-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BLqrKTDD+tEHqj9iKLS/HyENOaAQF0DmHvuyO4rHo1JTq8PiOrnnHcMHpXmtKHQa 85iAe4dP3uX8VRULala+XQ== 0000912057-96-010966.txt : 19960530 0000912057-96-010966.hdr.sgml : 19960530 ACCESSION NUMBER: 0000912057-96-010966 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960529 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKY MOUNTAIN CHOCOLATE FACTORY INC CENTRAL INDEX KEY: 0000785815 STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060] IRS NUMBER: 840910696 STATE OF INCORPORATION: CO FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14749 FILM NUMBER: 96573459 BUSINESS ADDRESS: STREET 1: 265 TURNER DR CITY: DURANGO STATE: CO ZIP: 81301 BUSINESS PHONE: 3032590554 MAIL ADDRESS: STREET 1: 265 TURNER DRIVE CITY: DURANGO STATE: CO ZIP: 81301 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 29, 1996 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-14749 ------------------------------ Rocky Mountain Chocolate Factory, Inc. -------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-0910696 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 265 Turner Drive, Durango, Colorado 81301 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (970) 259-0554 --------------- (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common Stock, $.03 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At May 13, 1996, there were 2,905,149 shares of Common Stock outstanding. The aggregate market value of the Common Stock (based on the average of the closing bid and asked prices as quoted on the NASDAQ National Market System on May 13,1996) held by non-affiliates was $11,128,587. Documents incorporated by reference: None The Exhibit Index is located on page 47 This document contains 149 pages including exhibits 1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page PART I Item 1. Business.............................................. 3 Item 2. Properties............................................ 13 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 and Related Stockholder Matters....................... 16 Item 6. Selected Financial Data.............................. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 19 Item 8. Financial Statements................................. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 41 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 41 Item 11. Executive Compensation............................... 43 Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 44 Item 13. Certain Relationships and Related Transactions...................................... 45 PART IV Item 14. Exhibits and Reports on Form 8-K..................... 47 2 PART I. ITEM 1. BUSINESS GENERAL Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain Chocolate Factory, Inc. (the "Company" or the "Registrant") manufactures an extensive line of premium chocolate candies and other confectionery products from its own proprietary recipes for sale at its franchised and Company-owned stores. As of April 30, 1996 there were 41 Company-owned and 153 franchised "Rocky Mountain Chocolate Factory" stores operating in 40 states and Canada. Approximately 30% of the products sold at the Company-owned and franchised stores are prepared on the premises. The Company believes this in-store preparation creates a special ambiance at "Rocky Mountain Chocolate Factory" stores. The aroma and sight of products being made attract passersby and assures them that those products are indeed fresh. The Company believes that its principal competitive strengths lie in its name recognition; its reputation for the quality, variety and taste of its products; the special ambiance of its stores; its knowledge and experience in applying criteria for selection of new store locations; its expertise in manufacturing, merchandising and marketing of chocolate candy products; and the control and training infrastructures it has implemented to assure consistent customer service and execution of successful practices and techniques at its franchised and Company-owned stores. In addition, the Company believes it derives a competitive strength by manufacturing its own products, through which the Company can better maintain its high product quality standards, offer proprietary products, manage costs, control production and shipment schedules and potentially pursue new or under-utilized distribution channels. The Company's revenues come from three principal sources: (i) sales to franchisees of chocolates and other confectionery products manufactured by the Company (53-47-44%); (ii) sales to the public at Company-owned stores of chocolates and other confectionery products (28-37-42%) and (iii) the collection of initial fees and royalties from franchisees (19-16-14%). The figures in parentheses show the percentage of total revenues attributable to each source for fiscal years 1994, 1995 and 1996, respectively. The total U.S. candy market exceeded $14.0 billion of sales in 1994, according to the National Confectionery Association. Candy sales have risen 29% since 1988, with an average annual growth rate of between 4% and 6%, according to United States Department of Commerce figures. According to the Department of Commerce, per capita consumption of chocolate exceeds 10 pounds per year nationally, generating annual sales of approximately $7.0 billion. Sales of chocolate products are expected to grow at a rate of 3% to 4% annually, according to THE CANDY MARKET. The Company's executive offices are located at 265 Turner Drive, Durango, Colorado 81301 and its telephone number is (970) 259-0554. BUSINESS STRATEGY The Company's objective is to build on its position as a leading franchisor and operator of retail chocolate stores in the United States and to continually seek opportunities to profitably expand its business. To accomplish this objective, the Company employs a business strategy that includes the following elements: PRODUCT QUALITY AND VARIETY. The Company maintains the unsurpassed taste and quality of its candies by using only the finest chocolate and other wholesome ingredients. The Company uses its own proprietary recipes, primarily developed by its master candy maker, who has over 40 years of experience in the confectionery industry. A typical Rocky Mountain Chocolate Factory store offers up to 100 of the Company's chocolate candies throughout the year and as many as 200, including many packaged candies, during the holiday seasons. Individual stores also offer more than 15 varieties of premium fudge 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 store prepares certain products, 3 including fudge, brittles and caramel apples, in the store. Instore preparation is designed both to be fun and entertaining for customers and to convey an image of freshness and homemade quality. The special ambiance of Rocky Mountain Chocolate Factory stores is also achieved through the use of distinctive decor designed to give the store an attractive country Victorian look. The Company's design staff has developed easily replicable designs and specifications to ensure that the Rocky Mountain Chocolate Factory concept is consistently implemented throughout the system. SITE SELECTION. Careful selection of a site is critical to the success of a Rocky Mountain Chocolate Factory store. Many factors are considered by the Company in identifying suitable sites, including tenant mix, visibility, attractiveness, accessibility, level of foot traffic and occupancy costs. Final site selection, for both franchised and Company owned stores, occurs only after the Company's senior management has approved the site. The Company believes that the experience of its management team in evaluating a potential site is one of the Company's competitive strengths. CUSTOMER SERVICE COMMITMENT. The Company emphasizes excellent customer service and seeks to employ, and to sell franchises to, motivated and energetic people. The Company has implemented sales incentive programs for the employees of franchised and Company owned stores so that the store personnel having direct contact with customers share in the success of their stores. The Company also fosters enthusiasm for its customer service philosophy and the Rocky Mountain Chocolate Factory concept through its annual franchisee convention, annual regional meetings and other frequent contacts with its franchisees and store managers. ENHANCED OPERATING EFFICIENCIES. The Company seeks to maximize its profitability by controlling costs and improving the efficiency of its operations. Efforts in the last fiscal year include the purchase of additional automated equipment such as a computer controlled shell filling machine for truffles, a candy bar molding machine, an automated pre-mixer to mix chocolate and nuts and an automated tempering machine to control the tempering of the chocolate used in the manufacture of the Company's products. These items enable the Company to produce certain of its products much more quickly and at a lower cost. In March 1996, the Company implemented a comprehensive MRP II forecasting, planning, scheduling and reporting system to improve the efficiency of manufacturing operations. The Company in the spring of calendar year 1995, completed a factory expansion and expanded its operation of a small fleet of trucks for the shipment of its products. These measures have significantly improved the Company's ability to deliver its products to franchised and Company owned stores safely, quickly and cost-effectively. EXPANSION STRATEGY The Company opened its first Rocky Mountain Chocolate Factory store in 1981 and at the end of fiscal 1992 had a total of 72 stores, most of which were franchised. Over the last four years, the Company has increased its total number of stores to 194. Key elements of the Company's expansion strategy include: AGGRESSIVE, BALANCED GROWTH. The Company's expansion strategy is to balance the growth of its Company-owned and franchised stores by increasing its emphasis on Company-owned store expansion. A Company-owned store provides a greater potential economic return to the Company than does a franchised store. In many cases, the Company is able to take advantage of a promising new location by establishing a Company-owned store when a delay in finding a qualified franchisee might jeopardize the Company's ability to secure the site. Company-owned stores also provide a training ground for Company-owned store and district managers and a controllable testing ground for new products and promotions, operating and training methods and merchandising techniques. The Company will continue to open additional franchised stores, which enable the Company to expand its system more quickly with no capital investment. The Company believes that its recent factory expansion has provided the manufacturing capacity necessary to support the Company's expansion plans for the next several years. HIGH TRAFFIC ENVIRONMENTS. The Company currently establishes franchised and Company-owned stores in three primary environments: factory outlet malls, tourist environments and regional malls, with a particular focus on factory outlet mall locations. Although each of these environments has a number of attractive features, including a high level of foot traffic, the factory outlet mall environment currently offers the best combination of tenant mix, customer spending characteristics and favorable occupancy costs. The Company has established a business relationship with the major 4 outlet mall developers in the United States and believes that these relationships provide it with the opportunity to take advantage of attractive sites in new and existing outlet malls. NAME RECOGNITION AND NEW MARKET PENETRATION. The Company believes the visibility of its stores and the high tourist traffic at its factory outlet mall and tourist locations has generated strong name recognition and demand for its franchises. The Rocky Mountain Chocolate Factory system has historically been concentrated in the western United States and the Rocky Mountains, but recent growth has generated a gradual easterly momentum as new Company-owned and franchised stores have been opened in the eastern half of the country. This growth has further increased the Company's name recognition and demand for its franchises. The Company believes its growing name recognition will facilitate the continued expansion of the Rocky Mountain Chocolate Factory system into new market areas. NEW STORE CONCEPT. The Company has developed a new store concept, Fuzziwigs-TM-, which it believes may allow it to expand its presence in its existing market environments, particularly regional malls. The concept uses creative lighting, music, animation and movement to entertain customers and appeal to both children and adults. A total of three FuzziwigsTM stores were in operation at April 30, 1996, in Phoenix, Arizona; Michigan City, Indiana; and Jeffersonville, Ohio. The new self-serve store concept sells a line of hard conventional and unusual/nostalgic candies much different from candies sold at existing Rocky Mountain Chocolate Factory stores. Initial indications are that the new concept does not compete with existing Rocky Mountain Chocolate Factory stores. The following table sets forth the number of Rocky Mountain Chocolate Factory stores opened and closed during the last five fiscal years:
YEAR ENDED FEBRUARY 28 OR 29, -------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Company-owned stores: Opened. . . . . . . . . . . . . 5 1 8 13 20 Closed. . . . . . . . . . . . . 0 1 1 1 2 Acquired from franchisees . . . 1 0 0 1 2 Sold to franchisees . . . . . . 0 2 1 4 0 Total open at year end. . . . . 9 7 13 22 42 Franchised stores:. . . . . . . . Opened. . . . . . . . . . . . . 8 18 30 30 27 Closed. . . . . . . . . . . . . 5 2 6 8 5 Acquired from Company . . . . . 0 2 1 4 0 Sold to Company . . . . . . . . 1 0 0 1 2 Total open at year end. . . . . 63 81 106 131 151 System-wide stores: . . . . . . . Opened. . . . . . . . . . . . . 13 19 38 43 47 Closed. . . . . . . . . . . . . 5 3 7 9 7 Total open at year end. . . . 72 88 119 153 193
As of April 30, 1996, the Company had signed leases for 15 additional Company-owned stores (all in factory outlet malls) and 15 additional franchised stores, and is currently completing the screening of qualified franchisees to operate such franchised stores. In addition, the Company is in the process of negotiating leases for 20 additional Company-owned or franchised stores, 15 of which will be in factory outlet malls. Implementation of the Company's expansion plans is subject to various contingencies, including the availability of suitable sites and of qualified franchisees. STORE CONCEPT The Company seeks to establish a fun and inviting atmosphere in its Rocky Mountain Chocolate Factory stores. Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory store prepares certain products, including fudge and caramel apples, in the store. Customers can observe store personnel make fudge from start to finish, including the mixing of ingredients in old-fashioned copper kettles and the cooling of the fudge on large marble tables, and are often 5 invited to sample the store's products. The Company believes that an average of approximately 30% of the revenues of Company-owned and franchised stores are generated by sales of products prepared on the premises. The Company believes the in-store preparation and aroma of its products enhance the ambiance at Rocky Mountain Chocolate Factory stores, are fun and entertaining for its customers and convey an image of freshness and homemade quality. Rocky Mountain Chocolate Factory stores have a distinctive country Victorian decor, which further enhances their friendly and enjoyable atmosphere. Each store includes finely-crafted wood cabinetry, copper and brass accents, etched mirrors and large marble tables on which fudge and other products are made. To ensure that all stores conform to the Rocky Mountain Chocolate Factory image, the Company's design staff provides working drawings and specifications and approves the construction plans for each new franchised or Company-owned store. The Company also controls the signage and building materials that may be used in the stores. The average store size is approximately 1,000 square feet, approximately 650 square feet of which is selling space. Most stores are open seven days a week. Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays. Store hours in tourist areas may vary depending upon the tourist season. The Company's average cash investment for the Company-owned stores opened during 1996, excluding pre-opening costs but including initial inventories, was approximately $142,000. PRODUCTS AND PACKAGING The Company typically produces approximately 250 chocolate candies and other confectionery products, using proprietary recipes developed primarily by the Company's master candy maker. These products include many varieties of clusters, caramels, creams, mints and truffles. The Company also produces custom-molded theme candy bars tailored to promotional concepts of individual stores. During the Christmas, Easter and Valentine's Day holiday seasons, the Company may make as many as 300 additional items, including many candies offered in packages specially designed for the holidays. A typical Rocky Mountain Chocolate Factory store offers up to 100 of these candies throughout the year and up to 200 during holiday seasons. Individual stores also offer more than 15 premium fudges and other products prepared in the store. The Company believes that approximately 50% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufactured at the Company's factory, 30% by products made in the store using Company recipes and ingredients purchased from the Company or approved suppliers and the remaining 20% by products, such as ice cream, soft drinks and other sundries, purchased from approved suppliers. The Company uses only the finest chocolates, nut meats and other wholesome ingredients in its candies. In February 1995 the Company's Valentine's Day gift-boxed chocolates were awarded MONEY MAGAZINE'S top rating and were described as having "superior flavor" which is "intense" and "natural." The Company continually strives to offer new confectionery products in order to maintain the excitement and appeal of its products. Chocolate candies manufactured by the Company are sold at Company-owned and franchised stores at prices ranging from $11.00 to $16.00 per pound, with an average price of $12.00 per pound. Franchisees set their own retail prices, though the Company does recommend prices for all its products. The Company's in-house graphics designers create packaging that reflects the country Victorian theme of its stores. The Company develops special packaging for the Christmas, Valentine's Day and Easter holidays, and customers can have their purchases packaged in decorative boxes and fancy tins throughout the year. The Company's new packaging for its Rocky Mountain Mints in 1995 received the AWARD OF EXCELLENCE from the National Paperbox Association. 6 OPERATING ENVIRONMENTS The Company currently establishes franchised and Company-owned stores in three primary environments: factory outlet malls, tourist areas and regional malls, with a particular focus on factory outlet mall locations. Although each of these environments has a number of attractive features, including high levels of foot traffic, the factory outlet mall environment currently offers the best combination of tenant mix, customer spending characteristics and favorable occupancy costs. FACTORY OUTLET MALLS. There are approximately 325 factory outlet malls in the United States, and as of April 30, 1996, there were Rocky Mountain Chocolate Factory stores in approximately 100 of these malls in 40 states. Management believes that approximately 25 new factory outlet locations will be established each year for at least the next several years. The Company has established business relationships with the major outlet mall developers in the United States. Although not all factory outlet malls provide desirable locations for Rocky Mountain Chocolate Factory stores, management believes the Company's relationships with these developers will provide it with the opportunity to take advantage of attractive sites in new and existing outlet malls. TOURIST AREAS. As of April 30, 1996, there were approximately 60 Rocky Mountain Chocolate Factory stores in franchised locations considered to be tourist areas, including Aspen, Colorado; Fisherman's Wharf in San Francisco, California; and the Riverwalk in San Antonio, Texas. Although some have short selling seasons, many tourist areas are very attractive locations because they offer high levels of foot traffic and favorable customer spending characteristics, and greatly increase the Company's visibility and name recognition. The Company believes there are significant opportunities to expand into additional tourist areas with high levels of foot traffic. REGIONAL MALLS. There are approximately 2,500 regional malls in the United States, and as of April 30, 1996, there were Rocky Mountain Chocolate Factory stores in approximately 29 of these, including the franchised locations in the Mall of America in Bloomington, Minnesota; Escondido, California; Fort Collins, Colorado; and West Palm Beach, Florida. Although often providing favorable levels of foot traffic, regional malls typically involve expensive rent structures rendering economic criteria for investment in such locations more difficult to satisfy. The Company believes there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory stores or the sale of the Company's products, such as airports, sports arenas and corporate sales. Three franchised Rocky Mountain Chocolate Factory stores exist at airport locations: two at Denver International Airport and one at Vancouver International Airport in Canada. FRANCHISING PROGRAM GENERAL. The Company believes it has excellent relations with its franchisees. The Company's philosophy is one of service and commitment to its franchise system, and it continuously seeks to improve its franchise support services. The Company's concept has consistently been rated as an outstanding franchise opportunity by publications and organizations rating such opportunities. In February 1995, Rocky Mountain Chocolate Factory was rated seventh in SUCCESS MAGAZINE'S "Franchise Gold 100" most desirable franchises. As of April 30, 1996, there were 155 franchised stores in the Rocky Mountain Chocolate Factory system. FRANCHISEE SOURCING AND SELECTION. The majority of new franchises are awarded to persons referred by existing franchisees, to interested consumers who have visited Rocky Mountain Chocolate Factory stores and to existing franchisees. The Company also advertises for new franchisees in national and regional newspapers as suitable potential store locations come to the Company's attention. Franchisees are approved by the Company on the basis of the applicant's net worth and liquidity, together with an assessment of work ethic and personality compatibility with the Company's operating philosophy. Currently, 18 domestic franchisees own two or more Rocky Mountain Chocolate Factory stores and 120 domestic franchisees own a single store. The largest number of stores owned by a single domestic franchisee is 5 . 7 In fiscal 1992, the Company entered into a franchise development agreement covering Canada with Immaculate Confections, Ltd. of Vancouver, British Columbia. Pursuant to this agreement, Immaculate Confections purchased the exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores in Canada. The agreement requires the franchise developer to open a minimum of 20 stores over a five year period and to comply with certain minimum purchase requirements. As of April 30, 1996, there were 17 Canadian stores in operation. TRAINING AND SUPPORT. Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a 10-day comprehensive training program in store operation and management. The Company has established a training center at its Durango headquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store. Topics covered in the training course include the Company's philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnel management. Training is based on standard operating policies and procedures contained in an operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement. Additionally, and importantly, trainees are provided with a complete orientation to Company operations by working in key factory operational areas and by meeting with each member of the senior management of the Company. Training continues through the opening of the store, where Company field personnel assist and guide the franchisee in all areas of operation. The Company's operating objectives include providing Company knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to maximize their skills and ensure that they are fully versed in the Company's proven techniques. The Company provides ongoing support to franchisees through its five district managers, who maintain regular and frequent communication with the stores by phone and by site visits. The district managers also review and discuss with the franchisee store operating results and provide advice and guidance in improving store profitability and in developing and executing store marketing and merchandising programs. The Company has developed a handbook containing a "pre-packaged" local store marketing plan, which allows franchisees to implement cost-effective promotional programs that have proven successful in other Rocky Mountain Chocolate Factory stores. Regional conferences are held each fall with a focus on holiday merchandising techniques in preparation for the fall and Christmas holidays. Additionally, the Company holds an annual convention each May, at which seminars and workshops are presented on subjects considered vital to continuing improvement in operating results of Rocky Mountain Chocolate Factory stores. QUALITY STANDARDS AND CONTROL. The franchise agreement requires franchisees to comply with the Company's procedures of operation and food quality specifications and to permit audits and inspections by the Company. Operating standards for Rocky Mountain Chocolate Factory stores are set forth in operating manuals. These manuals cover general operations, factory ordering, merchandising and advertising and accounting procedures. Through their regular visits to franchised stores, Company district managers audit performance and adherence to Company standards. The Company has the right to terminate any franchise agreement for non-compliance with the Company's operating standards. Products sold at the stores and ingredients used in the preparation of products approved for on-site preparation must be purchased from the Company or from approved suppliers. THE FRANCHISE AGREEMENT: TERMS AND CONDITIONS. The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is made by its Uniform Franchise Offering Circular prepared in accordance with federal and state laws and regulations. States that regulate the sale and operation of franchises require a franchisor 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 franchise agreement, franchisees pay the Company (i) an initial franchise fee of $19,500 for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a marketing fee equal to 1% of monthly gross sales. Franchisees are generally granted exclusive territory with respect to the operation of Rocky Mountain Chocolate Factory stores only in 8 the immediate vicinity of their stores. Chocolate products not made on the premises by franchisees must be purchased from the Company or approved suppliers. (The franchise agreement for the Company's Fuzziwigs-TM- new store concept is currently under development but is expected to provide for an initial franchise fee of $25,000 for each new store and royalties equal to 7% of monthly gross sales. Other terms are expected to be substantially the same as the Company's existing form of franchise agreement. The Company expects to begin sale of Fuzziwigs-TM- franchises in May of 1996). The franchise agreement requires franchisees to comply with the Company's procedures of operation and food quality specifications, to permit inspections and audits by the Company and to remodel stores to conform with standards in effect from time to time for the Rocky Mountain Chocolate Factory system. The Company may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in the judgment of the Company is likely to adversely affect the Rocky Mountain Chocolate Factory system. The Company's ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See "Business - Regulation." The agreement prohibits the transfer or assignment of any interest in a franchise without the prior written consent of the Company. The agreement also gives the Company a right of first refusal to purchase any interest in a franchise if a proposed transfer would result in a change of control of that franchise. The refusal right, if exercised, would allow the Company to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee. The term of each franchise agreement is five years, and franchisees generally have the right to renew for two successive five-year terms. The Company's agreements with 8 franchisees will expire in fiscal year 1997. The Company anticipates that substantially all such agreements will be renewed. FRANCHISE FINANCING. The Company does not provide prospective franchisees with financing for their stores, but has developed relationships with two national sources of franchisee financing to whom it will refer franchisees. Typically, franchisees have obtained their own sources of such financing and have not required the Company's assistance. COMPANY STORE PROGRAM GENERAL. As of April 30, 1996, there were 41 Company-owned Rocky Mountain Chocolate Factory stores. Although Company-owned stores require an initial capital outlay by the Company, they also provide a greater potential economic return to the Company than franchised stores. The average cost to the Company in fiscal 1996 of opening a new Company-owned store was approximately $142,000 for its chocolate stores and $225,000 for its Fuzziwigs-TM- stores, excluding pre-opening costs but including initial inventories. Company-owned stores also provide a training ground for Company-owned store and district managers and a controllable testing ground for new products and promotions, operating and training methods and merchandising techniques. In many cases, the Company is able to take advantage of a promising new location by establishing a Company-owned store when a delay in finding a qualified franchisee might jeopardize the Company's ability to secure the site. Managers of Company-owned stores are required to comply with all Company operating standards and undergo training and receive support from the Company similar to the training and support provided to franchisees. See "Franchising Program-Training and Support" and "-Quality Standards and Control." The Company's Director of Company Stores and his staff regularly visit Company-owned stores to ensure compliance with Company standards and procedures and to provide advice and support. FUZZIWIG'S NEW CONCEPT STORE. The Company has developed and opened a new store concept called Fuzziwigs-TM-, which it believes may allow it to expand its presence in its existing market environments, particularly regional malls. The new concept uses creative lighting, music, animation and movement to entertain customers. The Company believes the new concept appeals to children and 9 adults of all ages. The new store concept sells a different line of candies than the Company's current concept, and initial indications are that the new concept does not compete with existing Rocky Mountain Chocolate Factory Stores. A total of three Fuzziwigs-TM- stores (all Company-owned) were in operation at April 30, 1996 in Phoenix, Arizona; Michigan City, Indiana; and Jeffersonville, Ohio. It cost an average of $225,000 to establish each store including inventories but excluding pre-opening costs. The Company expects to begin franchising the new concept in May, 1996 under proposed terms of the franchise agreement as discussed above, and intends to both franchise and operate as Company-owned stores the new concept. The Company believes that the new store concept can be operated successfully in most locations in which Rocky Mountain Chocolate Factory stores currently operate. The Company believes that significant economic advantage will be provided where a franchisee or Company-owned store manager is able to manage concurrently employees of both a new concept store and a traditional Rocky Mountain Chocolate Factory store in a single regional or factory outlet mall or other location. MANUFACTURING OPERATIONS GENERAL. The Company manufactures its products at its factory in Durango, Colorado for sale to franchisees and for retail sale at Company-owned stores. All products are produced consistent with the Company's philosophy of using only the finest, highest quality ingredients with no artificial preservatives to achieve its marketing motto of "the peak of perfection in handmade chocolates." In fiscal 1996, the Company produced approximately 1.6 million pounds of candy and anticipates producing approximately 1.9 million pounds in fiscal 1997. Current factory capacity is approximately 3.5 million pounds per year. It has always been the belief of management that the Company should control the manufacturing of its own products. By controlling manufacturing, the Company can better maintain its high product quality standards, offer proprietary products, manage costs, control production and shipment schedules and potentially pursue new or under-utilized distribution channels. MANUFACTURING PROCESSES. The manufacturing process primarily involves cooking or preparing candy centers, including nuts, caramel, peanut butter, creams and jellies, and then coating them with chocolate or other toppings. All of these processes are conducted in carefully controlled temperature ranges, and the Company employs strict quality control procedures at every stage of the manufacturing process. The Company uses a combination of manual and automated processes at its factory. Although the Company believes that it is currently preferable to manufacture certain products by hand, such as dipping of some large pieces, automation increases the speed and efficiency of the manufacturing process. The Company has from time to time automated processes formerly performed by hand where it has become cost-effective for the Company to do so without compromising product quality or appearance. Recent examples include the purchase of a computer-controlled shell filling machine for truffles and a molding machine for candy bars, which enable the Company to produce these candies much more quickly and at a lower cost. The Company seeks to ensure the freshness of products sold in Rocky Mountain Chocolate Factory stores with frequent shipments and production schedules that are closely coordinated with projected and actual orders. In March of 1996, the Company implemented a comprehensive MRP II forecasting, planning, scheduling and reporting system to improve the efficiency of manufacturing scheduling of production. Franchised and Company-owned stores place orders to the Company's factory several times per month, on average, and the Company generally ships its candies within five working days after the order is received. Finished candies remain in inventory an average of one to four weeks prior to shipment. Most Rocky Mountain Chocolate Factory stores do not have significant space for the storage of inventory, and the Company encourages franchisees and store managers to order only the quantities that they can reasonably expect to sell within approximately two to four weeks. For these reasons, the Company generally does not have a significant backlog of orders. INGREDIENTS. The principal ingredients used by the Company are chocolate, nuts, sugar, corn syrup, peanut butter, cream and butter. The factory receives shipments of ingredients daily. To 10 ensure the consistency of its products, the Company buys ingredients from a limited number of reliable suppliers. In order to assure a continuous supply of chocolate and certain nuts, the Company frequently enters into purchase contracts for these products having durations of six to 18 months. Because prices for these products may fluctuate, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall. The Company has one or more alternative sources for all essential ingredients and therefore believes that the loss of any supplier would not have a material adverse effect on the Company and its results of operations. The Company currently also purchases small amounts of finished candy from third parties on a private label basis for sale in Rocky Mountain Chocolate Factory stores. FACTORY AND TRUCKING OPERATIONS. The Company in fiscal 1996 expanded its factory from 27,000 square feet to 53,000 square feet, which provided space for additional automated equipment and for warehousing of ingredients and finished candies prior to shipment. Beginning in fiscal 1994, the Company also began operating several trucks and now ships a substantial portion of its products from the factory on its own trucks. The Company's trucking operations and recent factory expansion have significantly improved the Company's ability to deliver its products to the stores quickly and cost-effectively. MARKETING The Company relies primarily on in-store promotion and point-of-purchase materials to promote the sale of its products. The monthly marketing fees collected from franchisees are used by the Company to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update the Company's local store marketing handbooks. The Company focuses on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and mail order catalogs generated by its in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs. The Company aggressively seeks low cost, high return publicity opportunities through its in-house public relations staff by participating in local and regional events, sponsorships and charitable causes. The Company has not historically and does not intend to engage in regional or national advertising in the immediate future. The Company has not historically and does not intend to engage in regional or national print, radio or television advertising. COMPETITION The retailing of confectionery products is highly competitive. The Company and its franchisees compete with numerous businesses that offer confectionery products. Many of these competitors have greater name recognition and financial, marketing and other resources than the Company. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could adversely affect the Company and its results of operations and its ability to expand successfully. The Company believes that its principal competitive strengths lie in its name recognition and its reputation for the quality, value, variety and taste of its products and the special ambiance of its stores; its knowledge and experience in applying criteria for selection of new store locations; its expertise in merchandising and marketing of chocolate candy products; and the control and training infrastructures it has implemented to assure execution of successful practices and techniques at its franchised and Company-owned store locations. In addition, by controlling the manufacturing of its own products, the Company can better maintain its high product quality standards, offer proprietary products, manage costs, control production and shipment schedules and potentially pursue new or under-utilized distribution channels. TRADE NAME AND TRADEMARKS The trade name "Rocky Mountain Chocolate Factory" and the phrases "The Peak of Perfection in Handmade Chocolates" and "America's Chocolatier", and as well as all other trademarks, service 11 marks, symbols, slogans, emblems, logos and designs used in the Rocky Mountain Chocolate Factory system, are proprietary rights of the Company. All of the foregoing are believed to be of material importance to the Company's business. The registration for the trademark "Rocky Mountain Chocolate Factory" and "Fuzziwig's" has been granted in the United States and Canada. Applications have been filed to register the trademarks in certain foreign countries. The Company has not attempted to obtain patent protection for the proprietary recipes developed by the Company's master candy-maker and is relying upon its ability to maintain the confidentiality of those recipes. EMPLOYEES At April 30, 1996, the Company employed 402 persons, of whom 288 were store employees, 80 were factory workers and 34 were corporate personnel. Most employees, with the exception of store, factory and corporate management, are paid on an hourly basis. The Company also employs some people on a temporary basis during peak periods of store and factory operations. The Company seeks to assure that participatory management processes, mutual respect and professionalism and high performance expectations for the employee exist throughout the organization. The Company believes that it provides working conditions, wages and benefits that compare favorably with those of its competitors. The Company's employees are not covered by a collective bargaining agreement. The Company considers its employee relations to be good. SEASONAL FACTORS The Company's sales and earnings are seasonal, with significantly higher sales and earnings occurring during the Christmas and summer vacation seasons than at other times of the year, which causes fluctuations in the Company's quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale of franchises. Because of the seasonality of the Company's business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. REGULATION Each of the Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining the required licensing or approvals could delay or prevent the opening of new stores. New stores must also comply with landlord and developer criteria. Many states have laws regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises. The Company is also subject to the Federal Trade Commission regulations relating to disclosure requirements in the sale of franchises and ongoing disclosure obligations. Additionally, certain states have enacted and others may enact laws and regulations governing the termination or nonrenewal of franchises and other aspects of the franchise relationship that are intended to protect franchisees. Although these laws and regulations, and related court decisions, may limit the Company's ability to terminate franchises and alter franchise agreements, the Company does not believe that such laws or decisions will have a material adverse effect on its franchise operations. However, the laws applicable to franchise operations and relationships continue to develop, and the Company is unable to predict the effect on its intended operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisors. Federal and state environmental regulations have not had a material impact on the Company's operations but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of new stores. 12 Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of the Company's facilities for an indeterminate period of time. The Nutrition Labeling and Education Act of 1990 became effective May 8, 1994. Pursuant to the Act, the Company has filed a "Small Business Food Labeling Exemption Notice" with the U.S. Food and Drug Administration, which exempts the Company's current packaged products from Nutrition Labeling requirements. The Company provides a limited amount of trucking services to third parties, to fill available space on the Company's trucks. The Company's trucking operations are subject to various federal and state regulations, including regulations of the Federal Highway Administration and other federal and state agencies applicable to motor carriers, safety requirements of the Department of Transportation relating to interstate transportation and federal, state and Canadian provincial regulations governing matters such as vehicle weight and dimensions. The Company believes it is operating in substantial compliance with all applicable laws and regulations. RECENT FINANCINGS In September and October 1995, the Company completed a public offering of common stock which provided it with net proceeds after offering expenses of approximately $4.8 million. Approximately $1.5 million of these net proceeds was utilized to retire then-existing debt. The balance of approximately $3.3 million augmented the Company's working capital reserves, and was used in part for Company-owned store expansion. In April 1996, the Company refinanced existing debt including its 20-year real estate mortgage loan ($1.6 million principal outstanding at the date of refinancing) and Chattel mortgage term loan ($.7 million principal outstanding at the date of refinancing) under the following terms: (1) Real Estate Mortgage loan; term 20 year; interest rate 8 1/4% per annum fixed; rate adjustment on each 5 year anniversary date to then- existing prime (2) Chattel mortgage term loan; term 6 years; interest rate 8 1/4% fixed Additionally, in April, 1996, the Company secured the following incremental financing to finance its fiscal 1997 growth objectives in the establishment of additional Company-owned Rocky Mountain Chocolate Factory and Fuzziwig's stores and to support its working capital needs. (1) Working capital availability line of credit; $2,000,000; interest rate at prime; secured by accounts receivable and inventory; line must be rested for at least 60 consecutive days in any 12 month period; balance owed at April 30, 1996, zero; (2) Fixed Asset availability line of credit; $500,000; interest rate 8 1/2% per annum fixed; secured by furniture, fixtures and equipment purchased or to be purchased by the Company; term 5 years; balance owed at April 30, 1996, $500,000; (3) Fixed Asset availability line of credit; $2,500,000; 8.9% per annum fixed; secured by furniture, fixtures and equipment purchased or to be purchased by the Company; term 7 years; balance owed at April 30, 1996, $1,500,000; (4) Fixed Asset availability line of credit; $2,000,000; 8.3% per annum interest rate fixed; secured by furniture, fixtures and equipment to be purchased by the Company; term 6 years; balance owed at April 30, 1996, zero. ITEM 2. PROPERTIES FACTORY CAPACITY AND EXPANSION The Company's manufacturing operations and corporate headquarters are located at the Company's Durango, Colorado facility. The Company expanded its factory in fiscal year 1995 from its then 27,000 square feet to its current 53,000 square feet. This expansion was substantially completed by February 1995 and increased the production capacity of the factory to an estimated 13 3.5 million pounds per year. In addition, the Company purchased, as an integral part of the expansion, equipment to automate certain of its production processes and additional equipment to allow it to produce products such as candy bars that it previously purchased from outside vendors. The decision to expand the factory and to procure additional machinery and equipment was based on the Company's assessment that full efficient utilization had been made of the then-existing facility at 11/2 shifts per day operation, due in particular to the limiting constraint of product shipping and receiving areas. It was based, additionally, on calculated increased manufacturing direct labor and other efficiencies anticipated to result from the expansion and investment in equipment estimated by the Company to produce approximately $.15 savings for each pound of chocolate produced. The Company believes that its current facilities are adequate to support its operations and system expansion for the next several years. MANUFACTURING PERFORMANCE AND PROGRAM FOR IMPROVEMENT The Company, in fiscal 1996, experienced a decline in factory margins produced by the combined effects of increased material usage and lesser labor efficiencies in the production of the Company's products than that existing in the prior fiscal year. Additionally, increased manufacturing overhead cost relative to pounds of product produced contributed to this factory margin decline. The Company has effected a concerted plan to correct for its reduced factory margins as follows: (1) The Company has hired a New Vice President - Operations, a former Senior Manufacturing Manager with See's Candies, with extensive experience in chocolate candy manufacturing process improvement, manufacturing management and control, with the goal of challenging existing manufacturing practices and assessing the effectiveness of existing manufacturing processes used by the Company in the manufacture of its products; (2) The Company has effected a comprehensive MRP II-based forecasting, planning, scheduling and reporting system to improve the effectiveness and efficiency of factory operations; (3) The Company has strongly enhanced the visibility of and accountability for the achievement of daily factory material utilization and labor efficiency performance standards by factory supervisors and employees. These actions are intended to return factory gross margin performance to that existing previously through the combined impact of improvement in manufacturing practices and processes, improved manufacturing scheduling and logistics, and accountability for the achievement of manufacturing performance standards by manufacturing supervisors and employees. The Company is continuing to investigate the causes producing these unfavorable labor efficiency and material utilization effects. There can be no guarantee, however, that Company efforts will be successful or that reduced gross margin performance at the Factory will not continue. For further discussion of the impact of reduced factory margins on financial condition and results of operations and of the plan to correct for reduced factory margins, see item 7 of this report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." LEASE COMMITMENTS As of April 30, 1996, all 41 Company-owned stores were occupied pursuant to non-cancelable leases of five to ten years having varying expiration dates, most of which contain optional five-year renewal rights. The Company does not deem any individual store lease to be significant in relation to its overall operations. The Company acts as primary lessee of some franchised store premises, which it then subleases to franchisees, but the majority of existing locations are leased by the franchisee directly. New locations, however, are increasingly requiring the Company to act as primary lessee, particularly in the factory outlet environment which has become the Company's focus. At April 30, 1996, the Company was the primary lessee at 48 of its 153 franchised stores. The subleases for such stores are on the 14 same terms as the Company's leases of the premises. For information as to the amount of the Company's rental obligations under leases on both Company-owned and franchised stores, see Note D to the Financial Statements contained elsewhere in this Report. ITEM 3. LEGAL PROCEEDINGS LEGAL PROCEEDINGS The Company is not currently involved in any legal proceedings that are material to the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (A) MARKET INFORMATION On July 28, 1994, the Company's Common Stock began trading on the National Market System of The National Association of Securities Dealers Automated Quotation System ("NASDAQ"). Prior to that date, the Common Stock was traded over-the-counter on NASDAQ. The trading symbol for the Common Stock, which did not change, is "RMCF." Until March 17, 1995 the Company's $1.00 Cumulative Convertible Preferred Stock ("Preferred Stock") also traded on such markets under the symbol "RMCFP". On February 15, 1995, the Company called for redemption on March 17, 1995 all outstanding shares of its Preferred Stock at a redemption price of $10.41, including accrued dividends. As of February 28, 1995 14,610 shares of Preferred Stock were outstanding and as of March 17, 1995, all shares of Preferred Stock had been converted or redeemed by the Company and the Preferred Stock was de-listed from the NASDAQ National Market System. On January 17, 1996 the Company purchased on the open market 125,000 shares of its common stock at a price of $8.09/share. The company made this purchase because the Company felt and continues to feel that its common stock is undervalued, as well as to signal its belief to the market. The table below sets forth high and low bid information for the Common Stock as quoted on NASDAQ for each quarter of fiscal years 1995 and 1996. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. Fiscal Year Ended February 28, 1995 HIGH LOW - ----------------------------------- ---- --- FIRST QUARTER Common Stock........................... 12 11 1/2 SECOND QUARTER Common Stock........................... 12 1/2 11 1/2 THIRD QUARTER Common Stock........................... 13 1/2 11 3/4 FOURTH QUARTER Common Stock........................... 13 1/2 13 1/4 Fiscal Year Ended February 29, 1996 HIGH LOW - ----------------------------------- ---- --- FIRST QUARTER Common Stock........................... 15 3/4 13 1/2 SECOND QUARTER Common Stock........................... 18 1/2 15 3/4 THIRD QUARTER Common Stock........................... 17 1/2 12 FOURTH QUARTER Common Stock........................... 12 1/4 8 On May 13, 1996 the closing bid price for the Common Stock as reported on the NASDAQ National Market System was $7. 16 (B) HOLDERS On May 13, 1996 there were approximately 385 record holders of the Company's Common Stock. The Company believes that there are more than 830 beneficial owners of its Common Stock. (C) DIVIDENDS The Company has not paid since its inception, nor does it intend to pay in the foreseeable future, cash dividends on its Common Stock. Any future earnings will be retained for use in the Company's business. 17 ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data and store data) The selected financial data presented below for the fiscal years ended February 28 or 29, 1992 through 1996, are derived from the Financial Statements of the Company, which have been audited by Grant Thornton LLP, independent auditors. The selected financial data should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED FEBRUARY 28 OR 29, ------------------------------ 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- STATEMENT OF INCOME DATA: Revenues: Factory sales. . . . . . . . . . . . . . . . . . . . . . $ 3,023 $ 3,798 $ 4,998 $ 6,399 $8,156 Retail sales . . . . . . . . . . . . . . . . . . . . . . 1,570 1,763 2,642 5,028 7,939 Royalties and marketing fees . . . . . . . . . . . . . . 909 1,000 1,233 1,607 2,034 Franchise fees . . . . . . . . . . . . . . . . . . . . . 208 437 488 582 614 ----- ----- ----- ------ ------ Total revenues. . . . . . . . . . . . . . . . . . . . 5,710 6,998 9,361 13,616 18,743 ----- ----- ----- ------ ------ Costs and expenses: Cost of chocolate sales. . . . . . . . . . . . . . . . . 3,021 3,506 4,530 5,986 8,599 Franchise costs. . . . . . . . . . . . . . . . . . . . . 772 929 1,008 1,377 1,803 General and administrative expenses. . . . . . . . . . . 817 815 969 1,234 1,437 Retail operating expenses. . . . . . . . . . . . . . . . 1,069 1,245 1,603 2,749 4,746 ----- ----- ----- ------ ------ Total costs and expenses. . . . . . . . . . . . . . . 5,679 6,495 8,110 11,346 16,585 ----- ----- ----- ------ ------ Operating income. . . . . . . . . . . . . . . . . . . . . 31 503 1,251 2,270 2,158 Other income (expense): Interest expense . . . . . . . . . . . . . . . . . . . . (85) (101) (88) (153) (300) Interest income. . . . . . . . . . . . . . . . . . . . . 20 5 10 23 58 -- - -- -- -- Total other income (expense). . . . . . . . . . . . . (65) (96) (78) (130) (242) ---- ---- ---- ----- ----- Income (loss) before income tax expense . . . . . . . . . (34) 407 1,173 2,140 1,916 Income tax expense. . . . . . . . . . . . . . . . . . . . _ 3 311(1) 790 708 ----- ----- ----- ------ ------ Net income (loss) . . . . . . . . . . . . . . . . . . . . $(34) $404 $862 $ 1,350 1,208 ----- ----- ----- ------ ------ ----- ----- ----- ------ ------ Income (loss) per common share -- fully diluted . . . . . $(.10) $.14 $.32 $.49 $.42 ----- ---- ---- ---- ---- ----- ---- ---- ---- ---- Weighted average number of common shares outstanding -- fully diluted. . . . . . . . . . . . . . . 1,527 2,459 2,533 2,726 2,890 STORE DATA: Number of stores open at end of period: Company-owned. . . . . . . . . . . . . . . . . . . . . . 9 7 13 22 42 Franchised . . . . . . . . . . . . . . . . . . . . . . . 63 81 106 131 151 -- -- --- --- --- Total . . . . . . . . . . . . . . . . . . . . . . . . 72 88 119 153 193 -- -- --- --- --- -- -- --- --- --- SYSTEM-WIDE REVENUES: . . . . . . . . . . . . . . . . . . . $15,439 $19,886 $26,011 $35,612 $46,880 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- FEBRUARY 28 OR 29 ----------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital. . . . . . . . . . . . . . . . . . . . . $1,118 $1,716 $1,889 $ 1,627 $ 2,043 Total assets . . . . . . . . . . . . . . . . . . . . . . 4,381 4,496 6,024 10,181 16,314 Long-term debt (excluding current portion) . . . . . . . 985 1,000 604 2,314 2,184 Stockholders' equity . . . . . . . . . . . . . . . . . . 2,445 2,881 4,143 5,907 11,117
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1996 COMPARED TO 1995 RESULTS SUMMARY The Company reported net income of $1,207,745 for fiscal 1996 in comparison with $1,350,432 for fiscal 1995; a decrease of $142,687 and 10.6%. The following presents an outline of the causes of the decline in net income together with the corrective actions taken by the Company to correct for these: CAUSE: A decline in factory margins produced primarily by the combined effects of increased material usage and lesser labor efficiencies than that existing in the prior fiscal year. Additionally increased manufacturing overhead cost relative to pounds of product produced contributed to this factory margin decline. CORRECTIVE ACTIONS: The Company has effected a concerted plan to correct for its reduced factory margins as follows: (1) The Company has hired a Vice President - Operations, a former Senior Manufacturing Manager with See's Candies, with extensive experience in chocolate candy manufacturing process improvement, manufacturing management and control, with the goal of challenging existing manufacturing practices and assessing the effectiveness of existing manufacturing processes used by the Company in the manufacture of its products (see part III Item 10. "Directors and Officers of the Registrant"); (2) The Company has effected a comprehensive MRP II-based forecasting, planning, scheduling and reporting system to improve the effectiveness and efficiency of factory operations; (3) The Company has strongly enhanced the visibility of and accountability for the achievement of daily factory material utilization and labor efficiency performance standards by factory supervisors and employees. These actions are intended to return factory gross margin performance to that existing previously through the combined impact of improvement in manufacturing practices and processes, improved manufacturing scheduling and logistics, and accountability for the achievement of manufacturing performance standards by manufacturing supervisors and employees. The Company is continuing to investigate the causes producing these unfavorable labor efficiency and material utilization effects. There can be no guarantee, however, that Company efforts will be successful or that reduced gross margin performance at the factory will not continue. The Company, further, has increased its prices on its products by an average of 2.6% effective January 1, 1996. CAUSE: Higher Company-owned store expense relative to revenues resulting from delay in new Company-owned store openings in comparison with planned openings and as a result of unusually warm summer weather. Both of these factors caused Company-owned store revenues to be lower than anticipated. CORRECTIVE ACTION: 19 (1) Delay in Company-owned store openings resulted from delay in availability of space from developers. The Company has secured locations from developers in support of its planned store establishment for fiscal 1997. Although the Company is unaware of any forthcoming delays in the availability of space by developers, the Company is unable to compensate for the effect of such delays if they occur. There can be no guarantee that the Company will not experience additional delays in store openings in fiscal 1997; (2) The Company has focused its attention on effecting daily monitoring and follow-up of sales performance at each store in total, by product category and by employee through the use of a new Point-of-Sale system in place at each Company-owned store. This system provides a remote dial-up communications link with each Company-owned store from Company headquarters and provides daily reporting of sales results in total, by product category and by employee at each store. Below is a detailed analysis of financial results by revenue, cost of revenue and expense line item: REVENUES Revenue results by revenue component for fiscal 1996 in comparison with fiscal 1995 are as follows ($000):
Revenue Component 1996 1995 Change Change% - ----------------- ---- ---- ------ ------- Factory Sales $ 8,156.5 $ 6,399.3 $1,757.2 27.5% Royalty and Marketing Fees 2,034.0 1,606.6 427.4 26.6% Franchise Fees 614.3 581.9 32.4 5.6% Retail Sales 7,938.5 5,028.3 2,910.2 57.9% -------- ------- ------- ------ Total $18,743.3 $13,616.1 $5,127.2 37.7% --------- --------- -------- ------
FACTORY SALES Factory sales represent candy sales to the Company's franchised store locations. Significantly increased factory sales resulted primarily from the larger number of franchised stores in existence throughout the year (151 franchised stores franchised at February 29, 1996 in comparison with 131 at February 28, 1995) as augmented by the impact of an approximate 2% price increase effected in April 1995. Same store pounds purchased declined by 1% in fiscal 1996. When computing same store pounds purchased from the factory, purchases by franchised stores open for 12 months in each period are compared. ROYALTY AND MARKETING FEES AND FRANCHISE FEES Increased royalty and marketing fees resulted from the combined impact of a larger number of franchised stores in existence throughout the year together with an increase in same store retail sales of approximately 2.8%. The Company sold 41 new franchise locations in fiscal 1996 in comparison with 39 in fiscal 1995 resulting in the increased franchise fee revenue shown, in combination with the effect of higher balance - due revenue recognition on franchises previously sold: $5,000 is earned upon franchise agreement signing with the balance of $14,500 earned upon signing of the lease of the facility representing the franchised location. RETAIL SALES Retail sales of Company-owned stores increased as a result of a larger number of Company stores in existence throughout the year (42 stores existed at February 29, 1996, in comparison with 22 in 20 existence at February 28, 1995) in fiscal 1996 in comparison with the prior fiscal year coupled with a same store retail sales increase of 4%. The Company anticipates continued significant growth in all revenue categories as a result of increased franchise sales revenues, increased franchised and Company store openings, and the increased factory sales which will result from the product needs of these additional stores. Additional royalties are also projected to be derived from higher projected total franchise system retail sales. COSTS AND EXPENSES COST OF CHOCOLATE SALES. Cost of chocolate sales, which include costs incurred by the Company to manufacture candy sold by its Company-owned stores and to its franchised stores, increased 43.6% to $8.6 million in fiscal 1996 from $6.0 million in fiscal 1995. Cost of chocolate sales as a percentage of total chocolate sales (defined as the total of factory sales and retail sales) increased to 53.4% in 1996 from 52.4% in 1995. Cost of chocolate sales as a percentage of total chocolate sales had been expected to improve as a result of an increase in higher margin retail sales as a percentage of total chocolate sales brought about by the rapid and large increase in the number of Company-owned stores, together with the effect of an approximate 2% retail and factory price increase effected in April, 1995. This has not occurred due to an absolute 4% decline in factory margins resulting from increased material usage and lesser labor efficiencies in the manufacture of the Company's products, the effect of increased manufacturing overhead cost relative to pounds produced together with certain price reductions in selected categories of Company product sales, as discussed above. The Company is engaged in a concerted effort, using the strategy discussed above, to correct for the cause of increased material usage, as well as to improve labor efficiencies with the goal of returning factory margins to historical levels and to continue the improvement which it had been experiencing in its margins. The Company increased its prices by approximately 2.8% in January 1996 as part of this margin improvement effort. FRANCHISE COSTS. Franchise costs increased 31.0% to $1.8 million in fiscal 1996 from $1.4 million in fiscal 1995. As a percentage of the total of royalties and marketing fees and franchise fees, franchise costs increased to 68.1% of such fees in 1996 from 62.9% in 1995. The hiring of additional field support and associated administrative personnel to support the Company's accelerated pace of store opening activities and the larger base of stores is the partial cause of this increase. Additionally, the Company incurred increased expenses for promotional programs and marketing materials to support the larger base of stores. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 16.4% to $1.4 million in fiscal 1996 from $1.2 million in fiscal 1995, as a result of increased expense for administrative support personnel and increased depreciation expense for additional investment in computer hardware and software to serve as the platform for additional manufacturing and administrative control capability for the Company. As a percentage of total revenues, general and administrative expense declined to 7.7% in fiscal 1996 from 9.1% in fiscal 1995, due to a focus by the Company on minimizing increases in administrative personnel and other administrative cost by a concerted effort to effect automated data entry and control processes as a basis for minimizing such increases. RETAIL OPERATING EXPENSE. Retail operating expense increased 72.6% to $4.7 million in fiscal 1996 from $2.7 million in fiscal 1995. This increase resulted from the effect of the larger number of Company-owned stores in existence as discussed above. As a percentage of retail sales, retail operating expenses increased to 59.8% in fiscal 1996 from 54.7% in fiscal 1995. As discussed above, the Company experienced delays in store openings in fiscal 1996. This delay in store openings resulted in total revenue growth not in proportion to the increase in operating expenses. Additionally, the Company for the first time in fiscal 1996, began a program of allocating directly-related administrative expense to support the Company-owned store programs to retail operating expense. OTHER EXPENSE 21 Other expense of $242,000 incurred in fiscal 1996 increased 86.3% from the $130,000 incurred in fiscal 1995. This increase resulted from increased interest expense caused by borrowings in support of the Company's factory expansion and Company-owned store expansion as partially offset by increased interest income resulting from cash surpluses generated by the Company's stock offering (see "Liquidity and Capital Resources" discussed below). INCOME TAX EXPENSE The Company's effective income tax rate in fiscal 1996 of 37.0% approximated the 36.9% in fiscal 1995. RESULTS OF OPERATIONS 1995 COMPARED TO 1994 RESULTS SUMMARY The Company reported net income of $1,350,432 for fiscal 1995 in comparison with $861,787 for fiscal 1994; an increase of $488,645 and 56.7%. REVENUES Revenue results by revenue component for fiscal 1995 in comparison with fiscal 1994 are as follows ($000):
Revenue Component 1995 1994 Change Change% - ----------------- ---- ---- ------ ------- Factory Sales $ 6,399.3 $ 4,997.5 $1,401.8 28.1% Royalty and Marketing Fees 1,606.6 1,232.6 374.0 30.3% Franchise Fees 581.9 489.0 92.9 19.0% Retail Sales 5,028.3 2,642.2 2,386.1 90.3% ------- ------- ------- ------ Total $13,616.1 $9,361.3 $4,254.8 45.45% --------- -------- -------- ------
FACTORY SALES Significantly increased factory sales resulted primarily from the larger number of franchised stores in existence throughout the year (131 stores existed at February 28, 1995 in comparison with 106 at February 28, 1994) as augmented by the full year impact of an approximate 2% price increase effected in January 1994. Same store pounds purchased from the factory declined by 5.7% in fiscal 1995. ROYALTIES AND MARKETING FEES AND FRANCHISE FEES Increased royalties resulted from the combined impact of a larger number of franchised stores in existence throughout the year (131 franchised stores existed at February 28, 1995, in comparison with 106, at February 28, 1994) together with an increase in same store sales at franchised stores of approximately 1.7%. The Company sold 39 new franchise locations in fiscal 1995 in comparison with 33 in fiscal 1994 resulting in the increased franchise fee revenue shown in combination with the effect of higher balance - due revenue recognition on franchises previously sold: $5,000 is earned upon franchise agreement signing with the balance of $14,500 earned upon signing of the lease of the facility representing the franchised location. RETAIL SALES 22 Retail sales of Company-owned stores increased as a result of a larger number of Company-owned stores in existence throughout the year (22 stores existed at February 28, 1995, in comparison with 13 in existence at February 28, 1994) in fiscal 1995 in comparison with the prior fiscal year. COSTS AND EXPENSES COST OF CHOCOLATE SALES. Cost of chocolate sales, which includes costs incurred by the Company to manufacture candy sold by its Company-owned stores and to its franchised stores, increased 32.1% to $6.0 million in 1995 from $4.5 million in 1994. Cost of chocolate sales as a percentage of total chocolate sales (defined as the total of factory sales and retail sales) decreased to 52.4% in 1995 from 59.3% in 1994. This decrease in cost of chocolate sales as a percentage of total chocolate sales resulted from an increase in higher margin retail sales as a percentage of total chocolate sales, a modest factory and retail price increase and improved manufacturing efficiencies resulting largely from the six-month impact of the Company's factory expansion and the implementation of additional automation at the factory. Additionally, improved manufacturing overhead absorption, resulting from higher factory production volumes, contributed to the decrease in cost of chocolate sales as a percentage of total chocolate sales. FRANCHISE COSTS. Franchise costs increased 36.6% to $1.4 million in 1995 from $1.0 million in 1994. As a percentage of the total of royalties and marketing fees and franchise fees, franchise costs increased to 62.9% of such fees in 1995 from 58.6% in 1994. The hiring of additional field support and associated administrative personnel to support the Company's accelerated pace of new franchise signing and store opening activities and the larger base of stores is the partial cause of this increase. Additionally, the Company incurred increased expenses for promotional programs and marketing materials. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 27.3% to $1.2 million in 1995 from $969,000 in 1994, as a result of increased professional fees incurred to support the Company's accelerated pace of franchise signings and lease negotiating activities and increased expense for administrative support personnel. As a percentage of total revenues, general and administrative expenses declined to 9.1% in 1995 from 10.4% in 1994, primarily due to a significant increase in total revenues without a proportionate increase in general and administrative expenses. RETAIL OPERATING EXPENSES. Retail operating expenses increased 75.0% to $2.7 million in 1995 from $1.6 million in 1994. This increase resulted from the effect of the larger number of Company-owned stores in existence throughout the fiscal year. As a percentage of retail sales, retail operating expenses declined to 54.7% in 1995 from 59.5% in 1994 as a result of higher retail sales without a proportionate increase in expenses due to improved expense control at Company-owned stores. OTHER EXPENSE Other expense of $130,000 incurred in fiscal 1995 increased 66.7% from the $78,000 incurred in fiscal 1994. This increase resulted from increased interest expense associated with borrowings to finance the Company's factory expansion. INCOME TAX EXPENSE The Company's effective income tax rate in 1995 was 36.9% in comparison with 26.5% in 1994. The absolute 10.4% increase in effective tax rates resulted from full utilization of remaining net operating loss carryforwards in 1994, offsetting income through the second quarter of that year. By comparison, in 1995, all income was fully taxed at the Company's effective income tax rate. LIQUIDITY AND CAPITAL RESOURCES At February 29, 1996, working capital was $2,043,143 in comparison with $1,627,026 at February 28, 1995, a $416,117 increase. This increase resulted primarily from the impact of the proceeds from the September/October, 1995 public offering (see "Recent Financings" discussed in ITEM 1 "Business" section of this Report) after utilization of a portion of the proceeds to retire existing debt and to fund the Company's Company-owned store expansion program. 23 Cash and cash equivalent balances increased from $382,905 at February 28, 1995 to $528,787 at February 29, 1996 as a result of this impact of the Company's public offering. The Company's current ratio was 1.7/1 at February 29, 1996 in comparison with 1.9/1 at February 28, 1995. The Company's long-term debt is comprised primarily of real estate mortgage financing (unpaid balance as of February 29, 1996, $1,625,798), and Chattel mortgage financing (unpaid balance as of February 29, 1996, $658,479) provided by local banking facilities and used to fund the Company factory expansion. The remaining balance of long-term debt represents lease and chattel mortgage financing obtained from Ford Equipment Leasing and Textron Financial Corporation (secured by Capital Equipment procured with the proceeds from this financing and with a term, in each case, of 60 months). The Company also possessed a $1,000,000 working capital line of credit, secured by accounts receivable at February 29, 1996, which line had a $1,000,000 balance at that date. As discussed in greater detail in "Recent Financings", ITEM 1 "Business" section of this document, the Company refinanced under favorable terms its existing real estate, Chattel mortgage and working capital loans and additionally obtained incremental financing as follows: (1) Increase in its working capital availability line of credit to $2,000,000 from $1,000,000 (balance owed at April 30, 1996, zero); (2) Achievement of fixed asset availability lines of credit totaling $5,000,000 for use by the Company in its Company-owned store expansion program (balance utilized and owed at April 30, 1996, $2,000,000). In fiscal 1997, the Company anticipates making $5.9 in capital expenditures in comparison with $5.6 million in fiscal 1996. Of this sum, approximately $5.2 million is anticipated to be used for the opening of new Company-owned stores with the balance anticipated to be used for the purchase of capital equipment for the factory as well as additional computer equipment for its administrative functions. The Company believes that cash flow from operating activities and available bank lines of fixed asset and working capital credit will be sufficient to service debt, fund anticipated capital expenditures and provide necessary working capital at least through the end of fiscal 1997. There can be no guarantee, however, that unforeseen events will not require the Company to secure additional sources of financing. The Company may also seek additional financing from time to time, through borrowings or public or private offerings of equity or debt securities, to fund its future expansion plans. IMPACT OF INFLATION Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally the Company's future lease cost for new facilities may reflect potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on its increased costs to its customers. Depreciation expense is based on the historical cost to the Company of its fixed assets, and therefore is less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years. SEASONALITY The Company is subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of the Company's products have occurred during the Christmas and summer vacations 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 24 openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year. EFFECT OF NEW ACCOUNTING STANDARD Financial Accounting Standard (FAS) 121, "Accounting for the Impairment of Long-Lived Assets", is effective for fiscal years beginning after December 15, 1996. This standard provides for the reduction of asset values of assets defined in the Standard as long-lived, with the impact of this reduction being charged to results of operations. The Company does not anticipate a material impact of adoption of this new accounting standard on results of operations of the Company. 25 ITEM 8. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants........... 27 Financial Statements Balance Sheets........................................... 28 Statements of Income..................................... 30 Statements of Changes in Stockholders' Equity................................ 31 Statements of Cash Flows................................. 33 Notes to Financial Statements............................ 35 26 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Rocky Mountain Chocolate Factory, Inc. We have audited the accompanying balance sheets of Rocky Mountain Chocolate Factory, Inc. as of February 29, 1996 and February 28, 1995, and the related statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended February 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Chocolate Factory, Inc. at February 29, 1996 and February 28, 1995, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 1996, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP GRANT THORNTON LLP Dallas Texas April 17, 1996 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS ASSETS February 29, February 28, 1996 1995 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 528,787 $ 382,905 Accounts and notes receivable-trade, less allowance for doubtful accounts of $28,196 in 1996 and $48,366 in 1995 1,463,901 1,179,019 Inventories 2,504,908 1,687,016 Deferred income taxes 59,219 68,586 Other 224,001 110,105 ------------ ------------ Total current assets 4,780,816 3,427,631 PROPERTY AND EQUIPMENT - AT COST Land 122,558 122,558 Building 3,596,905 2,453,069 Leasehold improvements 1,753,165 803,160 Machinery and equipment 4,898,174 2,917,148 Furniture and fixtures 2,330,057 1,086,282 Transportation equipment 228,816 197,346 ------------ ------------ 12,929,675 7,579,563 Less accumulated depreciation and amortization 2,468,084 1,690,118 ------------ ------------ 10,461,591 5,889,445 OTHER ASSETS Accounts and notes receivable - trade, due after one year 111,588 136,132 Goodwill, net of accumulated amortization of $253,740 in 1996 and $230,136 in 1995 336,260 359,864 Other 624,185 368,098 ------------ ------------ 1,072,033 864,094 ------------ ------------ $16,314,440 $10,181,170 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these statements. 28 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BALANCE SHEETS - CONTINUED LIABILITIES and STOCKHOLDERS' EQUITY February 29 February 28 CURRENT LIABILITIES 1996 1995 ------------ ------------ Short-term debt $ 1,000,000 $ - Current maturities of long-term debt 134,538 182,852 Accounts payable - trade 998,520 839,117 Accrued compensation 335,926 222,713 Accrued liabilities 214,460 272,593 Income taxes payable 54,229 283,330 ------------ ------------ Total current liabilities 2,737,673 1,800,605 LONG-TERM DEBT, less current maturities 2,183,877 2,313,895 DEFERRED INCOME TAXES 275,508 159,863 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY $1.00 cumulative convertible preferred stock-authorized 250,000 shares, $.10 par value; issued and outstanding, 14,610 shares in 1995 - 1,462 Common stock - authorized 7,250,000 shares, $.03 par value; issued 3,034,302 shares in 1996 and 2,634,289 in 1995 91,029 79,029 Additional paid-in capital 9,703,985 4,700,527 Retained earnings 2,338,267 1,130,522 ------------ ------------ 12,133,281 5,911,540 Less common stock held in treasury, at cost - 129,153 shares in 1996 and 4,303 shares in 1995 1,015,899 4,733 ------------ ------------ 11,117,382 5,906,807 ------------ ------------ $ 16,314,440 $ 10,181,170 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these statements. 29 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF INCOME For the Years Ended ------------------------------------------ February 29, February 28, February 28, 1996 1995 1994 ------------ ------------ ------------ REVENUES Sales $16,094,995 $11,427,700 7,639,664 Franchise and royalty fees 2,648,303 2,188,434 1,721,570 ------------ ------------ ------------ 18,743,298 13,616,134 9,361,234 COSTS AND EXPENSES Cost of sales 8,598,798 5,985,970 4,529,645 Franchise costs 1,803,506 1,376,820 1,008,517 General and administrative 1,436,551 1,234,002 969,116 Retail operating expenses 4,746,026 2,749,511 1,603,290 ------------ ------------ ------------ 16,584,881 11,346,303 8,110,568 ------------ ------------ ------------ Operating profit 2,158,417 2,269,831 1,250,666 OTHER INCOME (EXPENSE) Interest expense (299,792) (152,592) (87,929) Interest income 57,620 22,580 9,681 ------------ ------------ ------------ (242,172) (130,012) (78,248) Income before income tax expense 1,916,245 2,139,819 1,172,418 ------------ ------------ ------------ INCOME TAX EXPENSE Current 583,488 749,516 259,226 Deferred 125,012 39,871 51,405 ------------ ------------ ------------ 708,500 789,387 310,631 ------------ ------------ ------------ NET INCOME 1,207,745 1,350,432 861,787 Dividend requirements on preferred stock - 14,610 88,733 ------------ ------------ ------------ INCOME ALLOCABLE TO COMMON STOCKHOLDERS $ 1,207,745 $ 1,335,822 $ 773,054 ------------ ------------ ------------ ------------ ------------ ------------ PRIMARY INCOME PER COMMON AND EQUIVALENT SHARE $ .42 $ .51 $ .43 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average and equivalent shares 2,887,063 2,612,730 1,813,381 ------------ ------------ ------------ ------------ ------------ ------------ FULLY-DILUTED INCOME PER COMMON AND EQUIVALENT SHARE $ .42 $ .49 $ .32 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average and equivalent shares 2,889,538 2,725,690 2,533,530 ------------ ------------ ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these statements. 30 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended ------------------------------------------ February 29, February 28, February 28, 1996 1995 1994 ------------ ------------ ------------ COMMON STOCK Balance at beginning of year $ 79,029 $ 65,590 $ 46,868 Conversion of 7% convertible notes to common - 12,972 12,495 Sale of common stock 10,125 - - Conversion of preferred stock to common 435 17 5,567 Exercise of stock options 1,440 450 660 ------------ ------------ ------------ Balance at end of year 91,029 79,029 65,590 ------------ ------------ ------------ PREFERRED STOCK Balance at beginning of year 1,462 1,496 11,973 Conversion of preferred stock to common (1,309) (34) (10,477) Redemption of preferred stock (153) - - ------------ ------------ ------------ Balance at end of year - 1,462 1,496 ------------ ------------ ------------ ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 4,700,527 4,197,838 3,806,825 Conversion of 7% convertible notes to common - 387,029 287,505 Sale of common stock 4,846,010 - - Conversion of preferred stock to common 874 17 4,909 Exercise of stock options 180,435 114,280 97,589 Distribution of treasury stock 2,010 1,363 1,010 Redemption of preferred stock (25,871) - - ------------ ------------ ------------ Balance at end of year 9,703,985 4,700,527 4,197,838 ------------ ------------ ------------ RETAINED EARNINGS (Accumulated Deficit) Balance at beginning of year 1,130,522 (117,341) (979,128) Net income for the year 1,207,745 1,350,432 861,787 Preferred stock dividends - (102,569) - ------------ ------------ ------------ Balance at end of year 2,338,267 1,130,522 (117,341) ------------ ------------ ------------ TREASURY STOCK, AT COST Balance at beginning of year (4,733) (4,870) (5,310) Purchase of stock for treasury (1,011,331) - - Distribution of treasury stock 165 137 440 ------------ ------------ ------------ Balance at end of year (1,015,899) (4,733) (4,870) ------------ ------------ ------------ $ 11,117,382 $ 5,906,807 $ 4,142,713 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 31 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
For the years ended ------------------------------------------ February 29, February 28, February 28, 1996 1995 1994 ------------ ------------ ------------ COMMON SHARES Balance at beginning of year 2,634,289 2,186,335 1,562,245 Conversion of 7% convertible notes to common - 432,376 416,493 Sale of common stock 337,500 - - Conversion of preferred stock to common 14,513 578 185,597 Exercise of stock options 48,000 15,000 22,000 ------------ ------------ ------------ Balance at end of year 3,034,302 2,634,289 2,186,335 ------------ ------------ ------------ ------------ ------------ ------------ PREFERRED SHARES Balance at beginning of year 14,610 14,954 119,725 Redemption of preferred stock (1,532) - - Conversion of preferred stock to common (13,078) (344) (104,771) ------------ ------------ ------------ Balance at end of year - 14,610 14,954 ------------ ------------ ------------ ------------ ------------ ------------ TREASURY SHARES Balance at beginning of year 4,303 4,428 4,828 Purchase of stock for treasury 125,000 - - Distribution of treasury stock (150) (125) (400) ------------ ------------ ------------ Balance at end of year 129,153 4,303 4,428 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 32 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS
For the years ended ------------------------------------------ February 29, February 28, February 28, 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,207,745 $ 1,350,432 $ 861,787 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and 823,890 487,737 299,315 amortization Changes in operating assets and liabilities: Accounts and notes receivable - trade (260,338) (117,236) (143,873) Inventories (817,892) (602,672) (261,520) Other assets (113,896) (47,474) (22,104) Accounts payable-trade 159,403 332,011 199,512 Income taxes payable (229,101) 121,134 224,051 Deferred income taxes 125,012 39,871 51,406 Accrued liabilities and compensation 55,080 153,954 122,009 ------------ ------------ ------------ Net cash provided by operating activities 949,903 1,717,757 1,330,583 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of other assets (164,353) (50,064) (65,050) Purchase of property and equipment (5,464,166) (4,399,958) (972,720) ------------ ------------ ------------ Net cash used in investing activities $ (5,628,519) $ (4,450,022) $ (1,037,770) ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 33 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended ------------------------------------------ February 29, February 28, February 28, 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in line of credit $ 1,000,000 $ - $ - Proceeds from issuance of long-term debt 1,500,000 2,437,500 - Principal payments on long-term debt (1,678,332) (270,882) (87,967) Proceeds from sale of common stock 4,856,135 - - Proceeds from exercise of stock options 181,875 52,876 98,248 Redemption of preferred stock (26,024) - - Dividends paid - (102,570) - Proceeds from sale of treasury stock 2,175 1,500 1,450 Purchase of stock for treasury (1,011,331 - - ------------ ------------ ------------ Net cash provided by financing activities 4,824,498 2,118,424 11,731 ------------ ------------ ------------ Net increase (decrease)in cash and cash equivalents 145,882 (613,841) 304,544 Cash and cash equivalents at beginning of year 382,905 996,746 692,202 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 528,787 $ 382,905 $ 996,746 ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTARY DISCLOSURES: Interest paid $ 301,481 $ 155,015 $ 87,054 Income taxes paid 812,589 628,382 9,128 Non-cash financing activities: Issuance of 432,376 and 416,493 shares of common stock upon conversion of 7% convertible notes in 1995 and 1994 respectively $ - $ 400,000 $ 300,000 Owner financed equipment purchase - 30,000 - Conversion of preferred stock into common stock 1,309 34 34
The accompanying notes are an integral part of these statements. 34 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS February 29, 1996 and February 28, 1995 and 1994 NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES Description of the nature of company operations, together with a summary of the significant accounting policies applied in the preparation of the accompanying financial statements and of the estimates used in their preparation follows: NATURE OF OPERATIONS The Company is a manufacturer of an extensive line of premium chocolate candy for sale at its franchised and company-owned stores located throughout the United States and in Canada. The majority of the Company's revenues are generated from these sales. The balance of the Company's revenues are generated from royalties and marketing fees, based on a franchisee's monthly gross sales, and from franchise fees, which consist of fees earned from the sale of franchises. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed by the straight-line method based upon the estimated useful life of the asset. Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. AMORTIZATION OF GOODWILL Goodwill is amortized on the straight-line method over twenty-five years. FRANCHISE AND ROYALTY FEES Franchise fee revenue is recognized upon completion of all significant initial services provided to the franchisee and upon satisfaction of all material conditions of the franchise agreement. In addition to the initial franchise fee, the Company receives a royalty fee of five percent (5%) and a marketing and promotion fee of one percent (1%) of the store's gross sales. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents include cash in excess of daily requirements which is invested in various financial instruments having an original maturity of three months or less. 35 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED February 29, 1996 and February 28, 1995 and 1994 NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED INCOME PER COMMON SHARE Primary income per common and common equivalent share is computed by dividing net income, adjusted for dividends on preferred stock, by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares result from the assumed issuance of shares under the Company's incentive stock option plan when dilutive. Fully-diluted income per common share is computed as above but assumes conversion of convertible notes payable and cumulative convertible preferred stock, when dilutive. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, short- term investments in money market fund and other liquid assets, trade receivables and payables, notes receivable and debt, which has variable rates. The fair value of all instruments approximates the carrying value. NOTE B - INVENTORIES Inventories consist of the following: February 29, February 28, 1996 1995 ------------ ------------ Ingredients and supplies $1,117,517 $ 712,727 Finished candy 1,387,391 974,289 ---------- ---------- $2,504,908 $1,687,016 ---------- ---------- ---------- ---------- NOTE C - LINE OF CREDIT AND LONG-TERM DEBT LINE OF CREDIT: At February 29, 1996 the Company possessed a $1,000,000 line of credit from a bank, collateralized by accounts receivable and inventory. Draws may be made under the line at 75% of eligible accounts receivable. Interest on borrowings is at prime. Terms of the line require that the line be rested (that is, that there be no outstanding balance) for two periods of not less than 30 consecutive days during the term of the loan. The credit line expires in July, 1996. 36 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED February 29, 1996 and February 28, 1995 and 1994 NOTE C - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED LONG-TERM DEBT:
February 29, February 28, 1996 1995 ------------ ------------ Chattel mortgage note payable in monthly installments of $9,247 through August, 2004 including interest at 8.25% per annum, collateralized by machinery, equipment, furniture and fixtures. 658,479 711,689 Real estate mortgage note payable in monthly installments of $14,506 through August, 2014; interest rate of 8.25%; collateralized by factory building. 1,625,798 1,660,275 Capital lease obligation, 60-month term, payable in monthly installments of $3,503 through June, 1996; interest imputed at 11.04%. 17,082 66,070 Promissory note payable in monthly installments of $1,000 through June, 1996, when entire outstanding principal balance is due; non- interest bearing; collateralized by equipment purchased from note holder. 9,000 21,000 Chattel mortgage note payable in monthly installments of $2,746 through May, 1996 including interest at 13.46% per annum, collateralized by equipment 8,056 37,713 ---------- ---------- 2,318,415 2,496,747 Less current maturities 134,538 182,852 ---------- ---------- $2,183,877 $2,313,895 ---------- ---------- ---------- ----------
Maturities of long-term debt are as follows: Year-ending February 28 (29), ----------------------------- 1997 134,538 1998 109,186 1999 118,543 2000 128,701 2001 135,157 Thereafter 1,692,290 ---------- $2,318,415 ---------- ---------- 37 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED February 29, 1996 and February 28, 1995 and 1994 NOTE D - OPERATING LEASES The Company conducts its retail sales operations in facilities leased under five to ten year noncancelable operating leases. Certain leases contain renewal options for between two and ten additional years at increased monthly rentals. The majority of the leases provide for contingent rentals based on sales in excess of predetermined base levels. The following is a schedule by year of future minimum rental payments required under such leases: Year-ending February 28 (29), ----------------------------- 1997 $ 961,592 1998 960,217 1999 925,989 2000 822,134 2001 662,639 Thereafter 625,787 ---------- $4,958,358 ---------- ---------- In some instances, in order to retain the right to site selection or because of requirements imposed by the lessor, the Company leases space for its proposed franchise outlets. When a franchise is sold, the store is subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease. The Company's liability as primary lessee on sublet franchise outlets, all of which is offset by sublease rentals, is as follows: Year-ending February 28 (29), ----------------------------- 1997 $1,184,301 1998 1,124,310 1999 987,476 2000 829,096 2001 619,875 Thereafter 807,139 ---------- $5,552,197 ---------- ---------- The following is a schedule of lease expense for all operating leases for the three years ended February 29, 1996: 1996 1995 1994 ---------- ----------- ---------- Minimum rentals $1,547,817 $ 1,042,235 $ 748,510 Less sublease rentals (982,780) (663,457) (422,292) Contingent rentals 56,037 33,040 23,045 ---------- ----------- ---------- $ 621,074 $ 411,818 $ 349,263 ---------- ----------- ---------- ---------- ----------- ---------- NOTE E - RELATED PARTY LEASE Until June, 1994 the Company leased land and its factory building under a ten year operating lease with the President of the Company for a monthly rental of $7,750. On June 2, 1994 the Company acquired the land and building from the President at a price of $700,332. 38 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED February 29, 1996 and February 28, 1995 and 1994 NOTE F - INCOME TAXES Income tax expense is comprised of the following: Years Ended February 29 - 28, 1996 1995 1994 ---- ---- ---- Federal Current $527,211 $658,061 $216,899 Deferred 125,012 39,871 51,405 State 56,277 91,455 42,327 -------- -------- -------- $708,500 $789,387 $310,631 -------- -------- -------- -------- -------- -------- A reconciliation of the statutory federal income tax rate and the effective rate as a percentage of pretax income is as follows: Years Ended February 29 - 28, 1996 1995 1994 ---- ---- ---- Statutory rate 34.0% 34.0% 34.0% Goodwill amortization .4% .4% .7% Reduction in valuation allowance - - (11.1%) State income taxes, net of federal benefit 1.9% 2.8% 3.6 Other .7% (.3%) (.7%) ----- ----- ----- 37.0% 36.9% 26.5% ----- ----- ----- ----- ----- ----- The components of deferred income taxes at February 29, 1996 and February 28, 1995 are as follows: Deferred Tax Asset 1996 1995 ------------------ ---- ---- Allowance for doubtful accounts $ 10,573 $ 18,863 Accrued compensation 48,646 49,723 --------- --------- Net current deferred tax asset $ 59,219 $ 68,586 --------- --------- --------- --------- Deferred Tax Liabilities ------------------------ Depreciation $(294,237) $(172,616) Deferred lease rentals 18,729 12,753 --------- --------- Net noncurrent deferred tax liability $(275,508) $(159,863) --------- --------- --------- --------- NOTE G - PREFERRED STOCK On February 15, 1995, the Company called for redemption all outstanding shares of its Preferred Stock at a redemption price of $10.41, including $.21 in unpaid, accrued dividends. As of March 17, 1995, all preferred shares had been converted or redeemed. Each share of the $1.00 cumulative convertible preferred stock was entitled to a cumulative annual dividend of $1.00 and was convertible into common stock at $9.00 per share of common stock with each share of preferred stock being valued at $10.00 for the purpose of such conversion. The conversion price was subject to adjustment in certain events. The value of each share of preferred stock for the purpose of conversion was increased by the amount of all unpaid cumulative dividends. The preferred stock was redeemable at the option of the Company at a call price of $10.20 per share plus cumulative dividends. 39 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED February 29, 1996 and February 28, 1995 and 1994 NOTE H - STOCK OPTION PLANS Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan") options to purchase 215,000 shares of the Company's common stock were granted at prices not less than market value at the date of grant. The 1985 Plan expired in October 1995. Options granted under the 1985 Plan could not have a term exceeding ten years. Grants of options representing 124,000 shares of the Company's common stock remain outstanding under the 1985 Plan at February 29, 1996. Under the 1995 Stock Option Plan (the "1995 Plan") and the Nonqualified Stock Option Plan for Nonemployee Directors (the "Nonemployee Plan"), options to purchase up to 100,000 and 90,000 shares, respectively, of the Company's common stock may be granted at prices not less than market value at the date of grant. Options granted may not have a term exceeding ten years. Grants of options representing 70,000 and 30,000 shares of the Company's common stock remain outstanding under the 1995 Plan and Nonemployee Plan, respectively. The options outstanding under these plans will expire, if not exercised, in March 1998 through September 2005. Options for 200,000 shares were exercisable at February 29, 1996. The following table sets forth the option activity for the years ended February 28, 1995 and February 29, 1996: Option price ------------ Shares Per share Total -------- ------------ ----------- February 28, 1994 141,000 $3.125-13.50 $ 536,250 Granted 66,000 13.50 891,000 Forfeited (6,000) 13.50 (81,000) Exercised (15,000) 3.125-4.00 (52,875) -------- ------------ ----------- February 28, 1995 186,000 $3.125-13.50 1,293,375 Granted 87,000 18.25 1,587,750 Forfeited (1,000) 18.25 (18,250) Exercised (48,000) 3.125-5.25 (181,875) -------- ------------ ----------- February 29, 1996 224,000 $3.125-18.25 $2,681,000 -------- ----------- -------- ----------- NOTE I - SEGMENT INFORMATION The Company operates in only one industry segment. All significant revenues relate to sales of its products through Company operated and franchised retail stores. 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION Franklin E. Crail . . . . . . . . . 54 Chairman of the Board, President, Treasurer and Director Ralph L. Nafziger . . . . . . . . . 50 Vice President - Manufacturing and Director Clifton W. Folsom . . . . . . . . . 42 Vice President - Franchise Support Jay B. Haws . . . . . . . . . . . . 45 Vice President - Marketing Lawrence C. Rezentes. . . . . . . . 48 Vice President - Finance Terri A. Gentry . . . . . . . . . . 45 Corporate Secretary Lee N. Mortenson. . . . . . . . . . 60 Director Fred M. Trainor . . . . . . . . . . 57 Director Gerald A. Kien. . . . . . . . . . . 65 Director Everett A. Sisson . . . . . . . . . 75 Director
FRANKLIN E. CRAIL. Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. Since the incorporation of the Company in November 1982, he has served as its President and a Director, and since September 1981 as its Treasurer. He was elected Chairman of the Board in March 1986. Prior to founding the Company, Mr. Crail was co-founder and president of CNI Data Processing, Inc., a software firm which developed automated billing systems for the cable television industry. RALPH L. NAFZIGER. Mr. Nafziger joined the Company in January 1990 as Vice President of Manufacturing and has served as a Director of the Company since 1990. From 1988 to 1989, Mr. Nafziger served as Chief Financial Officer of Midcontinent Airlines Inc., a regional airline operation based in Kansas City. From 1987 to 1988, he was an independent business planning consultant to several manufacturing and service corporations. From 1977 to 1986, Mr. Nafziger was a principal and officer of Snugli Inc., a children's products manufacturer, which was acquired by Huffy Corporation, a bicycle manufacturer, in 1985. Mr. Nafziger possesses a B.S. in accounting from Pennsylvania State University. CLIFTON W. FOLSOM. Mr. Folsom has served as Vice President of Franchise Support of the Company since June 1989. He joined the Company in May 1983 as Director of Franchise Sales and Support, and was promoted in March 1985 to Vice President of Franchise Sales, a position he held until he began serving in his current capacity in June 1989. From March 1978 until joining the Company, Mr. Folsom was employed as a sales representative by Sears Roebuck & Company. 41 JAY B. HAWS. Mr. Haws joined the Company in August 1991 as Vice President of Marketing. Since 1981, Jay had been closely associated with the Company both as a franchisee and marketing/graphic design consultant. From 1986 to 1991 he was Vice-President and President of Chocolate Factory, Inc., which operated two Rocky Mountain Chocolate Factory franchises located in San Francisco, California. From 1983 to 1989 he served as Vice President of Marketing for Image Group, Inc., a marketing communications firm based in Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky Mountain Chocolate Factory franchises located in Sacramento and Walnut Creek, California. From 1973 to 1983 he was principal of Jay Haws and Associates, an advertising and graphic design agency. Mr. Haws holds a B.A. in graphics design and communication from California State University. LAWRENCE C. REZENTES. Mr. Rezentes joined the Company in July 1990 as Vice President of Finance. From 1989 to April 1990, he served as Vice President of Finance for Fanamation, Inc., a designer and manufacturer of robotic inspection systems. From 1985 through 1988, he was a principal in Venture Consulting Resource, a financial and business planning consulting organization to technology based businesses and to the venture capital community. From 1980 through 1984, Mr. Rezentes was co-founder and Vice President of Finance of Infomed Corporation, a venture capital financed pioneer in the field of computer and telecommunications-based medical diagnosis. Mr. Rezentes holds a B.S. in accounting from Fairleigh Dickinson University and an M.B.A. in finance from the University of Chicago Graduate School of Business. He is a certified public accountant. TERRI A. GENTRY. Ms. Gentry has served as the Company's corporate secretary since April, 1996. Ms. Gentry has served the Company in a number of administrative and managerial capacities including her current position as Customer Service Manager, (which she fulfills concurrent with her responsibilities as Corporate Secretary) since joining the Company in June 1991. LEE N. MORTENSON. Mr. Mortenson has served on the Board of Directors of the Company since 1987. Since December 1993, Mr. Mortenson has been President and a Director of Coronet. Mr. Mortenson has served, since May 1988, as President and a Director and, since December 1990, as Chief Operating Officer of Sunstates Corporation (formerly known as Acton Corporation). He also served as Chief Executive Officer of Sunstates Corporation, the parent corporation of Coronet, from May 1988 to December 1990. Sunstates Corporation is engaged in non-standard automative casualty insurance, manufacturing and real estate development. Since 1984, Mr. Mortenson has served as President, Chief Operating Officer and a Director of Telco Capital Corporation, a diversified financial services and manufacturing company and an indirect parent of Coronet. Mr. Mortenson also served as a Director of Hickory Furniture Company from 1980 to 1993 and of Sun Electric Corporation, a manufacturer of automotive test equipment, from 1988 to 1992 and has served as a Director of Alba-Waldensian, Inc., since 1984, of NRG Inc., a leasing company, since 1987, and of Wellco Enterprises, Inc., a boot manufacturer, since 1994. FRED M. TRAINOR. Mr. Trainor has served as a Director since August 1992. Mr. Trainor is the founder, and since 1984 has served as Chief Executive Officer and President of AVCOR Health Care Products, Inc., Fort Worth, Texas, a manufacturer and marketer of specialty dressings products. Prior to founding AVCOR Health Care Products, Inc., in 1984, Mr. Trainor was a founder, Chief Executive Officer and President of Tecnol, Inc. of Fort Worth, Texas, also a company involved with the health care industry. Before founding Tecnol, Inc., Mr. Trainor was with American Hospital Supply Corporation (AHSC) for thirteen years in a number of management capacities. GERALD A. KIEN. Mr. Kien was first elected as a Director of the Company in August 1995. From 1993 to 1995 Mr. Kien served as President and Chief Executive Officer of Remote Sensing Technologies, Inc., a subsidiary of Envirotest Systems, Inc., a company engaged in the development of instrumentation for vehicle emissions testing. From 1989 to 1993 Mr. Kien served as Chairman, President and Chief Executive Officer of Sun Electric Corporation, a manufacturer of automotive test equipment, and has served as a Director and as Chairman of the Executive Committee of that Company since 1980. Sun Electric merged with Snap-On Tools in 1993, and Mr. Kien remained as President of the Sun Electric division of Snap-On Tools until his retirement in 1994. Mr. Kien was a co-founder of the First National Bank of Hoffman Estates and remained as a Director from 1979 to 1990, and was a Director of the Charter Bank and Trust of Illinois from 1984 to 1990. He served as a Director of Systems Control, Inc. and Vehicle Test Technologies, Inc., from 1989 to 1993, both of which are engaged in emissions testing of motor vehicles. Mr. Kien received his Ph.D. from the University of Illinois Graduate College of Medicine, in 1959. 42 EVERETT A. SISSON. Mr. Sisson was first elected as a Director of the Company in August 1995. Mr. Sisson is President of The American Growth Group, which is engaged in land development, investment, management services and management consulting, a position he has held since he formed the firm in 1966. Mr. Sisson served as a Director of the Century Companies of America, a company providing life insurance and related financial products, from 1962 until 1991, and Chairman of the Board from 1977 until 1983. Mr. Sisson has been a Director of Coronet since 1992. During various periods over the past 20 years, Mr. Sisson served as a Director and member of several Board committees of Libco Corporation, Wisconsin Real Estate Investment Trust, Hickory Furniture Company, Telco Capital Corporation, Greater Heritage Corporation, Indiana Financial Investors Inc., Sunstates Corporation and Acton Corporation. On April 17, 1996, Ralph L. Nafziger resigned from the Corporation as Director and Officer but he has agreed to provide miscellaneous services to the corporation through December, 1996 to assure a smooth transition. Resignation as Director was effective immediately, with his resignation as Vice President - Manufacturing to be effective upon the beginning of service of his successor. Mr. Nafziger's successor as Vice President, Mr. Gary Hauer, was appointed May 17, 1996 with his service to begin May 28, 1996. A replacement for Mr. Nafziger as Director has yet to be appointed. A summary of Mr. Hauer's background follows: Mr. Hauer has served in a number of manufacturing management capacities over a 28 year career in the chocolate candy and confectionery industries, including 18 years with See's Candies. Mr. Hauer is currently plant manager with See's Candies, a capacity in which he has served for the past 10 years. The Board of Directors has a standing Audit Committee and Compensation Committee, each consisting of Messrs. Mortenson and Trainor, Sisson and Kien. Currently, all directors of the Company are elected annually by the stockholders and hold office until their respective successors are elected and qualified. SECTION 16 (a) COMPLIANCE The Company has no knowledge that any director, executive officer of 10% stockholder was required to file a Form 5 for fiscal 1996 and failed to do so, and the Company has received a written representation that a Form 5 was not required from each such person. The Company has not received such a representation from Clyde Wm. Engle or Gerald M. Tierney, who were directors of the Company for a portion of fiscal 1996. In making these disclosures, the Company has relied solely on written representations of its directors, executive officers and 10% stockholders and copies of the reports filed by them with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information with respect to annual compensation paid for the years indicated to the Company's Chief Executive Officer. No other executive officer of the Company met the minimum compensation threshold of $100,000 for inclusion in the table. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION ------------ ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) - --------------------------- ---- -------- ------- --------------- Franklin E. Crail, Chairman of the Board and President 1996 $146,538 $10,000 $1,833 1995 $129,618 $31,050 $2,162 1994 $104,000 $14,500 $ 0- 43 (1) Includes amounts deferred at the Named Officer's election pursuant to the Company's 401(k) Plan, which was first offered in fiscal 1995. (2) Represents Company contributions on behalf of the Named Officer under the Company's 401(k) Plan, which was first offered in fiscal 1995. Additional columns required by Securities and Exchange Commission rules to be included in the foregoing table, and certain additional tables required by such rules, have been omitted because no compensation required to be disclosed therein was paid or awarded to the Named Officer. COMPENSATION OF DIRECTORS Directors of the Company do not receive any compensation for serving on the Board or on committees. Directors are entitled to receive stock option awards under the Company's 1990 Nonqualified Stock Option Plan for Nonemployee Directors "the Directors' Plan." The Directors' Plan, as amended, provides for automatic grants of nonqualified stock options covering a maximum of 60,000 shares of Common Stock of the Company to Directors of the Company who are not also employees or officers of the Company and who have not made an irrevocable, one-time election to decline to participate in the plan. The Directors' Plan provides that during the term of the plan options will be granted automatically to new nonemployee Directors upon their election. Each such option permits the nonemployee director to purchase 10,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant of the option. Each nonemployee director's option may be exercised in full during the period beginning one year after the grant date of such option and ending ten years after such grant date, unless the option expires sooner due to termination of service or death. Mr. Kien and Mr. Sisson were each granted an option to purchase 10,000 shares of Common Stock upon their election as Directors in August 1995. Lee N. Mortenson, a Director of the Company, is President and Director of Coronet, and Clyde Wm. Engle, a Director of the Company from 1987 to 1995, is Chairman of the Board of Coronet, and each is a Director and officer of certain affiliated corporations of Coronet. Gerald M. Tierney, Jr., a Director of the Company from 1987 to 1995, is Senior Vice President and General Counsel of Telco Capital Corporation, an indirect parent of Coronet. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, at May 12, 1996, with respect to (i) each person known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock, (ii) the shares of the Company's Common Stock beneficially owned by each director and nominee (which included both executive officers named in the Summary Compensation Table) and (iii) by directors and executive officers of the Company as a group. The number of shares beneficially owned includes shares of Common Stock in which the persons named below have either investment or voting power. A person is also deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of that security within sixty (60) days through the exercise of an option or through the conversion of another security. Except as noted, each beneficial owner has sole investment and voting power with respect to the Common Stock. Common Stock not outstanding that is subject to options or conversion privileges is deemed to be outstanding for the purpose of computing the percentage of Common Stock beneficially owned by the person holding such options or conversion privileges, but is not deemed to be outstanding for the purpose of computing the percentage of Common Stock beneficially owned by any other person. Common Stock - ------------ Amount and 44 Name of Nature of Percent Beneficial Beneficial of Owner (1) Ownership Class - ---------- ----------- ------- Coronet Insurance Company et al. 868,757 (2) 29.9% Franklin E. Crail 296,099 10.2% Ralph Nafziger 46,000 (3) 1.6% Everett A. Sisson 10,000 (4) .3% Gerald A. Kien 10,000 (4) .3% Lee N. Mortenson 11,000 (4) .4% Fred M. Trainor 10,000 (4) .3% All executive officers and directors as a group (10 persons) 527,431 (6) 17.0% (1) The address of Coronet Insurance Company is 3500 West Peterson Avenue, Chicago, Illinois 60659. Mr. Crail's address is the same as the Company's address (2) All of the shares indicated as being owned by Coronet are held of record by Rocky Mountain Holdings Company, a wholly-owned subsidiary of Coronet, and may also be deemed to be beneficially owned by the following affiliates of Coronet: Normandy Insurance Agency, Inc., Sunstates Corporation, Wisconsin Real Estate Investment Trust, Hickory Furniture Company, Telco Capital Corporation, RDIS Corporation and Clyde Wm. Engle, a former director of the Company. This information is based on Forms 4 filed by Coronet and such affiliates with the Securities and Exchange Commission and on information provided to the Company by Coronet. (3) Mr. Nafziger has the right to acquire these shares within 60 days through the exercise of employee stock options granted previously to him. (4) Includes 10,000 shares that Messrs. Mortenson, Trainor, Sisson and Kien each has the right to acquire within 60 days through the exercise of options granted pursuant to the Company's Nonqualified Stock Option Plan for Nonemployee Directors. (5) Includes shares which officers and directors as a group have the right to acquire through the exercise of options granted pursuant to the Company's 1985 Incentive Stock Option Plan, 1995 Stock Option Plan, and the Director's Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company, until June 1994, leased its factory in Durango, Colorado, from Franklin E. Crail, Chairman of the Board of Directors, President and Treasurer of the Company. The lease, which commenced August 15, 1983, had a primary term of 10 years and was renewed for an additional five-year term in August 1993. Monthly rentals for the fiscal years ended February 28, 1993, 1994 and 1995 (through the date of purchase) were $7,750. The lease was a net lease under which the Company was required to pay real estate taxes, insurance and maintenance expenses. In fiscal years 1993, 1994 and 1995 (through the date of purchase), the Company paid Mr. Crail $93,000, $93,000 and $25,140, respectively, pursuant to the factory lease. The Company, in June 1994, acquired from Mr. Crail the then existing facility at a price of $700,332. The Company believes that the terms of the lease with Mr. Crail and the terms of the purchase transaction were at least as favorable as those that could have been obtained from an independent third party. In November 1987, the Company's Board of Directors approved a Note Purchase Agreement (the "Note Purchase Agreement") dated November 16, 1987, and certain other agreements with Coronet pursuant to which, among other things, (i) the Company sold to Coronet 7% Convertible Secured Notes due November 16, 1997 in the aggregate principal amount of $1,100,000 (together with an additional $100,000 7% Convertible Secured Note due November 16, 1997 sold to Coronet in January 1989, the "Notes"); (ii) the Company agreed, as long as any Notes remained outstanding, to nominate and use 45 its best efforts to elect to its Board of Directors three designees of Coronet (Coronet named Clyde Wm. Engle, Lee N. Mortenson and Gerald M. Tierney, Jr. as its three designees, and such persons were elected to the Company's Board of Directors in November 1987); and (iii) the Company granted Coronet certain registration rights with respect to shares of Common Stock issuable upon conversion of the Notes. Between December 31, 1989 and May 31, 1994, Coronet converted the Notes into an aggregate of 1,586,957 shares of Common Stock. Coronet completed such conversions by converting Notes in the aggregate principal amount of $400,000 into 432,376 shares of Common Stock on May 31, 1994. At February 28, 1993, 1994 and 1995, the total principal and interest owed by the Company to Coronet under the Notes was $714,292, $408,167 and $ 0 , respectively. The Company paid interest on the Notes of $51,563, $50,121 and $12,250 during fiscal years 1993, 1994 and 1995 (through the date on which the final conversion occurred), respectively. Clyde Wm. Engle, a Director of the Company from 1987 to 1995, is Chairman of the Board of Coronet, and Lee N. Mortenson, a Director of the Company, is President and a Director of Coronet, and each is a Director and officer of certain affiliated corporations of Coronet. 46 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS PAGE Report of Independent Certified Public Accountants 27 Balance Sheets 28 Statements of Income 30 Statements of Changes in Stockholders' Equity 31 Statements of Cash Flows 33 Note to Financial Statements 35 2. FINANCIAL STATEMENT SCHEDULES Schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto. 3. EXHIBITS Exhibit Incorporated by Number Description Reference to - ------ ----------- ------------ 3.1 Articles of Incorporation of Exhibit 3.1 to Current Report on the Registrant, as amended Form 8-K of the Registrant filed on August 1, 1988. 3.2 By-laws of the Registrant, Exhibit 3.2 to the Annual Report as amended on June 10, 1987 on Form 10-K of the Registrant for the fiscal year ended February 28, 1987. 4.1 Specimen Common Stock Exhibit 4.1 to Current Report on Certificate Form 8-K of the Registrant filed on August 1, 1988. 4.2 Working capital loan Exhibit 4.8 to the Annual Report agreement dated October 17, on Form 10-K of the Registrant 1991 between the Company and for the Fiscal year ended Burns National Bank of February 29, 1992 Durango (Amended by change in terms agreements provided as Exhibits 4.5, 4.9, 4.11 and 4.12 below) 4.3 Lease agreement dated July Exhibit 4.10 to the Annual 19, 1991 between the Company Report on Form 10-K of the and Ford Equipment Leasing Registrant for the Fiscal year Company ended February 29, 1992 4.4 Installment note dated Exhibit 4.11 to the Annual August 23, 1991 between the Report on Form 10-K of the Company and Textron Registrant for the Fiscal year Financial Corporation ended February 29, 1992 4.5 Change in terms agreement(to Exhibit 4.12 to the Annual working capital loan Report on Form 10-KSB of agreement dated October 17, registrant for the fiscal year 1991 filed as Exhibit 4.2) ended February 28, 1994 47 Exhibit Incorporated by Number Description Reference to - ------ ----------- ------------ dated October 17, 1994 4.6 Letters of commitment from Exhibit 4.13 to the Annual financial institutions Report on Form 10-KSB of supporting commitment of registrant for the fiscal $3,500,000 in financing year ended February 28, 1994 4.7 Chattel mortgage loan Exhibit 4.14 to the annual agreement dated June 2, 1994 report on form 10-K of the in the amount of $750,000 Registrant for the fiscal between the registrant and year ended February 28, 1995 First National Bank of Farmington 4.8 Real estate mortgage loan Exhibit 4.15 to the annual agreement dated June 2, 1994 report on form 10-K of the in the amount of $1,687,500 Registrant for the fiscal between the registrant and year ended February 28, 1995 First National Bank of Farmington 4.9 Change in terms agreement (to Exhibit 4.16 to the annual working capital loan report on form 10-K of the agreement dated October 17, Registrant for the fiscal 1991 filed as Exhibit 4.8) year ended February 28, 1995 dated April 12, 1995 4.10 Chattel mortgage loan Exhibit 4.17 to the annual agreement dated April 12, report on form 10-K of the 1995 in the amount of Registrant for the fiscal $1,500,000 between the year ended February 28, 1995 registrant and First National Bank of Farmington 4.11 Third Amendment to Loan Exhibit 4.18 to Registration Agreement dated April 12, Statement on Form S-1 1995 (amending working (Registration No. 33-62149) capital loan agreement dated filed on August 25, 1995 October 17, 1991 filed as Exhibit 4.2) 4.12 Change in terms agreement (to Exhibit 4.19 to Registration working capital loan Statement on Form S-1 agreement dated October 17, (Registration No. 33-62149) 1991 filed as Exhibit 4.2) filed on August 25, 1995 dated July, 17, 1995 4.13 Real Estate mortgage loan Filed Herewith agreement dated April 5, 1996 in the amount of $1,650,000 between Norwest Banks and the Registrant 4.14 Chattel mortgage loan Filed Herewith agreement dated April 2, 1996 in the amount of $700,000 between Norwest equipment finance and the Registrant 48 Exhibit Incorporated by Number Description Reference to - ------ ----------- ------------ 4.15 Chattel mortgage loan Filed Herewith agreement dated April 5, 1996 in the amount of $500,000 between Norwest Banks and the Registrant 4.16 Chattel mortgage loan Filed Herewith agreement dated April 2, 1996 in the amount of $1,500,000 between Norwest Equipment Finance and the Registrant 4.17 Letters of Commitment from Filed Herewith financial institutions supporting commitment of $3,000,000 in financing 4.18 Working Capital availability Filed Herewith loan agreement dated April 5, 1996 in the amount of $ 2,000,000 between Norwest Banks and the Registrant 10.1 Form of Stock Option Exhibit 10.3 to The Form 10-K Agreement for Incentive Stock of the Registrant for the Option Plan of the Annual fiscal year ended February 28, Report of Registrant * 1986. 10.2 Incentive Stock Option Plan Exhibit 10.2 to the Annual of the Registrant as amended Report on Form 10-K of the July 27, 1990 * Registrant for the fiscal year ended February 28, 1991 10.4 Current form of franchise Filed Herewith agreement used by the Registrant 10.5 Form of Real Estate Lease Exhibit 10.7 to Registration between the Registrant as Statement on Form S-18 Lessee and franchisee as (Registration No. 33-2016-D). Sublessee 10.7 Form of Nonqualified Stock Exhibit 10.7 to the Option Agreement for Registration Statement on Nonemployee Directors for the Form S-1 of the Registrant Registrant * (Registration No. 33-62149 filed August 25, 1995) 10.8 Nonqualified Stock Option Exhibit 10.8 to the Plan for Nonemployee Registration Statement on Directors dated March 20, 1990 * Form S-1 of the Registrant (Registration No. 33-62149 filed August 25, 1995) * Management contract or compensatory plan 49 Exhibit Incorporated by Number Description Reference to - ------ ----------- ------------ 10.9 1995 Stock Option Plan of Exhibit 10.9 to the Registrant Registration Statement on Form S-1 of the Registrant (Registration No. 33-62149 filed August 25, 1995) 10.10 Forms of Incentive Stock Exhibit 10.10 to the Option Stock option awards to Registration Statement on directors * Form S-1 of the Registrant (Registration No. 33-62149 filed August 25, 1995) 10.11 Forms of Nonqualified Stock Exhibit 10.11 to the Option Agreement for 1995 Registration Statement on Stock Option Plan * Form S-1 of the Registrant (Registration No. 33-62149 filed August 25, 1995) 11.1 Statement re-computation of Filed Herewith. per share earnings 23.1 Consent of independent public Filed Herewith. accountants (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Registrant during the fourth quarter of the year ended February 28, 1996. * Management contract or compensatory plan 50 EXHIBIT INDEX
Exhibit Incorporated by Sequentially Number Description Reference to Numbered Page - ------ ----------- ------------ ------------- 3.1 Articles of Incorporation Exhibit 3.1 to Current Report of the Registrant, as on Form 8-K of the Registrant amended filed on August 1, 1988. 3.2 By-laws of the Registrant, Exhibit 3.2 to the Annual Report as amended on June 10, 1987 on Form 10-K of the Registrant for the fiscal year ended February 28, 1987. 4.1 Specimen Common Stock Exhibit 4.1 to Current Report Certificate on Form 8-K of the Registrant filed on August 1, 1988. 4.2 Working capital loan Exhibit 4.8 to the Annual Report agreement dated on Form 10-K of the Registrant October 17, 1991 between for the Fiscal year ended the Company and Burns February 29, 1992 National Bank of Durango (Amended by change in terms agreements provided as Exhibits 4.5, 4.9, 4.11 and 4.12 below) 4.3 Lease agreement dated Exhibit 4.10 to the Annual Report July 19, 1991 between the on Form 10-K of the Registrant Company and Ford Equipment for the Fiscal year ended Leasing Company February 29, 1992 4.4 Installment note dated Exhibit 4.11 to the Annual Report August 23, 1991 between the on Form 10-K of the Registrant Company and Textron for the Fiscal year ended Financial Corporation February 29, 1992 4.5 Change in terms agreement Exhibit 4.12 to the Annual Report (to working capital loan on Form 10-KSB of registrant agreement dated for the fiscal year ended October 17, 1991 filed as February 28, 1994 Exhibit 4.2) dated October 17, 1994 4.6 Letters of commitment from Exhibit 4.13 to the Annual Report financial institutions on Form 10-KSB of registrant supporting commitment of for the fiscal year ended $ 3,500,000 in financing February 28, 1994 51 Exhibit Incorporated by Sequentially Number Description Reference to Numbered Page - ------ ----------- ------------ ------------- 4.7 Chattel mortgage loan Exhibit 4.14 to the annual report agreement dated on form 10-K of the Registrant June 2, 1994 in the amount for the fiscal year ended of $750,000 between the February 28, 1995 registrant and First National Bank of Farmington 4.8 Real estate mortgage loan Exhibit 4.15 to the annual report agreement dated June 2, 1994 on form 10-K of the Registrant in the amount of $1,687,500 for the fiscal year ended between the registrant and February 28, 1995 First National Bank of Farmington 4.9 Change in terms agreement Exhibit 4.16 to the annual report (to working capital loan on form 10-K of the Registrant agreement dated for the fiscal year ended October 17, 1991 filed as February 28, 1995 Exhibit 4.8) dated April 12, 1995 4.10 Chattel mortgage loan Exhibit 4.17 to the annual report agreement dated on form 10-K of the Registrant April 12, 1995 in the for the fiscal year ended amount of $1,500,000 February 28, 1995 between the registrant and First National Bank of Farmington 4.11 Third Amendment to Loan Exhibit 4.18 to Registration Agreement dated Statement on Form S-1 April 12, 1995 (amending (Registration No. 33-62149) working capital loan filed on August 25, 1995 agreement dated October 17, 1991 filed as Exhibit 4.2) 4.12 Change in terms agreement Exhibit 4.19 to Registration (to working capital loan Statement on Form S-1 agreement dated (Registration No. 33-62149) October 17, 1991 filed as filed on August 25, 1995 Exhibit 4.2) dated July, 17, 1995 4.13 Real Estate mortgage loan Filed Herewith 56 agreement dated April 5, 1996 in the amount of $1,650,000 between Norwest Banks and the Registrant 4.14 Chattel mortgage loan Filed Herewith 79 agreement dated April 2, 1996 in the amount of $700,000 between Norwest equipment finance and the Registrant 4.15 Chattel mortgage loan Filed Herewith 81 agreement dated April 5, 1996 in the amount of $500,000 between Norwest Banks and the Registrant 52 Exhibit Incorporated by Sequentially Number Description Reference to Numbered Page - ------ ----------- ------------ ------------- 4.16 Chattel mortgage loan Filed Herewith 83 agreement dated April 2, 1996 in the amount of $1,500,000 between Norwest Equipment Finance and the Registrant 4.17 Letters of Commitment from Filed Herewith 85 financial institutions supporting commitment of $ 3,000,000 in financing 4.18 Working Capital Filed Herewith 97 availability loan agreement dated April 5, 1996 in the amount of $ 2,000,000 between Norwest Banks and the Registrant 10.1 Form of Stock Option Exhibit 10.3 to The Form 10-K Agreement for incentive of the Registrant for the stock option plan of the fiscal year ended Annual Report on February 28, 1986. Registrant * 10.2 Incentive Stock Option Exhibit 10.2 to the Annual Report Plan of the Registrant on Form 10-K of the Registrant as amended July 27, 1990 * for the fiscal year ended February 28, 1991 10.4 Current form of franchise Filed Herewith 99 agreement used by the Registrant 10.5 Form of Real Estate Lease Exhibit 10.7 to Registration Statement between the Registrant as on Form S-18 Lessee and franchisee as (Registration No. 33-2016-D). Sublessee 10.7 Form of Nonqualified Stock Exhibit 10.7 to the Registration Option Agreement for Statement on Form S-1 of the Nonemployee Directors for Registrant (Registration the Registrant * No. 33-62149 filed August 25, 1995) * Management contract or compensatory plan 53 Exhibit Incorporated by Sequentially Number Description Reference to Numbered Page - ------ ----------- ------------ ------------- 10.8 Nonqualified Stock Option Exhibit 10.8 to the Registration Plan for Nonemployee Statement on Form S-1 Directors dated of the Registrant March 20, 1990 * (Registration No. 33-62149 filed August 25, 1995) 10.9 1995 Stock Option Plan of Exhibit 10.9 to the Registration Registrant Statement on Form S-1 of the Registrant (Registration No. 33-62149 filed August 25, 1995) 10.10 Forms of Incentive Stock Exhibit 10.10 to the Registration Option Stock option awards Statement on Form S-1 to directors * of the Registrant (Registration No. 33-62149 filed August 25, 1995) 10.11 Forms of Nonqualified Stock Exhibit 10.11 to the Registration Option Agreement for Statement on Form S-1 1995 Stock Option Plan * of the Registrant (Registration No. 33-62149 filed August 25, 1995) 11.1 Statement re-computation Filed Herewith. 143 of per share earnings 23.1 Consent of independent Filed Herewith. 148 public accountants
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Registrant during the fourth quarter of the year ended February 28, 1996. * Management contract or compensatory plan 54 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. By/S/ Franklin E. Crail --------------------- FRANKLIN E. CRAIL President Date: May 24, 1996 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: May 24, 1996 /S/ Franklin E. Crail --------------------- FRANKLIN E. CRAIL Chairman of the Board of Directors, President, Treasurer and Director (principal executive officer) Date: May 24, 1996 /S/ Lawrence C. Rezentes ------------------------ LAWRENCE C. REZENTES Vice President - Finance and Chief Financial Officer (principal financial and accounting officer) Date: May 24, 1996 /S/ Gerald A. Kien ------------------ GERALD A. KIEN, Director Date: May 24, 1996 /S/ Lee N. Mortenson -------------------- LEE N. MORTENSON, Director Date: May 24, 1996 /S/ Everett A. Sisson --------------------- EVERETT A. SISSON, Director Date: May 24, 1996 /S/ Fred M. Trainor ------------------- FRED M. TRAINOR, Director 55 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. By ----------------------- FRANKLIN E. CRAIL President Date: May 24, 1995 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: May 24, 1996 ----------------------- FRANKLIN E. CRAIL Chairman of the Board of Directors, President, Treasurer and Director (principal executive officer) Date: May 24, 1996 ----------------------- LAWRENCE C. REZENTES Vice President - Finance and Chief Financial Officer (principal financial and accounting officer) Date: May 24, 1996 ----------------------- GERALD A. KIEN, Director Date: May 24, 1996 ----------------------- LEE N. MORTENSON, Director Date: May 24, 1996 ----------------------- EVERETT A. SISSON, Director Date: May 24, 1996 ----------------------- FRED M. TRAINOR, Director 55 EX-4.13 2 EXHIBIT 4.13 EXHIBIT 4.13 NORWEST BANK COLORADO, NATIONAL ASSOCIATION 1063 MAIN AVENUE, DURANGO, CO 81302 FOR BANK USE ONLY Customer No. Loan No. 6490021402 0-8008037 Face Amount Rate (% per year) Note Date Maturity Date $1,650,000.00 8.250% 04/10/1996 03/31/2016 Maker Home Phone Business Phone ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. Street Address, City, State, Zip Code 265 TURNER DRIVE DURANGO, CO 81301 Security 1ST DEED OF TRUST, ACCOUNTS RECEIVABLE, INVENTORY, GENERAL INTANGIBLES The captions in the boxes above, and the names, dates, amounts and other information therein, are defined terms and are hereby incorporated in the note provisions below. Maker promises to pay to the order of Bank at Bank's address the Face Amount with interest on the unpaid balance of the Face Amount from the Note Date at the Rate indicated above (based upon a year of 360 days and computed for the actual number of days elapsed). Principal and interest shall be payable as follows: Principal and interest in the amount of $14,250.00 shall be payable monthly on the last day of each month beginning April 30, 1996, based on a 240-month amortization schedule. Monthly payments will be adjusted on the first day following each five-year anniversary of the date of the promissory note to remain in effect for the following 60-months period. Each adjusted payment amount will consist of principal calculated on the amount of months remaining in the 240-month amortization schedule on the day of adjustment, plus interest calculated at a rate equal to the Norwest Bank Colorado, National Association Prime Rate of interest as in effect on the date of adjustment. All outstanding principal and unpaid interest is due and payable at maturity of the promissory note. Overdue principal and (to the extent legally enforceable) overdue interest, whether caused by acceleration of maturity or otherwise, shall bear interest at a rate four percentage points above the rate in effect at the time such principal or interest becomes due. At the option of the holder of this note (the "holder") the unpaid balance of this note plus accrued interest and all other obligations of Maker to the holder, direct or indirect, absolute or contingent, now existing or hereafter arising, shall become immediately due and payable without notice or demand if (a) any payment required by this note is not made when due, or (b) a default or event of default occurs under any loan or security agreement or instrument executed as security for or in connection with this note, or (c) the holder at any time in good faith believes that the prospect of any payment required by this note is impaired, whether or not such belief is caused by any act or failure to act of any Maker or of any endorser, guarantor or accomodation party of or on this note (hereafter collectively referred to as "any other signer"). Maker and any other signer (1) waive presentment, notice of dishonor and protect, (2) assent to any extension of time with respect to any payment due under this note, to any substitution or release of collateral and to the addition or release of any party, and (3) agree that Bank may apply, as Bank elects, any payment received after default to any portion of Maker's obligations hereunder. No waiver of any payment or other right under this note shall operate as a waiver of any other payment or right. Maker and any other signer shall pay all reasonable costs of collection, including attorneys' fees, paid or incurred by the holder in enforcing this note on default. This note (a) is secured by the Security indicated above, if any, and (b) shall be construed under and governed by the laws of Colorado. If there is more than one Maker, all of the provisions of this note shall apply to each and any of them. THE ARBITRATION TERMS AND CONDITIONS ON THE BACK OF THIS PAGE ARE A PART OF AND INCORPORATED INTO THIS NOTE. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FOR BANK USE ONLY - ------------------ By: FRANKLIN E. CRAIL ----------------------------------- New Loan FRANKLIN E. CRAIL, CHAIRMAN OF BOARD A GALLEGOS PRESIDENT, TREASURER M NOESEN TERM LOAN AND CREDIT AGREEMENT THIS TERM LOAN AND CREDIT AGREEMENT (the "Agreement") is dated as of April 5, 1996, and is by and between ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado corporation located at 265 Turner Drive, Durango, Colorado 81301 (the "Borrower") and NORWEST BANK COLORADO, NATIONAL ASSOCIATION, a national banking association located at 1063 Main Avenue, Durango, Colorado 81301 (the "Bank"). RECITALS: WHEREAS, the Borrower desires to obtain from the Bank a revolving credit line in the principal amount of TWO MILLION AND NO/100 DOLLARS ($2,000,000.00) to Finance accounts receivable from franchise stores and seasonal raw material purchases for factory production. WHEREAS, the Borrower desires to borrow from the Bank the sum of ONE MILLION SIX HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($1,650,000.00) on a term loan basis to refinance existing debt incurred in connection with the acquisition and expansion of the Borrowers factory. WHEREAS, the Borrower desires to borrow from the Bank the sum of FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) on a term loan basis to finance the acquisition of furniture, fixtures, and equipment. WHEREAS, the Borrower desires to borrow from the Bank the sum of FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) on a term loan basis subject to certain conditions to finance the acquisition of furniture, fixtures, and equipment. WHEREAS, the Bank is willing to extend such credit and to lend such sums to Borrower upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises herein contained, and each intending to be legally bound hereby, the parties agree as follows: 1 . Definitions As used herein: 1.1. "Acceptable Accounts Receivable" shall mean Borrower's accounts receivable which are: (i) less than 90 days in age and for which the Borrower has not agreed to later payment terms; (ii) of which no more than 10% of the outstanding balance is more than 90 days past due; (iii) not subject to offset or dispute; (iv) not due from the U.S. Government, foreign entities (other than Canadian affiliates, subsidiaries, or franchisees: accounts receivable from these entities are expressly included as acceptable accounts receivable), subsidiaries or affiliates of the Borrower; (v) not a royalties receivable; and (vi) not representing booked but unfilled orders. 1.2. "Acceptable Inventory" shall mean all of the Borrower's Inventory located at the Borrower's Durango factory, including raw materials and finished goods, but excluding Inventory used for work in process. 1.3. "Accounts," "Chattel Paper," "Contracts," "Contract Rights," "Documents," "Equipment," "Fixtures," "General Intangibles," "Goods," "Instruments," "Inventory" and "Machinery" shall have the same respective meanings as are given to those terms in the Uniform Commercial Code as in effect in the State of Colorado. 1.4. "Agreement" shall mean this Term Loan and Credit Agreement and all amendments and supplements hereto which may from time to time become effective hereafter in accordance with the terms of this Agreement. 1.5. "Bank" shall mean Norwest Bank Colorado, National Association. 1.6. "Banking Day" shall mean a day on which banks are open for business in Durango, Colorado 81301. 1.7. "Borrower" shall mean Rocky Mountain Chocolate Factory, Inc. 1.8. "Borrowed Money" shall mean funds obtained by incurring contractual indebtedness and shall not include trade accounts payable. 1.9. "Borrowing Base" shall mean (75% of Acceptable Accounts Receivable) plus (30% of Acceptable Inventory up to and no more than $500,000.00). 1.10. "Borrowing Base Certificate" shall mean a schedule of Borrower's Accounts receivable, Acceptable Accounts Receivable, Inventory, and Acceptable Inventory, executed by an authorized officer of the Borrower and in form acceptable to the Bank. 1.11. "Cash Flow Coverage Ratio" shall mean the ratio of [Net Income + (depreciation + interest + amortization + bad debt + all other non- cash deductions)] to [(current Bank principal payments + current Bank interest) 2 of 21 + (all other current principal and interest payments owed to other creditors, if any)]. 1.12. "Collateral Documents" means all those certain documents specified in Section 4, which evidence the Bank's security interests in the Borrower's assets. 1.13. "Credit" shall mean the revolving credit line established under Section 2.1.1, which shall not in any event exceed the aggregate principal amount of TWO MILLION AND NO/100 DOLLARS ($2,000,000.00). 1.14. "Credit Maturity Date" shall be July 31, 1997. 1.15. "Current Assets" and "Current Liabilities" shall mean, at any time, all assets or liabilities, respectively, that, in accordance with Generally Accepted Accounting Principles consistently applied, should be classified as Current Assets or Current Liabilities, respectively, on a balance sheet of the Borrower. 1.16. "Default" shall mean an Event of Default as referred to in Section 8 hereof, or an event which, with notice or lapse of time or both, would become an Event of Default. 1.17. "Equipment Finance" shall mean Norwest Equipment Finance, Inc. 1.18. "Generally Accepted Accounting Principles" or "GAAP" shall mean Generally Accepted Accounting Principles applied on a basis consistent with those reflected in the financial statements referred to in Section 5.8 hereof. 1.19. "Indebtedness" shall mean, as to the Borrower, all items of indebtedness, obligation or liability, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several. 1.20. "Notes" shall mean, collectively, the Revolving Note and the Term Notes. 1.21. "Prime Rate" shall mean the "base" or "prime" rate of interest as announced by the Bank at its office in Durango, Colorado 81301, as in effect from time to time. 1.22. "Revolving Note" shall mean the promissory note of the Borrower evidencing borrowings under Section 2.1.1 hereof. 1.23. "Tangible Net Worth" shall mean the sum of the par or stated value of all outstanding capital stock, surplus and undivided profits of the Borrower, 3 of 21 less any amounts attributable to treasury stock, good will, patents, copyrights, mailing lists, catalogues, trademarks, bond discount and underwriting expenses, organization expenses and other like intangibles, prepaid expenses classified as current assets or intangible assets offset by equal related liabilities, all as determined in accordance with Generally Accepted Accounting Principles. 1.24. "Term Loan 1" shall mean the Term Loan extended in accordance with section 2.2. hereof. 1.25. "Term Loan I Maturity Date" shall mean March 31, 2016. 1.26. "Term Loan 2" shall mean the term loan extended in accordance with section 2.3. hereof. 1.27. "Term Loan 2 Maturity Date" shall mean March 31, 2001. 1.28. "Term Loan 3" shall mean the term loan extended in accordance with section 2.4. hereof. 1.29. "Term Loan 3 Maturity Date" shall mean November 30, 2001. 1.30. "Term Notes" or "Term Note l," "Term Note 2," and Term Note 3," respectively, shall mean the promissory notes of the Borrower evidencing borrowings under sections 2.2, 2.3, and 2.4 hereof. 1.31. "Working Capital" shall mean Current Assets of the Borrower less Current Liabilities of the Borrower, each determined in accordance with Generally Accepted Accounting Principles. To be excluded from Working Capital are notes due from stockholders and officers, such notes to be classified as non-current assets, unless they are advances against a current liability due the same officer or stockholder. 2. Borrowings and Conditions of Lending 2.1. REVOLVING LINE OF CREDIT. 2.1.1. The Bank agrees to lend to the Borrower from time to time from the effective date hereof until the Credit Maturity Date, sums not to exceed the lesser of the Borrowing Base or TWO MILLION AND NO/100 DOLLARS ($2,000,000.00) in the aggregate principal amount at any one time outstanding. Each borrowing under this Section 2.1.1 will be requested in writing or in person by an authorized officer of the Borrower, or telephonically by any person reasonably believed by the Bank to be an authorized officer of the 4 of 21 Borrower. Each borrowing under this Section 2.1.1 will be made at the sole discretion of the Bank and, if made, will be evidenced by a notation on the Bank's records, which shall be conclusive evidence of such borrowing, and by the Revolving Note. The officer making the request must present the Bank with a Borrowing Base Certificate current through the end of the immediately preceding month. Within the limits of the Credit and subject to the terms and conditions hereof, prior to the Credit Maturity Date, the Borrower may borrow, prepay and reborrow pursuant to this Section 2.1. 2.1.2. The purpose of the Credit is to Finance accounts receivable from the franchise stores and raw material purchases. 2.1.3. At any time when the outstanding principal balance exceeds the Borrowing Base, the Borrower will pay funds sufficient to reduce the outstanding principal amount to an amount of at least the amount of the Borrowing Base. 2.1.4. Interest on the Credit shall be calculated at an annual rate equal to the Prime Rate in effect from time to time on the basis of the actual number of days elapsed in a year of 360 days and shall change if and when the Prime Rate changes. 2.1.5. Interest on the Credit shall be paid monthly on the last day of each month. 2.1.6. The outstanding principal of the Credit and all interest accrued and unpaid shall be repaid at the Credit Maturity Date. 2.1.7. The outstanding principal balance under the Credit shall be in an amount of $0 for a period of 60 consecutive days during each twelve-month period, starting with the twelve-month period beginning with the effective date of the Agreement. 2.2. TERM LOAN 1. 2.2.1. On the effective date hereof, the Bank will lend to the Borrower the lesser of the principal sum of ONE MILLION SIX HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($1,650,000.00) or 75% of the appraised value of the Borrower's property located at 265 Turner Drive, Durango, Colorado, on a term basis ("Term Loan 1"). 2.2.2. The purpose of Term Loan I is to refinance existing debt. 5 of 21 2.2.3. From the effective date hereof until April 30, 2001, interest on Term Loan 1 shall be calculated at a fixed annual rate of 8.25%. From May 1, 2001 until April 30, 2006, interest shall be calculated at a fixed rate equal to the Prime Rate in effect on May 1, 2001. From May 1, 2006 until April 30, 2011, interest shall be calculated at a fixed rate equal to the Prime Rate in effect on May 1, 2006. From May 1, 2011 until the Term Loan 1 Maturity Date, interest shall be calculated at a fixed rate equal to the Prime Rate in effect on May 1, 2011. 2.2.4. The principal and interest of Term Loan 1 will be repaid in 239 equal, consecutive, Monthly installments, payable on the last day of each month, commencing April 30, 1996, and continuing on the last day of each month thereafter, plus one final payment of remaining principal and unpaid interest, due on the Term Loan 1 Maturity Date. From the effective date hereof until April 30, 2001, the payment amount of principal and interest shall be $14,250.00. Beginning May 1, 2001, and every 5 years thereafter, the amount of the payment will change if and when the interest rate changes as provided in section 2.2.2 above. 2.3. TERM LOAN 2. 2.3.1. On the effective date hereof, the Bank will lend to the Borrower the lesser of the principal sum of FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) or the cost of new store establishments or acquisitions on a term basis ("Term Loan 2"). The Bank may in its sole discretion determine what constitutes the actual cost of establishment or acquisition. 2.3.2. The purpose of Term Loan 2 is to finance the establishment or acquisition of stores that sell the same types of products and conduct the same type of business as stores currently owned by Borrower or Borrower's franchisee's are selling and conducting, namely chocolate stores. The Bank may use the proceeds of Term Loan 2 to repay to the Bank any funds advanced to the Borrower prior to funding under this Agreement for the purposes described in this paragraph 2.3.2. 2.3.3. Interest on Term Loan 2 shall be calculated at a fixed annual rate of 8.25%. 2.3.4. The principal and interest of Term Loan 2 will be repaid in 59 equal, consecutive, Monthly installments of $10,500.00 each, 6 of 21 1996, and continuing on the last day of each month thereafter, plus one final payment of remaining principal and unpaid interest, due on the Term Loan 2 Maturity Date. 2.3.5. The Bank shall not be obligated to advance any funds under Term Loan 2 unless: (i) the store concept does not substantially differ from the existing store concept, which is the sale of chocolate. (ii) the Borrower has executed and delivered such collateral documents as the Bank may require at that time to secure Term Loan 2 with the Borrower's Inventory, Equipment, leasehold improvements, Fixtures, and other assets to be acquired with the proceeds of the Term Loan 2. 2.4. TERM LOAN 3. 2.4.1. On or after November 1, 1996, and subject to the conditions set forth in section 2.4.4. below, the Bank will lend to the Borrower the lesser of the principal sum of FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) or the cost of new store establishments or acquisitions on a term basis ("Term Loan 3"). The Bank may in its sole discretion determine what constitutes the actual cost of establishment or acquisition. 2.4.2. The purpose of Term Loan 3 is to finance the establishment or acquisition either of chocolate stores (as described in section 2.3.2. above) or of stores selling different types of products, such as hard candy, which is currently contemplated by the Borrower under the name of "Fuzziwig's." The Bank may in its sole discretion determine for which of these two purposes the Bank will advance funds under Term Loan 3. 2.4.3. Interest on the Term Loan 3 shall be calculated at a fixed annual rate of 8.50%. 2.4.4. The principal and interest of Term Loan 3 will be repaid in 59 equal, consecutive, Monthly installments of $10,500.00 each, payable on the last day of each month, commencing December 31, 1996, and continuing on the last day of each month thereafter, plus one final payment of remaining principal and unpaid interest, due on the Term Loan 3 Maturity Date. 7 of 21 2.4.5. The Bank shall not be obligated to advance any funds under Term Loan 3 unless, at the time the Borrower requests funds to be advanced under Term Loan 3: (i) the store concept does not substantially differ from the existing store concept, which is the sale of chocolate, except that the Bank will at that time discuss advancing funds for Fuzziwig's stores or other store concepts. (ii) the Borrower meets and has complied with all covenants set forth in the Agreement. (iii) the Borrower meets the following additional performance criteria as determined in accordance with GAAP as of September 30, 1996: total revenues are no less than $14,000,000.00, retail revenues from all "Fuzziwig's" stores are no less than $500,000.00, total gross profits of the Borrower are no less than 48.5%, and net income of the Borrower is not less than $1,100,000.00. (iv) the Borrower has executed and delivered such collateral documents as the Bank may require at that time to secure Term Loan 3 with the Borrower's Inventory Equipment, leasehold improvements, Fixtures, and other assets to be acquired with the proceeds of the Term Loan 3. 3. Conditions Precedent The obligation of the Bank to make any advance hereunder is subject to the following conditions precedent: 3.1. The Borrower shall have delivered to the Bank, prior to the disbursement of any funds (the "Closing") the following: 3.1.1. The Notes; 3.1.2. Security Agreements in form and substance acceptable to the Bank, granting security interests in the Borrower's Inventory, Equipment, Accounts, General intangibles, real property, and other assets as required by this Agreement; 3.1.3. Financing statements as required by the Bank; 3.1.4. An assignment of life insurance policy. in a death benefit coverage amount of no less then $1,000,000.00, covering the life of Frank Crail; 8 of 21 3.1.5. Copies of the Borrower's articles of incorporation and bylaws; 3.1.6. All documents relating to the Borrower's undertakings as a franchiser, together with all future changes, modifications, addenda thereto, including but not limited to copies and updates of franchise agreements and Federal Trade Commission Offering Circulars; 3.1.7. A deed of trust and assignment of rents and leases covering property owned by the Borrower located in Bodo Industrial Park, Durango, Colorado; 3.1.8. Deeds of trust, security agreements, and financing statements granting to the Bank a first security interest in leasehold improvements and assets acquired or to be acquired with the proceeds of the Term Loan, where applicable; 3.1.9. Title insurance policies, appraisals, surveys, hazard insurance, flood insurance, hazard insurance policies listing the Bank as loss payee, mortgagee, or additional insured, and such other documentation as required by the Bank to evaluate perfect, and protect its liens in the real and personal property granted as security for the Notes hereunder, and 3.1.10. An opinion from Borrower's outside counsel stating that the Borrower is in compliance with all applicable federal franchise laws as promulgated and enforced by the Federal Trade Commission and applicable Colorado and California laws. 3.2. At the time of the Closing and of any subsequent request for an advance: 3.2.1. No Event of Default shall have occurred and be continuing, and no event shall have occurred and be continuing that, with the giving of notice or passage of time or both, would be an Event of Default; 3.2.2. No material adverse change shall have occurred in the financial condition of Borrower or any Subsidiary since the date of this Agreement or the Closing, as applicable; 3.2.3. All of the Collateral Documents shall have remained in full force and effect; 3.2.4. The Bank shall have completed an on-site collateral review and found such review satisfactory; and 9 of 21 3.2.5. An environmental audit shall have been performed and the Bank shall have found the results of such audit satisfactory. 3.3. At the time of the Closing and each subsequent disbursement, all legal matters incidental thereto shall be satisfactory to the Bank. 4. Security 4.1. To secure the Notes and the performance of its additional obligations as set forth hereunder, prior to or simultaneous with the first borrowing hereunder, the Borrower shall execute and deliver to the Bank security agreements, financing statements, deeds of trust and assignment of rents and leases, granting to the Bank first security interests in and first liens against the Borrower's assets, including but not limited to: (i) the Borrower's Accounts (including but not limited to accounts receivable, franchise fees and royalties), Inventory, Equipment, Fixtures, General Intangibles (including but not limited to all of Borrower's intellectual property), Chattel Paper, Contracts, Contract Rights, Documents, Goods, Machinery, and Instruments; (ii) real property and fixtures located at Bodo Industrial Park, Durango, Colorado; and (iii) leasehold improvements and assets acquired or to be acquired with the proceeds of the Term Loans, where applicable. 4.2. To further secure the Notes and performance hereunder, the Borrower shall assign to the Bank a life insurance policy in a death benefit amount of no less than $1,000,000.00 on the life of Frank Crail. 4.3. Any collateral serving as security for any one credit or term loan facility described in this Agreement shall also serve as security for all other credits or term loan facilities described hereunder, or any extensions, renewals, amendments, modifications or additions thereof. 4.4. No forbearance nor extension of time granted any subsequent owner of the collateral shall release Borrower from liability. 4.5. Any of Borrower's other property in which the Bank has a security interest to secure payment of any other debt, whether actual, contingent, direct or indirect, including its guaranties of the debts of others, shall also secure payment of the Notes. 10 of 21 4.6. The Collateral and any of Borrower's other property in which Equipment Finance now has or will later acquire a security interest to secure payment of any Indebtedness to Equipment Finance, including its guaranties of the debts of others, shall also secure payment of the Notes, and the Collateral (as defined in section 4.7. below) shall also secure any Indebtedness to Equipment Finance. 4.7. The property in which a security interest is granted pursuant to the provisions of Sections 4.1 to 4.3 is herein collectively called the "Collateral." The Collateral, together with all of the Borrower's other property of any kind held by the Bank, shall stand as one general, continuing collateral security for all Indebtedness to the Bank and may be retained by the Bank until all Indebtedness has been paid in full. 4.8. As security for the prompt payment of all Indebtedness to the Bank, the Borrower hereby assigns, transfers and sets over to the Bank all of its right, title and interest in and to, and grants to the Bank a lien on and a security interest in, all amounts that may be owing from time to time by the Bank to the Borrower in any capacity, including, but without limitation, any balance or share belonging to the Borrower, of any deposit or other account with the Bank, which lien and security interest shall be independent of any right of set-off which the Bank may have. 4.9. At any time requested by the Bank, the Borrower shall execute and deliver or cause to be executed and delivered to the Bank such additional documents as the Bank may consider to be necessary or desirable to evidence or perfect the security interests referred to in this section 4. 4.10. The foregoing liens shall be first and prior liens. 5. Representations and Warranties. To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank as follows: 5.1. The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Colorado. 5.2. The Borrower is duly qualified to do business and is in good standing in any additional jurisdictions where, on advice of legal counsel, registration was deemed necessary. 5.3. The execution, delivery and performance of this Agreement, and the issuance of the Notes by the Borrower are within its partnership powers, have been duly authorized, and are not in contravention of law, or the 11 of 21 terms of Borrower's Partnership Agreement or of any undertaking to which the Borrower is a party or by which it is bound. 5.4. This Agreement is, and the Notes when issued will be, valid and binding in accordance with their terms. 5.5. No consent, approval or authorization of or declaration or filing with any governmental authority on the part of the Borrower is required in connection with the execution and delivery of this Agreement or the borrowings by the Borrower hereunder or on the part of the Borrower in connection with the consummation of any transaction contemplated hereby. 5.6. The properties of the Borrower are not subject to any lien except liens permitted hereunder. 5.7. No litigation or governmental proceeding is pending, or, to the knowledge of the officers of the Borrower, threatened against the Borrower which could have a material adverse effect on the Borrower's financial condition or business. 5.8. All financial statements which the Borrower submitted to the Bank to induce the Bank to enter into this Agreement are complete and accurate in all respects and present fairly the financial condition of the Borrower as of such dates, and the results of their operations for the periods covered thereby in accordance with GAAP. There has been no material adverse change in the condition of the Borrower, financial or otherwise, since these financial statements have been submitted to the Bank. 5.9. The Borrower is not in default with respect to any of its existing Indebtedness. 6. Affirmative Covenants The Borrower covenants and agrees that so long as any indebtedness remains outstanding hereunder, unless the Bank shall otherwise consent in writing, it will: 6.1. Pay, when due, all taxes assessed against it or its property except to the extent and so long as contested in good faith. 6.2. Maintain its corporation existence, comply with all laws and regulations applicable thereto, and comply with all laws applicable to the Borrower and the Borrower's business, including but not limited to all laws governing the Borrower's franchise operations. 12 of 21 6.3. Furnish to the Bank: 6.3.1. Within 90 days after the end of each fiscal year of the Borrower (i) a detailed report of audit of the Borrower for such fiscal year including the balance sheet of the Borrower as of the end of such fiscal year and the statements of profit and loss and surplus of the Borrower for the fiscal year then ended, prepared by independent certified public accountants satisfactory to the Bank, and (ii) a certificate of such accountants stating whether, in making their audit, they have become aware of any Event of Default set forth in Section 8 hereof, or of any event which might become such an Event of Default after the lapse of time or the giving of notice and the lapse of time, which has occurred and is then continuing and, if any such event has occurred and is continuing, specifying the nature and period of existence thereof; 6.3.2. Within 30 days after the end of each month, the balance sheet of the Borrower as of the end of such period and the statement of profit and loss and surplus of the Borrower from the beginning of such fiscal year to the end of such period, unaudited, but certified as correct (subject to year end adjustments) by an appropriate officer of the Borrower; 6.3.3. Annually, a properly completed United States Securities and Exchange Commission Form 1OK. 6.3.4. Quarterly, a properly completed United States Securities and Exchange Commission Form 1OQ. 6.3.5. Monthly Borrowing Base Certificates; 6.3.6. Monthly, a list of all franchisees currently in default, if any, together with a description of the nature of each default; 6.3.7. Annually, a list of monthly projections of the Borrower's business for the coming year and a list annual projections for the coming 3 years; 6.3.8. Annually, a copy of a policy of insurance, showing the Bank as Loss Payee, Mortgagee, or Additional Insured, covering all personal and real property of the Borrower, and its subsidiaries and affiliates, if any; 6.3.9. Promptly upon knowledge thereof, notice of the Bank in writing of the occurrence of any event which has or might, after the lapse of 13 of 21 time or the giving of notice and the lapse of time, become an event of default under Section 8 of this Agreement; and, 6.3.10 Promptly, such other information as the Bank may reasonably request. 6.4. Maintain present management of Borrower and ownership interest of Borrower's management. 6.5. Use proceeds from sales of Borrower's assets to repay borrowings hereunder. 6.6. Maintain at all times its Inventory, Equipment, real estate and other properties in good condition and repair (normal wear and tear excepted), and pay and discharge or cause to be paid and discharged when due, the cost of repairs to or maintenance of the same, and pay or cause to be paid all rental or mortgage payments due on such real estate. 6.7. Maintain at all times a ratio of debt to Tangible Net Worth of not more than 1.00 to 1.00. 6.8. Maintain at all times a ratio of Current Assets to Current Liabilities of not less than 1.50 to 1.00. 6.9. Maintain at all times a Tangible Net Worth of more than $10,000,000.00. 6.10. Maintain at all times a minimum Cash Flow Coverage Ratio of more than 1.25 to 1:00. 6.11. Maintain at all times a loan-to-value ratio of no more than 75%. If the Bank reasonably believes that (i) the market value of the Borrower's real property has declined, (ii) debt service coverage has fallen below 1:25 to 1:00, or (iii) regulatory requirements of the Bank have changed, the Bank may require that the property be reappraised at the Borrower's expense, and in the event of a decline in the value of the property, that the Borrower reduce amounts outstanding under Credit or the Term Loans or take such other measures as the Bank may require at that time. 6.12. Maintain at all times a working capital of at least 2,000,000.00. 6.13. When requested so to do, make available for inspection by duly authorized representatives of the Bank any of its books and records, and furnish the Bank any information regarding its business affairs and financial condition within a reasonable time after written request therefor. 14 of 21 6.14. Promptly notify the Bank of any defaults occurring with any franchisee of the Borrower, of any litigation initiated against the Borrower, and of the Borrower's intent to acquire additional factory facilities or other business operations. 7. Negative Covenants Without the Bank's written consent, which shall not be unreasonably withheld, so long as any indebtedness remains outstanding hereunder, the Borrower will not: 7.1. Permit any lien including, without limitation, any pledge, assignment, mortgage, title retaining contract or other type of security interest to exist on its property, real or personal, except: 7.1.1. Liens for taxes not delinquent or being contested in good faith; 7.1.2. Liens created in connection with workmen's compensation, unemployment insurance, and social security, or to secure the performance of bids, tenders or contracts (other than for the repayment of Borrowed Money), leases, statutory obligations, surety and appeal bonds, and other obligations of like nature made in the ordinary course of its business; 7.1.3. Existing liens known to the Bank; 7.1.4. Purchase money liens; and, 7.1.5. Liens pursuant to Section 4 hereof. 7.2. Create, incur, assume or suffer to exist, contingently or otherwise, other than in the ordinary course of business for conducting its present business operation, indebtedness for Borrowed Money, except: (i) indebtedness arising under this Agreement, (ii) indebtedness disclosed to the Bank in writing as existing at the time of execution of this Agreement; and (iii) purchase money financing. 7.3. Permit the aggregate amount of the Borrower's capital expenditures for fixed assets, including but not limited to fixed asset leases and lease purchases, to exceed $6.5 million annually; 7.4. Pay any dividends; 7.5. Pay management fees to any outside entity; 15 of 21 7.6. Enter into any transaction of merger or consolidation, or transfer, sell, assign, lease or otherwise dispose of all or a substantial part of its properties or assets, or any of its notes or accounts receivable or any stock (other than directors qualifying shares) or indebtedness of any subsidiary, or any assets or properties necessary or desirable for the proper conduct of its business, or change the nature of its business, or wind up, liquidate or dissolve, or agree to do any of the foregoing, or permit any Subsidiary to do so. 7.7. Change its management, management's ownership, or corporate headquarters without at least 10 days prior notice to the Bank; 7.8. Purchase or otherwise acquire all or substantially all of the assets of any person, firm, corporation or association unless after the consummation of such transaction, and after giving effect thereto and to any concurrent transactions, no Event of Default and no event which with notice or lapse of time or both would become such an Event of Default, would exist. 7.9. Become or remain a guarantor or surety, or pledge its credit or become liable in any manner (except by endorsement for deposit in the ordinary course of business) on undertakings of another. 7.10. Make any loan or advance to any partner, officer, shareholder, director or employee of the Borrower or any Subsidiary, except for temporary advances in the ordinary course of business. 7.11. Purchase or otherwise invest in or hold securities, non-operating real estate or other non-operating assets, except: (i) direct obligations of the United States of America; (ii) the present investment in any such assets; ; (iii) operating assets that hereafter become non-operating assets; and (iv) the Borrowees stock. 8. Events of Default 8.1. Upon the occurrence of any of the following Events of Default: 8.1.1. Default in any payment of interest or of principal on any one of the Notes when due, and continuance thereof for 10 days; or 8.1.2. Default in the observance or performance of any agreement of the Borrower set forth in the Agreement, in the Collateral Documents, or in any other agreement between the Bank and the Borrower; or 8.1.3. Default under any agreement between the Borrower and Equipment Finance; or 16 of 21 8.1.4. Default in the observance or performance of any other agreement of the Borrower with any other party thereof for 30 days; or 8.1.5. Default by the Borrower in the payment of any other indebtedness for Borrowed Money or in the observance or performance of any term, covenant or agreement of the Borrower in any agreement relating to any indebtedness of the Borrower, the effect of which default is to permit the holder of such indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof; or 8.1.6. Any representation or warranty made by the Borrower herein, or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or 8.1.7. The occurrence of any litigation or governmental proceeding which is pending or threatened against the Borrower, which could have a material adverse effect on the Borrower's financial condition or business, and which is not remedied within a reasonable period of time (a reasonable period of time not to exceed 10 days) after notice thereof to the Borrower, then, or at any time thereafter, unless such event of default is remedied, the Bank or the holder of the Notes may, by notice in writing to the Borrower, declare the Credit to be terminated or the Notes to be due and payable, or both, whereupon the Credit shall immediately terminate or the Notes shall immediately become due and payable, or both, as the case may be. 8.2. Upon the occurrence of any of the following events of default: The Borrower becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to the appointment of a custodian, trustee or receiver for itself or for the greater part of its properties; or a custodian, trustee or receiver is appointed for the Borrower, or for the greater part of its properties without its consent and is not discharged within 60 days; or bankruptcy, reorganization or liquidation proceedings are instituted by or against the Borrower and, if instituted against it, are consented to by it or remain undismissed for 60 days; then the Credit shall immediately terminate and the Notes shall automatically become immediately due and payable, without notice. 17 of 21 9. Miscellaneous 9.1. The provisions of this Agreement shall be in addition to those of any guaranty, pledge or security agreement, note or other evidence of liability held by the Bank, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the Bank from enforcing any or all other notes, guaranty, pledge or security agreements in accordance with their respective terms. 9.2. From time to time, the Borrower will execute and deliver to the Bank such additional documents and will provide such additional information as the Bank may reasonably require to carry out the terms of this Agreement and be informed of the Borrower's status and affairs. 9.3. The Bank shall have the right at all times to enforce the provisions of this Agreement and the Collateral Documents in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the Bank in refraining from so doing at any time or times. The failure of the Bank at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of the Bank are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. 9.4. The Borrower will pay all expenses, including but not limited to the reasonable fees and expenses of legal counsel for the Bank, appraisal fees, environmental audit fees, collateral audit fees, filing fees, title insurance fees, or flood certificate fees, which are incurred in connection with the preparation, administration, amendment, modification or enforcement of this Agreement and the Collateral Documents and the collection or attempted collection of the Notes. 9.5. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows, unless such address is changed by written notice hereunder: 9.5.1. If to the Borrower: ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. 265 Turner Drive Durango, Colorado 81301 Attention: Larry Rezentes 18 of 21 9.5.2. If to the Bank: NORWEST BANK COLORADO, NATIONAL ASSOCIATION 1063 Main Ave, Durango, Colorado 81301 Attention: Michael Noesen 9.6. Notwithstanding any other provision of this Agreement, the Borrower understands that the Bank may enter into participation agreements with participating banks whereby the Bank will allocate certain percentages of its commitment to them. The Borrower acknowledges that, for the convenience of all parties, this Agreement is being entered into with the Bank only and that its obligations under this Agreement are undertaken for the benefit of, and as an inducement to, each of any such participating banks as well as the Bank, and the Borrower hereby grants to each such participating bank, to the extent of its participation in the loans, the right to set off deposit accounts maintained by the Borrower with such bank. 9.7. The substantive laws of the State of Colorado shall govern the construction of this Agreement and the rights and remedies of the parties hereto. 9.8. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Bank. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 9.9. If any provision of this Agreement shall be held invalid under any applicable laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 9.10. All representations, warranties, covenants and agreements of the Borrower hereunder shall survive the making of the credits and loans provided for in this Agreement. 9.11. Whenever any installment of the interest on the Notes becomes due and payable on a day which is not a Banking Day, the maturity or due date thereof shall be extended to the next succeeding Banking Day and, in the 19 of 21 case of principal of the Notes, interest shall be payable thereon at the rate per annum specified in the Notes during such extension. 9.12. ARBITRATION. Subject to the provisions of the next paragraph below, the Bank and the Borrower agree to submit to binding arbitration any and all claims, disputes and controversies between or among them, whether in tort, contract or otherwise (and their respective employees, officers, directors, attorneys and other agents) arising out of or relating to in any way any credit or loan extended hereunder or any other Indebtedness and related loan and security documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or requests for additional credit. However, "Core Proceedings" under the United States Bankruptcy Code shall be exempted from arbitration. Such arbitration shall proceed in Denver, Colorado, shall be governed by the Federal Arbitration Act (Title 9 of the United States Code), and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitrator shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. Nothing in the preceding paragraph, nor the exercise of any right to arbitrate, shall limit the right of any party hereto (1) to foreclose against real or personal property collateral by the exercise of the power of sale, under a deed of trust, mortgage, or other pledge, security agreement, or instrument, or applicable law; (2) to exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (3) to obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment, or appointment of a receiver from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding. The institution and maintenance of any action for such judicial relief, or pursuit of provisional or ancillary remedies, or exercise of self-help remedies shall not constitute a waiver of the right or obligation of any party to submit any claim or dispute to arbitration, including those claims or disputes arising from exercise of any such judicial relief, or provisional or ancillary remedies, or exercise of self-help remedies. Arbitration under this Agreement shall be before a single arbitrator, who shall be a neutral attorney who has practiced in the area of commercial law for at least 10 years, selected in the manner established by the Commercial Arbitration Rules of the AAA. 20 of 21 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWER: ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. BY: /S/ FRANKLIN CRAIL -------------------------------- Print: FRANKLIN CRAIL -------------------------------- Title: PRESIDENT -------------------------------- By: -------------------------------- Print: -------------------------------- Title: -------------------------------- BANK NORWEST BANK COLORADO, NATIONAL ASSOCIATION By: /S/ MICHAEL NOESEN ---------------------------------------- Michael Noesen, Assistant Vice President 21 of 21 EX-4.14 3 EXHIBIT 4.14 EXHIBIT 4.14 [LOGO] EQUIPMENT NORWEST EQUIPMENT FINANCE, INC. PROMISSORY NOTE FINANCE SUITE 300 733 MARQUETTE AVENUE MINNEAPOLIS, MINNESOTA 55479-2048 FOR VALUE RECEIVED, THE UNDERSIGNED, ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. HEREBY PROMISES TO PAY TO THE ORDER OF NORWEST EQUIPMENT FINANCE, INC. (THE "LENDER") AT ITS OFFICE IN MINNEAPOLIS, MINNESOTA, OR AT SUCH OTHER PLACE AS MAY BE DESIGNATED FROM TIME TO TIME BY THE HOLDER HEREOF, THE SUM OF $889,840.08 IN INSTALLMENTS ACCORDING TO THE SCHEDULE SET FORTH BELOW; PROVIDED, HOWEVER, THAT THE UNDERSIGNED AND THE LENDER MAY AGREE TO ANY OTHER PAYMENT SCHEDULE, IN WHICH CASE ANY VARIATIONS SHALL BE SET FORTH IN THE SPACE PROVIDED FOR ADDITIONAL PROVISIONS. THE FIRST PAYMENT PERIOD SHALL BEGIN ON THE 15TH DAY OF THE MONTH IN WHICH LENDER DISBURSES THE LOAN PROCEEDS IF DISBURSEMENT IS MADE ON OR BEFORE THE 15TH DAY OF SUCH MONTH, AND THE FIRST PAYMENT PERIOD SHALL BEGIN ON THE LAST DAY OF SUCH MONTH IF DISBURSEMENT IS MADE DURING THE BALANCE OF SUCH MONTH. THE FIRST INSTALLMENT SHALL BE PAYABLE ON THE FIRST PAYMENT DUE DATE SET FORTH BELOW (WHICH MAY BE THE SAME AS THE DATE THE FIRST PAYMENT PERIOD BEGINS). SUBSEQUENT INSTALLMENTS SHALL BE PAYABLE ON THE FIRST DAY OF EACH PAYMENT PERIOD BEGINNING AFTER THE FIRST PAYMENT PERIOD. THE UNDERSIGNED AGREES THAT THE DATE THE FIRST PAYMENT PERIOD BEGINS MAY BE LEFT BLANK WHEN THIS NOTE IS EXECUTED AND HEREBY AUTHORIZED LENDER TO INSERT SUCH DATE BASED UPON THE DATE THE LOAN PROCEEDS ARE DISBURSED. PAYMENT SCHEDULE: DATE FIRST PAYMENT PERIOD BEGINS: April 15, 1996 FIRST PAYMENT DUE: May 15, 1996 NUMBER OF INSTALLMENTS: SEVENTY-TWO (72) MONTHS AMOUNT OF EACH INSTALLMENT: $12,358.89 PAYMENT PERIOD (CHECK ONE): /X/ MONTHLY / / ANNUALLY / / QUARTERLY / / OTHER--SEE ADDITIONAL PROVISIONS / / SEMI-ANNUALLY ANNUAL INTEREST RATE USED IN COMPUTING PAYMENT SCHEDULE: 8.25% PRINCIPAL AMOUNT OF LOAN PROCEEDS DISBURSED: $700,000.00 IN ADDITION TO INSTALLMENT PAYMENTS AS SET FORTH ABOVE, THE UNDERSIGNED AGREES TO PAY LENDER INTERIM INTEREST ON THE LOAN PROCEEDS DISBURSED HEREUNDER FROM THE DATE OF DISBURSEMENT TO THE DATE THE FIRST PAYMENT PERIOD BEGINS AT THE ANNUAL INTEREST RATE SET FORTH ABOVE USED IN COMPUTING THE PAYMENT SCHEDULE. INTERIM INTEREST SHALL BE DUE AND PAYABLE ON THE DATE THE FIRST PAYMENT PERIOD BEGINS. ADDITIONAL PROVISIONS: IF ANY INSTALLMENT IS NOT PAID WHEN DUE, THEN IN ADDITION TO ANY OTHER REMEDY LENDER MAY HAVE HEREUNDER, LENDER MAY IMPOSE AND, IF IMPOSED, THE UNDERSIGNED SHALL PAY A LATE CHARGE OF 5% OF THE AMOUNT OF THE DELINQUENT INSTALLMENT BUT IN ANY EVENT NOT MORE THAN PERMITTED BY APPLICABLE LAW. PAYMENTS THEREAFTER RECEIVED SHALL BE APPLIED FIRST TO DELINQUENT INSTALLMENTS AND THEN TO CURRENT INSTALLMENTS. THIS NOTE MAY BE PREPAID IN WHOLE OR IN PART AT ANYTIME AND FROM TIME TO TIME BUT ONLY IF ACCOMPANIED BY A PREPAYMENT PREMIUM OF 2% OF THE PRINCIPAL AMOUNT PREPAID. ANY PARTIAL PREPAYMENT SHALL BE APPLIED TO THE LAST MATURING INSTALLMENT OR INSTALLMENTS. UPON ANY PREPAYMENT IN FULL, THE UNEARNED PORTION OF THE INTEREST WILL BE REFUNDED USING THE SIMPLE INTEREST METHOD. THE FOLLOWING SHALL CONSTITUTE AN EVENT OF DEFAULT HEREUNDER: (a) FAILURE TO PAY ANY INSTALLMENT HEREUNDER WHEN DUE; (b) THE OCCURRENCE OF AN EVENT OF DEFAULT AS DEFINED IN ANY SECURITY AGREEMENT OR MORTGAGE SECURING THIS NOTE; (c) THE COMMENCEMENT OF ANY BANKRUPTCY OR INSOLVENCY PROCEEDINGS BY OR AGAINST THE UNDERSIGNED OR ANY GUARANTOR OF THIS NOTE; AND (d) ANY INDEBTEDNESS THE UNDERSIGNED MAY NOW OR HEREAFTER OWE TO NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION OR ANY AFFILIATE THEREOF SHALL BE ACCELERATED FOLLOWING A DEFAULT THEREUNDER OR, IF ANY SUCH INDEBTEDNESS IS PAYABLE ON DEMAND, PAYMENT THEREOF SHALL BE DEMANDED. UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, LENDER MAY DO ANY ONE OR MORE OF THE FOLLOWING AS IT MAY ELECT: (i) UPON WRITTEN NOTICE TO THE UNDERSIGNED, DECLARE THE ENTIRE UNPAID BALANCE OF THE NOTE TO BE IMMEDIATELY DUE AND PAYABLE, AND THE SAME (LESS UNEARNED INTEREST COMPUTED USING THE SIMPLE INTEREST METHOD AS IF THIS NOTE HAD BEEN PAID IN FULL ON THE DATE IT BECAME DUE AND PAYABLE) SHALL THEREUPON BE AND BECOME IMMEDIATELY DUE AND PAYABLE; (ii) EXERCISE ANY ONE OR MORE OF THE RIGHTS AND REMEDIES AVAILABLE TO IT UNDER ANY SECURITY AGREEMENT OR MORTGAGE SECURING THIS NOTE OR UNDER ANY OTHER AGREEMENT OR BY LAW. THE UNDERSIGNED HEREBY WAIVES PRESENTMENT, NOTICE OF DISHONOR, AND PROTEST. THE UNDERSIGNED AGREES TO PAY ALL COSTS OF COLLECTION OF THIS NOTE, INCLUDING REASONABLE ATTORNEY'S FEES. THE HOLDER HEREOF MAY CHANGE THE TERMS OF PAYMENT OF THE NOTE BY EXTENSION, RENEWAL OR OTHERWISE, AND RELEASE ANY SECURITY FOR, OR PARTY TO, THIS NOTE AND SUCH ACTION SHALL NOT RELEASE ANY ACCOMMODATION MAKER, ENDORSER, OR GUARANTOR FROM LIABILITY ON THIS NOTE. DATED APRIL 10, 1996. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. -------------------- ------------------------------------------ BORROWER BY: /s/ LAWRENCE C. REZENTES -------------------------------------- VICE PRESIDENT -- FINANCE EX-4.15 4 EXHIBIT 4.15 EXHIBIT 4.15 NORWEST BANK COLORADO, NATIONAL ASSOCIATION 1063 MAIN AVENUE, DURANGO, CO 81302 FOR BANK USE ONLY Customer No. Loan No. 6490021402 0-8008019 Face Amount Rate (% per year) Note Date Maturity Date $500,000.00 ** % 03/27/1996 04/30/1996 Maker Home Phone Business Phone ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. Street Address, City, State, Zip Code 265 TURNER DRIVE DURANGO, CO 81301 Security The captions in the boxes above, and the names, dates, amounts and other information therein, are defined terms and are hereby incorporated in the note provisions below. Maker promises to pay to the order of Bank at Bank's address the Face Amount with interest on the unpaid balance of the Face Amount from the Note Date at the Rate indicated above (based upon a year of 360 days and computed for the actual number of days elapsed). Principal and interest shall be payable as follows: The balance of principal plus accured interest shall be payable at maturity. **The interest rate shall be at an annual rate equal to the Norwest Bank Colorado, National Association Prime Rate, effective the same day of its change. Prime Rate shall mean the interest rate charged by Norwest Bank Colorado, National Association as announced or published by the Bank from time to time as its Prime Rate, and may not be the lowest interest rate charged by the Bank. Overdue principal and (to the extent legally enforceable) overdue interest, whether caused by acceleration of maturity or otherwise, shall bear interest at a rate four percentage points above the rate in effect at the time such principal or interest becomes due. At the option of the holder of this note (the "holder") the unpaid balance of this note plus accrued interest and all other obligations of Maker to the holder, direct or indirect, absolute or contingent, now existing or hereafter arising, shall become immediately due and payable without notice or demand if (a) any payment required by this note is not made when due, or (b) a default or event of default occurs under any loan of security agreement or instrument executed as security for or in connection with this note, or (c) the holder at any time in good faith believes that the prospect of any payment required by this note is impaired, whether or not such belief is caused by any act or failure to act of any Maker or any any endorser, guarantor or accommodation party of or on this note (hereafter collectively referred to as "any other signer"). Maker and any other signer (1) waive presentment, notice of dishonor and protest, (2) assent to any extension of time with respect to any payment due under this note, to any substitution or release of collateral and to the addition or release of any party, and (3) agree that Bank may apply, as Bank elects, any payment received after default to any portion of Maker's obligations hereunder. No waiver of any payment or other right under this note shall operate as a waiver of any other payment or right. Maker and any other signer shall pay all reasonable costs of collection, including attorneys' fees, paid or incurred by the holder in enforcing this note on default. This note (a) is secured by the Security indicated above, if any, and (b) shall be construed under and governed by the laws of Colorado. If there is more than one Maker, all of the provisions of this note shall apply to each and any of them. THE ARBITRATION TERMS AND CONDITIONS ON THE BACK OF THIS PAGE ARE A PART OF AND INCORPORATED INTO THIS NOTE. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FOR BANK USE ONLY By: /S/ FRANKLIN E. CRAIL ----------------------------------- New Loan FRANKLIN E. CRAIL, CHAIRMAN OF BOARD PRESIDENT, TREASURER A GALLEGOS M. NOESEN EX-4.16 5 EXHIBIT 4.16 EXHIBIT 4.16 [LOGO] NORWEST EQUIPMENT FINANCE, INC. PROMISSORY NOTE EQUIPMENT SUITE 300 FINANCE 733 MARQUETTE AVENUE MINNEAPOLIS, MINNESOTA 55479-2048 FOR VALUE RECEIVED, THE UNDERSIGNED, ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. HEREBY PROMISES TO PAY TO THE ORDER OF NORWEST EQUIPMENT FINANCE, INC. (THE "LENDER") AT ITS OFFICE IN MINNEAPOLIS, MINNESOTA, OR AT SUCH OTHER PLACE AS MAY BE DESIGNATED FROM TIME TO TIME BY THE HOLDER HEREOF, THE SUM OF $2,122,535.52 IN INSTALLMENTS ACCORDING TO THE SCHEDULE SET FORTH BELOW; PROVIDED, HOWEVER, THAT THE UNDERSIGNED AND THE LENDER MAY AGREE TO ANY OTHER PAYMENT SCHEDULE, IN WHICH CASE ANY VARIATIONS SHALL BE SET FORTH IN THE SPACE PROVIDED FOR ADDITIONAL PROVISIONS. THE FIRST PAYMENT PERIOD SHALL BEGIN ON THE 15TH DAY OF THE MONTH IN WHICH LENDER DISBURSES THE LOAN PROCEEDS IF DISBURSEMENT IS MADE ON OR BEFORE THE 15TH DAY OF SUCH MONTH, AND THE FIRST PAYMENT PERIOD SHALL BEGIN ON THE LAST DAY OF SUCH MONTH IF DISBURSEMENT IS MADE DURING THE BALANCE OF SUCH MONTH. THE FIRST INSTALLMENT SHALL BE PAYABLE ON THE FIRST PAYMENT DUE DATE SET FORTH BELOW (WHICH MAY BE THE SAME AS THE DATE THE FIRST PAYMENT PERIOD BEGINS). SUBSEQUENT INSTALLMENTS SHALL BE PAYABLE ON THE FIRST DAY OF EACH PAYMENT PERIOD BEGINNING AFTER THE FIRST PAYMENT PERIOD. THE UNDERSIGNED AGREES THAT THE DATE THE FIRST PAYMENT PERIOD BEGINS MAY BE LEFT BLANK WHEN THIS NOTE IS EXECUTED AND HEREBY AUTHORIZED LENDER TO INSERT SUCH DATE BASED UPON THE DATE THE LOAN PROCEEDS ARE DISBURSED. PAYMENT SCHEDULE: DATE FIRST PAYMENT PERIOD BEGINS: April 15, 1996 FIRST PAYMENT DUE: May 15, 1996 NUMBER OF INSTALLMENTS: EIGHTY-FOUR (84) MONTHS AMOUNT OF EACH INSTALLMENT: $25,268.28 PAYMENT PERIOD (CHECK ONE): /X/ MONTHLY / / ANNUALLY / / QUARTERLY / / OTHER--SEE ADDITIONAL PROVISIONS / / SEMI-ANNUALLY ANNUAL INTEREST RATE USED IN COMPUTING PAYMENT SCHEDULE: 8.94% PRINCIPAL AMOUNT OF LOAN PROCEEDS DISBURSED: 1,573,500.00 IN ADDITION TO INSTALLMENT PAYMENTS AS SET FORTH ABOVE, THE UNDERSIGNED AGREES TO PAY LENDER INTERIM INTEREST ON THE LOAN PROCEEDS DISBURSED HEREUNDER FROM THE DATE OF DISBURSEMENT TO THE DATE THE FIRST PAYMENT PERIOD BEGINS AT THE ANNUAL INTEREST RATE SET FORTH ABOVE USED IN COMPUTING THE PAYMENT SCHEDULE. INTERIM INTEREST SHALL BE DUE AND PAYABLE ON THE DATE THE FIRST PAYMENT PERIOD BEGINS. ADDITIONAL PROVISIONS: IF ANY INSTALLMENT IS NOT PAID WHEN DUE, THEN IN ADDITION TO ANY OTHER REMEDY LENDER MAY HAVE HEREUNDER, LENDER MAY IMPOSE AND, IF IMPOSED, THE UNDERSIGNED SHALL PAY A LATE CHARGE OF 5% OF THE AMOUNT OF THE DELINQUENT INSTALLMENT BUT IN ANY EVENT NOT MORE THAN PERMITTED BY APPLICABLE LAW. PAYMENTS THEREAFTER RECEIVED SHALL BE APPLIED FIRST TO DELINQUENT INSTALLMENTS AND THEN TO CURRENT INSTALLMENTS. THIS NOTE MAY BE PREPAID IN WHOLE OR IN PART AT ANYTIME AND FROM TIME TO TIME BUT ONLY IF ACCOMPANIED BY A PREPAYMENT PREMIUM OF 2% OF THE PRINCIPAL AMOUNT PREPAID. ANY PARTIAL PREPAYMENT SHALL BE APPLIED TO THE LAST MATURING INSTALLMENT OR INSTALLMENTS. UPON ANY PREPAYMENT IN FULL, THE UNEARNED PORTION OF THE INTEREST WILL BE REFUNDED USING THE SIMPLE INTEREST METHOD. THE FOLLOWING SHALL CONSTITUTE AN EVENT OF DEFAULT HEREUNDER: (a) FAILURE TO PAY ANY INSTALLMENT HEREUNDER WHEN DUE; (b) THE OCCURRENCE OF AN EVENT OF DEFAULT AS DEFINED IN ANY SECURITY AGREEMENT OR MORTGAGE SECURING THIS NOTE; (c) THE COMMENCEMENT OF ANY BANKRUPTCY OR INSOLVENCY PROCEEDINGS BY OR AGAINST THE UNDERSIGNED OR ANY GUARANTOR OF THIS NOTE, AND (d) ANY INDEBTEDNESS THE UNDERSIGNED MAY NOW OR HEREAFTER OWE TO NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION OR ANY AFFILIATE THEREOF SHALL BE ACCELERATED FOLLOWING A DEFAULT THEREUNDER OR, IF ANY SUCH INDEBTEDNESS IS PAYABLE ON DEMAND, PAYMENT THEREOF SHALL BE DEMANDED. UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, LENDER MAY DO ANY ONE OR MORE OF THE FOLLOWING AS IT MAY ELECT: (i) UPON WRITTEN NOTICE TO THE UNDERSIGNED, DECLARE THE ENTIRE UNPAID BALANCE OF THE NOTE TO BE IMMEDIATELY DUE AND PAYABLE, AND THE SAME (LESS UNEARNED INTEREST COMPUTED USING THE SIMPLE INTEREST METHOD AS IF THIS NOTE HAD BEEN PAID IN FULL ON THE DATE IT BECAME DUE AND PAYABLE) SHALL THEREUPON BE AND BECOME IMMEDIATELY DUE AND PAYABLE: (ii) EXERCISE ANY ONE OR MORE OF THE RIGHTS AND REMEDIES AVAILABLE TO IT UNDER ANY SECURITY AGREEMENT OR MORTGAGE SECURING THIS NOTE OR UNDER ANY OTHER AGREEMENT OR BY LAW. THE UNDERSIGNED HEREBY WAIVES PRESENTMENT, NOTICE OF DISHONOR, AND PROTEST. THE UNDERSIGNED AGREES TO PAY ALL COSTS OF COLLECTION OF THIS NOTE, INCLUDING REASONABLE ATTORNEY'S FEES. THE HOLDER HEREOF MAY CHANGE THE TERMS OF PAYMENT OF THE NOTE BY EXTENSION, RENEWAL OR OTHERWISE, AND RELEASE ANY SECURITY FOR, OR PARTY TO, THIS NOTE AND SUCH ACTION SHALL NOT RELEASE ANY ACCOMMODATION MAKER, ENDORSER, OR GUARANTOR FROM LIABILILY ON THIS NOTE. DATED APRIL 2, 1996. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. --------------------- -------------------------------------------- BORROWER BY: /s/ LAWRENCE C. REZENTES ---------------------------------------- ITS VICE PRESIDENT -- FINANCE ----------------------------------- EX-4.17 6 EXHIBIT 4.17 EXHIBIT 4.17 U.S. BANCORP LEASING & FINANCIAL 825 N.E. MULTNOMAH, SUITE 800 PORTLAND, OR 97232-2151 503-797-0200 April 4, 1996 Mr. Lawrence C. Rezentes Rocky Mountain Chocolate Factory, Inc. 265 Turner Dr. Durango, CO 81301 Dear Mr. Rezentes: We are pleased to present for your consideration the following commitment to provide lease financing for Rocky Mountain Chocolate Factory, Inc. The terms and conditions are as follows: LESSOR: U.S. Bancorp Leasing & Financial LESSEE: ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AGREED VALUE: $2,000,000.00 Line of Credit EQUIPMENT DESCRIPTION: New Store Equipment to be used in new Company owned and operated Rocky Mountain Chocolate Factory retail stores. This will include all equipment, furniture and fixtures and contractor costs to install them at the retail store location. It is anticipated these costs will be between $100,000 and $150,000 per retail location and Lease Schedule. LEASE TERM: 72 months RENTAL PAYMENTS: Payments collected monthly in advance, 1.7758%, expressed as a percentage per month of the original equipment cost. This rate is exclusive of any applicable state or local use tax. RENTAL ADJUSTMENTS: When delivery and acceptance have taken place, and if there has been a change in the yield on the 30 day average of five year U.S. Treasury Securities from the April 1, 1996 approximately 5.97%, the effective lease rates will be adjusted. Upon the Lessee's written acceptance of the equipment, the adjusted lease rate, if applicable, shall become fixed for the duration of the lease. RENTAL DUE DATES: Regular monthly rentals shall begin and be due on the first day of the month following equipment delivery and acceptance. A pro-rata daily rental shall accrue up to the first of the month. PURCHASE OPTION: $1.00 at the end of the lease term upon timely payment of all rentals and amounts outstanding. FUNDING DATE: It is anticipated funding will take place no later than November 30, 1996. The Lessor shall have no obligation to fund after this date. DOCUMENTATION: Documents pertaining to this transaction will be provided by the Lessor and this offer is subject to the execution of all documentation by Lessor and Lessee within a reasonable time. DISBURSEMENT: Reimbursement/Payment by Lessor for purchase of the Property will be made after receipt of all properly executed lease documents and specific equipment invoices. CLOSING COSTS: $500 per Lease Schedule. LANDLORD'S WAIVER: If applicable, Lessee shall obtain from the landlord, or mortgagee, of it's premises a waiver stating that the Property under Lease is Lessor's personal property and that no claim will be made against the Property by such landlord or mortgagee during the Lease term or any renewal. INSURANCE: The Lessee shall maintain insurance in types and amounts acceptable to the Lessor. Lessor shall be named as additional insured and loss payee. Our commitment is subject to the provision that whenever the Lessor, in its sole discretion, feels that there has been a material adverse change in the financial condition or management of the company, or feels that the company has failed to comply with any terms or restrictions of the commitment, no further disbursement need be made. If this commitment is acceptable to you, please acknowledge by signing the duplicate copy of this letter in the space provided below and returning it to us along with a commitment fee of $10,000.00. This commitment expires if your signed acceptance and fee have not been received by us as of the close of business on April 15, 1996. In the event this financing is not completed through no fault of the Lessor, the commitment fee will be used to compensate Lessor for consideration of commitment, time spent and services performed. Should financing be completed, the commitment fee shall be applied to the first monthly payment due, on a pro-rata basis to the initial $1,000,000 of equipment cost financed. Under Oregon law, most agreements, promises, and commitments made by Lender/Lessor after October 3, 1989 concerning loans/leases and other credit extensions which are not for personal, family, or household purposes or secured solely by the Lessee's residence must be in writing, express consideration, and be signed by the Lender/Lessor to be enforceable. Sincerely, /S/ THOMAS E. LULICH - -------------------------------- Thomas E. Lulich Asst. Vice President Accepted and agreed to this 8 day of April 1996 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. By: /S/ LAWRENCE C. REZENTES --------------------------------------- LAWRENCE C. REZENTES VICE PRESIDENT -- FINANCE NORWEST BANK COLORADO, N.A. DURANGO NORWEST BANKS 1063 MAIN AVENUE [LOGO] P.O. DRAWER K DURANGO, COLORADO 81302-2870 303/247-3242 March 12, 1996 Lawrence C. Rezentes, VP - Finance Rocky Mountain Chocolate Factory, Inc. 265 Turner Drive Durango, CO 81301 Dear Larry: Norwest Bank Colorado, National Association (the "Bank") and Norwest Equipment Finance, Inc. (the "Finance Company") (collectively, "Norwest") are pleased to provide the following credit commitment to Rocky Mountain Chocolate Factory, Inc. (the "Company" or the "Borrower") subject to the terms and conditions contained herein. LENDER: NORWEST BANK COLORADO, NATIONAL ASSOCIATION TOTAL COMMITMENT: $4,650,000.00 FACILITY #1 AMOUNT: $2,000,000.00 Line of Credit PRICING: The Bank's prime rate (the "Prime Rate") of interest, as announced by the Bank to be in effect from time to time. The Pricing changes if and when the Prime Rate changes. PURPOSE: Finance Accounts Receivable and Inventory BORROWING 75% of accounts receivable less (i) all inter-company BASE: receivables, (ii) accounts more than 60 days old, (iii) accounts with 10% of which are past due, (iv) royalty NORWEST BANKS [LOGO] receivables, and (v) foreign accounts PLUS 30% of finished-goods and raw material inventories ($500,000.00 cap) excluding work in progress inventory. REPAYMENT: From the effective date thereof until the Note Maturity Date of the Promissory Note, the outstanding principal balance shall not exceed $0.00 for a period of at least 60 consecutive days. Interest payable monthly; principal payable at Maturity, which will be no later than 1-year from the Promissory Note date. COLLATERAL: Accounts Receivable, Inventory and General Intangibles (including but not limited to all accounts receivable and accounts, inventory, contract rights, assignment of proceeds due from franchises and all general intangibles including trademarks, trade names, patents, proprietary rights, copyrights and other like intangibles); Assignment of Key Man Life Insurance on the life of Frank Crail; Cross- Collateralized with All Norwest Debt FACILITY #2 AMOUNT: $1,650,000.00 Term Loan PRICING: 8.25%, Fixed PURPOSE: Refinance Building Acquisition and Expansion BORROWING The lessor of 75% of Bank accepted and reviewed BASE: appraised value of commercial property located at 265 Turner Drive, Durango, CO or $1,650,000.00 REPAYMENT: 20-Year Amortization & Note, 5-Year Rate Adjustments and Re- Amortization at the in effect at that time Prime Rate; Initial Monthly Principal and Interest Payments of $14,250.00 NORWEST BANKS [LOGO] COLLATERAL: First Deed of Trust on Commercial Property; Cross- Collateralized with All Norwest Debt FACILITY #3 AMOUNT: $500,000.00 Term Loan PRICING: 8.50%, Fixed PURPOSE: Finance Furniture, Fixtures & Equipment BORROWING 100% of Norwest accepted and reviewed invoices BASE: directly related to company-owned store openings- existing chocolate store concept REPAYMENT: 5-Year Amortization & Note; Monthly Principal and Interest Payments of $10,500.00 COLLATERAL: Furniture, Fixtures & Equipment; Cross-Collateralized with All Norwest Debt FACILITY #4 AMOUNT: $500,000.00 Term Loan PRICING: 8.50%, Fixed PURPOSE: Finance Furniture, Fixtures & Equipment BORROWING 100% of Norwest accepted and reviewed invoices BASE: directly related to company-owned store openings REPAYMENT: 5-Year Amortization & Note; Monthly Principal and Interest Payments of $10,500.00 COLLATERAL: Furniture, Fixtures & Equipment; Cross-Collateralized with All Norwest Debt NORWEST BANKS [LOGO] COLLATERAL: First Deed of Trust on Commercial Property; Cross- Collateralized with All Norwest Debt FACILITY #3 AMOUNT: $500,000.00 Term Loan PRICING: 8.50%, Fixed PURPOSE: Finance Furniture, Fixtures & Equipment BORROWING 100% of Norwest accepted and reviewed invoices BASE: directly related to company-owned store openings- existing chocolate store concept REPAYMENT: 5-Year Amortization & Note; Monthly Principal and Interest Payments of $10,500.00 COLLATERAL: Furniture, Fixtures & Equipment, Cross-Collateralized with All Norwest Debt FACILITY #4 AMOUNT: $500,000.00 Term Loan PRICING: 8.50%, Fixed PURPOSE: Finance Furniture, Fixtures & Equipment BORROWING 100% of Norwest accepted and reviewed invoices BASE: directly related to company-owned store openings REPAYMENT: 5-Year Amortization & Note; Monthly Principal and Interest Payments of $10,500.00 COLLATERAL: Furniture, Fixtures & Equipment; Cross-Collateralized with All Norwest Debt NORWEST BANKS [LOGO] CONDITIONS Facility is not available to be drawn upon until PRECEDENT: November 1, 1996, and will be subject at that time to (i) the Company not being in default with Norwest, (ii) substantially meeting all covenants contained herein, and (iii) meeting the following operating performance criteria: AS OF YTD (000'S Omitted) 09/30/96 ------------ Total Revenues > $14,000 Retail Revenues - Fuzziwig's > $550 Total Gross Profit % > 48.50% Net Income > $ 1,100 Further, draws are subject to final Bank approval of site location and store concept. LENDER: NORWEST EQUIPMENT FINANCE, INC. TOTAL COMMITMENT: $2,200,000.00 FACILITY #5 AMOUNT: $700,000.00 Term Loan PRICING: 8.25%, Fixed PURPOSE: Refinance Equipment REPAYMENT: 6-Year Amortization & Note; Monthly Principal and Interest Payments of $12,500.00 COLLATERAL: Plant Equipment; Cross-Collateralized with All Norwest Debt FACILITY #6 AMOUNT: $1,500,000.00 Term Loan PRICING: 8.90%, Fixed NORWEST BANKS [LOGO] This pricing commitment is based on cost of funds represented by comparable maturity Treasury Notes at this time. In the event this rate changes prior to funding, the pricing may be adjusted to reflect this change. PURPOSE: Finance Furniture, Fixtures & Equipment BORROWING 100% of Norwest accepted and reviewed BASE: invoices directly related to company-owned store openings REPAYMENT: 7-Year Amortization & Note; Monthly Principal and Interest Payments of $24,250.00 COLLATERAL: Furniture, Fixtures & Equipment; Cross- Collateralized with All Norwest Debt In addition to the above, the Company agrees to the following affirmative and negative covenants: REPORTING INFORMATION The Company will submit to the Bank: 1. Audited Annual Financial Statements 2. 1O-K 3. 1O-Q 4. Internally-Prepared Financial Statements Monthly 5. Borrowing Base Certificates Monthly including Agings and Inventory Valuations 6. 1-Year Monthly Projections and 3-Year Annual Projections 7. Such Other Information Norwest May Reasonably Request From Time to Time FINANCIAL (ADJUSTABLE ANNUALLY) The Company will maintain: 1 . Working Capital > $2,000,000.00 2. Current Ratio > 1.50:1.00 3. TNW > $10,000,000.00 4. Debt/TNW < 1.00:1.00 NORWEST BANKS [LOGO] 5. Capital Expenditures < $6,500,000.00 6. Minimum Cash Flow Coverage (as defined by Bank) > 1.25:1.00 7. No Dividends/Management Fees (Coronet) without Bank Approval 8. LTV on Facility #2 < 75% at all times; the Bank will require that the property be re-appraised, if, in the reasonable opinion of the Bank, the market value of the property has declined, debt service coverage falls below 1.25:1.00 or bank regulatory requirements are changed OTHER 1 . Cross-Default with All Norwest debt 2. Adequate Insurance with Norwest as Loss Payee, Additional Insured and/or Mortgagee (as appropriate) 3. 1O-Days Prior Written Notice of Any Change in Corporate Headquarters, Ownership or Management of Company 4. Notification of all franchisee uncured defaults, unprofitable company-owned stores and/or litigation against the Company 5. Without Norwest's prior written consent, which shall not be unreasonably withheld, agree not to: a) create, incur, or assume, contingently or otherwise, indebtedness with another financial institution b) purchase or acquire all or substantially all of the assets of any person, corporation or other entity c) guarantee or pledge its credit or become liable on outside transactions The commitments hereunder are subject to satisfaction of the following conditions precedent. 1 Execution and delivery of all such documents and documentation required by Norwest and to the satisfaction of Norwest's counsel 2. Review and acceptance of real estate appraisal completed within forty-five (45) business days upon acceptance of this commitment 3. Results of environmental audit(s) with initial screening to be completed within ten (10) business days upon your acceptance of this commitment 4. Legal opinion from outside counsel stating satisfactory compliance with applicable federal franchise laws enforced by the Federal Trade Commission and applicable statutory laws in the states of Colorado & California NORWEST BANKS [LOGO] 5. On-site collateral review to be performed by Bank audit staff 6. No material or adverse change in financial condition of Company 7. Any other requirements Norwest may reasonably set forth Note: All reasonable out-of-pocket expenses and other costs normally associated with loans and/or leases of this nature to be borne by the Company. Larry, Norwest is pleased to provide this commitment to Rocky Mountain Chocolate Factory, Inc. We are very excited about the opportunity of doing business together soon. We look forward to your acceptance of this commitment in writing no later than March 15, 1996. Otherwise, this commitment shall be deemed null and void. Sincerely, Norwest Bank Colorado, National Association Norwest Equipment Finance, Inc. Michael J. Noesen Thomas J. Petersen Assistant Vice President Assistant Vice President Agreed and accepted this 15 day of March 1996: Rocky Mountain Chocolate Factory, Inc. By: /S/ LAWRENCE C. REZENTES ----------------------------------- Print: LAWRENCE C. REZENTES ----------------------------------- Title: VICE PRESIDENT -- FINANCE ----------------------------------- EX-4.18 7 EXHIBIT 4.18 EXHIBIT 4.18 NORWEST BANK COLORADO, NATIONAL ASSOCIATION Address, City, State & Zip Code 1063 MAIN AVENUE, DURANGO, CO 81302 FOR BANK USE ONLY Customer No. Loan No. 6490021402 0-8008046 Face Amount Rate (% per year) Note Date Maturity Date $2,000,000.00 ** % 04/10/1996 07/31/1997 Maker Home Phone Business Phone ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. Street Address, City, State, Zip Code 265 TURNER DRIVE DURANGO, CO 81301 Security 2nd DEED OF TRUST, ACCOUNTS RECEIVABLE, INVENTORY, GENERAL INTANGIBLES The captions in the boxes above, and the names, dates, amounts and other information therein, are defined terms and are hereby incorporated in the note provisions below. Maker promises to pay to the order of Bank at Bank's address the Face Amount and interest on the unpaid balance of the Face Amount (from the Note Date at the Rate indicated above (based upon a year of 360 days and computed for the actual number of days elapsed). Principal and interest shall be payable as follows: Interest shall be payable monthly on the last day of each month beginning 04/30/1996. The balance of principal plus accrued interest shall be payable at maturity. **The interest rate shall be at an annual rate equal to the Norwest Bank Colorado, National Association Prime Rate, effective the same day of its change. Prime Rate shall mean the interest rate charged by Norwest Bank Colorado, National Association as announced or published by the Bank from time to time as its Prime Rate, and may not be the lowest interest rate charged by the Bank. THIS NOTE EVIDENCES AN ARRANGEMENT PROVIDING FOR FUTURE ADVANCES THAT IN AGGREGATE AMOUNT OUTSTANDING SHALL AT NO TIME EXCEED THE FACE AMOUNT. Overdue principal and (to the extent legally enforceable) overdue interest, whether caused by acceleration of maturity or otherwise, shall bear interest at a rate four percentage points above the rate in effect at the time such principal or interest becomes due. At the option of the holder of this note (the "holder") the unpaid balance of this note plus accrued interest and all other obligations of Maker to the holder, direct or indirect, absolute or contingent, now existing or hereafter arising, shall become immediately due and payable without notice or demand if (a) any payment required by this note is not made when due, or (b) a default or event of default occurs under any loan or security agreement or instrument executed as security for or in connection with this note, or (c) the holder at any time in good faith believes that the prospect of any payment required by this note is impaired, whether or not such belief is caused by any act or failure to act of any Maker or of any endorser, guarantor or accommodation party of or on this note (hereafter collectively referred to as "any other signer"). Maker and any other signer (1) waive presentment, notice of dishonor and protest, (2) assent to any extension of time with respect to any payment due under this note, to any substitution or release of collateral and to the addition or release of any party, and (3) agree that Bank may apply, as Bank elects, any payment received after default to any portion of Maker's obligations hereunder. No waiver of any payment or other right under this note shall operate as a waiver of any other payment or right. Maker and any other signer shall pay all reasonable costs of collection, including attorneys' fees, paid or incurred by the holder in enforcing this note on default. This note (a) is secured by the Security indicated above, if any, and (b) shall be construed under and governed by the laws of Colorado. If there is more than one Maker, all of the provisions of this note shall apply to each and any of them. THE ARBITRATION TERMS AND CONDITIONS ON THE BACK OF THIS PAGE ARE A PART OF AND INCORPORATED INTO THIS NOTE. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FOR BANK USE ONLY BY: /S/ FRANKLIN E. CRAIL New Loan ------------------------------------- FRANKLIN E. CRAIL, CHAIRMAN OF BOARD A GALLEGOS PRESIDENT, TREASURER M NOESEN EX-10.4 8 EXHIBIT 10.4 EXHIBIT 10.4 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FRANCHISE AGREEMENT Franchisee: --------------------------- Date: ---------------------------------- Franchised Location: ------------------ --------------------------------------- (11/8/95) ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FRANCHISE AGREEMENT TABLE OF CONTENTS 1. PURPOSE........................................................... 1 2. GRANT OF FRANCHISE................................................ 1 2.01. Grant of Franchise......................................... 1 2.02. Scope of Franchise Operations.............................. 1 3. FRANCHISED LOCATION AND DESIGNATED AREA........................... 2 3.01. Franchised Location........................................ 2 3.02. Protected Territory........................................ 2 3.03. Limitation on Franchise Rights............................. 2 3.04. Franchisor's Reservation of Rights......................... 3 4. INITIAL FRANCHISE FEE............................................. 3 4.01. Initial Franchise Fee...................................... 3 5. DEVELOPMENT OF FRANCHISED LOCATION................................ 3 5.01. Approval of Lease.......................................... 3 5.02. Conversion and Design...................................... 4 5.03. Signs...................................................... 4 5.04. Equipment.................................................. 4 5.05. Permits and Licenses....................................... 5 5.06. Commencement of Operations................................. 5 6. TRAINING.......................................................... 5 6.01. Initial Training Program................................... 5 6.02. Length of Training......................................... 5 6.03. Additional Training........................................ 6 7. DEVELOPMENT ASSISTANCE............................................ 6 7.01. Franchisor's Development Assistance........................ 6 8. OPERATIONS MANUAL................................................. 7 8.01. Operations Manual.......................................... 7 8.02. Confidentiality of Operations Manual Contents.............. 7 8.03. Changes to Operations Manual............................... 7 9. OPERATING ASSISTANCE.............................................. 8 9.01. Franchisor's Services...................................... 8 9.02. Additional Franchisor Services............................. 8 10. FRANCHISEE'S OPERATIONAL COVENANTS................................ 9 10.01. Business Operations........................................ 9 11. ROYALTIES......................................................... 11 11.01. Monthly Royalty............................................ 11 11.02. Gross Retail Sales......................................... 11 11.03. Royalty Payments........................................... 12 12. ADVERTISING....................................................... 12 12.01. Approval of Advertising.................................... 12 12.02. Local Advertising.......................................... 12 12.03. Marketing and Promotion Fee................................ 13 12.04. Regional Advertising Programs.............................. 13 13. QUALITY CONTROL................................................... 14 13.01. Compliance with Operations Manual.......................... 14 13.02. Standards and Specifications............................... 14 13.03. Inspections................................................ 14 13.04. Restrictions on Services and Products...................... 14 13.05. Approved Suppliers......................................... 15 13.06. Intended Change of Supplier................................ 15 13.07. Approval of Intended Supplier.............................. 15 14. TRADEMARKS, TRADE NAMES AND PROPRIETARY INTERESTS................. 16 14.01. Trademarks................................................. 16 14.02. No Use of Other Marks...................................... 16 14.03. Licensed Methods........................................... 16 14.04. Effect of Termination...................................... 16 14.05. Trademark Infringement..................................... 16 14.06. Franchisee's Business Name................................. 17 14.07. Change of Marks............................................ 17 15. REPORTS, RECORDS AND FINANCIAL STATEMENTS......................... 17 15.01. Franchisee Reports......................................... 17 15.02. Annual Financial Statements................................ 18 15.03. Verification............................................... 18 15.04. Books and Records.......................................... 18 15.05. Audit of Books and Records................................. 18 15.06. Failure to Comply with Reporting Requirements.............. 18 16. ASSIGNMENT........................................................ 19 16.01. Assignment by Franchisee................................... 19 16.02. Pre-Conditions to Franchisee's Assignment.................. 19 16.03. Franchisor's Approval of Transfer.......................... 20 16.04. Right of First Refusal..................................... 20 16.05. Types of Transfers......................................... 21 16.06. Assignment by the Franchisor............................... 21 16.07. Franchisee's Death or Disability........................... 21 17. TERM AND EXPIRATION............................................... 22 17.01. Term....................................................... 22 17.02. Rights Upon Expiration..................................... 22 17.03. Exercise of Option for Successor Franchise................. 22 17.04. Conditions of Refusal...................................... 22 18. DEFAULT AND TERMINATION........................................... 23 18.01. Termination by Franchisor - Effective Upon Notice.......... 23 18.02. Termination by Franchisor - Thirty Days Notice............. 24 18.03. Franchisor's Remedies...................................... 25 18.04. Right to Repurchase........................................ 25 18.05. Obligations of Franchisee Upon Termination or Expiration... 26 18.06. State and Federal Law...................................... 27 19. BUSINESS RELATIONSHIP............................................. 28 19.01. Independent Businesspersons................................ 28 19.02. Payment of Third Party Obligations......................... 28 19.03. Indemnification............................................ 28 20. RESTRICTIVE COVENANTS............................................. 28 20.01. Non-Competition During Term................................ 28 20.02. Post-Termination Covenant Not to Compete................... 29 20.03. Confidentiality of Proprietary Information................. 30 20.04. Confidentiality Agreement.................................. 30 21. INSURANCE......................................................... 30 21.01. Insurance Coverage......................................... 30 21.02. Proof of Insurance Coverage................................ 30 22. MISCELLANEOUS PROVISIONS.......................................... 31 22.01. Governing Law/Consent to Venue and Jurisdiction............ 31 22.02. Modification............................................... 31 22.03. Entire Agreement........................................... 31 22.04. Delegation by the Franchisor............................... 31 22.05. Effective Date............................................. 32 22.06. Review of Agreement........................................ 32 22.07. Attorneys' Fees............................................ 32 22-08. Injunctive Relief.......................................... 32 22.09. No Waiver.................................................. 32 22.10. No Right to Set Off........................................ 32 22.11. Invalidity................................................. 32 22.12. Notices.................................................... 32 22.13. Acknowledgement............................................ 33 EXHIBITS I. Addendum to Franchise Agreement - Location Approval II. Personal Guaranty III. Statement of Ownership ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FRANCHISE AGREEMENT THIS AGREEMENT (the "Agreement") is made this ____ day of 199_, by and between ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado corporation, located at 265 Turner Drive, Durango, Colorado 81301 (the "Franchisor") and ___________ _________________, located at _____________________________ (the "Franchisee"), who, on the basis of the following understandings and agreements, agree as follows: 1. PURPOSE 1.01. The Franchisor has developed methods for establishing, operating and promoting retail stores selling gourmet chocolates and other premium confectionery products ("ROCKY MOUNTAIN CHOCOLATE FACTORY Businesses" or "Businesses") which use the service mark "ROCKY MOUNTAIN CHOCOLATE FACTORY" and related trade names and trademarks ("Trademarks") and the Franchisor's proprietary methods of doing business (the "Licensed Methods"). 1.02. The Franchisor grants the right to others to develop and operate a ROCKY MOUNTAIN CHOCOLATE FACTORY Business, under the Trademarks and pursuant to the Licensed Methods. 1.03. The Franchisee desires to establish a ROCKY MOUNTAIN CHOCOLATE FACTORY Business at a location identified herein or to be later identified, and the Franchisor desires to grant the Franchisee the right to operate a ROCKY MOUNTAIN CHOCOLATE FACTORY Business at such location under the terms and conditions which are contained in this Agreement. 2. GRANT OF FRANCHISE 2.01. GRANT OF FRANCHISE. The Franchisor grants to the Franchisee, and the Franchisee accepts from the Franchisor, the right to use the Trademarks and Licensed Methods in connection with the establishment and operation of a ROCKY MOUNTAIN CHOCOLATE FACTORY Business, at the location described in Article 3 of this Agreement. The Franchisee agrees to use the Trademarks and Licensed Methods, as they may be changed, improved, and further developed by the Franchisor from time to time, only in accordance with the terms and conditions of this Agreement. 2.02. SCOPE OF FRANCHISE OPERATIONS. The Franchisee agrees at all times to faithfully, honestly and diligently perform the Franchisee's obligations hereunder, and to continuously exert best efforts to promote the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The Franchisee agrees to utilize the Trademarks and Licensed Methods to operate all aspects of the business franchised hereunder in accordance with the methods and systems developed and prescribed from time to time by the Franchisor, all of which are a part of the Licensed Methods. The Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business shall offer all products and services as the Franchisor shall designate and shall be restricted from manufacturing, offering or selling any products and services not previously approved by the Franchisor in writing. The Franchisee is required to devote a minimum of fifty percent (50%) of all retail floor space to ROCKY MOUNTAIN CHOCOLATE FACTORY brand bulk chocolates and packaged candies. The Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business must feature ROCKY MOUNTAIN CHOCOLATE FACTORY brand candy, cookies made from ROCKY MOUNTAIN CHOCOLATE FACTORY brand cookie dough and other confectionery products ("Candy") and related items ("Items") approved by the Franchisor in writing. The products which Franchisee shall be permitted to serve, make and/or sell are store-made candies prepared from recipes and specifications authorized in the Franchisor's Operations Manual, described in Article 8 below, through the process of dipping, molding and cooking ("Store-Made Candies"), Australian glazed fruit, Oreo cookies, graham crackers, pretzels, fresh and dried fruit items, dog bones and plain chocolate ("Candy-Related Items"), and such other Items which the Franchisor has approved in writing, in its sole discretion. 3. FRANCHISED LOCATION AND DESIGNATED AREA 3.01. FRANCHISED LOCATION. The Franchisee is granted the right and franchise to own and operate a ROCKY MOUNTAIN CHOCOLATE FACTORY Business at the address and location which shall be set forth in EXHIBIT I, attached hereto ("Franchised Location"). If, at the time of execution of this Agreement, the Franchised Location cannot be designated as a specific address because a location has not been selected and approved, then the Franchisee shall promptly take steps to choose and acquire a location for its ROCKY MOUNTAIN CHOCOLATE FACTORY Business within the Designated Area, set forth in Exhibit I. In such circumstances, the Franchisee shall select and propose to the Franchisor for the Franchisor's prior approval a specific location for the Franchised Location which, once approved by the Franchisor, shall hereinafter be set forth in the rider to EXHIBIT I. 3.02. PROTECTED TERRITORY. So long as the Franchisee is in compliance with this Agreement, the Franchisor shall not establish or license another person or entity to establish a ROCKY MOUNTAIN CHOCOLATE FACTORY Business within a certain geographic area as set forth in Exhibit I ("Protected Territory"). 3.03. LIMITATION ON FRANCHISE RIGHTS. The rights that are hereby granted to the Franchisee are for the specific Franchised Location and Protected Territory and cannot be transferred to an alternative Franchised Location or Protected Territory, or any other location, without the prior written approval of the Franchisor, which approval shall not be unreasonably withheld. The Trademarks and Licensed Methods are licensed to the Franchisee for the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business only at the Franchised Location; therefore, the Franchisee may not operate food carts or kiosks, participate in food - 2 - festivals or offer any other off-site food services using the Trademarks and Licensed Methods without the prior written consent of the Franchisor. 3.04. FRANCHISOR'S RESERVATION OF RIGHTS. The Franchisee acknowledges that the franchise granted hereunder is non-exclusive and that the Franchisor retains the rights, among others: (1) to use, and to license others to use, the Trademarks and Licensed Methods for the operation of ROCKY MOUNTAIN CHOCOLATE FACTORY Businesses at any location other than in the Protected Territory; (2) to use the Trademarks and Licensed Methods in connection with other services and products, promotional and marketing efforts or related items, materials or services or in alternative channels of distribution, without regard to the location of the use, including, but not limited to, the wholesale sale of its products to unrelated retail outlets or to candy distributors; and (3) to use and license the use of other proprietary marks or methods in connection with the operation of retail stores selling gourmet chocolates and other premium confectionery products business at any location, which businesses are the same as, or similar to, or different from ROCKY MOUNTAIN CHOCOLATE FACTORY Business, on any terms and conditions as the Franchisor deems advisable, and without granting the Franchisee any rights therein. 4. INITIAL FRANCHISE FEE 4.01. INITIAL FRANCHISE FEE. In consideration for the right to develop and operate one ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the Franchisee agrees to pay to the Franchisor an initial franchise fee of $19,500, $5,000 of which is due and payable as of the date of execution of this Agreement, with the balance of $14,500 due and payable at the earlier of 120 days from the date this Agreement is executed or the date that a lease is executed for a Franchised Location that has been approved by the Franchisor. The Franchisee acknowledges and agrees that the initial franchise fee represents payment for the initial grant of the rights to use the Trademarks and Licensed Methods, that the Franchisor has earned the initial franchise fee upon receipt thereof and that the fee is under no circumstances refundable to the Franchisee after it is paid, unless otherwise specifically set forth in this Agreement. 5. DEVELOPMENT OF FRANCHISED LOCATION 5.01. APPROVAL OF LEASE. The Franchisee shall obtain the Franchisor's prior written approval before executing any lease or purchase agreement for the Franchised Location. Any lease for the Franchised Location shall, at the option of the Franchisor, contain a provision: (1) allowing for assignment of the lease to the Franchisor in the event that this Agreement is terminated or not renewed for any reason; (2) giving the Franchisor the right to cure any default by the Franchisee under such lease; and (3) providing the Franchisor with the right, exercisable upon and as a condition of the approval of the Franchised Location, to execute the lease agreement or other document providing entitlement to the use of the Franchised Location in its own name or jointly with the Franchisee as lessee and, upon the exercise of such option, the - 3 - Franchisor shall provide the Franchisee with the right to use the premises as its sublessee, assignee, or other similar capacity upon the same terms and conditions as obtained by the Franchisor. The Franchisee shall deliver a copy of the signed lease for the Franchised Location to the Franchisor within fifteen (15) days of its execution. The Franchisee acknowledges that approval of a lease for the Franchised Location by the Franchisor does not constitute a recommendation, endorsement or guarantee by the Franchisor of the suitability of the location or the lease and the Franchisee should take all steps necessary to ascertain whether such location and lease are acceptable to the Franchisee. 5.02. CONVERSION AND DESIGN. The Franchisee acknowledges that the layout, design, decoration and color scheme of ROCKY MOUNTAIN CHOCOLATE FACTORY Businesses are an integral part of the Franchisor's proprietary Licensed Methods and accordingly, the Franchisee shall convert, design and decorate the Franchised Location in accordance with the Franchisor's plans and specifications. The Franchisee shall also obtain the Franchisor's written consent to any conversion, design or decoration of the premises before remodeling or decorating begins, recognizing that such remodeling, decoration and any related costs are the Franchisee's sole responsibility. 5.03. SIGNS. The Franchisee shall purchase or otherwise obtain for use at the Franchised Location and in connection with the ROCKY MOUNTAIN CHOCOLATE FACTORY Business signs which comply with the standards and specifications of the Franchisor as set forth in the Operations Manual, as that term is defined in Section 8.01. It is the Franchisee's sole responsibility to insure that any signs comply with applicable local ordinances, building codes and zoning regulations. Any modifications to the Franchisor's standards and specifications for signs which must be made due to local ordinances, codes or regulations shall be submitted to the Franchisor for prior written approval. The Franchisee acknowledges the Trademarks, or any other name, symbol or identifying marks on any signs shall only be used in accordance with the Franchisor's standards and specifications and only with the prior written approval of the Franchisor. 5.04. EQUIPMENT. The Franchisee shall purchase or otherwise obtain for use at the Franchised Location and in connection with the ROCKY MOUNTAIN CHOCOLATE FACTORY Business equipment of a type and in an amount which complies with the standards and specifications of the Franchisor. The Franchisee acknowledges that the type, quality, configuration, capability and/or performance of the equipment are all standards and specifications which are a part of the Licensed Methods and therefore such equipment must be purchased, leased, or otherwise obtained in accordance with the Franchisor's standards and specifications and only from suppliers or other sources approved by the Franchisor. The Franchisor reserves the right to require the Franchisee to purchase or lease computer hardware and software for use in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The Franchisor also reserves the right to require that it be given reasonable access to information and data regarding the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business by computer modem. - 4 - 5.05. PERMITS AND LICENSES. The Franchisee agrees to obtain all such permits and certifications as may be required for the lawful construction and operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business together with all certifications from government authorities having jurisdiction over the site that all requirements for construction and operation have been met, including without limitation, zoning, access, sign, health, safety requirements, building and other required construction permits, licenses to do business and fictitious name registrations, sales tax permits, health and sanitation permits and ratings and fire clearances. Franchisee agrees to obtain all customary contractors' sworn statements and partial and final lien waivers for construction, remodeling, decorating and installation of equipment at the Franchised Location. Copies of all subsequent inspection reports, warnings, certificates and ratings issued by any governmental entity during the term of this Agreement in connection with the conduct of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business which indicates the Franchisee's failure to meet or maintain the highest governmental standards, or less than full compliance by the Franchisee with any applicable law, rule or regulation, shall be forwarded to the Franchisor within five days of the Franchisee's receipt thereof. 5.06. COMMENCEMENT OF OPERATIONS. Unless otherwise agreed in writing by the Franchisor and the Franchisee, the Franchisee has 180 days from the date of this Agreement within which to complete the initial training program, described in Section 6.01 of this Agreement, select and develop the Franchised Location and commence operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The Franchisor will extend the time in which the Franchisee has to commence operations for a reasonable period of time in the event factors beyond the Franchisee's reasonable control prevent the Franchisee from meeting this development schedule, so long as the Franchisee has made reasonable and continuing efforts to comply with such development obligations and the Franchisee requests, in writing, an extension of time in which to have its ROCKY MOUNTAIN CHOCOLATE FACTORY Business established before such development period lapses. 6. TRAINING 6.01. INITIAL TRAINING PROGRAM. The Franchisee or, if the Franchisee is not an individual, the person designated by the Franchisee to assume primary responsibility for the management of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, ("General Manager") is required to attend and successfully complete the initial training program which is offered by the Franchisor at one of the Franchisor's designated training facilities. Up to three individuals are eligible to participate in the Franchisor's initial training program without charge of a tuition or fee. The Franchisee shall be responsible for any and all traveling and living expenses incurred in connection with attendance at the training program. At least one individual must successfully complete the initial training program prior to the Franchisee's commencement of operation of its ROCKY MOUNTAIN CHOCOLATE FACTORY Business. 6.02. LENGTH OF TRAINING. The initial training program shall consist of ten (10) days of instruction at a location designated by the Franchisor; provided, however, that the Franchisor - 5 - reserves the right to waive a portion of the training program or alter the training schedule, if in the Franchisor's sole discretion, the Franchisee or General Manager has sufficient prior experience or training. 6.03. ADDITIONAL TRAINING. From time to time, the Franchisor may present seminars, conventions or continuing development programs or conduct meetings for the benefit of the Franchisee. The Franchisee or its General Manager shall be required to attend any ongoing mandatory seminars, conventions, programs or meetings as may be offered by the Franchisor. The Franchisor shall give the Franchisee at least thirty (30) days prior written notice of any on- going seminar, convention or program which is deemed mandatory. The Franchisor shall not require that the Franchisee attend any ongoing training more often than once a year. All mandatory training will be offered without charge of a tuition or fee; provided, however, the Franchisee will be responsible for all traveling and living expenses which are associated with attendance at the same. 7. DEVELOPMENT ASSISTANCE 7.01. FRANCHISOR'S DEVELOPMENT ASSISTANCE. The Franchisor shall provide the Franchisee with assistance in the initial establishment of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business as follows: (a) Provision of the initial training program to be conducted at the Franchisor's designated training facilities or at another location designated by the Franchisor, as described in Article 6 above. (b) Provision of written specifications for a Franchised Location which shall include, without limitation, specifications for space requirements, build out and the demographics and character of surrounding area. The Franchisee acknowledges that the Franchisor shall have no other obligation to provide assistance in the selection and approval of a Franchised Location other than the provision of such written specifications and approval or disapproval of a proposed Franchised Location, which approval or disapproval shall be based on information submitted to the Franchisor in a form sufficient to assess the proposed location as may be reasonably required by the Franchisor. (c) Advice regarding the required conversion, design and decoration of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business premises, plus specifications concerning signs, decor and equipment. (d) Advice regarding the selection of suppliers of equipment, items and materials used and inventory offered for sale in connection with the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. After execution of this Agreement, the Franchisor will provide the Franchisee with a list of approved suppliers, if any, of such equipment, items, materials and inventory and, if available, a description of any national or central - 6 - purchase and supply agreements offered by such approved suppliers for the benefit of ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees. (e) Provision of an operations manual in accordance with Section 8 below. (f) As the Franchisor may reasonably schedule, and depending on availability of personnel, the Franchisor will make available to the Franchisee at or close to the commencement of the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business a representative ("Site Representative") to be present during the opening of the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business. There will be no charge to the Franchisee for this service provided by the Franchisor. The Site Representative will assist the Franchisee's employees in opening the Business, unless in the Franchisor's determination, the Franchisee or the General Manager have had sufficient prior training or experience. 8. OPERATIONS MANUAL 8.01. OPERATIONS MANUAL. The Franchisor agrees to provide to the Franchisee one or more manuals, technical bulletins, cookbooks and recipes or other written materials (collectively referred to as "Operations Manual") covering Candy ordering, manufacturing, processing and stocking and other operating and marketing techniques for the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The Franchisee agrees that it shall comply with the Operations Manual as an essential aspect of its obligations under this Agreement and failure by the Franchisee to substantially comply with the Operations Manual may be considered by the Franchisor to be a breach of this Agreement. 8.02. CONFIDENTIALITY OF OPERATIONS MANUAL CONTENTS. The Franchisee agrees to use the Trademarks and Licensed Methods only as specified in the Operations Manual. The Operations Manual is the sole property of the Franchisor and shall be used by the Franchisee only during the term of this Agreement and in strict accordance with the terms and conditions hereof. The Franchisee shall not duplicate the Operations Manual nor disclose its contents to persons other than its employees or officers who have signed a confidentiality and noncompetition agreement in a form approved by the Franchisor. The Franchisee shall return the Operations Manual to the Franchisor upon the expiration, termination or assignment of this Agreement. 8.03. CHANGES TO OPERATIONS MANUAL. The Franchisor reserves the right to revise the Operations Manual from time to time as it deems necessary to update or change operating and marketing techniques or standards and specifications. The Franchisee, within 30 days of receiving any updated information, shall in turn update its copy of the Operations Manual as instructed by the Franchisor and shall conform its operations with the updated provisions within a reasonable time thereafter. The Franchisee acknowledges that a master copy of the Operations Manual maintained by the Franchisor at its principal office shall be controlling in the event of a dispute relative to the content of any Operations Manual. - 7 - 9. OPERATING ASSISTANCE 9.01. FRANCHISOR'S SERVICES. The Franchisor agrees that, during the Franchisee's operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the Franchisor shall make available to the Franchisee the following services: (a) Upon the reasonable request of the Franchisee, consultation by telephone regarding the continued operation and management of a ROCKY MOUNTAIN CHOCOLATE FACTORY Business and advice regarding the retail services, product quality control, inventory issues, customer relations issues and similar advice. (b) Access to advertising and promotional materials as may be developed by the Franchisor, the cost of which may be passed on to the Franchisee at the Franchisor's option. (c) On-going updates of information and programs regarding the candy industry, the ROCKY MOUNTAIN CHOCOLATE FACTORY concept and related Licensed Methods, including, without limitation, information about special or new products which may be developed and made available to ROCKY MOUNTAIN CHOCOLATE FACTORY Franchisees. (d) The Franchisor shall make the initial training program available to replacement or additional General Managers during the term of this Agreement. The Franchisor reserves the right to charge a tuition or fee in an amount payable in advance, commensurate with the then current published prices of the Franchisor for such training. The Franchisee shall be responsible for all travel and living expenses incurred by its personnel during the training program. Further, the availability of the training programs shall be subject to space considerations and prior commitments to new ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees. 9.02. ADDITIONAL FRANCHISOR SERVICES. Although not obligated to do so, upon the reasonable request of the Franchisee, the Franchisor may make its employees or designated agents available to the Franchisee for on-site advice and assistance in connection with the on-going operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business governed by this Agreement. In the event that the Franchisee requests such additional assistance and the Franchisor agrees to provide the same, the Franchisor reserves the right to charge the Franchisee for all travel, lodging, living expenses, telephone charges and other identifiable expenses associated with such assistance, plus a fee based on the time spent by each employee on behalf of the Franchisee, which fee will be charged in accordance with the then current daily or hourly rates being charged by Franchisor for assistance. - 8 - 10. FRANCHISEE'S OPERATIONAL COVENANTS 10.01. BUSINESS OPERATIONS. The Franchisee acknowledges that it is solely responsible for the successful operation of its ROCKY MOUNTAIN CHOCOLATE FACTORY Business and that the continued successful operation thereof is, in part, dependent upon the Franchisee's compliance with this Agreement and the Operations Manual. In addition to all other obligations contained in this Agreement and in the Operations Manual, the Franchisee covenants that: (a) The Franchisee shall maintain clean, efficient and high quality ROCKY MOUNTAIN CHOCOLATE FACTORY Business operations and shall operate the business in accordance with the Operations Manual and in such a manner as not to detract from or adversely reflect upon the name and reputation of the Franchisor and the goodwill associated with the ROCKY MOUNTAIN CHOCOLATE FACTORY name and Trademarks. (b) The Franchisee will conduct itself and operate its ROCKY MOUNTAIN CHOCOLATE FACTORY Business in compliance with all applicable laws, health department regulations and other ordinances and in such a manner so as to promote a good public image in the business community. In connection therewith, the Franchisee will be solely and fully responsible for obtaining any and all licenses to carry on the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The Franchisee shall promptly forward to the Franchisor copies of all health department, fire department, building department and other similar reports of inspections as and when they become available. (c) The Franchisee acknowledges that proper management of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business is important and shall insure that the Franchisee or a designated General Manager who has completed the Franchisor's initial training program be responsible for the management of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business after commencement of Business operations and be present at the Franchised Location during operation of the Business. (d) The Franchisee shall offer only authorized products and services as are more fully described in the Operations Manual, which may include, without limitation, Candy, Store-Made Candy, Candy-Related Items, Items and other authorized confectionery food and beverage products. The Franchisee shall offer all types of products and services as from time to time may be prescribed by the Franchisor and shall refrain from offering any other types of products or services, or operating or engaging in any other type of business or profession, from or through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, including, without limitation, filling "Wholesale Orders", defined below, any catering or off-premises sales, without the prior written consent of the Franchisor. "Wholesale Orders" are defined as those orders or sales where the principal purpose of the purchase is for resale, not consumption, or any sale other than those sold over the counter at a price other than that price charged to the general public; provided, however, that volume discounted sales made on the premises at the Franchised Location - 9 - to a single purchaser, not for resale, and discounted sales made on the premises at the Franchised Location to charitable organizations for fund-raising purposes shall be permitted. Candy, Store-Made Candies, Candy-Related Items and Items shall never be sold in containers or bags other than those supplied by the Franchisor or other supplier approved by the Franchisor. (e) The Franchisee shall promptly pay when due all taxes and other obligations owed to third parties in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, including without limitation, unemployment and sales taxes, and any and all accounts or other indebtedness of every kind incurred by the Franchisee in the conduct of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. In the event of a bona fide dispute as to the liability for taxes assessed or other indebtedness, the Franchisee may contest the validity or the amount of the tax or indebtedness in accordance with procedures of the taxing authority or applicable law; however, in no event shall the Franchisee permit a tax sale or seizure by levy or execution or similar writ or warrant, or attachment by a creditor to occur against the premises of the Franchised Location, or any improvement thereon. (f) The Franchisee shall subscribe for and maintain not less than one separate telephone number for its ROCKY MOUNTAIN CHOCOLATE FACTORY Business at the Franchised Location, which number(s) shall be listed and identified exclusively with the ROCKY MOUNTAIN CHOCOLATE FACTORY Business in all official telephone directories and in all advertising in which such number(s) appear and shall be separate and distinct from all other telephone numbers subscribed for by the Franchisee. (g) The Franchisee shall comply with all agreements with third parties related to the ROCKY MOUNTAIN CHOCOLATE FACTORY Business including, in particular, all provisions of any premises lease. (h) The Franchisee and all employees of the Franchisee shall adhere to reasonable grooming and dress code guidelines while on duty at the Franchised Location. The Franchisee is required, at the Franchisee's expense, to purchase specified wearing apparel from suppliers approved by the Franchisor. The Franchisor has the right, in its sole and absolute discretion, to change or modify such dress code guidelines. (i) The Franchisee agrees to renovate, refurbish, remodel or replace, at its own expense, the real and personal property and equipment used in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, when reasonably required by the Franchisor in order to comply with the image, standards of operation and performance capability established by the Franchisor from time to time. If the Franchisor changes its image or standards of operation, it shall give the Franchisee a reasonable period of time within which to comply with such changes. - 10 - (j) The Franchisee shall at all times during the term of this Agreement own and control the ROCKY MOUNTAIN CHOCOLATE FACTORY Business authorized hereunder. Upon request of the Franchisor, the Franchisee shall promptly provide satisfactory proof of such ownership to the Franchisor. The Franchisee represents that the Statement of Ownership, attached hereto as EXHIBIT III and by this reference incorporated herein, is true, complete, accurate and not misleading, and, in accordance with the information contained in the Statement of Ownership, the controlling ownership of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business is held by the Franchisee. The Franchisee shall promptly provide the Franchisor with a written notification if the information contained in the Statement of Ownership changes at any time during the term of this Agreement and shall comply with the applicable transfer provisions contained in Article 16 herein. (k) The Franchisee shall at all times during the term of this Agreement keep its ROCKY MOUNTAIN CHOCOLATE FACTORY Business open during the business hours as may be designated by the Franchisor from time to time in the Operations Manual. (l) Unless notified in writing otherwise by the Franchisor, all Candy and related products shall be sold and shipped to the Franchisee on a net 30-day basis, or according to the then current payment terms set by the Franchisor. The Franchisor reserves the right to charge interest at the rate of 1.5% per month if the Franchisee fails to pay for its orders on time and the Franchisor reserves the right to discontinue shipment of products to the Franchisee if the Franchisee is repeatedly delinquent in paying for its products, in the Franchisor's sole discretion. The Franchisee may be required to "prepay" factory orders, notwithstanding the payment policy set forth above, in the event of poor payment performance. The Franchisor reserves the right to change payment terms and policies at any time. The Franchisor also reserves the right to change the price for Candy and Items from time to time as may be set forth in the most recent price bulletin sent to all franchisees or the then current Operations Manual. 11. ROYALTIES 11.01. MONTHLY ROYALTY. The Franchisee agrees to pay to the Franchisor a monthly royalty ("Royalty") equal to five percent (5%) of the total amount of its Gross Retail Sales, defined in Section 11.02 below, generated from or through its ROCKY MOUNTAIN CHOCOLATE FACTORY Business. 11.02. GROSS RETAIL SALES. "Gross Retail Sales" shall be defined as receipts and income of any kind from all products or services sold from or through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, including any such sale of products or services made for cash or upon credit, or partly for cash and partly for credit, regardless of collection of charges for which credit is given, less returns for which refunds are made, provided that the refund shall not exceed the sales price and exclusive of discounts, sales taxes and other taxes, amounts - 11 - received in settlement of a loss of merchandise, shipping expenses paid by the customer and discount sales to corporations or to charities for fund-raising purposes. "Gross Retail Sales" shall also include the fair market value of any services or products received by the Franchisee in barter or exchange for its services and products. 11.03. ROYALTY PAYMENTS. The Franchisee agrees that Royalty payments shall be paid monthly and sent to the Franchisor, post-marked no later than the 15th of each month based on Gross Retail Sales for the immediately preceding month. Royalty payments shall be accompanied by monthly reports, as more fully described in Section 15 hereof, and standard transmittal forms containing information regarding the Franchisee's Gross Retail Sales and such additional information as may be requested by the Franchisor. The Franchisor reserves the right to require Royalty payments be made on a weekly or bi-weekly basis if the Franchisee does not timely or fully submit the required payments or reports. The Franchisor shall have the right to verify such Royalty payments from time to time as it deems necessary, in any reasonable manner. In the event that the Franchisee fails to pay any Royalties within 14 days after they are due, the Franchisee shall, in addition to such Royalties, pay a late charge equivalent to eighteen percent (18%) of the late Royalty payment; provided, however, in no event shall the Franchisee be required to pay a late payment at a rate greater than the maximum interest rate permitted by applicable law. If the Franchisee pays Royalties with a check returned for non-sufficient funds more than one time in any calendar year, in addition to all other remedies which may be available, the Franchisor shall have the right to require that Royalty payments be made by certified or cashier's checks. 12. ADVERTISING 12.01. APPROVAL OF ADVERTISING. The Franchisee shall obtain the Franchisor's prior written approval of all written advertising or other marketing or promotional programs regarding the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, including, without limitation, "Yellow Pages" advertising, newspaper ads, flyers, brochures, coupons, direct mail pieces, specialty and novelty items and radio and television advertising. The proposed written advertising or a description of the marketing or promotional program shall be submitted to the Franchisor at least ten (10) days prior to publication, broadcast or use. The Franchisee acknowledges that advertising and promoting the ROCKY MOUNTAIN CHOCOLATE FACTORY Business in accordance with the Franchisor's standards and specifications is an essential aspect of the Licensed Methods, and the Franchisee agrees to comply with all advertising standards and specifications. 12.02. LOCAL ADVERTISING. The Franchisor reserves the right to require the Franchisee to spend up to one percent (1%) of monthly Gross Retail Sales on local advertising to create public awareness of the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The Franchisee will submit to the Franchisor an accounting of the amounts spent on advertising within 30 days following the end of each calendar quarter. If the Franchisor requires its franchisees to advertise locally as described above, all Franchisor-owned Businesses will be - 12 - required to spend money for local advertising on an equal percentage basis with all franchised Businesses. 12.03. MARKETING AND PROMOTION FEE. The Franchisee shall pay to the Franchisor, in addition to Royalties, a fee of one percent (1%) of the total amount of the Franchisee's Gross Retail Sales ("Marketing and Promotion Fee"). The Marketing and Promotion Fee shall be in addition to and not in lieu of the Franchisee's expenditures for local advertising, as described in paragraph 12.02 above. The following terms and conditions will apply: (a) The Marketing and Promotion Fee shall be payable concurrently with the payment of the Royalties, mailed to the Franchisor, postmarked no later than the 15th day of each month, for all Marketing and Promotion Fees based on Gross Retail Sales for the immediately preceding month. (b) The Marketing and Promotion Fees will be subject to the same late charges as the Royalties, in an amount and manner set forth in paragraph 12.03 above. (c) Upon written request by the Franchisee, the Franchisor will make available to the Franchisee, no later than 120 days after the end of each fiscal year, an annual financial statement which indicates how the Marketing and Promotion Fees have been spent. (d) The Marketing and Promotion Fees, will be administered by the Franchisor, in its sole discretion, and may be used for production and placement of point of purchase advertising, in-store signage, in-store promotions, media advertising, direct mailings, brochures, collateral material advertising, surveys of advertising effectiveness, or other advertising or public relations expenditures relating to advertising the Franchisee's services and products. (e) The Franchisor may reimburse itself for independent audits, reasonable accounting, bookkeeping, reporting and legal expenses, taxes and other reasonable direct and indirect expenses as may be incurred by the Franchisor or its authorized representatives in connection with the programs funded by the Marketing and Promotion Fees. The Franchisor will not be liable for any act or omission with respect to such Marketing and Promotion Fees which is consistent with this Agreement and is done in good faith. 12.04. REGIONAL ADVERTISING PROGRAMS. Although not obligated to do so, the Franchisor reserves the right to allocate all or a portion of the Marketing and Promotion Fees as may be collected in accordance with paragraph 12.03 above toward a regional advertising program for the benefit of ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees located within a particular region. The Franchisor has the right, in its sole discretion, to determine the composition of all geographic territories and market areas for the implementation of such regional advertising and promotion campaigns and to require that the Franchisee participate in such regional advertising programs as and when they may be established by the Franchisor. If a - 13 - regional advertising program is implemented on behalf of a particular region by the Franchisor, the Franchisor, to the extent reasonably calculable, will only use contributions from ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees within such region for the particular regional advertising program. The Franchisor also reserves the right to establish an advertising cooperative for a particular region to enable the cooperative to self-administer the regional advertising program. If a regional advertising cooperative is established by the Franchisor, the Franchisee agrees that it will participate in the same. 13. QUALITY CONTROL 13.01. COMPLIANCE WITH OPERATIONS MANUAL. The Franchisee agrees to maintain and operate the ROCKY MOUNTAIN CHOCOLATE FACTORY Business in compliance with this Agreement and the standards and specifications contained in the Operations Manual, as the same may be modified from time to time by the Franchisor. 13.02. STANDARDS AND SPECIFICATIONS. The Franchisor will make available to the Franchisee standards and specifications for products and services offered at or through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business and the candy processing recipes, uniforms, materials, forms, menu boards, items and supplies used in connection with the franchised business. The Franchisor reserves the right to change standards and specifications for services and products offered at or through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business or for the candy processing recipes, uniforms, materials, forms, items and supplies used in connection with the franchised business upon 30 days prior written notice to the Franchisee. 13.03. INSPECTIONS. The Franchisor shall have the right to examine the Franchised Location, including the inventory, products, equipment, materials or supplies, to ensure compliance with all standards and specifications set by the Franchisor. The Franchisor shall conduct such inspections during regular business hours and the Franchisee may be present at such inspections. The Franchisor, however, reserves the right to conduct the inspections without prior notice to the Franchisee. 13.04. RESTRICTIONS ON SERVICES AND PRODUCTS. The Franchisee will be required to purchase any and all of its Candy, including cookie dough, for its ROCKY MOUNTAIN CHOCOLATE FACTORY Business from the Franchisor or its designee. Candy shall consist of any and all varieties from time to time made available to the Franchisor's franchisees by the Franchisor and its designated suppliers. The parties hereby acknowledge the uniqueness and importance of Candy being prepared by the Franchisor or its designee in order to maintain the uniformity, quality and uniqueness of Candy, and therefore the Franchisor and its designees are hereby appointed the Franchisee's exclusive source of Candy. The Franchisee is prohibited from offering or selling any products or services not authorized by Franchisor, including, without limitation, operating a catering or wholesale business as part of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. However, if the Franchisee proposes to offer, conduct or - 14 - utilize any products, services, materials, forms, items and supplies for use in connection with or sale through the ROCKY MOUNTAIN CHOCOLATE FACTORY Business which are not previously approved by the Franchisor as meeting its specifications, the Franchisee shall first notify the Franchisor in writing requesting approval. The Franchisor may, in its sole discretion, for any reason whatsoever, elect to withhold such approval; however, in order to make such determination, the Franchisor may require submission of specifications, information, or samples of such products, services, materials, forms, items or supplies. The Franchisor will advise the Franchisee within a reasonable time whether such products, services, materials, forms, items or supplies meet its specifications. 13.05. APPROVED SUPPLIERS. The Franchisee shall purchase all products, services, supplies and materials required for the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business licensed herein, from manufacturers, suppliers or distributors designated by the Franchisor or, if there is no designated supplier for a particular product, service, supply or material, from such other suppliers who meet all of the Franchisor's specifications and standards as to quality, composition, finish, appearance and service, and who shall adequately demonstrate their capacity and facilities to supply the Franchisee's needs in the quantities, at the times, and with the reliability requisite to an efficient operation. 13.06. REQUEST TO CHANGE SUPPLIER. In the event the Franchisee desires to purchase products, services, supplies or materials from manufacturers, suppliers or distributors other than those previously approved by the Franchisor, the Franchisee shall, prior to purchasing any such products, services, supplies or materials, give the Franchisor a written request to change supplier. In the event the Franchisor rejects the Franchisee's requested new manufacturer, supplier or distributor, the Franchisor must, within sixty (60) days of the receipt of the Franchisee's request to change supplier notify the Franchisee in writing of its rejection. Failure to notify the Franchisee within such time period shall constitute a waiver of any and all objections by the Franchisor to the new manufacturer, supplier or distributor submitted by the Franchisee. The Franchisor may continue from time to time to inspect any manufacturer's, suppliers, or distributor's facilities and products to assure proper production, processing, storing and transportation of products, services, supplies or materials to be purchased from the manufacturer, supplier or distributor by the Franchisee. Permission for such inspection shall be a condition of the continued approval of such manufacturer, supplier or distributor. 13.07. APPROVAL OF INTENDED SUPPLIER. The Franchisor may at its sole discretion, for any reason whatsoever, elect to withhold approval of the manufacturer, supplier or distributor; however, in order to make such determination, the Franchisor may require that samples from a proposed new supplier be delivered to the Franchisor for testing prior to approval and use. A charge not to exceed the actual cost of the test may be made by the Franchisor and shall be paid by the Franchisee. - 15 - 14. TRADEMARKS, TRADE NAMES, AND PROPRIETARY INTERESTS 14.01. TRADEMARKS. The Franchisee hereby acknowledges that the Franchisor has the sole right to license and control the Franchisee's use of the ROCKY MOUNTAIN CHOCOLATE FACTORY service mark and other of the Trademarks, and that such marks shall remain under the sole and exclusive ownership and control of the Franchisor. The Franchisee acknowledges that it has not acquired any right, title or interest in such marks except for the right to use such marks in the operation of its ROCKY MOUNTAIN CHOCOLATE FACTORY Business as it is governed by this Agreement. 14.02. NO USE OF OTHER MARKS. The Franchisee further agrees that no service mark other than "ROCKY MOUNTAIN CHOCOLATE FACTORY" or such other Trademarks as may be specified by the Franchisor shall be used in the marketing, promotion or operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. 14.03. LICENSED METHODS. The Franchisee hereby acknowledges that the Franchisor owns and controls the distinctive plan for the establishment, operation and promotion of ROCKY MOUNTAIN CHOCOLATE FACTORY Business and all related licensed methods of doing business, previously defined as the "Licensed Methods", which include, but are not limited to, gourmet chocolate specialty recipes and cooking methods, confectionery ordering, processing, manufacturing, stocking and inventory control, technical equipment standards, order fulfillment methods and customer relations, marketing techniques, written promotional materials, advertising, and accounting systems, all of which constitute trade secrets of the Franchisor, and the Franchisee acknowledges that the Franchisor has valuable rights in and to such trade secrets. The Franchisee further acknowledges that it has not acquired any right, title or interest in the Licensed Methods except for the right to use the Licensed Methods in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business as it is governed by this Agreement. 14.04. EFFECT OF TERMINATION. In the event this Agreement is terminated for any reason, the Franchisee shall immediately cease using any of the Licensed Methods and Trademarks, trade names, trade dress, trade secrets, copyrights or any other symbols used to identify the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, and all rights the Franchisee had to the same shall automatically terminate. The Franchisee agrees to execute any documents of assignment as may be necessary to transfer any rights the Franchisee may possess in and to the Trademarks. 14.05. TRADEMARK INFRINGEMENT. The Franchisee agrees to notify the Franchisor in writing of any possible infringement or illegal use by others of a trademark the same as or confusingly similar to the Trademarks which may come to its attention. The Franchisee acknowledges that the Franchisor shall have the right, in its sole discretion, to determine whether any action will be taken on account of any possible infringement or illegal use. The Franchisor may commence or prosecute such action in the Franchisor's own name and may join the Franchisee as a party thereto if the Franchisor determines it to be reasonably necessary for the continued protection and quality control of the Trademarks and Licensed Methods. The - 16 - Franchisor shall bear the reasonable cost of any such action, including attorneys' fees. The Franchisee agrees to fully cooperate with the Franchisor in any such litigation. 14.06. FRANCHISEE'S BUSINESS NAME. The Franchisee acknowledges that the Franchisor has a prior and superior claim to the ROCKY MOUNTAIN CHOCOLATE FACTORY trade name. The Franchisee shall not use the words "ROCKY MOUNTAIN CHOCOLATE FACTORY" in the legal name of its corporation, partnership or any other business entity used in conducting the business provided for in this Agreement. The Franchisee also agrees not to register or attempt to register a trade name using the word "ROCKY MOUNTAIN CHOCOLATE FACTORY" in the Franchisee's name or that of any other person or business entity, without prior written consent of the Franchisor. When this Agreement is terminated, the Franchisee shall execute any assignment or other document the Franchisor requires to transfer to itself any rights the Franchisee may possess in a trade name utilizing the word ROCKY MOUNTAIN CHOCOLATE FACTORY or any other Trademark owned by the Franchisor. The Franchisee further agrees that it will not identify itself as being "Rocky Mountain Chocolate Factory, Inc." or as being associated with the Franchisor in any manner other than as a franchisee or licensee. The Franchisee further agrees that in all advertising and promotion and promotional materials it will display it business name only in obvious conjunction with the phrase "ROCKY MOUNTAIN CHOCOLATE FACTORY Licensee" or "ROCKY MOUNTAIN CHOCOLATE FACTORY Franchisee" or with such other words and in such other phrases as may from time to time be prescribed in the Operations Manual, in the Franchisor's sole discretion. 14.07. CHANGE OF MARKS. In the event that the Franchisor, in its sole discretion, shall determine it necessary to modify or discontinue use of any proprietary Trademarks, or to develop additional or substitute marks, the Franchisee shall, within a reasonable time after receipt of written notice of such a modification or discontinuation from the Franchisor, take such action, at the Franchisee's sole expense, as may be necessary to comply with such modification, discontinuation, addition or substitution. 15. REPORTS, RECORDS AND FINANCIAL STATEMENTS 15.01. FRANCHISEE REPORTS. The Franchisee shall establish and maintain at its own expense a bookkeeping and accounting system which conforms to the specifications which the Franchisor may prescribe from time to time, including the Franchisor's current "Standard Code of Accounts" as described in the Operations Manual. The Franchisee shall supply to the Franchisor such reports in a manner and form as the Franchisor may from time to time reasonably require, including: (a) Monthly summary reports, in a form as may be prescribed by the Franchisor, mailed to the Franchisor postmarked no later than the 15th day of the month and containing information relative to the previous month's operations; and - 17 - (b) Quarterly financial statements, prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), and consisting of a profit and loss statement and balance sheet for the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, mailed to the Franchisor postmarked no later than the 15th day following the end of the calendar quarter, based on operating results of the prior quarter, which shall be submitted in a form approved by the Franchisor and shall be certified by the Franchisee to be correct. The Franchisor reserves the right to disclose data derived from such reports, without identifying the Franchisee, except to the extent identification of the Franchisee is required by law. 15.02. ANNUAL FINANCIAL STATEMENTS. The Franchisee shall, within 90 days after the end of its fiscal year, provide to the Franchisor annual unaudited financial statements, compiled or reviewed by an independent certified public accountant acceptable to and approved by the Franchisor and prepared in accordance with GAAP, and state and federal income tax returns prepared by a certified public accountant. If these financial statements or tax returns show an underpayment of any amounts owed to the Franchisor, these amounts shall be paid to the Franchisor concurrently with the submission of the statements or returns. 15.03. VERIFICATION. Each report and financial statement to be submitted to the Franchisor hereunder shall be signed and verified by the Franchisee. 15.04. BOOKS AND RECORDS. The Franchisee shall maintain all books and records for its ROCKY MOUNTAIN CHOCOLATE FACTORY Business in accordance with generally accepted accounting principles, consistently applied, and preserve these records for at least five years after the fiscal year to which they relate. 15.05. AUDIT OF BOOKS AND RECORDS. The Franchisee shall permit the Franchisor to inspect and audit the books and records of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business at any reasonable time, at the Franchisor's expense. If any audit discloses a deficiency in amounts for payments owed to the Franchisor pursuant to this Agreement, then such amounts shall become immediately payable to the Franchisor by the Franchisee, with interest from the date such payments were due at the lesser of one and one-half percent (1-1/2%) per month or the maximum rate allowed by law. In addition, if it is found by such audit that the Gross Retail Sales of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business have been understated by five percent (5%) or more during the period audited, the Franchisee shall pay all reasonable costs and expenses the Franchisor incurred in connection with such audit. 15.06. FAILURE TO COMPLY WITH REPORTING REQUIREMENTS. If the Franchisee fails to prepare and submit any statement or report as required under this Article 15, then the Franchisor shall have the right to treat the Franchisee's failure as good cause for termination of this Agreement. In addition to all other remedies available to the Franchisor, in the event that the Franchisee fails to prepare and submit any statement or report required under this Article 15 for two consecutive reporting periods, the Franchisor shall be entitled to make an audit, at the - 18 - expense of the Franchisee, of the Franchisee's books, records and accounts, including the Franchisee's bank accounts, which in any way pertain to the Gross Retail Sales of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The statements or reports not previously submitted shall be prepared by or under the direction and supervision of an independent certified public accountant selected by the Franchisor. 16. ASSIGNMENT 16.01. ASSIGNMENT BY FRANCHISEE. The franchise granted herein is personal to the Franchisee and, except as stated below, the Franchisor shall not allow or permit any transfer, assignment, subfranchise or conveyance of this Agreement or any interest hereunder. 16.02. PRE-CONDITIONS TO FRANCHISEE'S ASSIGNMENT. The Franchisee shall not sell, transfer or assign its rights under this Agreement or any interest in it, or any part or portion of any business entity that owns it or all or a substantial portion of the assets of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, unless the Franchisee obtains the Franchisor's written consent and complies with the following requirements: (a) Payment of all amounts due and owing pursuant to this Agreement by the Franchisee to the Franchisor or its affiliates or to third parties whose debts or obligations the Franchisor has guaranteed on behalf of the Franchisee, if any; (b) Agreement by the proposed transferee to satisfactorily complete the initial training program described in this Agreement, which training may be completed by the transferee either prior to or immediately after assignment of this Agreement; (c) Execution of a Franchise Agreement in a form then currently offered by the Franchisor, which shall supersede this Agreement in all respects. If a new Franchise Agreement is signed, the terms thereof may differ from the terms of this Agreement, provided, however, the transferee will not be required to pay any additional initial franchise fee; (d) Provision by the Franchisee of written notice to the Franchisor thirty (30) days' prior to the proposed effective date of the transfer, such notice to contain information reasonably detailed to enable the Franchisor to evaluate the terms and conditions of the proposed transfer; (e) The proposed transferee shall have provided information to the Franchisor sufficient for the Franchisor to assess the proposed transferee's business experience, aptitude and financial qualification, and the Franchisor shall have ascertained that the proposed transferee meets such qualifications; - 19 - (f) Execution by Franchisee of a general release, in a form satisfactory to the Franchisor, of any and all claims against the Franchisor, its affiliates and their respective officers, directors, employees and agents; (g) Payment by the Franchisee or the proposed transferee of $2,500.00; and (h) Agreement by the Franchisee to abide by the post-termination covenant not to compete set forth in Section 19.02 below. 16.03. FRANCHISOR'S APPROVAL OF TRANSFER. The Franchisor has 3O days from the date of the written notice to approve or disapprove in writing, of the Franchisee's proposed assignment. The Franchisee acknowledges that the proposed transferee shall be evaluated for approval by the Franchisor based on the same criteria as is currently being used to assess new franchisees of the Franchisor and that such proposed transferee shall be provided, if appropriate, with such disclosures as may be required by state or federal law. If the Franchisee and its proposed transferee comply with all conditions for assignment set forth herein and the Franchisor has not given the Franchisee notice of its approval or disapproval within such period, approval is deemed granted. 16.04. RIGHT OF FIRST REFUSAL. In the event the Franchisee wishes to sell, transfer or assign its rights under this Agreement or any interest in it, or any part or portion of any business entity that owns it, or all or a substantial portion of the assets of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the Franchisee agrees to grant to the Franchisor a 30 day right of first refusal to purchase such rights, interest or assets on the same terms and conditions as are contained in the written offer to purchase submitted to the Franchisee by the proposed purchaser; provided, however, the following additional terms and conditions shall apply: (a) The Franchisee shall notify the Franchisor of such offer by sending a written notice to the Franchisor (which notice may be the same notice as required by Section 16.02(d) above), enclosing a copy of the written offer from the proposed purchaser; (b) The 30 day right of first refusal period will run concurrently with the period in which the Franchisor has to approve or disapprove the proposed transferee; (c) Such right of first refusal is effective for each proposed transfer and any material change in the terms or conditions of the proposed transfer shall be deemed a separate offer on which a new 30 day right of first refusal shall be given to the Franchisor; (d) If the consideration or manner of payment offered by a third party is such that the Franchisor may not reasonably be required to furnish the same, then the Franchisor may purchase the interest which is proposed to be sold for the reasonable cash equivalent. If the parties cannot agree within a reasonable time on the cash consideration, an independent appraiser shall be designated by the Franchisor, whose determination will be - 20 - binding upon the parties. All expenses of the appraiser shall be paid for equally between the Franchisor and the Franchisee; and (e) If the Franchisor chooses not to exercise its right of first refusal, the Franchisee shall be free to complete the sale, transfer or assignment, subject to compliance with Sections 16.02 and 16.03 above. Absence of a reply to the Franchisee's notice of a proposed sale within the 30 day period is deemed a waiver of such right of first refusal. 16.05. TYPES OF TRANSFERS. The Franchisee acknowledges that the Franchisor's right to approve or disapprove of a proposed sale or transfer, and all other requirements and rights related to such proposed sale or transfer, as provided for above, shall apply (1) if the Franchisee is a partnership or other business association, to the addition or deletion of a partner or members of the association or the transfer of any partnership or membership among existing partners or members; (2) if the Franchisee is a corporation, to any proposed transfer or assignment of 25% or more of the stock of the corporate Franchisee, whether such transfer occurs in a single transaction or several transactions; and (3) if the Franchisee is an individual, to the transfer from such individual or individuals to a corporation controlled by them, in which case the Franchisor's approval will be conditioned upon: (i) the continuing personal guarantee of the individual (or individuals) for the performance of obligations under this Agreement; (ii) the issuance and/or transfer of shares which would affect a change in ownership of 25% or more of the stock in the corporation being conditioned on the Franchisor's prior written approval; (iii) a limitation on the corporation's business activity to that of operating the ROCKY MOUNTAIN CHOCOLATE FACTORY Business and related activities; and (iv) other reasonable conditions. With respect to a proposed transfer as described in subsection (1) and (3) of this paragraph, the Franchisor's right of first refusal to purchase, as set forth above, shall not apply and the Franchisor will waive any transfer fee chargeable to the Franchisee for a transfer under these circumstances. 16.06. ASSIGNMENT BY THE FRANCHISOR. This Agreement is fully assignable by the Franchisor and shall inure to the benefit of any assignee or other legal successor in interest, and the Franchisor shall in such event be fully released from the same. 16.07. FRANCHISEE'S DEATH OR DISABILITY. Upon the death or permanent disability of the Franchisee (or the Franchisee's individual controlling the Franchisee entity), the executor, administrator, conservator, guardian or other personal representative of such person shall transfer the Franchisee's interest in this Agreement or such interest in the Franchisee entity to an approved third party. Such disposition of this Agreement or such interest (including, without limitation, transfer by bequest or inheritance) shall be completed within a reasonable time, not to exceed 120 days from the date of death or permanent disability, and shall be subject to all terms and conditions applicable to transfers contained in this Article 16. Provided, however, that for purposes of this Section 16.07, there shall be no fee charged by the Franchisor for the initial training program offered to the transferee. Failure to transfer the interest in this Agreement or such interest in the Franchisee entity within said period of time shall constitute a breach of this Agreement. For the purposes hereof, the term "permanent disability" shall mean a mental or physical disability, impairment or condition that is reasonably expected to prevent or actually - 21 - does prevent the Franchisee or the owner of a controlling interest in the Franchisee entity from supervising the management and operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business for a period of 120 days from the onset of such disability, impairment or condition. 17. TERM AND EXPIRATION 17.01. TERM. The term of this Agreement is for a period of five years from the date of this Agreement, unless sooner terminated as provided herein. 17.02. RIGHTS UPON EXPIRATION. At the end of the initial term hereof the Franchisee shall have the option to renew its franchise rights for two (2) additional five (5) year terms, by acquiring successor franchise rights, if the Franchisor does not exercise its right not to offer a successor franchise in accordance with paragraph 17.04 below and if the Franchisee: (a) At least 30 days prior to expiration of the term, executes the form of Franchise Agreement then in use by the Franchisor; (b) Has complied with all provisions of this Agreement during the current term, including the payment on a timely basis of all Royalties and other fees due hereunder. "Compliance" shall mean, at a minimum, that the Franchisee has not received any written notification from the Franchisor of breach hereunder more than four times during the term hereof; (c) Upgrades and/or remodels the ROCKY MOUNTAIN CHOCOLATE FACTORY Business and its operations at the Franchisee's sole expense (the necessity of which shall be in the sole discretion of the Franchisor) to conform with the then current Operations Manual; (d) Executes a general release, in a form satisfactory to the Franchisor, of any and all claims against the Franchisor and its affiliates, and their respective officers, directors, employees and agents arising out of or relating to this Agreement; and (e) Pays a successor franchise fee of $100. 17.03. EXERCISE OF OPTION FOR SUCCESSOR FRANCHISE. The Franchisee may exercise its option for a successor franchise by giving written notice of such exercise to the Franchisor not less than 210 days prior to the scheduled expiration of this Agreement. The Franchisee's successor franchise rights shall become effective by signing the Franchise Agreement then currently being offered to new franchisees of the Franchisor. 17.04. CONDITIONS OF REFUSAL. The Franchisor shall not be obligated to offer the Franchisee a successor franchise upon the expiration of this Agreement if the Franchisee fails - 22 - to comply with any of the above conditions of renewal. In such event, except for failure to execute the then current Franchise Agreement or pay the successor franchise fee, the Franchisor shall give notice of expiration at least 180 days prior to the expiration of the term, and such notice shall set forth the reasons for such refusal to offer successor franchise rights. Upon the expiration of this Agreement, the Franchisee shall comply with the provisions of Section 18.02 below. 18. DEFAULT AND TERMINATION 18.01. TERMINATION BY FRANCHISOR-EFFECTIVE UPON NOTICE. The Franchisor shall have the right, at its option, to terminate this Agreement and all rights granted the Franchisee hereunder, without affording the Franchisee any opportunity to cure any default (subject to any state laws to the contrary where state law shall prevail), effective upon receipt of notice by the Franchisee, addressed as provided in Section 22.12, upon the occurrence of any of the following events: (a) ABANDONMENT. If the Franchisee ceases to operate the ROCKY MOUNTAIN CHOCOLATE FACTORY Business or otherwise abandons the ROCKY MOUNTAIN CHOCOLATE FACTORY Business for a period of five consecutive days, or any shorter period that indicates an intent by the Franchisee to discontinue operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, unless and only to the extent that full operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business is suspended or terminated due to fire, flood, earthquake or other similar causes beyond the Franchisee's control and not related to the availability of funds to the Franchisee; (b) INSOLVENCY; ASSIGNMENTS. If the Franchisee becomes insolvent or is adjudicated a bankrupt; or any action is taken by the Franchisee, or by others against the Franchisee under any insolvency, bankruptcy or reorganization act, (this provision may not be enforceable under federal bankruptcy law, 11 U.S.C. Section 101 ET SEQ.), or if the Franchisee makes an assignment for the benefit of creditors, or a receiver is appointed by the Franchisee; (c) UNSATISFIED JUDGMENTS; LEVY; FORECLOSURE. If any material judgment (or several judgments which in the aggregate are material) is obtained against the Franchisee and remains unsatisfied or of record for 30 days or longer (unless a supersedeas or other appeal bond has been filed); or if execution is levied against the Franchisee's business or any of the property used in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business and is not discharged within five days; or if the real or personal property of the Franchisee's business shall be sold after levy thereupon by any sheriff, marshall or constable; (d) CRIMINAL CONVICTION. If the Franchisee is convicted of a felony, a crime involving moral turpitude, or any crime or offense that is reasonably likely, in the sole - 23 - opinion of the Franchisor, to materially and unfavorably affect the Licensed Methods, Trademarks, goodwill or reputation thereof; (e) FAILURE TO MAKE PAYMENTS. If the Franchisee fails to pay any amounts due the Franchisor or affiliates, including any amounts which may be due as a result of any subleases or lease assignments between the Franchisee and the Franchisor, within 10 days after receiving notice that such fees or amounts are overdue; (f) MISUSE OF MARKS. If the Franchisee misuses or fails to follow the Franchisor's directions and guidelines concerning use of the Franchisor's Trademarks and fails to correct the misuse or failure within ten days after notification from the Franchisor; (g) UNAUTHORIZED DISCLOSURE. If the Franchisee intentionally or negligently discloses to any unauthorized person the contents of or any part of the Franchisor's Operations Manual or any other trade secrets or confidential information of the Franchisor; (h) REPEATED NONCOMPLIANCE. If the Franchisee has received two previous notices of default from the Franchisor and is again in default of this Agreement within a 12 month period, regardless of whether the previous defaults were cured by the Franchisee; or (i) UNAUTHORIZED TRANSFER. If the Franchisee sells, transfers or otherwise assigns the Franchise, an interest in the Franchise or the Franchisee entity, this Agreement, the ROCKY MOUNTAIN CHOCOLATE FACTORY Business or a substantial portion of the assets of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business owned by the Franchisee without complying with the provisions of Article 16 above. 18.02. TERMINATION BY FRANCHISOR - THIRTY DAYS NOTICE. The Franchisor shall have the right to terminate this Agreement (subject to any state laws to the contrary, where state law shall prevail), effective upon 30 days written notice to the Franchisee, if the Franchisee breaches any other provision of this Agreement and fails to cure the default during such 30 day period. In that event, this Agreement will terminate without further notice to the Franchisee, effective upon expiration of the 30 day period. Defaults shall include, but not be limited to, the following: (a) FAILURE TO MAINTAIN STANDARDS. The Franchisee fails to maintain the then-current operating procedures and standards established by the Franchisor as set forth herein or in the Operations Manual or otherwise communicated to the Franchisee; (b) DECEPTIVE PRACTICES. The Franchisee engages in any unauthorized business or practice or sells any unauthorized product or service under the Franchisor's Trademarks or under a name or mark which is confusingly similar TO the Franchisor's Trademarks; - 24 - (c) FAILURE TO OBTAIN CONSENT. The Franchisee fails, refuses or neglects to obtain the Franchisor's prior written approval or consent as required by this Agreement; (d) FAILURE TO COMPLY WITH MANUAL. The Franchisee fails or refuses to comply with the then-current requirements of the Operations Manual; or (e) BREACH OF RELATED AGREEMENT. The Franchisee defaults under any term of the sublease or lease assignment for the Franchised Location, any other agreement material to the ROCKY MOUNTAIN CHOCOLATE FACTORY Business or any other Franchise Agreement between the Franchisor and the Franchisee and such default is not cured within the time specified in such sublease, other agreement or other Franchise Agreement. Notwithstanding the foregoing, if the breach is curable, but is of a nature which cannot be reasonably cured within such 30 day period and the Franchisee has commenced and is continuing to make good faith efforts to cure the breach during such 30 day period, the Franchisee shall be given an additional reasonable period of time to cure the same, and this Agreement shall not terminate. 18.03. FRANCHISOR'S REMEDIES. In addition to all other remedies that may be exercised by the Franchisor upon a default by the Franchisee under the terms of this Agreement, the Franchisor reserves the right to collect amounts due from the Franchisee to any third party and to pay the third party directly. If the Franchisor collects any such amounts, the Franchisor in its sole discretion, charge the Franchisee an administrative fee to reimburse the Franchisor for its costs of collecting and paying such amounts. Any administrative fee charged would not exceed 15% of the total amount of money collected. 18.04. RIGHT TO REPURCHASE. Upon termination or expiration of this Agreement for any reason, the Franchisor shall have the option to purchase the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, which may include, at the Franchisor's option, all of the Franchisee's interest, if any, in and to the real estate upon which the ROCKY MOUNTAIN CHOCOLATE FACTORY Business is located, and all buildings and other improvements thereon, including leasehold interests, at fair market value, less any amount apportioned to the goodwill of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business which is attributable to the Franchisor's Trademarks and Licensed Methods, and less any amounts owed to the Franchisor by the Franchisee. The following additional terms shall apply to the Franchisor's exercise of this option: (a) The Franchisor's option hereunder shall be exercisable by providing the Franchisee with written notice of its intention to exercise the option given to the Franchisee no later than the effective date of termination, in the case of termination, or at least 90 days prior to the expiration of the term of the franchise, in the case of non-renewal. (b) In the event that the Franchisor and the Franchisee cannot agree to a fair market value of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, then the - 25 - fair market value shall be determined by an independent third party appraisal. The Franchisor and the Franchisee shall each select one independent, qualified appraiser, and the two so selected shall select a third appraiser, all three to determine the fair market value of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The purchase price shall be the median of the fair market values as determined by the three appraisers. (c) The Franchisor and the Franchisee agree that the terms and conditions of this right and option to purchase may be recorded, if deemed appropriate by the Franchisor, in the real property records and the Franchisor and the Franchisee further agree to execute such additional documentation as may be necessary and appropriate to effectuate such recording. (d) The closing for the purchase of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business will take place no later than 60 days after the termination or nonrenewal date. The Franchisor will pay the purchase price in full at the closing, or, at its option, in five equal consecutive monthly installments with interest at a rate of ten percent per annum. The Franchisee must sign all documents of assignment and transfer as are reasonably necessary for purchase of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business by the Franchisor. In the event that the Franchisor does not exercise the Franchisor's right to repurchase the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business as set forth above, the Franchisee will be free to keep or to sell, after such termination or expiration, to any third party, all of the physical assets of its ROCKY MOUNTAIN CHOCOLATE FACTORY Business; provided, however, that all appearances of the Trademarks are first removed in a manner approved in writing by the Franchisor. The Franchisor will only be obligated to repurchase any assets of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business in the event and to the extent it is required by applicable state or federal law. 18.05. OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR EXPIRATION. The Franchisee is obligated upon termination or expiration of this Agreement to immediately: (a) Pay to the Franchisor all Royalties, other fees, and any and all amounts or accounts payable then owed the Franchisor or its affiliates pursuant to this Agreement, or pursuant to any other agreement, whether written or oral, including subleases and lease assignments, between the parties; (b) Cease to identify itself as a ROCKY MOUNTAIN CHOCOLATE FACTORY Franchisee or publicly identify itself as a former Franchisee or use any of the Franchisor's trade secrets, signs, symbols, devices, trade names, trademarks, or other materials. (c) Immediately cease to identify the Franchised Location as being, or having been, associated with the Franchisor, and immediately cease using any proprietary mark - 26 - of the Franchisor or any mark in any way associated with the ROCKY MOUNTAIN CHOCOLATE FACTORY Trademarks and Licensed Methods; (d) Deliver to the Franchisor all Candy inventory which bears the ROCKY MOUNTAIN CHOCOLATE FACTORY logo, signs, sign-faces, advertising materials, forms and other materials bearing any of the Trademarks or otherwise identified with the Franchisor and obtained by and in connection with this Agreement; (e) Immediately deliver to the Franchisor the Operations Manual and all other information, documents and copies thereof which are proprietary to the Franchisor; (f) Promptly take such action as may be required to cancel all fictitious or assumed names or equivalent registrations relating to its use of any Trademarks which are under the exclusive control of the Franchisor or, at the option of the Franchisor, assign the same to the Franchisor; (g) Notify the telephone company and all telephone directory publishers of the termination or expiration of the Franchisee's right to use any telephone number and any regular, classified or other telephone directory listings associated with any Trademark and to authorize transfer thereof to the Franchisor or its designee. The Franchisee acknowledges that, as between the Franchisee and the Franchisor, the Franchisor has the sole rights to and interest in all telephone, telecopy or facsimile machine numbers and directory listings associated with any Trademark. The Franchisee authorizes the Franchisor, and hereby appoints the Franchisor and any of its officers as the Franchisee's attorney-in-fact, to direct the telephone company and all telephone directory publishers to transfer any telephone, telecopy or facsimile machine numbers and directory listings relating to the ROCKY MOUNTAIN CHOCOLATE FACTORY Business to the Franchisor or its designee, should the Franchisee fail or refuse to do so, and the telephone company and all telephone directory publishers may accept such direction or this Agreement as conclusive of the Franchisor's exclusive rights in such telephone numbers and directory listings and the Franchisor's authority to direct their transfer; and (h) Abide by all restrictive covenants set forth in Article 20 of this Agreement. 18.06. STATE AND FEDERAL LAW. THE PARTIES ACKNOWLEDGE THAT IN THE EVENT THAT THE TERMS OF THIS AGREEMENT REGARDING TERMINATION OR EXPIRATION ARE INCONSISTENT WITH APPLICABLE STATE OR FEDERAL LAW, SUCH LAW SHALL GOVERN THE FRANCHISEE'S RIGHTS REGARDING TERMINATION OR EXPIRATION OF THIS AGREEMENT. - 27 - 19. BUSINESS RELATIONSHIP 19.01. INDEPENDENT BUSINESSPERSONS. The parties agree that each of them are independent businesspersons, their only relationship is by virtue of this Agreement and that no fiduciary relationship is created hereunder. Neither party is liable or responsible for the other's debts or obligations, nor shall either party be obligated for any damages to any person or property directly or indirectly arising out of the operation of the other party's business authorized by or conducted pursuant to this Agreement. The Franchisor and the Franchisee agree that neither of them will hold themselves out to be the agent, employer or partner of the other and that neither of them has the authority to bind or incur liability on behalf of the other. 19.02. PAYMENT OF THIRD PARTY OBLIGATIONS. The Franchisor shall have no liability for the Franchisee's obligations to pay any third parties, including without limitation, any product vendors, or any sales, use, service, occupation, excise, gross receipts, income, property or other tax levied upon the Franchisee, the Franchisee's property, the ROCKY MOUNTAIN CHOCOLATE FACTORY Business or upon the Franchisor in connection with the sales made or business conducted by the Franchisee (except any taxes the Franchisor is required by law to collect from the Franchisee with respect to purchases from the Franchisor). 19.03. INDEMNIFICATION. The Franchisee agrees to indemnify, defend and hold harmless the Franchisor, its subsidiaries and affiliates, and their respective shareholders, directors, officers, employees, agents, successors and assignees, (the "Indemnified Parties") against, and to reimburse them for all claims, obligations and damages described in this paragraph 19.03, any and all third party obligations described in paragraph 19.02 and any and all claims and liabilities directly or indirectly arising out of the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business or arising out of the use of the Trademarks and Licensed Methods in any manner not in accordance with this Agreement. For purposes of this indemnification, claims shall mean and include all obligations, actual and consequential damages and costs reasonably incurred in the defense of any claim against the Indemnified Parties, including, without limitation, reasonable accountants', attorneys' and expert witness fees, costs of investigation and proof of facts, court costs, other litigation expenses and travel and living expenses. The Franchisor shall have the right to defend any such claim against it. This indemnity shall continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement. 20. RESTRICTIVE COVENANTS 20.01. NON-COMPETITION DURING TERM. The Franchisee acknowledges that, in addition to the license of the Trademarks hereunder, the Franchisor has also licensed commercially valuable information which comprises and is a part of the Licensed Methods, including without limitation, recipes, operations, marketing, advertising and related information and materials and that the value of this information derives not only from the time, effort and money which went into its compilation, but from the usage of the same by all the franchisees of the Franchisor using the Trademarks and Licensed Methods. The Franchisee therefore agrees that other than the - 28 - ROCKY MOUNTAIN CHOCOLATE FACTORY Business licensed herein neither the Franchisee nor any of the Franchisee's officers, directors, shareholders or partners, nor any member of his or their immediate families, shall during the term of this Agreement: (a) have any direct or indirect controlling interest as a disclosed or beneficial owner in a "Competitive Business" as defined below; (b) perform services as a director, officer, manager, employee, consultant, representative, agent or otherwise for a Competitive Business; or (c) divert or attempt to divert any business related to, or any customer or account of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business, the Franchisor's business or any other ROCKY MOUNTAIN CHOCOLATE FACTORY franchisee's business, by direct inducement or otherwise, or divert or attempt to divert the employment of any employee of the Franchisor or another franchisee licensed by the Franchisor to use the Trademarks and Licensed Methods, to any Competitive Business by any direct inducement or otherwise. The term "Competitive Business" as used in this Agreement shall mean any business operating, or granting franchises or licenses to others to operate, a retail, wholesale, distribution or manufacturing business deriving more than 5% of its gross receipts from the sale, processing or manufacturing of Candy, Items or other products which are offered in ROCKY MOUNTAIN CHOCOLATE FACTORY Businesses and which constitutes 5% or more of the Gross Retail Sales of any ROCKY MOUNTAIN CHOCOLATE FACTORY Business; provided, however, the Franchisee shall not be prohibited from owning securities in a Competitive Business if such securities are listed on a stock exchange or traded on the over-the-counter market and represent five percent (5%) or less of that class of securities issued and outstanding. 20.02. POST-TERMINATION COVENANT NOT TO COMPETE. Upon termination or expiration of this Agreement for any reason, the Franchisee and its officers, directors, shareholders, and/or partners agree that, for a period of two years commencing on the effective date of termination or expiration, or the date on which the Franchisee ceases to conduct business, whichever is later, neither Franchisee nor its officers, directors, shareholders, and/or partners shall have any direct or indirect interest (through a member of any immediate family of the Franchisee or its Owners or otherwise) as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent or in any other capacity in any Competitive Business, defined in Section 20.01 above, located or operating within a ten mile radius of the Franchised Location or within ten miles of any other franchised or company-owned ROCKY MOUNTAIN CHOCOLATE FACTORY Business. The restrictions of this paragraph shall not be applicable to the ownership of shares of a class of securities listed on a stock exchange or traded on the over-the-counter market that represent five percent or less of the number of shares of that class of securities issued and outstanding. The Franchisee and its officers, directors, shareholders, and/or partners expressly acknowledge that they possess skills and abilities of a general nature and have - 29 - other opportunities for exploiting such skills. Consequently, enforcement of the covenants made in this paragraph will not deprive them of their personal goodwill or ability to earn a living. 20.03. CONFIDENTIALITY OF PROPRIETARY INFORMATION. The Franchisee shall treat all information it receives which comprises or is a part of the Licensed Methods licensed hereunder as proprietary and confidential and will not use such information in an unauthorized manner or disclose the same to any unauthorized person without first obtaining the Franchisor's written consent. The Franchisee acknowledges that the Trademarks and the Licensed Methods have valuable goodwill attached to them, that the protection and maintenance thereof is essential to the Franchisor and that any unauthorized use or disclosure of the Trademarks and Licensed Methods will result in irreparable harm to the Franchisor. 20.04. CONFIDENTIALITY AGREEMENT. The Franchisor reserves the right to require that the Franchisee cause each of its officers, directors, partners, shareholders, and General Manager, and, if the Franchisee is an individual, immediate family members, to execute a Nondisclosure and Noncompetition Agreement containing the above restrictions, in a form approved by the Franchisor. 21. INSURANCE 21.01. INSURANCE COVERAGE. The Franchisee shall procure, maintain and provide evidence of (i) comprehensive general liability insurance for the Franchised Location and its operations with a limit of not less than $1,000,000 combined single limit, or such greater limit as may be required as part of any lease agreement for the Franchised Location; (ii) automobile liability insurance covering all employees of the ROCKY MOUNTAIN CHOCOLATE FACTORY Business with authority to operate a motor vehicle in an amount not less than $1,000,000 or, with the prior written consent of the Franchisor, such lesser amount as may be available at a commercially reasonable rate, but in no event less than any statutorily imposed minimum coverage; (iii) unemployment and worker's compensation insurance with a broad form all-states endorsement coverage sufficient to meet the requirements of the law; and (iv) all-risk personal property insurance in an amount equal to at least 100% of the replacement costs of the contents and tenant improvements located at the ROCKY MOUNTAIN CHOCOLATE FACTORY Business. All of the required policies of insurance shall name the Franchisor as an additional named insured and shall provide for a 3O day advance written notice to the Franchisor of cancellation. 21.02. PROOF OF INSURANCE COVERAGE. The Franchisee will provide proof of insurance to the Franchisor prior to commencement of operations at its ROCKY MOUNTAIN CHOCOLATE FACTORY Business. This proof will show that the insurer has been authorized to inform the Franchisor in the event any policies lapse or are cancelled. The Franchisor has the right to change the minimum amount of insurance the Franchisee is required to maintain by giving the Franchisee prior reasonable notice, giving due consideration to what is reasonable and customary in the similar business. Noncompliance with the insurance provisions set forth herein shall be - 30 - deemed a material breach of this Agreement; in the event of any lapse in insurance coverage, in addition to all other remedies, the Franchisor shall have the right to demand that the Franchisee cease operations of the ROCKY MOUNTAIN CHOCOLATE FACTORY Businesses until coverage is reinstated, or, in the alternative, pay any delinquencies in premium payments and charge the same back to the Franchisee. 22. MISCELLANEOUS PROVISIONS 22.01. GOVERNING LAW/CONSENT TO VENUE AND JURISDICTION. Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Sections 1051 ET SEQ.) or other federal law, this Agreement, the franchise and the relationship between the Franchisor and the Franchisee shall be governed by the laws of the state of Colorado. The Franchisee agrees that the Franchisor may institute any action against the Franchisee in any state or federal court of general jurisdiction in the state of Colorado and the Franchisee irrevocably submits to the jurisdiction of such courts and waives any objection he may have to either the jurisdiction of or venue in such courts. The Franchisee agrees that the only proper venue for any action shall be in the County of La Plata, State of Colorado. 22.02. MODIFICATION. The Franchisor and/or the Franchisee may modify this Agreement only upon execution of a written agreement between the two parties. The Franchisee acknowledges that the Franchisor may modify its standards and specifications and operating and marketing techniques set forth in the Operations Manual unilaterally under any conditions and to the extent in which the Franchisor, in its sole discretion, deems necessary to protect, promote, or improve the Trademarks and the quality of the Licensed Methods, but under no circumstances will such modifications be made arbitrarily without such determination. 22.03. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties and supersedes any and all prior agreements concerning the subject matter hereof. The Franchisee agrees and understands that the Franchisor shall not be liable or obligated for any oral representations or commitments made prior to the execution hereof and that no modifications of this Agreement shall be effective except those in writing and signed by both parties. The Franchisor does not authorize and will not be bound by any representation of any nature other than those expressed in this Agreement. The Franchisee further acknowledges and agrees that no representations have been made to it by the Franchisor regarding projected sales volumes, market potential, revenues, profits of the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Business, or operational assistance other than as stated in this Agreement or in any disclosure document provided by the Franchisor or its representatives. 22.04. DELEGATION BY THE FRANCHISOR. From time to time, the Franchisor shall have the right to delegate the performance of any portion or all of its obligations and duties hereunder to third parties, whether the same are agents of the Franchisor or independent contractors which the Franchisor has contracted with to provide such services. The Franchisee agrees in advance - 31 - to any such delegation by the Franchisor of any portion or all of its obligations and duties hereunder. 22.05. EFFECTIVE DATE. This Agreement shall not be effective until accepted by the Franchisor as evidenced by dating and signing by an officer of the Franchisor. 22.06. REVIEW OF AGREEMENT. The Franchisee acknowledges that it had a copy of this Agreement in its possession for a period of time not less than ten full business days, during which time the Franchisee has had the opportunity to submit same for professional review and advice of the Franchisee's choosing prior to freely executing this Agreement. 22.07. ATTORNEYS' FEES. In the event of any default on the part of either party to this Agreement, in addition to all other remedies, the party in default will pay the aggrieved party all amounts due and all damages, costs and expenses, including reasonable attorneys' fees, incurred by the aggrieved party in any legal action, arbitration or other proceeding as a result of such default, plus interest at the highest rate allowable by law, accruing from the date of such default. 22.08. INJUNCTIVE RELIEF. Nothing herein shall prevent the Franchisor or the Franchisee from seeking injunctive relief to prevent irreparable harm, in addition to all other remedies. 22.09. NO WAIVER. No waiver of any condition or covenant contained in this Agreement or failure to exercise a right or remedy by the Franchisor or the Franchisee shall be considered to imply or constitute a further waiver by the Franchisor or the Franchisee of the same or any other condition, covenant, right, or remedy. 22.10. NO RIGHT TO SET OFF. The Franchisee shall not be allowed to set off amounts owed to the Franchisor for Royalties, fees or other amounts due hereunder, against any monies owed to Franchisee, nor shall the Franchisee in any event withhold such amounts due to any alleged nonperformance by the Franchisor hereunder, which right of set off is hereby expressly waived by the Franchisee. 22.11. INVALIDITY. If any provision of this Agreement is held invalid by any tribunal in a final decision from which no appeal is or can be taken, such provision shall be deemed modified to eliminate the invalid element and, as so modified, such provision shall be deemed a part of this Agreement as though originally included. The remaining provisions of this Agreement shall not be affected by such modification. 22.12. NOTICES. All notices required to be given under this Agreement shall be given in writing, by certified mail, return receipt requested, or by an overnight delivery service providing documentation of receipt, at the address set forth in the first paragraph of this Agreement or at such other addresses as the Franchisor or the Franchisee may designate from time to time, and shall be effectively given when deposited in the United States mails, postage prepaid, or when received via overnight delivery, as may be applicable. - 32 - 22.13. ACKNOWLEDGEMENT. BEFORE SIGNING THIS AGREEMENT, THE FRANCHISEE SHOULD READ IT CAREFULLY WITH THE ASSISTANCE OF LEGAL COUNSEL. THE FRANCHISEE ACKNOWLEDGES THAT: (A) THE SUCCESS OF THE BUSINESS VENTURE CONTEMPLATED HEREIN INVOLVES SUBSTANTIAL RISKS AND DEPENDS UPON THE FRANCHISEE'S ABILITY AS AN INDEPENDENT BUSINESS PERSON AND ITS ACTIVE PARTICIPATION IN THE DAILY AFFAIRS OF THE BUSINESS, AND (B) NO ASSURANCE OR WARRANTY, EXPRESS OR IMPLIED, HAS BEEN GIVEN AS TO THE POTENTIAL SUCCESS OF SUCH BUSINESS VENTURE OR THE EARNINGS LIKELY TO BE ACHIEVED, AND (C) NO STATEMENT, REPRESENTATION OR OTHER ACT, EVENT OR COMMUNICATION, EXCEPT AS SET FORTH IN THIS DOCUMENT, AND IN ANY OFFERING CIRCULAR SUPPLIED TO THE FRANCHISEE IS BINDING ON THE FRANCHISOR IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above set forth. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. By: ----------------------------------- Title: -------------------------------- Date: By: -------------------------------- ----------------------------------- Attest: Title: ------------------------------ -------------------------------- FRANCHISEE: -------------------------------------- -------------------------------------- Individually Date: -------------------------------- Attest: ------------------------------ - 33 - OR: (if a corporation or partnership) -------------------------------------- Company Name By: ----------------------------------- Title: -------------------------------- Date: -------------------------------- Attest: ------------------------------ (11/8/95) - 34 - EXHIBIT I TO FRANCHISE AGREEMENT ADDENDUM TO ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. FRANCHISE AGREEMENT 1. FRANCHISED LOCATION AND PROTECTED TERRITORY. The Franchised Location, set forth in paragraph 3.01 of the Agreement shall be: ________________________ ______________________________________________________________________________, and the Protected Territory described in paragraph 3.02 of the Agreement, shall be: ___________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ 2. DESIGNATED AREA. The Franchisor and the Franchisee acknowledge that the Franchised Location cannot be designated in paragraph 1 above as a specific address because the location has not been selected and approved; therefore, within 120 days following the date of the Agreement, the Franchisee shall take steps to choose and acquire a location for its ROCKY MOUNTAIN CHOCOLATE FACTORY Business within the following geographic area ("Designated Area"): _______________________________________________________________________________ _______________________________________________________________________________ Fully executed this _____ day of _______________, 19__. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. By: ----------------------------------- Title: -------------------------------- FRANCHISEE By: ----------------------------------- Title: -------------------------------- EXHIBIT I-1 TO FRANCHISE AGREEMENT RIDER TO ADDENDUM - LOCATION APPROVAL 1. FRANCHISED LOCATION. The Franchised Location, set forth in paragraph 3.01 of the Agreement shall be: ______________________________________________ ______________________________________________________________________________ 2. LEGAL ADDRESS. The business address for any notices mailed pursuant to paragraph 22.12 of the Agreement shall be changed to read as follows: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 3. PROTECTED TERRITORY. The Protected Territory described in paragraph 3.02 of the Agreement, shall be: ______________________________________________________________________________ ______________________________________________________________________________ Fully executed this ____ day of _________________, 19__. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. By: ----------------------------------- Title: -------------------------------- FRANCHISEE By: ----------------------------------- Title: -------------------------------- EXHIBIT II TO FRANCHISE AGREEMENT GUARANTY AND ASSUMPTION OF FRANCHISEE'S OBLIGATIONS In consideration of, and as an inducement to, the execution of the above Franchise Agreement (the "Agreement") by Rocky Mountain Chocolate Factory, Inc. ("the Franchisor"), each of the undersigned hereby personally and unconditionally: 22.001 Guarantees to the Franchisor and its successors and assigns, for the term of this Agreement, including renewals thereof, that ________________________________________________ ("Franchisee") shall punctually pay and perform each and every undertaking, agreement and covenant set forth in the Agreement; and 22.002 Agrees to be personally bound by, and personally liable for the breach of, each and every provision in the Agreement. Each of the undersigned waives the following: 1. Acceptance and notice of acceptance by the Franchisor of the foregoing undertaking; 2. Notice of demand for payment of any indebtedness or nonperformance of any obligations hereby guaranteed; 3. Protest and notice of default to any party with respect to the indebtedness or nonperformance of any obligations hereby guaranteed; 4. Any right he or she may have to require that any action be brought against Franchisee or any other person as a condition of liability; and 5. Any and all other notices and legal or equitable defenses to which he or she may be entitled. Each of the undersigned consents and agrees that: 1. His or her direct and immediate liability under this guaranty shall be joint and several; 2. He or she shall render any payment or performance required under the Agreement upon demand if Franchisee fails or refuses punctually to do so; 3. Such liability shall not be contingent or conditioned upon pursuit by the Franchisor of any remedies against Franchisee or any other person; and 4. Such liability shall not be diminished, relieved or otherwise affected by any extension of time, credit or other indulgence which the Franchisor may from time to time grant to Franchisee or to any other person, including without limitation the acceptance of any partial payment or performance, or the compromise or release of any claims, none of which shall in any way modify or amend this guaranty, which shall be continuing and irrevocable during the term of the Agreement, including renewals thereof. IN WITNESS WHEREOF, each of the undersigned has affixed his or her signature effective on the same day and year as the Agreement was executed. WITNESS GUARANTOR(S) - ------------------------------------- -------------------------------------- - ------------------------------------- -------------------------------------- - ------------------------------------- -------------------------------------- - ------------------------------------- -------------------------------------- EXHIBIT III TO FRANCHISE AGREEMENT STATEMENT OF OWNERSHIP FRANCHISEE: _________________________________________________________________ TRADE NAME (if different from above): _______________________________________ _____________________________________________________________________________ Form of Ownership (Check One) ____ Individual ____ Partnership ____ Corporation If a Partnership, provide name and address of each partner showing percentage owned, whether active in management, and indicate the state in which the partnership was formed. If a Corporation, give the state and date of incorporation, THE NAMES AND ADDRESSES OF EACH OFFICER AND DIRECTOR, and list the names and addresses of every shareholder showing what percentage of stock is owned by each. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ Franchisee acknowledges that this Statement of Ownership applies to the ROCKY MOUNTAIN CHOCOLATE FACTORY Business authorized under the Franchise Agreement. Use additional sheets if necessary. Any and all changes to the above information must be reported to the Franchisor in writing. - ------------------------------------- -------------------------------------- Date Name EX-11.1 9 EXHIBIT 11.1 EXHIBIT 11.1 EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES COMPUTATION OF INCOME PER COMMON SHARE
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, 1996 1995 1994 ------------ ------------ ----------- PRIMARY INCOME PER SHARE Net income $ 1,207,745 $ 1,350,432 $ 861,787 Dividend requirements on preferred stock - (14,610) (88,733) ------------ ------------ ----------- Net income allocable to common and common equivalent shares $ 1,207,745 $ 1,335,822 $ 773,054 ------------ ------------ ----------- ------------ ------------ ----------- Weighted average number of common shares outstanding 2,797,201 2,517,449 1,741,106 Net effect of dilutive stock options based on the treasury stock method using average market price 89,862 95,281 72,275 ------------ ------------ ----------- Weighted average number of common and common equivalent shares outstanding 2,887,063 2,612,730 1,813,381 ------------ ------------ ----------- ------------ ------------ ----------- PRIMARY INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .42 $ .51 $ .43 ------------ ------------ ----------- ------------ ------------ -----------
EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES COMPUTATION OF INCOME PER COMMON SHARE - CONTINUED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, 1996 1995 1994 ------------ ------------ ----------- FULLY DILUTED INCOME PER SHARE Net income $ 1,207,745 $ 1,350,432 $ 861,787 Add interest expense and loan costs amortized on convertible - 12,339 48,527 Less dividend requirements on debt preferred stock - (14,610) (88,733) ------------ ------------ ----------- Net income allocable to common and common equivalent shares $ 1,207,745 $ 1,348,161 $ 821,581 ------------ ------------ ----------- ------------ ------------ ----------- Weighted average number of common shares outstanding 2,797,201 2,517,449 1,741,106 Assuming conversion of convertible debt - 107,798 688,680 Assuming conversion of preferred stock - - - Net effect of dilutive stock options based on the treasury stock method using the greater of the average or ending market price 92,337 100,443 103,744 ------------ ------------ ----------- Weighted average number of common and common equivalent shares outstanding 2,889,538 2,725,690 2,533,530 ------------ ------------ ----------- ------------ ------------ ----------- INCOME PER COMMON AND COMMON EQUIVALENT SHARE ASSUMING FULL DILUTION $ .42 $ .49 $ .32 ------------ ------------ ----------- ------------ ------------ -----------
For 1995 and 1994, if conversion of the preferred stock were assumed, the related income per share would be $.51 and $.34, respectively. EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES COMPUTATION OF INCOME PER COMMON SHARE
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, 1996 1995 1994 ------------ ------------ ----------- PRIMARY INCOME PER SHARE Net income $ 1,207,745 $ 1,350,432 $ 861,787 Dividend requirements on preferred stock - (14,610) (88,733) ------------ ------------ ----------- Net income allocable to common and common equivalent shares $ 1,207,745 $ 1,335,822 $ 773,054 ------------ ------------ ----------- ------------ ------------ ----------- Weighted average number of common shares outstanding 2,797,201 2,517,449 1,741,106 Net effect of dilutive stock options based on the treasury stock method using average market price 89,862 95,281 72,275 ------------ ------------ ----------- Weighted average number of common and common equivalent shares outstanding 2,887,063 2,612,730 1,813,381 ------------ ------------ ----------- ------------ ------------ ----------- PRIMARY INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .42 $ .51 $ .43 ------------ ------------ ----------- ------------ ------------ -----------
EXHIBIT 11.1 ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES COMPUTATION OF INCOME PER COMMON SHARE - CONTINUED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, 1996 1995 1994 ------------ ------------ ----------- FULLY DILUTED INCOME PER SHARE Net income $ 1,207,745 $ 1,350,432 $ 861,787 Add interest expense and loan costs amortized on convertible - 12,339 48,527 Less dividend requirements on debt preferred stock - (14,610) (88,733) ------------ ------------ ----------- Net income allocable to common and common equivalent shares $ 1,207,745 $ 1,348,161 $ 821,581 ------------ ------------ ----------- ------------ ------------ ----------- Weighted average number of common shares outstanding 2,797,201 2,517,449 1,741,106 Assuming conversion of convertible debt - 107,798 688,680 Assuming conversion of preferred stock - - - Net effect of dilutive stock options based on the treasury stock method using the greater of the average or ending market price 92,337 100,443 103,744 ------------ ------------ ----------- Weighted average number of common and common equivalent shares outstanding 2,889,538 2,725,690 2,533,530 ------------ ------------ ----------- ------------ ------------ ----------- INCOME PER COMMON AND COMMON EQUIVALENT SHARE ASSUMING FULL DILUTION $ .42 $ .49 $ .32 ------------ ------------ ----------- ------------ ------------ -----------
For 1995 and 1994, if conversion of the preferred stock were assumed, the related income per share would be $.51 and $.34, respectively. EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 17, 1996, accompanying the financial statements incorporated by reference or included in the Annual Report of Rocky Mountain Chocolate Factory, Inc. on Form 10-K for the year ended February 29, 1996. We hereby consent to the incorporation by reference of said report in the Registration Statements of Rocky Mountain Chocolate Factory, Inc. on Forms S-8 (File No. 33-79342, effective May 25, 1994 and File No, 33-64653, effective November 30, 1995). /s/ GRANT THORNTON LLP - -------------------------------- Grant Thornton LLP Dallas, Texas May 29,1996 EX-27 11 EXHIBIT 27
5 YEAR FEB-29-1996 MAR-01-1995 FEB-29-1996 528,787 0 1,463,901 0 2,504,908 4,780,816 12,929,675 2,468,084 16,314,440 2,737,673 2,183,877 0 0 91,029 12,042,252 16,314,440 16,094,995 18,743,298 8,598,798 16,584,881 0 0 242,172 1,916,245 708,500 1,207,745 0 0 0 1,207,745 .42 .42
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