Document:

ex10-01

Exhibit 10.01

AMENDED

STRAYER EDUCATION, INC.

1996 STOCK OPTION PLAN

May 21, 2001

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
					Page
					

	1.		
PURPOSE
			11	
	
	
	
	

			
ADMINISTRATION
			11	
	
	
	
	

			
2.1. Board
			11	
	
	
	
	

			
2.2. Committee
			12	
	
	
	
	

			
2.3. No Liability
			12	
	
	
	
	

	3.		
STOCK
			12	
	
	
	
	

	4.		
ELIGIBILITY
			13	
	
	
	
	

	5.		
EFFECTIVE DATE AND TERM
			13	
	
	
	
	

			
5.1. Effective Date
			13	
	
	
	
	

			
5.2. Term
			13	
	
	
	
	

	6.		
GRANT OF OPTIONS
			13	
	
	
	
	

			
6.1. General
			13	
	
	
	
	

			
6.2. Eligible Directors (Non-Employee Directors)
			14	
	
	
	
	

	7.		
LIMITATION ON INCENTIVE STOCK OPTIONS
			14	
	
	
	
	

	8.		
OPTION AGREEMENTS
			14	
	
	
	
	

	9.		
OPTION PRICE
			15	
	
	
	
	

	10.		
TERM AND EXERCISE OF OPTIONS
			15	
	
	
	
	

			
10.1. Term
			15	
	
	
	
	

			
10.2. Exercise by Optionee
			16	
	
	
	
	

			
10.3. Option Period and Limitations on Exercise
			16	
	
	
	
	

			
10.4. Method of Exercise
			16	
	
	
	
	

	11.		
TRANSFERABILITY OF OPTIONS
			17	
	
	
	
	

	12.		
TRANSFERABILITY OF STOCK PURCHASED PURSUANT TO INCENTIVE STOCK
OPTION
			17	
	
	
	
	

	13.		
TERMINATION OF EMPLOYMENT
			18	
	
	
	
	

	14.		
RIGHTS IN THE EVENT OF DEATH OR DISABILITY
			18	
	
	
	
	

			
14.1. Death
			18	
	
	
	
	

			
14.2. Disability
			19	
	
	
	
	

	15.		
RESTRICTED STOCK
			19	
	
	
	
	

			
15.1. Grant of Restricted Stock
			19		 
	
	
	
	

			
15.2. Restrictions
			19	
	
	
	
	

			
15.3. Restricted Stock Certificates
			20	
	
	
	
	

			
15.4. Rights of Holders of Restricted Stock
			20	
	
	
	
	

			
15.5. Termination of Employment
			20	
	
	
	
	

			
15.6. Purchase of Restricted Stock
			20	
	
	
	
	

			
15.7. Delivery of Stock
			21	
	
	
	
	

	16.		
USE OF PROCEEDS
			21	
	
	
	
	

	17.		
SECURITIES LAWS
			21	
	
	
	
	

	18.		
EXCHANGE ACT: RULE 16b-3
			22	
	
	
	
	

	19.		
AMENDMENT AND TERMINATION
			22	

 

	 	 	 	 	 	 	 
	20.		
EFFECT OF CHANGES IN CAPITALIZATION
			23	
	
	
	
	

			
20.1. Changes in Stock
			23	
	
	
	
	

			
20.2. Reorganization With Corporation Surviving
			23	
	
	
	
	

			
20.3. Other Reorganizations; Sale of Assets or Stock
			23	
	
	
	
	

			
20.4. Adjustments
			24	
	
	
	
	

			
20.5. No Limitations on Corporation
			24	
	
	
	
	

	21.		
WITHHOLDING
			25	
	
	
	
	

	22.		
DISCLAIMER OF RIGHTS
			25	
	
	
	
	

	23.		
NONEXCLUSIVITY
			25	

 

AMENDED

STRAYER EDUCATION, INC.

1996 STOCK OPTION PLAN

                        STRAYER EDUCATION, INC., a Maryland corporation (the “Corporation”), sets
forth herein the terms of the Amended 1996 Stock Option Plan (the “Plan”) as
follows:

1.       PURPOSE

                        The Plan is intended to advance the interests of the Corporation by
providing eligible individuals (as designated pursuant to Section 4 hereof) an
opportunity to acquire or increase a proprietary interest in the Corporation,
which thereby will create a stronger incentive to expend maximum effort for the
growth and success of the Corporation and its subsidiaries and will encourage
such eligible individuals to remain in the employ of the Corporation or that of
one or more of its subsidiaries. Each stock option granted under the Plan (an
“Option”) is intended to be an “incentive stock option” (“Incentive Stock
Option”) within the meaning of Section 422 of the Internal Revenue Code of
1986, or the corresponding provision of any subsequently enacted tax statute,
as amended from time to time (the “Code”), except (a) to the extent that any
such Option would exceed the limitations set forth in Section 7 hereof, (b) for
Options specifically designated at the time of grant as not being “incentive
stock options” and (c) for Options granted to directors who are not officers or
other employees of the Corporation or any subsidiary.

2.       ADMINISTRATION

            2.1       Board

                        The Plan shall be administered by the board of directors of the
Corporation (the “Board”), which shall have the full power and authority to
take all actions and to make all determinations required or provided for under
the Plan or any Award granted or Award Agreement entered into hereunder and all
such other actions and determinations not inconsistent with the specific terms
and provisions of the Plan deemed by the Board to be necessary or appropriate
to the administration of the Plan or any Award granted or Award Agreement
entered into hereunder. The interpretation and construction by the Board of
any provision of the Plan or of any Award granted or Award Agreement entered
into hereunder shall be final and conclusive. For purposes of the Plan an
Award shall mean the grant of an Option or Restricted Stock and an Award
Agreement shall mean an Option Agreement (as defined in Section 8) or a
Restricted Stock Agreement (as defined in Section 15).

 

            2.2       Committee

                        The Board may from time to time appoint a Stock Option Committee (the
“Committee”) which may, in the discretion of the Board, be the Compensation
Committee of the Board. The Board, in its sole discretion, may provide that
the role of the Committee shall be limited to making recommendations to the
Board concerning any determinations to be made and actions to be taken by the
Board pursuant to or with respect to the Plan, or the Board may delegate to the
Committee such powers and authorities related to the administration of the
Plan, as set forth in Section 2.1 hereof, as the Board shall determine,
consistent with the Certificate of Incorporation and Bylaws of the Corporation
and applicable law. In the event that the Plan or any Award granted or Award
Agreement entered into hereunder provides for any action to be taken by or
determination to be made by the Board, such action may be taken by or such
determination may be made by the Committee if the power and authority to do so
has been delegated to the Committee by the Board as provided for in this
Section 2.2. Unless otherwise expressly determined by the Board, any such action
or determination by the Committee shall be final and conclusive.

            2.3       No Liability

                        No member of the Board or of the Committee shall be liable for any action
or determination made, or any failure to take or make an action or
determination, in good faith with respect to the Plan or any Award granted or
Award Agreement entered into hereunder.

3.       STOCK

                        The stock that may be issued pursuant to Awards granted under the Plan
shall be shares of Common Stock of the Corporation (the “Stock”), which shares
may be treasury shares or authorized but unissued shares. The number of shares
of Stock that may be issued pursuant to Awards granted under the Plan shall not
exceed in the aggregate two million five hundred thousand (2,500,000) shares of
Stock, which number of shares is subject to adjustment as provided in
Section 20 hereof; provided further that no more than twenty percent (20%) of the shares
of Stock may be issued pursuant to the grant of Restricted Stock. If any Award
is forfeited, expires, terminates or is terminated for any reason prior to
exercise in full, the shares of Stock that were subject to the unexercised or
forfeited portion of such Award shall be available for future Awards granted
under the Plan.

 

4.       ELIGIBILITY

                        Awards may be granted under the Plan to any: (i) officer or employee of
the Corporation or any “subsidiary corporation” thereof within the meaning of
Section 424(f) of the Code (a “Subsidiary”), (ii) director (including a
non-employee director), (iii) consultant, or (iv) other person determined to be
in the best interests of the Corporation as the Board shall determine and
designate from time to time prior to expiration or termination of the Plan. An
individual may hold more than one Award, subject to such restrictions as are
provided herein.

5.       EFFECTIVE DATE AND TERM

            5.1       Effective Date

                        The Plan shall become effective as of the date of adoption by the Board,
subject to stockholders’ approval of the Plan within one year of such effective
date; provided, however, that upon approval of the Plan by the stockholders of
the Corporation, all Awards granted under the Plan on or after the effective
date shall be fully effective as if the stockholders of the Corporation had
approved the Plan on the effective date. If the stockholders fail to approve
the Plan within one year of such effective date, any Awards granted hereunder
shall be null, void and of no effect.

            5.2       Term

                        The Plan shall terminate on May 21, 2011.

6.       GRANT OF OPTIONS

            6.1       General

                        The Plan shall become effective as of the date of adoption by the Board.
Subject to the terms and conditions of the Plan, the Board may, at any time and
from time to time prior to the date of termination of the Plan, grant to such
eligible individuals as the Board may determine (“Optionees”) Options to
purchase such number of shares of the Stock on such terms and conditions as the
Board may determine, including any terms or conditions which may be necessary
to qualify such Options as “incentive stock options” under Section 422 of the
Code. Without limiting the foregoing, the Board may at any time, with the
consent of the Optionee, amend the terms of outstanding Options or issue new
Options in exchange for the surrender and cancellation of outstanding Options.
The date on which the Board approves the grant of an Option (or such later date
as is specified by the Board)

 

shall be considered the date on which such Option is granted. The maximum
number of shares of Stock subject to Options that can be awarded under the Plan
to any person in a single calendar year is 350,000 shares; which number shall
be subject to adjustment in accordance with Section 20.

            6.2       Eligible Directors (Non-Employee Directors)

                        For
purposes of this Section 6.2 an “Eligible Director” means a person
elected to serve on the Board at or after the 2001 meeting of the Corporation’s
stockholders who is not an officer or other salaried employee of the
Corporation or any Subsidiary; provided, that, partners and employees of
preferred stockholders of the Corporation shall not be Eligible Directors.
Each Eligible Director shall be granted an Option to purchase 10,000 shares on
the 10th trading day after the date of the first annual meeting of the
Corporation’s stockholders following the Eligible Director’s initial election
to the Board. This Award of 10,000 shares shall be made automatically and
shall not require any further Board action. The Option Price of this Award
shall be the average of the closing prices of the Corporation’s Stock for the
first 10 trading days after the annual meeting multiplied by the sum of one (1)
plus the interest rate on five year treasury notes applicable on that day. The
foregoing number of shares shall be subject to adjustment pursuant to
Section 20
below.

7.       LIMITATION ON INCENTIVE STOCK OPTIONS

                        An Option (other than an Option described in Section 1(b) hereof) shall
constitute an Incentive Stock Option only to the extent that the aggregate fair
market value (determined at the time the Option is granted) of the Stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionee during any calendar year (under the Plan and all other plans of
the Optionee’s employer corporation and its parent and subsidiary corporations
within the meaning of Section 422(d) of the Code) does not exceed $100,000.
This limitation shall be applied by taking Options into account in the order in
which such Options were granted.

8.       OPTION AGREEMENTS

                        All Options granted pursuant to the Plan shall be evidenced by written
agreements (“Option Agreements”) to be executed by the Corporation and the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same
time need not contain similar provisions; provided, however, that all such
Option

 

Agreements shall comply with all terms of the Plan and any applicable
employment agreement.

9.       OPTION PRICE

                        The purchase price of each share of the Stock subject to an Option (the
“Option Price”) shall be fixed by the Board, shall be not less than the fair
market value of a share of the Stock covered by the Option and shall be stated
in each Option Agreement. In the case of an Option that is intended to
constitute an Incentive Stock Option, the Option Price shall be not less than
the fair market value of a share of the Stock covered by the Option; provided,
however, that in the event the Optionee would otherwise be ineligible to
receive an Incentive Stock Option by reason of the provisions of Sections
422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10
percent), the Option Price of an Option which is intended to be an Incentive
Stock Option shall be not less than the greater of par value or 110 percent of
the fair market value of a share of the Stock covered by the Option at the time
such Option is granted.

                        In the event that the Stock is listed on an established national or
regional stock exchange, is admitted to quotation on the National Association
of Securities Dealers Automated Quotation System, or is publicly traded in an
established securities market, in determining the fair market value of the
Stock, the Board shall use the closing price of the Stock on such exchange or
system or in such market (the highest such closing price if there is more than
one such exchange or market) on the date the Option is granted (or, if there is
no such closing price, then the Board shall use the mean between the highest
bid and lowest asked prices or between the high and low prices on such date),
or, if no sale of the Stock has been made on such day, on the next preceding
day on which any such sale shall have been made.

10.       TERM AND EXERCISE OF OPTIONS

            10.1     Term

                        Each Option granted under the Plan shall terminate and all rights to
purchase shares thereunder shall cease upon the expiration of 10 years from the
date such Option is granted, or on such date prior thereto as may be fixed by
the Board and stated in the Option Agreement relating to such Option; provided,
however, that in the event the Optionee would otherwise be ineligible to
receive an Incentive Stock Option by reason of the provisions of Sections
422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10
percent), an Option

 

granted to such Optionee which is intended to be an Incentive Stock Option
shall in no event be exercisable after the expiration of five years from the
date it is granted.

            10.2     Exercise by Optionee

                        Only the Optionee receiving an Option (or, in the event of the Optionee’s
legal incapacity or incompetency, the Optionee’s guardian or legal
representative, and in the case of the Optionee’s death, the Optionee’s estate)
may exercise the Option.

            10.3     Option Period and Limitations on Exercise

                        Each Option granted under the Plan shall be exercisable in whole or in
part at any time and from time to time over a period commencing on or after the
date of grant of the Option and ending upon the expiration or termination of
the Option, as the Board shall determine and set forth in the Option Agreement
relating to such Option. Without limitation of the foregoing, the Board,
subject to the terms and conditions of the Plan, may in its sole discretion
provide that an Option may not be exercised in whole or in part for any period
or periods of time during which such Option is outstanding as the Board shall
determine and set forth in the Option Agreement relating to such Option. Any
such limitation on the exercise of an Option contained in any Option Agreement
may be rescinded, modified or waived by the Board, in its sole discretion, at
any time and from time to time after the date of grant of such Option, so as to
accelerate the time at which the Option may be exercised. Notwithstanding any
other provisions of the Plan, no Option shall be exercisable in whole or in
part prior to the date the Plan is approved by the stockholders of the
Corporation as provided in Section 5.1 hereof.

            10.4     Method of Exercise

                        An Option that is exercisable hereunder may be exercised by delivery to
the Corporation on any business day, at its principal office addressed to the
attention of the Board, of written notice of exercise, which notice shall
specify the number of shares for which the Option is being exercised, and shall
be accompanied by payment in full of the Option Price of the shares for which
the Option is being exercised. Payment of the Option Price for the shares of
Stock purchased pursuant to the exercise of an Option shall be made, as
determined by the President and set forth in the Option Agreement pertaining to
an Option, (a) in cash or by certified check payable to the order of the
Corporation; (b) through the tender to the Corporation of shares of Stock,
which shares shall be valued, for purposes of determining the extent to which
the Option Price has been paid thereby, at their fair market value (determined
in the manner described in Section 9 hereof ) (“Fair Market Value”) on the date
of exercise; or (c) by a combination of the methods

 

described in Sections 10.4(a) and 10.4 (b) hereof; provided, however, that the
Board may in its discretion impose and set forth in the Option Agreement
pertaining to an Option such limitations or prohibitions on the use of shares
of Stock to exercise Options as it deems appropriate. Payment in full of the
Option Price need not accompany the written notice of exercise provided the
notice directs that the Stock certificate or certificates for the shares for
which the Option is exercised be delivered to a licensed broker acceptable to
the Corporation as the agent for the individual exercising the Option and, at
the time such Stock certificate or certificates are delivered, the broker
tenders to the Corporation cash (or cash equivalents acceptable to the
Corporation) equal to the Option Price; provided, further, that additional
shares of Stock may be withheld upon a broker-assisted cashless exercise for
the purpose of paying withholding taxes in accordance with Section 21. An
attempt to exercise any Option granted hereunder other than as set forth above
shall be invalid and of no force and effect.

                        Promptly after the exercise of an Option and the payment in full of the
Option Price of the shares of Stock covered thereby, the individual exercising
the Option shall be entitled to the issuance of a Stock certificate or
certificates evidencing such individual’s ownership of such shares. A separate
Stock certificate or certificates shall be issued for any shares purchased
pursuant to the exercise of an Option which is an Incentive Stock Option, which
certificate or certificates shall not include any shares which were purchased
pursuant to the exercise of an Option which is not an Incentive Stock Option.
An individual holding or exercising an Option shall have none of the rights of
a stockholder until the shares of Stock covered thereby are fully paid and
issued to such individual and, except as provided in Section 20 hereof, no
adjustment shall be made for dividends or other rights for which the record
date is prior to the date of such issuance.

11.       TRANSFERABILITY OF OPTIONS

                        No Option shall be assignable or transferable by the Optionee to whom it
is granted, other than by will or the laws of descent and distribution.

12.       TRANSFERABILITY OF STOCK PURCHASED PURSUANT TO INCENTIVE STOCK OPTION

                        An Optionee shall be required to give notice to the Corporation if Stock
acquired pursuant to an Incentive Stock Option is sold, pledged, assigned,
transferred or otherwise disposed of by the Optionee within two years from the
date of grant of such Incentive Stock Option or within one year after the
transfer of such Stock to the Optionee; provided, however that a transfer to a
trustee, receiver, or other fiduciary in any insolvency proceeding, as
described in Section 422(c)(3) of the Code shall not be deemed to be such a
disposition.

 

13.       TERMINATION OF EMPLOYMENT

                        The Board may provide, by inclusion of appropriate language in any Option
Agreement or applicable employment agreement, that an Optionee may (subject to
the general limitations on exercise set forth in Section 10.3 hereof), in the
event of termination of employment of the Optionee with the Corporation or a
Subsidiary, exercise an Option, in whole or in part, at any time subsequent to
such termination of employment and prior to termination of the Option pursuant
to Section 10.2 hereof, either subject to or without regard to any installment
limitation on exercise imposed pursuant to Section 10.3 hereof, as the Board, in
its sole and absolute discretion, shall determine and set forth in the Option
Agreement. Whether a leave of absence or leave on military or government
service shall constitute a termination of employment for purposes of the Plan
shall be determined by the Board, which determination shall be final and
conclusive. For purposes of the Plan only and unless otherwise stated in the
applicable Award Agreement, an Optionee’s change in position or duties shall
not result in interrupted or terminated employment, so long as such Grantee
continues to be an employee, officer, director of, or consultant to the
Corporation or a Subsidiary.

14.       RIGHTS IN THE EVENT OF DEATH OR DISABILITY

            14.1     Death

                        If an Optionee dies while employed by the Corporation or a Subsidiary or
within the period following the termination of employment during which the
Option is exercisable under Section 13 or 14.2 hereof, the executors,
administrators, legatees or distributees of such Optionee’s estate shall have
the right (subject to the general limitations on exercise set forth in Section
10.3 hereof), at any time within one year after the date of such Optionee’s death
and prior to termination of the Option pursuant to Section 10.1 hereof, to
exercise any Option held by such Optionee at the date of such Optionee’s death,
to the extent such Option was exercisable immediately prior to such Optionee’s
death; provided, however, that the Board may provide by inclusion of
appropriate language in any Option Agreement or applicable employment agreement
that, in the event of the death of an Optionee, the executors, administrators,
legatees or distributees of such Optionee’s estate may exercise an Option
(subject to the general limitations on exercise set forth in
Section 10.3 hereof),
in whole or in part, at any time subsequent to such Optionee’s death and prior
to termination of the Option pursuant to Section 10.1 hereof, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
Section 10.3 hereof, as the Board, in its sole and absolute discretion, shall
determine and set forth in the Option Agreement.

 

            14.2     Disability

                        If an Optionee terminates employment with the Corporation or a Subsidiary
by reason of the “permanent and total disability” (within the meaning of
Section 22(e) (3) of the Code) of such Optionee, then such Optionee shall have
the right (subject to the general limitations on exercise set forth in Section
10.3 hereof), at any time within one year after such termination of employment and
prior to termination of the Option pursuant to Section 10.1 hereof, to exercise,
in whole or in part, any Option held by such Optionee at the date of such
termination of employment, to the extent such Option was exercisable
immediately prior to such termination of employment; provided, however, that
the Board may provide, by inclusion of appropriate language in any Option
Agreement or applicable employment agreement, that an Optionee may (subject to
the general limitations on exercise set forth in Section 10.3 hereof), in the
event of the termination of employment of the Optionee with the Corporation or
a Subsidiary by reason of the “permanent and total disability” (within the
meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an Option,
in whole or in part, at any time subsequent to such termination of employment
and prior to termination of the Option pursuant to Section 10.1 hereof, either
subject to or without regard to any installment limitation on exercise imposed
pursuant to Section 10.3 hereof, as the Board, in its sole and absolute
discretion, shall determine and set forth in the Option Agreement. Whether a
termination of employment is to be considered by reason of “permanent and total
disability” for purposes of the Plan shall be determined by the Board, which
determination shall be final and conclusive.

15.       RESTRICTED STOCK

            15.1     Grant of Restricted Stock

                        The Board may from time to time grant shares of Stock subject to
restrictions (“Restricted Stock”) to persons eligible to receive Awards under
Section 4 hereof (“Grantees”), subject to such restrictions, conditions and
other terms, if any, as the Board may determine. Awards of Restricted Stock
may be made for no consideration (other than par value of the shares which is
deemed paid by services already rendered).

            15.2     Restrictions.

                        At the time a grant of Restricted Stock is made, the Board may, in its
sole discretion, establish a period of time (a “restricted period”) applicable
to such Restricted Stock. Each Award of Restricted Stock may be subject to a
different restricted period. The Board may, in its sole discretion, at the
time a grant of Restricted Stock is made, prescribe restrictions in addition to
or other than the expiration of the restricted period, including the
satisfaction of corporate or individual

 

performance objectives. Restricted Stock may not be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of during the restricted
period or prior to the satisfaction of any other restrictions prescribed by the
Board with respect to such Restricted Stock.

            15.3     Restricted Stock Certificates.

                        The Corporation shall issue, in the name of each Grantee to whom
Restricted Stock has been granted, stock certificates representing the total
number of shares of Restricted Stock granted to the Grantee, as soon as
reasonably practicable after the Grant Date. The Board may provide in an Award
Agreement that either (i) the Secretary of the Corporation shall hold such
certificates for the Grantee’s benefit until such time as the Restricted Stock
is forfeited to the Corporation or the restrictions lapse, or (ii) such
certificates shall be delivered to the Grantee, provided, however, that such
certificates shall bear a legend or legends that comply with the applicable
securities laws and regulations and makes appropriate reference to the
restrictions imposed under the Plan and the Award Agreement.

            15.4     Rights of Holders of Restricted Stock.

                        Unless the Board otherwise provides in an Award Agreement, holders of
Restricted Stock shall have the right to vote such Stock and the right to
receive any dividends declared or paid with respect to such Stock. The Board
may provide that any dividends paid on Restricted Stock must be reinvested in
shares of Stock, which may or may not be subject to the same vesting conditions
and restrictions applicable to such Restricted Stock. All distributions, if
any, received by a Grantee with respect to Restricted Stock as a result of any
stock split, stock dividend, combination of shares, or other similar
transaction shall be subject to the restrictions applicable to the original
Grant.

            15.5     Termination of Employment.

                        Unless the Board otherwise provides in an Award Agreement, in applicable
employment agreement, or in writing after the Award Agreement is issued, upon
the termination of a Grantee’s employment with the Corporation or a Subsidiary,
any shares Restricted Stock held by such Grantee that have not vested, or with
respect to which all applicable restrictions and conditions have not lapsed,
shall immediately be deemed forfeited. Upon forfeiture of Restricted Stock,
the Grantee shall have no further rights with respect to such Award, including
but not limited to any right to vote Restricted Stock or any right to receive
dividends with respect to shares of Restricted Stock.

            15.6     Purchase of Restricted Stock.

                        The Grantee shall be required, to the extent required by applicable law,
to purchase the Restricted Stock from the Corporation at a purchase price equal
to the greater of (i) the aggregate par value of the shares of Stock
represented

 

by such Restricted Stock or (ii) the purchase price, if any, specified in the
Award Agreement relating to such Restricted Stock.

            15.7     Delivery of Stock.

                        Upon the expiration or termination of any restricted period and the
satisfaction of any other conditions prescribed by the Board, the restrictions
applicable to shares of Restricted Stock, and, unless otherwise provided in the
Award Agreement, a stock certificate for such shares shall be delivered, free
of all such restrictions, to the Grantee or the Grantee’s beneficiary or
estate, as the case may be.

16.       USE OF PROCEEDS

                        The proceeds received by the Corporation from the sale of Stock pursuant
to Options or Restricted Stock granted under the Plan shall constitute general
funds of the Corporation.

17.       SECURITIES LAWS

                        The Corporation shall not be required to sell or issue any shares of Stock
under any Award if the sale or issuance of such shares would constitute a
violation by the individual exercising the Award or by the Corporation of any
provisions of any law or regulation of any governmental authority, including,
without limitation, any federal or state securities laws or regulations. If at
any time the Corporation shall determine, in its discretion, that the listing,
registration or qualification of any shares subject to the Award upon any
securities exchange or under any state or federal law, or the consent of any
government regulatory body, is necessary or desirable as a condition of, or in
connection with, the issuance or purchase of shares, the Award may not be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Corporation, and any delay caused thereby shall in no way
affect the date of termination of the Award. Specifically in connection with
the Securities Act of 1933, as amended (the “Securities Act”), upon exercise of
any Award or the lapse of restrictions of any Award, unless a registration
statement under the Securities Act is in effect with respect to the shares of
Stock covered by such Award, the Corporation shall not be required to sell or
issue such shares unless the Corporation has received evidence satisfactory to
the Corporation that the Optionee may acquire such shares pursuant to an
exemption from registration under the Securities Act. Any determination in
this connection by the Corporation shall be final and conclusive. The
Corporation may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Securities Act. The Corporation shall not be
obligated to take any affirmative action in order to cause the exercise of an
Award or the issuance of

 

shares pursuant to an Award to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Option shall not be exercisable unless and until the shares
of Stock covered by such Option are registered or are subject to an available
exemption from registration, the exercise of such Option (under circumstances
in which the laws of such jurisdiction apply) shall be deemed conditioned upon
the effectiveness of such registration or the availability of such an
exemption.

18.       EXCHANGE ACT: RULE 16b-3

                        During any time when the Corporation has a class of equity security
registered under Section 12 of the Securities Exchange Act of 1934 it is the
intent of the Company that Awards pursuant to the Plan and the exercise of
Options granted hereunder will qualify for the exemption provided by Rule 16b-3
under the Exchange Act. To the extent that any provision of the Plan or action
by the Board does not comply with the requirements of Rule 16b-3, it shall be
deemed inoperative to the extent permitted by law and deemed advisable by the
Board, and shall not affect the validity of the Plan. In the event that Rule
16b-3 is revised or replaced, the Board may exercise its discretion to modify
this Plan in any respect necessary to satisfy the requirements of, or to take
advantage of any features of, the revised exemption or its replacement.

19.       AMENDMENT AND TERMINATION

                        The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Awards have not been
granted. The Corporation also may retain the right in an Award Agreement to
cause a forfeiture of the shares or gain realized by an Optionee or Grantee on
account of the Optionee taking actions in “competition with the Corporation,”
as defined in the applicable Award Agreement. Furthermore, the Corporation
may, in the Award Agreement, retain the right to annul the grant of an Option
if the holder of such grant was an employee of the Corporation or a Subsidiary
and is terminated “for cause,” as defined in the applicable Award Agreement.
Except as permitted under Section 20 hereof, no amendment, suspension or
termination of the Plan shall, without the consent of the Optionee or Grantee,
alter or impair rights or obligations under any Award theretofore granted under
the Plan.

 

20.       EFFECT OF CHANGES IN CAPITALIZATION

            21.1     Changes in Stock

                        If the number of outstanding shares of Stock is increased or decreased or
changed into or exchanged for a different number or kind of shares or other
securities of the Corporation by reason of any recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend or other distribution payable in capital stock, or other
increase or decrease in such shares effected without receipt of consideration
by the Corporation, occurring after the effective date of the Plan, a
proportionate and appropriate adjustment shall be made by the Corporation in
the number and kind of shares for which Awards are outstanding, so that the
proportionate interest of the Optionee or Grantee immediately following such
event shall, to the extent practicable, be the same as immediately prior to
such event. Any such adjustment in outstanding Options shall not change the
aggregate Option Price payable with respect to shares subject to the
unexercised portion of the Option outstanding but shall include a corresponding
proportionate adjustment in the Option Price per share.

            21.2     Reorganization With Corporation Surviving

                        Subject
to Section 20.3 hereof, if the Corporation shall be the surviving
corporation in any reorganization, merger or consolidation of the Corporation
with one or more other corporations, any Award theretofore granted pursuant to
the Plan shall pertain to and apply to the securities to which a holder of the
number of shares of Stock subject to such Award would have been entitled
immediately following such reorganization, merger or consolidation, with a
corresponding proportionate adjustment of the Option Price per share so that
the aggregate Option Price thereafter shall be the same as the aggregate Option
Price of the shares remaining subject to the Option immediately prior to such
reorganization, merger or consolidation.

            21.3     Other Reorganizations; Sale of Assets or Stock

                        Upon the dissolution or liquidation of the Corporation, or upon a merger,
consolidation or reorganization of the Corporation with one or more other
corporations in which the Corporation is not the surviving corporation, or upon
a sale of substantially all of the assets of the Corporation to another
corporation, or upon any transaction (including, without limitation, a merger
or reorganization in which the Corporation is the surviving corporation)
approved by the Board that results in any person or entity (other than persons
who are holders of stock of the Corporation at the time the Plan is approved by
the Stockholders and other than an Affiliate) owning 80 percent or more of the
combined voting power of all classes of

 

stock of the Corporation, the Plan and all Options outstanding hereunder
shall terminate, except to the extent provision is made in connection with such
transaction for the assumption of the Options theretofore granted, or for the
substitution for such Options of new options covering the stock of a successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kinds of shares and exercise prices, in which event the Plan
and Options theretofore granted shall continue in the manner and under the
terms so provided.

                        In the event of any such termination of the Plan, each Optionee shall have
the right (subject to the general limitations on exercise set forth in Section
10.3 hereof and except as otherwise specifically provided in the Option Agreement
relating to such Option), immediately prior to the occurrence of such
termination and during such period occurring prior to such termination as the
Board in its sole discretion shall designate, to exercise such Option in whole
or in part, whether or not such Option was otherwise exercisable at the time
such termination occurs, but subject to any additional limitations that the
Board may, in its sole discretion, include in any Option Agreement. The Board
shall send written notice of an event that will result in such a termination to
all Optionees not later than the time at which the Corporation gives notice
thereof to its stockholders. Unless otherwise provided in the applicable
Restricted Stock Agreement, all restrictions applicable to Awards of Restricted
Stock shall lapse immediately prior to the occurrence of an event described in
the first paragraph of this Section 20.3.

            21.4     Adjustments

                        Adjustments
under this Section 20 relating to stock or securities of the
Corporation shall be made by the Board, whose determination in that respect
shall be final and conclusive. No fractional shares of Stock or units of other
securities shall be issued pursuant to any such adjustment, and any fractions
resulting from any such adjustment shall be eliminated in each case by rounding
downward to the nearest whole share or unit.

            21.5     No Limitations on Corporation

                        The grant of an Award pursuant to the Plan shall not affect or limit in
any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.

 

22.       WITHHOLDING

                        The Corporation shall have the right to withhold, or require an Optionee
or Grantee to remit to the Corporation, an amount sufficient to satisfy any
applicable federal, state or local withholding tax requirements imposed with
respect to exercise of Options or lapse of restrictions or other taxable event
with respect to Restricted Stock. To the extent permissible under applicable
tax, securities and other laws and authorized by the Corporation in the Award
Agreement or at the time of such payment, the Optionee or Grantee may satisfy a
tax withholding requirement by directing the Corporation to apply shares of
Stock to which the Optionee or Grantee is entitled as a result of the exercise
of an Option or grant of Restricted Stock to satisfy withholding requirements
under this Section 21.

23.       DISCLAIMER OF RIGHTS

                        No provision in the Plan or in any Award granted or Award Agreement
entered into pursuant to the Plan shall be construed to confer upon any
individual the right to remain in the employ of the Corporation or any
Subsidiary, or to interfere in any way with the right and authority of the
Corporation or any Subsidiary either to increase or decrease the compensation
of any individual at any time, or to terminate any employment or other
relationship between any individual and the Corporation or any Subsidiary. The
obligation of the Corporation to pay any benefits pursuant to the Plan shall be
interpreted as a contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed herein. The Plan
shall in no way be interpreted to require the Corporation to transfer any
amounts to a third party trustee or otherwise hold any amounts in trust or
escrow for payment to any participant or beneficiary under the terms of the
Plan.

24.       NONEXCLUSIVITY

                        Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Corporation for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable
either generally to a class or classes of individuals or specifically to a
particular individual or individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options or
restricted stock otherwise than under the Plan.

* * *

 

                        The Plan was duly adopted and approved by the Board on July 24, 1996 and
was duly approved by the stockholders of the Corporation on July 24, 1996. On
March 16, 2001, the Board and stockholders of the Corporation approved an
amendment to the Plan increasing the maximum number of shares of Common Stock
that may be issued pursuant to awards granted under the Plan to 2,500,000. The
Plan was further amended by the Board on April 23, 2001, and approved by the
stockholders of the Corporation on May 21, 2001.<PAGE>   1
                                                                     EXHIBIT 4.1

                                CREDIT AGREEMENT

         THIS AGREEMENT is entered into as of August 31, 2001, by and between
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado corporation ("Borrower"), and
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").

                                     RECITAL

        Borrower has requested that Bank extend or continue credit to Borrower
as described below, and Bank has agreed to provide such credit to Borrower on
the terms and conditions contained herein.

         NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

                                    ARTICLE I
                                   THE CREDITS

         SECTION 1.1. LINE OF CREDIT.

         (a) Line of Credit. Bank has made advances to Borrower from time to
time up to and including August 31, 2001, not to exceed at any time the
aggregate principal amount of Two Million Dollars ($2,000,000.00), on which the
outstanding principal balance as of the date hereof is $2,350,000.00 ("Line of
Credit"). The proceeds of the Line of Credit shall be used to finance accounts
receivables and seasonal inventory build-up. Borrower's obligation to repay
advances under the Line of Credit shall be evidenced by a promissory note.

         (b) Limitation on Borrowings. Outstanding borrowings under the Line of
Credit, to a maximum of the principal amount set forth above, shall not at any
time exceed an aggregate of seventy-five percent (75%) of Borrower's eligible
accounts receivable, plus fifty percent (50%) of the value of Borrower's
eligible inventory (exclusive of work in process and inventory which is
obsolete, unsaleable or damaged), with value defined as the lesser of cost or
market value. All of the foregoing shall be determined by Bank upon receipt and
review of all borrowing base reports required hereunder and such other documents
and collateral information as Bank may from time to time require.

         As used herein, "eligible accounts receivable" shall consist solely of
receivables and notes receivable created in the ordinary course of Borrower's
business, upon which Borrower's right to receive payment is absolute and not
contingent upon the fulfillment of any condition whatsoever, and in which Bank
has a perfected security interest of first priority, and shall not include:

                  (i) any account which is more than ninety (90) days past due;

                  (ii) royalty receivables;

                  (iii) that portion of any account for which there exists any
         right of setoff, defense or discount (except regular discounts allowed
         in the ordinary course of business to promote prompt payment) or for
         which any defense or counterclaim has been asserted;

                                      -1-
<PAGE>   2

                  (iv) any account which represents an obligation of any state
         or municipal government or of the United States government or any
         political subdivision thereof (except accounts which represent
         obligations of the United States government and for which the
         assignment provisions of the Federal Assignment of Claims Act, as
         amended or recodified from time to time, have been complied with to
         Bank's satisfaction);

                  (v) any account which represents an obligation of an account
         debtor located in a foreign country, except to the extent any such
         account, in Bank's determination, is supported by a letter of credit or
         insured under a policy of foreign credit insurance, in each case in
         form, substance and issued by a party acceptable to Bank;

                  (vi) any account which arises from the sale or lease to or
         performance of services for, or represents an obligation of, an
         employee, affiliate, partner, member, parent or subsidiary of Borrower;
         and

                  (vii) that portion of any account, which represents interim or
         progress billings or retention right on the part of the account debtor.

         (c) Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided, however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above. Notwithstanding the foregoing, Borrower shall maintain a zero balance on
advances under the Line of Credit for a period of at least 30 consecutive days
during the term of the Line of Credit.

         SECTION 1.2. TERM LOAN A.

         (a) Term Loan A. Bank has made a loan to Borrower in the original
principal amount of One Million Dollars ($1,000,000.00) ("Term Loan A"), due 3
years from origination, the proceeds of which shall be used to repurchase
Borrower's common stock. Borrower's obligation to repay Term Loan A shall be
evidenced by a promissory note. All advances under Term Loan A must be made
within one (1) year of origination. Any amounts not advanced prior to such time,
shall not be advanced to Borrower by Bank.

         (b) Repayment. The principal amount of the Term Loan A shall be repaid
in accordance with the provisions of the Term Note A.

         (c) Prepayment. Borrower may prepay principal on the Term Loan A solely
in accordance with the provisions of the Term Note A.

         SECTION 1.3. TERM LOAN B.

         (a) Term Loan B. Bank has made a loan to Borrower in the original
principal amount of Two Million Eight Hundred Thousand Dollars ($2,800,000.00)
("Term Loan B"), due 4 years from origination, on which the outstanding
principal balance as of the date hereof is $926,768.84, ("Term Loan B"), the
proceeds of which shall be used to repay existing Bank debt and to replenish
working capital. Borrower's obligation to repay Term Loan B shall be evidenced
by a promissory note.

                                      -2-
<PAGE>   3
         (b) Repayment. The principal amount of the Term Loan B shall be repaid
in accordance with the provisions of the Term Note B.

         (c) Prepayment. Borrower may prepay principal on the Term Loan B solely
in accordance with the provisions of the Term Note B.

         SECTION 1.4. TERM LOAN C.

         (a) Term Loan. Bank has made a loan to Borrower in the original
principal amount of Two Million Ninety Two Thousand Five Hundred Dollars
($2,092,500.00) ("Term Loan C"), with a 15 year term, on which the outstanding
principal balance as of the date hereof is $1,776,332.87, the proceeds of which
shall be used to term out a portion of the line of credit and renew existing
debt. Borrower's obligation to repay Term Loan C shall be evidenced by a
promissory note.

         (b) Repayment. The principal amount of the Term Loan C shall be repaid
in accordance with the provisions of the Term Note C.

         (c) Prepayment. Borrower may prepay principal on the Term Loan C solely
in accordance with the provisions of the Term Note C.

         SECTION 1.5. TERM LOAN D.

         (a) Term Loan. Bank has made a loan to Borrower in the original
principal amount of Two Hundred Fifty Two Thousand Five Hundred and Seventy
Three Dollars ($252,573.00) ("Term Loan D"), on which the outstanding principal
balance as of the date hereof is $134,929.17 ("Term Loan D"), due on February
28, 2003, the proceeds of which were used to purchase equipment. Borrower's
obligation to repay Term Loan D shall be evidenced by a promissory note

         (b) Repayment. The principal amount of the Term Loan D shall be repaid
in accordance with the provisions of the Term Note D.

         (c) Prepayment. Borrower may prepay principal on the Term Loan D solely
in accordance with the provisions of the Term Note D.

         SECTION 1.6. LOAN COMMITMENT.

         (a) Loan Commitment. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time not
to exceed the aggregate principal amount of Seven Hundred Thousand Dollars
($700,000.00) ("Loan Commitment"), the proceeds of which shall be used replenish
working capital and finance the purchase of equipment. Individual loans booked
under this commitment will mature in five years when secured by primarily
manufacturing equipment and three years when secured primarily by computer
equipment. The amount of each loan will not exceed 80% of the purchase price of
the primary collateral securing the loan. The Borrowers obligation to repay
advances under the Loan Commitment shall be evidenced by a promissory note.

         (b) Limitation on Borrowings. Individual loans will be booked under
this commitment with a minimum individual loan amount of One Hundred Thousand
Dollars ($100,000.00). Each

                                      -3-
<PAGE>   4

request for an advance under the Loan Commitment shall be accompanied by a
breakdown of the use of all funds requested on such form as Bank may from time
to time provide to Borrower.

         (c) Borrowing and Repayment. Borrower may from time to time during the
term of the Loan Commitment borrow and partially or wholly repay its outstanding
borrowings, provided that amounts repaid may not be reborrowed, subject to all
the limitations, terms and conditions contained herein; provided however, that
the total outstanding borrowings under the Loan Commitment shall not exceed the
maximum principal amount available thereunder, as set forth above.

         (d) Prepayment. Borrower may prepay principal on the Loan Commitment
solely in accordance with the provisions of the Loan Commitment Note.

         SECTION 1.7. INTEREST/FEES.

        (a) Interest. The outstanding principal balance of each credit subject
hereto shall bear interest from the date such draft is paid to the date such
amount is fully repaid by Borrower, at the rate of interest set forth in each
promissory note or other instrument executed in connection therewith.

         SECTION 1.8. COLLATERAL.

         As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority in all
Borrower's equipment, machinery, fixtures, accounts receivables, notes
receivables, inventory, general intangibles and a lien of not less than first
priority on that certain real property located at 265 Turner Drive, Bodo
Industrial Park and a 2 acre parcel adjacent thereto (collectively, the "Real
Estate").

         All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for
all costs and expenses incurred by Bank in connection with any of the foregoing
security, including without limitation, filing and recording fees and costs of
appraisals, audits and title insurance.

                                   ARTICLE II
                         REPRESENTATIONS AND WARRANTIES

         Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.

         SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized
and existing and in good standing under the laws of the state of Colorado, and
is qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.

         SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each
promissory note, contract, instrument and other document required hereby or at
any time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have

                                      -4-
<PAGE>   5

been duly authorized, and upon their execution and delivery in accordance with
the provisions hereof will constitute legal, valid and binding agreements and
obligations of Borrower or the party which executes the same, enforceable in
accordance with their respective terms.

         SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.

         SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.

         SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated May 31, 2001, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b) discloses
all liabilities of Borrower that are required to be reflected or reserved
against under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles for interim financial statements
consistently applied. Since the date of such financial statement there has been
no material adverse change in the financial condition of Borrower, nor has
Borrower mortgaged, pledged, granted a security interest in or otherwise
encumbered any of its assets or properties except in favor of Bank or as
otherwise permitted by Bank in writing.

         SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.

         SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.

         SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is now
engaged in compliance with applicable law.

         SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.

                                      -5-
<PAGE>   6

         SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.

         SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.

         SECTION 2.12. REAL PROPERTY COLLATERAL. Except as disclosed by Borrower
to Bank in writing prior to the date hereof, with respect to any real property
collateral required hereby:

         (a) All taxes, governmental assessments, insurance premiums, and water,
sewer and municipal charges, and rents (if any) which previously became due and
owing in respect thereof have been paid as of the date hereof.

         (b) There are no mechanics' or similar liens or claims which have been
filed for work, labor or material (and no rights are outstanding that under law
could give rise to any such lien) which affect all or any interest in any such
real property and which are or may be prior to or equal to the lien thereon in
favor of Bank.

         (c) None of the improvements which were included for purpose of
determining the appraised value of any such real property lies outside of the
boundaries and/or building restriction lines thereof, and no improvements on
adjoining properties materially encroach upon any such real property.

         (d) There is no pending, or to the best of Borrower's knowledge
threatened, proceeding for the total or partial condemnation of all or any
portion of any such real property, and all such real property is in good repair
and free and clear of any damage that would materially and adversely affect the
value thereof as security and/or the intended use thereof.

                                   ARTICLE III
                                   CONDITIONS

         SECTION 3.1 CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to extend any credit contemplated by this Agreement is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:

         (a) Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.

                                      -6-
<PAGE>   7

         (b) Documentation. Bank shall have received each of the Loan Documents,
duly executed and in form and substance satisfactory to Bank.

         (c) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower.

         (d) Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with loss payable endorsements in favor of Bank, including, without
limitation, policies of fire and extended coverage insurance covering all real
property collateral required hereby, with replacement cost and mortgagee loss
payable endorsements, and such policies of insurance against specific hazards
affecting any such real property as may be required by governmental regulation
or Bank.

         (e) Appraisals. Bank shall have obtained, at Borrower's cost, an
appraisal of all real property collateral required hereby, and all improvements
thereon, issued by an appraiser acceptable to Bank and in form, substance and
reflecting values satisfactory to Bank, in its discretion.

         (f) Title Insurance. Bank shall have received an ALTA Policy of Title
Insurance, with such endorsements as Bank may require issued by a company and in
form and substance satisfactory to Bank insuring Bank's lien on the real
property collateral required hereby to be of the priority set forth in Section
1.9 hereof, subject only to such exceptions as Bank shall approve in its
discretion, with all costs thereof to be paid by Borrower.

         SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:

         (a) Compliance. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.

         (b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.

                                   ARTICLE IV
                              AFFIRMATIVE COVENANTS

         Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:

                                      -7-
<PAGE>   8

         SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein, and immediately upon demand by Bank,
the amount by which the outstanding principal balance of any credit subject
hereto at any time exceeds any limitation on borrowings applicable thereto.

         SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.

         SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:

         (a) not later than 90 days after and as of the end of each fiscal year,
an audited financial statement of Borrower, prepared by a certified public
account acceptable to Bank, to include balance sheet, income statement and a
properly completed United States Securities and Exchange Commission ("SEC") Form
10K, and within 90 days after filing, but in no event later than each December
1, copies of Borrower's filed federal income tax returns for such year;

         (b) not later than 30 days after and as of the end of each month, a
financial statement of Borrower, prepared by Borrower, to include balance sheet
and income statement;

         (c) not later than 45 days after and as of the end of each quarter, a
properly completed SEC Form 10Q, prepared by Borrower;

         (d) not later than 30 days after and as of the end of each month, a
borrowing base certificate;

         (e) not later than 90 days after and as of the end of each year, a list
of monthly projections of Borrower's business for the coming year and a list of
annual projections for the coming three (3) years; and

         (f) from time to time such other information as Bank may reasonably
request.

         SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower and/or its business.

         SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.

         SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals

                                      -8-
<PAGE>   9

and replacements thereto so that such properties shall be fully and efficiently
preserved and maintained.

         SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and state
and local property taxes and assessments, except such (a) as Borrower may in
good faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made provision in accordance with GAAP, for eventual payment
thereof in the event Borrower is obligated to make such payment.

         SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower with a claim in excess of
$500,000.00.

         SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as of each quarter using generally accepted accounting principles for
interim financial statements consistently applied:

         (a) Current Ratio not at any time less than 1.2 to 1.0, with "Current
Ratio" defined as total current assets divided by total current liabilities.

         (b) Working Capital not at any time less than $1,200,000.00, with
"Working Capital" defined as total current assets minus total current
liabilities.

         (c) Tangible Net Worth not at any time less than $6,000,000.00, with
"Tangible Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets; provided, however, if Term Loan A
shall become fully funded, Tangible Net Worth shall not be less than
$5,000,000.00 for the two (2) quarters following such funding.

         (d) Total Liabilities divided by Tangible Net Worth shall not at any
time be greater than 1.6 to 1.0, with "Total Liabilities" defined as the
aggregate of current liabilities and non-current liabilities less subordinated
debt, and with "Tangible Net Worth" as defined above; provided, however, if Term
Loan A shall become fully funded, Total Liabilities divided by Tangible Net
Worth shall not be greater than 2.0 to 1.0 for the two (2) quarters following
such funding.

         (e) Cash Flow Coverage Ratio at any time less than 1.25x, with "Cash
Flow Coverage Ratio" defined as the ratio of net income plus depreciation, plus
interest, plus amortization, plus bad debt and all other non-cash deductions to
current Bank principal payments, plus current Bank interest payments, plus all
other current principal and interest payments owed to other creditors, if any.

         (f) A Loan To Value Ratio ("LTV") with respect to the Real Estate of no
less than 75%, with LTV defined as the ratio between the amount of the loan and
the appraised value of the security for the loan, expressed as a percentage of
the appraised value. If (i) the market value of the Real Estate has declined,
(ii) the Debt Service Coverage Ratio has fallen below 1.25:1.0, or (iii) the
Bank's regulatory requirements have changed, the Bank may require that the Real
Estate be reappraised at Borrower's expense, and in the event of a decline in
the value of the Real Estate, that the Borrower reduce the amounts outstanding
under Term Loan C or take such measures as the Bank may require at that time.

                                      -9-
<PAGE>   10

         SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; (d) any termination or cancellation
of any insurance policy which Borrower is required to maintain, or any uninsured
or partially uninsured loss through liability or property damage, or through
fire, theft or any other cause affecting Borrower's property; (e) litigation
against Borrower that could reasonably impair Bank's collateral hereunder; (f)
Borrower's intent to acquire additional factory facilities and/or other business
operations; provided, however, nothing set forth herein shall in any way
abrogate Borrower's obligation to comply with Section 5.2 of this Agreement.

                                    ARTICLE V
                               NEGATIVE COVENANTS

         Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:

         SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit
extended hereunder except for the purposes stated in Article I hereof.

         SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets for fiscal year ended February 28, 2002 in excess of an aggregate
of $700,000.00. This amount shall be adjusted annually by Bank in its sole
discretion.

         SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several in excess of $100,000 without banks prior written
consent, except (a) the liabilities of Borrower to Bank, and (b) any other
liabilities of Borrower existing as of, and disclosed to Bank prior to, the date
hereof.

         SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature of
Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets except in the ordinary course of its business; nor change its management,
management's ownership, or corporate headquarters without providing Bank with at
least ten days (10) prior written notice.

         SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank; provided, however, nothing

                                      -10-
<PAGE>   11

contained herein shall prohibit Borrower from issuing a Guarantee for the
leasehold interest of Borrower's franchisees.

         SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity in excess of $200,000.00 without
Bank's prior written consent.

         SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor of
Bank or which is existing as of, and disclosed to Bank in writing prior to, the
date hereof.

         SECTION 5.9. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash or any other property on Borrower's stock now or
hereafter outstanding without Bank's prior written consent.

                                   ARTICLE VI
                                EVENTS OF DEFAULT

         SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:

         (a) Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under any of the Loan Documents.

         (b) Any financial statement made in accordance with GAAP or certificate
furnished to Bank in connection with, or any representation or warranty made by
Borrower or any other party under this Agreement or any other Loan Document
shall prove to be incorrect, false or misleading in any material respect when
furnished or made.

         (c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in subsections (a) and (b) above), and
with respect to any such default which by its nature can be cured, such default
shall continue for a period of twenty (20) days from its occurrence.

         (d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower has incurred any debt
or other liability to any person or entity, including Bank.

         (e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower; or the entry of a judgment against Borrower.

         (f) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief

                                      -11-
<PAGE>   12

under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended
or recodified from time to time ("Bankruptcy Code"), or under any state or
federal law granting relief to debtors, whether now or hereafter in effect; or
any involuntary petition or proceeding pursuant to the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy, reorganization or
other relief for debtors is filed or commenced against Borrower, or Borrower
shall file an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition; or Borrower shall be adjudicated a
bankrupt, or an order for relief shall be entered against Borrower by any court
of competent jurisdiction under the Bankruptcy Code or any other applicable
state or federal law relating to bankruptcy, reorganization or other relief for
debtors.

         (g) There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the prospect
of payment or performance by Borrower of its obligations under any of the Loan
Documents.

         (h) The dissolution or liquidation of Borrower; or Borrower or any of
its directors, stockholders or members, shall take action seeking to effect the
dissolution or liquidation of Borrower.

         (i) Not withstanding anything to the contrary set forth in any
promissory note executed in connection with each credit subject hereto, any
change in ownership during the term of this Agreement of an aggregate of fifty
percent (50%) or more of the common stock of Borrower.

         (j) The sale, transfer, hypothecation, assignment or encumbrance,
whether voluntary, involuntary or by operation of law, without Bank's prior
written consent, of all or any part of or interest in any real property
collateral required hereby.

         SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and after five (5) days
notice, become immediately due and payable without presentment, demand, protest
or notice of dishonor, all of which are hereby expressly waived by Borrower; (b)
the obligation, if any, of Bank to extend any further credit under any of the
Loan Documents shall immediately cease and terminate; and (c) Bank shall have
all rights, powers and remedies available under each of the Loan Documents, or
accorded by law, including without limitation the right to resort to any or all
security for any credit subject hereto and to exercise any or all of the rights
of a beneficiary or secured party pursuant to applicable law. All rights, powers
and remedies of Bank may be exercised at any time by Bank and from time to time
after the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided by law
or equity.

                                   ARTICLE VII
                                  MISCELLANEOUS

         SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of

                                      -12-
<PAGE>   13

any kind by Bank of any breach of or default under any of the Loan Documents
must be in writing and shall be effective only to the extent set forth in such
writing.

         SECTION 7.2. NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:

         BORROWER:                  ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
                                    265 Turner Drive
                                    Durango, CO 81301

         BANK:                      WELLS FARGO BANK, NATIONAL ASSOCIATION
                                    200 West. College Drive
                                    Durango, CO 81301

or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail return receipt required and postage prepaid; and (c) if sent by
telecopy, upon receipt.

         SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
Agreement and the other Loan Documents, Bank's continued administration hereof
and thereof, and the preparation of any amendments and waivers hereto and
thereto, (b) the enforcement of Bank's rights and/or the collection of any
amounts which become due to Bank under any of the Loan Documents, and (c) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.

         SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however that,
except as otherwise set forth in any of the other Loan Documents, Borrower may
not assign or transfer its interest hereunder without Bank's prior written
consent. Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Bank's rights and
benefits under each of the Loan Documents. In connection therewith, Bank may
disclose all documents and information which Bank now has or may hereafter
acquire relating to any credit subject hereto, Borrower or its business, or any
collateral required hereunder.

         SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to each credit subject hereto and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only in writing signed by each
party hereto.

                                      -13-
<PAGE>   14

         SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.

         SECTION 7.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.

         SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.

         SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.

         SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado.

         SECTION 7.11. ARBITRATION.

         (a) Arbitration. The parties hereto agree, upon demand by any party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise arising out of or relating
to in any way (i) the loan and related Loan 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 (ii) requests for additional
credit.

         (b) Governing Rules. Any arbitration proceeding will (i) proceed in a
location in Colorado selected by the American Arbitration Association ("AAA");
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA's optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the "Rules"). If there
is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or
any similar applicable state law.

         (c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
arbitration requirement does not limit the right of any party to (i) foreclose
against real or personal property

                                      -14-
<PAGE>   15

collateral; (ii) exercise self-help remedies relating to collateral or proceeds
of collateral such as setoff or repossession; or (iii) obtain provisional or
ancillary remedies such as replevin, injunctive relief, attachment or the
appointment of a receiver, before during or after the pendency of any
arbitration proceeding. This exclusion does not constitute a waiver of the right
or obligation of any party to submit any dispute to arbitration or reference
hereunder, including those arising from the exercise of the actions detailed in
sections (i), (ii) and (iii) of this paragraph.

         (d) Arbitrator Qualifications and Powers. Any arbitration proceeding in
which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00. Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of Colorado or a neutral retired judge of the
state or federal judiciary of Colorado, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of Colorado and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the Colorado Rules of Civil Procedure or other applicable
law. Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

         (e) Discovery. In any arbitration proceeding discovery will be
permitted in accordance with the Rules. All discovery shall be expressly limited
to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA. Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

         (f) Class Proceedings and Consolidations. The resolution of any dispute
arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

         (g) Payment Of Arbitration Costs And Fees. The arbitrator shall award
all costs and expenses of the arbitration proceeding.

         (h) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding

                                      -15-
<PAGE>   16

may disclose the existence, content or results thereof, except for disclosures
of information by a party required in the ordinary course of its business or by
applicable law or regulation. If more than one agreement for arbitration by or
between the parties potentially applies to a dispute, the arbitration provision
most directly related to the Loan Documents or the subject matter of the dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.

                                      -16-
<PAGE>   17

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.

                                               BORROWER:

                                               ROCKY MOUNTAIN CHOCOLATE
                                               FACTORY, INC.,
                                               a Colorado corporation

                                               By: /s/ Bryan Merryman
                                                  ------------------------------
                                               Name: Bryan Merryman
                                                    ----------------------------
                                               Title: COO
                                                     ---------------------------

                                               BANK:

                                               WELLS FARGO BANK,
                                                 NATIONAL ASSOCIATION

                                               By: /s/ Mary Green
                                                  ------------------------------
                                               Name: Mary Green
                                                    ----------------------------
                                               Title: VP
                                                     ---------------------------

                                      -17-

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