidencing the liability of thecompany; to repay the same and to secure any and all thereof by mortgages or deeds of trust on any or all of the real or personalproperty of the company.

5. To acquire the good will, rights, property and assets of all kinds of any business capable of being carried on in connection withthis company’s business, and to undertake the whole or part of the liability of the person, firm, or corporation owning such good will,rights, property and assets, on such terms and conditions as may be agreed upon, and to pay for the same in cash, stock, bonds,debentures, notes or securities of this company.

6. To conduct business in the State of Colorado and in any other state or territory of the United States of America, including theDistrict of Columbia.

7. To carry on any business which the company may deem proper or convenient in connection with any of the foregoing powersand purposes, whether indirectly or otherwise, or which may be calculated, directly or indirectly, to promote the interests of thecompany or to enhance the value of its property; and to have and


exercise all of the powers conferred by the laws of the State of Colorado on a corporation formed under the act pursuant to which thiscorporation is formed.

8. The purposes specified herein shall be construed as both purposes and powers and shall in no way be limited or restricted byreference to, or inference from, the terms of any other clause in this or any other article, but the purposes and powers specified ineach of the clauses herein shall be regarded as independent purposes and powers, and the enumeration of specific purposes andpowers shall not be construed to limit or restrict in any manner the meaning of the general terms or of the general powers of thecompany; nor shall the expression of one thing be deemed to exclude another, although it be of like nature not expressed.

ARTICLE IV

The total number of shares which may be issued by the corporation is 50,000 each of which shall be without par value.

ARTICLE V

At all meetings of the stockholders for the election of directors, cumulative voting shall be allowed.

ARTICLE VI

The initial registered office of the corporation shall be 519 1/2 Main Avenue, Durango, La Plata County, Colorado 81301. Theinitial registered agent of the corporation shall be FRANKLIN E. CRAIL.

ARTICLE VII

The name and address of the person forming this corporation is: J. DOUGLAS SHAND 124 East Ninth Street Durango, Colorado 81301

ARTICLE VIII

The management of this corporation shall be vested in a board of directors; the number of directors of this corporation shall be asdetermined by the by—laws of this corporation. The initial board of directors of this corporation shall consist of three members. Thenames and addresses of the persons who are to be the initial directors and who are to serve as directors until the first annual meetingof shareholders or until their successors be elected and qualified are: FRAMKLIN E. CRAIL 225 Rockridge Circle Durango, Colorado 81301 JAMES HILTON 225 Rockridge Circle Durango, Colorado 81301 MARK LAPINSKI 225 Rockridge Circle Durango, Colorado 81301


ARTICLE IX

All stock shall be issued as fully paid and non-assessable, and cannot be made assessable by any amendment to this certificate ofincorporation, nor shall the holder or such shares be liable for further payment thereon.

ARTICLE X

Each shareholder of the corporation shall have the preemptive right to acquire additional or treasury shares of the corporation orsecurities convertible into shares or carrying stock purchase warrants or privileges.

ARTICLE XI

The board of directors of this corporation shall have the power to make from time to time such by-laws for the management of theaffairs of the corporation as may be necessary or proper, and after reasonable notice to all directors (or without notice if all directorsconsent thereto) to repeal, amend, or alter the same or to adopt new by laws. The board of directors shall have the power to fix thesalaries of directors, corporate officers and agents and employees of this corporation. The board of directors shall have the power toappoint and remove officers, agents and employees of the company.

ARTICLES OF AMENDMENT

to the


of

ROCKY MOUNTAIN. CHOCOLATE FACTORY,. INC.

Pursuant to the provisions of the Colorado Corporation Act, the undersigned corporation adopts the following Articles ofAmendment to Its Articles of Incorporation:

FIRST: The name of the corporation is ROCKY MOUNTAIN. CHOCOLATE FACTORY,. INC.

SECOND: The following amendment of the Articles of Incorporation was adopted by the shareholders of the corporation onOctober 7, 1985, in the manner prescribed by the Colorado Corporation Act:

Article IV of the Articles of Incorporation of the corporation is hereby amended to read as follows:

“The total number of shares which may be issued by the corporation is Seven Million Five Hundred Thousand (7,500,000)common shares, with a par value of One Cent ($.0l) per share. Each outstanding share of common stock of the corporation is herebysplit up and exchanged into Eight Hundred Eighty-three and One Hundred Seventy- seven One Hundred Eighty—one OneHundredths (883-l77/l81) shares of common stock of a par value of One Cent ($.0l) per share.”


Article X of the Articles of Incorporation of the corporation is hereby amended to read as follows:

“Shareholders of the corporation shall have no preemptive rights to acquire unissued or treasury shares or securities convertibleinto such shares or carrying a right to subscribe to or acquire shares.”

THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,810; and the number of sharesentitled to vote thereon was 1,810.

FOURTH: The designation and number of outstanding shares of each class entitled to vote thereon as a class were as follows:

Class Number of Shares

common 1,810

FIFTH: The number of shares voted for such amendment was 1,810; and the number of shares voted against such amendmentwas -0-.

SIXTH: The number of shares of each class entitled to vote thereon as a class voted for and against such amendment,respectively, was: Number of Shares Voted

Class For Against

Common 1,810 -0-

SEVENTH: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issuedshares provided for in the amendment shall be effected, is as follows:

As set forth in the Amendment

EIGHTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capitalas changed by such amendment, are as follows:

The amount of stated capital prior to the amendment is $78,000.00. The amount of stated capital subsequent to theamendment is $16,000.00.


to the


of

ROCKY MOUNTAIN.CHOCOLATE FACTORY,. INC.




SECOND: The following amendment of the Articles of Incorporation was adopted by the shareholders of the corporation onNovember 4, 1985, in the manner prescribed by the Colorado Corporation Act:

On October 18, 1985, Article IV of the Articles of Incorporation of the corporation was amended to read as follows:

“The total number of shares which may be issued by the corporation is Seven Million Five Hundred Thousand (7,500,000)common shares, with a par value of One Cent ($.0l) per share. Each outstanding share of common stock of the corporation is herebysplit up and exchanged into Eight Hundred Eighty-three and One Hundred Seventy- seven One Hundred Eighty—one OneHundredths (883-l77/l81) shares of common stock of a par value of One Cent ($.0l) per share.”

Article IV of the Articles of Amendment to the Articles of Incorporation of the corporation is hereby corrected to read as follows:

“The total number of shares which may be issued by the corporation is Seven Million Five Hundred Thousand (7,500,000)common shares, with a par value of One Cent ($.0l) per share. Each outstanding share of common stock of the corporation is herebysplit up and exchanged into One Thousand Thirteen and Four Hundred Seventy-three One Thousand Five Hundred Seventy-ninths(1013-473/1579) shares of common stock of a par value of One Cent ($.0l) per share.”

THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,579; and the number of sharesentitled to vote thereon was 1,579.



common 1,579

FIFTH: The number of shares voted for such amendment was 1,579; and the number of shares voted against such amendmentwas -0-.


Class For Against

Common 1,579 -0-


As set forth in the Amendment


The amount of stated capital prior to the amendment is $78,000.00. The amount of stated capital subsequent to theamendment is $16,000.00.



to the


of






“The total number of shares which may be issued by the corporation is Seven Million Five Hundred Thousand (7,500,000) shares,Seven Million Two Hundred Fifty Thousand (7,250,000) of which shall be designated as “Common Shares”, with a par value of OneCent ($.01) per share (referred to hereinafter either as “Common Stock” or “Common Shares”), and Two Hundred Fifty Thousand(250,000) of which shall be designated as “Preferred Shares”, with a par value of Ten Dollars ($10.00) per share (referred tohereinafter either as “Preferred Stock” or Preferred Shares”). Each outstanding share of common stock of the corporation outstandingon October 7, 1985, is hereby split up and exchanged into One Thousand Thirteen and Four Hundred Seventy-three One ThousandFive Hundred Seventy-ninths (1013-473/1579) shares of common stock of a par value of One Cent ($.0l) per share.”

Article XII of the Articles of Incorporation of the corporation is hereby added to the Articles of Incorporation of the corporation, toread as follows:

“The Board of Directors is hereby expressly authorized, by resolution or resolutions which they may from time to time adopt, toprovide for the issuance of the Preferred Stock in one or more series and to fix and state, to the extent not fixed by the provisionshereinafter set forth and subject to limitations prescribed by law, the designations and powers, preferences and rights of the shares ofeach such series and the qualifications, limitations and restrictions thereof, including, but not limited to, determination of any of thefollowing:

The distinctive serial designation and the number of shares constituting the series;

The dividend rate, whether dividends shall be cumulative and, if so, from which date, the payment date or dates for dividends, and thepreferential, participating or other special rights, if any, with respect to dividends;

The voting powers, full or limited, in addition to the voting powers provided by law;

Whether the shares shall be redeemable and, if so, the price, or prices to be paid, and the terms and conditions on which the sharesmay be redeemed;


The amount or amounts payable upon the shares in the event of voluntary or involuntary liquidation, dissolution or winding up of thecorporation;

Whether the shares shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption ofshares of the series, and, if so entitled, the amount of such fund and the manner of its application, including the price or prices atwhich the shares may be redeemed or purchased through application of such funds: and

Whether the shares be convertible into or exchangeable for shares of any other class or classes or of any other series of the same orany other class or classes of stock of the corporation and, if so convertible or exchangeable, the conversion price or prices, or therates of exchange, and the adjustments thereof, if any, at which conversion or exchange may be made, and any other terms orconditions of such conversion or exchange.

Each share of each series of Preferred Stock shall have the same relative rights as and be identical in all respects with all othershares of the same series.

Before the corporation shall issue any shares of Preferred Stock of any series authorized as hereinabove provided, a certificatesetting forth (i) the name of the corporation; (ii) a copy of the resolution or resolutions with respect to such shares adopted by theBoard of Directors of the corporation pursuant to the foregoing authority vested in said Board, establishing and designating the seriesand fixing and determining the relative rights and preferences thereof; (iii) the date of adoption of such resolution or resolutions; and(iv) that such resolution was duly adopted by the Board, shall be made, executed, acknowledged, filed and recorded in accordancewith the applicable requirements, if any, of the laws of the State of Colorado. If no such certificate is then so required by law, acertificate shall be signed and verified on behalf of the corporation by its president or a vice president and by its secretary, treasureror assistant secretary, and such certificate shall be filed and kept on file at the principal office of the corporation in the State ofColorado and in any other place or places as the Board of Directors shall designate.”

THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,600,000; and the number ofshares entitled to vote thereon was 1,600,000.



common 1,600,000

FIFTH: The number of shares voted for such amendment was 1,600,000; and the number of shares voted against suchamendment was -0-.


Class For Against

Common 1,600,000 -0-


No change



No change


to the


of






“The total number of shares which may be issued by the corporation is Seven Million Five Hundred Thousand (7,500,000) shares,Seven Million Two Hundred Fifty Thousand (7,250,000) of which shall be designated as “Common Shares”, with a par value of OneCent ($.01) per share (referred to hereinafter either as “Common Stock” or “Common Shares”), and Two Hundred Fifty Thousand(250,000) of which shall be designated as “Preferred Shares”, with a par value of Ten Cents ($.10) per share (referred to hereinaftereither as “Preferred Stock” or Preferred Shares”). Each share of Common Stock of the corporation outstanding on October 7, 1985, ishereby split up and exchanged into One Thousand Thirteen and Four Hundred Seventy-three One Thousand Five Hundred Seventy-ninths (1013-473/1579) shares of Common Stock of a par value of One Cent ($.0l) per share.”

THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,600,000; and the number ofshares entitled to vote thereon was 1,600,000.



common 1,600,000

FIFTH: The number of shares voted for such amendment was 1,600,000; and the number of shares voted against suchamendment was -0-.



Class For Against

Common 1,600,000 -0-


No change


No change

ARTICLES OF AMENDMENTto the


Pursuant to the provisions of the Colorado Corporation Code, the undersigned corporation adopts the following Articles ofAmendments to its Articles of Incorporation:

FIRST: The name of the corporation is Rocky Mountain Chocolate Factory. Inc.

SECOND: The following amendment to the Articles of Incorporation was adopted on July. 29 1988, as prescribed by the ColoradoCorporation Code, in the manner marked with an X below:

o Such amendment was adopted by the board of directors where not shares have been issued.

☑ Such amendment was adopted by a vote of the shareholders. The number of shares voted for the amendment was sufficientfor approval.

Article IV of the Articles of Incorporation of the corporation is hereby amended in its entirety to read as follows:

“The total number of shares which may be issued by the corporation is Seven Million Five Hundred Thousand (7,500,000)shares, Seven Million Two Hundred Fifty Thousand (7,250,000) of which shall be designated as shares of common stock, with apar value of Three Cents ($.03) per share (hereinafter referred to as “Common Stock” or “Common Shares”), and Two HundredFifty Thousand (250,000) of which shall be designated as shares of preferred stock, with a par value of Ten Cents (S.l0) pershare (hereinafter referred to as “Preferred Stock” or “Preferred Shares”). The 2,233,491 shares of Common Stock, with a parvalue of One Cent ($.01) per share, of the corporation, either issued and


outstanding or held by the corporation as treasury stock on the effective date of this amendment, are automatically reclassifiedand changed into 744,497 fully-paid and nonassessable shares of Common Stock, with a par value of Three Cents ($.03),provided that no fractional shares shall be issued. In lieu of issuing fractional shares of Common Stock with respect to anyfractional share interests that occur as a result of the foregoing reclassification and change, the corporation shall cause itstransfer agent to pay the holders thereof a cash amount determined by multiplying each such fractional share interest times themean average of the closing bid and asked prices of the corporation’s common stock, with a par value of One Cent ($01) pershare, for the ten business days ending on July 28, 1988.”

THIRD: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued sharesprovided for in the amendment shall be effected, is as follows:

Notice will be given to holders of Common Stock on the effective date of this amendment to surrender their certificates to theCompany’s transfer agent, who will issue the new certificates to evidence the reclassification.

FOURTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of statedcapital as changed by such amendment, are as follows:

No change

ARTICLES OF AMENDMENTto the


Pursuant to the provisions of the Colorado Corporation Code, the undersigned corporation adopts the following Articles ofAmendment to its Articles of Incorporation:

FIRST: The name of the corporation is Rocky Mountain Chocolate Factory, Inc.

SECOND: The following amendment to the Articles of Incorporation was adopted on July 28, 1989, as prescribed by the ColoradoCorporation Code, in the manner marked with an X below:

o Such amendment was adopted by the board of directors where no shares have been issued.

☑ Such amendment was adopted by a vote of the shareholders. The number of shares voted for the amendment was sufficientfor approval.


RESOLVED, that a new Article XII be added to the Articles of Incorporation of the Corporation and read as follows:

The personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as adirector is limited to the full extent provided by Colorado law.

THIRD: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued sharesprovided for in the amendment shall be effected, is as follows:

No change

FOURTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of statedcapital as changed by such amendment, are as follows:

No change

ARTICLES OF AMENDMENTTO THE

ARTICLES OF INCORPORATIONOF


This document is entitled to be filed pursuant to sections 7-90-301 et. seq. and 7-110-106 of the Colorado Revised Statutes:

FIRST: The domestic entity name of the corporation is:


SECOND: Article IV of the Articles of Incorporation is hereby amended in its entirety to read as follows:

The aggregate number of shares of all classes of capital stock that the corporation shall have authority to issue is One HundredMillion Two Hundred Fifty Thousand (100,250,000) shares; One Hundred Million (100,000,000) of which shall be designated asshares of common stock, with a par value of three cents ($0.03) per share (the “Common Stock” or “Common Shares”); and TwoHundred Fifty Thousand of which shall be designated as shares of preferred stock, with a par value of ten cents ($0.10) per share(the “Preferred Stock” or “Preferred Shares”).

THIRD: The name and address of the individual who causes this document to be delivered for filing is

Virginia PerezRocky Mountain Chocolate Factory, Inc.265 Turner DriveDurango, CO 81303


Exhibit 3.2

BY-LAWS OF


(As Amended on November 25, 1997)

ARTICLE I

OFFICES

Section 1. The registered office of the corporation shall be located at Durango, Colorado.

Section 2. The corporation may also have offices at such other places both within and without the State of Colorado as the boardof directors may from time to time determine or the business of the corporation may require.

ARTICLE II

ANNUAL MEETING OF SHAREHOLDERS

Section 1. All meetings of the shareholders for the election of directors shall be held in the City of Durango, State of Colorado, atsuch place as may be fixed from time to time by the board of directors, or such other place either within or without the State ofColorado as shall be designated from time to time by the board of directors and stated in the notice of the meeting.

Section 2. Annual meetings of shareholders shall be held at such time and place as shall be designated from time to time by theboard of directors and stated in the notice of the meeting, at which the shareholders shall elect by a plurality vote a board of directors,and transact such other business as may properly be brought before the meeting.

Section 3. Written or printed notice of the annual meeting stating the place, day and hour of the meeting shall be delivered not lessthan ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of thepresident, the secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting.Notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to each shareholder ofrecord entitled to vote at the meeting at that shareholder’s address as it appears on the records of the corporation.

Section 4. Only proposals by shareholders made in accordance with the procedures set forth in this Section 4 shall be eligible forinclusion on the agenda of any annual or special meeting of shareholders.

a) NOMINATION OF DIRECTORS. The board of directors shall act as a nominating committee for selecting the managementnominees for election as directors. Except in the case of a nominee substituted as a result of the death, refusal to serve or otherincapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 daysprior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors exceptthose made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders aremade in accordance with the provisions of this Section 4. Nominations of individuals for election to the board of directors of thecorporation at an annual meeting of shareholders may be made by any shareholder of the corporation entitled to vote for theelection of directors at that meeting who complies with the

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notice procedures set forth in this Section 4. Such nominations, other than those made by the board of directors acting asnominating committee, shall be made pursuant to timely notice in writing to the secretary of the corporation as set forth in thisSection 4.

(b) OTHER PROPOSALS. Any shareholder of the corporation entitled to vote at any annual or special meeting of shareholdersmay make nominations for the election of directors and other proper proposals for inclusion on the agenda of any such meetingprovided such shareholder complies with the timely notice provisions set forth in this Section 4 (as well as any additionalrequirements under any applicable law or regulation).

(c) TIMELY NOTICE. A shareholder’s notice shall be delivered to or mailed and received at the principal executive offices of thecorporation (i) in the case of a special meeting, not less than 30 days nor more than 75 days prior to the meeting date specified inthe notice of such meeting, provided, however, that in the event that less than 40 days’ notice or prior public disclosure of the dateof a special meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later thanthe close of business on the 10th day following the day on which such notice of the date of the special meeting was mailed or suchpublic disclosure was made, and (ii) in the case of any annual meeting, not less than 75 days prior to the day and month on which,in the immediately preceding year, the annual meeting for such year was held. Such shareholder’s notice shall set forth (as isapplicable in any given instance) (a) as to each person whom the shareholder proposes to nominate for election or re-election as adirector, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment ofsuch person, currently and for at least the preceding five years, (iii) the class and number of shares of stock of the corporation thatare beneficially owned by such person, (iv) a description of all arrangements or understandings between such person and suchshareholder, or any other persons (naming them), pursuant to which the nomination is to be made by the shareholder, (v) suchother information as would be required to be disclosed in solicitations of proxies with respect to nominees for election as directorspursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and (vi) such person’s written consent tobeing named as a nominee and to serving as a director, if elected; (b) as to each action item requested to be included on theagenda, a description, in sufficient detail, of the purpose and effect of the proposal to the extent necessary to properly inform allshareholders entitled to vote thereon prior to any such vote; and (c) as to the shareholder giving the notice, (i) the name andaddress, as they appear on the corporation’s books, of such shareholder, (ii) the class and number of shares of stock of thecorporation beneficially owned by such shareholder and (iii) a representation that such shareholder will appear at the meeting tonominate the person, or to submit the proposal, specified in the notice. No person shall be elected as a director of the corporationunless nominated in accordance with the procedures set forth in this Section 4. The Chairman of the meeting shall, if the factswarrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed bythe bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.Ballots bearing the names of all the persons nominated by the nominating committee and by shareholders shall be provided for useat the annual meeting. If in response to any proposal properly submitted in accordance with this Section 4 the nominatingcommittee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at theannual meeting by any shareholder entitled to vote and shall be voted upon.

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ARTICLE III

SPECIAL MEETINGS OF SHAREHOLDERS

Section 1. Special meetings of shareholders for any purpose other than the election of directors may be held at such time andplace within or without the State of Colorado as shall be stated in the notice of the meeting or in a duly executed waiver of noticethereof.

Section 2. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by thearticles of incorporation, may be called by the president, the board of directors, or the holders of not less than one-tenth (1/10) of allthe shares entitled to vote at the meeting.

Section 3. Written or printed notice of a special meeting stating the place, day and hour of the meeting and the purpose orpurposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of themeeting, either personally or by mail, by or at the direction of the president, the secretary, or the officer or persons calling themeeting, to each shareholder of record entitled to vote at such meeting. Notice shall be deemed to be delivered when deposited in theUnited States mail, postage prepaid, addressed to each shareholder of record entitled to vote at the meeting at that shareholder’saddress as it appears on the records of the corporation.

Section 4. The business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice.

ARTICLE IV

QUORUM AND VOTING OF STOCK

Section 1. The holders of a majority of the shares of stock issued and outstanding and entitled to vote, represented in person or byproxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided bystatute or by the articles of incorporation. If, however, such quorum shall not be present or represented at any meeting of theshareholders, the shareholders present in person or represented by proxy shall have power to adjourn the meeting from time to time,without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting atwhich a quorum shall be present or represented any business may be transacted which might have been transacted at the meetingas originally notified.

Section 2. If a quorum is present, the affirmative vote of a majority of the shares of stock represented at the meeting shall be theact of the shareholders unless the vote of a greater number of shares of stock is required by law or the articles of incorporation.

Section 3. Each outstanding share of stock, having voting power, shall be entitled to one vote on each matter submitted to a voteat a meeting of shareholders. A shareholder may vote either in person or by proxy executed in writing by the shareholder or by hisduly authorized attorney-in-fact.

In all elections for directors every shareholder entitled to vote shall have the right to vote, in person or by proxy, the number ofshares of stock owned by that shareholder, for as many persons as there are directors to be elected, or to cumulate the vote of saidshares, and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal,or to distribute the votes on the same principle among as many candidates as he may see fit.

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Section 4. Any action required to be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing,setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof.

ARTICLE V

DIRECTORS

Section 1. The number of directors shall be no fewer than three (3) nor more than nine (9). Directors need not be residents of theState of Colorado nor shareholders of the corporation. The directors, other than the first board of directors, shall be elected at theannual meeting of the shareholders, and each director elected shall, unless he or she shall resign or otherwise be removed pursuantto these Bylaws and/or the Colorado Corporation Code, serve until the next succeeding annual meeting and until his or her successorshall have been elected and qualified. The first board of directors shall hold office until the first annual meeting of shareholders.

Section 2. Vacancies and newly created directorships resulting from any increase in the number of directors may be filled by amajority of the directors then in office, though less than a quorum, and the directors so chosen shall hold office until the next annualelection and until their successors are duly elected and shall qualify. Also, newly created directorships resulting from any increase inthe number of directors may be filled by election at an annual or at a special meeting of shareholders called for that purpose.

Section 3. The business affairs of the corporation shall be managed by its board of directors, which may exercise all such powersof the corporation and do all such lawful acts and things as are not by statute or by the articles of incorporation or by these by-lawsdirected or required to be exercised or done by the shareholders.

Section 4. The directors may keep the books of the corporation, except such as are required by law to be kept within the state,outside of the State of Colorado, at such place or places as they may from time to time determine.

Section 5. The board of directors, by the affirmative vote of a majority of the directors then in office, and irrespective of anypersonal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to thecorporation as directors, officers or otherwise.

Section 6. The entire board of directors or any lesser number may be removed, with or without cause, by a vote of the holders ofthe majority of the shares then entitled to vote at an election of directors, at a meeting called expressly for that purpose. If less thanthe entire board is to be removed, no one of the directors may be removed if the votes cast against his or her removal would besufficient to elect that director if then cumulatively voted at an election of the entire board of directors.

ARTICLE VI

MEETINGS OF THE BOARD OF DIRECTORS

Section 1. Meetings of the board of directors, regular or special, may be held either within or without the State of Colorado.

4


Section 2. The first meeting of each newly-elected board of directors shall be held immediately following the annual meeting of theshareholders at which the newly-elected board of directors was so elected, unless such other time and place for such meeting shallbe fixed by the vote of the shareholders at the annual meeting. No notice of such meeting shall be necessary to the newly electeddirectors in order legally to constitute the meeting, provided that a quorum shall be present. The first meeting of the newly-electeddirectors may also convene at such place and time as shall be fixed by the consent in writing of all the directors.

Section 3. Regular meetings of the board of directors may be held at such time and at such place as shall from time to time bedetermined by the board. No notice need be given of such regular meetings.

Section 4. Special meetings of the board of directors may be called by the president on forty-eight (48) hours’ notice to eachdirector, delivered by mail, or on twenty-four (24) hours’ notice, delivered personally or by telegram. Special meetings shall be calledby the president or secretary in like manner and on like notice on the written request of two directors. Notice by mail shall be deemedto be delivered when deposited in the United States mail, postage prepaid, addressed to each director at his or her address as itappears on the records of the corporation. Neither the business to be transacted at, nor the purpose of, any regular or specialmeeting of the board of directors need be specified in the notice or waiver of notice of such meeting.

Section 5. A majority of the directors shall constitute a quorum for the transaction of business unless a greater number is requiredby law or by the articles of incorporation. The act of a majority of the directors present at any meeting at which a quorum is presentshall be the act of the board of directors, unless the act of a greater number is required by statute or by the articles of incorporation. Ifa quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time,without notice other than announcement at the meeting, until a quorum shall be present.

Section 6. Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if a consent inwriting, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matterthereof.

ARTICLE VII

EXECUTIVE AND OTHER COMMITTEES

Section 1. The board of directors, by resolution adopted by a majority of the number of directors fixed by the by-laws or otherwise,may designate from among its members an executive committee and one or more other committees, each of which, to the extentprovided in such resolution, shall have and exercise all of the authority of the board of directors in the management of the corporation,except that no such committee shall have the authority to: (i) declare dividends or distributions; (ii) approve or recommend toshareholders actions or proposals required by law to be approved by shareholders; (iii) fill vacancies on the board of directors or anycommittee thereof; (iv) amend the by-laws; (v) approve a plan of merger not requiring shareholder approval; (vi) reduce earned orcapital surplus; (vii) authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by theboard of directors; or (viii) authorize or approve the issuance or sale of, or any contract to issue or sell, shares, or designate the termsof a series of a class of shares, and except that the board of directors, having acted regarding general authorization for the issuanceor sale of shares or any contract therefore and, in the case of a series, the designation thereof, may, pursuant to a general formula ormethod specified by the board by resolution or by adoption of a stock option or other plan, authorize a committee to fix the terms ofany contract for the sale of the shares and to fix

5


the terms upon which such shares may be issued or sold, including, without limitation, the price, the dividend rate, provisions forredemption, sinking fund, conversion, or voting or preferential rights, and provisions for other features of a class of shares or a seriesof a class of shares, with full power in such committee to adopt any final resolution setting forth all terms thereof and to authorize thestatement of the terms of a series for filing with the secretary of state under law.

Section 2. Vacancies in the membership of any committee shall be filled by the board of directors at a regular or special meetingof the board of directors. The executive committee shall keep regular minutes of its proceedings and report the same to the boardwhen required.

ARTICLE VIII

OFFICERS

Section 1. The officers of the corporation shall be chosen by the board of directors and shall be a president, a vice-president, asecretary and a treasurer. The board of directors may also choose additional vice-presidents, and one or more assistant secretariesand assistant treasurers.

Section 2. The board of directors at its first meeting after each annual meeting of shareholders shall choose a president, one ormore vice-presidents, a secretary and a treasurer, none of whom need be a member of the board. Any two or more offices may beheld by the same person, except the offices of president and secretary.

Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold theiroffices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the boardof directors.

Section 4. The salaries of all officers and agents of the corporation shall be fixed by the board of directors.

Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected orappointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Anyvacancy occurring in any office of the corporation shall be filled by the board of directors.

THE PRESIDENT

Section 6. The president shall be the chief executive officer of the corporation, shall preside at all meetings of the shareholdersand the board of directors, shall have general and active management of the business of the corporation and shall see that all ordersand resolutions of the board of directors are carried into effect.

Section 7. The president shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation,except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereofshall be expressly delegated by the board of directors to some other officer or agent of the corporation.

6


THE VICE-PRESIDENTS

Section 8. The vice-president, or if there shall be more than one, the vice-presidents, in the order determined by the board ofdirectors, shall, in the absence or disability of the president, perform the duties and exercise the powers of the president and shallperform such other duties and have such other powers as the board of directors may from time to time prescribe.

THE SECRETARY AND ASSISTANT SECRETARIES

Section 9. The secretary shall attend all meetings of the board of directors and all meetings of the shareholders and record all theproceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall performlike duties for the standing committees when required. The secretary shall give, or cause to be given, notice of all meetings of theshareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the boardof directors or president, under whose supervision he shall be. The secretary shall have custody of the corporate seal of thecorporation and shall have, or an assistant secretary shall have, authority to affix the same to any instrument requiring it and when soaffixed, it may be attested by his or her signature or by the signature of such assistant secretary. The board of directors may givegeneral authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature.

Section 10. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board ofdirectors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shallperform such other duties and have such other powers as the board of directors may from time to time prescribe.

THE TREASURER AND ASSISTANT TREASURERS

Section 11. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts ofreceipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the nameand to the credit of the corporation in such depositories as may be designated by the board of directors.

Section 12. The treasurer shall disburse the funds of the corporation as may be ordered by the board of directors, taking propervouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when theboard of directors so requires, an account of all transactions as treasurer and of the financial condition of the corporation.

Section 13. If required by the board of directors, the treasurer shall give the corporation a bond in such sum and with such suretyor sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of the office and for therestoration to the corporation, in case of the treasurer’s death, resignation, retirement or removal from office, of all books, papers,vouchers, money and other property of whatever kind in the possession or under the control of the treasurer belonging to thecorporation.

Section 14. The assistant treasurer, or, if there shall be more than one, the assistant treasurers in the order determined by theboard of directors, shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer andshall perform such other duties and have such other powers as the board of directors may from time to time prescribe.

7


ARTICLE IX

INDEMNIFICATION

Section 1. The corporation shall indemnify any director, officer, agent, or employee as to those liabilities and on those terms andconditions as are specified in Section 7-3-1101(o) of the Colorado Corporation Code.

Section 2. In any event, the corporation shall have the right to purchase and maintain insurance on behalf of any such personsagainst any liability asserted against or incurred by such person whether or not the corporation would have the power to indemnifysuch person against the liability insured against.

ARTICLE X

CERTIFICATES FOR SHARES

Section 1. The shares of the corporation shall be represented by certificates signed by the chairman or vice chairman of the boardof directors or by the president or a vice-president and by the treasurer or an assistant treasurer or by the secretary or an assistantsecretary of the corporation, and may be sealed with the seal of the corporation or a facsimile thereof.

When the corporation is authorized to issue shares of more than one class there shall be set forth upon the face or back of thecertificate, or the certificate shall have a statement that the corporation will furnish to any shareholder upon request and withoutcharge, a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to beissued and, if the corporation is authorized to issue any preferred or special class in series, the variations in the relative rights andpreferences between the shares of each such series so far as the same have been fixed and determined and the authority of theboard of directors to fix and determine the relative rights and preferences of subsequent series.

Section 2. The signatures of the officers of the corporation upon a certificate may be facsimiles if the certificate is countersignedby a transfer agent, or registered by a registrar, other than the corporation itself or an employee of the corporation. In case any officerwho has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before suchcertificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of its issue.

LOST CERTIFICATES

Section 3. The board of directors may direct a new certificate to be issued in place of any certificate theretofore issued by thecorporation alleged to have been lost or destroyed. When authorizing such issue of a new certificate, the board of directors, in itsdiscretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions as it deems expedient, andmay require such indemnities as it deems expedient, and may require such indemnities as it deems adequate, to protect thecorporation from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed.

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TRANSFER OF SHARES

Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate representing shares dulyendorsed or accompanied by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued tothe person entitled thereto, and the old certificate cancelled and the transaction recorded upon the books of the corporation.

CLOSING OF TRANSFER BOOKS

Section 5. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or anyadjournment thereof or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any otherproper purpose, the board of directors may provide that the stock transfer books shall be closed for a stated period but not to exceed,in any case, seventy (70) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled tonotice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding suchmeeting. In lieu of closing the stock transfer books, the board of directors may fix in advance a date as the record date for any suchdetermination of shareholders, such date in any case to be not more than seventy (70) days and, in case of a meeting ofshareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholdersis to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled tonotice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which noticeof the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the casemay be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at anymeeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof.

REGISTERED SHAREHOLDERS

Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner ofshares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its booksas the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on thepart of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws ofColorado.

LIST OF SHAREHOLDERS

Section 7. The officer or agent having charge of the transfer books for shares shall make, at least ten (10) days before eachmeeting of shareholders, a complete list of the shareholders entitled to vote at such meting, arranged in alphabetical order, with theaddress of each and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kepton file at the principal office of the corporation and shall be subject to inspection by any shareholder at any time during usual businesshours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection ofany shareholder during the whole time of the meeting. The original share ledger or transfer book, or a duplicate thereof, shall beprima facie evidence as to who are the shareholders entitled to examine such list or share ledger or transfer book or to vote at anymeeting of the shareholders.

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ARTICLE XI

GENERAL PROVISIONS

DIVIDENDS

Section 1. Subject to the provisions of the articles of incorporation relating thereto, if any, dividends may be declared by the boardof directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capitalstock, subject to any provisions of the articles of incorporation.

Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends suchsum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, orfor equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directorsshall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner inwhich it was created.

CHECKS

Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such otherperson or persons as the board of directors may from time to time designate.

FISCAL YEAR

Section 4. The fiscal year of the corporation shall be fixed by resolution of the board of directors.

SEAL

Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words“Corporate Seal, Colorado”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any mannerreproduced.

ARTICLE XII

AMENDMENTS

Section 1. These by-laws may be altered, amended, or repealed or new by-laws may be adopted by the affirmative vote of amajority of the board of directors at any regular or special meeting of the board.

Section 2. These by-laws may be altered, amended or repealed or new by-laws may be adopted at any regular or special meetingof shareholders at which a quorum is present or represented, by the affirmative vote of a majority of the stock entitled to vote,provided notice of the proposed alteration, amendment or repeal be contained in the notice of such meeting.

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EXHIBIT 4.1

ROCKY MOUNTAIN CHOCOLATE FACTORY SEE REVERSE FOR CERTAIN DEFINITION

INCORPORATED UNDER THE LAWS OF THE STATE OF COLORADO COMMON STOCK CUSIP 774678 40 3

SEE REVERSE FOR CERTAIN DEFINITIONS

THIS CERTIFIES THAT S P E C I M E N

Is The Owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF $.03 PAR VALUE COMMON STOCK OF ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

transferable only on the books of the Corporation by the holder hereof, in person or by attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Corporation’s Articles of Incorporation, as amended, to all of which the holder by acceptance hereof assents. This certificate is not valid until countersigned by the Transfer Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

Dated:

SECRETARY

PRESIDENT [SEAL]



The Corporation will furnish without charge to each stockholder who so requests the Corporation’s Articles of Incorporation, asamended, and the Statement of Resolution Establishing Series of Shares of $1.00 Cumulative Convertible Preferred Stock, which setforth the designations and amounts, and the voting powers, preferences and rights, and the qualifications, limitations and restrictionsthereof, in respect of each class of stock and series thereof. Such request may be made to the Corporation or the Transfer Agent.

Keep this certificate in a safe place. If it is lost, stolen or destroyed the Corporation may require a bond of indemnity as a conditionto the issuance of a replacement certificate.

This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement dated as ofMay 18, 1999, as it may be amended from time to time (the “Rights Agreement”), between Rocky Mountain Chocolate Factory, Inc.and American Securities Transfer & Trust, Inc., as Rights Agent, the terms of which are hereby incorporated herein by reference anda copy of which is on file at the principal executive offices of Rocky Mountain Chocolate Factory, Inc. Under certain circumstances, asset forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by thiscertificate. Rocky Mountain Chocolate Factory, Inc. will mail to the holder of this certificate a copy of the Rights Agreement withoutcharge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rightsbeneficially owned by an Acquiring Person or its Affiliates or Associates (as such terms are defined in the Rights Agreement) and byany subsequent holder of such Rights are null and void and nontransferable.

The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they werewritten out in full according to applicable laws or regulations:

TEN COM

-as tenants in common

UNIF GIFT MIN ACT- Custodian

TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act in common (State)

Additional abbreviations may also be used though not in the above list.

For Value Received, hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHERIDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE. OF ASSIGNEE)

Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint

attorney-in-fact to transfer the said stock on the books of the within-named Corporation, with full power of substitution in thepremises.

Dated


NOTICE:

THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE

CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER

Signature(s) Guaranteed:


EXHIBIT 10.1

FORM OF EMPLOYMENT AGREEMENT

This Restated Employment Agreement (“Agreement”), dated as of , 1999 is between Rocky Mountain ChocolateFactory, 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 andthose 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 valuableconsideration, the parties agree as follows:

SECTION 1. Employment. Employer hereby employs Employee, and Employee hereby accepts employment, upon the terms andsubject to the conditions hereinafter set forth.

SECTION 2. Duties. Employee shall be employed as , or such other position to which he may beappointed by the Board of Directors. Employee agrees to devote his full time and best efforts to the performance of the dutiesattendant 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. Theterm of employment of Employee hereunder will be automatically extended on a month-to-month basis after the end of the initial termunless either Employer or Employee shall give the other written notice of its election not to renew this Agreement at least 30 daysprior 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 compensateEmployee as follows:

(a) Base Salary. Until the termination of Employee’s employment hereunder, Employer shall pay Employee, semi-monthly inarrears, 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 Salary as then in effect may not be decreased at any time during the term of Employee’s employment hereunder and shallbe reviewed annually by Employer. Any increase in the Base Salary shall be in the sole discretion of the Compensation Committee ofthe Board of Directors of the Company.

(b) Management Incentive Bonus. Employee shall be eligible to receive from Employer such annual incentive bonuses as may bedetermined by the Compensation

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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 ofEmployer 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 groupaccident, 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 theterms of this Agreement, Employee will be required to make payments for travel, entertainment of business associates and similarexpenses. Employer shall reimburse Employee for all reasonable expenses of types authorized by Employer and incurred byEmployee in the performance of his duties hereunder. Employee shall comply with such budget limitations and approval and reportingrequirements 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 theterm specified in Section 3, except that the employment of Employee hereunder shall terminate prior to such time in accordance withthe 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 negligenceor 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 asan officer of Employer, and such failure is not cured within 20 days after he receives notice of such failure from the President ofEmployer.

(iii) Without Cause. Without Cause upon notice by Employer to Employee. Without limiting the foregoing, for purposes ofSection 6(b)(ii) Employee’s employment hereunder shall be deemed to have been terminated by Employer without Cause pursuantto this Section 6(a)(iii) (a) upon the expiration of the term of Employee’s employment specified in Section 3, if Employer has giventhe notice of nonrenewal contemplated by the last sentence of Section 3, or (b) if Employee’s employment is ConstructivelyTerminated by Employer.

(b) Severance Pay and Bonuses.

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(i) Termination Upon Death or Disability. Employee shall not be entitled to any severance pay or other compensation upontermination of his employment hereunder pursuant to Section 6(a)(i) except for the following (which shall be paid promptly aftertermination, 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 totermination;

(3) compensation for accrued, unused vacation as of the date of termination, determined in accordance with Employer’spolicies 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 thelast 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 timebonuses are paid in respect of the Bonus Period to other employees of Employer entitled to receive bonuses for the BonusPeriod. 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 orother applicable bonus period during which Employee’s employment hereunder was terminated (or during which Employeebecame Disabled, in the event of a termination for Disability).

(ii) Termination Without Cause, Separation Payments. In the event Employee’s employment hereunder is terminated pursuantto Section 6(a)(iii), Employer shall pay Employee Separation Payments as Employee’s sole remedy in connection with suchtermination. “Separation Payments” are payments made at the monthly rate of Employee’s Base Salary in effect immediatelypreceding the date of termination. Separation Payments shall be made for 12 months after the date of termination (the “SeparationPayment Period”) and shall be paid by Employer in equal monthly payments in arrears. Separation Payments shall be reduced bythe amount of any personal services income earned by Employee from 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 remainingin 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 9hereof. Employer shall also promptly pay Employee the following:


(2) unpaid expense reimbursements under Section 5 for expenses incurred in accordance with the terms hereof prior totermination; and

(3) compensation for accrued, unused vacation as of the date of termination, determined in accordance with Employer’spolicies and procedures then in effect.

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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 ChangeIn Control.

(iii) Termination For Cause, Voluntary Termination. Employee shall not be entitled to Separation Payments or any otherseverance pay or other compensation upon termination of his employment hereunder pursuant to Section 6(a)(ii), or uponEmployee’s voluntary termination of his employment hereunder, except for the following (which shall be paid promptly aftertermination):


(2) unpaid expense reimbursements under Section 5 for expenses incurred in accordance with the terms hereof prior totermination; and

(3) compensation for accrued, unused vacation as of the date of termination, determined in accordance with Employer’spolicies 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 Optionsgranted to Employee under the Option Plan and outstanding at the time of such termination shall be fully vested and shall becomeimmediately exercisable upon such termination, and shall thereafter be exercisable by Employee in accordance with the termsthereof and the applicable provisions of the Plan. The Board of Directors or the Compensation Committee of the Board of Directors ofthe 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 (includingwithout limitation all data and records pertaining thereto) that relate to the business of Employer, whether or not specifically withinEmployee’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, eitheralone or with others and whether or not during working hours or by the use of the facilities of Employer (“Inventions”), shall be theexclusive property of Employer. Employee shall promptly disclose all Inventions to Employer, shall execute at the request of Employerany 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 hisattorney-in-fact to execute on his behalf any assignments or other documents deemed necessary by Employer to protect or perfect itsrights to any Inventions.

(b) Covenant to Assign and Cooperate. Without limiting the generality of the foregoing, Employee shall assign and transfer, anddoes hereby assign and transfer, to Employer the world-wide right, title and interest of Employee in the Inventions. Employee agreesthat Employer may file copyright registrations and apply for and receive patents (including without limitation Letters Patent in theUnited States) for the Inventions in Employer’s name in such countries as may be determined solely by Employer. Employee shallcommunicate to Employer all facts known to Employee relating to the Inventions and shall cooperate with Employer’s reasonablerequests in connection with vesting title to the Inventions and related copyrights and patents exclusively in Employer and inconnection with

4


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 successorsand assigns and shall survive the expiration of the term of this Agreement for such time as may be necessary to protect theproprietary rights of Employer in the Inventions.

(d) Consideration and Expenses. Employee shall perform his obligations under this Section 7 at Employer’s expense, but withoutany additional or special compensation therefor.

SECTION 8. Confidential Information.

(a) Acknowledgment of Proprietary Interest. Employee acknowledges that all Confidential Information is a valuable, special andunique asset of Employer’s business, access to and knowledge of which are essential to the performance of Employee’s dutieshereunder. Employee acknowledges the proprietary interest of Employer in all Confidential Information. Employee agrees that allConfidential Information learned by Employee during his employment with Employer or otherwise, whether developed by Employeealone or in conjunction with others or otherwise, is and shall remain the exclusive property of Employer. Employee furtheracknowledges 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, research and work in progress, (ii) methods of operation, (iii) market data,(iv) proprietary computerprograms and codes, (v) drawings, designs, plans and proposals, (vi) marketing and sales programs, (vii) franchisee and supplier listsand 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 orperformed for or by Employer and (xi) all information related to the business, products, purchases or sales of Employer or any of itsfranchisees, 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. Asa 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 todisclose or allow to be disclosed to any person, firm or corporation, other than to persons engaged by Employer to further thebusiness of Employer, and not to use except in the pursuit of the business of Employer, the Confidential Information, without the priorwritten consent of Employer. This Section 8 shall survive and continue in full force and effect in accordance with its terms after, andwill not be deemed to be terminated by, any termination of this Agreement or of Employee’s employment with Employer for anyreason.

(d) Return of Materials at Termination. In the event of any termination or cessation of his employment with Employer for anyreason, Employee shall promptly deliver to Employer all property of Employer, including without limitation all documents, data andother information containing, derived from or otherwise pertaining to Confidential Information. Employee shall not take or retain anyproperty 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

5


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 provideto 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 maintenanceconstitutes a legitimate interest to be protected by Employer by the enforcement of the covenant not to compete contained in thisSection 9. Employee also acknowledges that such covenant not to compete is ancillary to other enforceable agreements of theparties, including without limitation the agreements regarding Confidential Information in Section 8 and the agreements regarding thepayment 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 thisSection 9) after termination of Employee’s employment hereunder (including, without limitation, a Triggering Termination as defined inSection 10), Employee shall not directly or indirectly

(i) engage, alone or as a shareholder, partner, member, manager, director, officer, employee of or consultant to any otherbusiness organization that engages or is planning to engage, anywhere in the United States or Canada or in any other geographicarea in or with respect to which Employee has any duties or responsibilities during the term of his employment with Employer, inany business activities that relate to the manufacture or retail sale of chocolate candy, including but not limited to the sale throughfranchisees (the “Designated Industry”); or

(ii) solicit or encourage any director, officer, employee of or consultant to Employer to end his relationship with Employer orcommence any such relationship with any competitor of Employer.

Notwithstanding the foregoing, (1) Employee’s noncompetition obligations hereunder shall not preclude Employee from owningless than five percent of the voting power or economic interest in any publicly traded corporation conducting business activities in theDesignated Industry and (2) an entity shall not be deemed to be engaged in the Designated Industry unless its revenue from themanufacture and/or retail sale of chocolate candy (including sales through franchisees) represents 25% or more of its total revenuefor its full fiscal quarter immediately preceding the date of termination of Employee’s employment hereunder (or the date of hisassociation 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 resultof such violation or the time involved in obtaining legal or equitable relief therefor, be deprived of the benefit of the full period of anysuch covenant. Accordingly, the covenants of Employee contained in this Section 9 shall be deemed to have the duration specified inSection 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 inviolation of any of the covenants contained in this Section 9 prior to the commencement of any litigation relating thereto and (ii) thetotal number of days the parties are involved in such litigation, through the date of entry by a court of competent jurisdiction of a finaljudgment enforcing the covenants of Employee in this Section 9. This Section 9 shall survive and continue in full force and effect inaccordance with its terms after, and will not be deemed to be terminated by, any termination of this Agreement or of Employee’semployment with Employer for any reason.

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(c) Severability. If at any time the provisions of this Section 9 are determined to be invalid or unenforceable by reason of beingvague or unreasonable as to area, duration or scope of activity, this Section 9 shall be considered divisible and shall be immediatelyamended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court orother body having jurisdiction over the matter, and Employee agrees that this Section 9 as so amended shall be valid and binding asthough any invalid or unenforceable provision had not been included herein.

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 ordistraction of management to the detriment of Employer and its stockholders, and Employer has determined that appropriate stepsshould 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 conflictingprovisions in this Agreement in the event Employee’s employment with Employer is terminated in a Triggering Termination. Each ofthe 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 ofEmployee’s initial or any renewal term of employment specified in Section 3, within the 12-month period following a Change InControl;

(ii) terminated by Employer for any reason other than the commission of a felony by Employee, or terminated upon theexpiration 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 inanticipation of a Change In Control to the extent that his continued employment with Employer is not pursuant to the terms ofthis Agreement (other than as provided herein with respect to an Agreement Termination) and thereafter is only on an at-willbasis. Employee’s determination to effect an Agreement Termination must be based on a good faith judgment of Employee andany two or more Concurring Persons, in light of the circumstances as then known or understood by them, that a Change InControl 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 onlyfor 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

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(III) the Board of Directors of Employer has taken any action to approve or facilitate the Change In Control.

(2) The concurrence or approval of the Concurring Persons is limited to the occurrence and timing of the Change In Controland 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 UpPayment prior to a Change In Control, Employee agrees that, upon (and notwithstanding) his exercise of such right and thepayment to him of the Termination Payment and Gross Up Payment, he shall continue, without interruption until such Change InControl occurs (unless his at-will employment with Employer is sooner terminated or Constructively Terminated by Employer, asdescribed in Sections 10(a)(ii) and (iii), or Employee dies or his employment with Employer is terminated due to Disability), todevote his full time and best efforts as an at-will employee of Employer to the performance of the same duties that he performedfor Employer, holding the same office or position with Employer as he held before the Agreement Termination, but without theright 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 Paymentand 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 thisAgreement (including without limitation his compensation and benefits, duties, position and rights regarding any other actualor 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 TerminationPayment and Gross Up Payment received by Employee (together with interest, if any, actually earned on the funds while inEmployee’s control).

(5) If Employee fails to satisfy his Continued Performance Obligation, and such failure continues for more than one businessday after receipt by Employee of written otice from Employer of such failure, then

(I) such Agreement Termination shall be void and ineffective, and Employee shall be deemed to have voluntarilyterminated 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 Paymentand Gross Up Payment received by

8


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 to2.99 times the sum of the following items:

(I) Employee’s annualized base compensation determined by using the highest annual base compensation rate in effect atany 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 ChangeIn Control occurred; provided that the amount determined under this Section 10(b)(i)(l)(II) shall not be less than 25% of theamount 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 followingamounts 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 thedate 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 lifeinsurance coverage for the 18-month period following the expiration of his continuation (COBRA) rights; provided that thisSection 10(b)(i)(2)(IV) shall be applied without regard to, and the amount payable under this Section 10(b)(i)(2)(IV) is inaddition to, any continuation (COBRA) rights or conversion rights under any plan provided by Employer, which rights are notaffected by any provision hereof.

(ii) Time for Payment; Interest. Employer shall pay the Termination Payment to Employee concurrently with the TriggeringTermination or, if the Triggering Termination occurs before the Change In Control, concurrently with the Change In Control.Employer’s obligation to pay to Employee any amounts under this Section 10, including without limitation the TerminationPayment 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 samerate, 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 awire transfer or otherwise effect payment on behalf of Employer to satisfy Employer’s obligations to pay all amounts due toEmployee under this Section 10.

9


(iv) Termination. Employer’s obligation to pay the Termination Payment shall not be affected by the manner in whichEmployee’s employment hereunder is terminated. Without limiting the generality of the foregoing, Employer shall be obligated topay the Termination Payment and any Gross Up Payment regardless of whether Employee’s termination of employment isvoluntary, involuntary, for cause, without cause, in violation of any employment agreement or other agreement in effect at the timeof the Change In Control (except as provided in Section 10(a)(iv)(5)(I) with respect to Employee’s failure to satisfy his ContinuedPerformance Obligation in the event of an Agreement Termination) or due to Employee’s retirement or Disability. Employee’snotice of his termination of employment hereunder in connection with a Change In Control may be made by any means and to anyofficer 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 ofthe following circumstances: (i) there shall have occurred an event that would be required to be reported in response to Item 6(e) ofSchedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not Employer is then subject to such reportingrequirement; (ii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (an “Acquiring Person”) shallhave become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities ofEmployer representing 20% or more of the combined voting power of Employer’s then outstanding voting securities (a “ShareAcquisition”); (iii) Employer is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as aconsequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less thana majority of the Board of Directors thereafter; or (iv) during any period of two consecutive years, individuals who at the beginning ofsuch period constituted the Board of Directors (including for this purpose any new director whose election or nomination for electionby Employer’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at thebeginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that anevent described in clause (i) or (ii) shall not be deemed a Change In Control if such event is approved, prior to its occurrence or within60 days thereafter by at least two-thirds of the members of the Board of Directors in office immediately prior to such occurrence. Inaddition to the foregoing, a Change In Control shall be deemed to have occurred if, after the occurrence of a Share Acquisition thathas been approved by a two-thirds vote of the Board as contemplated in the proviso to the preceding sentence, the Acquiring Personshall have become the beneficial owner, directly or indirectly, of securities of Employer representing an additional 5% or more of thecombined voting power of Employer’s then outstanding voting securities (a “Subsequent Share Acquisition”) without the approval priorthereto or within 60 days thereafter of at least two-thirds of the members of the Board of Directors who were in office immediately priorto such Subsequent Share Acquisition and were not appointed, nominated or recommended by, and do not otherwise represent theinterests of, the Acquiring Person on the Board. Each subsequent acquisition by an Acquiring Person of securities of Employerrepresenting an additional 5% or more of the combined voting power of Employer’s then outstanding voting securities shall alsoconstitute a Subsequent Share Acquisition (and a Change In Control unless approved as contemplated by the preceding sentence) ifthe approvals contemplated by this paragraph were given with respect to the initial Share Acquisition and all prior Subsequent ShareAcquisitions by such Acquiring Person. The Board approvals contemplated by the two preceding sentences and by the proviso to thefirst sentence of this paragraph may contain such conditions as the members of the Board granting such approval may deemadvisable and appropriate, the subsequent failure or violation of which shall result in the rescission of such approval and cause aChange In Control to be deemed to have occurred as of the date of the Share Acquisition or Subsequent Share Acquisition, as thecase may be. Notwithstanding

10


the foregoing, a Change In Control shall not be deemed to have occurred for purposes of clause (ii) of the first sentence of thisparagraph with respect to any Acquiring Person meeting the requirements of clauses (i) and (ii) of Rule 13d-l(b)(1) promulgated underthe 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 “excessparachute payments” within the meaning of Section 280G(b)(1) of the Code as the result of any payments or distributions byEmployer to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of thisAgreement 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 byEmployee, after deduction of (1) any Excise Tax owed, or that would be owed if the Change In Control satisfied the requirements ofSection 280G(b)(2)(A)(i) of the Code, upon any Payments (other than payments provided by this Section 10(d)(i)) and (2) anyfederal, state and local income and employment taxes owed (together with penalties and interest) and Excise Tax owed, or thatwould be owed if the Change In Control satisfied the requirements of Section 280G(b)(2)(A)(i) of the Code, upon the paymentsprovided by this Section 10(d)(i), shall be equal to the amount of the Payments (other than payments provided by thisSection 10(d)(i)).

(ii) Applicable Rates. For purposes of determining the Gross Up Payment amount, Employee shall be deemed:

(1) to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individual taxpayers in thecalendar year in which the Gross Up Payment is made (which rate shall be adjusted as necessary to take into account the effectof any reduction in deductions, exemptions or credits otherwise available to Employee had the Gross Up Payment not beenreceived);

(2) to pay additional employment taxes as a result of the receipt of the Gross Up Payment in an amount equal to the highestmarginal rate of employment taxes applicable to wages; provided that if any employment tax is applied only up to a specifiedmaximum 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’sresidence on the date of the Triggering Termination, net of the maximum reduction in federal income taxes that could beobtained 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, atEmployer’s expense, by Grant Thornton LLP or another nationally recognized public accounting firm selected by Employee (ineither case, the “Accountants”). If the Excise Tax amount payable by Employee, based upon a “Determination,” is different from theExcise Tax amount computed by the Accountants for purposes of determining the Gross Up Payment amount, then appropriateadjustments to the Gross Up Payment amount shall be made in the manner provided in Section 10(d)(iv). For purposes ofdetermining the Gross Up Payment amount

11


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) andSection 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 aParachute 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 Employeeas a result ofxthe receipt of the payment described in Section 10(l); and

(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 ConsultingAgreement shall be made, and all of such payments shall be treated as Parachute Payments; provided that nothing in thisSection 10(d)(iii)(4) shall limit or reduce the payment of any amount similar to the Gross Up Payment under the ConsultingAgreement;

(5) the “ascertainable fair market value” (as set forth in Prop. Treas. Reg. Section 1.280G-1, Q&A 13) of the Options, thevesting of which was accelerated by the Change In Control as provided in the Option Plan and as further provided inSection 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 inProp. Treas. Reg. Section 1.280G-1, Q&A 24(b), the amount reflecting the lapse of the obligation to continue performingservices 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 minimumamount

12


provided for in any temporary or final regulations that supersede Prop. Treas. Reg. Section 1.280G-1 and that are applicable tothe 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 thepayment of the Termination Payment. Employee and Employer agree to reasonably cooperate in the determination of the actualGross Up Payment amount. Further, Employee and Employer agree to make such adjustments to the estimated Gross UpPayment amount as may be necessary to equal the actual Gross Up Payment amount based upon a Determination, which in thecase of Employee shall refer to refunds of prior overpayments and in the case of Employer shall refer to makeup of priorunderpayments.

(e) Term. Notwithstanding the provisions of Section 3, if a Change In Control occurs prior to the date on which Employee’semployment hereunder is terminated pursuant to Section 3, Sections 10, 11 and 12 shall continue in effect until the date oftermination pursuant to Section 3 or the date that is 12 months after the date of the Change In Control, whichever is later.

(f) Consulting Agreement. To preserve a sound and vital management team for the Company during the period immediatelyfollowing a Change In Control, Employee agrees that, in the event of a Triggering Termination, Employee shall enter into aConsulting Agreement (the “Consulting Agreement”) in the form attached hereto as Exhibit B if requested by the Board of Directors ofthe Company within 30 days after the Change In Control. If Employee breaches his obligation under the preceding sentence bydeclining to enter into a Consulting Agreement, as liquidated damages for such breach and not as a penalty, Employee shall pay toEmployer the amount that Employee otherwise would have received as compensation from Employer under the ConsultingAgreement 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 inconsideration of his past service and his continued service to Employer from the Commencement Date, and his entitlement theretoshall neither be governed by any duty to mitigate his damages by seeking further employment nor offset by any compensation thathe 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 rightto 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 immediatelyexercisable upon a Change In Control. Employer shall take no action to facilitate a transaction involving a Change In Control unless ithas taken such action as may be necessary to ensure that Employee has the opportunity to exercise all Options he may then hold, ata time and in a manner that shall give Employee the opportunity to sell or exchange the securities of Employer acquired uponexercise of his Options, if any (the “Acquired Securities”), at the earliest time and in the most advantageous manner any holder of thesame class of securities as the Acquired Securities is able to sell or exchange such securities in connection with such Change InControl. Employer acknowledges that its covenants in the preceding sentence (the “Covenants”) are reasonable and necessary inorder to protect the legitimate interests of Employer in maintaining Employee as one of its employees and that any violation of theCovenants by Employer would result in irreparable injuries to Employee, and Employer therefore acknowledges that in the event ofany violation of the Covenants by Employer or its directors, officers or employees, or any of their respective agents, Employee shallbe 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

13


performance of the exercise of his Options and the sale or exchange of the Acquired Securities in the advantageous mannercontemplated above or (iii) prevent violation of the Covenants; provided that nothing in this Agreement shall be deemed to prejudiceEmployee’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

(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 TerminationPayment and such Separation Payments shall be made (in this event, Employer waives any requirement that Employee reducethe 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, Employeragrees to reimburse Employee for any outplacement consulting fees and expenses incurred by Employee during any ApplicablePeriod and during the two-year period following the Change In Control; provided that the aggregate amount reimbursed by Employershall not exceed 15% of Employee’s Base Salary in effect immediately prior to the Triggering Termination. In addition and as to eachreimbursement payment, to the extent that any reimbursement under this Section 10(l) is subject to federal, state or local incometaxes, Employer shall pay Employee an additional amount such that the net amount retained by Employee, after deduction of anyfederal, 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 anystatements of such amounts and thereafter shall bear interest at the rate of 18% per annum or, if different, the maximum rate allowedby law until paid by Employer, and all accrued and unpaid interest shall bear interest at the same rate, all of which interest shall becompounded 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 bywritten telecommunication, and shall be deemed to have been duly given if delivered personally or if mailed by certified mail, returnreceipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipientof such notice or communication shall have specified to the other party in accordance with this Section 11(a): If to Employer, to: with a copy to: Rocky Mountain Chocolate Factory, Inc. Thompson & Knight, P.C.265 Turner Drive 1700 Pacific Avenue, Suite 3300Durango, Colorado 81301 Dallas, Texas 75201Attention: President Attention: Kenn W. Webb

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Facsimile Number: (970) 382-7366 Facsimile Number: (214) 969-1751

If to Employee, to:

53 Silver Mountain RoadP. O. Box 3671Durango, Colorado 81302

(b) Withholding; No Offset. All payments required to be made to Employee by Employer shall be subject to the withholding of suchamounts, if any, relating to federal, state and local taxes as may be required by law. No payments under Section 10 shall be subjectto 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 resultof any breach by Employer of its obligations under this Agreement, including without limitation all such costs incurred in contesting ordisputing any determination made by Employer under Section 10 or in connection with any tax audit or proceeding to the extentattributable to the application of Section 4999 of the Code to any payment under Section 10. Reimbursements of such costs shall bemade by Employer within 15 days after Employee’s presentation to Employer of any statements of such costs and thereafter shallbear interest at the rate of 18% per annum or, if different, the maximum rate allowed by law until paid by Employer, and all accruedand 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 hisobligations under any of Sections 7, 8 and 9, Employer shall have no adequate remedy at law and accordingly shall be entitled tospecific 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 fullyseverable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never compriseda part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalidor unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, thereshall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceableprovision 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 thereofor 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 ofwhich together shall constitute one and the same instrument.

(h) Captions. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any ofthe terms or provisions hereof.

(i) Reference to Agreement. Use of the words “herein,” “hereof,” “hereto,” “hereunder” and the like in this Agreement refer to thisAgreement only as a whole and not to any particular section or subsection of this Agreement, unless otherwise noted.

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(j) Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties and shall be enforceable by thepersonal representatives and heirs of Employee and the successors and assigns of Employer. This Agreement may be assigned byEmployer to a legal successor-in-interest of Employer or to a wholly owned subsidiary to which substantially all the business andoperations of Employer are transferred. If Employee dies while any amounts would still be payable to him hereunder, such amountsshall 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 andunderstandings, relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed byeach of the parties hereto.

(1) Governing Law. This Agreement and the performance hereof shall be construed and governed in accordance with the laws ofthe 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 denotethe 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, uponreasonable notice, furnish such information and proper assistance to Employer as may reasonably be required by Employer inconnection with any litigation in which Employer is, or may become, a party and with respect to which Employee’s particularknowledge or experience would be useful. Employer shall reimburse Employee for all reasonable out-of-pocket expenses incurred byEmployee in rendering such assistance. The provisions of this Section 11(n) shall continue in effect notwithstanding termination ofEmployee’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 mayincur as a result of Employer’s failure to perform under this Agreement or as a result of Employer, any Acquiring Person or anyaffiliate of Employer seeking to terminate this Agreement other than in accordance with the terms hereof or contesting the validity orenforceability 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).

(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 ofEmployee’s employment with Employer, in any form, shall be deemed to include (whether or not so expressed) an AgreementTermination.

(f) Applicable Period means, with respect to any Change In Control, the period of 90 days immediately preceding the Change InControl.

(g) Base Salary has the meaning ascribed to it in Section 4(a).

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(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 theCompensation Committee of the Board of Directors of the Company (or, if no Compensation Committee exists, or there are fewerthan two members of the Compensation Committee, a nonemployee member of the Board of Directors of the Company) at the time inquestion.

(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 ifEmployer

(i) demotes Employee to a lesser position, either in title or responsibility (whether or not there is a change in title), than thehighest 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 withEmployer or reduces Employee’s benefits and perquisites below the highest levels in effect at any time during Employee’semployment with Employer (other than as a result of any amendment or termination of any employee or group or other executivebenefit plan, which amendment or termination is applicable to all executives of Employer);

(iii) requires Employee to relocate to a principal place of business more than 25 miles from the principal place of businessoccupied 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 byclauses (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 anysubstantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result indeath 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, thedetermination of Disability will be made by a licensed physician selected by Employer, which physician’s decision will be final andbinding.

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(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 RockyMountain 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).

(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 suchEmployee’s Base Salary that would be paid to Employee under any incentive bonus plan of Employer assuming the measurementcriteria 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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Exhibit A

The duties to be performed by Employee pursuant to this Agreement include the following:

[To be supplied by Company]

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Exhibit B

CONSULTING AGREEMENT

This Consulting Agreement (“Agreement”), dated as of ___, ___ (“Effective Date”), is between Rocky MountainChocolate 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 (“EmploymentAgreement”), under which Consultant is obligated to enter into this Agreement at the request of the Board of Directors of theCompany under certain circumstances.

C. The Board of Directors of the Company has requested that Consultant enter into this Agreement and Consultant is willing to doso.

NOW, THEREFORE, for and in consideration of the mutual promises contained in this Agreement, and on the terms and subject tothe 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 advisoryservices as may be requested from time to time by the Company’s Board of Directors. Consultant agrees to devote his attention, skillsand best efforts to the performance of his duties under this Agreement. Consultant shall not be obligated, however, to devote morethan 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 andcontinues, unless earlier terminated pursuant to Section 5, until 180 days after the date of the Change In Control, as defined in theEmployment Agreement.

SECTION 3. Compensation. In consideration for the services provided by Consultant, the Company shall pay to Consultant anamount equal to one-half of his annual base compensation considered for purposes of Section 10(b)(i)(l)(I) of the EmploymentAgreement, which amount shall be paid in six equal monthly installments, with the first installment due and payable on the EffectiveDate.

SECTION 4. Expenses. The parties anticipate that Consultant, in connection with the services to be performed by him under thisAgreement, will incur expenses for travel, lodging and similar items. The Company shall advance the estimated amount of suchexpenses to Consultant and shall, within 15 days after Consultant’s presentation to the Company of reasonable documentation theactual expenses, reimburse Consultant for all expenses incurred by Consultant in the performance of his duties under this Agreementthat 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.

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(ii) For Cause. For “Cause” immediately upon written notice by the Company to Consultant. For purposes of this Agreement, atermination 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 ofDirectors; or (B) commits a material breach of any of the covenants, terms and provisions of this Agreement and such failure orbreach continues uncured for more than 30 days after receipt by Consultant of written notice from the Company of such failureor breach.

(b) Payments Upon Early Termination. Consultant shall not be entitled to any compensation upon termination of this Agreementpursuant to this Section 5 except for his compensation accrued but unpaid as of the date of such termination and unpaid expensereimbursements 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 bedeemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by writtentelecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communicationshall 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 3300Durango, Colorado 81301 Dallas, Texas 75201Attention: President Attention: Kenn W. WebbFacsimile Number: (970) 382-7366 Facsimile Number: (214) 969-1751

If to Consultant, to:

53 Silver Mountain RoadP. O. Box 3671Durango, Colorado 81302

(b) Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision shall be fullyseverable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never compriseda part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalidor unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, thereshall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceableprovision 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 suchright, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercisethereof or the exercise of any other right, power or privilege.

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(d) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all ofwhich 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 ofthe terms or provisions hereof.

(f) Reference to Agreement. Use of the words “hereof,” “hereto,” “hereunder” and the like in this Agreement refer to this Agreementas 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 bythe personal representatives and heirs of Consultant and the successors of the Company. If Consultant dies while any amounts wouldstill be payable to him hereunder, such amounts shall be paid to Consultant’s estate. This Agreement is not otherwise assignable byConsultant or by the Company.

(h) Entire Agreement. This Agreement contains the entire understanding of the parties, supersedes all prior agreements andunderstandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed byeach of the parties hereto.

(i) Governing Law. This Agreement and the performance hereof shall be construed and governed in accordance with the laws ofthe State of Colorado, without regard to its choice of law principles.

(j) Gender and Number. The masculine gender shall be deemed to denote the feminine or neuter genders, the singular to denotethe plural, and theplural 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 10.7

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this “Agreement”), made and entered into as of the day of April, 1998, byand between ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado corporation (the “Corporation”), and (“Director”).

W I T N E S S E T H:

WHEREAS, it is essential to the Corporation to retain and attract as directors the most capable persons available;

WHEREAS, Director is a director of the Corporation;

WHEREAS, both the Corporation and Director recognize the risk of litigation and other claims being asserted against directors ofpublic companies; and

WHEREAS, in recognition of Director’s need for substantial protection against personal liability in order to maintain continuedservice to the Corporation in an effective manner and to provide Director with specific contractual assurance that the protection will beavailable to Director, the Corporation desires to provide in this Agreement for the indemnification of and the advancement ofexpenses to Director 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 Director’s continuedservice to the Corporation, the Corporation and Director 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 followingcircumstances: (a) there shall have occurred an event that would be required to be reported in response to Item 6(e) of Schedule 14Aof Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities ExchangeAct 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 Corporationrepresenting 20% or more of the combined voting power of the Corporation’s then outstanding voting securities (a “ShareAcquisition”); (c) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as aconsequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less thana majority of the Board of Directors thereafter; or (d) during any period of two consecutive years, individuals who at the beginning ofsuch period constituted the Board of Directors (including for this purpose any new director whose election or nomination for electionby the Corporation’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directorsat the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors;

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PROVIDED, HOWEVER, that an event described in clause (a) or (b) shall not be deemed a Change In Control if such event isapproved, prior to its occurrence or within 60 days thereafter, by at least two-thirds of the members of the Board of Directors in officeimmediately prior to such occurrence. In addition to the foregoing, a Change In Control shall be deemed to have occurred if, after theoccurrence of a Share Acquisition that has been approved by a two-thirds vote of the Board as contemplated in the proviso to thepreceding sentence, the Acquiring Person shall have become the beneficial owner, directly or indirectly, of securities of theCorporation representing an additional 5% or more of the combined voting power of the Corporation’s then outstanding votingsecurities (a “Subsequent Share Acquisition”) without the approval prior thereto or within 60 days thereafter of at least two-thirds ofthe members of the Board of Directors who were in office immediately prior to such Subsequent Share Acquisition and were notappointed, nominated or recommended by, and do not otherwise represent the interests of, the Acquiring Person on the Board. Eachsubsequent acquisition by an Acquiring Person of securities of the Corporation representing an additional 5% or more of thecombined 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 thisparagraph were given with respect to the initial Share Acquisition and all prior Subsequent Share Acquisitions by such AcquiringPerson. The Board approvals contemplated by the two preceding sentences and by the proviso to the first sentence of this paragraphmay contain such conditions as the members of the Board granting such approval may deem advisable and appropriate, thesubsequent failure or violation of which shall result in the rescission of such approval and cause a Change In Control to be deemed tohave occurred as of the date of the Share Acquisition or Subsequent Share Acquisition, as the case may be. Notwithstanding theforegoing, a Change In Control shall not be deemed to have occurred for purposes of clause (b) of the first sentence of this paragraphwith respect to any Acquiring Person meeting the requirements of clauses (i) and (ii) of Rule 13d-l(b)(1) promulgated under theExchange Act.

“Expenses” shall include reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travelexpenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all otherdisbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute ordefend, 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 neitherpresently is, nor in the five years previous to his or her selection or appointment has been, retained to represent: (a) the Corporationor Director in any matter material to either such party, (b) any other party to the Proceeding giving rise to a claim for indemnificationhereunder or (c) the beneficial owners, directly or indirectly, of securities of the Corporation representing 5% or more of the combinedvoting 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 whetherformal or informal, including without limitation one initiated by Director pursuant to Section 10 of this Agreement to enforce his rightsunder this Agreement.

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Section 2.

INDEMNIFICATION. The Corporation shall indemnify, and advance Expenses to, Director to the fullest extent permitted byapplicable law in effect on the date of the effectiveness of this Agreement, and to such greater extent as applicable law may thereafterpermit. The rights of Director provided under the preceding sentence shall include, but not be limited to, the right to be indemnified tothe fullest extent permitted by Section 7-109-102(4) and (5) of the C.B.C.A. in Proceedings by or in the right of the Corporation and tothe fullest extent permitted by Section 7-109-102(1)-(3) of the C.B.C.A. in all other Proceedings. To the fullest extent permitted byapplicable law, such right to be indemnified shall survive and continue following the termination of Director’s service as a director ofthe Corporation, with respect to conduct and actions taken, and decisions made, by Director in his capacity as a director of theCorporation. The provisions set forth below in this Agreement are provided in furtherance, and not by way of limitation, of theobligations expressed in this Section 2.

Section 3.

EXPENSES RELATED TO PROCEEDINGS. If Director is, by reason of his status as a director of the Corporation, a witness in ora party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually andreasonably incurred by him or on his behalf in connection therewith. If Director is not wholly successful in such Proceeding but issuccessful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Director against allExpenses actually and reasonably incurred by him or on his behalf relating to each Matter. The termination of any Matter in such aProceeding 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 Director for the Expenses incurred by Director inadvance of the final disposition of a Proceeding within ten days after Director requests such payment or reimbursement, to the fullestextent permitted by, and subject to compliance with, Section 7-109-104 of the C.B.C.A.

Section 5.

REQUEST FOR INDEMNIFICATION. To obtain indemnification Director shall submit to the Corporation a written request withsuch information as is reasonably available to Director. The Secretary of the Corporation shall promptly advise the Board of Directorsof such request.

Section 6.

DETERMINING ENTITLEMENT TO INDEMNIFICATION IF NO CHANGE IN CONTROL. If there has been no Change In Controlat the time the request for Indemnification is sent, Director’s entitlement to indemnification shall be determined in accordance withSection 7-109-106 of the C.B.C.A. If entitlement to indemnification is to be determined by Independent Counsel, the Corporation shallfurnish notice to Director within ten days after receipt of the request for indemnification, specifying the identity and address ofIndependent Counsel. Director may, within 14 days after receipt of such written notice of selection, deliver to the Corporation a writtenobjection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does notmeet the requirements of Independent Counsel and the objection shall set forth

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with particularity the factual basis of such assertion. If there is an objection to the selection of Independent Counsel, either theCorporation or Director may petition any court of competent jurisdiction for a determination that the objection is without a reasonablebasis 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 thetime the request for indemnification is sent, Director’s entitlement to indemnification shall be determined in a written opinion byIndependent Counsel selected by Director. Director shall give the Corporation written notice advising of the identity and address of theIndependent Counsel so selected. The Corporation may, within seven days after receipt of such written notice of selection, deliver toDirector a written objection to such selection. Director 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 ofselection, deliver to Director a written objection to such selection. Any objection is subject to the limitations in Section 6 of thisAgreement. Director may petition any court of competent jurisdiction for a determination that the Corporation’s objection to the firstand/or second selection of Independent Counsel is without a reasonable basis and/or for the appointment as Independent Counsel ofa person selected by the court.

Section 8.

PROCEDURES OF INDEPENDENT COUNSEL. If there has been a Change In Control before the time the request forindemnification is sent by Director, Director shall be presumed (except as otherwise expressly provided in this Agreement) to beentitled to indemnification upon submission of a request for indemnification in accordance with Section 5 of this Agreement, andthereafter the Corporation shall have the burden of proof to overcome the presumption in reaching a determination contrary to thepresumption. The presumption shall be used by Independent Counsel as a basis for a determination of entitlement to indemnificationunless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or theinvestigation, review and analysis of Independent Counsel convinces him or her by clear and convincing evidence that thepresumption should not apply.

Except in the event that the determination of entitlement to indemnification is to be made by Independent Counsel, if the person orpersons empowered under Section 6 or 7 of this Agreement to determine entitlement to indemnification shall not have made andfurnished to Director in writing a determination within 60 days after receipt by the Corporation of the request therefor, the requisitedetermination of entitlement to indemnification shall be deemed to have been made and Director shall be entitled to suchindemnification unless Director knowingly misrepresented a material fact in connection with the request for indemnification or suchindemnification is prohibited by law. The termination of any Proceeding or of any Matter therein, by judgment, order, settlement orconviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not (except as otherwise expressly provided in thisAgreement) of itself adversely affect the right of Director to indemnification or create a presumption that (a) Director did not act ingood faith and in a manner that he reasonably believed, in the case of conduct in his official capacity as a director 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 bestinterests, or (b) with respect to any criminal Proceeding, that Director had reasonable cause to believe that his conduct was unlawful.

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Section 9.

EXPENSES OF INDEPENDENT COUNSEL. The Corporation shall pay any and all reasonable fees and expenses of IndependentCounsel incurred acting pursuant to this Agreement and in any proceeding to which it is a party or witness in respect of itsinvestigation and written report and shall pay all reasonable fees and expenses incident to the procedures in which such IndependentCounsel was selected or appointed. No Independent Counsel may serve if a timely objection has been made to his or her selectionuntil a court has determined that such objection is without a reasonable basis.

Section 10.

TRIAL DE NOVO. In the event that (a) a determination ismade pursuant to Section 6 or 7 of this Agreement that Director is notentitled to indemnification under this Agreement, (b) advancement of Expenses is not timely made pursuant to Section 4 of thisAgreement, (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 acourt or (iii) within 90 days after the time for the Corporation or Director to object to his or her selection or (d) payment ofindemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to havebeen made pursuant to Section 6, 7 or 8 of this Agreement, Director shall be entitled to an adjudication in any court of competentjurisdiction of his entitlement to such indemnification or advancement of Expenses. In the event that a determination shall have beenmade that Director is not entitled to indemnification, any judicial proceeding (including any arbitration) commenced pursuant to thisSection 10 shall be conducted in all respects as a DE NOVO trial on the merits, and Director shall not be prejudiced by reasons ofthat adverse determination. If a Change In Control shall have occurred, in any judicial proceeding commenced pursuant to thisSection 10, the Corporation shall have the burden of proving that Director is not entitled to indemnification or advancement ofExpenses, as the case may be. If a determination shall have been made or deemed to have been made that Director is entitled toindemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to this Section10, or otherwise, unless Director knowingly misrepresented a material fact in connection with the request for indemnification, or suchindemnification is prohibited by law.

The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 10 that theprocedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that theCorporation is bound by all provisions of this Agreement. In the event that Director, pursuant to this Section 10, seeks a judicialadjudication to enforce his rights under, or to recover damages for breach of, this Agreement, Director shall be entitled to recover fromthe Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by himin such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Director is entitledto receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Director in connectionwith such judicial adjudication shall nevertheless be paid by the Corporation.

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Section 11.

NON-EXCLUSIVITY. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shallnot be deemed exclusive of any other rights to which Director may at any time be entitled under applicable law, the Certificate ofIncorporation, Bylaws, a vote of stockholders, a resolution of the Board of Directors or otherwise. No amendment or modification ofthis Agreement or any provision hereof shall be effective as to Director for acts, events and circumstances that occurred, in whole orin part, before such amendment or modification. The provisions of this Agreement shall continue as to Director notwithstanding anytermination of his status as a director 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 liabilityinsurance for directors or officers of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefitplan or other enterprise which such person serves at the request of the Corporation, Director shall be covered by such policy orpolicies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under suchpolicy or policies.

In the event of any payment hereunder, the Corporation shall be subrogated to the extent of such payment to all the rights ofrecovery of Director, who shall execute all papers required and take all action necessary to secure such rights, including execution ofsuch 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, Director has otherwise actually received such payment under any insurance policy, contract, agreement orotherwise.

Section 13.

SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reasonwhatsoever, 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 bythe provision held invalid, illegal or unenforceable.

Section 14.

CIRCUMSTANCES WHEN DIRECTOR IS NOT ENTITLED TO INDEMNIFICATION. Director shall not be entitled toindemnification or advancement of Expenses under this Agreement with respect to any Proceeding, or any Matter therein, brought ormade by Director against the Corporation, other than a Proceeding, or Matter therein, brought by Director to enforce his rights underthis Agreement and in which Director is successful, in whole or in part.

Section 15.

NOTICES. Any communication required or permitted to the Corporation shall be addressed to the Secretary of the Corporation andany such communication to Director shall be given in writing by depositing the same inthe United States mail, with postage thereonprepaid, 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.

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Section 16.

CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCEWITH THE LAWS OF THE STATE OF COLORADO, WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.

Section 17.

CONSENT TO JURISDICTION. THE CORPORATION AND DIRECTOR EACH HEREBY IRREVOCABLY CONSENT TO THEJURISDICTION OF THE COURTS OF THE STATE OF COLORADO FOR ALL PURPOSES IN CONNECTION WITH ANY ACTIONOR PROCEEDING WHICH ARISES OUT OF OR RELATES TO THIS AGREEMENT AND AGREE THAT ANY ACTIONINSTITUTED 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 awriting signed by each of the parties hereto.

IN WITNESS WHEREOF, the Corporation and Director 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

(Director)

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EXHIBIT 10.8

FORM OF INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this “Agreement”), made and entered into as of the day of April, 1998, by and betweenROCKY 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 ofpublic companies; and

WHEREAS, in recognition of Officer’s need for substantial protection against personal liability in order to maintain continuedservice to the Corporation in an effective manner and to provide Officer with specific contractual assurance that the protection will beavailable to Officer, the Corporation desires to provide in this Agreement for the indemnification of and the advancement of expensesto 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 continuedservice 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 followingcircumstances: (a) there shall have occurred an event that would be required to be reported in response to Item 6(e) of Schedule 14Aof Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities ExchangeAct 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 Corporationrepresenting 20% or more of the combined voting power of the Corporation’s then outstanding voting securities (a “ShareAcquisition”); (c) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as aconsequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less thana majority of the Board of Directors thereafter; or (d) during any period of two consecutive years, individuals who at the beginning ofsuch period constituted the Board of Directors (including for this purpose any new director whose election or nomination for electionby the Corporation’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directorsat 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 occurrenceor within 60 days thereafter, by at least two-thirds of the members of the Board of Directors in office immediately prior to suchoccurrence. In addition to the

1


foregoing, a Change In Control shall be deemed to have occurred if, after the occurrence of a Share Acquisition that has beenapproved by a two-thirds vote of the Board as contemplated in the proviso to the preceding sentence, the Acquiring Person shall havebecome the beneficial owner, directly or indirectly, of securities of the Corporation representing an additional 5% or more of thecombined voting power of the Corporation’s then outstanding voting securities (a “Subsequent Share Acquisition”) without theapproval prior thereto or within 60 days thereafter of at least two-thirds of the members of the Board of Directors who were in officeimmediately prior to such Subsequent Share Acquisition and were not appointed, nominated or recommended by, and do nototherwise represent the interests of, the Acquiring Person on the Board. Each subsequent acquisition by an Acquiring Person ofsecurities of the Corporation representing an additional 5% or more of the combined voting power of the Corporation’s thenoutstanding voting securities shall also constitute a Subsequent Share Acquisition (and a Change In Control unless approved ascontemplated by the preceding sentence) if the approvals contemplated by this paragraph were given with respect to the initial ShareAcquisition and all prior Subsequent Share Acquisitions by such Acquiring Person. The Board approvals contemplated by the twopreceding sentences and by the proviso to the first sentence of this paragraph may contain such conditions as the members of theBoard granting such approval may deem advisable and appropriate, the subsequent failure or violation of which shall result in therescission of such approval and cause a Change In Control to be deemed to have occurred as of the date of the Share Acquisition orSubsequent Share Acquisition, as the case may be. Notwithstanding the foregoing, a Change In Control shall not be deemed to haveoccurred for purposes of clause (b) of the first sentence of this paragraph with respect to any Acquiring Person meeting therequirements 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, travelexpenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all otherdisbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute ordefend, 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 neitherpresently is, nor in the five years previous to his or her selection or appointment has been, retained to represent: (a) the Corporationor Officer in any matter material to either such party, (b) any other party to the Proceeding giving rise to a claim for indemnificationhereunder or (c) the beneficial owners, directly or indirectly, of securities of the Corporation representing 5% or more of the combinedvoting 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 whetherformal or informal, including without limitation one initiated by Officer pursuant to Section 10 of this Agreement to enforce his rightsunder this Agreement.

Section 2. Indemnification. The Corporation shall indemnify, and advance Expenses to, Officer to the fullest extent permitted byapplicable law in effect on the date of the effectiveness of this Agreement, and to such greater extent as applicable law may thereafterpermit. The rights of Officer provided under the preceding sentence shall include, but not be limited to, the right to be indemnified tothe 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 thefullest

2


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) ofthe C.B.C.A. To the fullest extent permitted by applicable law, such right to be indemnified shall survive and continue following thetermination of Officer’s service as an officer of the Corporation, with respect to conduct and actions taken, and decisions made, byOfficer 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 aparty to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually andreasonably incurred by him or on his behalf in connection therewith. If Officer is not wholly successful in such Proceeding but issuccessful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Officer against allExpenses actually and reasonably incurred by him or on his behalf relating to each Matter. The termination of any Matter in such aProceeding 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 inadvance of the final disposition of a Proceeding within ten days after Officer requests such payment or reimbursement, to the fullestextent 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 withsuch information as is reasonably available to Officer. The Secretary of the Corporation shall promptly advise the Board of Directorsof such request.

Section 6. Determining Entitlement to Indemnification if No Change In Control. If there has been no Change In Control at the timethe 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 Corporationshall furnish notice to Officer within ten days after receipt of the request for indemnification, specifying the identity and address ofIndependent Counsel. Officer may, within 14 days after receipt of such written notice of selection, deliver to the Corporation a writtenobjection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does notmeet the requirements of Independent Counsel and the objection shall set forth with particularity the factual basis of such assertion. Ifthere is an objection to the selection of Independent Counsel, either the Corporation or Officer may petition any court of competentjurisdiction for a determination that the objection is without a reasonable basis and/or for the appointment of Independent Counselselected by the court.

Section 7. Determining Entitlement to Indemnification if Change In Control. If there has been a Change In Control at the time therequest for indemnification is sent, Officer’s entitlement to indemnification shall be determined in a written opinion by IndependentCounsel selected by Officer. Officer shall give the Corporation written notice advising of the identity and address of the IndependentCounsel so selected. The Corporation may, within seven days after receipt of such written notice of selection, deliver to Officer awritten objection to such selection. Officer may, within five days after the receipt of such objection from the Corporation, submit thename 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. Officermay petition any court of competent jurisdiction for a

3


determination that the Corporation’s objection to the first and/or second selection of Independent Counsel is without a reasonablebasis 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 forindemnification is sent by Officer, Officer shall be presumed (except as otherwise expressly provided in this Agreement) to be entitledto indemnification upon submission of a request for indemnification in accordance with Section 5 of this Agreement, and thereafter theCorporation shall have the burden of proof to overcome the presumption in reaching a determination contrary to the presumption. Thepresumption shall be used by Independent Counsel as a basis for a determination of entitlement to indemnification unless theCorporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation,review and analysis of Independent Counsel convinces him or herby clear and convincing evidence that the presumption should notapply.

Except in the event that the determination of entitlement to indemnification is to be made by Independent Counsel, if the person orpersons empowered under Section 6 or 7 of this Agreement to determine entitlement to indemnification shall not have made andfurnished to Officer in writing a determination within 60 days after receipt by the Corporation of the request therefor, the requisitedetermination of entitlement to indemnification shall be deemed to have been made and Officer shall be entitled to suchindemnification unless Officer misrepresented a material fact in connection with the request for indemnification or suchindemnification is prohibited by law. The termination of any Proceeding or of any Matter therein, by judgment, order, settlement orconviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) ofitself adversely affect the right of Officer to indemnification or create a presumption that (a) Officer did not act in good faith and in amanner that he reasonably believed, in the case of conduct in his official capacity as an officer of the Corporation, to be in the bestinterests 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 ofIndependent Counsel incurred acting pursuant to this Agreement and in any proceeding to which it is a party or witness in respect ofits investigation and written report and shall pay all reasonable fees and expenses incident to the procedures in which suchIndependent Counsel was selected or appointed. No Independent Counsel may serve if a timely objection has been made to his orher 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 isnot entitled to indemnification under this Agreement, (b) advancement of Expenses is not timely made pursuant to Section 4 of thisAgreement, (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 acourt or (iii) within 90 days after the time for the Corporation or Officer to object to his or her selection or (d) payment ofindemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to havebeen made pursuant to Section 6, 7 or 8 of this Agreement, Officer shall be entitled to an adjudication in any court of competentjurisdiction of his entitlement to such indemnification or advancement of Expenses. In the event that a determination shall have beenmade that Officer is not entitled to indemnification, any judicial proceeding (including any arbitration) commenced pursuant to thisSection 10 shall be conducted in all respects as a de novo trial

4


on the merits, and Officer shall not be prejudiced by reasons of that adverse determination. If a Change In Control shall haveoccurred, in any judicial proceeding commenced pursuant to this Section 10, the Corporation shall have the burden of proving thatOfficer is not entitled to indemnification or advancement of Expenses, as the case may be. If a determination shall have been made ordeemed to have been made that Officer is entitled to indemnification, the Corporation shall be bound by such determination in anyjudicial proceeding commenced pursuant to this Section 10, or otherwise, unless Officer knowingly misrepresented a material fact inconnection 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 theprocedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that theCorporation is bound by all provisions of this Agreement. In the event that Officer, pursuant to this Section 10, seeks a judicialadjudication to enforce his rights under, or to recover damages for breach of, this Agreement, Officer shall be entitled to recover fromthe Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by himin such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Officer is entitledto receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Officer in connectionwith 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 Agreementshall not be deemed exclusive of any other rights to which Officer may at any time be entitled under applicable law, the Certificate ofIncorporation, Bylaws, a vote of stockholders, a resolution of the Board of Directors or otherwise. No amendment or modification ofthis Agreement or any provision hereof shall be effective as to Officer for acts, events and circumstances that occurred, in whole or inpart, before such amendment or modification. The provisions of this Agreement shall continue as to Officer notwithstanding anytermination 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 liabilityinsurance for directors or officers of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefitplan or other enterprise which such person serves at the request of the Corporation, Officer shall be covered by such policy orpolicies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under suchpolicy or policies.

In the event of any payment hereunder, the Corporation shall be subrogated to the extent of such payment to all the rights ofrecovery ofOfficer, who shall execute all papers required and take all action necessary to secure such rights, including execution ofsuch 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 anypayment of amounts otherwise indemnifiable hereunder if,and to the extent that, Officer has otherwise actually received such payment under any insurance policy, contract, agreement orotherwise.

Section 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for anyreason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impairedthereby; and, to the fullest extent possible, the

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provisions of this Agreement shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal orunenforceable.

Section 14. Circumstances When Officer is Not Entitled to Indemnification. Officer shall not be entitled to indemnification oradvancement of Expenses under this Agreement with respect to any Proceeding, or any Matter therein, brought or made by Officeragainst the Corporation, other than a Proceeding, or Matter therein, brought by Officer to enforce his rights under this Agreement andin which Officer is successful, in whole or in part.

Section 15. Notices. Any communication required or permitted to the Corporation shall be addressed to the Secretary of theCorporation and any such communication to Officer shall be given in writing by depositing the same in the United States mail, withpostage thereon prepaid, addressed to the person to whom such notice is directed at the address of such person on the records ofthe 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 INACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO, WITHOUT REGARD TO THE CONFLICT OF LAWSPRINCIPLES THEREOF.

Section 17. Consent to Jurisdiction. THE CORPORATION AND OFFICER EACH HEREBY IRREVOCABLY CONSENT TO THEJURISDICTION OF THE COURTS OF THE STATE OF COLORADO FOR ALL PURPOSES IN CONNECTION WITH ANY ACTIONOR PROCEEDING WHICH ARISES OUT OF OR RELATES TO THIS AGREEMENT AND AGREE THAT ANY ACTIONINSTITUTED UNDER THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF THE STATE OF COLORADO.

Section 18. Amendment. No amendment, modification, termination orcancellation of this Agreement shall be effective unlessmade 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 Office

(Officer)

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Exhibit 10.11

GUITTARD®

FIRMCONTRACTF590, F591

Since 1868 August 28, 2006

GUITTARD CHOCOLATE CO. OF BURLINGAME, CALIFORNIA, AGREES TO SELL, AND ROCKY MOUNTAIN CHOCOLATE FACTORY 265 TURNER DRIVE ACCT: 475155DURANGO, CO 81301 PHONE: 970-247-4943ATTN: MR. BRYAN MERRYMAN

AGREES TO PURCHASE THE FOLLOWING SUBJECT TO THE CONDITIONS INDICATED BELOW: QTY. ITEM PACK PRICE PER POUND F.O.B. LOCATION

* * * * *

F.O.B. SEE ABOVE WITHDRAWALS TO START NOW AND TO BE COMPLETED BY June 30, 2007

At seller’s option withdrawal date may be extended ninety days at an additional charge of one hundred and thirty cents perhundred weight.

Our terms are 2% ten days, thirty days net, seller’s credit department having the right to determine the amount of open creditduring the thirty day period. If buyer fails to fulfill the terms of payment, the seller has the right to defer shipments until such paymentsare made.

Should any form of tax be levied by the United States Government, or any political subdivisions, on these items, or on the rawmaterials contained therein, it shall be assumed and paid for by the buyer.

Performance of this contract by the seller shall be excused in the event of floods, fires, strike, plant disablement, war, raw materialcontrols, acts of God, or other conditions beyond its control, no matter where such event occurs.

Buyer will be protected against advance in price, but it is understood and agreed that the above prices are NOT GUARANTEEDAGAINST decline. ACCEPTED BY: ACCEPTED BY: ROCKY MTN. CHOCOLATE FACTORY GUITTARD CHOCOLATE COMPANY CUSTOMER NAME /s/ Bryan J. Merryman

BUYER

/s/ Mark Spini

August 28, 2006

Date Date

CUSTOMER COPY

Legend:

* The material has been omitted pursuant to a request for confidential treatment and such material has been filed separately withthe Commission.

GUITTARD CHOCOLATE COMPANYMANUFACTURERS OF CHOCOLATE AND COCOA PRODUCTS • 10 GUITTARD ROAD, BURLINGAME, CA 94010-2203

P.O. BOX 4308 • BURLINGAME, CA 94011-4308(650) 697-4427 • (800) 468-2426 • FAX (650) 692-2761 • www.guittard.com


Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated May 14, 2007 accompanying the financial statements and schedule in the 2007 Annual Report ofRocky Mountain Chocolate Factory, Inc. on Form 10-K for the years ended February 28, 2007 and 2006. We hereby consent to theincorporation by reference in the Registration Statements of Rocky Mountain Chocolate Factory, Inc. on Forms S-8 (File No. 333-109936 effective October 23, 2003; File No. 333-119107 effective September 17, 2004; File No. 33-64651 effective November 30,1995; File No. 33-64653 effective November 30, 1995; File No. 33-79342 effective May 25, 1994).




Exhibit 31.1

Certification Pursuant To Rules 13a-14(a) And 15d-14(a) Under The Securities Exchange Act Of1934, As Adopted Pursuant To The Sarbanes-Oxley Act of 2002

I, Franklin E. Crail, certify that:

1. I have reviewed this report on Form 10-K of Rocky Mountain Chocolate Factory, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented inthis report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f))for the registrant and have:

a) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

Date: May 14, 2007

/s/ Franklin E. Crail

Franklin E. Crail,

President, Chief Executive Officer and Chairman ofthe Board of Directors


Exhibit 31.2

Certification Pursuant To Rules 13a-14(a) And 15d-14(a) Under The Securities Exchange Act Of1934, As Adopted Pursuant To The Sarbanes-Oxley Act of 2002

I, Bryan J. Merryman, certify that:

1. I have reviewed this report on Form 10-K of Rocky Mountain Chocolate Factory, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented inthis report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f))for the registrant and have:

a) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

Date: May 14, 2007

/s/ Bryan J. Merryman

Bryan J. Merryman, Chief Operating Officer, ChiefFinancial Officer, Treasurer and Director


Exhibit 32.1

Certification of Chief Executive Officer

CERTIFICATION PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Annual Report of Rocky Mountain Chocolate Factory, Inc. (the “Company”) on Form 10-K for the annualperiod ended February 28, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), theundersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to hisknowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company. Dated: May 14, 2007

By

/s/ Franklin E. Crail

Franklin E. Crail, President, Chief Executive

Officer and Chairman of the Board of Directors


Exhibit 32.2

Certification of Chief Financial Officer

CERTIFICATION PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Annual Report of Rocky Mountain Chocolate Factory, Inc. (the “Company”) on Form 10-K for the annualperiod ended February 28, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), theundersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to hisknowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company. Dated: May 14, 2007

By

/s/ Bryan J. Merryman

Bryan J. Merryman, Chief Operating Officer, Chief

Financial Officer, Treasurer and Director


Documents

ROCKY MOUNTAIN CHOCOLATE FACTORY INCfilings.irdirect.net/data/785815/000103570407000395/d46614e10vk.… · table of contents securities and exchange commission washington, d.c. 20549