<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
265 Turner Drive
Durango, Colorado 81301
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 13, 1995
To the Shareholders:
The 1995 Annual Meeting of Shareholders of Rocky Mountain Chocolate
Factory, Inc., will be held on Friday, October 13, 1995 at 10:00 a.m. (local
time), at the Red Lion Inn, 501 Camino Del Rio, in Durango, Colorado, for the
following purposes:
1. To elect six directors to serve until the 1996 Annual Meeting of
Shareholders and until their respective successors are elected and qualified.
2. To consider and vote upon a proposal to approve the adoption of the
Company's 1995 Stock Option Plan.
3. To consider and vote upon a proposal to amend the Company's 1990
Nonqualified Stock Option Plan for Nonemployee Directors to increase from 60,000
to 90,000 the aggregate number of shares of Common Stock authorized for issuance
under such plan.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only holders of Common Stock of record at the close of business on August
28, 1995, will be entitled to notice of and to vote at the meeting or any
adjournments thereof.
Each shareholder, even though he or she now plans to attend the meeting, is
requested to promptly mark, sign, date and return the enclosed Proxy in the
envelope provided. Any shareholder present at the meeting may withdraw his or
her Proxy and vote personally on each matter brought before the meeting.
By order of the Board of Directors
Loresa McCoy
-----------------------------------
LORESA McCOY
Secretary
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
265 Turner Drive
Durango, Colorado 81301
PROXY STATEMENT
Annual Meeting of Shareholders - October 13, 1995
SOLICITATION AND REVOCABILITY OF PROXIES
This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Board of Directors of Rocky Mountain Chocolate Factory, Inc. (the
"Company") for use only at the Annual Meeting of the Company's shareholders to
be held at the time and place, and for the purposes, set forth in the
accompanying Notice of Annual Meeting of Shareholders.
It is anticipated that the Proxy Statement, together with the Proxies, will
first be mailed to the Company's shareholders on or about September 18, 1995.
The Company's 1995 Annual Report to Shareholders was mailed on August 29, 1995.
A person giving the enclosed Proxy has the power to revoke it at any time before
it is exercised by (1) delivering written notice of revocation to the Secretary
of the Company, (2) duly executing and delivering a Proxy for the Annual Meeting
bearing a later date or (3) voting in person at the Annual Meeting.
The Company will bear the cost of this solicitation of Proxies, including
the charges and expenses of brokerage firms and others for forwarding
solicitation materials to beneficial owners of the Company's Common Stock, par
value $.03 per share (the "Common Stock"). In addition, the Company's officers,
directors and other regular employees, without additional compensation, may
solicit Proxies by mail, personal interview, telephone or telegraph.
VOTING SECURITIES
The close of business on August 28, 1995, has been fixed as the record date
for the determination of holders of record of the Company's Common Stock
entitled to notice of and to vote at the Annual Meeting. On the record date,
2,657,499 shares of the Company's Common Stock were outstanding and eligible to
be voted at the Annual Meeting.
For each share of Common Stock held on the record date, a shareholder is
entitled to one vote on all matters to be voted on at the Annual Meeting, except
the election of directors.
Shareholders have cumulative voting rights in the election of directors,
and there is no condition precedent to the exercise of those rights. Under
cumulative voting, each shareholder is entitled to as many votes as shall
equal the number of his or her shares multiplied by six, the number of directors
to be elected, and he or she may cast all of those votes for a single nominee or
divide them among any two or more of them as he or she sees fit. It is the
intention of the
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Proxy holders to exercise voting rights in order to elect the maximum number of
nominees named below. An instruction on the Proxy to withhold authority to vote
for any nominee will be deemed an authorization to vote cumulatively for the
remaining nominees, unless otherwise indicated.
VOTING PROCEDURES
The vote required for the election of directors and for the approval of
each of the other proposals to be acted on at the Annual Meeting is the
affirmative vote of a majority of the shares entitled to vote on the matter and
present or represented by proxy at the meeting, provided a quorum is present. A
quorum is established by the presence or representation at the meeting of the
holders of a majority of the Company's voting shares. Under the rules of the
Nasdaq National Market System, brokers who hold shares in street name have the
authority to vote on certain items when they have not received instructions from
beneficial owners. Brokers that do not receive instructions are entitled to
vote on the election of directors. The shares represented by a broker non-vote
(or other limited proxy) as to any proposal will be considered present for
quorum purposes, but will not be considered part of the shares entitled to be
voted on that proposal at the meeting. Thus, the effect of such non-votes will
be to reduce the number of affirmative votes required to approve such proposal
and the number of negative votes required to block such proposal. An abstention
with respect to any nominee or any proposal will effectively count as a vote
against the election of such nominee or such proposal.
BENEFICIAL OWNERSHIP OF THE COMPANY'S EQUITY SECURITIES
The following table sets forth information, as of August 28, 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, nominee for election as a director and each
executive officer named in the Summary Compensation Table, and (iii) by all
current directors and executive officers of the Company as a group.
The number of shares beneficially owned includes shares of Common Stock
with respect to which the persons named below have either investment or voting
power. A person is also deemed to be the beneficial owner of a security if that
person has the right to acquire beneficial ownership of that security within 60
days through the exercise of an option or through the conversion of another
security. Except as noted, each beneficial owner has sole investment and voting
power with respect to the Common Stock.
Common Stock not outstanding that is subject to options or conversion
privileges is deemed to be outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by the person holding such options
or conversion privileges, but is not deemed to be outstanding for the purpose of
computing the percentage of Common Stock beneficially owned by any other person.
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Franklin E. Crail, Chairman of the Board, President and Treasurer of the
Company, has pledged to Coronet Insurance Company, a principal shareholder of
the Company ("Coronet"), 337,766 shares of Common Stock, representing 12.7% of
the total outstanding shares as of August 28, 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. An event
resulting in foreclosure on this indebtedness could therefore result in an
increase in the control of the Company by Coronet at a subsequent date.
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, representing
52.8% of the total outstanding shares as of August 28, 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.
The Company has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission relating to a proposed public offering of
900,000 shares of Common Stock (excluding any underwriter's over-allotment
shares). Of this number, Mr. Crail intends to sell 100,000 shares of Common
Stock, Coronet intends to sell 500,000 shares of Common Stock, and the Company
intends to sell 300,000 shares of Common Stock. The shares to be sold by Mr.
Crail and Coronet in the proposed offering are pledged to Coronet and to LaSalle
National Bank, respectively, as described above. Mr. Crail has advised the
Company that he intends to use the proceeds from the sale of his shares in the
proposed offering to retire his indebtedness to Coronet and to obtain the
release of the remaining shares from such pledge. As of the date of this Proxy
Statement, the registration statement has not been declared effective by the
Securities and Exchange Commission.
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<TABLE>
<CAPTION>
Amount and
Nature of Percent
Name of Beneficial of
Beneficial Owner (1) Ownership Class(%)
- -------------------- ---------- --------
<S> <C> <C>
Coronet Insurance
Company et al. 1,421,257 (2) 53.5
Franklin E. Crail 396,099 (3) 14.9
Ralph Nafziger 36,000 (4) 1.3
Lee N. Mortenson 10,000 (5) *
Fred M. Trainor 10,000 (5) *
Everett A. Sisson -- --
Gerald A. Kien -- --
All executive officers
and directors as a
group (10 persons) 558,365 (6) 19.9
<FN>
- --------------------
(1) The address of Coronet Insurance Company is 3500 West Peterson Avenue,
Chicago, Illinois 60659. Mr. Crail's address is the same as the Company's
address.
(2) All of the shares indicated as being owned by Coronet 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. 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 a promissory note 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 Company's 1985 Incentive Stock Option 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
Company's Nonqualified Stock Option Plan for Nonemployee Directors.
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(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
Company's 1985 Incentive Stock Option Plan and the Company's Nonqualified
Stock Option Plan for Nonemployee Directors.
</TABLE>
ITEM 1. ELECTION OF DIRECTORS
NOMINEES
The Company's By-Laws provide for no fewer than three nor more than nine
directors. The Board has previously fixed the current number of directors at
six. Directors are elected for one year. Six directors will be elected at the
Annual Meeting.
Clyde Wm. Engle and Gerald M. Tierney, Jr. resigned from the Board of
Directors effective August 24, 1995. Messrs. Engle and Tierney both resigned to
pursue other interests, and their resignations are not the result of any
disagreement with the Company's management or Board of Directors.
All of the nominees are currently directors of the Company.
Proxies will be voted, unless authority to vote is withheld by the
shareholder, FOR the election of Messrs. Crail, Nafziger, Kien, Mortenson,
Sisson and Trainor to serve until the 1996 Annual Meeting of Shareholders and
until the election and qualification of their respective successors. If any
such nominee shall be unable or shall fail to accept nomination or election by
virtue of an unexpected occurrence, Proxies may be voted for such other person
or persons as shall be determined by the Proxy holders in their discretion.
Shareholders may not vote for more than six persons for election as directors at
the Annual Meeting.
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Set forth below is certain information concerning each nominee for election
as a director:
<TABLE>
<CAPTION>
Positions
with Director
Name Company Age Since
- ---- --------- --- --------
<S> <C> <C> <C>
Franklin E. Crail Chairman of the Board, 53 1982
President, Treasurer
and Director
Ralph L. Nafziger Vice President- 49 1990
Manufacturing
and Director
Gerald A. Kien Director 64 1995
Lee N. Mortenson Director 59 1987
Everett A. Sisson Director 74 1995
Fred M. Trainor Director 57 1992
</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.
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
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<PAGE>
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.
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 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 automotive 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 has 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.
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.
FRED M. TRAINOR. Mr. Trainor has served as a director of the Company 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.
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INFORMATION REGARDING THE BOARD OF DIRECTORS
There is no family relationship between any director or executive officer
and any other director or executive officer of the Company.
COMMITTEES AND MEETINGS
The Board of Directors has a standing Compensation Committee and Audit
Committee. For the fiscal year ended February 28, 1995, each committee was
composed of Messrs. Mortenson, Trainor, Engle and Tierney. Since the
resignations of Mr. Engle and Mr. Tierney from the Board, each committee has
been composed of Mr. Mortenson and Mr. Trainor. The Compensation Committee's
function is to approve and administer grants of stock options under the
Company's 1985 Stock Option Plan and, subject to its approval at the 1995 Annual
Meeting of Shareholders, the 1995 Stock Option Plan. The Compensation Committee
also approves remuneration arrangements for the Company's executive officers.
The Audit Committee receives and reviews the reports of the Company's
independent auditors. The Compensation Committee and Audit Committee each held
one meeting during the last fiscal year. The Company has no standing nominating
committee.
During the last fiscal year, the Company's Board of Directors held three
meetings. Each director attended at least 75% of the aggregate of (i) the total
number of meetings of the Board of Directors held during the period he was a
director and (ii) the total number of meetings held by all committees of the
Board on which he served.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE ELECTION OF THE SIX NOMINEES NAMED ABOVE.
ITEM 2. PROPOSAL TO APPROVE THE ADOPTION OF THE 1995 STOCK OPTION PLAN
INTRODUCTION
At the Annual Meeting, the shareholders of the Company will be asked to
consider and approve the adoption of the 1995 Stock Option Plan (the "Option
Plan"). The Option Plan was adopted, subject to shareholder approval, by the
Board of Directors on August 24, 1995. The Company's 1985 Incentive Stock
Option Plan (the "1985 Plan") will expire in October 1995. A total of 100,000
shares are reserved for issuance under the Option Plan. The following is a
summary of the terms of the Option Plan, which is nevertheless qualified in its
entirety by reference to its complete text attached to this Proxy Statement as
Exhibit A.
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PURPOSE OF PLAN
The purpose of the Option Plan is to promote the interests of the Company
and its shareholders by attracting, retaining and stimulating the performance of
selected officers and other key employees by giving such employees the
opportunity to acquire a proprietary interest in the Company and an increased
personal interest in its continued success and progress.
ADMINISTRATION OF THE PLAN
A Committee of two or more members of the Board of Directors (the
"Committee") must be designated to administer the plan. The Committee must be
composed of disinterested directors, as defined by Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), or any similar rule or
regulation promulgated thereunder. The Committee has full authority subject to
the express provisions of the Option Plan to grant options under the Option
Plan, to interpret the Plan and any option granted hereunder, to determine the
terms of each option granted under the Option Plan and to make all other
determinations and perform such actions as the Committee deems necessary or
advisable to administer the Plan. The Board of Directors has designated the
Compensation Committee to perform the functions of the Committee.
SHARES AVAILABLE
The Option Plan provides that the Committee may grant to employees such
number of shares of Common Stock as the Committee in its discretion shall deem
to be in the best interest of the Company. All grants under the plan are
subject to adjustments in certain circumstances as hereinafter described.
ELIGIBILITY AND PARTICIPATION
Awards made pursuant to the Option Plan may be granted only to individuals
who, at the time of the grant, are key employees or officers of the Company.
There are presently approximately 20 such persons. Awards may not be made to
any director who is not also an employee of the Company, nor to any member of
the Committee. Grants of options are made at the discretion of the Committee
and are based on the employee's present and potential contributions to the
success of the Company and such other factors as the Committee deems appropriate
to carry out the purposes of the Option Plan.
TYPES OF GRANTS UNDER THE OPTION PLAN
If approved by the shareholders, the Option Plan provides that the
Committee may designate any option granted either as a nonqualified stock option
or an incentive stock option, except that the aggregate fair market value of the
Common Stock with respect to which incentive stock options are exercisable for
the first time by such employee during any calendar year may not exceed
$100,000, determined as of the date the incentive stock option is granted. If,
however, such option is intended to be an incentive stock option and its fair
market value exceeds
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$100,000, such option will be deemed to be an incentive stock option to the
extent it does not exceed $100,000 and a nonqualified stock option to the extent
it exceeds that limit.
OPTION PRICE
The purchase price of options is determined by the Committee in its
discretion at the time of the grant. The purchase price of incentive stock
options must not be less than 100% of the fair market value per share of the
Common Stock on the date the option is granted, except that the purchase price
shall be at least 110% of the fair market value per share of the Common Stock on
the date of grant if the optionee, on the date of such grant, possesses more
than 10% of the total combined voting power of all classes of stock of the
Company or any affiliate. The purchase price of a nonqualified stock option
must be greater than the par value of the stock on either the date the option is
granted or the date it is exercised, whichever is greater.
EXERCISE OF OPTIONS
An option may be exercised in whole or in part in accordance with
procedures established by the Committee. Such procedures may include a
limitation on the number of shares purchasable in any period of time, or any
other terms and conditions not inconsistent with the terms of the Option Plan.
The Committee, in its discretion, may accelerate the exercise date of any
option.
PAYMENT OF EXERCISE PRICE
Common Stock purchased upon the exercise of an option must be paid for in
full at the time of purchase. Payment must be made in cash or, if accepted by
the Committee, in its discretion, shares of Common Stock owned by the optionee
(valued at the fair market value on the date of exercise). Furthermore, the
Committee may, in its discretion, approve the extension of a loan to an optionee
to assist in the payment of the exercise price. If the loan is to an employee
who is also a director, the Committee must first have determined in good faith
that the such loan is fair to the Company and the loan must otherwise comply
with applicable law.
NONTRANSFERABILITY OF OPTIONS
Option awards are not transferable except by will or by the laws of
descent and distribution and shall be exercisable during the lifetime of the
optionee only by the optionee.
EXPIRATION OF OPTIONS
Options granted under the Option Plan will generally be exercisable for a
period of ten years after the date of grant. Options will expire, however, upon
an earlier termination of the optionee's employment, subject to certain grace
periods. If, however, the optionee's employment is terminated by reason of such
optionee's fraud, dishonesty or performance of other acts detrimental to the
Company or an affiliate, such optionee's options will immediately become null
and void.
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Any incentive stock option granted to an optionee who possesses more than
10% of the total combined voting power of all classes of stock of the Company or
any affiliate shall not be exercisable after the expiration of five years from
the date of its grant.
TERMINATION OF EMPLOYMENT
For purposes of the Option Plan, a transfer of employment shall not be
considered to be a termination of employment for purposes of the Option Plan.
The Committee, in its discretion, may determine whether an authorized leave of
absence will constitute a termination of employment for purposes of the Option
Plan. Nothing contained in the Option Plan or in any option agreement shall
interfere with the right of the Company or any affiliate to terminate the
employment of the optionee at any time with or without cause.
ADJUSTMENTS TO AWARDS UPON CHANGES IN COMMON STOCK
The number of shares as to which options may be granted under the Option
Plan will be decreased or increased proportionally to account for a stock split
or a dividend payable in shares of Common Stock.
In the event of any other reclassification of Common Stock, or in the event
of a liquidation or reorganization of the Company or an affiliate, the Board
will make any necessary adjustments to any unexercised options granted under the
Option Plan.
If the Company is merged into or consolidated with another corporation and
the Company is not the surviving corporation, or if the Company disposes of all
or substantially all of its assets to another corporation, then all outstanding
options may be cancelled by the Board, but all optionees must receive notice of
such cancellation and would have the right to exercise such option in full
during the 30-day period preceding the effective date of such action.
AMENDMENT AND TERMINATION OF THE OPTION PLAN
The Option Plan will terminate, unless previously terminated by the Board,
ten years from August 24, 1995. No options may be granted after that date.
The Board may alter or amend the Option Plan but may not, without
shareholder approval, (i) abolish the Committee, change the qualifications of
its members or withdraw the administration of the Option Plan from its
supervision, (ii) increase the total number of shares of Common Stock which may
be granted under the Option Plan, (iii) extend the term of the Option Plan or
the maximum exercise period provided in the Option Plan, (iv) decrease the
minimum purchase price of Common Stock provided in the Option Plan, (v)
materially increase the benefits accruing to participants under the Option Plan,
or (vi) materially modify the requirements as to eligibility for participation
in the Option Plan.
No termination or amendment of the Option Plan may adversely affect the
rights of an optionee under a previously granted option, except with the consent
of the optionee.
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MODIFICATIONS OF OPTIONS
Subject to the terms of the Option Plan, the Committee may modify or extend
outstanding options, or accept the surrender of options granted under the Option
Plan and authorize the granting of new options in substitution, except that no
such modification may, without the consent of the optionee, impair any rights
under any option, except as necessary to comply with Section 422(b) of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following summary is based upon an analysis of the Internal Revenue
Code as currently in effect (the "Code"), existing laws, judicial decisions,
administrative rulings, regulations and proposed regulations, all of which are
subject to change. Moreover, the following is only a summary of federal income
tax consequences, and the federal income tax consequences to employees may be
either more or less favorable than those described below depending on their
particular circumstances.
INCENTIVE STOCK OPTIONS. No income will be recognized by an optionee for
federal income tax purposes upon the grant or exercise of an incentive stock
option. The basis of shares transferred to an optionee pursuant to the exercise
of an incentive stock option is the price paid for the shares. If the optionee
holds the shares for at least one year after transfer of the shares to the
optionee and two years after the grant of the option, the optionee will
recognize capital gain or loss upon sale of the shares received upon the
exercise equal to the difference between the amount realized on the sale and the
exercise price. Generally, if the shares are not held for that period, the
optionee will recognize ordinary income upon disposition in an amount equal to
the excess of the fair market value of the shares on the date of exercise over
the option price of such shares, or if less (and if the disposition is a
transaction in which loss, if any, will be recognized), the gain on disposition.
Any additional gain realized by the optionee upon such disposition will be a
capital gain.
The excess of the fair market value of shares received upon the exercise of
an incentive stock option over the option price for the shares is an item of
adjustment for the optionee for purposes of the alternative minimum tax.
The Company is not entitled to a deduction upon the exercise of an
incentive stock option by an optionee. If the optionee disposes of the shares
received pursuant to such exercise prior to the expiration of one year following
transfer of the shares to the optionee or two years after grant of the option,
however, the Company may, subject to the deduction limitation described below,
deduct an amount equal to the ordinary income recognized by the optionee upon
disposition of the shares at the time such income is recognized by the optionee.
If an optionee uses already owned shares of Common Stock to pay the
exercise price for shares under an incentive stock option, the resulting tax
consequences will depend upon whether the already owned shares of Common Stock
are "statutory option stock", and, if so, whether such statutory option stock
has been held by the optionee for the applicable holding period referred to in
Section 424(c)(3)(A) of the Code. In general, "statutory option stock" (as
defined in Section 424(c)(3)(B) of the Code) is any stock acquired through the
exercise of an incentive stock option,
12
<PAGE>
a qualified stock option, an option granted pursuant to an employee stock
purchase plan or a restricted stock option, but not through the exercise of a
nonqualified stock option. If the stock is statutory option stock with respect
to which the applicable holding period has been satisfied, no income will be
recognized by the optionee upon the transfer of such stock in payment of the
exercise price of an incentive stock option. If the stock is not statutory
option stock, no income will be recognized by the optionee upon the transfer of
the stock unless the stock is not substantially vested within the meaning of the
regulations under Section 83 of the Code (in which event it appears that the
optionee will recognize ordinary income upon the transfer equal to the amount by
which the fair market value of the transferred shares exceeds their basis). If
the stock used to pay the exercise price of an incentive stock option is
statutory option stock with respect to which the applicable holding period has
not been satisfied, the transfer of such stock will be a disqualifying
disposition described in Section 421(b) of the Code which will result in the
recognition of ordinary income by the optionee in an amount equal to the excess
of the fair market value of the statutory option stock at the time the incentive
stock option covering such stock was exercised over the option price of such
stock. Under the present provisions of the Code, it is not clear whether all
shares received upon the exercise of an incentive stock option with already
owned shares will be statutory option stock or how the optionee's basis will be
allocated among such shares.
NONQUALIFIED STOCK OPTIONS. No income will be recognized by an optionee
for federal income tax purposes upon the grant of a nonqualified stock option.
Except as described below in the case of an "insider" subject to Section 16(b)
of the 1934 Act, who exercises his or her option less than six months from the
date of grant, upon exercise of a nonqualified stock option, the optionee will
recognize ordinary income in an amount equal to the excess of the fair market
value of the shares on the date of exercise over the option price of the shares.
In the absence of an election under Section 83(b) of the Code, an "insider"
subject to Section 16(b) of the 1934 Act who exercises a nonqualified stock
option less than six months from the date the option was granted will recognize
income on the date six months after the date of grant in an amount equal to the
excess of the fair market value of the shares on such date over the option price
of the shares. An optionee subject to Section 16(b) of the 1934 Act can avoid
such deferral by making an election under Section 83(b) of the Code, no later
than 30 days after the date of exercise. Executive officers, directors and 10%
shareholders of the Company will generally be deemed to be "insiders" for
purposes of Section 16(b) of the 1934 Act.
Income recognized upon the exercise of nonqualified stock options will be
considered compensation subject to withholding at the time the income is
recognized, and, therefore, the Company must make the necessary arrangements
with the optionee to ensure that the amount of the tax required to be withheld
is available for payment. Nonqualified stock options are designed to provide
the Company with a deduction equal to the amount of ordinary income recognized
by the optionee at the time of such recognition by the optionee.
The basis of shares transferred to an optionee pursuant to exercise of a
nonqualified stock option is the price paid for such shares plus an amount equal
to any income recognized by the optionee as a result of the exercise of the
option. If an optionee thereafter sells shares acquired upon exercise of a
nonqualified stock option, any amount realized over the basis of the shares will
constitute capital gain to the optionee for federal income tax purposes.
13
<PAGE>
If an optionee uses already owned shares of Common Stock to pay the
exercise price for shares under a nonqualified stock option, the number of
shares received pursuant to the option which is equal to the number of shares
delivered in payment of the exercise price will be considered received in a
nontaxable exchange, and the fair market value of the remaining shares received
by the optionee upon such exercise will be taxable to the optionee as ordinary
income. If such already owned shares of Common Stock are not "statutory option
stock" (which is defined in Section 424(c)(3)(B) of the Code to include any
stock acquired through the exercise of an incentive stock option, a qualified
stock option, an option granted pursuant to an employee stock purchase plan or a
restricted stock option, but not through the exercise of a nonqualified stock
option) or are statutory option stock with respect to which the applicable
holding period referred to in Section 424(c)(3)(A) of the Code has been
satisfied, the shares received pursuant to the exercise of the option will not
be statutory option stock and the optionee's basis in the number of shares
delivered in payment of the exercise price will be equal to the basis of the
shares delivered in payment. The basis of the remaining shares received upon
such exercise will be equal to the fair market value of such shares. However,
if such already owned shares of Common Stock are statutory option stock with
respect to which the applicable holding period has not been satisfied, it is not
presently clear whether such exercise will be considered a disqualifying
disposition of the statutory option stock, whether the shares received upon such
exercise will be statutory option stock or how the optionee's basis will be
allocated among the shares received.
LIMITATIONS ON THE COMPANY'S COMPENSATION DEDUCTION. Section 162(m) of the
Code, which became effective in 1994, limits the deduction which the Company may
take for otherwise deductible compensation payable to certain executive officers
of the Company to the extent that compensation paid to such officers for such
year exceeds $1 million, unless such compensation is performance-based, is
approved by the Company's shareholders and meets certain other criteria. To
date, only proposed, and not final, Treasury Regulations have been issued with
respect to Section 162(m) of the Code. There is no assurance that grants made
to employees under the Option Plan will satisfy the performance-based
compensation requirements and, accordingly, the Company may be limited by
Section 162(m) of the Code in the amount of deductions it would otherwise be
entitled to take (as described in the foregoing summary).
GRANTS UNDER THE OPTION PLAN
On September 2, 1995, the Compensation Committee granted incentive stock
options under the Option Plan covering 70,000 shares of Common Stock to 25
employees of the Company, including options covering a total of 41,000 shares
to five executive officers. The following table sets forth certain
information regarding such options. Options covering 42,000 shares of Common
Stock, including options covering 40,000 shares of Common Stock granted to
executive officers, are exercisable in full during the period beginning on
December 1, 1995 and ending 10 years from the date of grant. Options
covering 28,000 shares are exercisable in full during the period beginning
two years from the date of grant and ending 10 years from the date of grant.
NEW PLAN BENEFITS
1995 STOCK OPTION PLAN
<TABLE>
<CAPTION>
Name and Position Number of Shares % of Total Options Exercise Price
Underlying Granted to ($/Share)
Options Granted Employees
----------------- --------------- --------- --------------
<S> <C> <C> <C>
Franklin E. Crail, - 0 - - -
Chairman of the Board
and President
Ralph L. Nafziger, 10,000 14% $18.25
Vice President -
Manufacturing
Clifton W. Folsom, 10,000 14% $18.25
Vice President -
Franchise Support
Jay B. Haws, 10,000 14% $18.25
Vice President -
Marketing
Lawrence C. Rezentes, 10,000 14% $18.25
Vice President -
Finance
Executive Group (six 41,000 59% $18.25
persons)
Non-Executive Officer 29,000 41% $18.25
Employee Group
</TABLE>
Except as indicated above, no person received more than 5% of the total
options granted under the Option Plan. If the adoption of the Option Plan is
not approved by the shareholders at the Annual Meeting, each of the foregoing
options will be null and void.
There are currently options covering 133,000 shares of Common Stock
outstanding under the 1985 Plan, including options held by current executive
officers of the Company as a group covering 123,000 shares and options held by
other employees covering 10,000 shares.
14
<PAGE>
On September 2, 1995, the closing sale price of the Company's Common Stock
as reported on the Nasdaq National Market was $18.25 per share.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE 1995 STOCK OPTION PLAN IS IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE ADOPTION OF THE 1995
STOCK OPTION PLAN.
ITEM 3. PROPOSAL TO APPROVE AN AMENDMENT OF THE 1990 NONQUALIFIED STOCK OPTION
PLAN FOR NONEMPLOYEE DIRECTORS
At the Annual Meeting, holders of Common Stock will also be asked to
consider and approve the adoption of an amendment to increase from 60,000 to
90,000 the number of shares of Common Stock reserved for issuance under the
Company's 1990 Nonqualified Stock Option Plan for Nonemployee Directors (the
"Directors' Plan"). This amendment was adopted, subject to shareholder
approval, by the Board of Directors on August 24, 1995.
REASONS FOR THE AMENDMENTS TO THE DIRECTORS' PLAN
As of August 23, 1995, there were outstanding stock options covering 40,000
shares of Common Stock and only 10,000 shares remained available for future
awards under the Directors' Plan. The purpose of the proposal is to continue
the Directors' Plan by increasing by 30,000 shares the aggregate number of
shares of Common Stock that may be issued under the Directors' Plan, which will
allow the options awarded to the two directors elected to the Board of Directors
on August 24, 1995, Mr. Kien and Mr. Sisson, to be fully effective.
DESCRIPTION OF DIRECTORS' PLAN AS CURRENTLY IN EFFECT
The Directors' Plan provides for automatic grants of nonqualified stock
options covering a maximum of 60,000 shares of Common Stock of the Company
(90,000 shares, as proposed to be amended) to directors of the Company who are
not also employees or officers of the Company and who have not made an
irrevocable, one-time election to decline to participate in the plan. The
Directors' Plan provides that during the term of the Directors' Plan options
will be granted automatically to new nonemployee directors upon their election.
Each such option permits the nonemployee director to purchase 10,000 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant of the option. Each nonemployee director's option
may be exercised in full during the period beginning one year after the grant
date of such option and ending ten years after such grant date, unless the
option expires sooner due to termination of service or death. No options were
granted or exercised under the Directors' Plan during fiscal 1995. An option to
purchase 10,000 shares of Common Stock was
15
<PAGE>
automatically granted to each of Mr. Kien and Mr. Sisson upon their election as
directors on August 24, 1995.
If the amendment adopted by the Board of Directors is not approved by the
shareholders, such amendment will become null and void. In such event, the
options granted to Mr. Kien and Mr. Sisson would each be reduced to cover 5,000
shares of Common Stock, which is one-half of the total number of shares that
will be available for grant under the Directors' Plan if the proposed amendment
is not approved.
FEDERAL INCOME TAX CONSEQUENCES
All options granted under the Directors' Plan are non-statutory options not
entitled to special tax treatment under Section 422 of the Code. The Directors'
Plan is not qualified under Section 401(a) of the Code and is not subject to the
provisions of ERISA.
No income will be recognized by an optionee for federal income tax purposes
upon the grant of an option. Upon exercise of an option, the optionee will
recognize ordinary income in an amount equal to the excess of the fair market
value of the shares on the date of exercise over the option price of such
shares.
The Company will be allowed a deduction equal to the amount of ordinary
income recognized by the optionee due to the exercise of an option at the time
of such recognition by the optionee.
The basis of shares transferred to an optionee pursuant to the exercise of
an option is the price paid for such shares plus an amount equal to any income
recognized by the optionee as a result of the exercise. If an optionee sells
shares acquired upon exercise of an option, any amount realized over the basis
of such shares will constitute capital gain to such optionee for federal income
tax purposes.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED AMENDMENT TO THE
DIRECTORS' PLAN IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE
ADOPTION OF SUCH AMENDMENT.
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION COMMITTEE
The following is a report of the Compensation Committee of the Board of
Directors (the "Committee") on executive compensation policies for the fiscal
year ended February 28, 1995. The Committee administers the compensation
program for executive officers of the Company and makes all related decisions.
Executive compensation awards in fiscal 1995 were based on Company and executive
officer performance in the fiscal year ended February 28, 1994. The Company's
after-tax income increased 113% in fiscal 1994 compared to the prior year.
16
<PAGE>
The principal elements of the compensation program for executive officers
are base salary, performance-based annual bonuses and options granted under the
Company's stock option plan. The goals of the program are to ensure that a
strong relationship exists between executive compensation and the creation of
shareholder value and that executive officers are strongly motivated and
retained. The Company's compensation philosophy is to create a direct
relationship between the level of total executive officer compensation and the
Company's success in meeting its annual performance goals as represented by its
annual business plan. An additional element of this philosophy is to reward
equitably relative contribution and job performance of individual executive
officers.
BASE SALARY
Annual salaries for the Company's executive officers, including the
Chairman of the Board and President ("CEO"), are reviewed in May of each year
based on a number of factors, both objective and subjective, with any change to
be effective on June 1 of that year. Objective factors considered include
Company financial performance relative to plan, although no specific formulas
based on such factors are used to determine salaries. Salary decisions are
based primarily on the Committee's subjective analysis of the factors
contributing to the Company's success and of the executive's individual
contributions to that success. In June 1994, the average base salary of each
executive officer was increased by an average of 15.2%, including that of the
CEO, whose salary was increased 32.4%. The Committee believes that these
increases are consistent with improvements in the Company's financial
performance and with the compensation practices of comparable companies in the
industry.
PERFORMANCE-BASED ANNUAL BONUSES
Cash bonuses based on the Company's performance are awarded to the
executive officers under an incentive compensation plan. Under the current
plan, the CEO receives 20%, and other executive officers receive 10%, of their
base pay as a bonus if Company business plan profit objectives are achieved. In
addition, up to 6% of base pay is paid as bonuses to the executive officers if
individual executive officer job performance goals are achieved. Under the plan
that served as the basis for bonuses in fiscal 1995, all executive officers
received 10% of their base pay as a bonus if Company business plan profit
objectives were achieved, and up to 4% of base pay if individual executive
officer job performance goals were achieved. Thus, whether the executive
officers' total pay is comparable to the compensation of executives with similar
responsibilities at comparable companies may vary from year to year depending
upon the Company's performance. The CEO's performance goals for fiscal year
1995 included achievement of new store location sourcing objectives and
achieving budgeted Company-owned store financial results. In fiscal 1995, the
average bonus paid to executive officers represented 12.5% of base pay,
including the CEO, whose bonus represented 14% of his base pay.
STOCK OPTIONS
Awards of stock options strengthen the ability of the Company to attract,
motivate and retain executives of superior capability and more closely align the
interests of management with those of shareholders. The Committee considers on
an annual basis the grant of options to executive officers and key managers.
The number of options granted is generally based upon the
17
<PAGE>
position held by a participant and the Committee's subjective evaluation of such
participant's contribution to the Company's future growth and profitability.
The grant of options is an annual determination, but the Committee may consider
the size of past awards and the total amounts outstanding in making such a
determination.
Unlike cash, the value of a stock option will not immediately be realized
and does not result in a current expense to the Company. Stock options are
granted with an exercise price equal to the current market price of the
Company's stock and will have value only if the Company's stock price increases,
resulting in a commensurate benefit for the Company's shareholders. Although
the plan does not provide for a required vesting period, the Committee has
generally required that options granted to employees vest following two years of
employment with the Company, with additional grants following this period of
initial employment vesting immediately.
No stock options were awarded to executive officers under the Company's
incentive stock option plan in fiscal 1995. Options currently held by current
executive officers cover a total of 123,000 shares. The Committee's decision
not to grant additional options in 1995 was in consideration of awards
previously made to executive officers.
OTHER COMPENSATION
An additional element of the executive officer's compensation, which is not
performance-based, is the matching of contributions by the Company under the
Company's 401(k) plan.
The Compensation Committee believes that linking executive compensation to
corporate performance results in a better alignment of compensation with
corporate goals and shareholder interests. As performance goals are met or
exceeded, resulting in increased value to shareholders, executives are rewarded
commensurately. The Committee believes that compensation levels during 1995
adequately reflect the Company's compensation goals and policies.
August 23, 1995
COMPENSATION COMMITTEE:
Lee Mortenson
Clyde Wm. Engle
Fred M. Trainor
Gerald Tierney
18
<PAGE>
SUMMARY COMPENSATION TABLE
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").
<TABLE>
<CAPTION>
All Other
Annual Compensation Compensation(2)
----------------------- ---------------
Name and Principal Position Year Salary(1) Bonus
- --------------------------- ---- --------- ------
<S> <C> <C> <C> <C>
Franklin E. Crail, 1995 $129,618 $31,050 $ 2,162
Chairman of the Board 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.
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. See "Item 3. Proposal to Approve an Amendment of
the 1990 Nonqualified Stock Option Plan for Nonemployee Directors" for a
description of the Directors' Plan and information regarding stock options
granted thereunder.
19
<PAGE>
COMPARISON OF RETURN ON EQUITY
The following graph reflects the total return, which assumes reinvestment
of dividends, of a $100 investment in the Company's Common Stock, in the Nasdaq
U.S. Index and in a Peer Group Index of companies in the confectionery industry,
on February 28, 1990.
PERFORMANCE GRAPH
[GRAPH]
<TABLE>
<CAPTION>
Base
Period Return Return Return Return Return
Company/Index Name 1990 2/1991 2/1992 2/1993 2/1994 2/1995
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rocky Mountain Chocolate Factory, Inc. 100.00 55.18 73.57 101.16 220.71 257.49
NASDAQ 100.00 110.15 157.20 167.25 198.00 200.72
Peer Group(1) 100.00 106.71 118.32 145.72 167.95 170.23
<FN>
- ---------------------
(1) Comprised of the following companies: Grist Mill Company, Hershey Foods
Corporation, Imperial Holly Corporation, Paradise, Inc., Savannah Foods &
Industries, Tootsie Roll Industries, Valhi, Inc. and Wrigley (Wm.), Jr.
Company.
</TABLE>
20
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1995, the Company's Compensation Committee was comprised of
Messrs. Engle, Mortenson, Trainor and Tierney. 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, 1994 and
1995, the total principal and interest owed by the Company to Coronet under the
Notes was $408,167 and $-0-, respectively. See "Certain Transactions."
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 year ended February 28, 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 year 1995 (through the date of purchase), the Company paid Mr. Crail
$25,140 pursuant to the factory lease. The Company, in June 1994, as part of
its facility expansion and financing program, 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.
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
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<PAGE>
converting Notes in the aggregate principal amount of $400,000 into 432,376
shares of Common Stock on May 31, 1994. At February 28, 1994 and 1995, the
total principal and interest owed by the Company to Coronet under the Notes was
$408,167 and $-0-, respectively. The Company paid interest on the Notes of
$12,250 during fiscal year 1995 (through the date on which the final conversion
occurred).
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.
SECTION 16(A) COMPLIANCE
Loresa McCoy, Secretary of the Company, filed a late Form 3 following her
election as an officer. The Company has no knowledge that any other director,
executive officer of 10% shareholder was required to file a Form 5 for fiscal
1995 and failed to do so, and the Company has received a written representation
that a Form 5 was not required from each such person except Gerald M. Tierney,
Jr., and Clyde Wm. Engle, who were directors of the Company during fiscal 1995,
and Coronet. In making these disclosures, the Company has relied solely on
written representations of its directors, executive officers and 10%
shareholders and copies of the reports filed by them with the Securities and
Exchange Commission.
RELATIONSHIP WITH INDEPENDENT
PUBLIC ACCOUNTANTS
Grant Thornton was the independent public accountant for the Company for
the year ended February 28, 1995. It is expected that representatives of Grant
Thornton will be present at the meeting to make any statement they desire and to
respond to appropriate questions.
SHAREHOLDER PROPOSALS
Any shareholder of the Company wishing to have a proposal considered for
inclusion in the Company's 1996 proxy solicitation materials must, in addition
to other applicable requirements, set forth the proposal in writing and file it
with the Secretary of the Company on or before May 21, 1996. The Board of
Directors of the Company will review any proposals from shareholders which it
receives by that date and will determine whether any proposals will be included
in its 1996 Proxy solicitation materials.
22
<PAGE>
ANNUAL REPORT TO SHAREHOLDERS
The 1995 Annual Report to Shareholders was mailed to shareholders on or
about August 29, 1995.
OTHER MATTERS AT THE MEETING
As of the date of this Proxy Statement, management knows of no matters not
described herein to be brought before the shareholders at the Annual Meeting.
Should any other matters properly come before the meeting, it is intended that
the persons named in the accompanying Proxy will vote thereon according to their
best judgment in the interest of the Company.
SHAREHOLDERS ARE URGED TO PROMPTLY MARK, DATE, SIGN AND RETURN
THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE PROVIDED.
By Order of the Board of Directors
Loresa McCoy
--------------------------------------------------
LORESA McCOY
Secretary
September 18, 1995
A COPY OF THE COMPANY'S FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED
FEBRUARY 28, 1995, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS
AVAILABLE WITHOUT CHARGE TO EACH PERSON WHOSE PROXY IS SOLICITED HEREBY UPON
WRITTEN REQUEST TO LORESA MCCOY, SECRETARY, ROCKY MOUNTAIN CHOCOLATE FACTORY,
INC., 265 TURNER DRIVE, DURANGO, COLORADO 81301.
23
<PAGE>
EXHIBIT A
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
1995 STOCK OPTION PLAN
Section 1. PURPOSE. It is the purpose of the Plan to promote the
interests of Rocky Mountain Chocolate Factory, Inc. (the "Company") and its
shareholders by attracting, retaining and stimulating the performance of
selected officers and other key employees by giving such employees the
opportunity to acquire a proprietary interest in the Company and an increased
personal interest in its continued success and progress. Unless otherwise
specified in the option agreement, each Option granted under the Plan shall be
an Incentive Stock Option.
Section 2. DEFINITIONS. As used herein the following terms have the
following meanings:
(a) "Affiliate" means any parent or subsidiary corporation of the
Company within the meaning of Section 424(e) and (f) of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(d) "Committee" means the Compensation Committee described in Section
4 hereof.
(e) "Common Stock" means the $0.03 par value Common Stock of the
Company.
(f) "Company" means Rocky Mountain Chocolate Factory, Inc., a
Colorado corporation.
(g) "Employee" means any regular salaried officer (including an
officer who may be a member of the Board) or other key employee of the
Company or an Affiliate.
(h) "Fair Market Value" means, unless the Committee determines
otherwise in good faith, the closing sale price of the Common Stock on the
date in question (or, if there is no reported sale on such date, then on
the last preceding day on which a reported sale occurred) as reported on
the Nasdaq National Market or any national stock exchange or other stock
market on which the Common Stock is then traded, or if the Common Stock is
not listed or admitted to trading on the Nasdaq National Market or any
national stock exchange but is quoted as an over-the-counter security on
Nasdaq or any similar system then in use, "Fair Market Value" shall mean
the average of the closing high bid and low asked quotations on such system
for the Common Stock on the date in question.
(i) "Incentive Stock Option" means an incentive stock option within
the meaning of Section 422(b) of the Code.
(j) "Lock-Up Period" means any period during which an Optionee is
prohibited from selling shares of Common Stock without the consent of an
underwriter or placement agent (or a representative thereof) pursuant to an
agreement between the Optionee and such underwriter, placement agent or
representative in connection with an offering of securities of the Company.
<PAGE>
(k) "Nonqualified Stock Option" means an option that is not an
Incentive Stock Option.
(l) "Option" means any option to purchase shares of Common Stock
granted pursuant to the provisions of the Plan.
(m) "Optionee" means an Employee who has been granted an Option under
the Plan.
(n) "Plan" means this Rocky Mountain Chocolate Factory, Inc. 1995
Stock Option Plan.
(o) "Retirement" means an Optionee's termination of employment with
the Company or an Affiliate after the Optionee reaches age 65.
Section 3. NUMBER OF SHARES. Options may be granted by the Company from
time to time under the Plan to purchase an aggregate of 100,000 shares of the
authorized Common Stock. If an Option expires or terminates for any reason
without having been exercised in full, the unpurchased shares subject to such
expired or terminated Option shall be available for purposes of the Plan.
Section 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by
a Compensation Committee which shall consist of two or more members of the
Board, each of whom shall be a disinterested person within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended, or any similar rule
or regulation promulgated thereunder. Each member of the Committee shall be
appointed by and shall serve at the pleasure of the Board. The Board shall have
the sole continuing authority to appoint members of the Committee both in
substitution for members previously appointed and to fill vacancies however
caused. The following provisions shall apply to the administration of the Plan:
(a) The Committee shall designate one of its members as Chairman and
shall hold meetings at such times and places as it may determine. Each
member of the Committee shall be notified in writing of the time and place
of any meeting of the Committee at least two days prior to such meeting,
provided that such notice may be waived by a Committee member. A majority
of the members of the Committee shall constitute a quorum and any action
taken by a majority of the members of the Committee present at any duly
called meeting at which a quorum is present (as well as any action
unanimously approved in writing) shall constitute action by the Committee.
(b) The Committee may appoint a Secretary (who need not be a member
of the Committee) who shall keep minutes of its meetings. The Committee
may make such rules and regulations for the conduct of its business as it
may determine.
(c) No member of the Committee shall be eligible to receive an Option
under the Plan.
(d) The Committee shall have full authority subject to the express
provisions of the Plan to interpret the Plan and any Option granted
hereunder, to provide, modify and rescind
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<PAGE>
rules and regulations relating to the Plan, to determine the terms and
provisions of each Option and the form of each option agreement evidencing
an Option granted under the Plan and to make all other determinations and
perform such actions as the Committee deems necessary or advisable to
administer the Plan. In addition, the Committee shall have full authority,
subject to the express provisions of the Plan, to determine the Employees
to whom Options shall be granted, the time or date of grant of each such
Option, the number of shares subject thereto, and the price at which such
shares may be purchased, and the nature and extent of restrictions, if any,
on such shares. In making such determinations, the Committee may take into
account the nature of the services rendered by the Employee, his present
and potential contributions to the success of the Company's business and
such other facts as the Committee in its discretion shall deem appropriate
to carry out the purposes of the Plan.
(e) No member of the Committee or the Board shall be liable for any
action taken or determination made in good faith with respect to the Plan
or any Option granted hereunder.
Section 5. GRANT OF OPTIONS. At any time and from time to time during the
term of the Plan and subject to the express provisions hereof, Options may be
granted by the Committee to any Employee for such number of shares of Common
Stock as the Committee in its discretion shall deem to be in the best interest
of the Company and which will serve to further the purposes of the Plan. The
Committee, in its discretion, may designate any Option so granted as an
Incentive Stock Option; provided, however, that the aggregate Fair Market Value
of the Common Stock with respect to which Incentive Stock Options granted to an
Employee under the Plan (including all options qualifying as Incentive Stock
Options granted to such Employee under any other plan of the Company or an
Affiliate) are exercisable for the first time by such Employee during any
calendar year shall not exceed $100,000, determined as of the date the Incentive
Stock Option is granted. If an Option that is intended to be an Incentive Stock
Option shall be granted and such Option does not comply with the proviso of the
immediately preceding sentence, such Option shall not be void but shall be
deemed to be an Incentive Stock Option to the extent it does not exceed the
limit established by such proviso and shall be deemed a Nonqualified Stock
Option to the extent it exceeds that limit.
Section 6. OPTION PRICE AND PAYMENT. The purchase price per share of
Common Stock under each Incentive Stock Option shall be determined by the
Committee in its discretion, but in no event shall such price be less than 100%
of the Fair Market Value per share of Common Stock on the date the Incentive
Stock Option is granted; provided, however, that the purchase price per share of
Common Stock under any Incentive Stock Option granted to an Optionee who, on the
date such Incentive Stock Option is granted, owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company or any
Affiliate shall be at least 110% of the Fair Market Value per share of Common
Stock on the date of grant. The purchase price per share of Common Stock under
each Nonqualified Stock Option shall be determined by the Committee in its
discretion, but in no event shall such price be less the par value per share of
Common Stock on the date the Nonqualified Stock Option is granted or exercised,
whichever is greater. Upon exercise of an Option, the purchase price shall be
paid in full (i) in cash or (ii) with the consent of the Committee and if and to
the extent provided for under the option agreement for such Option, in cash
and/or by delivery of shares of Common Stock already owned by the Optionee,
which shares are free of all liens, claims and encumbrances of every kind and
have an aggregate Fair Market Value (determined as of the date of exercise)
equal to the purchase price. The proceeds of such sale shall constitute general
funds of the
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<PAGE>
Company. Upon exercise of an Option, the Optionee will be required to pay to
the Company the amount of any federal, state or local taxes required by law to
be withheld in connection with such exercise.
The Committee, in its sole and absolute discretion, may approve the
extension of a loan to an Optionee by the Company to assist the Optionee in
paying the exercise price of an Option; provided, however, that no such loan
shall be made to an Optionee who is a director of the Company unless the
Committee determines in good faith that the loan is fair to the Company at the
time of such approval. Any such loan to an Optionee shall be made in accordance
with the terms and conditions (including interest rate and terms of repayment)
determined by the Committee in its discretion and applicable law.
Section 7. OPTION PERIOD AND TERMS OF EXERCISE OF OPTIONS. Except as
otherwise provided for herein, each Option granted under the Plan shall be
exercisable during such period commencing on the date of the grant of such
Option as the Committee shall determine; provided, however, that the otherwise
unexpired portion of any Option shall expire and become null and void no later
than upon the first to occur of (i) the expiration of ten years from the date
such Option was granted; (ii) the later of (A) the expiration of 30 days from
the date of the termination of the Optionee's employment with the Company or an
Affiliate for any reason other than Retirement, disability or death or (B) in
the event that the 30-day period specified in (ii)(A) occurs during a Lock-Up
Period, the expiration of 30 days following the expiration of such Lock-Up
Period; (iii) the later of (A) the expiration of three months from the date of
the termination of the Optionee's employment with the Company or an Affiliate by
reason of Retirement or (B) in the event that the three-month period specified
in (iii)(A) occurs during a Lock-Up Period, the expiration of three months
following the expiration of such Lock-Up Period; or (iv) the expiration of one
year from the date of the termination of the Optionee's employment with the
Company or an Affiliate by reason of disability (as determined by the Committee
in its sole discretion) or death; provided, however, that an Option that is
intended to be an Incentive Stock Option shall not be treated as an Incentive
Stock Option to the extent it is exercised more than three months following the
Optionee's termination of employment with the Company or an Affiliate for any
reason other than disability or death. Anything herein to the contrary
notwithstanding, the otherwise unexpired portion of any option granted hereunder
shall expire and become null and void immediately upon an Optionee's termination
of employment with the Company or an Affiliate by reason of such Optionee's
fraud, dishonesty or performance of other acts detrimental to the Company or an
Affiliate (as determined by the Committee in its sole discretion). An Incentive
Stock Option granted to an Optionee who, on the date such Incentive Stock Option
is granted, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any Affiliate shall not be
exercisable after the expiration of five years from the date of its grant.
Under the provisions of any option agreement evidencing an Option, the Committee
may limit the number of shares purchasable thereunder in any period or periods
of time during which the Option is exercisable and may impose such other terms
and conditions upon the exercise of an Option as are not inconsistent with the
terms of this Plan; provided, however, that the Committee, in its discretion,
may accelerate the exercise date of any such Option.
Section 8. NONTRANSFERABILITY OF OPTIONS. An Option granted under the
Plan shall be transferable by the Optionee only by will or by the laws of
descent and distribution and shall be exercisable during the lifetime of the
Optionee only by the Optionee.
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<PAGE>
Section 9. TERMINATION OF EMPLOYMENT. A transfer of employment among the
Company and any of its Affiliates shall not be considered to be a termination of
employment for the purposes of the Plan. The Committee, in its sole and
absolute discretion, shall determine whether an authorized leave of absence or
absence on military or government service shall constitute a termination of
employment for purposes of the Plan. Nothing in the Plan or in any option
agreement evidencing an Option granted under the Plan shall confer upon any
Optionee any right to continue in the employ of the Company or any Affiliate or
in any way interfere with the right of the Company or any Affiliate to terminate
the employment of the Optionee at any time, with or without cause.
Section 10. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. In the event the
Company shall effect a split of the Common Stock or dividend payable in Common
Stock, or in the event the outstanding Common Stock shall be combined into a
smaller number of shares, the maximum number of shares as to which Options may
be granted under the Plan shall be decreased or increased proportionately. In
the event that before delivery by the Company of all of the shares of Common
Stock for which any Option has been granted under the Plan, the Company shall
have effected such a split, dividend or combination, the shares still subject to
such Option shall be increased or decreased proportionately and the purchase
price per share shall be decreased or increased proportionately so that the
aggregate purchase price for all of the shares then subject to such Option shall
remain the same as immediately prior to such split, dividend or combination.
In the event of a reclassification of Common Stock not covered by the
foregoing, or in the event of a liquidation or reorganization (including a
merger, consolidation, spinoff or sale of assets) of the Company or an
Affiliate, including a transaction in which the Company or an Affiliate is not
the survivor, the Board shall make such adjustments, if any, as it may deem
appropriate in the number, purchase price and kind of shares covered by the
unexercised portions of Options theretofore granted under the Plan. The
provisions of this Section shall only be applicable if, and only to the extent
that, the application thereof does not conflict with any valid governmental
statute, regulation or rule.
Section 11. AMENDMENT AND TERMINATION OF THE PLAN. Subject to the right
of the Board to terminate the Plan prior thereto, the Plan shall terminate at
the expiration of ten years from July 31, 1995, the date of adoption of the
Plan by the Board. No Options may be granted after termination of the Plan.
The Board may alter or amend the Plan but may not without the approval of the
shareholders of the Company make any alteration or amendment thereof which
operates to (i) abolish the Committee, change the qualifications of its members
or withdraw the administration of the Plan from its supervision, (ii) increase
the total number of shares of Common Stock which may be granted under the Plan
(other than as provided in Section 10 hereof), (iii) extend the term of the Plan
or the maximum exercise period provided in Section 7 hereof, (iv) decrease the
minimum purchase price for Common Stock provided in Section 6 (other than as
provided in Section 10 hereof), (v) materially increase the benefits accruing to
participants under the Plan, or (vi) materially modify the requirements as to
eligibility for participation in the Plan.
No termination or amendment of the Plan shall adversely affect the rights
of an Optionee under a previously granted Option, except with the consent of
such Optionee.
Section 12. MODIFICATION OF OPTIONS. Subject to the terms and conditions
of and within the limitations of the Plan, the Committee may modify, extend or
renew outstanding Options granted under
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<PAGE>
the Plan (including the conversion of an Incentive Stock Option into a
Nonqualified Stock Option), or accept the surrender of Options outstanding
hereunder (to the extent not theretofore exercised) and authorize the granting
of new Options in substitution therefor. Notwithstanding the foregoing, no
modification of an Option shall, without the consent of the Optionee, alter or
impair any rights or obligations under any Option theretofore granted to such
Optionee, except as may be necessary, with respect to Incentive Stock Options,
to satisfy the requirements of Section 422(b) of the Code.
Section 13. REQUIREMENTS OF LAW. The granting of Options and the issuance
of Common Stock upon the exercise of an Option shall be subject to all
applicable laws, rules and regulations and to such approval by governmental
agencies as may be required.
Section 14. INVESTMENT LETTER. If the Company so elects, the Company's
obligation to deliver Common Stock with respect to an Option shall be
conditioned upon its receipt from the Employee to whom such Common Stock is to
be delivered of an executed investment letter containing such representations
and agreements as the Committee may determine to be necessary or advisable in
order to enable the Company to issue and deliver such Common Stock to such
Employee in compliance with the Securities Act of 1933 and other applicable
federal, state or local securities laws or regulations.
Section 15. STOCK PURCHASE AGREEMENT. The Committee, in its sole and
absolute discretion, may require, as an additional condition to the issuance of
Common Stock upon the exercise of an Option, that the Optionee furnish to the
Company an executed stock purchase agreement in such form as may be prescribed
by the Committee.
Section 16. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective,
as of the date of its adoption by the Board, when it has been duly approved by
the holders of at least a majority of the shares of Common Stock present or
represented and entitled to vote at a meeting of the shareholders of the Company
duly held in accordance with applicable law within twelve months after the date
of adoption of the Plan by the Board. If the Plan is not so approved, the Plan
shall terminate and any Option granted hereunder shall be null and void.
Section 17. GENDER. Words of any gender used in the Plan shall be
construed to include any other gender, unless the context requires otherwise.
IN WITNESS WHEREOF, this Plan has been executed at Durango, Colorado, on
this 24th day of August, 1995, to be effective as of August 24, 1995.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By /s/ Franklin E. Crail
------------------------------------------
Franklin E. Crail, President
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<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
265 TURNER DRIVE
DURANGO, COLORADO 81301
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints FRANKLIN E. CRAIL and LAWRENCE C.
REZENTES, and each of them, as the undersigned's attorneys and proxies, each
with the power to appoint his substitute, and hereby authorizes them to
represent and to vote, as directed below, all the shares of common stock of
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. (the "Company") held of record by the
undersigned on August 28, 1995, at the annual meeting of shareholders to be
held on October 13, 1995 or any adjournment thereof.
Please mark boxes in blue or black ink.
1. ELECTION OF DIRECTORS: / / FOR all nominees listed below (except as
marked to the contrary below)
/ / WITHHOLD AUTHORITY to vote for all
nominees listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name below.)
Franklin E. Crail Lee N. Mortenson Everett A. Sisson
Gerald A. Kien Ralph L. Nafziger Fred M. Trainor
2. PROPOSAL TO APPROVE THE ADOPTION OF THE COMPANY'S 1995 STOCK OPTION PLAN:
FOR / / AGAINST / / ABSTAIN / /
3. PROPOSAL TO AMEND THE COMPANY'S 1990 NONQUALIFIED STOCK OPTION PLAN FOR
NONEMPLOYEE DIRECTORS TO INCREASE FROM 60,000 TO 90,000 THE AGGREGATE
NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE UNDER SUCH PLAN:
FOR / / AGAINST / / ABSTAIN / /
4. Each of the above-named attorneys and proxies (or his substitute) is
authorized to vote in his discretion upon such other business as may
properly come before the meeting or any adjournment thereof.
(Continued and to be signed on reverse side.)
<PAGE>
This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will be
voted FOR management's nominees for election as directors and FOR each of the
other proposals set forth above.
Date:-------------------------------------, 1995
------------------------------------------------
Signature
------------------------------------------------
Signature if held jointly
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney, executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by President or other
authorized officer. If a partnership, please sign
in partnership name by authorized person.
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
