<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 1995
REGISTRATION STATEMENT NO. 33-62149
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
COLORADO 2060 84-0910696
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
</TABLE>
<TABLE>
<S> <C>
FRANKLIN E. CRAIL
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
265 TURNER DRIVE 265 TURNER DRIVE
DURANGO, COLORADO 81301 DURANGO, COLORADO 81301
(970) 259-0554 (970) 259-0554
(Address, including zip code, and telephone number, (Name, address, including zip code,
including area code, and telephone number, including area
of registrant's principal executive offices) code, of agent for service)
COPIES TO:
Steven K. Cochran Gary M. Nelson
THOMPSON & KNIGHT OPPENHEIMER WOLFF & DONNELLY
A Professional Corporation 45 South Seventh Street
1700 Pacific Avenue Suite 3400
Suite 3300 Minneapolis, Minnesota 55402
Dallas, Texas 75201
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER FORM S-1 CAPTION PROSPECTUS LOCATION OR CAPTION
----------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.................... Outside Front Cover Page of Prospectus
6. Dilution........................................... Not Applicable
7. Selling Security Holders........................... Principal and Selling Stockholders
8. Plan of Distribution............................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Registered......... Outside Front Cover Page of Prospectus; Description
of Capital Stock
10. Interests of Named Experts and Counsel............. Legal Matters
11. Information with Respect to the Registrant......... Prospectus Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling Stockholders;
Description of Capital Stock; Shares Eligible for
Future Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities....................................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 1995
DATED , 1995
900,000 SHARES
[LOGO]
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMMON STOCK
Of the 900,000 shares of Common Stock offered hereby, 300,000 shares are being
sold by Rocky Mountain Chocolate Factory, Inc. (the "Company") and 600,000
shares are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
the shares by the Selling Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "RMCF." On September 13, 1995, the last sale price of the Common Stock as
reported by the Nasdaq National Market was $17.75 per share. See "Price Range of
Common Stock."
SEE "RISK FACTORS," BEGINNING ON PAGE 5 OF THIS PROSPECTUS, FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to
Public Discount(1) Company(2) Selling Stockholders
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total (3)............. $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $250,000.
(3) The Company and one of the Selling Stockholders have granted the Underwriter
a 30-day option to purchase up to an aggregate of 135,000 additional shares
of Common Stock, solely to cover over-allotments, if any, at the per share
Price to Public less the Underwriting Discount. If the Underwriter exercises
this option in full, the total Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting."
--------------------------
The shares of Common Stock are offered by the Underwriter, subject to prior sale
when, as and if delivered to and accepted by the Underwriter and subject to the
right of the Underwriter to reject any order in whole or in part. It is expected
that delivery of the certificates representing the shares of Common Stock will
be made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or
about , 1995.
[LOGO]
<PAGE>
[DESCRIPTION OF PHOTOS IN APPENDIX A]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHERE OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITER'S OVER-ALLOTMENT OPTION. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Rocky Mountain Chocolate Factory, Inc. (the "Company") is a leading
developer, franchisor and operator of retail chocolate stores. The Company
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 July 31, 1995, there were 165 Rocky
Mountain Chocolate Factory stores, including 138 franchised stores and 27
Company-owned stores operating in 34 states, Canada and Bermuda.
The Company believes 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.
Rocky Mountain Chocolate Factory stores' distinctive country Victorian decor
creates an enjoyable and inviting atmosphere. The average store size is
approximately 1,000 square feet. Each store features over 100 types of premium
chocolates and more than 15 varieties of fudge, as well as brittles, truffles,
caramel apples, chocolate sauces and boxed chocolates. Unlike most other
chocolate stores, Rocky Mountain Chocolate Factory stores prepare many products
on-site daily with fresh ingredients. 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. Brittles,
truffles, caramel apples and other items are also prepared in the stores. The
Company believes the in-store preparation and aroma of its products enhance the
ambiance of its stores, are fun and entertaining for its customers and convey an
image of freshness and homemade quality.
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 three years, the Company has more than doubled the
total number of stores. The Company's expansion strategy is to balance growth of
Company-owned and franchised stores by increasing its emphasis on Company-owned
store expansion. Company-owned stores have certain advantages to the Company
over franchised stores, including a greater potential economic return to the
Company. In the fiscal year ending February 29, 1996, the Company expects to
open between 25 and 30 new franchised stores and at least 17 new Company-owned
stores.
The Company's site selection strategy is to locate its stores in tourist
areas and shopping environments, such as factory outlet and regional malls, with
a high level of foot traffic. A variety of additional factors are analyzed in
the site selection process, including tenant mix, visibility, attractiveness,
accessibility and occupancy costs.
The Company has developed, and will soon test, a new store concept, which it
believes may allow it to further expand its presence in its existing market
environments, particularly regional malls. The new store concept will operate
under a different name and offer a different line of candies than the Company's
existing concept.
The Company was founded in 1981 and was incorporated as a Colorado
corporation in 1982. The Company's principal executive offices are located at
265 Turner Drive, Durango, Colorado 81301, and its telephone number is (970)
259-0554.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company........................... 300,000 shares
By the Selling Stockholders.............. 600,000 shares
Total.................................. 900,000 shares
Common Stock outstanding after the
Offering.................................. 2,957,499 shares(1)
Use of proceeds............................ To reduce outstanding debt and provide additional
working capital, including funds for future Company-
owned store expansion, which may include the testing and
development of a new store concept, and for general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol.............. RMCF
<FN>
--------------------------
(1) Excludes an aggregate of 189,000 shares reserved for issuance under the
Company's 1985 Incentive Stock Option Plan (the "1985 Plan") and 1990
Nonqualified Stock Option Plan for Nonemployee Directors (the "Directors'
Plan"), of which 173,000 shares represent outstanding options at July 31,
1995, with a weighted average exercise price of $7.24 per share, and 325
shares reserved for issuance as stock bonuses pursuant to the Company's
Franchisee-of-the-Year Award Program. Also does not include 100,000 shares
reserved for issuance under the Company's new 1995 Stock Option Plan (the
"1995 Plan") (70,000 of which are subject to outstanding options, with an
exercise price of $18.25 per share) and 30,000 additional shares reserved
for issuance under the Directors' Plan, as amended (20,000 of which are
subject to outstanding options, with an exercise price of $18.00 per
share), subject to approval by the Company's stockholders at the 1995
Annual Meeting on October 13, 1995. See "Capitalization."
</TABLE>
SUMMARY FINANCIAL AND STORE DATA
(In thousands, except per share and store data)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED FEBRUARY 28 OR 29, ENDED MAY 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Factory sales................................. $ 3,072 $ 3,023 $ 3,798 $ 4,998 $ 6,399 $ 978 $ 1,552
Retail sales.................................. 1,007 1,570 1,763 2,642 5,028 822 1,472
Royalties and marketing fees.................. 816 909 1,000 1,233 1,607 334 450
Franchise fees................................ 121 208 437 488 582 251 246
--------- --------- --------- --------- --------- --------- ---------
Total revenues.............................. 5,016 5,710 6,998 9,361 13,616 2,385 3,720
Operating income................................ 553 31 503 1,251 2,270 304 483
Net income (loss)............................... $ 520 $ (34) $ 404 $ 862 $ 1,350 $ 168 $ 267
Income (loss) per common share -- fully
diluted........................................ $ .19 $ (.10) $ .14 $ .32 $ .49 $ .07 $ .10
Weighted average number of common shares
outstanding -- fully diluted................... 2,376 1,527 2,459 2,533 2,726 2,713 2,748
STORE DATA:
Number of stores open at end of period:
Company-owned................................. 3 9 7 13 22 18 26
Franchised.................................... 61 63 81 106 131 108 133
--------- --------- --------- --------- --------- --------- ---------
Total....................................... 64 72 88 119 153 126 159
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
SYSTEM-WIDE REVENUES(1): $ 15,316 $ 15,439 $ 19,886 $ 26,011 $ 35,612 $ 7,162 $ 9,987
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1995
--------------------------
ACTUAL AS ADJUSTED(2)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 1,267 $ 4,553
Total assets......................................................... 11,148 14,434
Long-term debt (excluding current portion)........................... 3,022 1,522
Stockholders' equity................................................. 6,148 10,934
<FN>
------------------------------
(1) Includes franchised store sales, as reported to the Company by franchisees,
and Company-owned store sales.
(2) Adjusted to reflect the sale of 300,000 shares of Common Stock offered by
the Company hereby (at an assumed offering price of $18.00 per share) and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
</TABLE>
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. IN
DECIDING WHETHER TO PURCHASE SHARES OF COMMON STOCK OFFERED HEREBY, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED IN THIS
PROSPECTUS, INCLUDING THE FOLLOWING FACTORS THAT MAY AFFECT THE COMPANY'S
CURRENT OPERATIONS AND FUTURE PROSPECTS.
FLUCTUATIONS IN COST AND AVAILABILITY OF INGREDIENTS
Several of the principal ingredients used in the Company's products,
including chocolate and nuts, are subject to significant price fluctuations.
Although cocoa beans, the primary raw material used in the production of
chocolate, are grown commercially in Africa, Brazil and several other countries
around the world, cocoa beans are traded in the commodities market, and their
supply and price are therefore subject to volatility. The Company believes its
principal chocolate supplier purchases most of its beans at negotiated prices
from African growers, often at a premium to commodity prices. Although the price
of chocolate has been relatively stable in recent years, the supply and price of
cocoa beans, and in turn of chocolate, are affected by many factors, including
monetary fluctuations and economic, political and weather conditions in
countries in which cocoa beans are grown. The Company purchases most of its nut
meats from domestic suppliers who procure their products from growers around the
world. The price and supply of nuts are also affected by many factors, including
weather conditions in the various regions in which the nuts used by the Company
are grown. Although the Company often enters into purchase contracts for these
products, significant or prolonged increases in the prices of chocolate or of
one or more types of nuts, or the unavailability of adequate supplies of
chocolate or nuts of the quality sought by the Company, could have a material
adverse effect on the Company and its results of operations.
LOCATION DEPENDENCY
The Company's expansion plans are critically dependent on the Company's
ability to obtain suitable sites at reasonable occupancy costs for its
franchised and Company-owned stores in the factory outlet, tourist and regional
mall environments that constitute its primary location targets. There is no
assurance that the Company will be able to obtain suitable locations in these
environments at a cost that will allow stores to be economically viable.
RELIANCE ON FRANCHISEES
The continued growth and success of the Company is dependent in part upon
its ability to attract, retain and contract with qualified franchisees and the
ability of those franchisees to operate their stores successfully and to promote
and develop the Rocky Mountain Chocolate Factory store concept and its
reputation for an enjoyable in-store experience and product quality. Although
the Company has established criteria to evaluate prospective franchisees and has
been successful in attracting franchisees, there can be no assurance that
franchisees will be able to operate successfully Rocky Mountain Chocolate
Factory stores in their franchise areas in a manner consistent with the
Company's concepts and standards. See "Business -- Franchising Program."
RAPID EXPANSION; MANAGEMENT OF GROWTH
The number of franchised and Company-owned stores has more than doubled
since the end of fiscal 1992. The Company intends to open at least 17
Company-owned stores and between 25 and 30 franchised stores in fiscal 1996. The
Company is subject to a variety of business risks generally associated with
rapidly growing companies, such as the inability to control costs and achieve
continued profitability during a period of aggressive growth. The Company's
future store expansion will also depend upon a number of factors including,
among others, the cost and availability of suitable sites, the implementation of
enhanced operational and financial systems, the employment and training of
additional management, store staff and other personnel, the negotiation of
acceptable lease and financing terms, its ability to attract franchisees and the
cost-effective and timely opening of stores. There can be no assurance that the
Company will be able to manage its expanding operations effectively or that it
will be able to maintain or accelerate its growth. Also, there can be no
assurance that the Company will be able to open its planned stores in a timely
or cost-effective manner, if at all.
5
<PAGE>
GOVERNMENT REGULATION
The Company is subject to regulation by the Federal Trade Commission and
must comply with certain state laws governing the offer, sale and termination of
franchises and the refusal to renew franchises. Many state laws also regulate
substantive aspects of the franchisor-franchisee relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith, prohibiting
interference with the right of free association among franchisees and regulating
discrimination among franchisees in charges, royalties or fees. Franchise laws
continue to develop and change, and changes in such laws could impose additional
costs and burdens on franchisors. The Company's failure to obtain approvals to
sell franchises and the adoption of new franchise laws, or changes in existing
laws, could have a material adverse effect on the Company and its results of
operations.
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
required licenses or approvals from such agencies could delay or prevent the
opening of a new store. The Company and its franchisees are also subject to laws
governing their relationships with employees, including minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements. Because a significant number of the Company's employees are paid
at rates related to the federal minimum wage, increases in the minimum wage
would increase the Company's labor costs. The failure to obtain required
licenses or approvals, or an increase in the minimum wage rate, employee
benefits costs (including costs associated with mandated health insurance
coverage) or other costs associated with employees, could have a material
adverse effect on the Company and its results of operations.
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, and could have a
material adverse effect on the Company and its results of operations.
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 have a material adverse effect
on the Company and its results of operations and its ability to expand
successfully.
CONSUMER TASTES AND PREFERENCES
The sale of the Company's products is affected by changes in consumer tastes
and eating habits, including views regarding consumption of chocolate. Numerous
other factors that the Company cannot control, such as economic conditions,
demographic trends, traffic patterns and weather conditions, influence the sale
of the Company's products. Changes in any of these factors could have a material
adverse effect on the Company and its results of operations.
DEPENDENCE ON SENIOR MANAGEMENT
The Company's success is highly dependent on the skills, experience and
efforts of its senior management. The loss of the services of one or more
members of its senior management could have a material adverse effect on the
Company and its plans for growth. The Company is the beneficiary of key man life
insurance in the amount of $1,000,000 on the life of Franklin E. Crail, the
Company's Chairman of the Board and President; however, there can be no
assurance that such insurance would be adequate to compensate the Company for
the loss of Mr. Crail's services. The Company has not entered into employment
agreements with any member of its senior management. See "Management."
CONTROL BY EXISTING STOCKHOLDERS
Coronet Insurance Company ("Coronet") and Mr. Crail will continue to own
31.1% and 10.0%, respectively, of the outstanding Common Stock of the Company
after completion of this Offering (27.8%
6
<PAGE>
and 9.8%, respectively, if the Underwriter's over-allotment option is exercised
in full). The Selling Stockholders are likely to continue to have the ability to
control the election of the Company's Board of Directors and, therefore, to
control the Company and its business and affairs, and in some circumstances
could prevent the approval of proposals submitted by other stockholders. See
"Principal and Selling Stockholders."
CHANGE IN PRODUCT MIX
The Company believes that approximately 50% of franchised stores' revenues
are generated by sales of products manufactured by and purchased from the
Company, 30% by sales of products made in the stores with ingredients purchased
from the Company or approved suppliers and 20% by sales of products purchased
from approved suppliers for resale in the stores. Franchisees' sales of products
manufactured by the Company generate higher revenues to the Company than sales
of store-made or other products. A significant decrease in the amount of
products franchisees purchase from the Company, therefore, could adversely
affect the Company's total revenues and results of operations. Such a decrease
could result from franchisees' decisions to sell more store-made products or
products purchased from third party suppliers.
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 costs 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.
FLUCTUATIONS OF QUARTERLY RESULTS
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock of the Company in the public
market following the Offering made hereby could adversely affect the market
price for the Common Stock. Upon completion of this Offering, the Company will
have outstanding 2,957,499 shares of Common Stock (not including 263,000 shares
issuable upon the exercise of options under the Company's stock option plans,
173,000 of which are subject to options exercisable within 60 days of the date
hereof). The executive officers and directors of the Company and the Selling
Stockholders, who in the aggregate will beneficially own 1,379,622 shares of
Common Stock upon completion of this Offering, have agreed not to sell any
Common Stock without the prior written consent of the Underwriter for a period
of 180 days from the date of this Prospectus. Upon expiration of these
restrictions, the executive officers and directors of the Company and the
Selling Stockholders will be free to sell the shares beneficially owned by them,
subject to compliance with Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). In addition, Coronet, which will own 921,257 shares of
Common Stock after completion of this offering, has the right to demand that the
Company file further registration statements under the Securities Act covering
the sale of all or any part of its Common Stock holdings. See "Description of
Capital Stock -- Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
7
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 300,000 shares of
Common Stock being offered hereby by the Company (assuming a public offering
price of $18.00 per share) are estimated to be $4.8 million ($5.6 million if the
Underwriter's over-allotment option is exercised in full) after deducting the
underwriting discount and estimated offering expenses. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders.
The Company anticipates that approximately $1.5 million of the net proceeds
will be used to retire existing debt incurred pursuant to a chattel mortgage
financing. The chattel mortgage financing was secured to support the Company's
financing needs for completion of its factory expansion and for Company-owned
store openings and is secured by the Company's inventory, equipment, furniture
and fixtures. This chattel mortgage facility bears interest at prime plus 1 1/2%
(currently 10%), adjusted in April of each year and matures on June 15, 2000.
The balance of the proceeds will be used to provide additional working
capital to the Company, including funds for future Company-owned store
expansion, which may include the testing and development of a new store concept,
and for general corporate purposes.
The Company has developed a new store concept that it intends to test in the
current fiscal year and early in fiscal 1997. See "Business -- Company Store
Program." The Company will fund the establishment of initial test locations from
operating cash flows. Should test results justify commercial development of the
new concept, a potentially significant portion of working capital reserves
provided by this Offering is likely to be used to establish additional stores
under the new concept.
Pending any use of the proceeds, the Company intends to invest the net
proceeds from this Offering in investment grade short-term, interest-bearing
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. Following
this Offering, the Company intends to retain any earnings for use in the
operation and expansion of its business and, therefore, does not anticipate
declaring any cash dividends in the foreseeable future. The payment of
dividends, if any, in the future will be at the discretion of the Board of
Directors and will depend upon, among other things, future earnings, capital
requirements, restrictions in future financing agreements, the general financial
condition of the Company and general business conditions.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "RMCF." The table below sets forth for the periods indicated the high and
low last sale prices for the Company's Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED FEBRUARY 28, 1994
First Quarter......................... $ 5 1/4 $ 4 3/4
Second Quarter........................ 5 4 3/4
Third Quarter......................... 11 3/4 5
Fourth Quarter........................ 14 1/2 10 3/4
YEAR ENDED FEBRUARY 28, 1995
First Quarter......................... 12 11 1/2
Second Quarter........................ 12 1/2 11 1/2
Third Quarter......................... 13 1/2 11 3/4
Fourth Quarter........................ 13 1/2 13 1/4
YEAR ENDING FEBRUARY 29, 1996
First Quarter......................... 15 3/4 13 1/2
Second Quarter (through September
13).................................. 19 15 3/4
</TABLE>
On September 13, 1995, the last reported sale price of the Common Stock as
reported by the Nasdaq National Market was $17.75 per share. As of July 31,
1995, there were approximately 335 record holders of the Common Stock.
8
<PAGE>
CAPITALIZATION
The following table sets forth as of May 31, 1995, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale of the 300,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $18.00 per
share) and the application of the estimated net proceeds therefrom. This table
should be read in conjunction with the Financial Statements and related Notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1995
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt(1)................................................. $ 176 $ 176
--------- -----------
Long-term debt (excluding current portion)(1)............................................. $ 3,022 $ 1,522
--------- -----------
Stockholders' equity:
Preferred stock ($.10 par value per share) 250,000 shares authorized; no shares
outstanding, actual or adjusted........................................................ -- --
Common stock ($.03 par value per share) 7,250,000 shares authorized; 2,648,802 shares
issued and 2,644,499 shares outstanding; 2,948,802 shares issued and 2,944,499 shares
outstanding, as adjusted(2)............................................................ 79 88
Additional paid-in capital.............................................................. 4,676 9,453
Retained earnings....................................................................... 1,398 1,398
Less common stock held by Company, at cost -- 4,303 shares............................ (5) (5)
--------- -----------
Total stockholders' equity............................................................ 6,148 10,934
--------- -----------
Total capitalization.................................................................. $ 9,346 $ 12,632
--------- -----------
--------- -----------
<FN>
------------------------
(1) See Note C of Notes to Financial Statements for information regarding the
Company's long-term debt and capital lease obligations.
(2) Excludes 152,000 shares reserved for issuance under the 1985 Plan
(including 146,000 shares representing outstanding options) at May 31,
1995, 50,000 shares reserved for issuance under the Directors' Plan
(including 40,000 shares representing outstanding options) at May 31, 1995,
100,000 shares subsequently reserved for issuance under the 1995 Plan and
325 shares subsequently reserved for issuance as stock bonuses pursuant to
the Company's Franchisee-of-the-Year Award Program. At May 31, 1995, the
186,000 shares subject to outstanding options under the Company's option
plans had a weighted average exercise price of $6.95. The Company's Board
of Directors recently adopted the 1995 Plan and amended the Directors' Plan
to increase the number of shares authorized for issuance under the
Directors' Plan from 60,000 shares to 90,000 shares (including 10,000
shares previously issued). The adoption of the 1995 Plan and the amendment
of the Directors' Plan are subject to approval by the Company's
stockholders at the 1995 Annual Meeting on October 13, 1995. Of the 100,000
shares reserved for issuance under the 1995 Plan, 70,000 shares are subject
to outstanding options granted on September 2, 1995, with an exercise price
of $18.25 per share, subject to stockholder approval at the 1995 Annual
Meeting. Of the 30,000 additional shares reserved for issuance under the
Director's Plan, 20,000 shares are subject to outstanding options granted
on August 24, 1995, with an exercise price of $18.00 per share. If the
amendment to the Directors' Plan is not approved by the stockholders, the
number of shares subject to such options will be decreased from 20,000
shares to 10,000 shares. See "Management -- Executive Compensation" and "--
Compensation of Directors."
</TABLE>
9
<PAGE>
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, 1991 through 1995, are derived from the Financial Statements
of the Company, which have been audited by Grant Thornton LLP, independent
auditors. The selected financial data of the Company as of May 31, 1995 and for
the three months ended May 31, 1994 and 1995 have been derived from the
unaudited financial statements of the Company and, in the opinion of the
Company's management, include all adjustments necessary to present fairly the
Company's results of operations for the periods then ended and the financial
position of the Company as of such dates. The results of operations for the
three months ended May 31, 1995 are not necessarily indicative of the results to
be achieved for the remainder of fiscal 1996. The selected financial data should
be read in conjunction with the Financial Statements and related Notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED FEBRUARY 28 OR 29, ENDED MAY 31,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1994 1995
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Factory sales................................. $ 3,072 $ 3,023 $ 3,798 $ 4,998 $ 6,399 $ 978 $ 1,552
Retail sales.................................. 1,007 1,570 1,763 2,642 5,028 822 1,472
Royalties and marketing fees.................. 816 909 1,000 1,233 1,607 334 450
Franchise fees................................ 121 208 437 488 582 251 246
-------- -------- -------- -------- -------- -------- -------
Total revenues.............................. 5,016 5,710 6,998 9,361 13,616 2,385 3,720
-------- -------- -------- -------- -------- -------- -------
Costs and expenses:
Cost of chocolate sales....................... 2,810 3,021 3,506 4,530 5,986 947 1,612
Franchise costs............................... 417 772 929 1,008 1,377 318 450
General and administrative expenses........... 667 817 815 969 1,234 294 347
Retail operating expenses..................... 569 1,069 1,180 1,571 2,749 522 828
Loss on Company-owned store closing........... -- -- 65 32 -- -- --
-------- -------- -------- -------- -------- -------- -------
Total costs and expenses.................... 4,463 5,679 6,495 8,110 11,346 2,081 3,237
-------- -------- -------- -------- -------- -------- -------
Operating income................................ 553 31 503 1,251 2,270 304 483
Other income (expense):
Interest expense.............................. (61) (85) (101) (88) (153) (21) (62)
Interest income............................... 32 20 5 10 23 5 7
-------- -------- -------- -------- -------- -------- -------
Total other income (expense)................ (29) (65) (96) (78) (130) (16) (55)
-------- -------- -------- -------- -------- -------- -------
Income (loss) before income tax expense......... 524 (34) 407 1,173 2,140 288 428
Income tax expense.............................. 4 -- 3 311(1) 790 120 161
-------- -------- -------- -------- -------- -------- -------
Net income (loss)............................... $ 520 $ (34) $ 404 $ 862 $ 1,350 $ 168 $ 267
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
Income (loss) per common share -- fully
diluted........................................ $ .19 $ (.10) $ .14 $ .32 $ .49 $ .07 $ .10
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
Weighted average number of common shares
outstanding -- fully diluted................... 2,376 1,527 2,459 2,533 2,726 2,713 2,748
STORE DATA:
Number of stores open at end of period:
Company-owned................................. 3 9 7 13 22 18 26
Franchised.................................... 61 63 81 106 131 108 133
-------- -------- -------- -------- -------- -------- -------
Total....................................... 64 72 88 119 153 126 159
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
SYSTEM-WIDE REVENUES(2): $ 15,316 $ 15,439 $ 19,886 $ 26,011 $ 35,612 $ 7,162 $ 9,987
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1995
FEBRUARY 28 OR 29, ----------------------
----------------------------------------------------- AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(3)
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 1,491 $ 1,118 $ 1,716 $ 1,889 $ 1,627 $ 1,267 $ 4,553
Total assets.................................. 3,581 4,381 4,496 6,024 10,181 11,148 14,434
Long-term debt (excluding current portion).... 716 985 1,000 604 2,314 3,022 1,522
Stockholders' equity.......................... 2,454 2,445 2,881 4,143 5,907 6,148 10,934
<FN>
------------------------------
(1) Reflects the Company's utilization of the remainder of its net operating
loss carryforward in the third quarter of 1994.
(2) Includes franchised store sales, as reported to the Company by franchisees,
and Company-owned store sales.
(3) Adjusted to reflect the sale of 300,000 shares of Common Stock offered by
the Company hereby (at an assumed offering price of $18.00 per share) and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Rocky Mountain Chocolate Factory, founded in 1981, is a leading developer,
franchisor and operator of retail chocolate stores. The Company 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 July 31, 1995, there were 165 Rocky Mountain Chocolate Factory
stores, including 138 franchised stores and 27 Company-owned stores operating in
34 states, Canada and Bermuda. In the fiscal year ending February 29, 1996, the
Company expects to open between 25 and 30 new franchised stores and at least 17
new Company-owned stores.
The Company derives its revenues from four principal sources: (1) factory
sales, which consist of candy sales to its franchised store locations; (2)
retail sales, which consist of candy sales at retail by its Company-owned
stores; (3) royalties and marketing fees, based on a franchisee's monthly gross
sales; and (4) franchise fees, which consist of fees earned from the sale of
franchises.
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. As a result, retail sales as a percentage of total chocolate
sales (defined as the total of factory sales and retail sales) are expected to
continue to increase. Cost of chocolate sales as a percentage of total chocolate
sales is expected to decrease (with a corresponding increase in gross margin)
due to an increase in retail sales as a percentage of total chocolate sales and
the associated higher gross margins on retail sales. Also positively affecting
cost of chocolate sales are the improving manufacturing efficiencies resulting
from the Company's recent factory expansion and additional automation of its
factory.
During the last two fiscal years, the Company has capitalized Company-owned
store pre-opening costs up to approximately $12,750 per store and amortized such
costs over the 12-month period following a store's opening. Pre-opening costs
consist of direct costs related to the training and hiring of the work force
prior to the opening date as well as lease and utility expenses incurred prior
to the opening date.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to total revenues, unless otherwise indicated, of certain income
statement data.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED FEBRUARY 28 OR 29, ENDED MAY 31,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1994 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Factory sales.................... 61.2% 52.9% 54.3% 53.4% 47.0% 41.0% 41.7%
Retail sales..................... 20.1 27.5 25.2 28.2 36.9 34.5 39.6
Royalties and marketing fees..... 16.3 16.0 14.3 13.2 11.8 14.0 12.1
Franchise fees................... 2.4 3.6 6.2 5.2 4.3 10.5 6.6
----- ----- ----- ----- ----- ----- -----
Total revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
Costs and expenses:
Cost of chocolate sales(1)....... 68.9% 65.8% 63.0% 59.3% 52.4% 52.6% 53.3%
Franchise costs(2)............... 44.5 69.1 64.6 58.6 62.9 54.4 64.6
General and administrative
expenses........................ 13.3 14.3 11.6 10.4 9.1 12.3 9.3
Retail operating expenses(3)..... 56.5 68.1 66.9 59.5 54.7 63.5 56.3
Loss on Company-owned store
closing......................... -- -- 0.9 0.3 -- -- --
Total costs and expenses(4)........ 89.0 99.5 92.8 86.6 83.3 87.3 87.0
Operating income................... 11.0 0.5 7.2 13.4 16.7 12.7 13.0
Other income (expense):
Interest expense................. (1.2) (1.5) (1.5) (0.9) (1.1) (0.9) (1.7)
Interest income.................. 0.6 0.4 0.1 0.1 0.2 0.2 0.2
----- ----- ----- ----- ----- ----- -----
Total other income (expense)... (0.6) (1.1) (1.4) (0.8) (0.9) (0.7) (1.5)
----- ----- ----- ----- ----- ----- -----
Income (loss) before income tax
expense........................... 10.4 (0.6) 5.8 12.6 15.8 12.0 11.5
Income tax expense................. -- -- -- 3.3 5.8 5.0 4.3
----- ----- ----- ----- ----- ----- -----
Net income (loss).................. 10.4% (0.6%) 5.8% 9.3% 10.0% 7.0% 7.2%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<FN>
------------------------------
(1) As a percentage of total chocolate sales (defined as the total of factory
sales and retail sales).
(2) As a percentage of the total of royalties and marketing fees and franchise
fees.
(3) As a percentage of retail sales.
(4) As a percentage of total revenues.
</TABLE>
12
<PAGE>
QUARTER ENDED MAY 31, 1995 COMPARED TO QUARTER ENDED MAY 31, 1994
REVENUES
FACTORY SALES. Factory sales increased $574,000 or 58.7% to $1.6 million in
the first quarter of 1996, compared to $978,000 in the first quarter of 1995.
This increase resulted from the larger number of franchised stores in existence
throughout the quarter and, to a lesser extent, a modest price increase effected
in April 1995. Same store pounds purchased from the factory remained constant in
the first quarter of 1996 compared to the first quarter of 1995. When computing
same store pounds purchased from the factory, purchases by franchised stores
open for 12 months in each period are compared.
RETAIL SALES. Retail sales increased $650,000 or 79.1% to $1.5 million in
the first quarter of 1996, compared to $822,000 in the first quarter of 1995.
This increase resulted primarily from a larger number of Company-owned stores in
existence throughout the quarter. The impact of a modest price increase and a
9.3% same store sales increase at Company-owned stores also positively affected
retail sales.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing
fees increased $116,000 or 34.7% to $450,000 in the first quarter of 1996,
compared to $334,000 in the first quarter of 1995. This increase resulted from
increased royalties and marketing fees from a larger number of franchised stores
operating in the first quarter of 1996 compared to the first quarter of 1995,
together with increased same store sales at franchised stores of 5.5%. Franchise
fee revenues in the first quarter of 1996 approximated those earned in the first
quarter of 1995. Although franchise signings increased to 13 in the first
quarter of 1996 from 10 in the first quarter of 1995, franchise fees remained
relatively constant due to differences in the timing of revenue recognition
between the quarters.
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 70.2% to $1.6 million in the first
quarter of 1996 from $947,000 in the first quarter of 1995. Cost of chocolate
sales as a percentage of total chocolate sales (defined as the total of factory
sales and retail sales) increased to 53.3% in the first quarter of 1996 from
52.6% in the first quarter of 1995. This increase in cost of chocolate sales as
a percentage of total chocolate sales resulted from startup of the Company's
transportation division and inclusion for the first time of material
transportation revenues and costs as part of factory sales and cost of chocolate
sales. Without inclusion of transportation division revenues and costs, total
cost of chocolate sales would have increased to $1.5 million, and cost of
chocolate sales as a percentage of total chocolate sales would have decreased to
51.5%. This improvement 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. 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, excluding the effect of the transportation division.
FRANCHISE COSTS. Franchise costs increased 41.5% to $450,000 in the first
quarter of 1996 from $318,000 in the first quarter of 1995. As a percentage of
the total of royalties and marketing fees and franchise fees, franchise costs
increased to 64.6% of such fees in the first quarter of 1996 from 54.4% in the
first quarter of 1995. The hiring of additional field support and associated
administrative personnel to support the Company's accelerated pace of new
franchise signing and store opening activities and the larger base of stores is
a 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 18.0% to $347,000 in the first quarter of 1996 from $294,000 in the
first quarter of 1995, 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 9.3% in the first quarter of 1996 from 12.3% in the first
quarter of 1995, primarily due to a significant increase in total revenues
without a proportionate increase in general and administrative expenses.
13
<PAGE>
RETAIL OPERATING EXPENSES. Retail operating expenses increased 58.6% to
$828,000 in the first quarter of 1996 from $522,000 in the first quarter of
1995. This increase resulted from the effect of the larger number of
Company-owned stores in existence throughout the first quarter. As a percentage
of retail sales, retail operating expenses declined to 56.3% in the first
quarter of 1996 from 63.5% in the first quarter of 1995 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 $55,000 incurred in the first quarter of 1996 increased
243.7% from the $16,000 incurred in the first quarter of 1995. 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 the first quarter of 1996 was
37.5% compared to 41.7% in the first quarter of 1995. The absolute 4.2% decrease
in effective tax rates resulted from utilization of lower, more representative,
full year 1995 historical experience as a basis for estimating the effective tax
rate for the full year 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES
FACTORY SALES. Factory sales increased $1.4 million or 28.0% to $6.4
million in 1995, compared to $5.0 million in 1994. This increase resulted
primarily from the larger number of franchised stores in existence throughout
the year and, to a lesser extent, from a modest price increase. Same store
pounds purchased from the factory declined 5.7% in 1995 due to an overall
increase in the amount of store-made product relative to factory-supplied
product sold at franchised locations. When computing same store pounds purchased
from the factory, purchases by franchised stores open for 12 months in each
period are compared.
RETAIL SALES. Retail sales increased $2.4 million or 90.3% to $5.0 million
in 1995, compared to $2.6 million in 1994. This increase resulted primarily from
13 Company-owned stores opened in 1995 and a full year of operations for the
eight Company-owned stores opened in 1994. The full-year impact of a modest
price increase and a 1.1% same store sales increase at Company-owned stores also
positively affected retail sales.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties and marketing
fees increased $374,000 or 30.3% to $1.6 million in 1995, compared to $1.2
million in 1994. This increase resulted from increased royalty and marketing
fees from 30 franchised stores opened in 1995 and a full year of operations for
the 30 franchised stores opened in 1994, together with increased same store
sales at franchised stores of 1.7%. The $94,000 or 19.3% increase in franchise
fees to $582,000 in 1995 as compared to $488,000 in 1994 was due to 39 new
franchises sold in 1995 compared to 33 in 1994.
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
14
<PAGE>
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.
FISCAL 1994 COMPARED TO FISCAL 1993
REVENUES
FACTORY SALES. Factory sales increased $1.2 million or 31.6% to $5.0
million in 1994 compared to $3.8 million in 1993. This increase resulted
primarily from the larger number of franchised stores in existence throughout
the year and, to a lesser extent, from a modest price increase. Same store
pounds purchased from the factory remained relatively constant in 1994, compared
to 1993. When computing same store pounds purchased from the factory, purchases
by franchised stores open for 12 months in each period are compared.
RETAIL SALES. Retail sales increased $879,000 or 49.9% to $2.6 million in
1994, compared to $1.8 million in 1993. This increase resulted primarily from
the opening of eight new Company-owned stores in 1994 and the full year impact
of a modest price increase. Because of the limited number of Company-owned
stores in operation during these periods, a decrease in same store sales did not
materially impact retail sales.
ROYALTIES AND MARKETING FEES AND FRANCHISE FEES. Royalties increased
$233,000 or 23.3% to $1.2 million in 1994, compared to $1.0 million in 1993.
This increase resulted from increased royalties and marketing fees from 30
franchised stores opened in 1994 and a full year of operations for the 18
franchised stores opened in 1993. Same store sales at franchised stores remained
relatively constant in 1994, compared to 1993. The $51,000 increase in franchise
fees to $488,000 in 1994 compared to $437,000 in 1993 was due to 33 new
franchises sold in 1994 compared to 29 in 1993.
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 29.2% to $4.5 million in 1994 from $3.5
million in 1993. Cost of chocolate sales as a percentage of total chocolate
sales (defined as the total of factory sales and retail sales) decreased to
59.3% in 1994 from 63.0% in 1993 as a
15
<PAGE>
result of 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 and manufacturing overhead absorption resulting from
higher factory production volumes.
FRANCHISE COSTS. Franchise costs increased 8.5% to $1.0 million in 1994
from $929,000 in 1993. As a percentage of the total of royalties and marketing
fees and franchise fees, franchise costs declined to 58.6% in 1994 from 64.6% in
1993, as a result of an increase in such fees without a proportionate increase
in franchise costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 18.9% to $969,000 in 1994 from $815,000 in 1993. Increased expenses
resulted from an increased reserve for bad debts, a specific reserve for the
potential closing of one Company-owned store and increased expense incurred for
administrative support personnel. As a percentage of total revenues, general and
administrative expenses declined to 10.4% in 1994 from 11.6% in 1993, 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 33.1% to
$1.6 million in 1994 from $1.2 million in 1993. This increase resulted from the
effect of the larger number of Company-owned stores in existence throughout the
year. As a percentage of retail sales, retail operating expenses declined to
59.5% in 1994 from 66.9% in 1993 as a result of higher retail sales without a
proportionate increase in expenses.
OTHER EXPENSE
Other expense of $78,000 incurred in 1994 declined from the $96,000 incurred
in 1993. This decrease resulted from increased interest income caused by higher
invested cash balances in 1994 in comparison with that existing for the prior
year. Additionally, for most of the first quarter of 1993 interest expense was
incurred on borrowings under the Company's line of credit. Because of available
cash surpluses, borrowings under this line were unnecessary in 1994.
INCOME TAX EXPENSE
The Company exhausted its net operating loss carryforward in the third
quarter of 1994. In 1993, $3,000 was recorded as income tax expense,
representing alternative minimum tax. In 1994, $311,000 in income tax expense
(an effective tax rate of 26.5%) was recorded representing taxes on income
following full utilization of the net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations and Company-owned store
expansion program from operating cash flows. During 1995, the Company generated
approximately $1.7 million in operating cash flows. In 1995, the Company opened
13 new Company-owned stores and effected a major factory expansion. The Company
believes the factory expansion will allow the Company to meet current and
anticipated future product needs for the next several years. As part of the
expansion, the Company automated certain additional production processes. This
expansion has been funded by a combination of real estate and chattel mortgage
financing and operating cash flows.
At May 31, 1995, working capital was $1.3 million compared to $1.6 million
at February 28, 1995 and $1.9 million at February 28, 1994. These decreases
resulted from use of the Company's improved operating cash flows and cash
balances to fund elements of the Company's factory expansion and Company-owned
store expansion. Cash and cash equivalent balances decreased to $137,000 at May
31, 1995 from $383,000 at February 28, 1995 and $997,000 at February 28, 1994,
as a result of this use of cash flows and balances.
The Company's long-term debt includes a 20-year real estate mortgage loan
obtained in June 1994 ($1.7 million principal outstanding at May 31, 1995). In
addition, the Company has a $1.5 million chattel mortgage facility (the
"Facility"), the entire amount of which is outstanding. The Company also has
outstanding a $750,000 chattel mortgage term loan obtained in June 1994 under a
prior facility. The aggregate $2.25 million outstanding under the Facility and
the chattel mortgage term loan was incurred to support the Company's financing
needs for completion of the factory expansion and for Company-owned store
openings and is secured by the Company's inventory, equipment, furniture and
fixtures. The Company
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intends to retire the $1.5 million outstanding under the Facility with a portion
of the proceeds of this Offering. See "Use of Proceeds." For information
regarding the terms of the Company's long-term debt, see Note C to the Financial
Statements included elsewhere in this Prospectus.
The Company has a $1.0 million working capital line of credit, secured by
accounts receivable. The line had a zero balance at May 31, 1995. Terms of the
loan require that the line be rested (that is, that there be no outstanding
balance) for two periods of 30 consecutive days during the term of the loan,
which expires in July 1996. Interest on the line is at prime.
In 1996, the Company anticipates making $4.1 million in capital expenditures
in comparison with $4.5 million in 1995. As of May 31, 1995, the Company had
made approximately $1.5 million in capital expenditures, primarily for
completion of its factory expansion and the opening of new Company-owned stores.
The remaining $2.6 million expected to be expended in 1996 will be used
primarily for the opening of new Company-owned stores.
The Company believes that the proceeds from this Offering, cash flow from
operating activities and available bank lines of credit will be sufficient to
service debt, fund anticipated capital expenditures and provide necessary
working capital for the next several years. There can be no guarantees, 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.
QUARTERLY RESULTS
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
vacation seasons. In addition, quarterly results have been, and in the future
are likely to be, affected by the timing of new store openings and sales of
franchises. Because of the seasonality of the Company's business and the impact
of new store openings and sales of franchises, results for any quarter are not
necessarily indicative of results that may be achieved in other quarters or for
a full fiscal year.
The following is an unaudited summary of the Company's quarterly results of
operations for the years ended February 28, 1994 and 1995 and for the first
quarter of 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 28,
----------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
TOTAL REVENUES:
1994............................................... $ 1,585 $ 2,223 $ 2,856 $ 2,696
1995............................................... 2,385 3,197 4,274 3,760
1996............................................... 3,720 -- -- --
NET INCOME:
1994............................................... $ 143 $ 302 $ 295 $ 121
1995............................................... 168 377 483 322
1996............................................... 268 -- -- --
INCOME PER COMMON SHARE (FULLY DILUTED):
1994............................................... $ .05 $ .12 $ .11 $ .05
1995............................................... .07 .14 .18 .12
1996............................................... .10 -- -- --
</TABLE>
17
<PAGE>
BUSINESS
GENERAL
The Company is a leading developer, franchisor and operator of retail
chocolate stores. The Company 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 July 31,
1995, there were 165 Rocky Mountain Chocolate Factory stores, including 138
franchised stores and 27 Company-owned stores operating in 34 states, Canada and
Bermuda.
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 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.
STORE LOCATIONS
The map below illustrates the location by state of franchised and
Company-owned stores in the United States as of July 31, 1995.
[MAP]
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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, including fudge, brittles and caramel apples,
in the store. In-store preparation is designed both to be fun and entertaining
for customers and to convey an image of freshness and homemade quality. The
special ambiance of Rocky Mountain Chocolate Factory stores is also achieved
through the use of distinctive decor designed to give the store an attractive
country Victorian look. The Company's design staff has developed easily
replicable designs and specifications to ensure that the Rocky Mountain
Chocolate Factory concept is consistently implemented throughout the system.
SITE SELECTION. Careful selection of a site is critical to the success of a
Rocky Mountain Chocolate Factory store. Many factors are considered by the
Company in identifying suitable sites, including tenant mix, visibility,
attractiveness, accessibility, level of foot traffic and occupancy costs. Final
site selection, for both franchised and Company-owned stores, occurs only after
the Company's senior management has approved the site. The Company believes that
the experience of its management team in evaluating a potential site is one of
the Company's competitive strengths.
CUSTOMER SERVICE COMMITMENT. The Company emphasizes 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. Recent efforts include the purchase of additional automated
equipment such as a computer-controlled shell-filling machine for truffles and a
candy bar molding machine, which enable the Company to produce truffles and
candy bars much more quickly and at a lower cost. The Company also recently
completed a factory expansion and began operating 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 three years, the Company has more than doubled its
total number of stores. As of July 31, 1995, there were 165 Rocky Mountain
Chocolate Factory stores, including 138 franchised stores and 27 Company-owned
stores operating in 34 states, Canada and Bermuda. In fiscal 1996, the Company
expects to open between 25 and 30 new franchised stores and at least 17 new
Company-owned stores. 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
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<PAGE>
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 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, which it
believes may allow it to expand its presence in its existing market
environments, particularly regional malls. The concept will use creative
lighting, music, animation and movement to entertain customers and appeal to
both children and adults. Two prototype stores are expected to be opened in the
current fiscal year or early in fiscal 1997. The new store concept will use a
different name and sell a different line of candies than the Company's existing
concept. The Company does not believe the new concept will 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:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
---------------------------------------------------------------
1991 1992 1993 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Company-owned stores:
Opened................................................... 0 5 1 8 13
Closed................................................... 1 0 1 1 1
Acquired from franchisees................................ 1 1 0 0 1
Sold to franchisees...................................... 0 0 2 1 4
Total open at year end................................. 3 9 7 13 22
Franchised stores:
Opened................................................... 5 8 18 30 30
Closed................................................... 10 5 2 6 8
Acquired from Company.................................... 0 0 2 1 4
Sold to Company.......................................... 1 1 0 0 1
Total open at year end................................. 61 63 81 106 131
System-wide stores:
Opened................................................... 5 13 19 38 43
Closed................................................... 11 5 3 7 9
Total open at year end................................. 64 72 88 119 153
</TABLE>
20
<PAGE>
As of July 31, 1995, the Company had signed leases for 13 additional
Company-owned stores (all in factory outlet malls) and 19 additional franchised
stores (all in factory outlet malls), 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 37 additional Company-owned
or franchised stores, 31 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 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 1995, excluding pre-opening costs but including initial
inventories, was approximately $126,000.
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."
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.
21
<PAGE>
The Company continually strives to offer new confectionery products in order
to maintain the excitement and appeal of its products. For example, the Company
has recently added cookie dough to its line of products. Many Rocky Mountain
Chocolate Factory stores now offer these cookies, which are baked fresh in the
stores.
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 recently received the
AWARD OF EXCELLENCE from the National Paperbox Association.
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 July 31, 1995 there were Rocky Mountain Chocolate
Factory stores in approximately 70 of these malls in 32 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 July 31, 1995, 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 July 31, 1995 there were Rocky Mountain Chocolate Factory
stores in approximately 20 of these, including the franchised locations in the
Mall of America in Bloomington, Minnesota; Escondido, California; Fort Collins,
Colorado; and West Palm Beach, Florida. Although often providing favorable
levels of foot traffic, regional malls typically involve 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. Two franchised Rocky Mountain
Chocolate Factory stores recently opened in the new Denver International
Airport.
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 July 31, 1995, there were 138 franchised stores in the Rocky Mountain
Chocolate Factory system.
22
<PAGE>
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, 16 domestic franchisees own two or more Rocky Mountain Chocolate
Factory stores and 80 domestic franchisees own a single store. The largest
number of stores owned by a single domestic franchisee is five.
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 July 31, 1995, 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. To this end, the Company is
developing a multimedia, interactive, computer-based training program to allow
franchisees to successfully and consistently train their employees in proper
customer service, merchandising and administration techniques and practices.
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 recently 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
23
<PAGE>
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 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 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 11 franchisees will expire in fiscal year 1996. 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 July 31, 1995, there were 27 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 to
date in fiscal 1996 of opening a new Company-owned store is approximately
$119,000, 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.
24
<PAGE>
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.
NEW CONCEPT. The Company has developed a new store concept, which it
believes may allow it to expand its presence in its existing market
environments, particularly regional malls. The new concept will use creative
lighting, music, animation and movement to entertain customers. The Company
believes the new concept will appeal to children and adults of all ages. The new
store concept will use a different name and sell a different line of candies
than the Company's current concept, and the Company, therefore, does not believe
it will compete with existing Rocky Mountain Chocolate Factory stores.
The Company currently expects to test two prototype stores in the current
fiscal year or early in fiscal 1997. Both of these prototype stores will be
Company-owned, and the Company estimates that it will cost approximately
$200,000 to establish each store. The Company will fund these prototype stores
from operating cash flows. Should test results justify further expansion of the
new concept, a potentially significant portion of working capital reserves
provided by this Offering would be likely to be used to establish additional
stores under the new concept.
The Company believes that the new concept stores could be franchised or
operated as Company-owned stores in most locations in which Rocky Mountain
Chocolate Factory stores currently operate. The Company believes that
significant economic advantage would be provided where a franchisee or
Company-owned store manager were 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 1995, the Company produced approximately 1.3 million pounds of
candy and anticipates producing approximately 1.7 million pounds in fiscal 1996.
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. Franchised and
Company-owned stores place orders to the Company's factory several times
25
<PAGE>
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 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 recently 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 encourages local store marketing efforts through an incentive
program that provides cash awards to employees of the participating
Company-owned or franchised store that has the greatest increase in sales during
a specified period. The Company believes this program enhances customer service
by rewarding in-store personnel who have direct contact with customers for
improvements in a store's performance. This incentive program has had, and the
Company believes it will continue to have, a positive impact on same store sales
growth at participating stores.
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-
26
<PAGE>
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", as well as
all other trademarks, service marks, symbols, slogans, emblems, logos and
designs used in the Rocky Mountain Chocolate Factory system, are proprietary
rights of the Company. All of the foregoing are believed to be of material
importance to the Company's business. The registration for the trademark "Rocky
Mountain Chocolate Factory" has been granted in the United States and Canada.
Applications have been filed to register the trademark in certain foreign
countries.
The Company has not attempted to obtain patent protection for the
proprietary recipes developed by the Company's master candy-maker and is relying
upon its ability to maintain the confidentiality of those recipes.
EMPLOYEES
At July 31, 1995, the Company employed 278 persons on a full-time basis, of
whom 157 were store employees, 91 were factory workers and 30 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.
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.
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.
27
<PAGE>
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 Interstate Commerce Commission 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.
PROPERTIES
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 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 1 1/2 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.
As of July 31, 1995, all 27 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 July 31, 1995, the
Company was the primary lessee at 52 of its 138 franchised stores. The subleases
for such stores are on the same terms as the Company's leases of the premises.
For information as to the amount of the Company's rental obligations under
leases on both Company-owned and franchised stores, see Note D to the Financial
Statements contained elsewhere in this Prospectus.
LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that are
material to the Company's business or financial condition.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Franklin E. Crail....................... 53 Chairman of the Board, President, Treasurer and
Director
Ralph L. Nafziger....................... 49 Vice President -- Manufacturing and Director
Clifton W. Folsom....................... 41 Vice President -- Franchise Support
Jay B. Haws............................. 44 Vice President -- Marketing
Lawrence C. Rezentes.................... 47 Vice President -- Finance
Loresa McCoy............................ 29 Corporate Secretary
Lee N. Mortenson........................ 59 Director
Fred M. Trainor......................... 56 Director
Gerald A. Kien.......................... 64 Director
Everett A. Sisson....................... 74 Director
</TABLE>
FRANKLIN E. CRAIL. Mr. Crail co-founded the first Rocky Mountain Chocolate
Factory store in May 1981. Since the incorporation of the Company in November
1982, he has served as its President and a Director, and since September 1981 as
its Treasurer. He was elected Chairman of the Board in March 1986. Prior to
founding the Company, Mr. Crail was co-founder and president of CNI Data
Processing, Inc., a software firm which developed automated billing systems for
the cable television industry.
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.
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
29
<PAGE>
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.
LORESA MCCOY. Ms. McCoy has served as the Company's Corporate Secretary
since September 1994. Ms. McCoy served in several accounting and administrative
positions at the Company between joining the Company in November 1992 and
accepting the position of Corporate Secretary. From July 1990 until joining the
Company, she served as Manager at Wit's End Guest Ranch and Resort, which is
located in the Durango area.
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.
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.
Coronet previously had the right to designate three persons as nominees for
election to the Board of Directors of the Company in accordance with a Note
Purchase Agreement dated November 16, 1987
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<PAGE>
between the Company and Coronet. Three directors, including Lee N. Mortenson,
were elected to the Company's Board of Directors in 1987 and subsequent years
pursuant to this right. Coronet's right to designate persons as director
nominees expired in May 1994, when Coronet converted into Common Stock the final
promissory note that had been issued under such Note Purchase Agreement. See
"Certain Transactions."
The Board of Directors has a standing Audit Committee and Compensation
Committee, each consisting of Messrs. Mortenson and Trainor. Currently, all
directors of the Company are elected annually by the stockholders and hold
office until their respective successors are elected and qualified.
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 and the only other executive officer of the Company who met the minimum
compensation threshold of $100,000 for inclusion in the table (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2)
-------------------------------------------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Franklin E. Crail, ......................... 1995 $ 129,618 $ 31,050 $ 2,162
Chairman of the Board and President 1994 $ 104,000 $ 14,500 $ -0-
1993 $ 92,000 $ -0- $ -0-
Ralph L. Nafziger, ......................... 1995 $ 90,272 $ 14,400 $ 1,354
Vice President -- Manufacturing 1994 $ 78,220 $ 10,080 $ -0-
1993 $ 72,331 $ -0- $ -0-
<FN>
------------------------
(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 Officers under the
Company's 401(k) Plan, which was first offered in fiscal 1995.
</TABLE>
Additional columns required by Securities and Exchange Commission rules to
be included in the foregoing table, and certain additional tables required by
such rules, have been omitted because no compensation required to be disclosed
therein was paid or awarded to the Named Officers.
EMPLOYEE STOCK OPTION PLANS
1995 STOCK OPTION PLAN. Subject to stockholder approval at the 1995 Annual
Meeting of Stockholders, the Board of Directors of the Company has adopted the
1995 Plan and has reserved 100,000 shares of Common Stock for issuance pursuant
to nonqualified and incentive stock options granted under the 1995 Plan. The
following discussion assumes stockholder approval of the 1995 Plan.
The Compensation Committee of the Board of Directors, which administers the
1995 Plan, has full authority, subject to the provisions of the 1995 Plan, to
determine the employees to be granted options, the number of shares and exercise
price of the Common Stock covered by each option and the time or times when
options may be exercised. The term of any options granted under the 1995 Plan
may not exceed 10 years from the date of grant; provided, that the term of an
incentive stock option granted to an employee who owns capital stock of the
Company representing more than 10% of the combined voting power of all classes
of capital stock of the Company may not exceed five years from the date of
grant. The purchase price of incentive stock options shall not be less than 100%
of the fair market value per share of the Common Stock on the date the option is
granted; provided, however, that the purchase price shall be at least 110% of
the fair market value per share of the Common Stock on the date of grant, if the
optionee, on the date of such grant, possesses more than 10% of the total
combined voting power of all classes of stock of the Company or any affiliate.
The purchase price of a nonqualified stock option must be greater than the par
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<PAGE>
value of the stock on either the date the option is granted or the date it is
exercised, whichever is greater. No stock option granted under the 1995 Plan may
be transferred by an optionee other than by will or the laws of descent and
distribution, and during the lifetime of the optionee, may be exercised only by
the optionee. Subject to certain limitations, the Compensation Committee may at
any time alter, amend or terminate the 1995 Plan in accordance with its terms.
Unless previously terminated, the 1995 Plan will terminate at the expiration of
10 years from the date of its adoption.
1985 INCENTIVE STOCK OPTION PLAN. The 1985 Plan will expire in October
1995, although outstanding options previously granted thereunder will remain
outstanding in accordance with their terms. The 1985 Plan contains provisions
that are substantially the same as those of the 1995 Plan described in the
preceding paragraph, except that the 1985 Plan authorizes the grant only of
nonqualified stock options.
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 Directors' Plan.
The Directors' Plan 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. No
options were granted or exercised under the Directors' Plan during fiscal 1995.
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.
Subject to stockholder approval at the 1995 Annual Meeting, the Board of
Directors has amended the Directors' Plan to increase the number of shares of
Common Stock issuable pursuant to options granted under the Directors' Plan to
90,000. If the amendment is not approved, the number of shares subject to the
options granted to Mr. Kien and Mr. Sisson will be decreased from 10,000 shares
each to 5,000 shares each.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1995, the Company's Compensation Committee was comprised of
Mr. Mortenson, Mr. Trainor, Clyde Wm. Engle and Gerald M. Tierney, Jr. In
accordance with the terms of the Note Purchase Agreement (as defined in "Certain
Transactions" below), Coronet named Messrs. Engle, Mortenson and Tierney as its
three designees to the Company's Board of Directors. Mr. Engle is Chairman of
the Board, and Mr. Mortenson is President and a Director, of Coronet. Messrs.
Engle and Mortenson are also Directors of Normandy Insurance Agency, Inc., the
100% parent of Coronet. Mr. Engle is also Chairman of the Board and Chief
Executive Officer, and Mr. Mortenson is President, Chief Operating Officer and a
Director, of Telco Capital Corporation, an indirect parent of Coronet. Mr.
Tierney is Senior Vice President and General Counsel of Telco Capital
Corporation. Pursuant to the Note Purchase Agreement, Coronet purchased Notes
(as defined in "Certain Transactions" below) in the aggregate principal amount
of $1,200,000, which have been converted into 1,586,957 shares of Common Stock.
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. See "Certain Transactions."
Mr. Engle and Mr. Tierney resigned from the Board of Directors of the
Company on August 24, 1995. Mr. Engle and Mr. Tierney resigned to pursue other
interests, and not because of any disagreement with the Company's Board of
Directors or management.
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<PAGE>
CERTAIN 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, as part
of its facility expansion and financing program (see "Business -- Properties"),
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 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. See "Description of
Capital Stock -- Registration Rights."
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. See "Management -- Compensation
Committee Interlocks and Insider Participation." 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 corporation of Coronet.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of August 24, 1995, with
respect to the shares of Common Stock beneficially owned (i) by each person
known to the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, (ii) by each Director and each executive officer named in the
Summary Compensation Table, and (iii) by Directors and executive officers of the
Company as a group.
Coronet is selling 500,000 of the 900,000 shares of Common Stock of the
Company being sold in this Offering. Franklin E. Crail, Chairman of the Board,
President and Treasurer of the Company, is selling 100,000 shares of Common
Stock of the Company being sold in this Offering.
Coronet has pledged to LaSalle National Bank of Chicago, Illinois, 1,401,857
of the 1,421,757 shares of Common Stock owned by Coronet (including all 500,000
shares being sold by Coronet in this Offering),
33
<PAGE>
representing 52.8% of the total outstanding shares as of August 24, 1995, to
secure certain indebtedness to such bank. Coronet has retained voting rights
with respect to these shares. An event resulting in foreclosure on the
indebtedness could result in a change in control of the Company at a subsequent
date.
Mr. Crail has pledged to Coronet 337,766 shares of Common Stock (including
the 100,000 shares being sold by Mr. Crail in this Offering), representing 12.7%
of the total outstanding shares as of August 24, 1995, to secure personal
indebtedness incurred to purchase such shares in 1987 from two previous owners.
Mr. Crail has retained voting rights with respect to these shares. Mr. Crail has
advised the Company that he intends to use the proceeds from the sale of his
shares in the Offering to retire such indebtedness and obtain the release of the
remaining shares from such pledge. If such repayment and release are not
effected, an event resulting in foreclosure on the indebtedness could result in
an increase in the control of the Company by Coronet at a subsequent date.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING NUMBER OF SHARES THE OFFERING
NAME OF ------------------------- TO BE SOLD -------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT (%) IN THE OFFERING NUMBER PERCENT (%)
------------------------------------------- ---------- ------------- ----------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Coronet Insurance Company (2).............. 1,421,257 53.5 500,000 921,257 31.1
Franklin E. Crail (3)...................... 396,099 14.9 100,000 296,099 10.0
Ralph L. Nafziger (4)...................... 36,000 1.3 -- 36,000 1.2
Lee N. Mortenson (5)....................... 10,000 * -- 10,000 *
Fred M. Trainor (5)........................ 10,000 * -- 10,000 *
Everett A. Sisson.......................... -- * -- -- *
Gerald A. Kien............................. -- * -- -- *
All executive officers and directors as a
group (10 persons) (6).................... 558,365 19.9 100,000 458,365 14.8
<FN>
------------------------
* Amounts are less than one percent.
(1) The address of Coronet 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 dated June 9, 1995, filed by
Coronet and such affiliates with the Securities and Exchange Commission and
on information provided to the Company by Coronet. The shares indicated as
being owned by Coronet do not include the shares pledged to Coronet by
Franklin E. Crail.
(3) Includes 337,766 shares pledged by Mr. Crail to Coronet as security for
approximately $1.2 million due on promissory notes issued by Mr. Crail in
connection with the purchase of those shares from two individuals.
(4) Mr. Nafziger has the right to acquire these shares through the exercise of
options granted pursuant to the 1985 Plan.
(5) Includes 10,000 shares that Messrs. Mortenson and Trainor each have the
right to acquire through the exercise of options granted pursuant to the
Directors' Plan.
(6) Includes 143,000 shares which officers and Directors as a group have the
right to acquire through the exercise of options granted pursuant to the
1985 Plan and the Directors' Plan.
</TABLE>
All of the registration expenses of Coronet in this Offering, except for the
applicable underwriting discount and fees and expenses of counsel retained by
Coronet, if any, will be borne by the Company pursuant to a prior agreement. See
"Description of Capital Stock -- Registration Rights." The Company has not
agreed to pay any expenses that may be incurred by Mr. Crail individually in
connection with the Offering.
34
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 7,250,000 shares of
Common Stock, $0.03 par value per share, of which 2,657,499 shares are
outstanding as of the date of this Prospectus, and 250,000 shares of preferred
stock, $0.10 par value per share (the "Preferred Stock"), none of which are
outstanding. The following description of the capital stock of the Company and
certain provisions of the Company's Articles of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Articles of
Incorporation and Bylaws, which have been filed or incorporated by reference as
exhibits to the Company's Registration Statement of which this Prospectus is a
part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders, other than the election of
Directors. With respect to the election of Directors, the Company's Articles of
Incorporation provide for cumulative voting. Accordingly, a stockholder is
entitled to the number of votes obtained by multiplying the number of Directors
being elected by the number of shares of Common Stock owned by such stockholder,
and the stockholder may cast all of those votes for a single nominee or divide
them among any two or more nominees in any proportions desired. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, and are entitled to receive, pro rata, all assets of the
Company available for distribution to such holders upon liquidation. Holders of
Common Stock have no preemptive, subscription or redemption rights.
PREFERRED STOCK
Pursuant to its Articles of Incorporation, the Company is authorized to
issue 250,000 shares of Preferred Stock, which may be issued from time to time
in one or more series upon authorization by the Company's Board of Directors.
The Board of Directors, without further approval of the stockholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each series of
the Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a third party to gain control of the Company, discourage bids for the
Company's Common Stock at a premium, or otherwise adversely affect the market
price of the Common Stock.
REGISTRATION RIGHTS
The Company granted to Coronet, which currently owns a majority of the
Company's outstanding Common Stock, the right to require the Company, at the
Company's expense, to register for public sale the shares of Common Stock
acquired by Coronet pursuant to the conversion of the Notes, all of which have
been converted by Coronet. Such "demand" registration rights, which apply to all
of the 1,421,257 shares of Common Stock owned by Coronet, are exercisable by
Coronet at any time. However, Coronet may not exercise the registration rights
more than once in any consecutive 12-month period nor, after the Offering made
hereby, more than two times in the aggregate, unless Coronet agrees to pay all
the Company's costs and expenses in connection therewith. The Company also
granted "piggyback" rights to Coronet entitling Coronet to participate in a
registered offering of Common Stock by the Company in certain circumstances. The
offering of 500,000 shares of Common Stock by Coronet pursuant to this
Prospectus is being conducted as a result of an exercise by Coronet of its
demand registration rights as described in this paragraph.
ANTI-TAKEOVER PROVISIONS
The Board of Directors of the Company may issue Preferred Stock in one or
more series and may designate dividend rights and terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges and restrictions applicable to each series
of the Preferred Stock. It is not possible to state the effects of the issuance
of Preferred Stock on the rights of the holders of Common Stock until the Board
of Directors determines the specific rights of the holders of the
35
<PAGE>
Preferred Stock. However, among other effects, the issuance of Preferred Stock,
under certain circumstances, could make it more difficult for a third party to
gain control of the Company, discourage bids for the Company's Common Stock at a
premium or otherwise adversely affect the market price of the Common Stock.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer, Inc. of Denver, Colorado is the Transfer Agent
and Registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
2,957,499 shares (3,008,124 shares if the Underwriter's over-allotment option is
exercised in full) of Common Stock assuming no stock options are exercised. Of
these shares, all of the 900,000 shares (1,035,000 shares if the Underwriter's
over-allotment option is exercised in full) sold in this Offering and 820,202
shares outstanding prior to this Offering will be freely transferable by persons
other than "affiliates" of the Company without restriction under the Securities
Act.
The remaining 1,237,297 shares of Common Stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption contained in
Rule 144. Following satisfaction of the two-year holding period required by Rule
144, such restricted securities will be eligible for sale under Rule 144. The
Company, the Selling Stockholders and the Company's executive officers and
Directors have agreed not to offer to sell, sell or otherwise dispose of such
shares for 180 days after the date of this Prospectus without the prior written
consent of the Underwriter. See "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned his or her shares for
at least two years, including an "affiliate" of the Company (as that term is
defined under the Securities Act), is entitled to sell, within any three-month
period, that number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock of the Company or (ii) the average
weekly trading volume of the then outstanding shares during the four calendar
weeks preceding each such sale. A person (or persons whose shares are required
to be aggregated) who is not deemed an "affiliate" of the Company and who has
beneficially owned shares for at least three years, is entitled to sell such
shares under Rule 144 without regard to the volume limitations described above.
Affiliates, including members of the Board of Directors and senior management,
continue to be subject to such limitations.
All of the 921,257 shares of Common Stock that will be owned by Coronet upon
completion of this offering are restricted securities within the meaning of Rule
144. Coronet, however, has the right at any time to require the Company to
register, at the Company's expense, any or all of such shares for public sale,
subject to its agreement not to sell during the 180-day period referred to in
the preceding paragraph. See "Description of Capital Stock -- Registration
Rights."
No predictions can be made as to the effect, if any, that public sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Sales of substantial amounts of the Common Stock
in the public market, or the perception that such sales could occur, could have
an adverse impact on the market price. See "Description of Capital Stock --
Preferred Stock."
36
<PAGE>
UNDERWRITING
Piper Jaffray Inc. (the "Underwriter") has agreed, subject to the terms of
the Purchase Agreement, to purchase 300,000 shares of Common Stock from the
Company, 500,000 shares of Common Stock from Coronet and 100,000 shares of
Common Stock from Franklin E. Crail. The Underwriter is committed to purchase
and pay for all such shares if any are purchased.
The Company has been advised by the Underwriter that it proposes to offer
the shares to the public initially at the Price to Public set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $ share. The Underwriter may allow and such dealers may
reallow a concession not in excess of $ share on sales to certain other
brokers and dealers. After the initial offering the Price to Public, concession
and reallowance may be changed by the Underwriter.
The Company and Coronet have granted to the Underwriter an option,
exercisable during the 30-day period after the date of this Prospectus, under
which the Underwriter may purchase up to an additional 50,625 shares and 84,375
shares of Common Stock from the Company and Coronet, respectively, at the Price
to Public less the Underwriting Discount set forth on the cover page of this
Prospectus. The Underwriter may exercise the option only to cover
over-allotments, if any.
The Company and each Selling Stockholder have agreed to indemnify the
Underwriter against certain liabilities, including civil liabilities under the
Securities Act or to contribute to payments the Underwriter may be required to
make in respect thereof.
The Company, the Selling Stockholders and the Company's executive officers
and Directors have agreed, for a period of 180 days after the date of the
Purchase Agreement, not to directly or indirectly sell, offer to sell, grant any
option for the sale of, or otherwise dispose of, any shares of Common Stock or
any options or other rights to purchase any shares of Common Stock, without the
prior written consent of the Underwriter, except for (i) sales to the
Underwriter pursuant to the Purchase Agreement and (ii) in the case of the
Company, sales in connection with the exercise of options granted prior to the
date hereof pursuant to the Company's existing stock option plans.
In connection with this Offering, the Underwriter and selling group members
may engage in passive market making transactions in the Company's Common Stock
on the Nasdaq National Market immediately prior to the commencement of the sales
of the shares in this Offering, in accordance with Rule 10b-6A under the
Exchange Act. Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of market makers not connected with
this Offering and making purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited in amount to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period prior
to the filing of this Prospectus with the Commission and must be discontinued
when such limit is reached. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Thompson & Knight, A Professional Corporation, of Dallas, Texas.
Certain legal matters in connection with this Offering will be passed upon for
the Underwriter by Oppenheimer Wolff & Donnelly of Minneapolis, Minnesota.
EXPERTS
The financial statements of the Company at February 28, 1994 and 1995, and
for each of the years in the three-year period ended February 28, 1995, have
been included herein and in the Registration Statement in reliance upon the
reports of Grant Thornton LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
37
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered by this
Prospectus. This Prospectus does not contain all the information set forth in
the Registration Statement, certain portions of which are omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the shares offered by this Prospectus, reference is
made to the Registration Statement, including the exhibits and schedules filed
therewith. Statements contained in this Prospectus regarding the contents of any
contract or other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
Copies of the Registration Statement, of which this Prospectus is a part,
together with such exhibits and schedules, may be obtained from the Commission's
principal office in Washington, D.C., upon payment of the charges prescribed
therefor by the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and the Commission's following Regional Offices: Northwestern Atrium
Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60604 and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
38
<PAGE>
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 28, 1995 and 1994, and the related statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended February 28, 1995. 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 28, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended February 28,
1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
April 26, 1995
F-1
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------------- MAY 31,
1994 1995 1995
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................ $ 996,746 $ 382,905 $ 136,653
Accounts and notes receivable-trade, less allowance for doubtful accounts
of $49,280 and $48,366 at February 28, 1994 and 1995, respectively, and
$57,827 at May 31, 1995................................................. 856,383 1,179,019 1,107,247
Inventories.............................................................. 1,084,344 1,687,016 1,618,353
Deferred income taxes.................................................... 57,406 68,586 68,586
Other.................................................................... 62,631 110,105 153,927
------------ ------------- -------------
Total current assets................................................... 3,057,510 3,427,631 3,084,766
PROPERTY AND EQUIPMENT, at cost
Land..................................................................... -- 122,558 122,558
Building................................................................. -- 2,453,069 3,178,560
Leasehold improvements................................................... 1,103,799 803,160 945,790
Machinery and equipment.................................................. 1,904,335 2,917,148 3,222,031
Furniture and fixtures................................................... 603,362 1,086,282 1,364,181
Transportation equipment................................................. 47,749 197,346 206,149
------------ ------------- -------------
3,659,245 7,579,563 9,039,269
Less accumulated depreciation and amortization........................... 1,485,180 1,690,118 1,843,605
------------ ------------- -------------
2,174,065 5,889,445 7,195,664
OTHER ASSETS
Notes and accounts receivable due after one year......................... 63,379 136,132 127,865
Goodwill, net of accumulated amortization of $206,532 and $230,136 at
February 28, 1994 and 1995, respectively, and $236,037 at May 31,
1995.................................................................... 383,468 359,864 353,963
Due from officer......................................................... 40,110 -- --
Other.................................................................... 305,631 368,098 385,839
------------ ------------- -------------
792,588 864,094 867,667
------------ ------------- -------------
$ 6,024,163 $ 10,181,170 $11,148,097
------------ ------------- -------------
------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt..................................... $ 96,109 $ 182,852 $ 176,135
Accounts payable -- trade................................................ 507,106 839,117 851,869
Accrued compensation..................................................... 197,370 222,713 404,453
Accrued liabilities...................................................... 143,982 283,330 207,972
Income taxes payable..................................................... 224,051 272,593 176,948
------------ ------------- -------------
Total current liabilities.............................................. 1,168,618 1,800,605 1,817,377
LONG-TERM DEBT, less current maturities.................................... 604,020 2,313,895 3,022,405
DEFERRED INCOME TAXES...................................................... 108,812 159,863 159,863
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
$1.00 cumulative convertible preferred stock-authorized 250,000 shares,
$.10 par value; issued and outstanding, 14,954 and 14,610 shares at
February 28, 1994 and 1995, respectively................................ 1,496 1,462 --
Common stock -- authorized 7,250,000 shares $.03 par value; issued
2,186,335 and 2,634,289 shares at February 28, 1994 and 1995,
respectively, and 2,648,802 shares at May 31, 1995...................... 65,590 79,029 79,464
Additional paid-in capital............................................... 4,197,838 4,700,527 4,675,528
Retained earnings (accumulated deficit).................................. (117,341) 1,130,522 1,398,193
------------ ------------- -------------
4,147,583 5,911,540 6,153,185
Less common stock held in treasury, at cost -- 4,428 and 4,303 shares
at February 28, 1994 and 1995, respectively, and 4,303 shares at
May 31, 1995............................................................ 4,870 4,733 4,733
------------ ------------- -------------
4,142,713 5,906,807 6,148,452
------------ ------------- -------------
$ 6,024,163 $ 10,181,170 $11,148,097
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED FEBRUARY 28, ENDED MAY 31,
-------------------------------------- ------------------------
1993 1994 1995 1994 1995
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales............................................. $ 5,561,008 $ 7,639,664 $ 11,427,700 $ 1,800,342 $ 3,023,797
Franchise and royalty fees........................ 1,437,195 1,721,570 2,188,434 584,858 695,982
----------- ----------- ------------ ----------- -----------
6,998,203 9,361,234 13,616,134 2,385,200 3,719,779
COSTS AND EXPENSES
Cost of sales..................................... 3,506,121 4,529,645 5,985,970 946,908 1,611,530
Franchise costs................................... 929,273 1,008,517 1,376,820 317,978 449,533
General and administrative........................ 814,276 969,116 1,234,002 293,925 347,460
Retail operating expenses......................... 1,180,030 1,571,360 2,749,511 522,356 828,166
Loss on store closing............................. 65,249 31,930 -- -- --
----------- ----------- ------------ ----------- -----------
6,494,949 8,110,568 11,346,303 2,081,167 3,236,689
----------- ----------- ------------ ----------- -----------
Operating profit.................................. 503,254 1,250,666 2,269,831 304,033 483,090
OTHER INCOME (EXPENSE)
Interest expense.................................. (101,520) (87,929) (152,592) (21,146) (61,838)
Interest income................................... 5,178 9,681 22,580 4,765 7,022
----------- ----------- ------------ ----------- -----------
(96,342) (78,248) (130,012) (16,381) (54,816)
----------- ----------- ------------ ----------- -----------
Income before income tax expense.................. 406,912 1,172,418 2,139,819 287,652 428,274
INCOME TAX EXPENSE
Current........................................... 3,000 259,226 749,516 119,879 160,603
Deferred.......................................... -- 51,405 39,871 -- --
----------- ----------- ------------ ----------- -----------
3,000 310,631 789,387 119,879 160,603
----------- ----------- ------------ ----------- -----------
NET INCOME.......................................... 403,912 861,787 1,350,432 167,773 267,671
Dividend requirements on preferred stock.......... 119,725 88,733 14,610 3,653 --
----------- ----------- ------------ ----------- -----------
INCOME ALLOCABLE TO COMMON STOCKHOLDERS............. $ 284,187 $ 773,054 $ 1,335,822 $ 164,120 $ 267,671
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
PRIMARY INCOME PER COMMON AND EQUIVALENT SHARE...... $ .18 $ .43 $ .51 $ .07 $ .10
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Weighted average and equivalent shares............ 1,595,214 1,813,381 2,612,730 2,284,914 2,739,248
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
FULLY-DILUTED INCOME PER COMMON AND EQUIVALENT
SHARE.............................................. $ .14 $ .32 $ .49 $ .07 $ .10
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Weighted average and equivalent shares............ 2,459,152 2,533,530 2,725,690 2,712,971 2,748,224
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28, FOR THE THREE
-------------------------------- MONTHS ENDED MAY
1993 1994 1995 31, 1995
---------- --------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of period................. $ 46,355 $ 46,868 $ 65,590 $ 79,029
Conversion of 7% convertible notes to
common...................................... -- 12,495 12,972 --
Conversion of preferred stock to common...... 213 5,567 17 435
Exercise of stock options.................... 300 660 450 --
---------- --------- --------- -----------------
Balance at the end of period................... 46,868 65,590 79,029 79,464
PREFERRED STOCK
Balance at beginning of period................. 12,423 11,973 1,496 1,462
Conversion of preferred stock to common...... (450) (10,477) (34) (1,308)
Purchase and retirement of preferred stock... -- -- -- (154)
---------- --------- --------- -----------------
Balance at end of period....................... 11,973 1,496 1,462 --
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period................. 3,774,628 3,806,825 4,197,838 4,700,527
Conversion of 7% convertible notes to
common...................................... -- 287,505 387,029 --
Conversion of preferred stock to common...... 237 4,909 17 873
Exercise of stock options.................... 30,950 97,589 114,280 --
Sale of treasury stock....................... 1,010 1,010 1,363 --
Purchase and retirement of preferred stock... -- -- -- (25,872)
---------- --------- --------- -----------------
Balance at end of period....................... 3,806,825 4,197,838 4,700,527 4,675,528
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance at beginning of period................. (1,383,040) (979,128) (117,341) 1,130,522
Net income................................... 403,912 861,787 1,350,432 267,671
Preferred stock dividends.................... -- -- (102,569) --
---------- --------- --------- -----------------
Balance at end of period....................... (979,128) (117,341) 1,130,522 1,398,193
TREASURY STOCK, AT COST
Balance at beginning of period................. (5,750) (5,310) (4,870) (4,733)
Distribution of treasury stock............... 440 440 137 --
---------- --------- --------- -----------------
Balance at end of period....................... (5,310) (4,870) (4,733) (4,733)
---------- --------- --------- -----------------
$2,881,229 $4,142,713 $5,906,807 $ 6,148,452
---------- --------- --------- -----------------
---------- --------- --------- -----------------
COMMON SHARES
Balance at beginning of period................. 1,545,162 1,562,245 2,186,335 2,634,289
Conversion of 7% convertible notes to
common...................................... -- 416,493 432,376 --
Conversion of preferred stock to common...... 7,083 185,597 578 14,513
Exercise of stock options.................... 10,000 22,000 15,000 --
---------- --------- --------- -----------------
Balance at end of period....................... 1,562,245 2,186,335 2,634,289 2,648,802
PREFERRED SHARES
Balance at beginning of period................. 124,225 119,725 14,954 14,610
Conversion of preferred stock to common...... (4,500) (104,771) (344) (13,078)
Purchase and retirement of preferred stock... -- -- -- (1,532)
---------- --------- --------- -----------------
Balance at end of period....................... 119,725 14,954 14,610 --
TREASURY SHARES
Balance at beginning of period................. 5,228 4,828 4,428 4,303
Distribution of treasury stock............... (400) (400) (125) --
---------- --------- --------- -----------------
Balance at end of period....................... 4,828 4,428 4,303 4,303
---------- --------- --------- -----------------
---------- --------- --------- -----------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED FEBRUARY 28, ENDED MAY 31,
------------------------------------ -----------------------
1993 1994 1995 1994 1995
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.......................................... $ 403,912 $ 861,787 $ 1,350,432 $ 167,773 $ 267,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 277,525 333,289 487,737 99,371 159,388
Loss on store closing............................. 58,841 31,930 -- -- --
Changes in operating assets and liabilities:
Notes and accounts receivable................... (220,046) (143,873) (117,236) (86,888) 80,039
Inventories..................................... 73,009 (261,520) (602,672) (46,566) 68,663
Other assets.................................... 68,506 (22,104) (47,474) (57,665) (43,822)
Accounts payable trade.......................... (59,716) 199,512 332,011 (17,762) 12,752
Income taxes payable............................ -- 224,051 121,134 (143,593) (106,382)
Deferred income taxes........................... -- 51,406 39,871 7,933 --
Accrued liabilities............................. 54,245 122,009 153,954 8,901 117,119
---------- ----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities................................... 656,276 1,396,487 1,717,757 (68,496) 555,428
---------- ----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of other assets............................ -- (65,050) (50,064) 46,433 (17,741)
Purchase of property and equipment.................. (407,222) (1,067,866) (4,399,958) (685,225) (1,459,706)
Disposition of property and equipment............... 165,856 29,242 -- -- --
---------- ----------- ----------- ---------- -----------
Net cash used in investing activities......... (241,366) (1,103,674) (4,450,022) (638,792) (1,477,447)
---------- ----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit........................ (350,000) -- -- 150,000 --
Proceeds from issuance of long-term debt............ 100,000 -- 2,437,500 -- 754,634
Principal payments on long-term debt................ (65,505) (87,967) (270,882) 6,993 (52,842)
Proceeds from exercise of stock options............. 31,250 98,248 52,876 10,737 --
Dividends paid...................................... -- -- (102,570) (87,960) --
Proceeds from sale of treasury stock................ 1,450 1,450 1,500 137 --
Purchase and retirement of preferred stock.......... -- -- -- -- (26,025)
---------- ----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities................................... (282,805) 11,731 2,118,424 79,907 675,767
---------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 132,105 304,544 (613,841) (627,381) (246,252)
---------- ----------- ----------- ---------- -----------
Cash and cash equivalents at beginning of
period....................................... 560,097 692,202 996,746 996,746 382,905
---------- ----------- ----------- ---------- -----------
Cash and cash equivalents at end of period.... $ 692,202 $ 996,746 $ 382,905 $ 369,365 $ 136,653
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
SUPPLEMENTARY DISCLOSURES:
Interest paid....................................... $ 91,399 $ 87,054 $ 155,015 $ 22,075 $ 55,763
Income taxes paid................................... -- 9,128 628,382 237,231 271,985
NON-CASH FINANCING ACTIVITIES:
Issuance of 416,493 and 432,376 shares of Common
Stock upon conversion of 7% convertible notes in
1994 and 1995 respectively......................... $ -- $ 300,000 $ 400,000 $ -- $ --
Equipment purchase financed by debt................. -- -- 30,000 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE-MONTH PERIODS ENDED MAY 31, 1994 AND 1995
IS UNAUDITED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
BUSINESS
The Company is engaged in the manufacturing, wholesaling and retailing of
chocolate candy products.
INVENTORIES
Inventories are states 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 (buildings -- 39 years, equipment -- 5 to 10 years). Leasehold
improvements are amortized on a straight-line basis over the lives of the
respective leases or the service lives of the improvements, whichever is
shorter.
AMORTIZATION OF GOODWILL
Goodwill is amortized on a straight-line basis over twenty-five years. The
Company evaluates the impairment of goodwill on the basis of whether goodwill is
recoverable from the projected undiscounted net income before goodwill
amortization of the related assets.
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 received a royalty fee of 5% and a marketing and
promotion fee of 1% of the store's gross sales.
CASH EQUIVALENTS
Cash equivalents include cash in excess of daily requirements which is
invested in various financial instruments having an original maturity of three
months or less.
INCOME 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 and assumes conversion of convertible
notes payable and cumulative preferred stock, when dilutive.
INTERIM STATEMENTS
In the opinion of management, the unaudited interim financial statements as
of May 31, 1995 and for the three-month periods ended May 31, 1994 and May 31,
1995 include all adjustments, consisting only of those of a normal recurring
nature, necessary to present fairly the Company's financial position as of May
31, 1995 and the results of its operations and cash flows for the three-month
periods ended May 31, 1994 and 1995. The results of operations for the three
months ended May 31, 1995 are not necessarily indicative of the results to be
expected for the full year.
F-6
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE-MONTH PERIODS ENDED MAY 31, 1994 AND 1995
IS UNAUDITED)
NOTE B -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1995 MAY 31, 1995
------------ ------------ ------------
<S> <C> <C> <C>
Ingredients and supplies...................................... $ 541,701 $ 712,727 $ 691,866
Finished candy................................................ 542,643 974,289 926,487
------------ ------------ ------------
$ 1,084,344 $ 1,687,016 $ 1,618,353
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE C -- LINE OF CREDIT AND LONG-TERM DEBT
LINE OF CREDIT:
At February 28, 1995 and May 31, 1995 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. There is no balance
owed at February 28, 1995 or May 31, 1995 under the credit line. The credit line
expires in July 1996.
LONG-TERM DEBT:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1995 MAY 31, 1995
------------ ------------ ------------
<S> <C> <C> <C>
7% convertible notes, semi-annual payments of interest only
through November, 1997 when the principal is payable in full;
collateralized by plant improvements and equipment........... $ 400,000 $ -- $ --
Note payable under 60-month term, monthly installments of
$3,110 through March 1998; interest rate variable at bank
base rate (8.95% at February 28, 1995); collateralized by
machinery, equipment, furniture and fixtures................. 127,259 -- --
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 -- 711,689 698,134
Real estate mortgage note payable in monthly installments of
$14,506 through August, 2004; interest rate of 8.25%;
collateralized by factory building........................... -- 1,660,275 1,651,287
Capital lease obligation, 60-month term, payable in monthly
installments of $3,503 through June 1996; interest imputed at
11.04%....................................................... 109,214 66,070 45,818
Chattel mortgage note payable in monthly installments of
$25,882 through June 2000; interest at 10.0% per annum;
collateralized by machinery, equipment, furniture and
fixtures..................................................... -- -- 754,634
</TABLE>
F-7
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE-MONTH PERIODS ENDED MAY 31, 1994 AND 1995
IS UNAUDITED)
NOTE C -- LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1995 MAY 31, 1995
------------ ------------ ------------
<S> <C> <C> <C>
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................................... -- 21,000 18,000
Chattel mortgage note payable in monthly installments of
$2,746 through May 1996; including interest at 13.46% per
annum collateralized by equipment............................ 63,656 37,713 30,667
------------ ------------ ------------
700,129 2,496,747 3,198,540
Less current maturities....................................... 96,109 182,852 176,135
------------ ------------ ------------
$ 604,020 $ 2,313,895 $ 3,022,405
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The 7% convertible notes were convertible at the option of the payee into
shares of Common Stock of the Company at conversion prices determined by
formulas based upon the market price of the Common Stock. In addition, certain
registration rights were granted with respect to the Common Stock into which the
notes are convertible. The payee is the principal stockholder of the Company.
Interest expense on these notes during the three years ended February 28, 1995
(including amortization of deferred loan costs) was $12,250, $50,121 and $51,563
respectively. On May 31, 1994 the remaining $400,000 of notes were converted by
the holder into 432,376 shares of Common Stock. If the conversion had occurred
on March 1, 1994, primary income per share for the year ended February 28, 1995
would have been $.49 per share.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year-ending February 28,
1996.......................................................... $ 182,852
1997.......................................................... 135,130
1998.......................................................... 109,186
1999.......................................................... 118,543
2000.......................................................... 128,701
Thereafter.................................................... 1,822,335
----------
$2,496,747
----------
----------
</TABLE>
NOTE D -- OPERATING LEASES
The Company conducts its retail sales operations in facilities leased under
five to 10 year noncancelable operating leases. There are options to renew some
leases for an additional five years at increased monthly rentals. The majority
of the leases provide for contingent rentals based on sales in excess of
predetermined base levels.
F-8
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE-MONTH PERIODS ENDED MAY 31, 1994 AND 1995
IS UNAUDITED)
NOTE D -- OPERATING LEASES (CONTINUED)
The following is a schedule by year of future minimum rental payments
required under such leases:
<TABLE>
<S> <C>
Year-ending February 28,
1996.......................................................... $ 461,789
1997.......................................................... 475,149
1998.......................................................... 477,539
1999.......................................................... 419,377
2000.......................................................... 312,709
Thereafter.................................................... 406,988
----------
$2,553,551
----------
----------
</TABLE>
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 franchised stores. When a franchise is sold, the space 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 franchised
store locations, all of which is offset by sublease rentals, is as follows:
<TABLE>
<S> <C>
Year-ending February 28,
1996.......................................................... $ 982,780
1997.......................................................... 822,435
1998.......................................................... 597,762
1999.......................................................... 491,609
2000.......................................................... 384,272
Thereafter.................................................... 417,425
----------
$3,696,283
----------
----------
</TABLE>
The following is a schedule of lease expense for all operating leases:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY
YEARS ENDED FEBRUARY 28, 31,
-------------------------------------- ------------------------
1993 1994 1995 1994 1995
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Minimum rentals...................... $ 625,586 $ 748,510 $ 1,042,235 $ 237,368 $ 328,435
Less sublease rentals................ (316,795) (422,292) (663,457) (165,861) (218,720)
Contingent rentals................... 21,154 23,045 33,040 23,111 44,820
----------- ----------- ------------ ----------- -----------
$ 329,945 $ 349,263 $ 411,818 $ 94,618 $ 154,535
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
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.
F-9
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE-MONTH PERIODS ENDED MAY 31, 1994 AND 1995
IS UNAUDITED)
NOTE F -- INCOME TAXES
Income tax expense is composed of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY
YEARS ENDED FEBRUARY 28, 31,
--------------------------------- ----------------------
1993 1994 1995 1994 1995
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Federal
Current.................................... $ 3,000 $ 216,899 $ 658,061 $ 105,496 $ 139,189
Deferred................................... -- 51,405 39,871 -- --
State........................................ -- 42,327 91,455 14,383 21,414
--------- ---------- ---------- ---------- ----------
$ 3,000 $ 310,631 $ 789,387 $ 119,879 $ 160,603
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
rate as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED FEBRUARY 28, ENDED MAY 31,
-------------------------- ---------------
1993 1994 1995 1994 1995
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Statutory rate........................................ 34.0% 34.0% 34.0% 34.0% 34.0%
Goodwill amortization................................. 1.4 .7 .4 .7 .5
Reduction in valuation allowance...................... (35.0) (11.1) -- -- --
State income taxes, net of federal benefit............ -- 3.6 2.8 3.3 3.3
Other................................................. .3 (.7) (.3) 3.7 (.3)
------- ------- ------ ------ ------
.7% 26.5% 36.9% 41.7% 37.5%
------- ------- ------ ------ ------
------- ------- ------ ------ ------
</TABLE>
The components of deferred income taxes at February 28, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSET 1994 1995
-------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Allowance for doubtful accounts..................................... $ 19,430 $ 18,863
Accrued compensation................................................ 37,976 49,723
Deferred lease rentals.............................................. 7,660 12,753
----------- -----------
Net deferred tax asset.......................................... $ 65,066 $ 81,339
----------- -----------
----------- -----------
<CAPTION>
DEFERRED TAX LIABILITIES
--------------------------------------------------------------------
<S> <C> <C>
Depreciation........................................................ $ (116,472) $ (172,616)
----------- -----------
----------- -----------
</TABLE>
NOTE G -- PREFERRED STOCK
Each share of the $1.00 Cumulative Convertible Preferred Stock (""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. At February 28, 1995,
cumulative dividends of $.16 per share ($2,338) remained unpaid.
On February 15, 1995, the Company called for redemption at March 17, 1995
all outstanding shares of its Preferred Stock at a redemption price of $10.41,
including $.21 in unpaid, accrued dividends. As of
F-10
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE-MONTH PERIODS ENDED MAY 31, 1994 AND 1995
IS UNAUDITED)
NOTE G -- PREFERRED STOCK (CONTINUED)
February 28, 1995, 14,610 shares of Preferred Stock had not been converted; and,
as of March 17, 1995, all Preferred shares had been converted or redeemed by the
Company and Rocky Mountain Chocolate Factory Preferred Stock was de-listed from
the Nasdaq Market System.
NOTE H -- STOCK OPTION PLANS
Under the Incentive Stock Option Plan and Nonqualified Stock Option Plan for
Nonemployee Directors, options to purchase up to 215,000 and 60,000 shares,
respectively, of the Company's Common Stock may be granted at prices no less
than market value at date of grant. At May 31, 1995, there were options for
186,000 shares outstanding under these plans, which expire, if not exercised, in
July 1995 through June 24, 2002. Options for 186,000 shares were exercisable at
May 31, 1995.
The following table sets forth the option activity for the years ended
February 28, 1994 and 1995 and the three months ended May 31, 1995:
<TABLE>
<CAPTION>
OPTION PRICE
YEAR ENDED FEBRUARY 28, 1994 SHARES PER SHARE TOTAL
----------------------------------------------------- --------- -------------- ------------
<S> <C> <C> <C>
Balance at beginning of year......................... 163,000 $ 3.125-5.25 $ 611,000
Exercised............................................ (22,000) 3.125-5.25 (74,750)
--------- -------------- ------------
Balance at end of year............................... 141,000 $ 3.125-5.25 $ 536,250
--------- ------------
--------- ------------
<CAPTION>
YEAR ENDED FEBRUARY 28, 1995
-----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year......................... 141,000 $ 3.125-5.25 $ 536,250
Granted.............................................. 66,000 13.50 891,000
Forfeited............................................ (6,000) 13.50 (81,000)
Exercised............................................ (15,000) 3.125-4.00 (38,475)
--------- -------------- ------------
Balance at end of year............................... 186,000 $ 3.125-13.50 $ 1,307,775
--------- ------------
--------- ------------
<CAPTION>
THREE MONTHS ENDED MAY 31, 1995
-----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year......................... 186,000 $ 3.125-13.50 $ 1,307,775
Granted.............................................. -- -- --
Forfeited............................................ -- -- --
Exercised............................................ -- -- --
--------- -------------- ------------
Balance at end of period............................. 186,000 $ 3.125-13.50 $ 1,307,775
--------- ------------
--------- ------------
</TABLE>
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.
NOTE J -- SUPPLEMENTAL EARNINGS PER COMMON SHARE
Supplemental primary and fully-diluted earnings per common share were $0.53
and $0.51, respectively, for the year ended February 28, 1995. For the three
months in the period ended May 31, 1995, supplemental primary and fully-diluted
earnings per share were $0.10. Supplemental earnings per common share are
calculated assuming that retirement of debt ($1,500,000) with the proceeds of
the offering of common stock had occurred at the beginning of the respective
periods. The weighted average shares outstanding used for this calculation were
2,706,774 and 2,819,734, respectively, for the year ended February 28, 1995 and
2,833,292 for the three months in the period ended May 31, 1995.
F-11
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 8
Dividend Policy................................ 8
Price Range of Common Stock.................... 8
Capitalization................................. 9
Selected Financial Data........................ 10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 11
Business....................................... 18
Management..................................... 29
Certain Transactions........................... 33
Principal and Selling Stockholders............. 33
Description of Capital Stock................... 35
Shares Eligible for Future Sale................ 36
Underwriting................................... 37
Legal Matters.................................. 37
Experts........................................ 37
Additional Information......................... 38
Financial Statements........................... F-1
</TABLE>
900,000 SHARES
[LOGO]
ROCKY MOUNTAIN
CHOCOLATE FACTORY, INC.
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
[LOGO]
, 1995
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, incurred or to be incurred in connection
with the sale of the Common Stock being registered (all amounts are estimated
except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq Listing
Fees) all of which will be paid by the Registrant:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 6,425
NASD Filing Fee................................................... 2,363
Nasdaq Listing Fees............................................... 7,013
Blue Sky Qualification Fees and Expenses (including legal
expenses)........................................................ 5,000
Accounting Fees and Expenses...................................... 40,000
Legal Fees and Expenses........................................... 125,000
Transfer Agent and Registrar Fees................................. 5,000
Printing and Engraving............................................ 40,000
Miscellaneous..................................................... 19,199
---------
Total........................................................... $ 250,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XII of the Registrant's Articles of Incorporation, as amended,
provides as follows:
The personal liability of a director to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director
is limited to the full extent provided by Colorado law.
Article IX of the Registrant's Bylaws provides that the Company shall
indemnify directors, officers, employees and agents in accordance with Colorado
law. The Bylaws also authorize the Company to purchase and maintain insurance on
behalf of such persons regardless of whether the Company would have the power to
indemnify for the liability insured against.
Article 109 of the Colorado Business Corporation Act allows a corporation to
indemnify its officers, directors, employees and agents against liability
incurred because such person is or was an officer, director, employee or agent
if such person, (i) conducted himself or herself in good faith; (ii) reasonably
believed, (x) in the case of conduct in an official capacity with the
corporation, that his or conduct was in the best interests of the corporation
(or employee benefit plan, if applicable), or (y) in all other cases, that his
or her conduct was at least not opposed to the corporation's best interests; and
(iii) in the case of any criminal proceeding, such person had no reasonable
cause to believe the conduct was unlawful.
A corporation is prohibited from indemnifying an officer, director, employee
of agent if such person was adjudged liable to the corporation or was adjudged
liable on the basis that he or she derived an improper personal benefit.
A corporation is required to indemnify an officer, director, employee or
agent if such person was wholly successful, on the merits or otherwise, in
defense of any proceeding to which such person was a party, against reasonable
expenses incurred by him or her in connection with the proceeding.
Article 109 also contains provisions relating to the advancement of
expenses, petitioning the court for indemnification, authorization of
indemnification by disinterested parties and notice to shareholders of
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities sold by the Registrant
within the past three years and not registered under the Securities Act of 1933
(the "Securities Act").
II-1
<PAGE>
The only securities sold by the Registrant within the past three years and
not registered under the Securities Act have been connection with the exercise
of employee stock options granted to certain key employees of the Registrant
pursuant to the Registrant's 1985 Incentive Stock Option Plan. During fiscal
year 1994, four employees of the Company exercised stock options for the
purchase of a total of 22,000 shares of Common Stock at an average exercise
price of $3.40 per share. During fiscal year 1995, three employees of the
Company exercised stock options for the purchase of a total of 15,000 shares of
Common Stock at an average exercise price of $3.53 per share.
On November 20, 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 the Selling Stockholders and in connection
therewith, among other things, sold to the Selling Stockholders the Company's 7%
Convertible Secured Notes due November 16, 1997, in the aggregate principal
amount of $1,100,000. In addition, in January 1989, the Company's Board of
Directors approved the sale to the Selling Stockholders of an additional 7%
Convertible Secured Note due November 16, 1997, in the principal amount of
$100,000 (together with the notes sold on November 16, 1987, the "Notes"). The
Selling Stockholders has converted all of the Notes into an aggregate of
1,586,957 shares of common stock. In fiscal years 1993, 1994 and 1995, the
number of shares of Common Stock issued to the Selling Stockholders pursuant to
conversions of Notes were -0-, 416,493 and 432,376 shares, respectively.
In addition, the Company has issued stock bonuses to certain of its
franchisees that were selected by the Company as "Franchisees of the Year." In
the 1993, 1994 and 1995 fiscal years, the number of shares of Common Stock
issued to franchisees pursuant to this program were 400, 400 and 125 shares,
respectively. In addition, on May 31, 1995, 150 shares of Common Stock were
issued to a franchisee pursuant to this program.
Each of the transactions described above was conducted in reliance upon the
exemption from registration provided in Section 3(a)(9) or Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. Each of the
certificates representing the Registrant's securities issued in connection with
such transactions contains a restrictive legend, as appropriate, and no
underwriters participated in such transactions.
No other sales of unregistered securities were made by the Registrant during
the past three-year period.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- --------------------------------------------------------------------------------------------
<C> <S>
1.1 Revised form of Purchase Agreement
3.1 Articles of Incorporation, as amended
3.2 Bylaws, as amended on June 10, 1987
4.1 Form of Statement of Designation of Series and Determination of Rights and Preferences of
$1.00 Cumulative Convertible Preferred Stock, as amended (no shares of such series remain
outstanding)
4.2 Specimen Preferred Stock Certificate
4.3 Specimen Common Stock Certificate
4.8 Working Capital Loan Agreement dated October 17, 1991 between Registrant and Burns National
Bank of Durango (Amended by agreements provided as Exhibits 4.12, 4.16, 4.18 and 4.19 below)
4.10 Lease agreement dated July 19, 1991 between Registrant and Ford Equipment Leasing Company
4.11 Installment note dated August 23, 1991 between Registrant and Textron Financial Corp.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- --------------------------------------------------------------------------------------------
<C> <S>
4.12 Change in Terms Agreement (to Working Capital Loan Agreement dated October 17, 1991 filed as
Exhibit 4.8) dated October 17, 1994
4.13 Letters of commitment from financial institutions supporting commitment of $3,500,000 in
financing
4.14 Chattel Mortgage Loan Agreement dated June 2, 1994 for $750,000 between Registrant and First
National Bank of Farmington
4.15 Real Estate Mortgage Loan Agreement dated June 2, 1994 for $1,687,500 between Registrant and
First National Bank of Farmington
4.16 Change in Terms Agreement (to Working Capital Loan Agreement dated October 17, 1991 filed as
Exhibit 4.8) dated April 12, 1995
4.17 Chattel Mortgage Loan Agreement dated April 12, 1995 for $1,500,000 between Registrant and
First National Bank of Farmington
4.18 Third Amendment to Loan Agreement dated April 12, 1995 (amending Working Capital Loan
Agreement dated October 17, 1991 filed as Exhibit 4.8)
4.19 Change in Terms Agreement (to Working Capital Loan Agreement dated October 17, 1991 filed as
Exhibit 4.8) dated July 17, 1995
5.1 Opinion of Thompson & Knight, A Professional Corporation
10.1 Form of Stock Option Agreement for Incentive Stock Option Plan
10.2 Incentive Stock Option Plan of Registrant as amended July 27, 1990
10.4 Current form of franchise agreement
10.5 Form of Real Estate Lease between Registrant as Lessee and franchisee as Sublessee
10.7 Form of Nonqualified Stock Option Agreement for Nonemployee Directors for Registrant
10.8 Nonqualified Stock Option Plan for Nonemployee Directors of Registrant, as amended
10.9 1995 Stock Option Plan of Registrant
10.10 Forms of Incentive Stock Option Agreement for 1995 Stock Option Plan
10.11 Forms of Nonqualified Stock Option Agreement for 1995 Stock Option Plan
11.1 Statement re computation of per share earnings
23.1 Consent of Grant Thornton LLP
23.2 Consent of Thompson & Knight, A Professional Corporation (included in their opinion filed as
Exhibit 5.1)
24.1 Powers of Attorney (included on Page II-5)
</TABLE>
(b) Financial Statement Schedules
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants on Schedule
Schedule II -- Valuation and Qualifying Accounts
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
II-3
<PAGE>
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant also hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Rocky Mountain
Chocolate Factory, Inc. has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Durango, Colorado, on September 14, 1995.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By: /s/ FRANKLIN E. CRAIL
--------------------------------------
FRANKLIN E. CRAIL
CHAIRMAN OF THE BOARD OF DIRECTORS AND
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
-------------------------------------------------- ------------------------- ------------------
<C> <S> <C>
Chairman of the Board of
/s/ FRANKLIN E. CRAIL Directors, President,
------------------------------------------- Treasurer and Director September 14, 1995
Franklin E. Crail (principal executive
officer)
/s/ LAWRENCE C. REZENTES Vice President -- Finance
------------------------------------------- (principal financial and September 14, 1995
Lawrence C. Rezentes accounting officer)
LEE N. MORTENSON*
------------------------------------------- Director September 14, 1995
Lee N. Mortenson*
RALPH L. NAFZIGER* Vice President --
------------------------------------------- Manufacturing and September 14, 1995
Ralph L. Nafziger* Director
FRED M. TRAINOR*
------------------------------------------- Director September 14, 1995
Fred M. Trainor*
GERALD A. KIEN*
------------------------------------------- Director September 14, 1995
Gerald A. Kien*
EVERETT A. SISSON*
------------------------------------------- Director September 14, 1995
Everett A. Sisson*
*By: /s/ FRANKLIN E. CRAIL
-------------------------------------------
Franklin E. Crail,
Attorney-in-fact pursuant to power of attorney
included on page II-5 of original Registration
Statement
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors
Rocky Mountain Chocolate Factory, Inc.
In connection with our audits of the financial statements of Rocky Mountain
Chocolate Factory, Inc. referred to in our report dated April 26, 1995, which is
included in the Prospectus constituting Part I of this Registration Statement,
we have also audited Schedule II for each of the three years in the period ended
February 28, 1995. In our opinion, this Schedule presents fairly, in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Dallas, Texas
April 26, 1995
II-6
<PAGE>
SCHEDULE II
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED FEBRUARY 28, 1993, 1994, AND 1995
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO DEDUCTIONS END OF
DESCRIPTION OF PERIOD OPERATIONS (1) PERIOD
------------------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended February 28, 1993
Allowance for doubtful accounts............................. $ 10,324 $ 11,961 $ 8,922 $ 13,363
Year ended February 28, 1994
Allowance for doubtful accounts............................. $ 13,363 $ 55,369 $ 19,452 $ 49,280
Year ended February 28, 1995
Allowance for doubtful accounts............................. $ 49,280 $ 60,000 $ 60,914 $ 48,366
Notes
<FN>
------------------------
(1) Accounts deemed to be uncollectible.
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
--------- --------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
1.1 Revised form of Purchase Agreement Filed herewith
3.1 Articles of Incorporation, as amended Exhibit 3.1 to Current Report on Form 8-K filed on
August 1, 1988
3.2 Bylaws, as amended on June 10, 1987 Exhibit 3.2 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended February
28, 1987
4.1 Form of Statement of Designation of Series and Exhibit 4.1 to Amendment No. 1 of Registration
Determination of Rights and Preferences of $1.00 Statement on Form S-18 (No. 33-2016-D); and Exhibit
Cumulative Convertible Preferred Stock, as amended 4.1 to Amendment No. 3 of Registration Statement on
(no shares of such series remain outstanding) Form S-18 (No. 33-2016-D)
4.2 Specimen Preferred Stock Certificate Exhibit 4.2 to Amendment No. 2 of Registration
Statement on Form S-18 (No. 33-2016-D)
4.3 Specimen Common Stock Certificate Exhibit 4.1 to Current Report on Form 8-K filed on
August 1, 1988
4.8 Working Capital Loan Agreement dated October 17, Exhibit 4.8 to Annual Report on Form 10-K for the
1991 between Registrant and Burns National Bank of fiscal year ended February 29, 1992
Durango (Amended by agreements provided as Exhibits
4.12, 4.16, 4.18 and 4.19 below)
4.10 Lease agreement dated July 19, 1991 between Exhibit 4.10 to Annual Report on Form 10-K for the
Registrant and Ford Equipment Leasing Company fiscal year ended February 29, 1992
4.11 Installment note dated August 23, 1991 between Exhibit 4.11 to Annual Report on Form 10-K for the
Registrant and Textron Financial Corp. fiscal year ended February 29, 1992
4.12 Change in Terms Agreement (to Working Capital Loan Exhibit 4.12 to Annual Report on Form 10-KSB for
Agreement dated October 17, 1991 filed as Exhibit the fiscal year ended February 28, 1994
4.8) dated October 17, 1994
4.13 Letters of commitment from financial institutions Exhibit 4.13 to Annual Report on Form 10-KSB for
supporting commitment of $3,500,000 in financing the fiscal year ended February 28, 1994
4.14 Chattel Mortgage Loan Agreement dated June 2, 1994 Exhibit 4.14 to Annual Report on Form 10-K for the
for $750,000 between Registrant and First National fiscal year ended February 28, 1995
Bank of Farmington
4.15 Real Estate Mortgage Loan Agreement dated June 2, Exhibit 4.15 to Annual Report on Form 10-K for the
1994 for $1,687,500 between Registrant and First fiscal year ended February 28, 1995
National Bank of Farmington
4.16 Change in Terms Agreement (to Working Capital Loan Exhibit 4.16 to Annual Report on Form 10-K for the
Agreement dated October 17, 1991 filed as Exhibit fiscal year ended February 28, 1995
4.8) dated April 12, 1995
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
--------- --------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
4.17 Chattel Mortgage Loan Agreement dated April 12, Exhibit 4.17 to Annual Report on Form 10-K for the
1995 for $1,500,000 between Registrant and First fiscal year ended February 28, 1995
National Bank of Farmington
4.18 Third Amendment to Loan Agreement dated April 12, Previously filed with Registration Statement
1995 (amending Working Capital Loan Agreement dated
October 17, 1991 filed as Exhibit 4.8)
4.19 Change in Terms Agreement (to Working Capital Loan Previously filed with Registration Statement
Agreement dated October 17, 1991 filed as Exhibit
4.8) dated July 17, 1995
5.1 Opinion of Thompson & Knight, A Professional Previously filed with Registration Statement
Corporation
10.1 Form of Stock Option Agreement for Incentive Stock Exhibit 10.3 to Annual Report on Form 10-K for the
Option Plan fiscal year ended February 28, 1986
10.2 Incentive Stock Option Plan of Registrant as Exhibit 10.2 to Annual Report on Form 10-K for the
amended July 27, 1990 fiscal year ended February 28, 1991
10.4 Current form of franchise agreement Exhibit 10.4 to Annual Report on Form 10-K for the
fiscal year ended February 28, 1995
10.5 Form of Real Estate Lease between Registrant as Exhibit 10.7 to Registration Statement on Form S-18
Lessee and franchisee as Sublessee (No. 33-2016-D)
10.7 Form of Nonqualified Stock Option Agreement for Previously filed with Registration Statement
Nonemployee Directors for Registrant
10.8 Nonqualified Stock Option Plan for Nonemployee Previously filed with Registration Statement
Directors of Registrant, as amended
10.9 1995 Stock Option Plan of Registrant Previously filed with Registration Statement
10.10 Forms of Incentive Stock Option Agreement for 1995 Previously filed with Registration Statement
Stock Option Plan
10.11 Forms of Nonqualified Stock Option Agreement for Previously filed with Registration Statement
1995 Stock Option Plan
11.1 Statement re computation of per share earnings Exhibit 11.1 to Annual Report on Form 10-K for the
fiscal year ended February 28, 1995 and Exhibit
11.1 to Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995
23.1 Consent of Grant Thornton LLP Filed herewith
23.2 Consent of Thompson & Knight, A Professional
Corporation (included in their opinion filed as
Exhibit 5.1)
24.1 Powers of Attorney (included on Page II-5 of
Registration Statement as originally filed)
</TABLE>
<PAGE>
Appendix A.
-----------
FRONT COVER PAGE OF PROSPECTUS
The front cover page of the prospectus contains a light color background that
reflects an artist's rendering of an old fashioned chocolate factory. Supplies
are shown arriving by barge and wagon and a farm and mountains appear in the
background.
PAGE 2 OF PROSPECTUS:
Page 2 of the prospectus contains four color pictures: a store operator pouring
hot fudge on a marble cooling table while customers observe; a typical store
front for an outlet mall location; a plate of chocolates; and a typical store
front at a tourist location.
This page opens up into a gatefold which contains a number of color pictures.
The page that folds out from the cover page of the prospectus shows (clockwise
from the upper left) caramel apples, fudge, strawberries dipped in chocolate
and truffles.
The page to the left of page 2 contains two color pictures (one above the
other) of the inside of a typical store. Each picture shows, in a Victorian
decor, the counters, crates and barrels in which products are displayed.
INSIDE BACK COVER PAGE OF PROSPECTUS
The inside back cover page of the prospectus shows a cup of coffee in the
center surrounded by containers of coffee and sauces, truffles, chocolates,
candy bars and baskets and tins used to package products.
BACK COVER PAGE OF PROSPECTUS
The back cover page of the prospectus contains a light color background that
reflects an artist's rendering of an old fashioned chocolate factory.
Supplies are shown arriving by barge and wagon and a farm and mountains
appear in the background.
<PAGE>
900,000 SHARES(1)
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
COMMON STOCK
PURCHASE AGREEMENT
___________, 1995
PIPER JAFFRAY INC.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (the
"Company"), and the stockholders listed on Schedule I hereto (the "Selling
Stockholders"), severally propose to sell to you (the "Underwriter") an
aggregate of 900,000 shares (the "Firm Shares") of Common Stock, par value $.03
per share (the "Common Stock"), of the Company. The Firm Shares consist of
300,000 authorized but unissued shares of Common Stock to be issued and sold by
the Company and 600,000 outstanding shares of Common Stock to be sold by the
Selling Stockholders. The Company and certain of the Selling Stockholders have
also granted to you an option to purchase up to 50,625 and 84,375 additional
shares of Common Stock, respectively, on the terms and for the purposes set
forth in Section 3 hereof (the "Option Shares"). The Firm Shares and any Option
Shares purchased pursuant to this Purchase Agreement are herein collectively
called the "Securities."
The Company and the Selling Stockholders hereby confirm their agreement
with respect to the sale of the Securities to you.
1. REGISTRATION STATEMENT. A registration statement on Form S-1 (File
No. 33-_______) with respect to the Securities, including a preliminary form of
prospectus, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations ("Rules and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder and has been filed with the Commission; one or
more amendments to such registration statement have also been so prepared and
have been, or will be, so filed. Copies of such registration statement and
amendments and each related preliminary prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, it will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. Such registration
-----------------------------
(1)PLUS AN OPTION TO PURCHASE UP TO 135,000 ADDITIONAL SHARES TO COVER OVER-
ALLOTMENTS.
<PAGE>
statement as amended at the time it is or was declared effective by the
Commission, and, in the event of any amendment thereto after the effective date
and prior to the First Closing Date (as hereinafter defined), such registration
statement as so amended (but only from and after the effectiveness of such
amendment), including the information deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A(b), if applicable,
is hereinafter called the "Registration Statement." The prospectus included in
the Registration Statement at the time it is or was declared effective by the
Commission is hereinafter called the "Prospectus," except that if any prospectus
filed by the Company with the Commission pursuant to Rule 424(b) of the Rules
and Regulations or any other prospectus provided to you by the Company for use
in connection with the offering of the Securities (whether or not required to be
filed by the Company with the Commission pursuant to Rule 424(b) of the Rules
and Regulations) differs from the prospectus on file at the time the
Registration Statement is or was declared effective by the Commission, the term
"Prospectus" shall refer to such differing prospectus from and after the time
such prospectus is filed with the Commission or transmitted to the Commission
for filing pursuant to such Rule 424(b) or from and after the time it is first
provided to you by the Company for such use. The term "Preliminary Prospectus"
as used herein means any preliminary prospectus included in the Registration
Statement prior to the time it becomes or became effective under the Act and any
prospectus subject to completion as described in Rule 430A of the Rules and
Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) The Company represents and warrants to, and agrees with you, as
follows:
(i) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission and each Preliminary
Prospectus, at the time of filing thereof, did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; except
that the foregoing shall not apply to statements in or omissions from any
Preliminary Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by you specifically for use in the
preparation thereof.
(ii) As of the time the Registration Statement (or any post-effective
amendment thereto) is or was declared effective by the Commission, upon the
filing or first delivery to you of the Prospectus (or any supplement to the
Prospectus) and at the First Closing Date and Second Closing Date (as
hereinafter defined), (A) the Registration Statement and Prospectus (in
each case, as so amended and/or supplemented) will conform or conformed in
all material respects to the requirements of the Act and the Rules and
Regulations, (B) the Registration Statement (as so amended) will not or did
not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (C) the Prospectus (as so
supplemented) will not or did not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they are or were made, not misleading; except that the foregoing
shall not apply to statements in or omissions from any such document in
reliance upon, and in conformity with, written information furnished to the
Company by you or the Selling Stockholders, specifically for use in the
preparation thereof. If the Registration Statement has been declared
effective by the Commission, no stop order
-2-
<PAGE>
suspending the effectiveness of the Registration Statement has been issued,
and no proceeding for that purpose has been initiated or, to the Company's
knowledge, threatened by the Commission.
(iii) The consolidated financial statements of the Company, together
with the notes thereto, set forth in the Registration Statement and
Prospectus comply in all material respects with the requirements of the Act
and fairly present the financial condition of the Company as of the dates
indicated and the results of operations and changes in cash flows for the
periods therein specified in conformity with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise stated therein); and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. No other financial statements or schedules are required to be
included in the Registration Statement or Prospectus. Grant Thornton, LLP,
which has expressed its opinion with respect to the consolidated financial
statements and schedules filed as a part of the Registration Statement and
included in the Registration Statement and Prospectus, are independent
public accountants as required by the Act and the Rules and Regulations.
(iv) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation. The Company has full corporate power and authority to own
its properties and conduct its business as currently being carried on and
as described in the Registration Statement and Prospectus, and is duly
qualified to do business as a foreign corporation in good standing in each
jurisdiction in which it owns or leases real property or in which the
conduct of its business makes such qualification necessary and in which the
failure to so qualify would have a material adverse effect upon its
business, condition (financial or otherwise) or properties, taken as a
whole.
(v) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company has not incurred any material
liabilities or obligations, direct or contingent, or entered into any
material transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and there has
not been any change in the capital stock (other than a change in the number
of outstanding shares of Common Stock due to the issuance of shares upon
the exercise of outstanding options or warrants or pursuant to employee
benefit plans referred to in the Registration Statement), or any material
change in the short-term or long-term debt, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital
stock, of the Company (other than pursuant to employee benefit plans
referred to in the Registration Statement) or any material adverse change,
or any development involving a prospective material adverse change, in the
general affairs, condition (financial or otherwise), business, key
personnel, property, prospects, net worth or results of operations of the
Company, taken as a whole.
(vi) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of the Company, threatened or contemplated, any action,
suit or proceeding to which the Company is a party before or by any court
or governmental agency, authority or body, or any arbitrator, which might
result in any material adverse change in the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company, taken as a whole.
-3-
<PAGE>
(vii) There are no contracts or documents of the Company that are
required to be filed as exhibits to the Registration Statement by the Act
or by the Rules and Regulations that have not been so filed.
(viii) This Agreement has been duly authorized, executed and
delivered by the Company, and constitutes a valid, legal and binding
obligation of the Company, enforceable in accordance with its terms, except
as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity. The
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any agreement or instrument to which the Company is a
party or by which it is bound or to which any of its property is subject,
the Company's charter or by-laws, or any order, rule, regulation or decree
of any court or governmental agency or body having jurisdiction over the
Company or any of its properties; no consent, approval, authorization or
order of, or filing with, any court or governmental agency or body is
required for the execution, delivery and performance of this Agreement or
for the consummation of the transactions contemplated hereby, including the
issuance or sale of the Securities by the Company, except such as may be
required under the Act or state securities or blue sky laws; and the
Company has full power and authority to enter into this Agreement and to
authorize, issue and sell the Securities as contemplated by this Agreement.
(ix) All of the issued and outstanding shares of capital stock of the
Company, including the outstanding shares of Common Stock, are duly
authorized and validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights
to subscribe for or purchase securities, and the holders thereof are not
subject to personal liability by reason of being such holders; the
Securities which may be sold hereunder by the Company have been duly
authorized and, when issued, delivered and paid for in accordance with the
terms hereof, will have been validly issued and will be fully paid and
nonassessable, and the holders thereof will not be subject to personal
liability by reason of being such holders; and the capital stock of the
Company, including the Common Stock, conforms to the description thereof in
the Registration Statement and Prospectus. Except as otherwise stated in
the Registration Statement and Prospectus, there are no preemptive rights
or other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument to which
the Company is a party or by which the Company is bound. Neither the
filing of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any rights for
or relating to the registration of any shares of Common Stock or other
securities of the Company. Except as described in the Registration
Statement and the Prospectus, there are no options, warrants, agreements,
contracts or other rights in existence to purchase or acquire from the
Company any shares of the capital stock of the Company. The Company has an
authorized and outstanding capitalization as set forth in the Registration
Statement and the Prospectus.
-4-
<PAGE>
(x) The Company holds, and is operating in compliance in all material
respects with, all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business and to the
knowledge of the Company all such franchises, grants, authorizations,
licenses, permits, easements, consents, certifications and orders are valid
and in full force and effect; and the Company is in compliance in all
material respects with all applicable federal, state, local and foreign
laws, regulations, orders and decrees.
(xi) The Company has good and marketable title to all property
described in the Registration Statement and Prospectus as being owned by
it, in each case free and clear of all liens, claims, security interests or
other encumbrances except such as are described in the Registration
Statement and the Prospectus and such as do not substantially affect the
value of such property and do not materially interfere with the use made
and proposed to be made of such property by the Company; the property held
under lease by the Company is held by it under valid, subsisting and
enforceable leases with only such exceptions with respect to any particular
lease as do not interfere in any material respect with the conduct of the
business of the Company; the Company owns or possesses all patents, patent
applications, trademarks, service marks, tradenames, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets and rights necessary for the conduct of the
business of the Company as currently carried on and as described in the
Registration Statement and Prospectus; except as stated in the Registration
Statement and Prospectus, no name which the Company uses and no other
aspect of the business of the Company will involve or give rise to any
infringement of, or license or similar fees for, any patents, patent
applications, trademarks, service marks, tradenames, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets or other similar rights of others material to the
business or prospects of the Company and the Company has not received any
notice alleging any such infringement or fee.
(xii) The Company is not in violation of its respective charter or
by-laws or in breach of or otherwise in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note, indenture, loan agreement or any other contract, lease or
other instrument material to the conduct of the business of the Company to
which it is subject or by which it may be bound, or to which any of the
material property or assets of the Company is subject.
(xiii) The Company has filed all federal, state, local and foreign
income and franchise tax returns required to be filed and is not in default
in the payment of any taxes which were stated to be payable pursuant to
said returns or any assessments with respect thereto, other than any which
the Company is contesting in good faith.
(xiv) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and
sale of the Securities other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by the
Company.
(xv) The Securities have been approved for listing on the Nasdaq
National Market.
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(xvi) The Company owns no capital stock or other equity or ownership
or proprietary interest in any corporation, partnership, association, trust
or other entity.
(xvii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xviii) Other than as contemplated by this Agreement, the Company has
not incurred any liability for any finder's or broker's fee or agent's
commission in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
(xix) Neither the Company nor any of its affiliates is presently
doing business with the government of Cuba or with any person or affiliate
located in Cuba.
(xx) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts adequate, in its reasonable
opinion, for its business and in line with the insurance maintained by
similar companies and businesses.
(b) Each Selling Stockholder represents and warrants to, and agrees
with, you as follows:
(i) The Selling Stockholder is the sole record owner of, and on the
First Closing Date and/or the Second Closing Date, as the case may be, will
be the sole record owner of, the Securities to be sold by the Selling
Stockholder, free of any adverse claim, any lien in favor of the Company
and any restrictions on transfer imposed by the Company (other than
pursuant to federal and state securities laws and other than such security
interests as are described in the Prospectus); and upon delivery of and
payment for such Securities hereunder, you will acquire all rights of such
Selling Stockholder in such Securities, free of any adverse claim
(including, without limitation, such security interests as are described in
the Prospectus), any lien in favor of the Company and any restrictions on
transfer imposed by the Company. The Selling Stockholder is selling the
Securities to be sold by the Selling Stockholder for the Selling
Stockholder's own account and is not selling such Securities, directly or
indirectly, for the benefit of the Company, and no part of the proceeds of
such sale received by the Selling Stockholder will inure, either directly
or indirectly, to the benefit of the Company other than as described in the
Registration Statement and Prospectus.
(ii) The Selling Stockholder has duly authorized, executed and
delivered a Letter of Transmittal and Custody Agreement ("Custody
Agreement"), which Custody Agreement is a valid and binding obligation of
the Selling Stockholder, to American Securities Transfer, Inc., as
Custodian (the "Custodian"); pursuant to the Custody Agreement the Selling
Stockholder has placed in custody with the Custodian, for delivery under
this Agreement, the certificates representing the Securities to be sold by
the Selling Stockholder; such
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certificates represent validly issued, outstanding, fully paid and
nonassessable shares of Common Stock; and such certificates were duly and
properly endorsed in blank for transfer, or were accompanied by all
documents duly and properly executed that are necessary to validate the
transfer to you of all rights of the Selling Stockholder in such
Securities, free of any adverse claim (including, without limitation, such
security interests as are described in the Prospectus), any lien in favor
of the Company and any restrictions on transfer imposed by the Company.
(iii) The Selling Stockholder has the power and authority to enter
into this Agreement and to sell, transfer and deliver the Securities to be
sold by the Selling Stockholder; and (with respect to Franklin E. Crail)
the Selling Stockholder has duly authorized, executed and delivered to
Franklin E. Crail and Lawrence C. Rezentes, as attorneys-in-fact (the
"Attorneys-in-Fact"), an irrevocable power of attorney (a "Power of
Attorney") authorizing and directing the Attorneys-in-Fact, or either of
them, to effect the sale and delivery of the Securities being sold by the
Selling Stockholder, to enter into this Agreement and to take all such
other action as may be necessary hereunder.
(iv) This Agreement, the Custody Agreement and (if applicable) the
Power of Attorney have each been duly authorized, executed and delivered by
or on behalf of the Selling Stockholder and each constitutes a valid and
binding agreement of the Selling Stockholder, enforceable in accordance
with its terms, except as rights to indemnity hereunder or thereunder may
be limited by federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
laws affecting the rights of creditors generally and subject to general
principles of equity. The execution and delivery of this Agreement, the
Custody Agreement and (if applicable) the Power of Attorney and the
performance of the terms hereof and thereof and the consummation of the
transactions herein and therein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any agreement or instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder is bound, or any law, regulation,
order or decree applicable to the Selling Stockholder; no consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Custody Agreement and (if applicable)
the Power of Attorney or for the consummation of the transactions
contemplated hereby and thereby, including the sale of the Securities being
sold by the Selling Stockholder, except such as may be required under the
Act or state securities laws or blue sky laws.
(v) The Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Securities other than any Preliminary Prospectus
or the Prospectus or other materials permitted by the Act to be distributed
by the Selling Stockholder.
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information provided by the Selling Stockholder to the Company
for use in the preparation thereof, such Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, as of the time the Registration Statement (or any post-effective
amendment
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thereto) is or was declared effective by the Commission, upon the filing or
first delivery to you of the Prospectus (or any supplement to the
Prospectus) and at the First Closing Date and Second Closing Date, did not
or will not include an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statement therein, in light of the circumstances in which they were made or
are made, not misleading.
(vii) The Selling Stockholder has reviewed the Registration Statement
and the Prospectus and to the best knowledge of the Selling Stockholder
neither the Registration Statement nor the Prospectus contains any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading regarding the Selling Stockholder, the Company or otherwise.
(viii) To the best knowledge of the Selling Stockholder, the
representations and warranties of the Company contained in paragraph (a) of
this Section 2 are true and correct.
(c) Any certificate signed by any officer of the Company and
delivered to you or to your counsel pursuant to this Agreement shall be deemed a
representation and warranty by the Company to you as to the matters covered
thereby; any certificate signed by or on behalf of the Selling Stockholders as
such and delivered to you or to your counsel pursuant to this Agreement shall be
deemed a representation and warranty by the Selling Stockholders to you as to
the matters covered thereby.
3. PURCHASE, SALE AND DELIVERY OF SECURITIES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell 300,000 Firm Shares, and the Selling
Stockholders agree to sell 600,000 Firm Shares to you, and you agree to purchase
from the Company and the Selling Stockholders such Firm Shares. The purchase
price for each Firm Share shall be $____ per share. In making this Agreement,
you are contracting, except as provided in Section 8 hereof, to purchase only
the number of Firm Shares in this Section 3(a).
The Firm Shares will be delivered by the Company and the Custodian to
you for your account against payment of the purchase price therefor by certified
or official bank check or other next day funds payable to the order of the
Company and the Custodian, as appropriate, at the offices of Piper Jaffray Inc.,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such
other location as may be mutually acceptable, at 9:00 a.m., Minneapolis time, on
the third full business day following the date hereof, or at such other time as
you and the Company determine, such time and date of delivery being herein
referred to as the "First Closing Date." The Firm Shares, in definitive form
and in such denominations and registered in such names as you may request upon
at least two business days' prior notice to the Company and the Custodian, will
be made available for checking and packaging at the offices of Piper Jaffray
Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or
such other location as may be mutually acceptable, at least one business day
prior to the First Closing Date.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company, with respect to
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50,625 of the Option Shares, and certain of the Selling Stockholders, with
respect to the number of Option Shares set forth opposite the name of such
Selling Stockholder in Schedule I hereto, hereby grant to you an option to
purchase all or any portion of the Option Shares at the same purchase price as
the Firm Shares, for use solely in covering any over-allotments made by you in
the sale and distribution of the Firm Shares. The option granted hereunder may
be exercised at any time (but not more than once) within 30 days after the
effective date of this Agreement upon notice (confirmed in writing) by you to
the Company and to the Attorneys-in-Fact setting forth the aggregate number of
Option Shares as to which you are exercising the option, the names and
denominations in which the certificates for the Option Shares are to be
registered and the date and time, as determined by you, when the Option Shares
are to be delivered, such time and date being herein referred to as the "Second
Closing" and "Second Closing Date", respectively; provided, however, that the
Second Closing Date shall not be earlier than the First Closing Date nor earlier
than the second business day after the date on which the option shall have been
exercised. If the option is exercised, your obligation shall be to purchase the
Option Shares from the Company and the Selling Stockholders granting an option
to purchase Option Shares in the amounts indicated in Schedule I hereto. No
Option Shares shall be sold and delivered unless the Firm Shares previously have
been, or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Custodian and the Company,
as appropriate, to you for your account against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Custodian or the Company, as appropriate, at the offices of
Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable at 9:00 a.m.,
Minneapolis time, on the Second Closing Date. The Option Shares in definitive
form and in such denominations and registered in such names as you have set
forth in your notice of option exercise, will be made available for checking and
packaging at the office of Piper Jaffray Inc., Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually
acceptable, at least one business day prior to the Second Closing Date.
4. COVENANTS.
(a) The Company covenants and agrees with you as follows:
(i) If the Registration Statement has not already been declared
effective by the Commission, the Company will use its best efforts to cause
the Registration Statement and any post-effective amendments thereto to
become effective as promptly as possible; the Company will notify you
promptly of the time when the Registration Statement or any post-effective
amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed and of any request by the
Commission for any amendment or supplement to the Registration Statement or
Prospectus or additional information; if the Company has elected to rely on
Rule 430A of the Rules and Regulations, the Company will file a Prospectus
containing the information omitted therefrom pursuant to such Rule 430A
with the Commission within the time period required by, and otherwise in
accordance with the provisions of, Rules 424(b) and 430A of the Rules and
Regulations; the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus that, in the written opinion of your
counsel, may be necessary or advisable in connection with the distribution
of the Securities by you; and the Company will not file any amendment or
supplement to
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<PAGE>
the Registration Statement or Prospectus to which you shall reasonably
object by notice to the Company after having been furnished a copy a
reasonable time prior to the filing, unless in the written opinion of
Company counsel such amendment or supplement is required by law.
(ii) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement,
of the suspension of the qualification of the Securities for offering or
sale in any jurisdiction, or of the initiation or threatening of any
proceeding for any such purpose; and the Company will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such a stop order should be issued.
(iii) Within the time during which a prospectus relating to the
Securities is required to be delivered under the Act, the Company will
comply as far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations, as
from time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Securities as contemplated by the provisions
hereof and the Prospectus. If during such period any event occurs as a
result of which the Prospectus would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the Act,
the Company will promptly notify you and will amend the Registration
Statement or supplement the Prospectus (at the expense of the Company) so
as to correct such statement or omission or effect such compliance.
(iv) The Company will cooperate with you and your counsel in
qualifying the Securities for sale under the securities laws of such
jurisdictions as you reasonably designate and to continue such
qualifications in effect so long as required for the distribution of the
Securities, except that the Company shall not be required in connection
therewith to qualify as a foreign corporation or to execute a general
consent to service of process in any state.
(v) The Company will furnish to you copies of the Registration
Statement (three of which will be signed and will include all exhibits),
each Preliminary Prospectus, the Prospectus, and all amendments and
supplements to such documents, in each case as soon as available and in
such quantities as you may from time to time reasonably request.
(vi) During a period of five years commencing with the date hereof,
the Company will furnish to you copies of all periodic and special reports
furnished to the stockholders of the Company and all information, documents
and reports filed with the Commission, the National Association of
Securities Dealers, Inc., Nasdaq or any securities exchange.
(vii) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15 months
after the end of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a 12-month period beginning
after the effective date of the Registration Statement that shall satisfy
the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations.
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(viii) The Company, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming
effective under the provisions of Section 9(a) hereof or is terminated,
will pay or cause to be paid (A) all expenses (including transfer taxes
allocated to the respective transferees) incurred in connection with the
delivery to you of the Securities, (B) all expenses and fees (including,
without limitation, fees and expenses of the Company's accountants and
counsel but, except as otherwise provided below, not including fees of your
counsel) in connection with the preparation, printing, filing, delivery,
and shipping of the Registration Statement (including the financial
statements therein and all amendments, schedules, and exhibits thereto),
the Securities, each Preliminary Prospectus, the Prospectus, and any
amendment thereof or supplement thereto, and the printing, delivery, and
shipping of this Agreement and other underwriting documents, including Blue
Sky Memoranda, (C) all filing fees and fees and disbursements of your
counsel incurred in connection with the qualification of the Securities for
offering and sale by you or by dealers under the securities or blue sky
laws of the states and other jurisdictions which you shall designate in
accordance with Section 4(d) hereof, up to a maximum of $5,000, (D) the
fees and expenses of any transfer agent or registrar, (E) the filing fees
incident to any required review by the National Association of Securities
Dealers, Inc. of the terms of the sale of the Securities, (F) listing fees,
if any, and (G) all other costs and expenses incident to the performance of
its obligations hereunder that are not otherwise specifically provided for
herein. If the sale of the Securities provided for herein is not
consummated by reason of action by the Company pursuant to Section 9(a)
hereof which prevents this Agreement from becoming effective, or by reason
of any failure, refusal or inability on the part of the Company or the
Selling Stockholders to perform any agreement on its or their part to be
performed, or because any other condition of your obligations hereunder
required to be fulfilled by the Company or the Selling Stockholders is not
fulfilled, the Company will reimburse you for all out-of-pocket
disbursements (including fees and disbursements of counsel) incurred by you
in connection with their investigation, preparing to market and marketing
the Securities or in contemplation of performing their obligations
hereunder up to a maximum of $100,000. The Company shall not in any event
be liable to you for loss of anticipated profits from the transactions
covered by this Agreement.
(ix) The Company will apply the net proceeds from the sale of the
Securities to be sold by it hereunder for the purposes set forth in the
Prospectus and will file such reports with the Commission with respect to
the sale of the Securities and the application of the proceeds therefrom as
may be required in accordance with Rule 463 of the Rules and Regulations.
(x) The Company will not, without your prior written consent, offer
for sale, sell, contract to sell, grant any option for the sale of or
otherwise issue or dispose of any Common Stock or any securities
convertible into or exchangeable for, or any options or rights to purchase
or acquire, Common Stock, except to you pursuant to this Agreement and
except pursuant to employee stock option plans referred to in the
Registration Statement for a period of 180 days after the commencement of
the public offering of the Securities by you.
(xi) The Company either has caused to be delivered to you or will
cause to be delivered to you prior to the effective date of the
Registration Statement a letter from each
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of the Company's directors and officers stating that such person agrees
that he or she will not, without your prior written consent, offer for
sale, sell, contract to sell or otherwise dispose of any shares of Common
Stock or rights to purchase Common Stock, except to you pursuant to this
Agreement, for a period of 180 days after commencement of the public
offering of the Securities by you.
(xii) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities, and has not effected any sales of Common
Stock which are required to be disclosed in response to Item 701 of
Regulation S-K under the Act which have not been so disclosed in the
Registration Statement.
(xiii) The Company will not incur any liability for any finder's or
broker's fee or agent's commission in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(xiv) The Company will inform the Florida Department of Banking and
Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriter[s] if it commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba.
Such information will be provided within 90 days after the commencement
thereof or after a change occurs with respect to previously reported
information.
(b) Each Selling Stockholder covenants and agrees with you as
follows:
(i) Except as otherwise agreed to by the Company and the Selling
Stockholder, the Selling Stockholder will pay all taxes, if any, on the
transfer and sale, respectively, of the Securities being sold by the
Selling Stockholder, the fees of the Selling Stockholder's counsel and the
Selling Stockholder's proportionate share (based upon the number of
Securities being offered by such Selling Stockholder pursuant to the
Registration Statement) of all costs and expenses (except for legal and
accounting expenses and fees of the registrar and transfer agent) incurred
by the Company pursuant to the provisions of Section 4(a)(viii) of this
Agreement; provided, however, that the Selling Stockholder agrees to
reimburse the Company for any reimbursement made by the Company to you
pursuant to Section 4(a)(viii) hereof to the extent such reimbursement
resulted from the failure or refusal on the part of the Selling Stockholder
to comply under the terms or fulfill any of the conditions of this
Agreement.
(ii) If this Agreement shall be terminated by you because of any
failure, refusal or inability on the part of the Selling Stockholder to
perform any agreement on the Selling Stockholder's part to be performed, or
because any other condition of your obligations hereunder required to be
fulfilled by the Selling Stockholder are not fulfilled, the Selling
Stockholder agrees to reimburse you for all out-of-pocket disbursements
(including fees and disbursements of your counsel) incurred by you in
connection with your investigation, preparing to market and marketing the
Securities or in contemplation of performing your obligations hereunder.
The Selling Stockholder shall not in any event be liable to you for loss of
anticipated profits from the transactions covered by this Agreement.
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(iii) The Securities to be sold by the Selling Stockholder,
represented by the certificates on deposit with the Custodian pursuant to
the Custody Agreement of the Selling Stockholder, are subject to your
interest; the arrangements made for such custody are, except as
specifically provided in the Custody Agreement, irrevocable; and the
obligations of the Selling Stockholder hereunder shall not be terminated,
except as provided in this Agreement or in the Custody Agreement, by any
act of the Selling Stockholder, by operation of law, whether by the
liquidation, dissolution or merger of the Selling Stockholder, by the death
of any of the Selling Stockholder, or by the occurrence of any other event.
If the Selling Stockholder should liquidate, dissolve or be a party to a
merger or if any other such event should occur before the delivery of the
Securities hereunder, certificates for the Securities deposited with the
Custodian shall be delivered by the Custodian in accordance with the terms
and conditions of this Agreement as if such liquidation, dissolution,
merger or other event had not occurred, whether or not the Custodian shall
have received notice thereof.
(iv) The Selling Stockholder will not, without your prior written
consent, offer for sale, sell, contract to sell, grant any option for the
sale of or otherwise dispose of any Common Stock or any securities
convertible into or exchangeable for, or any options or rights to purchase
or acquire, Common Stock, except to you pursuant to this Agreement, for a
period of 180 days after the commencement of the public offering of the
Securities by you.
(v) The Selling Stockholder has not taken and will not take, directly
or indirectly, any action designed to or which might reasonably be expected
to cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities,
and has not effected any sales of Common Stock which, if effected by the
Company, would be required to be disclosed in response to Item 701 of
Regulation S-K.
(vi) The Selling Stockholder shall immediately notify you if any
event occurs, or of any change in information relating to the Selling
Stockholder or the Company or any new information relating to the Company
or relating to any matter stated in the Prospectus or any supplement
thereto, which results in the Prospectus (as supplemented) including an
untrue statement of a material fact or omitting to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. Your obligations hereunder
are subject to the accuracy, as of the date hereof and at each of the First
Closing Date and the Second Closing Date (as if made at such Closing Date), of
and compliance with all representations, warranties and agreements of the
Company and the Selling Stockholders contained herein, to the performance by the
Company and the Selling Stockholders of their respective obligations hereunder
and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Minneapolis time, on the date of this Agreement, or such later
time and date as you shall approve and all filings required by Rule 424 and Rule
430A of the Rules and Regulations shall have been timely made; no stop order
suspending the effectiveness of the Registration Statement or any
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amendment thereof shall have been issued; no proceedings for the issuance of
such an order shall have been initiated or threatened; and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to your
satisfaction.
(b) You shall not have advised the Company that the Registration
Statement or the Prospectus, or any amendment thereof or supplement thereto,
contains an untrue statement of fact which, in your opinion, is material, or
omits to state a fact which, in your opinion, is material and is required to be
stated therein or necessary to make the statements therein not misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries shall have
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transactions, or declared or paid any dividends or
made any distribution of any kind with respect to its capital stock; and there
shall not have been any change in the capital stock (other than a change in the
number of outstanding shares of Common Stock due to the issuance of shares upon
the exercise of outstanding options or warrants), or any material change in the
short-term or long-term debt of the Company, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital stock
of the Company or any of its subsidiaries, or any material adverse change or any
development involving a prospective material adverse change (whether or not
arising in the ordinary course of business), in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects, net
worth or results of operations of the Company and its subsidiaries, taken as a
whole, that, in your judgment, makes it impractical or inadvisable to offer or
deliver the Securities on the terms and in the manner contemplated in the
Prospectus.
(d) On each Closing Date, there shall have been furnished to you the
opinion of Thompson & Knight, a Professional Corporation, counsel for the
Company, dated such Closing Date and addressed to you, to the effect that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation. The Company has full corporate power and authority to own
its properties and conduct its business as currently being carried on and
as described in the Registration Statement and Prospectus, and is duly
qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which it owns or leases real property or in which
the conduct of its business makes such qualification necessary and in which
the failure to so qualify would have a material adverse effect upon the
business, condition (financial or otherwise) or properties of the Company
and its subsidiaries, taken as a whole.
(ii) The capital stock of the Company conforms as to legal matters to
the description thereof contained in the Prospectus under the caption
"Description of Capital Stock." All of the issued and outstanding shares
of the capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and the holders thereof are
not subject to personal liability by reason of being such holders. The
Securities to be issued and sold by the Company hereunder have been duly
authorized and, when issued, delivered and paid for in accordance with the
terms of this Agreement, will have been validly issued and will be fully
paid and nonassessable, and the holders thereof
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will not be subject to personal liability by reason of being such holders.
Except as otherwise stated in the Registration Statement and Prospectus,
there are no preemptive rights or other rights to subscribe for or to
purchase, or any restriction upon the voting or transfer of, any shares of
Common Stock pursuant to the Company's charter, by-laws or any agreement or
other instrument known to such counsel to which the Company is a party or
by which the Company is bound. To the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the offering or sale
of the Securities as contemplated by this Agreement gives rise to any
rights for or relating to the registration of any shares of Common Stock or
other securities of the Company, except those rights which have been
complied with or waived.
(iii) To the best of such counsel's knowledge, except as described in
the Registration Statement and Prospectus, there are no options, warrants,
agreements, contracts or other rights in existence to purchase or acquire
from the Company any shares of the capital stock of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or, to the knowledge of
such counsel, threatened by the Commission.
(v) The descriptions in the Registration Statement and Prospectus of
statutes, legal and governmental proceedings, contracts and other documents
are accurate and fairly present the information required to be shown; and
such counsel does not know of any statutes or legal or governmental
proceedings required to be described in the Prospectus that are not
described as required, or of any contracts or documents of a character
required to be described in the Registration Statement or Prospectus or
included as exhibits to the Registration Statement that are not described
or included as required.
(vi) The Company has full corporate power and authority to enter into
this Agreement, and this Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid, legal and binding
obligation of the Company enforceable in accordance with its terms (except
as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity); the
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, rule or regulation, any agreement or instrument known
to such counsel to which the Company is a party or by which it is bound or
to which any of its property is subject, the Company's charter or by-laws,
or any order or decree known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its
respective properties; and no consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is required for
the execution, delivery and performance of this Agreement or for the
consummation of the transactions contemplated hereby, including the
issuance or sale of the Securities by the Company, except such as may be
required under the Act or state securities laws.
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(vii) To the best of such counsel's knowledge, the Company holds, and
is operating in compliance in all material respects with, all franchises,
grants, authorizations, licenses, permits, easements, consents,
certificates and orders of any governmental or self-regulatory body
required for the conduct of its business and all such franchises, grants,
authorizations, licenses, permits, easements, consents, certifications and
orders are valid and in full force and effect.
(viii) To the best of such counsel's knowledge, the Company is not in
violation of its charter or by-laws. To the best of such counsel's
knowledge, the Company is not in breach of or otherwise in default in the
performance of any material obligation, agreement or condition contained in
any bond, debenture, note, indenture, loan agreement or any other material
contract, lease or other instrument to which it is subject or by which any
of them may be bound, or to which any of the material property or assets of
the Company or any of its subsidiaries is subject.
(ix) The Registration Statement and the Prospectus, and any amendment
thereof or supplement thereto, comply as to form in all material respects
with the requirements of the Act and the Rules and Regulations.
In rendering such opinion, such counsel may rely (i) as to matters of
law other than Texas, Colorado and federal law, upon the opinion or opinions of
local counsel provided that the extent of such reliance is specified in such
opinion and that such counsel shall state that such opinion or opinions of local
counsel are satisfactory to them and that they believe they and you are
justified in relying thereon, and (ii) as to matters of fact, to the extent such
counsel deems reasonable upon certificates of officers of the Company and its
subsidiaries provided that the extent of such reliance is specified in such
opinion. In rendering such opinion, as to matters of franchise law, such
counsel may also rely upon the opinion or opinions of franchise counsel for the
Company, or may provide for delivery of a separate opinion or opinions from
franchise counsel, in each case subject to the same conditions as described in
the preceding sentence.
In addition to the opinions set forth above, such counsel shall state
that on the basis of conferences with officers of the Company, examination of
documents referred to in the Registration Statement and Prospectus and such
other procedures as such counsel deemed appropriate, nothing has come to the
attention of such counsel that causes such counsel to believe that the
Registration Statement or any amendment thereof, at the time the Registration
Statement became effective and as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus (as of its date and as of such Closing Date), as amended or
supplemented, includes any untrue statement of material fact or omits to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; it being understood
that such counsel need express no view as to the financial statements, schedules
or other financial or statistical data included in any of the documents
mentioned in this paragraph.
(e) On each Closing Date, there shall have been furnished to you the
opinion of Thompson & Knight, a Professional Corporation, counsel for the
Selling Stockholder, dated such Closing Date and addressed to you, to the effect
that:
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(i) Each of the Selling Stockholders is the sole record owner of the
Securities to be sold by the Selling Stockholder. Upon delivery of such
Securities hereunder and payment of the purchase price therefor as herein
contemplated, and assuming that you purchased such Securities for value in
good faith and without notice of any adverse claim (other than such
security interests as are described in the Prospectus), you will acquire
all rights of such Selling Stockholder in such Securities, free of any
adverse claim (including, without limitation, such security interests as
are described in the Prospectus), any lien in favor of the Company and any
restrictions on transfer imposed by the Company.
(ii) Each of the Selling Stockholders has the power and authority to
enter into this Agreement, the Custody Agreement and (if applicable) the
Power of Attorney and to perform and discharge the Selling Stockholder's
obligations thereunder and hereunder; and this Agreement, the Custody
Agreement and (if applicable) the Power of Attorney has been duly and
validly authorized, executed and delivered by (or by the Attorneys-in-Fact,
or either of them, on behalf of) the Selling Stockholder and are valid and
binding agreements of the Selling Stockholder, enforceable in accordance
with their respective terms (except as rights to indemnity hereunder or
thereunder may be limited by federal or state securities laws and except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and
subject to general principles of equity).
(iii) The execution and delivery of this Agreement, the Custody
Agreement and (if applicable) the Power of Attorney and the performance of
the terms hereof and thereof and the consummation of the transactions
herein and therein contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any
statute, rule or regulation, or any agreement or instrument known to such
counsel to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound or to which any of its property is subject,
such Selling Stockholder's charter or by-laws, or any order or decree known
to such counsel of any court or government agency or body having
jurisdiction over such Selling Stockholder or any of his or its respective
properties; and no consent, approval, authorization or order of, or filing
with, any court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the Custody
Agreement and (if applicable) the Power of Attorney or for the consummation
of the transactions contemplated hereby and thereby, including the sale of
the Securities being sold by such Selling Stockholder, except such as may
be required under the Act or state securities laws or blue sky laws.
In rendering such opinion, such counsel may rely (i) as to matters of
law other than Texas, Colorado and federal law, upon the opinion or opinions of
local counsel provided that the extent of such reliance is specified in such
opinion and that such counsel shall state that such opinion or opinions of local
counsel are satisfactory to them and that they believe they and you are
justified in relying thereon, and (ii) as to matters of fact, to the extent such
counsel deems reasonable upon certificates of officers of the Selling
Stockholders provided that the extent of such reliance is specified in such
opinion.
(f) On each Closing Date, there shall have been furnished to you,
such opinion or opinions from Oppenheimer Wolff & Donnelly, your counsel, dated
such Closing Date and addressed to you, with respect to the formation of the
Company, the validity of the Securities, the Registration Statement, the
Prospectus and other related matters as you reasonably may request,
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and such counsel shall have received such papers and information as they request
to enable them to pass upon such matters.
(g) On each Closing Date you shall have received a letter of Grant
Thornton, LLP, dated such Closing Date and addressed to you and to the Board of
Directors of the Company, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under
Rule 2-01 of Regulation S-X of the Commission, and stating, as of the date of
such letter (or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of such
letter), the conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently with the execution of this Agreement, and the effect of the letter
so to be delivered on such Closing Date shall be to confirm the conclusions and
findings set forth in such prior letter.
(h) On each Closing Date, there shall have been furnished to you a
certificate, dated such Closing Date and addressed to you, signed on behalf of
the Company by the chief executive officer and by the chief financial officer of
the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, in all material respects, as if made at and
as of such Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the effectiveness of the
Registration Statement or any amendment thereof or the qualification of the
Securities for offering or sale has been issued, and no proceeding for that
purpose has been instituted or, to the best of their knowledge, is
contemplated by the Commission or any state or regulatory body; and
(iii) The signers of said certificate have carefully examined the
Registration Statement and the Prospectus, and any amendments thereof or
supplements thereto, and (A) such documents contain all statements and
information required to be included therein, the Registration Statement, or
any amendment thereof, does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented, does not include any untrue
statement of material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, (B) since the effective date of the Registration
Statement there has occurred no event required to be set forth in an
amended or supplemented prospectus which has not been so set forth, (C)
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any of
its subsidiaries has incurred any material liabilities or obligations,
direct or contingent, or entered into any material transactions, not in the
ordinary course of business, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock, and except as
disclosed in the Prospectus, there has not been any change in the capital
stock (other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding
options or warrants), or any material change in the short-term or long-term
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debt, or any issuance of options, warrants, convertible securities or other
rights to purchase the capital stock, of the Company, or any of its
subsidiaries, or any material adverse change or any development involving a
prospective material adverse change (whether or not arising in the ordinary
course of business), in the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a
whole, and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the
Company or any of its subsidiaries is a party before or by any court or
governmental agency, authority or body, or any arbitrator, which might
result in any material adverse change in the condition (financial or
otherwise), business, prospects or results of operations of the Company and
its subsidiaries, taken as a whole.
(i) On each Closing Date, there shall have been furnished to you, a
certificate or certificates, dated such Closing Date and addressed to you,
signed by each of the Selling Stockholders or such Selling Stockholder's
Attorney-in-Fact to the effect that the representations and warranties of the
Selling Stockholder contained in this Agreement are true and correct as if made
at and as of such Closing Date, and that the Selling Stockholder has complied
with all the agreements and satisfied all the conditions on the Selling
Stockholder's part to be performed or satisfied at or prior to such Closing
Date.
(j) The Company shall have furnished to you and counsel for the
Underwriter such additional documents, certificates and evidence as you or they
may have reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you and counsel for the Underwriters. The Company will furnish
you with such conformed copies of such opinions, certificates, letters and other
documents as you shall reasonably request.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and each of the Selling Stockholders, jointly and
severally, agree to indemnify and hold harmless the Underwriter against any
losses, claims, damages or liabilities, joint or several, to which the
Underwriter may become subject, under the Act or otherwise (including in
settlement of any litigation if such settlement is effected with the written
consent of the Company and/or the Selling Stockholders, as the case may be),
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
the information deemed to be a part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A, if applicable, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse you for any legal or other expenses reasonably
incurred by it in connection with investigating or defending against such loss,
claim, damage, liability or action; provided, however, that neither the Company
nor the Selling Stockholders shall be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any such
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amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by you specifically for use in the
preparation thereof; and further provided, however, that in no event shall any
such Selling Stockholder be liable under the provisions of this Section 6 for
any amount in excess of the aggregate amount of proceeds the Selling Stockholder
received from the sale of the Securities pursuant to this Agreement; and further
provided, however, that neither the Company nor the Selling Stockholders will be
liable to the Underwriter or any person controlling the Underwriter with respect
to any such untrue statement or omission made in any Preliminary Prospectus that
is corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased Securities
from the Underwriter but was not sent or given a copy of the Prospectus (as
amended or supplemented) at or prior to the written confirmation of the sale of
such Securities to such person in any case where such delivery of the Prospectus
(as amended or supplemented) is required by the Act, unless such failure to
deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 4(a)(v) of this Agreement.
In addition to their other obligations under this Section 6(a), the
Company and the Selling Stockholders, jointly and severally, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 6(a), they will
reimburse you on a monthly basis for all reasonable legal fees or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
and/or the Selling Stockholders' obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, you shall
promptly return it to the party or parties that made such payment, together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Norwest Bank Minnesota, N.A. (the "Prime Rate"). Any such
interim reimbursement payments which are not made to you within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement shall be in addition to any liabilities
which the Company or the Selling Stockholders may otherwise have.
(b) You will indemnify and hold harmless the Company and each Selling
Stockholder against any losses, claims, damages or liabilities to which the
Company and such Selling Stockholder may become subject, under the Act or
otherwise (including in settlement of any litigation, if such settlement is
effected with your written consent), insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by you specifically for use in the preparation thereof,
and will reimburse the Company and each Selling Stockholder for any legal or
other expenses reasonably
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incurred by the Company or such Selling Stockholder in connection with
investigating or defending against any such loss, claim, damage, liability or
action.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof. No indemnification under such subsection
(a) or (b), however, shall be available with respect to a proceeding to any
party who shall fail to give such notice if the party to whom notice was not
given was unaware of the proceeding to which the notice would have related and
was materially prejudiced by the failure to give such notice. In case any such
action shall be brought against any indemnified party, and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that if
the defendants in any such action include both the indemnified party or parties
and the indemnifying party, and the indemnified party or parties shall have
reasonably concluded that there may be legal defenses or claims available to it
or them that are different from or additional to those available to the
indemnifying party, or if there is a conflict of interest that would prevent
counsel for the indemnifying party or parties from also representing the
indemnified party or parties, and that it is advisable for the indemnified party
or parties to be represented by separate counsel, then the indemnified party or
parties shall have the right to employ a single counsel to represent the
indemnified party or the indemnified parties as a group, in which event the
reasonable fees and expenses of the separate counsel shall be borne by the
indemnifying party or parties. An indemnifying party shall not be obligated
under any settlement agreement relating to any action under this Section 6 to
which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above,
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and you on
the other from the offering of the Securities, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Stockholders on the one hand and you on the other in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and you on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company and Selling Stockholders bear to the total underwriting discounts
and commissions received by you, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling
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Stockholders or you and the parties' relevant intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company, the Selling Stockholders and you agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were to
be determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the first
sentence of this subsection (d). The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending against any action or claim which is the subject of
this subsection (d). Notwithstanding the provisions of this subsection (d), the
Underwriter shall not be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages that such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company and the Selling Stockholders under
this Section 6 shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls you within the meaning of
the Act; and your obligations under this Section 6 shall be in addition to any
liability that you may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company (including any person who, with his
consent, is named in the Registration Statement as about to become a director of
the Company), to each officer of the Company who has signed the Registration
Statement and to each person, if any, who controls the Company or any Selling
Stockholder within the meaning of the Act.
7. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto, and the agreements of the Company, the
Selling Stockholders and you contained in Section 6 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
you or on your behalf or on behalf of any person controlling you, or the Company
or any of its officers, directors, or controlling persons, or the Selling
Stockholders or any controlling person thereof, and shall survive delivery of,
and payment for, the Securities to and by you hereunder.
8. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at 10:00 a.m., Minneapolis
time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you or the Company may prevent
this Agreement from becoming effective without liability of any party to any
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other party, except that the provisions of Section 4(a)(viii), Section 4(b)(ii)
and Section 6 hereof shall at all times be effective.
(b) You shall have the right to terminate this Agreement by giving
notice as hereinafter specified at any time at or prior to the First Closing
Date, and the option referred to in Section 3(b), if exercised, may be cancelled
at any time prior to the Second Closing Date, if (i) the Company shall have
failed, refused or been unable, at or prior to such Closing Date, to perform any
agreement on its part to be performed hereunder, (ii) any other condition of
your obligations hereunder is not fulfilled, (iii) trading on the New York Stock
Exchange or the American Stock Exchange shall have been wholly suspended,
(iv) minimum or maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been required, on the New York Stock
Exchange or the American Stock Exchange, by such Exchange or by order of the
Commission or any other governmental authority having jurisdiction, (v) a
banking moratorium shall have been declared by Federal, New York, Minnesota or
Colorado authorities, or (vi) there has occurred any material adverse change in
the financial markets in the United States or an outbreak of major hostilities
(or an escalation thereof) in which the United States is involved, a declaration
of war by Congress, any other substantial national or international calamity or
any other event or occurrence of a similar character shall have occurred since
the execution of this Agreement that, in your judgment, makes it impractical or
inadvisable to proceed with the completion of the sale of and payment for the
Securities. Any such termination shall be without liability of any party to any
other party except that the provisions of Section 4(a)(viii), Section 4(b)(ii)
and Section 6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company and the
Selling Stockholders or an Attorney-in-Fact on behalf of the Selling
Stockholders, shall be notified promptly by you by telephone or telegram,
confirmed by letter. If the Company elects to prevent this Agreement from
becoming effective, you and the Selling Stockholders, or an Attorney-in-Fact on
behalf of the Selling Stockholders, shall be notified by the Company by
telephone or telegram, confirmed by letter.
9. DEFAULT BY THE SELLING STOCKHOLDERS OR THE COMPANY. If one or more of
the Selling Stockholders shall fail at the First Closing Date to sell and
deliver the number of Securities which such Selling Stockholder is obligated to
sell hereunder, and the remaining Selling Stockholders do not exercise the right
hereby granted to increase, pro rata or otherwise, the number of Securities to
be sold by them hereunder to the total number of Securities to be sold by the
Selling Stockholders as set forth in Schedule I hereto, then you may at your
option, by notice from you to the Company and the non-defaulting Selling
Stockholders, either (a) terminate this Agreement without any liability on the
part of any non-defaulting party, or (b) elect to purchase the Securities which
the Company and the non-defaulting Selling Stockholders have agreed to sell
hereunder.
In the event of a default by any Selling Stockholder as referred to in
this Section, either you or the Company shall have the right to postpone the
First Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
If the Company shall fail at the First Closing Date to sell and
deliver the number of Securities which it is obligated to sell hereunder, then
this Agreement shall terminate without any liability on the part of any
non-defaulting party.
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<PAGE>
No action taken pursuant to this Section shall relieve the Company or
any Selling Stockholder so defaulting from liability, if any, in respect of such
default.
10. INFORMATION FURNISHED BY UNDERWRITER. The statements set forth in the
last paragraph of the cover page and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written information
furnished by you or on your behalf referred to in Section 2 and Section 6
hereof.
11. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to you, shall be mailed,
telegraphed or delivered to Piper Jaffray Inc., Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402; if to the Company, shall be mailed,
telegraphed or delivered to it at Rocky Mountain Chocolate Factory, Inc., 265
Turner Drive, Durango, CO 81301, Attention: Larry C. Rezentes; if to the
Selling Stockholders, at the address of the Attorneys-in-Fact (if applicable) as
set forth in the Powers of Attorney, or in each case to such other address as
the person to be notified may have requested in writing. All notices given by
telegram shall be promptly confirmed by letter. Any party to this Agreement may
change such address for notices by sending to the parties to this Agreement
written notice of a new address for such purpose.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
successors and assigns and the controlling persons, officers and directors
referred to in Section 6. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from you.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
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<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter whereupon this letter will become a binding agreement between the
Company, the Selling Stockholders and you in accordance with its terms.
Very truly yours,
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
By:____________________________________
Franklin E. Crail, President
SELLING STOCKHOLDERS
By_____________________________________
Attorney-in-Fact
CORONET INSURANCE COMPANY
By ____________________________________
Its __________________________________
ROCKY MOUNTAIN HOLDINGS COMPANY
By ____________________________________
Its __________________________________
Confirmed as of the date first
above mentioned
PIPER JAFFRAY INC.
By__________________________________
Managing Director
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<PAGE>
SCHEDULE I
SELLING STOCKHOLDERS
Maximum Number of
Number of Option Shares
Name Firm Shares Subject to Option
---- ----------- -----------------
Coronet Insurance Company. . . . . 500,000 84,375
Franklin E. Crail. . . . . . . . . 100,000 0
------- ------
Total. . . . . . . . . . . . . . 600,000 84,375
------- ------
------- ------
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated April 26, 1995, accompanying the financial
statements and related schedule of Rocky Mountain Chocolate Factory, Inc.
contained in the Registration Statement and Prospectus. We consent to the use
of the aforementioned reports in the Registration Statement and Prospectus, and
to the use of our name as it appears under the caption "Experts" and "Selected
Financial Data".
GRANT THORNTON LLP
Dallas, Texas
September 14, 1995
