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