<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 6162 11-3404488
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
6851 JERICHO TURNPIKE
SUITE 246
SYOSSET, NEW YORK 11791
(516) 364-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEVEN M. LATESSA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
6851 JERICHO TURNPIKE
SUITE 246
SYOSSET, NEW YORK 11791
(516) 364-2700
(516) 364-2876 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
NORMAN M. FRIEDLAND, ESQ. ALAN I. ANNEX, ESQ.
DAVID M. KASTIN, ESQ. CAMHY KARLINSKY & STEIN LLP
RUSKIN, MOSCOU, EVANS 1740 BROADWAY
& FALTISCHEK, P.C. NEW YORK, NEW YORK 10019
170 OLD COUNTRY ROAD (212) 977-6600
MINEOLA, NEW YORK 11501 (212) 977-8389 (FAX)
(516) 663-6600
(516) 663-6641 (FAX) ---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF NUMBER OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE SHARES TO OFFERING PRICE PER AGGREGATE OFFERING PRICE REGISTRATION
REGISTERED BE REGISTERED SHARE (1) (1) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................... 1,265,000(2) $5.00 $6,325,000 $1,916.66
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Representative's
Warrants, each to
purchase one share of
Common Stock, $.01 par
value................... 110,000(3) $.0001 $11 $.03
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Common Stock, $.01 par
value (4)............... 110,000 $6.00 $660,000 $200.00
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</TABLE>
<TABLE>
<S> <C>
Total Fee.......................................................... $2,116.69
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 165,000 shares to cover the Underwriters' over-allotment option
(3) To be acquired by the Representative
(4) Issuable upon exercise of the Representative's Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1997
PROSPECTUS
[LOGO]
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
1,100,000 SHARES OF COMMON STOCK
Mortgage Plus Equity and Loan Holdings Corp. (the "Company") is hereby
offering (the "Offering") 1,100,000 shares of its common stock, $.01 par value
per share (the "Common Stock"). Prior to the Offering, there has been no public
market for the Common Stock of the Company and there can be no assurance that
such a market will develop, or if developed, that it will be sustained. See
"Underwriting." Application has been made for listing the Common Stock on the
NASDAQ SmallCap Market ("NASDAQ") under the symbol "MPLS." It is currently
estimated that the initial public offering price of the Common Stock will be
between $ and $ per share. See "Underwriting" for a discussion of
factors to be considered in determining the initial public offering price.
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION" ON
PAGE 17.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS (1) COMPANY (2)(3)
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<S> <C> <C> <C>
Per Share................... $ $ $
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Total (3)................... $ $ $
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</TABLE>
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(1) The Company has agreed to pay National Securities Corporation, as
representative (the "Representative") of the several underwriters (the
"Underwriters"), a 3% non-accountable expense allowance and to sell to the
Representative, for nominal consideration, warrants (the "Representative's
Warrants") to purchase up to 110,000 shares of Common Stock at an exercise
price of $ per share (120% of the initial public offering price.) The
Company also has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ ,
which includes the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 165,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriters subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify the Offering and to reject any order in whole or in part. It
is expected that delivery of share certificates will be made at the offices of
National Securities Corporation, 1001 Fourth Avenue, Seattle, Washington 98154,
on or about , 1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
<PAGE>
[MAP/GRAPH INSERT]
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR
OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK. SPECIFICALLY, THE
UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING, MAY BID FOR AND
PURCHASE SHARES OF COMMON STOCK ON THE OPEN MARKET IN ORDER TO STABILIZE THE
MARKET PRICE AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated herein, the information in this
Prospectus does not give effect to (i) the issuance of the Representative's
Warrants or the exercise thereof; (ii) the issuance of the Underwriters' over-
allotment option or the exercise thereof; and (iii) up to 350,000 shares of
Common Stock reserved for issuance upon exercise of options which may be
granted pursuant to the Company's 1995 Stock Option Plan (the "1995 Plan"),
17,500 of which have been granted to date. The information herein reflects the
consummation of the Exchange (as hereafter defined). As used herein, the term
"Company" refers to Mortgage Plus Equity and Loan Holdings Corp., a Delaware
corporation, and its wholly-owned subsidiary, Mortgage Plus Equity and Loan
Corporation ("Mortgage Plus"), a New York corporation.
THE COMPANY
The Company, through its wholly owned subsidiary, Mortgage Plus, is a full
service retail mortgage banking company providing a broad range of residential
mortgage products (including first mortgages, second mortgages and home equity
loans) to (i) prime, or "A" credit, borrowers who qualify for conventional
mortgages (including loans which conform to the standards of certain
institutional investors, such as Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC")), (ii) borrowers who are
classified as sub-prime, or "B/C" credit, borrowers, and (iii) borrowers who
qualify for mortgages insured by the Federal Housing Administration ("FHA") or
guaranteed by the Veterans Administration ("VA"). The Company is headquartered
in Long Island, New York and has a total of 14 retail branches (the "Branch
Network") in eight states, including Arkansas (1), Connecticut (1), Florida
(1), Illinois (1), Missouri (3), New Jersey (1), New York (4) and Pennsylvania
(1), and the Commonwealth of Puerto Rico (1). The Company is also a licensed
mortgage banking company in six additional states and anticipates becoming
licensed in 11 additional states during the fourth quarter of 1997.
From the Company's inception in 1987 until mid-1994, the Company operated as
a licensed mortgage broker, principally in New York. Since obtaining its
mortgage banking license in New York in 1994, the Company has grown
significantly, originating $43.3 million, $58.0 million and $108.2 million of
mortgage loans for the years ended December 31, 1994, 1995 and 1996,
respectively. For the six months ended June 30, 1997, the Company originated
$66.8 million of mortgage loans. This growth has been due primarily to the
Company's expansion into additional geographic markets, the Company's focus,
since mid-1996, on mortgage products for "B/C" credit-rated borrowers and a
substantial increase in loans to FHA/VA borrowers. The Company's "B/C" and
FHA/VA loan volume has grown steadily since 1995, with loans to "B/C" borrowers
accounting for 40.4%, of the Company's total loan origination volume for the
six months ended June 30, 1997, compared to 7.4% for the year ended December
31, 1995, and loans to FHA/VA borrowers accounting for 25.4% of the Company's
total loan origination volume for the six months ended June 30, 1997, compared
to 9.2% for the year ended December 31, 1995.
The Company's growth strategy includes the following elements:
. Increasing mortgage originations to sub-prime borrowers through
recruiting experienced loan officers, increasing telemarketing and
direct mail to target audiences;
. Expanding the Company's operations in the Commonwealth of Puerto Rico
through developing strategic alliances with financial institutions and
mortgage bankers and brokers; and
. Expanding the Company's geographic coverage for mortgage originations
generally, through additions to the Branch Network, through developing
strategic alliances with financial institutions, mortgage bankers and
brokers and possible acquisitions.
The Company is an active originator of prime, sub-prime and FHA/VA
residential mortgages in its markets to individual borrowers on a retail basis.
Loan officers within the Branch Network deal directly with
3
<PAGE>
mortgage customers who are initially identified through telemarketing
operations, advertising, direct mail, promotional materials and educational
seminars or who are referred by local real estate agents, builders,
accountants, financial planners, attorneys and mortgage brokers.
The growth of the Company's mortgage lending to "B/C" credit borrowers
reflects (i) the Company's focus on such customers since mid-1996, (ii) the
Company's prompt and responsive service to its customers, (iii) the increased
market demand for sub-prime mortgage products, (iv) the availability to the
Company of capital for these mortgage banking products in the form of warehouse
lines of credit, and (v) the development, on an industry-wide basis, of a large
secondary market of institutional investors who compete to purchase mortgages
from the Company and other mortgage originators. Most "B/C" credit borrowers
have impaired credit, although "B/C" credit borrowers also include individuals
whose credit histories are not impaired but are seeking to expedite the
mortgage process or persons, such as the self-employed, who have difficulty
verifying their income. The Company intends to make "B/C" credit-rated loans an
even greater percentage of its total loan originations since such loans, have
generated greater revenue to the Company than "A" credit-rated loans.
Furthermore, the Company believes that the demand for loans by "B/C" credit
borrowers is less sensitive to general levels of interest rates or home sales
and therefore less cyclical than demand for loans by "A" credit-rated
borrowers. Nevertheless, the Company's "B/C" mortgage lending activities are
subject to significant risks, including risks related to the competition from
an increasing number of lenders who are also seeking "B/C" credit borrowers
(see "Risk Factors--Competition"), and the risks associated with lending to
credit impaired borrowers (see "Risk Factors--Risks of Loan Delinquencies and
Defaults").
For the six months ended June 30, 1997, the Company's revenues were $4.1
million compared to $2.6 million for the six months ended June 30, 1996. For
the year ended December 31, 1996, the Company's revenues were $6.0 million,
compared to $3.0 million for the year ended December 31, 1995. The Company's
revenues are generated from the fees it charges borrowers on the origination of
mortgage loans, the premiums paid by institutional investors when they purchase
the loans from the Company and interest earned during the period (generally
less than 30 days) the loans are held for sale to institutional investors. The
Company does not sell mortgage loans in "securitization" transactions, but
rather sells loans either on an individual "whole loan" basis or pooled in
groups to financial institutions at fixed prices, usually on a non-recourse
basis for a cash premium. The Company sells its mortgages to institutional
investors on a "servicing-released" basis, i.e., the purchaser assumes the
obligations of servicing the loan and thereby avoids the administrative
expenses of managing a servicing portfolio, and the foreclosures, delinquencies
and resale of residential real estate associated with servicing of loans.
The Company was incorporated in Delaware in November 1997, and its wholly-
owned subsidiary, Mortgage Plus, was incorporated in the State of New York on
September 25, 1987. Prior to the commencement of this Offering, the
stockholders of Mortgage Plus will exchange all the outstanding shares of
Mortgage Plus for 4,028,000 shares of the Company (the "Exchange"). The
principal executive office of the Company is located at 6851 Jericho Turnpike,
Suite 246, Syosset, New York 11791 and its telephone number is (516) 364-2700.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company............... 1,100,000 shares
Common Stock Outstanding Prior to the Offering.... 4,028,000 shares
Common Stock to be Outstanding After the Offering. 5,128,000 shares
Use of Proceeds................................... Funding mortgage loans,
expanding the Branch
Network; expanding mortgage
banking operations in
Puerto Rico; increasing
telemarketing and
advertising; upgrading
information systems;
repaying indebtedness; and
general working capital
purposes.
Proposed NASDAQ SmallCap Symbol................... MPLS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, 1997
------------------------- ------------------------
1995 1996 1996 1997
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................... $ 2,982,922 $ 5,970,675 $ 2,586,089 $ 4,081,723
Net (Loss) Income......... (601,313) (223,340) (32,583) 140,069
Net (Loss) Income Per
Share.................... (.16) (.06) (.01) .03
Weighted Average Number of
Shares Outstanding....... 3,853,319 3,853,319 3,853,319 4,027,300
OPERATING DATA:
Mortgage loans originated
Conventional.............. $48,366,929 $ 48,102,840 $23,797,696 $22,879,138
FHA/VA.................... 5,323,313 24,810,101 11,658,600 16,966,540
Sub-Prime................. 4,284,375 35,290,148 16,308,520 26,958,160
----------- ------------ ----------- -----------
Total.................. $57,974,617 $108,203,089 $51,764,816 $66,803,838
Number of Loans............ 503 1,073 572 713
Average Principal Balance.. $ 115,257 $ 100,841 $ 90,497 $ 93,694
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER
31, 1996 AT JUNE 30, 1997
----------- --------------------------
ACTUAL ACTUAL AS ADJUSTED (1)
BALANCE SHEET DATA: ----------- ---------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................ $ 328,897 $ 342,881 $
Total assets............................. 11,447,525 13,501,388
Borrowings............................... 9,977,145 10,376,257
Stockholders' equity..................... 287,394 427,463
</TABLE>
- --------
(1) Adjusted to give effect to the sale of 1,100,000 shares of Common Stock by
the Company at an assumed initial public offering price of $ per share
and the application of the net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
An investment in the Common Stock of the Company involves a high degree of
risk and should not be purchased by persons who cannot afford the loss of
their entire investment. Prospective investors should carefully consider the
following risk factors, in addition to other information set forth in this
Prospectus, before purchasing the Common Stock offered hereby. This Prospectus
contains certain forward looking statements that are based on current
expectations, estimates and projections about the business of the Company and
the industry in which the Company operates, management's beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations on such words
and similar expressions are intended to identify such forward looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. The Company's actual results could differ materially from those
expressed or forecasted in these forward-looking statements as a result of
certain factors, including those set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Prospectus.
HISTORY OF OPERATING LOSSES; POSSIBLE NEED FOR ADDITIONAL FINANCING
Although the Company earned net income of $140,069 for the six months ended
June 30, 1997, the Company experienced net losses of $223,340 and $601,313 for
the years ended December 31, 1996 and 1995, respectively. The Company's
accumulated deficit was $518,440 at June 30, 1997. Such losses were
principally the result of the Company's expansion of the Branch Network and
increased personnel, marketing and administrative start-up costs associated
with the commencement of lending operations to "B/C" credit-rated borrowers.
There can be no assurance that the Company will not continue to experience
operating losses in future periods. Based on the Company's currently proposed
plans and assumptions relating to the implementation of its business strategy,
the Company anticipates that the net proceeds of this Offering will be
sufficient to satisfy its contemplated cash requirements for at least twelve
months following the consummation of this Offering. In the event that the
Company's plans change or its assumptions prove to be inaccurate (due to
unanticipated expenses, difficulties, delays or otherwise) or the proceeds of
this Offering otherwise prove to be insufficient to fund the implementation of
the Company's business strategy and working capital requirements, the Company
could be required to seek additional financing. The Company has no commitments
for any future funding, and there can be no assurance that the Company will be
able to obtain additional capital in the future. The type, timing and terms of
such funding (if it is available) will be determined by prevailing conditions
in the financial markets and the Company's financial condition, among other
factors. If the Company requires additional capital and is unable to obtain
the necessary capital, it may be required to significantly curtail its
activities which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON WAREHOUSE FINANCING; PRIOR DEFAULT UNDER WAREHOUSE FINANCING
The Company currently borrows substantially all of the funds which it uses
to originate mortgage loans pursuant to a $12 million warehouse financing
facility (the "Warehouse Facility") with a commercial bank. These borrowings
are, in turn, repaid with the proceeds received by the Company from selling
such loans in pools or individual whole loan sales to institutional investors,
usually within 30 days of when the loan is originated. The Warehouse Facility
expires on December 31, 1997. The borrowings thereunder are collateralized by
specific mortgage loans held for sale to institutional investors. The amount
outstanding under the Warehouse Facility at June 30, 1997 was $7,276,744.
Interest is variable based on the bank's prime rate, depending on the type of
loan financed, and ranged from 8.25% to 8.75% at June 30, 1997. The Warehouse
Facility is personally guaranteed by Steven Latessa and Cary Wolen, the
Company's President and Chief Operating Officer, respectively. Any failure to
renew or obtain adequate funding under its current Warehouse Facility, or any
substantial reduction in the size of or increase in the cost of such facility,
would have a material adverse effect on the Company's business, financial
condition and results of operations because it would limit or reduce the
Company's ability to originate mortgage loans.
6
<PAGE>
The Warehouse Facility contains numerous affirmative and negative covenants,
including maintenance of minimum tangible net worth, a limitation on the
Company's total indebtedness and certain financial ratios. In April 1997, the
Company determined that as of December 31, 1996, it was not in compliance with
the tangible net worth requirement of the Warehouse Facility ($900,000 at
December 31, 1996). The bank providing the Warehouse Facility waived the
Company's event of default and revised the Warehouse Facility to include the
Company's subordinated debt, obtained in the first quarter of 1997, as part of
the Company's tangible net worth.
In October 1996, the Company obtained an additional financing facility with
another bank to borrow up to an additional $6 million to fund loan
originations. This facility contained substantially the same covenants and
restrictions as the Warehouse Facility, including a $1 million tangible net
worth requirement. Upon being notified of the default by the Company of the
net worth requirement as of December 31, 1996, this lender elected not to
waive this default and notified the Company that it was terminating the line
of credit, requiring the Company to repay the amount outstanding, which as of
June 30, 1997 was approximately $2 million. This amount has been fully repaid
as of the date hereof.
While the Company believes it is now in full compliance with all of its loan
covenants under the Warehouse Facility , there can be no assurances that in
future periods the Company will continue to adhere to all covenants contained
in the Warehouse Facility. The Company's failure to comply with the tangible
net worth covenant or with any other covenants could again cause the Company
to be in default under the Warehouse Facility and have a material adverse
effect on the Company's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH SALES OF MORTGAGE LOANS; MORTGAGE LOAN PURCHASES BY A
LIMITED NUMBER OF INSTITUTIONS; FEDERAL PROGRAMS
The Company generates revenue by regularly selling loans it originates for
cash, at a premium, usually within 30 days after it originates the loans, to
institutional investors. There can be no assurance that such investors will
continue to purchase loans or will be willing to purchase loans on terms which
they have historically purchased. To the extent that institutional investors
who purchase "A" and/or "B/C" credit-rated loans reduce their purchases, the
price and level of the market for the Company's mortgage loans could be
negatively affected which, in turn, could materially adversely affect the
Company's mortgage loan origination volume and, potentially, its
profitability. Further, adverse conditions in the mortgage-backed
securitization market could negatively impact the ability of the Company to
complete loan sales, as many of the Company's loan purchasers securitize the
loans they purchase from the Company.
For the year ended December 31, 1996 and for the six months ended June 30,
1997, the Company sold 59% and 55%, respectively, of the mortgage loans it
originated (by volume) to three institutional investors and two institutional
investors, respectively. One of the investors in each of these periods was the
same. There can be no assurance that such institutional investors will
continue to purchase the Company's loans and to the extent that the Company
could not successfully replace such loan purchasers, the Company's business,
financial condition and results of operations could be materially and
adversely affected.
The Company's ability to sell "A" credit-rated mortgage loans to
institutional investors is dependent upon the continuation of programs
administered by government sponsored agencies such as the FHA and VA programs,
which facilitate the pooling of those mortgage loans into mortgage-backed
securities, as well as the Company's continued eligibility to participate in
these programs. The discontinuation of, or the loss of eligibility to
participate in, such government programs could have a material adverse effect
on the Company's business, financial condition and results of operations.
CONCENTRATION OF OPERATIONS IN MID-ATLANTIC REGION AND MISSOURI
For the six month period ended June 30, 1997, substantially all of the
mortgage loans originated by the Company were to borrowers in New York, New
Jersey and Missouri. Although the Company is attempting to expand its Branch
Network outside these regions, the Company's origination business is likely to
contain a high
7
<PAGE>
concentration in such areas for the foreseeable future. Consequently, the
Company's results of operations and financial condition are dependent upon
general trends in the economy and the residential real estate market in the
aforementioned areas.
ECONOMIC CONDITIONS
The Company's business will be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings by negatively affecting loan-to-value ratios of the home equity
collateral. To the extent that loan-to-value ratios of the home equity
collateral of prospective borrowers do not meet the Company's underwriting
criteria, the volume of loans originated by the Company could decline. A
decline in loan origination volumes would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, changes in the level of consumer confidence, real estate values and
prevailing interest rates, each of which tend to be affected by an economic
slowdown, could adversely affect the level and amount of consumer borrowing.
Furthermore, investment returns of investors purchasing mortgages are affected
by, among other things, the actual rates of delinquencies and foreclosures of
the mortgages they purchase, which could make mortgage loans less attractive
to investors during periods when such delinquencies and foreclosures are
increasing.
INTEREST RATE RISK
The Company's profitability may be directly affected by the levels of and
fluctuations in interest rates, which affect the Company's ability to earn a
spread between interest received on loans and the Company's costs of
borrowing. The operations and profitability of the Company are likely to be
adversely affected during any period of unexpected or rapid changes in
interest rates. For example, a substantial or sustained increase in interest
rates could adversely affect the ability of the Company to originate loans and
would reduce the value of loans that were originated prior to such increase.
RISK OF LOAN DELINQUENCIES AND DEFAULTS
The Company is exposed to the risk of loan delinquencies and defaults from
the time the loan is made until such loan is sold to institutional investors,
typically a 30 day period. After the Company originates a loan, the loan is
usually held by the Company as part of a portfolio of loans, to be sold either
on a pool or "whole loan" basis. The Company is also subject to loan
delinquencies and defaults in those cases where it is required to repurchase
such loan due to a breach of a representation or warranty by the Company in
connection with the "whole loan" sale.
Since mid-1996, the Company has focused on increasing mortgage originations
for "B/C" or "sub-prime" credit classified borrowers. For the six months ended
June 30, 1997, approximately 40.4% of the total principal amount of loans
originated by the Company were to borrowers in these credit classifications.
Loans made to such borrowers entail a higher risk of delinquency and higher
losses than loans made to borrowers who have higher credit classifications.
Although the Company sells these mortgages (as well as other mortgages) on a
"servicing released" basis to investors, usually on a non-recourse basis
(thereby limiting its exposure to the risk of delinquency or default), at
prices which reflect the credit risk associated with such borrowers, any
sustained period of increased delinquencies, foreclosures or losses on such
loans after the loans are sold could adversely affect the pricing of the
Company's future loan sales and/or the willingness of investors to purchase
such loans from the Company in the future.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company has expanded into new geographic regions, increasing the number
of retail branch offices to 14 as of the date of this Prospectus. The Company
anticipates that it will continue to open additional branch offices, in part,
with a portion of the proceeds of this Offering, and as a result expects to
substantially increase
8
<PAGE>
the volume of loans which it originates. The Company's continued growth and
expansion will place additional pressures on the Company's personnel and
systems. Any future growth may be limited by, among other things, the Company's
(i) need for continued funding sources and access to capital markets, (ii)
ability to attract and retain qualified personnel, (iii) ability to maintain
appropriate procedures, policies and systems to ensure that the Company's loans
have an acceptable level of credit risk and loss and (iv) ability to establish
new relationships and maintain existing relationships with mortgage holders and
borrowers in states where the Company is active and in states where the Company
is seeking to commence operations. The Company's need for additional operating
procedures, personnel and facilities is expected to increase as a result of
further growth which the Company anticipates over the near term. The Company is
assessing the purchase of new systems and software to support its operations,
and plans to continue to procure hardware and software that will require
additional corresponding investments in training and education. There can be no
assurance that the Company will successfully obtain or apply the human,
operational and financial resources needed to manage a developing and expanding
business. Failure by the Company to manage its growth effectively, or to
sustain its historical levels of performance in underwriting with respect to
its increased loan origination volume, could have a material adverse effect on
the Company's business, financial condition and results of operations and
financial condition. See "Business--Growth Strategy."
RISKS ASSOCIATED WITH MORTGAGE BANKING ACTIVITIES IN PUERTO RICO
In November 1996, the Company opened a mortgage office in Puerto Rico, and
has focused the activities of that office since mid-1997 on sub-prime
borrowers. Operationally, mortgage originations to sub-prime borrowers for
properties in Puerto Rico are essentially similar to mortgage originations for
properties located in the continental United States. However, the Company does
not believe that the secondary market of institutional investors purchasing
mortgage loans originated in Puerto Rico is as developed as the secondary
market for mortgage loans originated in the continental United States. The less
developed secondary market may adversely affect the premium which the Company
receives on the sale of mortgages originated in Puerto Rico. To date, the
Company has had very limited experience in the sale of mortgages originated in
Puerto Rico. Although the Company believes that there will be a number of
institutions willing to purchase mortgages originated in Puerto Rico from it on
a regular basis, in the event that the Company cannot find institutional
investors to purchase these loans, the Company will be forced to raise
additional capital to fund and hold the loans. There can be no assurance that
the Company will be able to find institutional investors for its mortgage loans
originated in Puerto Rico, which could cause a material adverse effect on the
Company's business and financial condition.
Section 936 of the U.S. Internal Revenue Code ("Section 936") has
historically provided incentives for U.S. corporations to invest in Puerto Rico
by granting a credit to qualifying corporations ("936 Corporations") against a
portion of the U.S. income tax payable from the active conduct of a trade or
business in Puerto Rico and 100% of certain qualifying investment income
derived in Puerto Rico. Section 936 together with complementary Puerto Rican
laws have provided incentives for 936 Corporations and financial intermediaries
receiving funds from 936 Corporations to invest in mortgage loans and mortgage-
backed securities originated in Puerto Rico. Section 936 has helped, in the
past, to create a pool of lower cost funds in Puerto Rico that has historically
been used by banks to fund mortgage loans. On August 20, 1996, the Small
Business Job Protection Act of 1996 (the "Small Business Job Protection Act")
was signed into law. That Act provides for the elimination of the special U.S.
federal income tax benefits available under Section 936 to U.S. corporations
operating and investing in Puerto Rico. The Act repeals Section 936, subject to
a ten-year grandfather rule for 936 Corporations that were engaged in the
active conduct of a trade or business on October 13, 1995 and that qualified
for and elected the benefits of Section 936 for the corporation's taxable year
which includes such date.
While the final impact of a repeal of Section 936 on the Company's
prospective business in Puerto Rico cannot be determined at this time, the
repeal of Section 936 could have an adverse effect on the general economic
condition of Puerto Rico by reducing incentives for investment in Puerto Rico.
Any such adverse effect on the general economy of Puerto Rico could lead to a
reduction in the level of residential construction and demand for mortgage
loans. The elimination of Section 936, particularly the elimination of the
credit for investment income,
9
<PAGE>
could also lead to a decrease in the amount of funds invested in the Puerto
Rico financial market by 936 Corporations ("936 Funds), thereby increasing
funding costs and decreasing liquidity for Puerto Rico mortgage products. The
impact of any such changes on the Company's prospective business in Puerto
Rico cannot be determined at this time.
COMPETITION
The mortgage banking business is highly competitive. The Company competes
with financial institutions, such as mortgage bankers, commercial banks,
savings associations, credit unions, loan brokers and insurance companies in
the origination of mortgage loans. Competition can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels and interest rates and origination fees charged to borrowers.
Competition may be affected by, among other things, fluctuations in interest
rates and general economic conditions. Although the Company believes that its
competitive advantage lies primarily with the Company's offering of a broad
menu of mortgage loan products with competitive features, its emphasis on the
quality of its service, and the pricing of its range of products at
competitive rates, there can be no assurance that the Company will be able to
compete effectively in this industry, which could materially adversely affect
the Company's financial conditions and results of operations. In addition, to
the extent that market pricing becomes more aggressive, the Company may be
unable to achieve its planned level of growth. The Company has become aware
that certain large national finance companies and conventional mortgage
originators are implementing plans to or have announced their intention to
allocate resources to the origination of loans to sub-prime credit-rated
borrowers. The entrance of these competitors into the Company's market could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Competition."
REGULATORY AND LEGISLATIVE RISK
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local
government authorities. These rules and regulations impose obligations and
restrictions on the Company's loan originations, credit activities and secured
transactions. In addition, these rules limit the interest rates, finance
charges and other fees the Company may assess, mandate extensive disclosure to
the Company's customers, prohibit discrimination and impose multiple
qualification and licensing obligations on the Company. The Company's loan
origination activities are subject to the laws and regulations in each of the
states in which those activities are conducted and are also subject to various
federal laws, including the Federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, the Homeownership and Equity Protection Act of 1994,
the Federal Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act of 1970, the Real Estate Settlement
Procedures Act of 1974 and Regulation X promulgated thereunder, the Fair
Housing Act, the Home Mortgage Disclosure Act and Regulation C promulgated
thereunder and the Federal Debt Collection Practices Act, as well as other
Federal and State statutes and regulations affecting the Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to revocation of its mortgage banking license in
the states where the Company is licensed and loss of approved status for
participation in government sponsored programs (such as the FHA and VA loans),
demands for indemnification or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcement actions by federal and state governmental agencies. See
"Business--Government Regulation."
Although the Company believes that it has systems and procedures to insure
compliance with these requirements and believes that it is currently in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and
10
<PAGE>
regulations or that more restrictive laws, rules and regulations will not be
adopted in the future that could make compliance substantially more difficult
or expensive. In the event that the Company is unable to comply with such laws
or regulations, its business, prospects, financial condition and results of
operations may be materially adversely affected.
Members of Congress, government officials and political candidates have from
time to time suggested the elimination of the mortgage interest deduction for
federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans,
the interest on which may be currently tax deductible, are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, some of the competitive advantage of such loans when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for mortgage loans
of the kind offered by the Company.
POSSIBLE ENVIRONMENTAL LIABILITIES
Although to date, the Company has not re-acquired any properties pursuant to
any foreclosure action against any borrowers, it is possible that the Company
may, in the future, foreclose on properties securing mortgage loans. Under
various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or chemical
releases at such property and may be held liable to a governmental entity or
to third parties for property damage, personal injury, and investigation and
clean up costs incurred by such parties in connection with the contamination.
Liability under such laws has been interpreted to be joint and several unless
the harm is divisible, and there is a reasonable basis for allocation of
responsibility. Although the Company has not incurred losses in any material
respect as a result of liabilities under environmental laws, there can be no
assurance that the Company will not experience such losses in the future.
DEPENDENCE UPON MANAGEMENT
The Company is dependent upon the personal efforts and abilities of two
executive officers, Steven Latessa, the Company's President and Chief
Executive Officer, Cary Wolen, the Company's Chief Financial Officer, Chief
Operating Officer, Secretary and Treasurer, and a key employee, Jon Blasi, the
Company's Chief Operating Officer for the "B/C" Lending Division (see
"Management"). The loss of the services of either Messrs. Latessa, Wolen or
Blasi could have a materially adverse effect on the Company's business and
operations. Messrs. Latessa, Wolen and Blasi have entered into employment
agreements with the Company that expire in September 2000. In addition, the
Company has obtained a $1 million key man, term life insurance policy on each
of the lives of Messrs. Latessa, Wolen and Blasi.
BENEFITS TO AFFILIATED PARTIES
The Company will use approximately $288,000 ( %) of the net proceeds of
this Offering to pay an unsecured subordinated debenture held by a corporation
owned by Messrs. Latessa, Wolen and the Estate of Anthony Saffiotti, a former
officer of the Company. In addition, upon completion of this Offering, Messrs.
Latessa and Wolen are expected to be released as personal guarantors under the
Company's Warehouse Facility and an equipment lease.
VOTING CONTROL BY MAJORITY SHAREHOLDERS
Following the completion of the sale of shares of Common Stock offered
hereby, Steven Latessa, Cary Wolen and Jon Blasi will beneficially own an
aggregate of 2,689,890 shares of the Company's outstanding Common Stock, which
will represent approximately 52.5% of the total number of shares of the
Company's outstanding Common Stock, assuming that no part of the Underwriters'
over-allotment option in the Offering is exercised (approximately 50.8% of the
total number of shares of the Company's outstanding Common Stock if
11
<PAGE>
the over-allotment option is exercised in full). In addition, the executors of
the Estate of Anthony Saffiotti have signed a proxy authorizing Messrs.
Latessa and Wolen to vote the 810,110 shares currently owned by the Estate
(which will constitute 15.8% of the total number of shares of the Company's
outstanding Common Stock following the Offering, assuming that no part of the
Underwriters' over-allotment option is exercised). As a result of their stock
ownership and proxy, Messrs. Latessa, Wolen and Blasi will have effective
control of the Company, and will continue to have the power to control the
election of all of the members of the Company's Board of Directors and to
direct the Company's management and policies. Such persons will be able to
control all decisions on matters requiring the vote of shareholders, which
include the amendment of the Company's Certificate of Incorporation and
certain provisions of the By-Laws and the approval of fundamental corporate
transactions. See "Principal Shareholders" and "Description of Securities--
Common Stock."
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to the Offering there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop, or
if developed, be sustained in the Common Stock after the Offering. The initial
public offering price of the Common Stock will be determined by negotiations
between the Company and the Representative and may not necessarily bear any
relationship to the Company's asset value, net worth or other established
criteria of value. Factors considered in such negotiations, in addition to
prevailing market conditions, will include the history and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors as may be deemed relevant. Accordingly, the initial public
offering price of the Common Stock may not be indicative of the price that may
prevail at any time or from time to time in the public market for the Common
Stock following the Offering. See "Underwriting."
NO ASSURANCE OF CONTINUED NASDAQ SMALLCAP MARKET LISTING; RISK OF APPLICATION
OF PENNY STOCK RULES
It is anticipated that, upon commencement of this Offering, the Common Stock
will be listed for trading on the NASDAQ SmallCap Market. The Board of
Governors of the National Association of Securities Dealers, Inc. has
established certain standards for the continued listing of a security on the
Nasdaq SmallCap Market. The maintenance standards require, among other things,
that an issuer have net tangible assets of at least $2,000,000; that the
minimum bid price for the listed securities be $1.00 per share; that the
minimum market value of the public float be at least $1,000,000; and that
there be at least two market makers for the issuer's securities. A deficiency
in either the market value of the public float or the bid price maintenance
standard will be deemed to exist if the issuer fails the individual stated
requirement for ten consecutive trading days. There can be no assurance that
the Company will continue to satisfy the requirements for maintaining a Nasdaq
SmallCap Market listing. If the Common Stock were to be delisted from the
Nasdaq SmallCap Market, it would adversely affect the prices of such
securities and the ability of holders to sell them, and the Company would be
required to comply with the initial listing requirement to be relisted on the
Nasdaq SmallCap Market.
If the Company were delisted from the NASDAQ SmallCap Market and the price
per share were to drop below $5.00, then unless the Company satisfied certain
net asset tests, the Common Stock would become subject to certain penny stock
rules promulgated by the Securities and Exchange Commission (the
"Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current
bid and offer quotations for the penny stock, the compensation of the broker-
dealer and its salesperson in the transaction and monthly account statements
showing the market value of each penny stock held in the customer's account.
In addition, the penny stock rules require that, prior to a transaction in a
penny stock not otherwise exempt from such rules, the broker-dealer must make
a special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written agreement to the
transaction. These disclosure requirements may have the effect of reducing the
level of trading
12
<PAGE>
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If the Common Stock becomes subject to the penny stock rules,
investors in the Offering may find it more difficult to sell their Common
Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
As of June 30, 1997, the net tangible book value of the Common Stock was
$0.10 per share. Upon completion of this Offering, the net tangible book value
will be approximately $ per share, representing dilution to the public
investors of approximately $ or %. As a result, purchasers of shares in
the Offering will incur immediate and substantial dilution. See "Dilution."
HOLDING COMPANY STRUCTURE
The Company is a holding company which will conduct all its operations
through its wholly-owned subsidiary, Mortgage Plus. All of the capital stock
of Mortgage Plus will be owned by the Company. Therefore, the Company's rights
to participate in the assets of Mortgage Plus upon such subsidiary's
liquidation or recapitalization will be subject to the prior claims of the
subsidiary's creditors, except to the extent that the Company may itself be a
creditor with recognized claims against the subsidiary.
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
inception (except that prior to December 31, 1996, Mortgage Plus made S
corporation distributions to its then existing stockholders) and does not
currently anticipate paying dividends on its Common Stock in the foreseeable
future. Since the Company conducts substantially all of its operations through
its subsidiary, Mortgage Plus, the Company's ability to pay dividends will be
dependent upon the ability of Mortgage Plus to make cash distributions to the
Company. The Warehouse Facility (which is with Mortgage Plus) provides that
Mortgage Plus may declare and pay dividends provided that the payment of such
dividends will not result in a violation of the financial covenants of the
Warehouse Facility. See "Dividend Policy."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations that are
unrelated to the Company's operating performance. In particular, the price of
the Common Stock may be affected by general market price movements as well as
developments specifically related to the consumer finance industry such as,
among other things, interest rate movements. In addition, the Company's
financial results are significantly dependent upon the successful completion
of the Company's loan sales in the market, and the Company's inability to
complete these transactions in a particular quarter may have a material
adverse effect on the Company's results of operations for that quarter and
could, therefore, negatively impact the price of the Common Stock.
SHARES AVAILABLE FOR FUTURE SALE
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to this Offering, pursuant to
Rule 144 under the Securities Act ("Rule 144") or otherwise, could materially
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise additional capital through the public or private
sale of its securities. All of the 4,028,000 shares of Common Stock currently
outstanding are "restricted securities" as that term is defined in Rule 144
and may, under certain circumstances, be sold without registration under the
Securities Act. The availability of Rule 144 to the holders of restricted
securities of the Company would be conditioned on, among other factors, the
availability of certain public information concerning the Company. In
addition, shares issuable upon exercise of options granted under the 1995
Plan, pursuant to Rule 701 under the Securities Act, could be sold publicly
commencing 90 days after the Company becomes a reporting company under the
Exchange Act. All officers, directors, stockholders and option holders of the
Company have executed agreements ("Lock-Up Agreements") pursuant to which they
13
<PAGE>
have agreed not to, directly or indirectly, issue, offer, agree to sell, sell,
grant an option for the purchase or sale of, transfer, pledge, assign,
hypothecate, distribute, or otherwise dispose of, or encumber any shares of
Common Stock or options, rights, warrants, or other securities convertible
into, or exercisable or exchangeable for, or evidencing any right to purchase
or subscribe for, shares of Common Stock, whether or not beneficially owned by
such person, or any beneficial interest therein for a period of 13 months from
the date of this Prospectus. See "Underwriting."
For a period of 13 months from the date of this Prospectus, the Company has
agreed that it will not sell or otherwise dispose of any securities of the
Company without the prior written consent of the Representative, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, during such
period the Company shall be entitled to issue (i) shares of Common Stock in
connection with mergers and acquisitions (subject to certain restrictions),
and (ii) up to 350,000 shares of Common Stock issuable upon exercise of
options which may be granted under the 1995 Stock Option Plan.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and By-
Laws, as well as Delaware General Corporation Law, may be deemed to have an
anti-takeover effect. The Company's Certificate of Incorporation provides that
the Board of Directors may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock with such
designations, relative voting rights, dividend rates, liquidation other
rights, preferences and limitations that the Board of Directors may fix
without stockholder approval. Moreover, the Company's Certificate of
Incorporation and By-Laws provide that its Board of Directors is divided into
three classes serving staggered three year terms, resulting in approximately
one-third of the directors being elected each year and certain other
provisions relating to voting and the removal of the officers and directors.
In addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law. In general, the statute prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" (as defined) for a period of three years after the
date of the transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. Each of
the foregoing provisions may have the effect of rendering more difficult,
delaying, discouraging, preventing or rendering more costly an acquisition of
the Company or a change in control of the Company. See "Description of
Securities; Section 203 of the Delaware General Corporation Law--Anti-Takeover
Provisions."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,100,000 shares of Common Stock offered hereby, after deducting all of the
expenses of the Offering (estimated to be approximately $ ), will total
approximately $ million.
The following table summarizes the Company's intended uses of the net
proceeds of the Offering:
<TABLE>
<CAPTION>
USE AMOUNT PERCENT
--- ------ -------
<S> <C> <C>
Fund mortgage loans...................................... $1,000,000
Expand Branch Network.................................... 500,000
Expand mortgage banking operations in Puerto Rico........ 500,000
Telemarketing and advertising............................ 500,000
Upgrade information systems.............................. 300,000
Repay indebtedness....................................... 810,000
Working capital..........................................
----------
Total.................................................. $ 100.00%
</TABLE>
The indebtedness to be repaid with a portion of the proceeds consists of an
aggregate principal amount of $778,000 unsecured subordinated debentures, with
an interest rate of 14% per year. Of this amount, $278,000 principal amount of
the debentures, plus interest, is payable to a corporation owned by Steven
Latessa, Cary Wolen and the Estate of Anthony Saffiotti. In addition, personal
guarantees of Messrs. Latessa and Wolen under the Company's Warehouse Facility
and an equipment lease are expected to be released upon consummation of this
Offering.
If the Underwriters exercise the over-allotment option in full, the Company
will receive additional net proceeds of $ from the sale of the 165,000
shares by the Company, which will be added to working capital.
The Company is dependent upon the proceeds of this Offering to implement its
business strategy and finance its working capital requirements. Based on the
Company's currently proposed plans and assumptions relating to the
implementation of its business strategy, the Company anticipates that the net
proceeds of this Offering will be sufficient to satisfy its contemplated cash
requirements for at least twelve months following the consummation of this
Offering. In the event that the Company's plans change or its assumptions
prove to be inaccurate (due to unanticipated expenses, difficulties, delays or
otherwise) or the proceeds of this Offering otherwise prove to be insufficient
to fund the implementation of the Company's business strategy and working
capital requirements, the Company could be required to seek additional
financing. Exact application of the net proceeds and timing of use will vary
depending upon numerous factors, including market and competitive issues. Due
to the number and variability of factors that may effect the Company's use of
the net proceeds, the Company will retain significant discretion over the
actual application of the net proceeds. Accordingly, there can be no assurance
that actual application will not vary substantially from the Company's current
expectation.
Pending use for the purposes specified above or otherwise, the net proceeds
received by the Company in the Offering may be invested in short-term,
investment grade, interest bearing securities.
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<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
inception (except that prior to December 31, 1996, Mortgage Plus made S
corporation distributions to its then existing stockholders) and does not
currently anticipate paying dividends on its Common Stock in the foreseeable
future. Since the Company conducts substantially all of its operations through
its subsidiary, Mortgage Plus, the Company's ability to pay dividends is also
dependent upon the ability of Mortgage Plus to make cash distributions to the
Company. The Warehouse Facility (which is with Mortgage Plus) provides that
Mortgage Plus may declare and pay dividends provided that the payment of such
dividends will not result in a violation of the financial covenants of the
Warehouse Facility.
DILUTION
As of June 30, 1997, the Company had a net tangible book value of
approximately $385,963 (or $0.10 per share) of Common Stock outstanding. Net
tangible book value equals the tangible net worth of the Company (tangible
assets less total liabilities) divided by the aggregate number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
1,100,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $ per share and the application of the net proceeds
therefrom, the pro forma net tangible book value of the Company as of June 30,
1997, would be approximately $ (or $ per share). This represents
an immediate increase in pro forma net tangible book value of $ per share
to current stockholders and an immediate dilution of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................... $
---
Net tangible book value before offering....................... $
-----
Increase attributable to new investors........................
-----
Pro forma net tangible book value after offering................
---
Dilution to new investors....................................... $
---
</TABLE>
The following table sets forth, as of June 30, 1997, the difference between
the existing stockholders of the Company and the new investors with respect to
the aggregate number of shares of Common Stock purchased from the Company, the
total cash consideration paid and the average cash price per share paid:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION PAID AVERAGE
-------------------- ------------------ CASH PRICE ---
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders... 4,000,000(1) 78.43% $1,000,000 % $0.25
New Investors........... 1,100,000 21.57% $ % $
--------- ------ ---------- ------
Total............... 5,100,000 100.00% $ 100.00%
========= ====== ========== ======
</TABLE>
- --------
(1) Does not reflect an additional 28,000 shares issued in July 1997.
16
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of June 30, 1997 and as adjusted to give effect to the sale by the
Company of 1,100,000 shares of Common Stock at an assumed public offering
price of $ per share, and the application by the Company of the net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements, including the Notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
AS
ACTUAL ADJUSTED(1)
----------- -----------
<S> <C> <C>
Debt:
Warehouse lines of credit............................ $ 9,244,663 $9,244,663
Subordinated debt.................................... 778,000 --
Notes payable........................................ 118,384 118,384
Obligation under capital lease....................... 235,210 235,210
----------- ----------
Total Debt............................................ $10,376,257 $9,598,257
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares au-
thorized and
none issued (2)..................................... -- --
Common stock, $.01 par value, 20,000,000 shares au-
thorized, 4,000,000 shares outstanding, actual and
5,100,000 shares outstanding, as adjusted........... 40,000 51,000
Additional paid-in-capital........................... 905,903
Accumulated deficit.................................. (518,440) (518,440)
Total stockholders' equity........................... 427,463
----------- ----------
Total capitalization.............................. $10,803,720 $
=========== ==========
</TABLE>
- --------
(1) Adjusted for the sale of 1,100,000 shares of Common Stock and application
of the estimated net proceeds therefrom as described under "Use of
Proceeds."
(2) See "Description of Securities" for description of the relative rights of
the Preferred Stock and Common Stock.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Statement of
Operations Data" and "Balance Sheet Data" for and as of the end of each of the
periods indicated are derived from the financial statements of the Company
appearing elsewhere herein. The information set forth below should be read in
conjunction with such financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected financial data presented below as of and for the six
months ended June 30, 1996 and 1997 are unaudited; however, in the opinion of
the Company, all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of the results of such periods, have been
included. The results of operations for the six months ended June 30, 1997 may
not be indicative of results of operations to be executed for the full year
ending December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30,
1995 1996 JUNE 30, 1996 1997
----------- ------------ ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................... $ 2,982,922 $ 5,970,675 $ 2,586,089 $ 4,081,723
Commissions, wages and
benefits................. 1,667,553 3,715,169 1,485,815 2,308,288
Selling and administra-
tive..................... 1,696,158 1,770,894 773,436 1,194,961
Interest expense.......... 220,524 707,952 359,421 438,405
Net (Loss) Income......... (601,313) (223,340) (32,583) 140,069
Net (Loss) Income Per
Share.................... (.16) (.06) (.01) .03
Weighted Average Number of
Shares Outstanding....... 3,853,319 3,853,319 3,853,319 4,027,300
OPERATING STATISTICS:
Mortgage originations
Conventional............ $48,366,929 $ 48,102,840 $23,797,696 $22,879,138
FHA/VA.................. 5,323,313 24,810,101 11,658,600 16,966,540
Sub-Prime............... 4,284,375 35,290,148 16,308,520 26,958,160
----------- ------------ ----------- -----------
Total................. $57,974,617 $108,203,089 $51,764,816 $66,803,838
Number of Loans........... 503 1,073 572 713
Average Principal Balance. $ 115,257 $ 100,841 $ 90,497 $ 93,694
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF JUNE 30, 1997
----------------------- -------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Mortgage loans held for
sale....................... $10,535,994 $12,049,043
Total assets............... 11,447,525 13,501,388
Borrowings................. 9,977,145 10,376,257
Stockholders' equity....... 287,394 427,463
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
GENERAL
Overview. The Company's revenues are generated from the fees it charges
borrowers on the origination of mortgage loans, the premiums paid by
institutional investors when they purchase the loans from the Company and
interest earned during the period (generally less than 30 days) the loan is
held for sale to institutional investors. The fees charged by the Company to
its borrowers in connection with the origination of the loans and the premium
on sales of loans to third parties, less transaction costs associated with
origination of the loans, are categorized as mortgage origination revenue and
are recognized when the loans are sold. The Company sells all of its mortgage
loans (together with servicing rights) to institutional investors, usually on
a non-recourse basis, in most instances within 30 days of origination. By
selling its mortgages to institutional investors on a "servicing-released"
basis, the Company avoids the administrative and collection expenses of
managing a servicing portfolio, and is not faced with foreclosures,
delinquencies and re-acquiring and disposing of residential real estate. The
Company does not sell mortgage loans in "securitization" transactions, but
rather sells loans to financial institutions, either on a pooled or individual
"whole-loan" basis, at fixed prices on a non-recourse basis.
MORTGAGE ORIGINATIONS
The following table summarizes the Company's mortgage loan originations for
the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CONVENTIONAL LOANS:
Volume................. $43,293,573 $48,366,929 $ 48,102,840 $ 23,797,696 $ 22,879,138
Percentage of total
volume................ 100.0% 83.4% 44.5% 46.0% 34.2%
FHA/VA LOANS:
Volume................. -- $ 5,323,313 $ 24,810,101 $ 11,658,600 $ 16,966,540
Percentage of total
volume................ -- 9.2% 22.9% 22.5% 25.4%
SUB-PRIME LOANS:
Volume................. -- $ 4,284,375 $ 35,290,148 $ 16,308,520 $ 26,958,160
Percentage of total
volume................ -- 7.4% 32.6% 31.5% 40.4%
TOTAL LOANS:
Volume................. $43,293,573 $57,974,617 $108,203,089 $ 51,764,816 $ 66,803,838
Number of Loans........ 329 503 1,073 572 713
Average Loan Size...... $ 131,591 $ 115,257 $ 100,841 $ 90,497 $ 93,694
</TABLE>
The Company increased its mortgage loan origination volume to $108.2 million
during 1996 from $58 million during 1995, an increase of 87%. This increase in
mortgage loan origination volume was primarily due to the expansion of the
Company's Missouri operations, which accounted for $27.6 million of mortgage
originations in 1996 compared to $5.9 million in 1995 and the growth in most
areas where the Company does business of "B/C" and FHA/VA loan originations.
For the year ended December 31, 1996 and for the six months ended June 30,
1997, the Company sold 59% and 55%, respectively, of the mortgage loans it
originated (by volume) to three institutional investors and two institutional
investors, respectively. One of the investors in each of these periods was the
same.
19
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996
Total revenues increased $1.5 million, or 58%, to $4.1 million for the six
months ended June 30, 1997 from $2.6 million for the six months ended June 30,
1996. During the same period, the Company's total expenses increased $1.3
million, or 51%, to $3.9 million from $3.6 million. As a result, the Company
recorded net income of $140,000, or $.03 per share, for the six months ended
June 30, 1997 compared to a net loss of $33,000, or $.01 per share, for the
six months ended June 30, 1996.
Revenues. The following table sets forth the components of the Company's
revenues for the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
Revenues:
Mortgage origination............................. $ 2,230,994 $ 3,637,834
Interest earned.................................. 355,095 443,889
------------ ------------
Total Revenues.................................. $ 2,586,089 $ 4,081,723
============ ============
</TABLE>
Mortgage origination revenue increased $1.4 million, or 63%, to $2.6 million
for the six months ended June 30, 1997 from $2.2 million for the six months
ended June 30, 1996. This increase was primarily the result of the increased
amount of mortgage loans originated through the Company's "B/C" Lending
Division, which typically generate higher mortgage origination revenue than an
"A" credit-rated mortgage loan. The Company, and the mortgage industry
generally, charge higher fees on "B/C" credit-rated mortgage loan originations
as these loans require greater processing and underwriting time and also
greater underwriting risk as compared to an "A" credit-rated mortgage loan.
Interest earned increased $89,000, or 25%, to $444,000 for the six months
ended June 30, 1997 from $355,000 for the six months ended June 30, 1996. The
increase in interest earned was primarily due to a higher aggregate balance of
loans held for sale during the six months ended June 30, 1997, resulting from
an increased volume of loan originations during this period, and a higher
balance of loans held for sale at the beginning of this period as compared to
the corresponding period in 1996.
Expenses. The following table sets forth the components of the Company's
expenses for the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
Expenses:
Commissions, wages and benefits.................. $ 1,485,815 $ 2,308,288
Selling and administrative....................... 773,436 1,194,961
Interest expense................................. 359,421 438,405
------------ ------------
Total Expenses.................................. $ 2,618,672 $ 3,941,654
============ ============
</TABLE>
Commissions, wages and benefits increased $800,000, or 55%, to $2.3 million
for the six months ended June 30, 1997 from $1.5 million for the six months
ended June 30, 1996. The increase in commission, wages and benefits was
primarily due to an increase in sales staff and administrative personnel
required to process the
20
<PAGE>
increased volume of mortgage loan originations. As of June 30, 1997, the
Company had 103 employees as compared to 81 employees as of June 30, 1996, an
increase of 27%. Included within commissions, wages and benefits for the six
months ended June 30, 1997 was $30,000 attributable to new branch start-up
expenses, as compared to $221,000 in new branch start up expenses during the
same period in 1996. During the six months ended June 30, 1997, the Company
opened two new branches, compared to four new branches during the six months
ended June 30, 1996. As a percentage of revenue, commissions, wages and
benefits represented 57.5% and 56.6% for the six months ended June 30, 1996
and 1997, respectively.
Selling and administrative expense, which consists of occupancy,
advertising, promotion, telephone and other expenses, increased $400,000, or
50%, to $1.2 million for the six months ended June 30, 1997 from $800,000 for
the six months ended June 30, 1996. The increase in selling and administrative
expense was primarily due to expenses incurred in connection with the
expansion of telemarketing operations. Included within selling and
administrative expense for the six months ended June 30, 1997 was $31,000
attributable to new branch start up expenses, as compared to $150,000 for the
same period in 1996. As a percentage of revenue, selling and administrative
expense represented 29.9% and 29.3% for the six months ended June 30, 1996 and
1997, respectively.
Interest expense increased $79,000, or 22%, to $438,000 for the six months
ended June 30, 1997 from $359,000 for the six months ended June 30, 1996. The
increase in interest expense was attributable to the interest costs on
borrowings by the Company to fund the higher balance of loans originated
during the 1997 period and a higher balance of loans held for sale at the
beginning of the period. The Company also incurred $31,000 of interest expense
related to $778,000 of subordinated debt in the six months ended June 30,
1997. The subordinated debt was not outstanding during 1996. As a percentage
of revenue, interest expense represented 13.9% and 10.7% for the six months
ended June 30, 1996 and 1997, respectively.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995.
Total revenues increased $3.0 million, or 100%, to $6.0 million for the year
ended December 31, 1996 from $3.0 million for the year ended December 31,
1995. During the same period, the Company's total expenses increased $2.6
million, or 73%, to $6.2 million from $3.6 million. As a result, the Company's
net loss decreased by 63% from $601,000 ($.16 per share) for the year ended
December 31, 1995 to $223,000 ($.06 per share) for the year ended December 31,
1996. The Company incurred large expenses in both 1996 and 1995 related to the
expansion of its Branch Network and the introduction of "B/C" credit-rated
mortgage loans. These activities and related expenses were the primary
contributor to the Company's losses in 1996 and 1995.
Revenues. The following table sets forth the components of the Company's
revenues for the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues:
Mortgage origination............. $2,821,414 $5,307,353
Interest earned.................. 161,508 663,322
---------- ----------
Total Revenues.................. $2,982,922 $5,970,675
========== ==========
</TABLE>
Mortgage origination revenue increased $2.5 million, or 88%, to $5.3 million
for the year ended December 31, 1996 from $2.8 million for the year ended
December 31, 1995. The increase was primarily attributable to substantial
increases in "B/C" and FHA/VA mortgage originations during the 1996 period.
Interest earned increased $502,000, or 311%, to $663,000 for the year ended
December 31, 1996 from $161,000 for the year ended December 31, 1995. The
increase in interest earned was primarily due to a higher
21
<PAGE>
average balance of loans held for sale throughout the year ended December 31,
1996 which resulted from the increased loan origination volume during such
period, and a higher balance of loans held for sale at the beginning of such
period as compared to the corresponding period in 1995.
Expenses. The following table sets forth the components of the Company's
expenses for the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Expenses:
Commissions, wages and benefits.. 1,667,553 3,715,169
Selling and administrative....... 1,696,158 1,770,894
Interest expense................. 220,524 707,952
---------- ----------
Total Expenses.................. $3,584,235 $6,194,015
========== ==========
</TABLE>
Commissions, wages and benefits increased $2.0 million, or 123%, to $3.7
million for the year ended December 31, 1996 from $1.7 million for the year
ended December 31, 1995. The increase in commissions, wages and benefits was
primarily due to an increase in sales staff and administrative personnel
required to process the increased volume of mortgage loan originations. As of
December 31, 1996, the Company had 103 employees as compared to 62 employees
as of December 31, 1995. Included within commissions, wages and benefits for
the year ended December 31, 1996 was $331,000 attributable to new branch
start-up expenses, as compared to $401,000 in new branch start-up expenses for
the year ended December 31, 1995. During the period ended December 31, 1996,
the Company opened five new branches, including two in Missouri, two in New
York and one in Puerto Rico, compared to two new branches in the year ended
December 31, 1995, including one in New Jersey and one in Missouri. As a
percentage of revenue, commissions, wages and benefits represented 55.9% and
62.2% for the years ended December 31, 1995 and 1996, respectively.
Selling and administrative expense, which consists of occupancy, marketing,
supplies, selling and other expenses, increased $100,000, or 4%, to $1.8
million for the year ended December 31, 1996 from $1.7 million for the year
ended December 31, 1995. Included within selling and administrative expense
for the years ended December 31, 1996 was $225,000 attributable to new branch
start up expenses, as compared to $86,000 for the year ended December 31,
1995. As a percentage of revenue, selling and administrative expense
represented 56.9% and 29.7% for the years ended December 31, 1995 and 1996,
respectively.
Interest expense increased $487,000, or 221%, to $708,000 for the year ended
December 31, 1996 from $221,000 for the year ended December 31, 1995. The
increase in interest expense was attributable to the interest costs on
borrowings by the Company to fund the higher balance of loans originated
during the year ended December 31, 1996 and a higher balance of loans held for
sale at the beginning of the period. As a percentage of revenue, interest
expense represented 7.4% and 11.9% for the years ended December 31, 1995 and
1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash requirements include the funding or
payment of: (i) loan originations; (ii) interest expense incurred on
borrowings under its Warehouse Facility; (iii) capital expenditures; (iv)
personnel and commission costs; and (v) other operating and administrative
expenses. The Company generates cash flow from fees received from its
borrowers for mortgage originations, the sale of mortgage loans into the
secondary market and interest income on loans held for sale.
22
<PAGE>
Since July, 1993, the Company has maintained the Warehouse Facility with a
commercial bank. This credit facility expires on December 31, 1997 and is
generally renewable on an annual basis. This credit facility currently has a
maximum borrowing limit of $12 million. All borrowings under the Warehouse
Facility are secured by the mortgage loans originated by the Company through
this facility. The Warehouse Facility is guaranteed by Steven Latessa and Cary
Wolen. The Company is required to comply with various operating and financial
covenants as defined in the Warehouse Facility including, but not limited to,
maintenance of certain financial ratios and minimum tangible net worth. The
Company has received a waiver from the commercial bank of the minimum tangible
net worth requirement as of December 31, 1996 and a modification for future
periods which allows the Company to include its subordinated debt in the
calculation of tangible net worth. The continued availability of funds
provided under the Warehouse Facility is subject to the Company's compliance
with the modified covenants. The Company expects to renew or replace the
Warehouse Facility when the current term expires.
On October 7, 1996 the Company entered into a Mortgage Loan Warehousing and
Security Agreement with another commercial bank. This credit facility was for
a maximum borrowing limit of $6 million. All borrowings under this credit
facility were secured by the mortgage loans originated by the Company through
this facility. The Mortgage Loan Warehousing and Security Agreement was
guaranteed by Messrs. Latessa and Wolen. The Company was required to comply
with various operating and financial covenants as defined in the Mortgage Loan
Warehousing and Security Agreement including, but not limited to, maintenance
of certain financial ratios and a minimum tangible net worth. As with the
Warehouse Facility, the Company was not in compliance with the net worth
covenant at December 31, 1996. The commercial bank notified the Company on May
16, 1997 that new loans would not be added to this warehouse line of credit
subsequent to June 15, 1997 and that this warehouse line of credit could not
be utilized subsequent to August 15, 1997. The Company has repaid all amounts
under this credit facility. The Company does not believe the unavailability of
this warehouse line of credit has had an impact on the Company's ability to
originate and sell mortgage loans due to the amount of credit available under
the $12 million Warehouse Facility. See "Risk Factors--Dependence on Warehouse
Financing; Prior Default under Warehouse Financing."
The Company's business requires continual access to short-term sources of
funds. While management believes that it has sufficient funds to finance its
operations and that it will be able to refinance or otherwise repay its debt
in the normal course of business, there can be no assurance that the Warehouse
Facility can be extended or that funds generated from operations will be
sufficient to satisfy such obligations. Future financing may involve the
issuance of debt or equity securities. The Company's cash requirements may be
significantly influenced by possible acquisitions or strategic alliances,
although no particular acquisition or strategic alliance has been agreed upon
or become the subject of any letter of intent or agreement in principle.
In the first quarter of 1997, the Company borrowed $778,000, of which
$278,000 was borrowed from SWL, Inc., a corporation controlled by Messrs.
Latessa, Wolen and the Estate of Anthony Saffiotti. The borrowings were in the
form of unsecured subordinated debentures bearing an interest rate of 14% per
year, payable quarterly in arrears, with the final payment due on March 31,
1998. These loans were made for general working capital purposes. Interest
through March 31, 1998 on $400,000 of the loan (which does not include the
$278,000 borrowed from SWL, Inc.) was prepaid in July 1997 through the
issuance of 28,000 shares of Common Stock. The Company intends to use
approximately $810,000 of the proceeds of this Offering to repay these loans,
with accrued interest.
In December 1996, the Company sold an aggregate of 500,000 shares of its
Common Stock at $2.00 per share, of which 450,000 shares were sold to Melville
Ventures & Associates, L.P., an investment partnership, and 50,000 shares were
sold to two additional investors.
The Company expects to increase its production of mortgage loan originations
through, among other things, increased advertising and promotion, expanded
telemarketing capabilities and continued expansion into new
23
<PAGE>
markets. This anticipated increase in mortgage loan originations is expected
to be funded by additional borrowings under the Warehouse Facility and one or
more new borrowing arrangements which the Company believes it will be able to
effect following the Offering. To the extent that additional borrowings under
the Warehouse Facility or other arrangements are not available on satisfactory
terms, the Company will explore alternative means of financing, including
raising capital through additional offerings of securities.
ACCOUNTING PRONOUNCEMENTS--SFAS 128
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share." SFAS 128 is effective
for periods ending after December 15, 1997 and establishes standards for
computing and presenting EPS for entities with publicly held common stock and
common stock equivalents. The statement simplifies the computations of EPS
that were previously found in APB Opinion No. 15 "Earnings Per Share" and
replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if all dilutive
potential common stock outstanding were converted. This statement requires a
reconciliation of the numerator and denominator of the two EPS calculations
and the restatement of all prior period EPS data presented after adoption. The
Company does not anticipate that the impact of SFAS 128 will have a material
effect on its financial statements.
24
<PAGE>
BUSINESS
GENERAL
The Company, through its wholly owned subsidiary, Mortgage Plus, is a full
service retail mortgage banking company providing a broad range of residential
Mortgage Products (including first mortgages, home equity loans and second
mortgages) to (i) prime, or "A" credit borrowers who qualify for conventional
mortgages (including loans which conform to the standards of certain
institutional investors, such as Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")), (ii) borrowers
who are classified as sub-prime, or "B/C" credit, borrowers, and (iii)
borrowers who qualify for mortgages insured by the Federal Housing
Administration ("FHA") or guaranteed by the Veterans Administration ("VA").
The Company is headquartered in Long Island, New York and has a total of 14
retail branches (the "Branch Network") in eight states, including Arkansas
(1), Connecticut (1), Florida (1), Illinois (1), Missouri (3), New Jersey (1),
New York (4) and Pennsylvania (1), and the Commonwealth of Puerto Rico (1).
The Company is also a licensed mortgage banking company in six additional
states and anticipates becoming licensed in 11 additional states during the
fourth quarter of 1997.
From the Company's inception in 1987 until mid-1994, the Company operated as
a licensed mortgage broker, principally in New York. Since obtaining its
mortgage banking license in New York in 1994, the Company has grown
significantly, originating $43.3 million, $58.0 million and $108.2 million of
mortgage loans for the years ended December 31, 1994, 1995 and 1996,
respectively. For the six months ended June 30, 1997, the Company originated
$66.8 million of mortgage loans. This growth has been due primarily to the
Company's expansion into additional geographic markets, the Company's focus,
since mid-1996, on mortgage products for "B/C" credit-rated borrowers and a
substantial increase in loans to FHA/VA borrowers. The Company's "B/C" and
FHA/VA loan volume has grown steadily since 1995, with loans to "B/C"
borrowers accounting for 40.4%, of the Company's total loan origination volume
for the six months ended June 30, 1997, compared to 7.4% for the year ended
December 31, 1995, and loans to FHA/VA borrowers accounting for 25.4% of the
Company's total loan origination volume for the six months ended June 30,
1997, compared to 9.2% for the year ended December 31, 1995.
The Company is an active originator of prime, sub-prime and FHA/VA
residential first mortgages in its markets to individual borrowers on a retail
basis. Loan officers within the Branch Network deal directly with mortgage
customers who are initially identified through telemarketing operations,
advertising, direct mail, promotional materials and educational seminars or
who are referred by local real estate agents, builders, accountants, financial
planners, attorneys and mortgage brokers.
The growth of the Company's mortgage lending to "B/C" credit borrowers
reflects (i) the Company's focus on such customers since mid-1996, (ii) the
Company's prompt and responsive service to its customers, (iii) the demand for
sub-prime mortgage products, (iv) the availability to the Company of capital
for these mortgage banking products in the form of warehouse lines of credit,
and (v) the development, on an industry-wide basis, of a large secondary
market of institutional investors who compete to purchase mortgages from the
Company and other mortgager originators. Most "B/C" credit borrowers have
impaired credit, although "B/C" credit borrowers also include individuals
whose credit histories are not adverse but are seeking an expedited mortgage
process or persons such as the self-employed, who have difficulty verifying
their income. The Company expects that "B/C" credit-rated loans will become an
even greater portion of its total loan originations since such loans, have
generated greater revenue to the Company than "A" credit-rated loans.
Furthermore, the Company believes that the demand for loans by "B/C" credit
borrowers is less sensitive to general levels of interest rates or home sales
and therefore less cyclical than demand for loans by "A" credit-rated
borrowers. Nevertheless, the Company's "B/C" mortgage lending activities are
subject to significant risks, including risks related to the competition from
an increasing number of lenders who are also seeking "B/C" credit borrowers
(see "Risk Factors--Competition"), and the risks associated with lending to
credit impaired borrowers (see "Risk Factors--Risks of Loan Delinquencies and
Defaults").
For the year ended December 31, 1996, the Company had revenues of $6.0
million, compared to $3.0 million for the year ended December 31, 1995. For
the six months ended June 30, 1997, the Company's revenues
25
<PAGE>
were $4.1 million compared to $2.6 million for the six months ended June 30,
1996. The Company's revenues are generated from the fees it charges borrowers
on the origination of mortgage loans, the premiums paid by institutional
investors when they purchase the loans from the Company and interest earned
during the period (generally less than 30 days) the loans are held for sale to
institutional investors. The Company does not sell mortgage loans in
"securitization" transactions, but rather sells loans either on an individual
"whole loan" basis or pooled in groups to financial institutions at fixed
prices, usually on a non-recourse basis for a cash premium. The Company sells
its mortgages to institutional investors on a "servicing-released" basis, i.e.
the purchaser assumes the obligations of servicing, the loan and thereby
avoids the administrative expenses of managing a servicing portfolio, and the
associated foreclosures, delinquencies and resale of residential real estate.
GROWTH STRATEGY
The Company's growth strategy includes the following elements:
. Increasing mortgage originations to sub-prime borrowers through
recruiting experienced loan officers, increasing telemarketing and
direct mail to target audiences;
. Expanding the Company's operations in the Commonwealth of Puerto Rico
through developing strategic alliances with financial institutions and
mortgage bankers and brokers; and
. Expanding the Company's geographic coverage for mortgage originations
generally, through additions to the Branch Network, through developing
strategic alliances with financial institutions, mortgage bankers and
brokers and possible acquisitions.
PRODUCTS AND SERVICES
The Company offers, through its Branch Network currently consisting of 14
offices, a broad array of mortgage products to "A" credit-rated borrowers, the
borrower who can qualify for an FHA/VA mortgage, or individuals seeking home
mortgages who are classified as "B/C" credit-rated, or sub-prime, borrowers.
The Company's mortgage products include fixed rate and adjustable rate loans
for the purchase and/or refinancing of residential properties.
Loan Originations to Borrowers. The Company's mortgage products are designed
to respond to consumer needs and competitive factors as well as the
requirements mandated by prospective purchasers of these loans. These products
include fixed-rate 15-year and 30-year mortgages offered in several formats.
The Company also offers various adjustable rate mortgages ("ARMS"), including
loans with balloon payments and various amortization schedules. Accordingly,
some loans may have relatively short maturity dates (such as five or seven
years) with longer amortization schedules (such as 25 to 30 years). Applicants
have a choice of electing to "lock-in" their interest rates as of the
application date or thereafter or to accept a prevailing interest rate at
closing. A prevailing interest rate is subject to change in accordance with
market interest rate fluctuations and is set by the Company three to five days
prior to closing.
The Company's mortgage products are tailored (with varying down payment
requirements, loan-to-value ratios ("LTV") and interest rates) based upon the
borrower's particular credit classification and the borrower's willingness or
ability to meet varying income documentation standards. These document
standards include the full income documentation program pursuant to which a
prospective borrower's income is evaluated based on tax returns, W-2 forms and
pay stubs; the limited income documentation program pursuant to which a
prospective borrower's income is evaluated based on bank statements and profit
and loss statements; the stated income program pursuant to which a prospective
borrower's employment, rather than income, is verified; or the no ratio loan
program pursuant to which a prospective borrower's credit history and
collateral values, rather than income or employment, are verified. These loan
variations give the Company the flexibility to loan funds to a wider range of
borrowers.
Mortgages Insured or Guaranteed by Government Agencies. The Company has been
designated by the U.S. Department of Housing and Urban Development ("HUD") as
a direct endorser of loans insured by the
26
<PAGE>
FHA and an automatic endorser of loans partially guaranteed by the VA, and can
offer FHA or VA mortgages to qualified borrowers. As a direct or automatic
endorser, the Company can originate loans insured or guaranteed by those
agencies without prior approval. Generally, FHA and VA mortgages are available
to borrowers with low/middle incomes and impaired credit classifications for
properties within a specific price range. FHA mortgages must be underwritten
within specific governmental guidelines, which include income verification,
borrower asset, borrower credit worthiness, property value and property
condition. Because these guidelines require that borrowers seeking FHA-insured
mortgages submit more extensive documentation and the Company perform a more
detailed underwriting of the mortgage than prime credit mortgages, the
Company's origination fees for these mortgages are generally higher than a
comparable sized mortgage from a prime credit-rated borrower. FHA/VA loans are
available on terms of fifteen or thirty years.
The Company also offers Title I home improvement loans, representing loans
to homeowners, a portion of which is guaranteed by the FHA, for the purpose of
certain pre-qualified home improvements.
FNMA/FHLMC Mortgages. The Company offers mortgage products that conform to
the underwriting guidelines of FNMA and FHLMC. Although the Company does not
currently sell these mortgages directly to FNMA and FHLMC, the Company
attempts to conform substantially all of the conventional loans which it
originates to their guidelines because they are readily marketable to
institutional investors.
Sales of Mortgage Loans
The Company follows a strategy of selling for cash, generally within 30 days
following the date of a mortgage origination, all of the loans it originates
(and related servicing rights) to institutional investors, usually on a non-
recourse basis. This strategy allows the Company to (i) generate cash revenues
(which includes, in most cases, a premium over the face amount of the loans to
be sold), (ii) reduce the Company's exposure to interest rate fluctuations,
and (iii) substantially reduce any potential expense or loss in the event the
loan goes into default after the first month of its origination. The non-
recourse nature of the Company's loan sales does not, however, entirely
eliminate the Company's default risk since the Company may be required to
repurchase a loan from the investor or indemnify an investor if the borrower
fails to makes its first mortgage payment or if the loan goes into default and
the Company is found to be negligent in uncovering fraud in connection with
the loan origination process.
SPECIFIC CLASSIFICATIONS OF VARIOUS MORTGAGE LOANS
Mortgage loans are classified by the Company according to a number of
factors related to the borrower and to the underlying property to be financed.
These factors are based on government, industry and institutional standards
and experience, and are widely employed by mortgage lenders as well as
mortgage investors in the secondary trading market. Government agencies
classify mortgage loans in order to assess those which qualify for certain
government-sponsored programs and enable purchasers of mortgages to resell
them in the form of asset-backed securities. These classifications help create
and maintain a substantial liquid secondary market for these financial assets.
This liquidity in turn ensures that lenders and borrowers will be able to
access the mortgage market.
The Company's underwriters follow guidelines established by various
government agencies and institutional investors. Loan applications are
classified according to certain characteristics such as collateral, loan size,
various debt ratios, LTV, credit history and term of the loan. Loan applicants
with less than favorable credit ratings may be offered loans with higher
interest rates, lower LTV ratios, and higher origination fees than applicants
with more favorable credit ratings. These higher fees reflect the somewhat
higher risks associated with these loans.
The Company has established classifications with respect to the credit
profiles of loans to sub-prime borrowers based on certain of the applicant's
characteristics. Each applicant for a sub-prime loan is placed into one of
three letter credit risk categories, credit grade "A" through "C." Ratings are
based upon a number of factors, including the applicant's credit history, the
value of the property and the applicant's employment status,
27
<PAGE>
and are subject to the discretion of the Company's underwriting staff. Terms of
loans made by the Company, as well as the maximum LTV and debt service-to-
income coverage (calculated by dividing fixed monthly debt payments by gross
monthly income), vary depending upon the classification of the borrower.
Borrowers with lower credit ratings generally pay higher interest rates and
loan origination fees.
The general criteria currently used by the Company's underwriting staff in
classifying "B/C" credit-rated loan applicants are as set forth below.
UNDERWRITING CRITERIA FOR SUB-PRIME LENDING
<TABLE>
<CAPTION>
"A" RISK "B" RISK "C" RISK
-------- -------- --------
<S> <C> <C> <C>
General Repayment....... Has repaid Has generally repaid May have experienced
installment or installment or credit significant past
revolving debt problems credit problems
Existing mortgage loans. Current at Current at May not be current at
application time application time and application time and
and a maximum of a maximum of three a maximum of four 30-
two 30-day late 30-day late payments day late payments and
payments in the in the last 12 months one 60-day late
last 12 months payment in the last
12 months
Non-mortgage credit..... Minor derogatory Some prior defaults Significant prior
items allowed with allowed but major delinquencies may
a letter of credit or installment have occurred, but
explanation; no debt paid as agreed major credit or
open collection may offset some installment debt paid
accounts or charge- delinquency; open as agreed may offset
offs, judgments or charge-offs, some delinquency
liens judgments or liens obligations in the
are permitted on a future
case-by-case basis
Bankruptcy filings...... Discharged more Discharged more than Discharged more than
than four years two years prior to one year prior to
prior to closing closing and credit closing and credit
and credit reestablished reestablished
reestablished
Debt service-to-income Generally 45% or Generally 45% or less Generally 50% or less
ratio.................. less
Maximum loan-to-value
ratio:
Owner-occupied.......... Generally 80% (or Generally 80% (or Generally 75% (or 80%
90%*) for a one-to 85%*) for a one-to for first liens*) for
two-family two-family residence a one-to two-family
residence; 75% for residence; 65% for a
a condominium condominium; 60% for
a three-to four-
family residence
Non-owner-occupied...... Generally 70% for a Generally 70% for a Generally 60% for a
one-to four-family one-to two-family one-to two-family
residence residence residence
</TABLE>
- --------
* On an exceptional basis
The Company uses the foregoing credit grading criteria as guidelines only. On
a case-by-case basis, the Company may determine that the prospective borrower
warrants an exception. Exceptions may generally be allowed if the application
reflects certain compensating factors such as loan-to-value ratio, debt ratio,
length of employment and other factors. For example, a higher debt ratio may be
acceptable with a lower loan-to-value ratio. Accordingly, the Company may
classify in a more favorable credit grade category certain mortgage loans that,
in the absence of such compensating factors, would satisfy only the criteria of
a less favorable risk category.
28
<PAGE>
MORTGAGE ORIGINATION
The following table shows mortgage loan origination volume by type of loan
for each of the three years ended December 31, 1994, 1995 and 1996 and six
months ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
CONVENTIONAL LOANS:
Volume................ $43,293,573 $48,366,929 $ 48,102,840 $23,797,696 $22,879,138
Percentage of total
volume............... 100.0% 83.4% 44.5% 46.0% 34.2%
FHA/VA LOANS:
Volume................ -- $ 5,323,313 $ 24,810,101 $11,658,600 $16,966,540
Percentage of total
volume............... -- 9.2% 22.9% 22.5% 25.4%
SUB-PRIME LOANS:
Volume................ -- $ 4,284,375 $ 35,290,148 $16,308,520 $26,958,160
Percentage of total
volume............... -- 7.4% 32.6% 31.5% 40.4%
TOTAL LOANS:
Volume................ $43,293,573 $57,974,617 $108,203,089 $51,764,816 $66,803,838
Number of Loans....... 329 503 1,073 572 713
Average Loan Size..... $ 131,591 $ 115,257 $ 100,841 $ 90,497 $ 93,694
</TABLE>
GEOGRAPHIC EXPANSION
The Company has expanded its Branch Network from 7 branches in four states
in December 1995, to 14 retail branch offices in 8 states and the Commonwealth
of Puerto Rico as of the date hereof. The Company is currently licensed as a
mortgage banking company and doing business in six additional states with
applications to become licensed pending in an additional 11 states. The
Company plans to continue the expansion of its Branch Network as opportunities
present themselves. Additional branch offices will allow the Company to focus
on developing contacts with individual borrowers, local brokers and referral
sources, such as accountants, attorneys and financial planners, with a view
toward expanding its direct consumer loan business. In addition, the Company's
expansion strategy involves: (i) targeting cities where the population density
and economic indicators are favorable for lending; and (ii) testing the target
market prior to the establishment of a branch office, where local regulations
permit, via newspaper, radio and direct mail advertising.
New locations are carefully selected. Most are in close proximity to offices
of prominent local realtors. All of the offices are operated under leases
which have terms of less than 5 years and are managed by personnel either
trained at the Company's headquarters in Syosset, New York or who possess
prior industry experience. The amount of space under these leases is based on
projected short to intermediate term needs, rather than committing Company
resources for an excessively long term. New locations are carefully selected
to provide either for contiguous in-state or related state expansion, while
others are intended to accommodate new state licenses and/or new markets.
The Company carefully evaluates several criteria as new offices are
considered, including income trends, employment data, housing affordability,
median sales prices of homes, single-family permits, local contacts,
management availability, and other housing-related characteristics.
Notwithstanding the Company's expansion of its Branch Network, substantially
all of the mortgage loans originated by the Company for the six month period
ended June 30, 1997 were to borrowers in New York, New Jersey and Missouri and
the Company's origination business is likely to contain a high concentration
in such areas for the foreseeable future.
29
<PAGE>
Puerto Rico. In November 1996, the Company opened a sales office in Puerto
Rico, initially to originate loans to "A" credit-rated borrowers, and
commenced sub-prime credit-rated mortgage originations in June 1997. It is
anticipated that the majority of mortgage originations in Puerto Rico in the
future will consist of loans to sub-prime credit-rated borrowers. These sub-
prime credit-rated mortgage originations are essentially similar to the
mortgage originations in the continental United States although the secondary
market for sub-prime mortgages is not as developed as the market for these
mortgages in the continental United States. The Company believes that Puerto
Rico offers an opportunity for the Company to increase its sub-prime mortgage
originations because Puerto Rico has high levels of home ownership and lack of
competition from other lenders for sub-prime credit mortgages. Through
September 30, 1997, the Puerto Rico office originated mortgage loans totaling
$3,265,450.
Expansion Through Strategic Alliances and Acquisitions. To date, the Company
has expanded its loan origination capabilities through internal growth.
However, in the future, it may also grow through creating strategic alliances
with other retail mortgage lenders and through acquisitions. The Company
believes that acquisitions will help the Company accelerate its pace of
growth, and will enable the Company to realize significant economies of scale
in the mortgage business. The Company will seek out candidates for alliances
and/or acquisitions which operate in geographic and product areas that
complement its existing business. As of the date of this Offering, the Company
has not entered into any commitments for any strategic alliance or
acquisition.
MARKETING AND SALES
The principal target of the Company's marketing programs are residential
home owners and home buyers. The Company uses a combination of direct
marketing and third party contacts through real estate professionals, such as
real estate brokers, attorneys, accountants, and financial planners to develop
new business.
The Company's marketing programs, at both the corporate and the branch
office level, include market-sensitive advertising in key newspapers and other
publications, public relations, promotional materials customized for consumers
and real estate professionals, collateral materials supporting particular
product promotions, educational seminars, trade shows, telemarketing, and
sponsoring or promoting other special events. The Company also conducts
seminars in conjunction with other real estate professionals, targeting
potential home buyers. All of the Company's loan representatives, consisting
of approximately 30 commissioned salespersons, support these activities with
extensive personal contact.
Telemarketing. In January, 1997, the Company formed its Retail/Telemarketing
Division to solicit loans directly from prospective borrowers. The Company
believes that the Retail/Telemarketing Division represents a significant
opportunity to expand origination volume by marketing directly to borrowers.
The division currently employs 20 telemarketers, who utilize telephone lists
from various sources.
Customer Service. A key element of the Company's marketing strategy, as well
as its operational philosophy, is to provide outstanding service to its
customers. The Company emphasizes promptness and professionalism in all its
dealings with customers. The Company believes that its ability to quickly
process loan applications provides an advantage over many banks, finance
companies, other mortgage banking firms and mortgage brokers. The Company
believes that its response to a potential mortgage customer, from the
Company's receipt of a loan application to its issuance of a final lending
commitment, is among the quickest in the industry. This capability, together
with the breadth of the Company's product offerings, has enabled the Company
to distinguish itself in a competitive market and thereby achieve growth in
revenues and profits.
OPERATIONS
Loan Approval Process. All loan applications are, depending on the type of
loan sought, forwarded to either Syosset, New York or St. Charles, Missouri
(for "A" credit-rated) or to Fairfield, New Jersey (for "B/C" credit-rated)
for processing, underwriting and closing. This centralization allows the
Company to maintain efficiency and uniformity in processing, as well as
quality control over all such loans.
The Company's review of a loan application and the related underwriting
process leading to loan approval generally includes matters such as
verification of an applicant's income and bank deposits, review of a credit
30
<PAGE>
report from a credit reporting agency, receipt of a preliminary title report,
receipt of a real estate appraisal, verification of the accuracy of the
applicant's information, and compliance with the Company's underwriting
criteria and those of either FHA, VA and/or institutional investors. After
underwriting approval of an "A" credit-rated loan, the Company issues a
written loan commitment to the applicant which sets forth, among other things,
the loan amount, interest rate, fees, funding conditions and approval
expiration dates. After underwriting approval of a sub-prime credit-rated
loan, the Company issues a pre-approval letter subject to completion of
underwriting conditions.
Loan Funding and Borrowing Arrangements. The Company's mortgage loan
originations are funded by borrowings under the Warehouse Facility in the
amount of $12 million, provided by a commercial bank. The Warehouse Facility
expires on December 31, 1997, is renewable annually and is collateralized by
specific mortgage loans held for sale. The Warehouse Facility requires the
Company to repay the amount it borrows to fund a loan origination generally
within 60 days after the loan is closed or when the Company receives payment
from the sale of the funded loan, whichever occurs first. Until such sale
closes, the Warehouse Facility provides that the funded loan is pledged to
secure the outstanding borrowings.
The amount outstanding under the Warehouse Facility at December 31, 1996 was
$7,657,362 and at June 30, 1997 was $7,276,774. The interest rate on funds
borrowed pursuant to the Warehouse Facility depends on the type of mortgage
financed, and is based on the bank's prime rate minus 25 basis points for "A"
credit-rated mortgage loans, and prime rate plus 25 basis points for sub-prime
credit-rated loans. At June 30, 1997, interest ranged from 8.25% to 8.75%. The
Warehouse Facility provides that the commercial bank fund 98% of the principal
amount of "A" credit-rated loans and 95% of the principal amount of "B/C"
credit-rated loans. The Warehouse Facility is personally guaranteed by Messrs.
Latessa and Wolen and contains certain covenants requiring, among other
things, maintenance of certain financial ratios and minimum tangible net worth
as of December 31, 1996. In June, 1997, the Company received a waiver from the
lender of the minimum tangible net worth requirement which was $900,000 at the
time of default and modifications thereof. (See "Risk Factors--Dependence on
Warehouse Financing; Prior Default under Warehouse Facility."). See "Use of
Proceeds." The Company expects to be able to renew or replace the Warehouse
Facility when its current terms expire.
From October 1996 through June 1997, the Company had an additional $6
million warehouse line of credit with a commercial bank which was
collateralized by specific mortgage loans held for sale. The amount
outstanding under this warehouse line of credit at December 31, 1996 was
$1,936,333 and at June 30, 1997 was $1,967,889. Interest was variable based on
prime and was 8.5% at December 31, 1996. This warehouse line of credit was
personally guaranteed by Messrs. Latessa and Wolen and contained certain
covenants requiring, among other things, maintenance of certain financial
ratios and minimum tangible net worth. The Company was not in compliance with
minimum tangible net worth requirement at December 31, 1996. The bank notified
the Company that it could not add new loans to the warehouse line of credit
subsequent to June 15, 1997 and that the warehouse line of credit would be
terminated subsequent to August 15, 1997. The Company subsequently paid off
all amounts outstanding under this line of credit. The management of the
Company does not believe that the unavailability of this warehouse line of
credit has had an impact on the Company's ability to originate or sell
mortgage loans due to the amount available under the Warehouse Facility.
The Company continues to investigate and pursue alternative and
supplementary methods of funding its operations through the public and private
capital markets. There can be no assurances, however, that the Company will be
successful in identifying these alternatives, or in consummating any such
funding transactions with such alternative sources.
Sale of Loans. The Company markets and sells loans it originates to various
financial institutions, including, but not limited to, insurance companies,
banks, savings and loans, finance companies and finance companies, in the
secondary market. "A" credit-rated loans are sold individually or in small
groups of less than 10 loans. Sub-prime, or "B/C" credit-rated loans are sold
in pools of $1 to $2 million face amount of mortgages. Both "A" and "B/C"
credit-rated loans are sold in privately-negotiated transactions. The Company
is not required to deliver any preset amount of loans to any of its investors,
and therefore does not have any fixed
31
<PAGE>
dollar commitments to any investor. However, the Company has arrangements with
certain of its institutional investors that require the investor to purchase
all loans which meet that investors guidelines for originating "A" credit-
rated loans.
The Company sells its loans to institutional investors with customary
representations and warranties covering loans sold. The Company, may be
required to repurchase loans pursuant to its representations and warranties.
The Company also may be obligated to repurchase a loan if a default occurs
within the first month following the date it was originated or if the loan
documentation is alleged to contain fraudulent misrepresentations made by the
borrower. To date, the Company has never been required to repurchase a loan.
In addition, in certain circumstances, if a loan is repaid within the first 12
months of the sale of the loan, the Company may be responsible for a partial
repayment of premiums. To date, the amount of premiums that had to be repaid
in any year has been less than 1% of the Company's total revenue.
Revenue Generated Upon Sale of the Loan. The Company's sale of mortgage
loans, together with servicing rights, to institutional investors generates
revenues based on the difference between the value of the loan to the
investors (which includes a servicing release premium, which is typically
between 1% and 2 1/2% of the mortgage's principal amount) and the Company's
cost basis for such loan, which is generally the principal amount of the loan
funded by the Company. The Company attempts to maximize its revenue on loan
sales by closely monitoring institutional purchasers' requirements and
focusing on originating the types of mortgage loans for which institutional
purchasers tend to pay higher prices.
The Company does not combine and sell its mortgage originations to investors
in private placements or in public offerings as asset-backed securities.
Quality Control. A significant element of the Company's quality control
process is that the Company's underwriting personnel function independently of
the Company's loan officers. The Company believes that the implementation and
enforcement of its comprehensive underwriting guidelines and its quality
control program are a significant element in the Company's ability to
originate quality loans that are attractive to the secondary market. The
Company's quality control process examines branch offices and approximately
10% of all loans that were originated in order to enhance the ongoing
evaluation of the loan processing function. In conducting branch examinations,
the quality control process reviews the loan applications for compliance with
federal and state and any institutional lending standards, which may involve
reverifying employment and bank information and obtaining separate credit
reports and property appraisals. The quality control reports are submitted
directly to an executive officer of the Company.
The Company has a training program for its sales and loan production
personnel through in-house classes which cover all aspects of making a loan.
Supervisory and other key personnel at the various branch offices are often
brought to the Syosset headquarters for extensive training; they in turn
conduct appropriate training at the local office level.
COMPETITION
The mortgage banking industry is highly competitive across the United States
and within the states where the Company conducts business. The Company's
competitors include financial institutions, such as other mortgage bankers,
state and national commercial banks, savings and loan associations, credit
unions, insurance companies, and other finance companies. Most of these
competitors are substantially larger and have considerably greater financial,
technical, and marketing resources than the Company. In addition, many
financial service organizations have formed networks for loan origination.
Competition in the mortgage banking industry can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, and interest rates. The Company
believes that it is able to compete on the basis of providing prompt and
responsive service and offering competitive loan programs to borrowers. The
Company's underwriters have the flexibility to deviate from the
32
<PAGE>
Company's underwriting guidelines when an exception or upgrade is warranted by
a particular loan applicant's situation, such as evidence of a strong mortgage
repayment history relative to a weaker overall consumer-credit repayment
history.
Since there are significant costs involved in establishing a network of
retail branches, such as the Company's Branch Network, there are potential
barriers to market entry for any company seeking to provide a full range of
mortgage banking services. No single lender or group of lenders has, on a
national level, achieved a dominant or even a significant share of the market
with respect to loan originations.
INFORMATION SYSTEMS
The Company continues to design and integrate into its operations the
ability to access critical information for management on a timely basis. The
Company uses various software programs designed specifically for the mortgage
lending industry. Each branch office provides headquarters and senior
management with productivity and other key data. The information system
provides weekly and monthly detailed information on loans in process, fees,
commissions, closings, detailed monthly financial statements and all other
aspects of running and managing the business. The Company anticipates using
proceeds of the Offering for upgrades and improvements of the information
system, including the capability to obtain loan and other information from
branches on a daily basis. The cost of implementing these upgrades and
improvements is estimated to be $300,000 including both software, hardware and
management information systems personnel for all locations.
PROPERTY
The Company maintains 14 leased locations in eight states and the
Commonwealth of Puerto Rico. All of the Company's leases are for terms of 5
years or less in order to minimize capital requirements and retain operating
flexibility. The table below provides details as to each location.
FACILITY LEASE DATA
<TABLE>
<CAPTION>
CURRENT
SIZE IN MONTHLY COST
CITY/STATE LOCATION SQUARE FEET LEASE COST SQ. FT. LEASE TERM OFFICE TYPE
- ---------- ---------------------- ----------- ---------- ------- ---------- -------------------
ARKANSAS (1)
<S> <C> <C> <C> <C> <C> <C>
Little Rock, AK........ 100 N. Rodney Parham 1100 $1,500 $16.36 2/1/97-1/31/2000 Branch
<CAPTION>
CONNECTICUT (1)
<S> <C> <C> <C> <C> <C> <C>
Torrington, CT......... 760 East Main Street 800 675 10.13 7/1/97-6/30/98 Branch
<CAPTION>
FLORIDA (1)
<S> <C> <C> <C> <C> <C> <C>
Ft. Meyers, FL 10051 McGregor 800 630 9.45 10/1/97-9/30/98 Branch
<CAPTION>
ILLINOIS (1)
<S> <C> <C> <C> <C> <C> <C>
Chattuck, IL........... 38 Harbor Drive 400 350 10.50 1/1/97-12-30/98 Branch
<CAPTION>
MISSOURI (3)
<S> <C> <C> <C> <C> <C> <C>
St. Charles, MO........ 2001 Golfway Dr 2,000 1,172 7.03 4/1/97-2/28/2001 Branch
Des Peres, MO.......... 1181 Manchester Rd 2,000 2,214 13.28 6/1/96-5/31/2001 Branch
Hannibal, MO........... 1239 N. Main Street 700 650 11.25 4/97-3/30/98 Branch
<CAPTION>
NEW JERSEY (1)
<S> <C> <C> <C> <C> <C> <C>
Sub-prime Lending
Fairfield, NJ.......... 100 Passaic 4,000 5,821 17.46 12/1/95-11/30/2000 Headquarters/Branch
<CAPTION>
NEW YORK STATE (4)
<S> <C> <C> <C> <C> <C> <C>
Corporate
Syosset, NY............ 6851 Jericho Tpke 6,623 8,500 15.40 6/1/96-6/30/99 Headquarters/Branch
Hauppauge, NY.......... 517 Rt. 111 1,270 1,482 14.00 3/1/96-2/28/98 Branch
Centereach, NY......... 2367 Middle Country Rd 1,000 1,300 15.60 10/1/96-11/30/99 Branch
Staten Island, NY...... 2025 Richmond 900 1,439 19.19 12/22/92-12/21/97 Branch
<CAPTION>
PENNSYLVANIA (1)
<S> <C> <C> <C> <C> <C> <C>
Scranton, PA........... 538 Spruce St. 700 700 12.00 10/1/97-9/30/98 Branch
<CAPTION>
PUERTO RICO (1)
<S> <C> <C> <C> <C> <C> <C>
Hato Rey, PR........... Royal Bank Center 750 1,200 19.20 9/1/97-8/30/98 Branch
</TABLE>
33
<PAGE>
GOVERNMENT REGULATIONS
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local
government authorities. These rules and regulations impose obligations and
restrictions on the Company's loan originations, credit activities and secured
transactions. In addition, these rules limit the interest rates, finance
charges and other fees the Company may assess, mandate extensive disclosure to
the Company's customers, prohibit discrimination and impose multiple
qualification and licensing obligations on the Company. The Company's loan
origination activities are subject to the laws and regulations in each of the
states in which those activities are conducted and are also subject to various
federal laws, including the Federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, the Homeownership and Equity Protection Act of 1994,
the Federal Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act of 1970, the Real Estate Settlement
Procedures Act of 1974 and Regulation X promulgated thereunder, the Fair
Housing Act, the Home Mortgage Disclosure Act and Regulation C promulgated
thereunder and the Federal Debt Collection Practices Act, as well as other
Federal and State statutes and regulations affecting the Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to revocation of its mortgage banking license in
the states where the Company is licensed and loss of approved status for
participation in government sponsored programs (such as the FHA and VA loans),
demands for indemnification or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcement actions by federal and state governmental agencies. See
"Business--Government Regulation."
Although the Company believes that it has systems and procedures to insure
compliance with these requirements and believes that it is currently in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations or that more restrictive laws, rules and
regulations will not be adopted in the future that could make compliance
substantially more difficult or expensive. In the event that the Company is
unable to comply with such laws or regulations, its business, prospects,
financial condition and results of operations may be materially adversely
affected.
Members of Congress, government officials and political candidates have from
time to time suggested the elimination of the mortgage interest deduction for
federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans,
the interest on which may be currently tax deductible, are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, some of the competitive advantage of such loans when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for mortgage loans
of the kind offered by the Company.
EMPLOYEES
As of June 30, 1997 the Company had 103 employees, substantially all of whom
were full-time employees. Of these, approximately 45 were employed at the
Company's Syosset, New York headquarters, and 58 were employed at the
Company's branch offices. Approximately 30 of the Company's employees are
commission-based loan officers. None of the Company's employees are
represented by a union. The Company considers its relations with its employees
to be satisfactory.
34
<PAGE>
LEGAL PROCEEDINGS
The Company is a defendant in a legal proceeding brought by two former
employees, alleging breach of contract in connection with establishing and
operating a branch office. The plaintiffs sought a preliminary injunction and
damages in the amount of $1,257,000 plus costs and disbursements. The
preliminary injunction has been denied, but the remaining claims are still
pending. The Company believes that the action is without merit and the Company
is vigorously defending this action.
Apart from the proceeding described above, in the ordinary course of its
business, the Company is from time to time subject to various legal
proceedings. The Company does not believe that any of these legal proceedings
arising in the ordinary course, individually or in the aggregate, will have a
material adverse effect on the business, financial condition or results of
operations of the Company.
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Company's directors
and persons nominated to become directors and executive officers and the
positions they hold with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven M. Latessa 42 Chief Executive Officer, President and
Chairman of the Board of Directors
Cary Wolen 35 Chief Operating Officer, Secretary,
Chief Financial Officer, Treasurer and
Director
Daniel Intemann [ ] Nominee for Director
</TABLE>
STEVEN M. LATESSA co-founded the Company in 1987 and is the Company's Chief
Executive Officer, President and Chairman of the Board of Directors.
CARY WOLEN co-founded the Company in 1987 and is the Company's Chief
Operating Officer, Chief Financial Officer and Director.
DANIEL INTEMANN has been nominated to become a director of the Company upon
the consummation of the Offering. From March 1996 through the present, Mr.
Intemann was Vice President--New York Regional Sales Manager for Chase
Manhattan Bank. From July 1995 through March 1996, Mr. Intemann was Vice
President--Sales Production of Greenpoint Bank. From April 1993 through July
1995, Mr. Intemann was Vice President for Barclay's American Mortgage. From
September 1987 through April 1993, Mr. Intemann was Vice President--Lender
Express at Prudential Home Mortgage Company, Inc. Mr. Intemann received a B.A.
in Economics from the State University of New York at Oneonta in 1981.
BOARD OF DIRECTORS
The Board of Directors currently consists of Messrs. Latessa & Wolen. Upon
completion of the Offering, the Company expects to appoint Daniel Intemann and
one additional independent director, who has not yet been identified, as
directors to its Board of Directors.
The Company's Board of Directors is divided into three classes with each
class consisting of, as nearly as may be possible, one-third of the total
number of directors constituting the entire Board. The Company's Board of
Directors presently consists of two members with one member in each of Class II
and Class III. The Class III director is Mr. Latessa, whose term will expire at
the 2000 annual meeting of stockholders and the Class II director is Mr. Wolen,
whose term will expire at the 1999 annual meeting of stockholders. It is
anticipated that, upon completion of this Offering, Daniel Intemann and the
additional independent director will be appointed as Class I directors and
their terms will expire at the 1998 annual meeting of stockholders. After the
initial term, each Class is elected for a term of three years. At each annual
meeting, directors are elected to succeed those in the Class whose term expires
at that annual meeting, with such newly elected directors to hold office until
the third succeeding annual meeting and the election and qualification of their
respective successors.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will establish an Audit Committee prior to the
commencement of this Offering. The Audit Committee will make annual
recommendations to the Board of Directors concerning the appointment of
36
<PAGE>
the independent public accountants of the Company and will review the results
and scope of the audit and other services provided by the Company's
independent auditors. A majority of the members of the Audit Committee will be
independent directors. Upon consummation of the Offering, the Board of
Directors expects to appoint Daniel Intemann and the additional independent
director to the Audit Committee.
EXECUTIVE COMPENSATION
The following table shows all the cash and other compensation paid or to be
paid by the Company, as well as certain other compensation paid or accrued,
during the fiscal years indicated, to the Chief Executive Officer ("CEO") and
the other most highly compensated executive officers whose compensation
exceeded $100,000 in the year ended December 31, 1996.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OTHER
--------------------------- ---- ---------- --------- -----
<S> <C> <C> <C> <C>
Steven M. Latessa........................ 1996 $130,000 $100,000
Chief Executive Officer, President 1995 104,920 18,900
1994 66,380 0
Cary Wolen............................... 1996 $132,080 $ 5,000
Chief Operating Officer, Chief Financial 1995 113,660 15,240
Officer, Secretary, Treasurer 1994 72,840 0
</TABLE>
KEY EMPLOYEE
JON P. BLASI has been Chief Operating Officer of the Company's "B/C" Lending
Division since March 1996 and from November 1995 through March 1996, Mr. Blasi
was its Executive Vice President. From January 1991 through November 1995, Mr.
Blasi was Director of Northeast Operations for New Jersey Mortgage and
Investment Corporation. From 1987 through 1991, Mr. Blasi was President of
Jordan Construction & Development, a construction company, and Jordan
Interests, a finance company, both located in New Jersey. From 1983 through
1987, Mr. Blasi was President of Credit Company of America, Inc., a real
estate investment and management firm ("CCA"). In January 1988, in connection
with the sale of promissory notes by CCA, Mr. Blasi entered a plea of nolo
contendere to a violation of the Texas State Securities Act. In March 1996,
after making full restitution to the note purchasers in the amount of $30,000,
the charges were dismissed.
KEY MAN LIFE INSURANCE
The Company is the beneficiary of $1,000,000 key man term life insurance
policies on each of the lives of Steven Latessa, Cary Wolen and Jon P. Blasi.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company (the "Certificate") provides
that a director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the director's duty of loyalty to the Company or
its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of law; (iii) for
liability under Section 174 of the Delaware General Corporation Law (relating
to certain unlawful dividends, stock repurchases or stock redemptions); or
(iv) for any transaction from which the director derived any improper personal
benefit. The effect of this provision in the Certificate is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in certain
limited situations. This provision does not limit or eliminate the rights of
the Company or any stockholder to seek non-monetary relief such as an
injunction or
37
<PAGE>
rescission in the event of a breach of a director's duty of care. These
provisions will not alter the liability of directors under federal securities
laws.
The Company's By-Laws provide that the Company shall indemnify each director
and such of the Company's officers, employees and agents as the Board of
Directors shall determine from time to time to the fullest extent provided by
the laws of the State of Delaware.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
service as members of the Board. It is expected that directors who are not
employees of the Company will receive, out of the 1995 Plan, options to
purchase shares of Common Stock immediately following each annual
meeting of stockholders so long as they continue to serve as directors
following such meeting, and reimbursement of expenses incurred in connection
with attendance of Board and/or committee meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Steven Latessa, Cary
Wolen and Jon P. Blasi. Each of the employment agreements expires on September
30, 2000, unless sooner terminated for death, physical or mental incapacity or
cause (which is defined as the uncured refusal to perform, or habitual neglect
of, the performance of the officer's duties, willful misconduct, dishonesty or
breach of trust which causes the Company to suffer any loss, fine, civil
penalty, judgment, claim, damage or expense, a material breach of the
employment agreement, or a felony conviction), or terminated by either party
with thirty (30) days' written notice, and are automatically renewed for an
additional three year term, unless cancelled at least one year prior to
expiration of the existing term. Each employment agreement provides that all
of such executive's business time be devoted to the Company. In addition, each
of the employment agreements also contain: (i) non-competition provisions that
preclude each employee from competing with the Company for a period of two
years from the date of the termination of his employment of the Company, (ii)
non-disclosure and confidentiality provisions that specify that all
confidential information developed or made known during the term of employment
shall be exclusive property of the Company, and (iii) non-interference
provisions whereby, for a period of two years after his termination of
employment with the Company, the executive shall not interfere with the
Company's relationship with its customers or employees.
Each of the employment agreements provides that the executive will receive
an initial base salary of $150,000 per annum, subject to increases of 4% per
year, commencing in 1998. Each of the executives will also be eligible for a
bonus of up to 5% of all pre-tax earnings of the Company.
Each of the employment agreements provides that if the executive officer is
terminated for reasons other than for cause, the Company will continue to pay
his total base salary for the remainder of the term of the employment
agreement or one year, whichever is greater.
1995 PLAN
The 1995 Plan, which was adopted on September 1, 1995, is an equity
incentive plan pursuant to which shares of common stock may be issued to
employees in the form of stock options, appreciation rights, performance
shares, or other forms of equity-based awards. The 1995 Plan was adopted to
provide long-term incentives to employees and for them to participate in the
long-term growth and success of the business. 350,000 shares of Common Stock
have been reserved for issuance upon exercise of options and other awards
which may be granted under the 1995 Plan. As of the date hereof, options to
purchase an aggregate of 17,500 shares have been granted under the 1995 Plan
at an exercise price of $2.00 per share. There have been no options or other
awards granted to any of the Company's executive officers under the 1995 Plan.
401(K) PLAN
The Company does not have a pension plan. The Company has a 401(k) plan
which it put in place in 1991. The plan provides for the Company to make
annual discretionary contributions.
38
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Certain of the Company's offices are sub-leased from Mattituck, Inc., a
company which is owned by Messrs. Latessa, Wolen and the Estate of Anthony
Saffioti. Total lease expense paid to Mattituck for the years ended
December 31, 1996 and 1995 was approximately $134,000 and $61,000,
respectively. Rent expense paid to Mattituck, Inc. was equal to the aggregate
amount of lease payments between Mattituck, Inc. and the respective lessors.
During the period October 1, 1995 through September 30, 1996, the Company
processed and closed approximately $24.7 million of residential mortgage loans
by borrowers whose loan applications were submitted to the Company by a joint
venture, which was 50% owned by the Company. The Company received revenues from
those loans of approximately $92,000 and $31,000 for the years ended December
31, 1996 and 1995, respectively. The Company ended this activity on September
30, 1996.
In December 1996, the Company sold an aggregate of 500,000 shares of its
Common Stock at $2.00 per share, of which 450,000 shares were sold to Melville
Ventures & Associates, L.P., an investment partnership, and 50,000 shares were
sold to an additional two investors.
In March 1997, SWL, Inc., a company owned by Messrs. Latessa, Wolen and
Anthony Saffioti, loaned the Company $278,000, at an interest rate of 14% per
year, due on March 31, 1998.
Prior to the commencement of this Offering, pursuant to the terms of a
contribution agreement (the "Contribution Agreement"), the existing Mortgage
Plus stockholders (the "Existing Stockholders") will contribute all of the
stock of Mortgage Plus that they beneficially own or otherwise control to the
Company in exchange for an aggregate of 4,028,000 shares of Common Stock, which
will constitute all of the stock of the Company outstanding prior to this
Offering. As a result of the Exchange, Mortgage Plus will be a wholly owned
subsidiary of the Company.
In February 1997, Messrs. Latessa, Wolen and Saffioti granted Jon Blasi
options to purchase an aggregate of 189,207 shares of Common Stock of the
Company, one-third of which are exercisable at $2.00 per share commencing on
February 15, 1998, one-third of which are exercisable at $2.50 per share
commencing February 15, 1999, and the remaining one-third of which are
exercisable at $3.00 per share commencing on February 15, 2000. The options are
exercisable until February 15, 2000 so long as Mr. Blasi remains employed by
the Company.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of the date of the Prospectus, and as adjusted to reflect the sale of
1,100,000 shares of Common Stock offered hereby, of (i) each person known by
the Company to own beneficially five percent or more of the outstanding Common
Stock immediately prior to the Offering; (ii) each of the Company's directors
and nominee directors; (iii) each of the executive officers of the Company;
and (iv) all directors and executive officers of the Company as a group. The
address of each person listed below is 6851 Jericho Turnpike, Syosset, New
York 11791, unless otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED
BENEFICIALLY OWNED AFTER THE OFFERING
PRIOR TO OFFERING (1) (1)
-------------------- --------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES CLASS SHARES CLASS
- ------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Steven M. Latessa.................... 1,171,695 29.09% 1,171,695 22.85%
Cary Wolen........................... 1,171,695 29.09% 1,171,695 22.85%
Estate of Anthony Saffiotti.......... 810,110 20.11% 810,110 15.80%
Jon and Lydya Blasi (2).............. 346,500 8.60% 346,500 6.76%
Melville Ventures & Associates, L.P.
(3).................................. 450,000 11.17% 450,000 8.78%
Daniel Intemann...................... -- -- -- --
All Officers and Directors as a
Group................................ 2,343,390 58.18% 2,843,390 44.70%
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the Rule 13d-3 of
the Securities Exchange Act of 1934 and generally includes voting and
investment power with respect to securities, subject to community property
laws, where applicable. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the
date of this Prospectus upon exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by
any other person) and that are exercisable within 60 days from the date of
this Prospectus have been exercised. Unless otherwise noted, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Does not include 189,207 shares of Common Stock issuable upon exercise of
options granted to Mr. Blasi by Messrs. Latessa, Wolen and the Estate of
Anthony Saffiotti. See "Certain Relationships and Related Party
Transactions."
(3) Address is 201 North Service Road, Melville, New York 11747.
40
<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of the Company's securities is qualified
in its entirety by reference to the Company's Certificate of Incorporation and
its By-Laws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, of
which 4,028,000 shares are issued and outstanding as of the date of this
Prospectus. Each outstanding share of Common Stock is entitled to one vote,
either in person or by proxy, on all matters that may be voted upon by the
owners thereof at meetings of the stockholders.
Subject to the rights of the preferred stock, the holders of Common Stock
(i) have equal ratable rights to dividends from funds legally available
therefore, when, and if declared by the Board of Directors of the Company,
after payment of dividends to holders of preferred stock, if any; (ii) are
entitled to share ratably in all of the assets of the Company available for
distribution to holders of Common Stock upon liquidation, dissolution or
winding up of the affairs of the Company after payment to holders of preferred
stock; (iii) do not have preemptive, subscription or conversion rights, or
redemption or sinking fund provisions applicable thereto; and (iv) are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of stockholders. This means that holders
of more than 50% of the shares voting for the election of directors can elect
all of the directors if they choose to do so.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to 1,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"), in one
or more series, to designate the number of shares constituting any series, and
to fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, voting rights, rights and terms of redemption, redemption
price or prices and liquidation preferences of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders.
The issuance of Preferred Stock with voting and conversion rights may
adversely effect the voting power of the holders of Common Stock, including
the loss of voting control. The Company has no present plans to issue any
shares of Preferred Stock. See "Risk Factors--Effects of Certain Anti-Takeover
Provisions."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW; ANTI-TAKEOVER PROVISIONS
The Company is governed by Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, this statute restricts a corporation
from entering into certain business combinations with an interested
stockholder (defined as any person or entity that is the beneficial owner of
at least 15% of a corporation's voting stock) or its affiliates for a period
of three years after the date of the transaction in which the person became an
interested stockholder unless (i) the transaction is approved by the Board of
Directors of the corporation prior to such business combination, (ii) the
interested stockholder acquires 85% of the corporation's voting stock in the
same transaction in which it exceeds 15%, or (iii) the business combination is
approved by the Board of Directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. The Company's Certificate
of Incorporation excludes Steven Latessa and Cary Wolen from the definition of
"interested stockholder."
41
<PAGE>
The Company's Certificate of Incorporation and By-Laws include certain
provisions which may have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider
in its best interests, including attempts that might result in a premium over
the market for the shares held by the stockholders and could make it more
difficult to remove incumbent management. The Company's Certificate of
Incorporation or By-Laws provide (i) that the Board of Directors is divided
into three classes of directors serving staggered three year terms resulting
in approximately one-third of the Company's Board of Directors being elected
each year; (ii) that directors may be removed from office only for cause and
only by the affirmative vote of the holders of 66 2/3% of the then outstanding
shares of capital stock entitled to vote generally in an election of
directors; (iii) that, except as otherwise required by law, vacancies in the
Board of Directors may be filled only by the remaining directors; (iv) that
commencing with the consummation of the Offering, any action required or
permitted to be taken by the stockholders of the Company may be effected only
at an annual or special meeting of stockholders and not by written consent of
the stockholders; (v) that any meeting of stockholders may be called only upon
the affirmative vote of at least a majority of the members of the Board of
Directors; and (vi) for an advance notice procedure for the nomination, other
than by or at the discretion of the Board of Directors or a committee of the
Board of Directors, the candidates for election as directors (as well as for
other stockholder proposals) to be considered at annual meetings of the
stockholders. In general, notice of an intent to nominate a director or raise
business at such meetings must be received by the Company not less than sixty
(60) nor more than ninety (90) days before the meeting and must contain
certain information concerning the person to be nominated or the matters to be
brought before the meeting and concerning stockholders submitting the
proposal. The affirmative vote of at least a majority of the directors or the
holders of at least 66 2/3% of the voting power of the Company's stock is
required to alter, amend, repeal or adopt any provision inconsistent with the
provisions described in this paragraph.
The Delaware statute, the Certificate of Incorporation and the By-Laws may
discourage certain types of transactions involving an actual or potential
change in control of the Company.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 1,100,000 shares of Common Stock sold in the Offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933 ("Securities Act") unless acquired by an "affiliate" of the
Company within the meaning of the Securities Act. Upon completion of the
Offering, the existing stockholders of the Company will own 4,028,000 shares
of Common Stock. All of these shares are deemed "restricted securities" as
defined by Rule 144 under the Securities Act of 1933, as amended ("Securities
Act"). Upon expiration of the contractual restrictions between the Company,
its officers and directors and the Representative, referred to below,
beginning 13 months after the date of this Prospectus, 4,028,000 shares will
be available for immediate sale in the public market, subject to compliance
with Rule 144.
In general, Rule 144 as currently in effect provides that a person who is an
affiliate of the Company (or persons whose sales are aggregated with an
affiliate), or who has beneficially owned shares for at least one year which
were issued and sold in reliance upon certain exemptions from registration
under the Securities Act ("Restricted Shares"), is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
one (1%) percent of the then outstanding shares of Common Stock or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner-
of-sale provisions, notice requirements and the availability of current public
information about the Company. However, a person who has beneficially owned
Restricted Shares for at least two years and who is not an affiliate of the
Company and who has not been an affiliate of the Company for at least three
months immediately preceding the sale may sell such shares under Rule 144
without regard to volume limitations described above.
In addition, subject to certain limitations on the aggregate offering price
of a transaction and other conditions, Rule 701 of the Securities Act ("Rule
701") may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisors prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. The Commission has indicated
that Rule 701 will apply to typical stock options granted by an issuer before
it becomes subject to the reporting requirements of the Exchange Act, along
with the shares acquired upon exercise of such options (including exercises
after the date of this Prospectus). The Company will become subject to the
Exchange Act reporting requirements upon commencement of this Offering.
Securities issued in reliance on Rule 701 are restricted securities and,
subject to the contractual restrictions described below, beginning 90 days
after the date of this Prospectus, may be sold by persons other than
affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.
All of the Company's current officers, directors and securityholders have
agreed with the Representative not to, directly or indirectly, offer, issue,
sell, grant an option for the sale of or otherwise dispose of any securities
of the Company for a period of 13 months from the date of this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock,
and no predictions can be made as to the effect, if any, that market sales of
Common Stock or the availability of Common Stock for sale will have on the
market price prevailing for the Common Stock from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and could impair the Company's
ability in the future to raise additional capital.
43
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation ("National") is acting as representative (the
"Representative"), have agreed, subject to the terms and conditions of the
Underwriting Agreement between the Company and the Representative (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of shares of Common Stock set forth opposite their name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
National Securities Corporation.................................
-------
Total...........................................................
=======
</TABLE>
The Underwriters are committed to purchase all of the Common Stock offered
hereby, if any of the Common Stock is purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
The Company has been advised by the Representative that it proposes
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page hereof and to certain dealers (who
may be Underwriters) at a price that represents a concession not in excess of
$ per share under the initial public offering price. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to other Underwriters or to certain other
dealers. After the initial public offering, the public offering price and such
concessions may be changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make. The Company has
agreed to pay the Representative a non-accountable expense allowance of 3% of
the gross proceeds from the sale of the Common Stock offered hereby, of which
$20,000 has been paid as of the date of this Prospectus.
The Company has granted to the Underwriters an over-allotment option,
exercisable for 45 days from the date of this Prospectus, to purchase up to
165,000 additional shares of Common Stock, at the initial public offering
price set forth on the cover page hereof, less underwriting discounts and
commissions (the "Over-Allotment Option"). To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of shares of Common
Stock as the percentage it was obligated to purchase pursuant to the
Underwriting Agreement. The Underwriters may exercise such option to purchase
additional shares solely for the purpose of covering over-allotments, if any,
incurred in connection with the sale of the shares offered hereby.
In connection with this Offering, the Company has agreed to sell to the
Representative and its designees, for nominal consideration, warrants to
purchase from the Company up to 110,000 shares of Common Stock (the
"Representative's Warrants"). The Representative's Warrants are exercisable at
a price of $ per share (120% of the initial public offering price per
share) for a period of four years commencing on the first anniversary of the
date hereof. The Representative's Warrants may not be sold, transferred,
assigned or hypothecated for a period of one year from the date of this
Prospectus, except to officers of the Representative. The Representative's
Warrants provide for adjustments in the number of shares of Common Stock
issuable upon the exercise thereof and in the exercise price of the
Representative's Warrants as a result of certain events, including
subdivisions and combinations of the shares of Common Stock. The
Representative's Warrants grant to the holders thereof certain registration
rights for the Common Stock issuable upon exercise of the Representative's
Warrants.
At any time during the exercise term of the Representative's Warrants, the
Representative (or the then holders of a majority of the Warrant Securities
(as hereinafter defined) shall have the right to require the Company to
prepare and file one post-effective amendment to the registration statement of
which this Prospectus
44
<PAGE>
is a part (the "Registration Statement") or one new registration statement
covering all or any portion of the Representative's Warrants and/or the shares
of Common Stock underlying the Representative's Warrants. In addition, if at
any time during the seven years after the effective date of the Registration
Statement, the Company shall prepare and file one or more post-effective
amendments to the Registration Statement or new registration statements under
the Securities Act of 1933 with respect to a public offering of equity or debt
securities of the Company, the Company will include in any such post-effective
amendment or new registration statement, such information as may be required
to permit a public offering of the Representative's Warrants or the shares of
Common Stock underlying the Representative's Warrants (collectively, the
"Warrant Securities") as may be requested. In the event of such a proposed
registration, the Company shall furnish the then holders of outstanding
Warrant Securities with not less than 30 days written notice prior to the
proposed date of the filing of such post-effective amendment or new
registration statement. Such notice shall continue to be given by the Company
to such holders of outstanding Warrant Securities until such time as all of
the warrant securities have been registered. The Company shall bear all fees
and expenses incurred by the Company in connection with the preparation and
filing of such post-effective amendment or new registration statement except
that the holders of the Warrant Securities shall pay any underwriting
discounts or commission and expenses of their own legal counsel.
The Company has agreed to pay the Representative a finder's fee in the event
that the Representative originates a financing, merger, acquisition, joint
venture or other transaction to which the Company is a party.
All of the officers, directors and security holders of the Company as of the
date of this Prospectus have agreed not to, directly or indirectly, offer,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of any equity securities of the Company for a period of 13 months
following the effective date of the Registration Statement relating to this
Offering without the prior written consent of the Representative. An
appropriate legend shall be marked on the reverse of the certificate
representing all such securities. The Company has agreed not to, without the
prior written consent of the Representative, offer, issue, sell, contract to
sell, grant any option for the sale of or otherwise dispose of any equity
securities for a period of 13 months following the effective date of the
Registration Statement, except for options under the 1995 Plan and shares of
common stock in connection with mergers and acquisitions (subject to certain
restrictions.)
The Company has agreed that, for a period of five years from the date of
this Prospectus, if so requested by the Representative, to nominate and use
its best efforts to elect a designee (reasonably acceptable to the Company) of
the Representative as a director of the Company, or, at the Representative's
option, as a non-voting advisor to the Company's Board of Directors. Such
person shall be entitled to attend all such meetings and to receive all
notices and other correspondence and communications sent by the Company to
members of its Board of Directors. The Company's officers, directors and
shareholders have agreed to vote their shares of Common Stock in favor of such
designee. The Representative has not yet exercised its right to designate such
a person. The Company has agreed to reimburse the designee of the
Representative for such designee's out-of-pocket expenses incurred in
connection with such designee's attendance of meetings of the Board of
Directors.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Company's
Common Stock. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
persons may bid or purchase Common Stock of the Company for the purpose of
stabilizing its market price. The Underwriters also may create a short
position of the account of the Underwriters by selling more of the Common
Stock in connection with the Offering then they are committed to purchase from
the Company, and in such case may purchase Common Stock of the Company in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position by exercising the Over-Allotment Option. In addition, the
Representative, on behalf of the Underwriters, may impose "penalty bids" under
contractual
45
<PAGE>
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to the shares of Common
Stock that are distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may stabilize or maintain the price of the Common
Stock of the Company at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and if, if they are undertaken, they may be discontinued at any
time.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiations between the Company and the Representative. Among the factors
which may be considered in determining the initial public offering price are
the history of, and the prospects for, the Company's business and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, the prospects for earnings of the Company, the present
state of the Company's development, the general condition of the securities
market at the time of the Offering and the market prices and earnings of
similar securities of comparable companies at the time of the Offering and
prevailing market and economic conditions.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New
York. Camhy Karlinsky & Stein LLP, New York, New York has acted as legal
counsel to the Underwriters in connection with this Offering.
EXPERTS
The financial statements of Mortgage Plus Equity and Loan Holdings Corp., as
of and for the year ended December 31, 1996, included elsewhere in the
Prospectus, have been audited by Richard A. Eisner & Company, LLP, independent
auditors, as set forth in their report thereon appearing herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of the Company for the year ended December 31, 1995
included elsewhere in the Prospectus, have been audited by Levy, Cohen & Gold,
LLP independent auditors, as stated in their report thereon appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The above mentioned financial statements audited by Levy, Cohen & Gold, LLP
contain no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. In August
1997, the Company determined to change auditors to Richard A. Eisner &
Company, LLP. There were no disagreements at any time between the Company and
Levy, Cohen & Gold, LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures.
46
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New York
10048. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission in Washington, D.C. 20549.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company; the address of such site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such interim reports as it deems
appropriate or as may be required by law.
The Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of the
Registration Statement (excluding exhibits) by contacting the Company at 6851
Jericho Turnpike, Suite 246, Syosset, New York 11791, telephone (516) 364-
2700, attention: Chief Financial Officer.
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Reports......................................... F-2
Consolidated Financial Statements:
Balance Sheet at December 31, 1996 and at June 30, 1997............. F-4
Statements of Operations for the years ending December 31, 1995 and
1996 and for the six months ended June 30, 1996 (unaudited) and
June 30, 1997 (unaudited).......................................... F-5
Statements of Stockholders' Equity/Capital Deficiency for the years
ended December 31, 1995 and 1996 and for the six months ended June
30, 1997 (unaudited)............................................... F-6
Statements of Cash Flows for the years ended December 31, 1995 and
1996 and for the six months ended June 30, 1996 (unaudited) and
June 30, 1997 (unaudited).......................................... F-7
Notes to Financial Statements......................................... F-8-F-17
</TABLE>
F-1
<PAGE>
To the Stockholders
Mortgage Plus Equity and Loan Holdings Corp.
Upon completion of the transaction described in Note 1, we will be in a
position to issue the following opinion
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
November 12, 1997
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Mortgage Plus Equity and Loan Holdings Corp.
We have audited the accompanying consolidated balance sheet of Mortgage Plus
Equity and Loan Holdings Corp. and subsidiary as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity/capital
deficiency and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the consolidated financial position of Mortgage Plus
Equity and Loan Holdings Corp. and subsidiary as of December 31, 1996 and the
results of its consolidated operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Florham Park, New Jersey
September 3, 1997
With respect to Note 1
, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Mortgage Plus Equity & Loan Corporation
We have audited the statements of operations, retained earnings, and cash
flows of Mortgage Plus Equity & Loan Corporation, a New York Corporation, for
the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements, referred to above, present fairly,
in all material respects, the results of operations and cash flows of Mortgage
Plus Equity and Loan Corporation for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Levy, Cohen & Gold, LLP
Great Neck, New York
March 31, 1996
F-3
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $ 328,897 $ 342,881
Mortgage loans held for sale............. 10,535,994 12,049,043
Other receivables and other assets....... 261,404 645,058
Deferred offering costs.................. -- 41,500
Property and equipment--net.............. 321,230 422,906
----------- -----------
$11,447,525 $13,501,388
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse line of credit................. $ 9,814,645 $ 9,244,663
Loans closed to be disbursed............. 490,227 2,171,559
Notes payable............................ 162,500 118,384
Subordinated debt........................ -- 778,000
Obligation under capital lease........... -- 235,210
Accounts payable and accrued expenses.... 692,759 526,109
----------- -----------
Total liabilities.................... 11,160,131 13,073,925
----------- -----------
Commitments and contingencies (Notes 8
and 13)
Stockholders' equity:
Preferred stock--$.01 par value;
authorized 1,000,000 shares; issued
and outstanding none
Common stock--$.01 par value;
authorized 20,000,000 shares; issued
and outstanding 4,000,000 40,000 40,000
Additional paid-in capital............. 905,903 905,903
Accumulated deficit.................... (658,509) (518,440)
----------- -----------
Total stockholders' equity........... 287,394 427,463
----------- -----------
$11,447,525 $13,501,388
=========== ===========
</TABLE>
See notes to financial statements
F-4
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- ----------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Mortgage origination, net. $2,821,414 $5,307,353 $2,230,994 $3,637,834
Interest earned........... 161,508 663,322 355,095 443,889
---------- ---------- ---------- ----------
Total revenues.......... 2,982,922 5,970,675 2,586,089 4,081,723
---------- ---------- ---------- ----------
EXPENSES:
Commissions, wages and
benefits................. 1,667,553 3,715,169 1,485,815 2,308,288
Selling and administra-
tive..................... 1,696,158 1,770,894 773,436 1,194,961
Interest expense.......... 220,524 707,952 359,421 438,405
---------- ---------- ---------- ----------
Total expenses.......... 3,584,235 6,194,015 2,618,672 3,941,654
---------- ---------- ---------- ----------
NET (LOSS) INCOME........... $ (601,313) $ (223,340) $ (32,583) $ 140,069
========== ========== ========== ==========
Net (loss) income per share. $ (0.16) $ (0.06) $ (0.01) $ 0.03
---------- ---------- ---------- ----------
Weighted average number of
shares outstanding.......... 3,853,319 3,853,319 3,853,319 4,027,300
---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements
F-5
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
NUMBER OF COMMON PAID-IN (ACCUMULATED
SHARES STOCK CAPITAL DEFICIT) TOTAL
--------- ------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1,
1995..................... 3,500,000 $35,000 -- $ 236,979 $ 271,979
S corporation
distribution.............. -- -- -- (27,277) (27,277)
Net loss.................. -- -- -- (601,313) (601,313)
--------- ------- -------- --------- ---------
BALANCE AS OF DECEMBER 31,
1995...................... 3,500,000 35,000 -- (391,611) (356,611)
Shares contributed by a
principal stockholder
to an officer............ $ 41,000 41,000
Issuance of common stock.. 500,000 5,000 864,903 -- 869,903
S corporation
distribution.............. -- -- -- (43,558) (43,558)
Net loss.................. -- -- -- (223,340) (223,340)
--------- ------- -------- --------- ---------
BALANCE AS OF DECEMBER 31,
1996...................... 4,000,000 40,000 905,903 (658,509) 287,394
Net income................ -- -- -- 140,069 140,069
--------- ------- -------- --------- ---------
BALANCE AS OF JUNE 30, 4,000,000 $40,000 $905,903 $(518,440) $ 427,463
1997 (UNAUDITED).......... ========= ======= ======== ========= =========
</TABLE>
See notes to financial statements
F-6
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ----------------------
1995 1996 1996 1997
----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)....... $ (601,313) $ (223,340) $ (32,583) $ 140,069
Adjustments to reconcile
net income (loss) to
net cash used in oper-
ating activities:
Shares contributed by a
principal stockholder
to an officer......... 41,000 41,000
Depreciation........... 17,400 39,996 21,307 33,000
Changes in:
Mortgage loans held
for sale............. (4,957,613) (4,781,181) (259,092) (1,513,049)
Other receivables and
other assets......... (32,036) (219,176) 6,111 (383,654)
Accounts payable and
accrued expenses..... 552,344 (85) 56,771 (270,819)
----------- ----------- --------- -----------
Net cash used in op-
erating activities.. (5,021,218) (5,142,786) (166,486) (1,994,453)
----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property
and equipment.......... (58,659) (253,890) (155,968) (134,676)
----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from (re-
payments of) warehouse
line of credit......... 5,023,695 4,062,670 -- (569,982)
Loans closed to be dis-
bursed................. -- 490,227 -- 1,681,332
Bank overdraft included
in accounts payable and
accrued expenses....... -- -- 60,339 104,169
Proceeds from subordi-
nated debt............. -- -- -- 778,000
Proceeds from notes pay-
able................... 170,000 30,000 30,000
Repayment of notes pay-
able................... (12,500) (25,000) (12,500) (44,116)
Proceeds from sale
leaseback of equipment. -- -- -- 275,000
Repayments of obligation
under capital lease.... -- -- -- (39,790)
S corporation distribu-
tion................... (27,277) (43,558) (15,750) --
Issuance of common
stock, net............. -- 869,903 -- --
Deferred offering costs. -- -- -- (41,500)
----------- ----------- --------- -----------
Net cash provided by
financing activi-
ties................ 5,153,918 5,384,242 62,089 2,143,113
----------- ----------- --------- -----------
NET INCREASE (DECREASE)
IN CASH.................. 74,041 (12,434) (260,365) 13,984
Cash and cash equiva-
lents at the beginning
of year................ 267,290 341,331 341,331 328,897
----------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS
AT THE END OF YEAR....... $ 341,331 $ 328,897 80,966 342,881
=========== =========== ========= ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMA-
TION:
Cash paid during the
year for:
Interest paid.......... $ 259,561 $ 649,706 $ 332,412 $ 403,615
=========== =========== ========= ===========
</TABLE>
See notes to financial statements
F-7
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
On November 1997, pursuant to a reorganization, Mortgage Plus Equity and
Loan Holdings Corp. (the "Company"), a newly formed Delaware corporation,
acquired all of the outstanding common stock of Mortgage Plus Equity and Loan
Corporation ("Mortgage Plus") by exchanging one of its shares of common stock
for each two shares of Mortgage Plus. The accompanying financial statements,
including the number of shares of common stock and per share data, have been
adjusted to give retroactive effect to the reorganization.
Mortgage Plus, organized in 1987, is primarily engaged in the business of
originating and selling first mortgages collateralized by single family
residences. From its inception through 1993, the Company operated as a
mortgage broker. The Company, in 1994, became a mortgage banker and in 1995,
the Company commenced originating and selling sub-prime residential first
mortgages. Mortgage Plus is an approved nonsupervised mortgagee for the U.S.
Department of Housing and Urban Development, and originates substantially all
of its mortgage loans in New York, New Jersey and Missouri.
Cash equivalents:
The Company considers cash equivalents to consist of short term investments
with an initial maturity of three months or less. Management mitigates market
risk by investing in or through large financial institutions.
Revenue recognition:
The Company sells whole mortgage loans and pools of mortgage loans on a
servicing released basis. Mortgage origination fees, net of direct loan
origination costs, are deferred and included in mortgage loans held for sale,
until the loans are sold. Revenue recognition from the sale of mortgage loans
occurs when all incidence of ownership passes to a permanent investor.
Mortgage loans held for sale:
Mortgage loans held for sale are collateralized residential real estate
loans with a weighted average interest rate of approximately 10.6% as of June
30, 1997 and are carried at the lower of cost or market on an aggregate basis.
Included in mortgage loans held for sale are deferred origination fees of
approximately $184,000 and $198,000 as of December 31, 1996 and June 30, 1997,
respectively, and deferred origination costs of $232,000 and $475,000 as of
December 31, 1996 and June 30, 1997, respectively.
Property and equipment:
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
over the lesser of the useful life of the asset or the remaining lease period.
Expenditures for maintenance and repairs are charged to expense; major
replacements and betterments are capitalized.
F-8
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If an asset is identified as impaired, the Company estimates future cash
flows (undiscounted and without interest) which are expected to result from
the use of the asset and its eventual disposition. If the sum of the future
cash flows is less than the carrying amount of the asset, the Company
recognizes an impairment loss. No such losses have been required to be
recognized.
Income taxes:
Through December 30, 1996, the Company had elected for both federal and
state purposes to be treated as an S corporation and incurred only minimum
taxes at the state level. Consequently, the net earnings of the Company were
taxed directly to the stockholders rather than the Company. Effective as of
December 31, 1996, the Company terminated its S corporation status and will be
taxed as a C corporation. The Company uses the cash basis of accounting for
income tax purposes.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities. (See Note 9).
Advertising expenses:
The Company expenses advertising costs which consist primarily of
promotional items and print media. Total advertising expense for the six
months ended June 30, 1997 and 1996 and the year ended December 31, 1996 and
1995 was $58,000, $127,000, $133,000 and $62,000, respectively.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123") allows companies to either expense the
estimated fair value of employee stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro
forma effects on net income (loss) had the fair value of the options been
expensed. The Company has elected to apply APB 25 in accounting for its
employee stock options incentive plans.
Per share data:
Earnings (loss) per share was computed based on the weighted average number
of shares of common stock outstanding during the period adjusted to give
retroactive effect to the reorganization on November 1997. Since in 1996,
certain common stock equivalents were issued at less than the anticipated
offering price of the proposed initial public offering, all such common stock
equivalents were considered outstanding for all periods presented in
accordance with certain rules of the Securities and Exchange Commission.
F-9
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company anticipates repaying the notes payable and subordinated debt
with proceeds from the proposed initial public offering. Had the subordinated
debt not been issued and had the Company issued common stock at the currently
contemplated initial public offering price (net of offering costs) instead,
net income per share for the six months ended June 30, 1997 would have been
$0.04. This per share computation assumes an additional weighted average
number of shares outstanding for the six months ended June 30, 1997 of
118,032.
Interim financial statements:
The accompanying interim financial statements as of June 30, 1997 and for
the six months ended June 30, 1996 and 1997 are unaudited. However, in the
opinion of management, all adjustments (consisting solely of normal recurring
adjustments) necessary to be in conformity with generally accepted accounting
principles have been made.
The results of operations and cash flows for the six months ended June 30,
1997 are not necessarily indicative of the results that may be expected for
the full year ending December 31, 1997.
Recently issued accounting standards:
In February 1997, the Financial Standards Accounting Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which is effective for periods ending after December 15, 1997. Management
believes that "basic earnings per share" as defined, for each of the periods
included in these financial statements would be substantially the same as the
earnings per share amounts included on the consolidated statements of
operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
ASSET
LIVES DECEMBER 31, 1996 JUNE 30, 1997
---------- ----------------- -------------
<S> <C> <C> <C>
Equipment and furniture............. 5-10 Years $352,928 $184,518
Equipment subject to capital lease.. 5 Years 300,389
Leasehold improvements.............. 5 Years 54,268 56,965
-------- --------
407,196 541,872
Accumulated depreciation and
amortization....................... (85,966) (118,966)
-------- --------
$321,230 $422,906
======== ========
</TABLE>
Included in depreciation expense for the six months ended June 30, 1997 is
depreciation expense on equipment under capital lease of $20,200.
3. WAREHOUSE LINES OF CREDIT
The Company has a $12 million warehouse line of credit expiring December 31,
1997, with a commercial bank which is collateralized by specific mortgage
loans held for sale. The amount outstanding under this warehouse line of
credit as of December 31, 1996 and June 30, 1997 was $7,657,362 and
$7,276,774,
F-10
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
3. WAREHOUSE LINES OF CREDIT (CONTINUED)
respectively. Interest is variable based on the prime rate and type of
collateral and ranged from 8 1/4% to 8 3/4% as of June 30, 1997. This
warehouse line of credit is personally guaranteed by the Company's principal
shareholders and contains certain covenants requiring, among other things,
maintenance of certain financial ratios and minimum tangible net worth. As of
December 31, 1996, the Company has received a waiver from the lender of
certain defaults of restrictive covenants, and modifications thereof, in the
credit agreement.
The Company had an additional $6 million warehouse line of credit with a
commercial bank which was collateralized by specific mortgage loans held for
sale. The amount outstanding under this warehouse line of credit at December
31, 1996 and June 30, 1997 was $1,936,333 and $1,967,889, respectively.
Interest was variable based on prime and was 8 3/4% as of June 30, 1997. This
warehouse line of credit was personally guaranteed by the Company's principal
shareholders and contains certain covenants requiring, among other things,
maintenance of certain financial ratios and minimum tangible net worth. The
Company was not in compliance with certain of these covenants as of December
31, 1996. The bank has notified the Company that new loans may not be added to
the warehouse line of credit subsequent to June 15, 1997 and that the
warehouse line of credit may not be utilized subsequent to October 15, 1997.
The management of the Company does not believe that the unavailability of this
warehouse line of credit will have an impact on the Company's ability to
originate or sell mortgage loans due to the amount available under the first
line.
4. DEFERRED OFFERING COSTS:
The Company has incurred $41,500 in incremental costs in connection with a
proposed initial public offering of common stock. Upon consummation of the
offering, the deferred costs will be charged against the gross proceeds of the
offering or, if not consummated, they will be charged to expense. The Company
will incur substantial additional offering costs.
5. NOTES PAYABLE
Notes payable as of December 31, 1996 and June 30, 1997 consists of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Note payable in monthly installments of $2,083 plus
interest at the prime rate plus 2% per annum (10 1/2% as
of June 30, 1997), due March 1999. Guaranteed by the
Company's principal shareholders........................ $ 62,500 $ 47,916
Note payable in monthly installments of $4,104 plus
interest at the prime rate plus 2% per annum (10 1/2% as 100,000 70,468
of June 30, 1997) due October 1998...................... -------- --------
$162,500 $118,384
======== ========
</TABLE>
Principal payments on the notes payable is as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30,
---------------
<S> <C>
1998............................................................ $95,464
1999............................................................ 22,920
--------
$118,384
========
</TABLE>
F-11
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
6. SUBORDINATED DEBT
In March 1997, the Company borrowed $778,000 ($278,000 from an affiliate of
certain of the Company's principal stockholders). These borrowings, due March
1998, are not collateralized and are subordinated to all other borrowings of
the Company. Interest on these notes is 14% per annum. In July 1997, the
Company issued 28,000 shares of its common stock to a note holder in
satisfaction of the interest due at maturity on $400,000 of this debt.
7. OBLIGATION UNDER CAPITAL LEASE
As of June 30, 1997, the future minimum lease payments under a capital lease
expiring December 1999 are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30,
--------------
<S> <C>
1998........................................................... $108,024
1999........................................................... 108,024
2000........................................................... 54,012
--------
270,060
Less amount representing interest............................... 34,850
--------
$235,210
========
</TABLE>
This obligation is guaranteed by the Company's principal stockholders.
8. RELATED PARTY TRANSACTIONS
The Company subleases certain of its offices from an affiliate. Total
related party lease expense paid approximated $71,000, $59,000, $134,000 and
$61,000 for the six months ended June 30, 1997 and 1996 the year ended
December 31, 1996 and 1995, respectively. The Company pays rent to the
affiliate based on the amount paid by the affiliate to the ultimate lessor.
During 1996 and 1995, the Company processed and closed approximately $18.3
million and $6.4 million, respectively, of residential mortgage loans for an
affiliate for which it received fees of approximately $92,000 and $31,000,
respectively. The Company ended this activity on September 30, 1996.
F-12
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
9. INCOME TAXES
The components of deferred tax assets and liabilities as of December 31,
1996 and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Deferred tax asset:
Accrual to cash adjustment............................. $ 99,000
Net operating loss carryforward........................ -- $ 203,000
-------- ---------
Total deferred tax asset.............................. 99,000 203,000
Deferred tax liability--accrual to cash adjustment:.... -- (174,000)
-------- ---------
Net deferred tax asset................................. 99,000 29,000
Valuation allowance.................................... (99,000) (29,000)
-------- ---------
$ -- $ --
======== =========
</TABLE>
The significant components of the provision for income taxes for the six
months ended June 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred:
Accrual to cash adjustment................................... $ 273,000
Net operating loss carryforward.............................. (203,000)
Decrease in valuation allowance.............................. (70,000)
---------
$ --
=========
</TABLE>
The difference between the statutory federal income tax rate on the
Company's net income and the Company's effective tax rate for the six months
ended June 30, 1997 is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Statutory federal income tax rate.................................. 34.0%
Decrease in valuation allowance.................................... (40.5)
Other.............................................................. 6.5
-----
Effective income tax rate.......................................... --
=====
</TABLE>
10. STOCKHOLDER'S EQUITY/CAPITAL DEFICIENCY
Common stock:
During 1996, a principal stockholder of the Company transferred 346,500
shares to an officer of the Company. The estimated fair value of $41,000 was
charged to operations and credited to additional paid in capital.
On December 31, 1996, the Company issued 500,000 shares of common stock in a
private placement at a price of $2.00 per share. Net proceeds of this private
placement were approximately $869,000 which were used for Company operations.
The Company has reserved 350,000 shares of its common stock for issuance
upon exercise of incentive stock options.
F-13
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
10. STOCKHOLDER'S EQUITY/CAPITAL DEFICIENCY (CONTINUED)
Incentive stock option plan:
On December 31, 1995, the Board of Directors approved the Equity Incentive
Plan (the "Plan") and authorized the issuance of up to 350,000 shares of
common stock of the Company upon the exercise of incentive stock options
("options") which may be granted for a maximum of ten years pursuant to the
Plan. The Plan provides primarily for the granting of options to certain key
employees and exercise prices at not less than the estimated fair value at
date of grant.
On November 1, 1996, 92,500 options were granted. The options were issued at
exercise prices equal to estimated fair value of the Company's common stock on
the grant date of $2.00 per common share. These options vest ratably on the
anniversary of the date of grant through November 1, 2000 (23,125 shares on
each of November 1, 1997, 1998, 1999 and 2000). The option's maximum term is
ten years. No options were canceled, forfeited or exercised during 1996 or
during the six months ended June 30, 1997, however, in October 1997, options
on 75,000 shares were canceled.
On February 15, 1997, the principal stockholders of the Company granted an
officer options to acquire up to 189,207 shares of the Company's common stock
owned by the stockholders. The following table summarizes information about
these options which expire in February 2000:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE VESTING DATE
---------------- --------------- -----------------
<S> <C> <C>
63,069 $2.00 February 15, 1998
63,069 2.50 February 15, 1999
63,069 3.00 February 15, 2000
</TABLE>
The fair value of each option granted has been estimated on the date of
grant using the Black-Scholes options pricing model with the following
assumptions; no dividend yield, expected volatility of 0%, risk-free interest
rate of 6% for options granted in 1996 and 7% for options granted in 1997 and
expected lives of approximately four years for the 1996 options and three
years for the 1997 options. The fair value of options granted during 1996 and
1997 were $0.43 and $0.00 per share, respectively.
The Company applies APB 25 in accounting for its stock option incentive plan
and, accordingly, recognizes compensation expense for the difference between
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS No. 123 on 1996 pro forma net
loss and loss per share is not necessarily representative of the effect on
reported net income in future years due to, among other things (1) the vesting
period of the stock options and (2) the fair value of additional stock options
in future years. Had compensation cost for the Company's stock option plan
been determined based upon the fair value at the grant date for awards under
the plan consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss and net loss per share in 1996 would have been
approximately $(263,000) and $(0.07), respectively and for 1997 the effect
would be immaterial.
The following table summarizes information about stock options outstanding
as of June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ------------------------------------
EXERCISE NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
PRICE AS OF JUNE 30, 1997 REMAINING CONTRACTUAL LIFE EXERCISE PRICE AS OF JUNE 30, 1997 EXERCISE PRICE
- ----------- ------------------- -------------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
$2.00-$3.00 281,707 4.84 Years $2.34 0 0
</TABLE>
F-14
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
11. BRANCH EXPENSE
During the six months ended June 30, 1997 and 1996 and the year ended
December 31, 1996 and 1995, the Company incurred expenses of approximately
$61,000, $371,000, $556,000 and $487,000, respectively, in conjunction with
the expansion of the Company's lending operation through the opening of new
offices. These expenses consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------- ----------------
1995 1996 1996 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Commissions, wages and benefits.............. $401,000 $331,000 $221,000 $30,000
Selling and administrative expenses.......... 86,000 225,000 150,000 31,000
</TABLE>
12. RETIREMENT PLAN
The Company has a 401(k) savings plan (the "Plan") which enables employees
to make contributions on a pre-tax salary basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The Plan provides
for a discretionary company contribution to be determined annually. The
Company contributed $5,000 for the 1996 Plan year.
13. COMMITMENTS, CONTINGENCY AND OTHER
Litigation:
In May 1997, two former employees initiated litigation alleging breach of
contract in connection with establishing and operating a branch office and are
seeking approximately $1,257,000 in damages and sought a preliminary
injunction. While the preliminary injunction has been denied, the remaining
claims are still pending. Management is vigorously contesting this matter.
Leases:
The Company has various lease agreements for equipment and office space
extending through October 2001.
The following is a schedule of future minimum rental payments required under
noncancelable leases:
<TABLE>
<CAPTION>
TWELVE MONTHS RELATED PARTY OTHER
ENDING JUNE 30, LEASES LEASES
--------------- ------------- --------
<S> <C> <C>
1998........................... $179,000 $229,000
1999........................... 159,000 198,000
2000........................... 37,000 128,000
2001........................... 23,000 61,000
-------- --------
$398,000 $616,000
======== ========
</TABLE>
The Company's lease expense approximated $231,000, $82,000, $362,000 and
$149,000 for the six months ended June 30, 1997 and 1996 and the year ended
December 31, 1996 and 1995, respectively.
F-15
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
13. COMMITMENTS, CONTINGENCY AND OTHER (CONTINUED)
Employment agreements:
The Company has employment agreements with three key employees expiring in
September 2000. Under the terms of the agreements, the aggregate initial
annual compensation is $150,000 per employee. Additionally, each of the
agreements, among other things, include provisions for bonuses based on up to
5% of pre-tax earnings, as defined, increases in compensation and severance
payments based upon certain events.
Contingency:
The Company has received an assessment from the Internal Revenue Service
(the "IRS") concerning the classification of certain workers by the Company as
independent contractors during the period 1992 through 1994. This assessment
totals approximately $233,000 for employment taxes as if the independent
contractors
were classified as employees during the period. The Company has formally
disputed this assessment and has commenced discussions with the IRS to settle
this dispute. Management believes, based on advice of counsel, that it has
sufficient documentation and basis for its independent contractor
classification, and that the ultimate settlement will not have a significant
impact on the Company's financial position or results of operations.
Financial instruments with off-balance sheet risk or concentrations of credit
risk:
In the normal course of business, there are various financial instruments
which are properly not recorded in the financial statements. The Company's
risk of accounting loss due to the credit risks and market risks associated
with these off-balance sheet instruments varies with the type of financial
instrument and principal amounts. Credit risk represents the possibility of a
loss occurring from the failure of another party to perform in accordance with
the terms of a contract. Market risk represents the possibility that future
changes in market prices may make a financial instrument less valuable or more
onerous.
Certain of the investors in sub-prime mortgages require the Company to
return a portion of the sale price of the mortgage loan paid to the Company if
the sub-prime mortgagor pays off within one year. During the year ended
December 31, 1996, the Company incurred costs of approximately $20,000 related
to the early pay-off of sub-prime mortgage loans sold to investors. The
Company does not currently believe any future recapture costs would be
significant.
The Company had approximately $41.9 million of mortgage loans in various
stages of process as of June 30, 1997 of which approximately $3.4 million has
been rate-locked. For approximately $27.6 million of such mortgage loan
commitments, the Company simultaneously committed to sell them to investors.
For sub-prime mortgage loans, the Company accumulates mortgage loans into
pools (usually $1 million to $2 million) and sells the weighted average note
rate to an investor. The ultimate amount of the gain or loss on the sale of
the mortgage loan is determined by the difference between the cost of the
loans and the price paid by the investor.
The Company had approximately $15.5 million of mortgage loans in various
stages of process as of December 31, 1996 of which approximately $1.5 million
has been rate-locked. For approximately $6.5 million of such mortgage loan
commitments, the Company simultaneously committed to sell them to investors.
In connection with the sale of loans to its investors, the Company normally
makes representations and warranties (which are customary in the industry)
relating to, among other things, the Company's compliance with laws,
regulations, investor standards and the accuracy of information supplied by
the mortgagor and verified by the Company. In the event of a breach of these
representations and warranties, the Company would be required to repurchase
such loans. The Company did not repurchase any loans during the period from
January 1, 1995 through June 30, 1997.
F-16
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
13. COMMITMENTS, CONTINGENCY AND OTHER (CONTINUED)
Fair value of financial instruments:
Statement of Financial Accounting Standards No, 107, "Disclosures about Fair
Values of Financial Instruments ("FAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Because no
market exists for certain of the Company's assets and liabilities, fair value
estimates are based upon judgments regarding credit
risk, investor expectation of economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. The tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered in the estimates.
The following summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements in
accordance with FAS 107:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash................................ $ 328,897 $ 328,897 $ 342,881 $ 342,881
Mortgages held for sale............. 10,535,994 11,265,000 12,049,043 12,815,000
Loans closed to be disbursed........ 490,227 490,227 2,171,559 2,171,559
Borrowings.......................... 9,977,145 9,977,145 10,375,267 10,375,257
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off-balance sheet instruments
are as follows:
CASH
The carrying amount of cash approximates fair value.
MORTGAGE LOANS HELD FOR SALE
The Company has estimated the fair values reported based on recent sales.
BORROWINGS AND LOANS CLOSED BUT NOT DISBURSED
The carrying value reported approximates fair value due to the short-term
nature of a significant portion of the borrowings and the variable interest
rates charged on most borrowings.
COMMITMENTS TO ORIGINATE LOANS AND LOANS IN PROCESS
Many loan commitments are expected to, and typically do, expire without
being drawn upon. As the rates and terms of the commitments to lend and
loans in process are competitive with others, the values disclosed above
are determined to be a reasonable estimate of fair value.
Concentrations:
For the six months ended June 30, 1997 and 1996 and the year ended December
31, 1996, two investors accounted for 55% of mortgages sold, five investors
accounted for 84% and three investors accounted for 59%, respectively.
F-17
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 16
Dilution.................................................................. 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 25
Management................................................................ 36
Principal Stockholders.................................................... 40
Certain Relationships and Related Party Transactions...................... 39
Description of Securities................................................. 41
Shares Eligible for Future Sale........................................... 43
Underwriting.............................................................. 44
Legal Matters............................................................. 46
Experts................................................................... 46
Additional Information.................................................... 47
Index to Financial Statements............................................. F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distributions, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters with respect to their unsold allotments of
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,100,000 SHARES
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
COMMON STOCK
---------------
PROSPECTUS
---------------
NATIONAL SECURITIES CORPORATION
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate or limit the liability of a
directors (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) arising
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any
other rights to which the directors and officers may be entitled under the
Company' By-Laws, any agreement, vote of shareholders or otherwise.
The Company's Certificate of Incorporation eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the
Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such
persons in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonably cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the applicable provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities
being registered, other than underwriting discounts and commissions and the
Representative's non-accountable expense allowance. All of the amounts shown
are estimated except the Securities and Exchange Commission registration fee
and the NASD filing fee.
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
SEC registration fee.................................................. $2,116.69
NASDAQ listing fee....................................................
NASD fee.............................................................. 1,198.50
Blue Sky fees and expenses (including legal fees).....................
Printing and engraving expenses.......................................
Legal fees and expenses...............................................
Accounting fees and expenses..........................................
Transfer agent and registrar fee......................................
Miscellaneous.........................................................
Total................................................................
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In December 1996, the Company sold an aggregate of 500,000 shares of its
Common Stock at $2.00 per share, of which 450,000 shares were sold to Melville
Ventures & Associates, L.P., an investment committee partnership.
II-1
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Representative's Warrant Agreement
*3.1 Form of Certificate of Incorporation
*3.2 Form of By-Laws
*4.1 Form of Common Stock Certificate
*4.2 Form of Representative's Warrant
*5.1 Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
*10.1 1995 Stock Option Plan
*10.2 Form of Employment Agreement between the Company and Steven Latessa
*10.3 Form of Employment Agreement between the Company and Cary Wolen
*10.4 Form of Contribution Agreement
*10.5 Form of Indemnity Agreement
*10.6 Mortgage Loan Warehousing Agreement by and between Mortgage Plus Equity
and Loan Corporation and Summit Bank
*21.1 Subsidiaries of Registrant
23.1 Consent of Richard A. Eisner & Company, LLP
23.2 Consent of Levy Cohen & Gold
Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit
*23.3 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Statement Schedule
99.1 Valuation and Qualifying Accounts Schedule (with consent)
</TABLE>
- --------
* to be filed by amendment
Schedules other than the ones listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issues.
The undersigned Registrant hereby undertakes to provide to the Underwriter,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and continued in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act each Post-
Effective Amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities therein and the
Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in Syosset, New York, on November 12, 1997.
Mortgage Plus Equity And Loan Holdings
Corp.
By: ______________________________________
Steven Latessa, President
Pursuant to the requirements of the Act, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated. Each person whose signature appears below hereby authorizes each of
Steven M. Latessa and Cary Wolen with full power of substitution to execute in
the name of such person and to file any Amendment or Post-Effective Amendment
to this Registration Statement making such changes in this Registration
Statement as the Registrant deems appropriate and appoints each of Steven M.
Latessa and Cary Wolen with full power of substitution, attorney-in-fact to
sign and to file any amendment and Post-Effective Amendment to this
Registration Statement.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Steven M. Latessa President, Chief Executive November 12, 1997
____________________________________ Officer, Chairman of the
Board, Director
/s/ Cary Wolen Chief Operating Officer, November 12, 1997
____________________________________ Chief Executive Officer,
Chief Financial Officer,
Secretary, Director
</TABLE>
II-3
<PAGE>
DRAFT 11/10/97
1,100,000 Shares of Common Stock
MORTGAGE PLUS LOAN AND EQUITY HOLDINGS CORPORATION
UNDERWRITING AGREEMENT
Syosset, New York
_______________, 1997
National Securities Corporation
As Representative of the Several Underwriters
1001 Fourth Avenue, Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
Mortgage Plus Loan and Equity Holdings Corporation, a Delaware
corporation (the "Company"), hereby agrees with National Securities Corporation
("National") and each of the underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in Section 11), for whom
National is acting as representative (in such capacity, National shall
hereinafter be referred to as "you" or the "Representative") with respect to
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective amount of shares set forth in said Schedule
A, of the Company's common stock, par value $.01 per share (the "Common
Stock"), which aggregate to 1,100,000 shares (the "Shares").
Upon your request, as provided in Section 2(b) of this Agreement,
the Company shall also issue and sell to the Underwriters, acting severally and
not jointly, up to an additional aggregate of 165,000 shares of Common Stock
for the purpose of covering over-allotments, if any. Such 165,000 shares of
Common Stock are hereinafter referred to as the "Option Shares." The Company
also proposes to issue and sell to you warrants (the "Representative's
Warrants") pursuant to the Representative's Warrant Agreement (the
"Representative's Warrant Agreement") for the purchase of an additional 110,000
shares of Common Stock. The shares of Common Stock issuable upon exercise of
the Representative's Warrants are hereinafter referred to as the
"Representative's Shares." The Shares, Option Shares, the Representative's
Warrants, and the Representative's Shares are more fully described in the
Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date and the Option Closing Date, if any, as
follows:
<PAGE>
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 [(No. 333-____)], including any
related preliminary prospectus (the "Preliminary Prospectus"), for the
registration of the Shares, the Option Shares, the Representative's Warrants,
and the Representative's Shares (collectively, hereinafter referred to as the
"Registered Securities") under the Securities Act of 1933, as amended (the
"Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
Regulations (as defined below) of the Commission under the Act. The Company
will not file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called
the "Prospectus." For purposes hereof, "Regulations" mean the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus and no proceedings for
a stop order suspending the effectiveness of the Registration Statement have
been instituted, or, to the Company's knowledge, are threatened. Each of the
Preliminary Prospectus, the Registration Statement and the Prospectus at the
time of filing thereof conformed in all material respects with the requirements
of the Act and Regulations, and none of the Preliminary Prospectus, the
Registration Statement or the Prospectus at the time of filing thereof
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein and necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters by or on behalf of
the Underwriters expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date (as defined in Section 2(c)
hereof) and each Option Closing Date (as defined in Section 2(b) hereof), if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus, as amended or supplemented as
required, will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, and will conform in all material
respects to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not mislead
<PAGE>
ing, provided, however, that this representation and warranty does not apply to
-------- -------
statements made or statements omitted in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto.
(d) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under the
laws of the respective states of their incorporation. The Company does not own
or control, directly or indirectly, any corporation, partnership, trust, joint
venture or other business entity other than the subsidiaries listed in Exhibit
21 of the Registration Statement. Each of the Company and its subsidiaries is
duly qualified and licensed and in good standing as a foreign corporation in
each jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing (except
these jurisdictions in which the failure to not qualify will not, in the
aggregate, have a material adverse effect on the Company). Each of the Company
and its subsidiaries has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in the Prospectus;
the Company and each of its subsidiaries have been doing business in compliance
with all such authorizations, approvals, orders, licenses, certificates,
franchises and permits and all federal, state, local and foreign laws, rules
and regulations; and neither the Company nor any of its subsidiaries have
received any notice of proceedings relating to the revocation or modification
of any such authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the business affairs, operations,
properties, or results of operations of the Company and its subsidiaries, taken
as a whole. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and regulations on
the Company's business as currently conducted and as contemplated are correct
in all material respects and do not omit to state a material fact necessary to
make the statements contained therein not misleading in light of the
circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Description of Securities" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Registered Securities and all other securities issued or issuable by the Company
conform or, when issued and paid for, will conform, in all material respects to
all statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights
<PAGE>
or other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements and the options or other rights granted and
exercised thereunder as set forth in the Prospectus conforms in all material
respects with the requirements of the Act. All issued and outstanding securities
of the Company have been duly authorized and validly issued and are fully paid
and nonassessable, and the holders thereof have no rights of rescission with
respect thereto and are not subject to personal liability by reason of being
such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company.
(f) The Registered Securities are not and will not be subject
to any preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and will
conform in all material respects to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the authorization,
issue and sale of the Registered Securities has been duly and validly taken;
and the certificates representing the Registered Securities will be in due and
proper form. Upon the issuance and delivery pursuant to the terms hereof of
the Registered Securities to be sold by the Company hereunder, the Underwriters
or the Representative, as the case may be, will acquire good and marketable
title to such Registered Securities free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect, or other restriction or equity
of any kind whatsoever. No stockholder of the Company has any right which has
not been waived in writing to require the Company to register the sale of any
shares owned by such stockholder under the Act in the public offering
contemplated by this Agreement. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required for the
issuance and sale of the Shares, the Option Shares and the Representative's
Warrants to be sold by the Company as contemplated herein.
(g) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in stockholders' equity and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply and such financial statements have been prepared in conformity with
generally accepted accounting principles and the Regulations, consistently
applied throughout the periods involved. There has been no material adverse
change or development involving a material prospective change in the condition,
financial or otherwise, or in the business, affairs, operations, properties, or
results of operation of the Company and its subsidiaries taken as a whole
whether or not arising in the ordinary course of business since the date of the
financial statements included in the Registration Statement and the Prospectus
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company and its subsidiaries taken as a whole conform in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Financial information set forth in the Prospectus
under the headings "Prospectus Summary - Summary Consolidated Financial
Information," "Selected Financial Data," "Capitalization," and "Management's
Discussion and Analysis of
<PAGE>
Financial Condition and Results of Operations," fairly present, on the basis
stated in the Prospectus, the information set forth therein and have been
derived from or compiled on a basis consistent with that of the audited
financial statements included in the Prospectus.
(h) The Company (i) has paid all federal, state, local,
franchise, and foreign taxes for which it is liable, including, but not limited
to, withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(i) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the issuance
by the Company of the Registered Securities, (ii) the purchase by the
Underwriters of the Registered Securities from the Company and the purchase by
the Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Registered Securities in connection with the distribution
contemplated hereby.
(j) There is no action, suit, proceeding, inquiry,
arbitration, mediation, investigation, litigation or governmental proceeding
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties or
businesses of, the Company which (i) questions the validity of the capital
stock of the Company, this Agreement or the Representative's Warrant Agreement,
or of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement or the Representative's Warrant Agreement, (ii)
is required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration Statement
are accurately summarized in all material respects), or (iii) might materially
and adversely affect the condition, financial or otherwise, or the business,
affairs, position, stockholders' equity, operation, properties, or results of
operations of the Company and its subsidiaries taken as a whole.
(k) The Company has the corporate power and authority to
authorize, issue, deliver, and sell the Registered Securities and to enter into
this Agreement and the Representative's Warrant Agreement, and to consummate
the transactions provided for in such agreements; and this Agreement and the
Representative's Warrant Agreement have each been duly and properly authorized,
executed, and delivered by the Company. Each of this Agreement and the
Representative's Warrant Agreement constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with
its respective terms (except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law), and none of the issue and sale of the Registered Securities, execution by
the Company, delivery or performance of this Agreement and the Representative's
Warrant Agreement, the
<PAGE>
consummation by the Company of the transactions contemplated herein and therein,
or the conduct of the Company's businesses as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (i) the articles of
incorporation or by-laws of the Company, as amended and restated, (ii) any
license, contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or may be bound or
to which its properties or assets (tangible or intangible) is or may be subject,
or any indebtedness, or (iii) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory body
or administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company of any of
their activities or properties.
(l) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other body,
domestic or foreign, is required for the issuance of the Registered Securities
pursuant to the Prospectus and the Registration Statement, the performance of
this Agreement, the Representative's Warrant Agreement, and the transactions
contemplated hereby and thereby, including without limitation, any waiver of
any preemptive, first refusal or other rights that any entity or person may
have for the issue and/or sale of any of the Registered Securities, except such
as have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters' purchase and
distribution of the Registered Securities to be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits
to the Registration Statement to which the Company is a party or by which it
may be bound or to which its assets, properties or businesses may be subject
have been duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law). The descriptions in the
Registration Statement of such agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(n) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as described in
or specifically
<PAGE>
contemplated by the Prospectus (i) the Company has not incurred any material
liabilities or obligations, indirect, direct or contingent, or entered into any
material verbal or written agreement or other transaction which is not in the
ordinary course of business or which could result in a material reduction in the
future earnings of the Company; (ii) the Company has not sustained any material
loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock, and the Company is not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Shares, the Option Shares and the Representative's Shares hereunder and upon the
exercise of options and warrants described in the Registration Statement) of, or
indebtedness material to, the Company (other than in the ordinary course of
business); (v) the Company has not issued any securities or incurred any
liability or obligation, primary or contingent, for borrowed money; and (vi)
there has not been any material adverse change in the condition (financial or
otherwise), business, properties, results of operations, or prospects of the
Company.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, (i) the Company has sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct its business as now conducted; (ii) the expiration of any trademarks,
trade names, patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects of the
Company; (iii) the Company has no knowledge of any infringement by it or its
subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and (iv) there is no
claim being made against the Company regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company.
(p) No default exists in the due performance and observance of
any term, covenant or condition of any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement, or any other material
agreement or instrument evidencing an obligation for borrowed money, or any
other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets (tangible or
intangible) of the Company is subject or affected.
(q) To the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor
practice charge or complaint against the Company pending before the National
Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or to its knowledge threatened against or involving the
Company. No representation question exists respecting the employees of the
Company. No collective bargaining agreement, or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective
<PAGE>
bargaining agreements of the Company. No labor dispute with the employees of the
Company exists or to its knowledge is imminent.
(r) Except as described in the Prospectus, the Company does
not maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute
to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan
(or any trust created thereunder) has engaged in a "prohibited transaction"
within the meaning of Section 406 of ERISA or Section 4975 of the Code, which
could subject the Company to any tax penalty on prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all material reporting, disclosure and other requirements of the Code and ERISA
as they relate to any such ERISA Plan. Determination letters have been
received from the Internal Revenue Service with respect to each ERISA Plan
which is intended to comply with Code Section 401(a), stating that such ERISA
Plan and the attendant trust are qualified thereunder. The Company has never
completely or partially withdrawn from a "multiemployer plan."
(s) None of the Company, nor any of its employees, directors,
stockholders, or affiliates (within the meaning of the Regulations) of any of
the foregoing has taken or will take directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Registered Securities.
(t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
stated in the Prospectus to be owned or leased by it, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, or other
restrictions or equities of any kind whatsoever other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(u) Richard A. Eisner & Company LLP ("Eisner & Company"),
whose report is filed with the Commission as a part of the Registration
Statement, are independent certified public accountants as required by the Act
and the Regulations.
(v) The Company has caused to be duly executed legally binding
and enforceable agreements pursuant to which all persons or entities that
directly or beneficially own Common Stock or options to purchase Common Stock,
as of the effective date of the Registration Statement, have agreed not to,
directly or indirectly, offer, offer to sell, sell, grant any option for the
sale of, transfer, assign, pledge, hypothecate or otherwise encumber or dispose
of any shares of Common Stock or securities convertible into Common Stock,
exercisable or exchangeable for or evidencing any right to purchase or
subscribe for any shares of Common Stock (either pursuant to Rule 144 of the
Regulations or otherwise) or dispose of any interest therein for a period from
the date of the Prospectus until thirteen (13) months following the date that
the Registration Statement becomes effective, without the prior written consent
of National (the "Lock-up Agreements"). The Company will cause the Transfer
Agent
<PAGE>
(as defined herein) to place "stop transfer" orders on the Company's stock
ledgers in order to effect the Lock-up Agreements.
(w) There are no claims, payments, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Registered
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company or any of its officers,
directors, stockholders, employees or affiliates that may affect the
Underwriters' compensation as determined by the Commission and the National
Association of Securities Dealers, Inc. (the "NASD").
(x) The Registered Securities have been approved for quotation
on the NASDAQ SmallCap Market.
(y) Neither the Company nor any of its officers, employees,
agents or any other person acting on behalf of the Company has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business)
to any customer, supplier, employee or agent of a customer or supplier, or
official or employee of any governmental agency (domestic or foreign) or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or other person who was, is, or
may be in a position to help or hinder the business of the Company (or assist
the Company in connection with any actual or proposed transaction) which might
subject the Company or any other such person to any damage or penalty in any
civil, criminal or governmental litigation or proceeding (domestic or foreign).
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Regulations) of any
of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or
sells services or products which are furnished or sold or are proposed to be
furnished or sold by the Company, or (B) purchases from or sells or furnishes
to the Company any goods or services, or (ii) a beneficiary interest in any
contract or agreement to which the Company is a party or by which it may be
bound or affected. Except as set forth in the Prospectus there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company, and any officer, director, principal shareholder (as such term is used
in the Prospectus) of the Company, or any affiliate or associate of any of the
foregoing persons or entities.
(aa) The Company is not, and does not intend to conduct its
business in a manner in which it would become an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(ab) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Underwriters' Counsel (as defined in
Section 4(d)
<PAGE>
herein) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(ac) The minute books of the Company have been made available
to the Underwriters and contain a complete summary of all meetings and actions
of the directors and stockholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(ad) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the offering
and sale of the Shares in this offering other than the Prospectus, the
Registration Statement and the other materials permitted by the Act. Except as
described in the Prospectus, no holders of any securities of the Company or of
any options, warrants or other convertible or exchangeable securities of the
Company have the right to include any securities issued by the Company as part
of the Registration Statement or to require the Company to file a registration
statement under the Act and no person or entity holds any anti-dilution rights
with respect to any securities of the Company.
(ae) Each of the Company and its subsidiaries maintains
insurance by insurers of recognized financial responsibility of the types and
in the amounts as are prudent, customary and adequate for the business in which
it is engaged, including, but not limited to, insurance covering real and
personal property owned or leased by the Company and its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect. The
Company has no reason to believe that it will not be able to renew existing
insurance coverage with respect to the Company as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business, in either case, at a cost that would not have a
material adverse effect on the financial condition, operations, business, assets
or properties of the Company. The Company has not failed to file any claims, has
no material disputes with its insurance company regarding any claims submitted
under its insurance policies, and has complied with all material provisions
contained in its insurance policies.
2. Purchase, Sale and Delivery of the Registered Securities.
---------------------------------------------------------
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, and each
Underwriter, severally and not jointly agrees to purchase from the Company, at
a price equal to [$ ] per share, that number of Shares set forth in
-----
Schedule A opposite the name of such Underwriter, subject to such adjustment as
the Representative in its discretion shall make to eliminate any sales or
purchases of fractional shares, plus any additional numbers of Shares which
such Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the
terms and conditions herein set forth, the Company hereby grants an option to
the Underwriters, severally and not jointly, to purchase all or any part of the
Option Shares at a price equal to [$ ]. The option
-----
<PAGE>
granted hereby will expire 45 days after (i) the date the Registration Statement
becomes effective, if the Company has elected not to rely on Rule 430A under the
Regulations, or (ii) the date of this Agreement if the Company has elected to
rely upon Rule 430A under the Regulations, and may be exercised in whole or in
part from time to time (but not on more than two (2) occasions) only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Shares upon notice by the Representative to the
Company setting forth the number of Option Shares as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Shares. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than three full business days after the exercise of said option, nor in
any event prior to the Closing Date, as hereinafter defined, unless otherwise
agreed upon by the Representative and the Company. Nothing herein contained
shall obligate the Underwriters to exercise the over-allotment option described
above. No Option Shares shall be delivered unless the Shares shall be
simultaneously delivered or shall theretofore have been delivered as herein
provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the offices of National, at 1001
Fourth Avenue, Suite 2200, Seattle, Washington, or at such other place as shall
be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 11:00 a.m. (New York time) on [__________ __,] 1997,
or at such other time and date as shall be agreed upon by the Representative
and the Company, but no more than four (4) business days after the date hereof
(such time and date of payment and delivery being herein called the "Closing
Date"). In addition, in the event that any or all of the Option Shares are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Shares shall be made at the above mentioned
office of National or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Shares and the Option Shares, if any, shall be made to the Underwriters
against payment by the Underwriters, of the purchase price for the Shares and
the Option Shares, if any, by wire transfer to the Company. In the event such
option is exercised, each of the Underwriters, acting severally and not jointly,
shall purchase that proportion of the total number of Option Shares then being
purchased which the number of Shares set forth in Schedule A hereto opposite the
name of such Underwriter bears to the total number of Shares, subject in each
case to such adjustments as the Representative in its discretion shall make to
eliminate any sales or purchases of fractional shares. Certificates for the
Shares and the Option Shares, if any, shall be in definitive, fully registered
form, shall bear no restrictive legends and shall be in such denominations and
registered in such names as the Underwriters may request in writing at least
three (3) business days prior to Closing Date or the relevant Option Closing
Date, as the case may be. The certificates for the Shares and the Option Shares,
if any, shall be made available to the Representative at such office or such
other place as the Representative may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business day prior to Closing Date
or the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to
the Representative Representative's Warrants at a purchase price of $.0001 per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 110,000 shares of Common
<PAGE>
Stock. The Representative's Warrants shall expire five (5) years after the
effective date of the Registration Statement and shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of the
Registration Statement at a price equaling 120% of the initial public offering
price of the Shares. The Representative's Warrant Agreement and form of Warrant
Certificate shall be substantially in the form filed as Exhibit [___] to the
Registration Statement. Payment for the Representative's Warrants shall be made
on the Closing Date.
3. Public Offering of the Shares. As soon after the
-----------------------------
Registration Statement becomes effective as the Representative deems advisable,
the Underwriters shall make a public offering of the Shares (other than to
residents of or in any jurisdiction in which qualification of the Shares is
required and has not become effective) at the price and upon the other terms
set forth in the Prospectus. The Representative may from time to time increase
or decrease the public offering price after distribution of the Shares has been
completed to such extent as the Representative, in its sole discretion, deems
advisable. The Underwriters may enter into one or more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or more
broker-dealers who shall act as dealers in connection with such public
offering.
4. Covenants of the Company. The Company covenants and agrees
------------------------
with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the Shares
by the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or
the threatening, of any proceeding, suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose, (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Registered
Securities for offering or sale in any jurisdiction or of the initiation, or
the threatening, of any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission; and (v) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to the
Prospectus or for additional information. If the Commission or any state
securities commission authority shall enter a stop order or suspend such
qualification at any time, the Company will use its best efforts to obtain
promptly the lifting of such order.
<PAGE>
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative) in accordance with the
requirements of the Act.
(d) The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriters in connection with the offering of the Registered
Securities which differs from the corresponding prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether or
not such revised prospectus is required to be filed pursuant to Rule 424(b) of
the Regulations), and will furnish the Representative with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement to which the Representative or Camhy Karlinsky & Stein LLP
("Underwriters' Counsel") shall reasonably object.
(e) The Company shall endeavor in good faith, in cooperation
with the Representative, at or prior to the time the Registration Statement
becomes effective, to qualify the Registered Securities for offering and sale
under the securities laws of such jurisdictions as the Representative may
reasonably designate to permit the continuance of sales and dealings therein
for as long as may be necessary to complete the distribution, and shall make
such applications, file such documents and furnish such information as may be
required for such purpose; provided, however, the Company shall not be
-------
required to qualify as a foreign corporation or become subject to service of
process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Representative
agree that such action is not at the time necessary or advisable, use all
reasonable efforts to file and make such statements or reports at such times as
are or may reasonably be required by the laws of such jurisdiction to continue
such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act, as now and hereafter amended,
and by the Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Registered Securities in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the
Registered Securities is required to be delivered under the Act, any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend or supplement
the Prospectus to comply with the Act, the Company will notify the
Representative promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be satisfactory to Underwriters' Counsel, and the
Company will furnish to the Underwriters copies of such amendment or supplement
as soon as available and in such quantities as the Underwriters may request.
<PAGE>
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Representative, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations,
which statement need not be audited unless required by the Act, covering a
period of at least 12 consecutive months after the effective date of the
Registration Statement.
(h) During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and will make available to its stockholders unaudited quarterly
reports of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to
its stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders;
(ii) concurrently with furnishing such annual reports to
its stockholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of
independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the Commission,
the Nasdaq National Market or any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by or on
behalf of the Company; and
(vi) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its
businesses which the Representative may reasonably request.
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
<PAGE>
(i) The Company will maintain a transfer agent (the "Transfer
Agent") and, if necessary under the jurisdiction of incorporation of the
Company, a registrar (which may be the same entity as the transfer agent) for
the Common Stock and the Representative's Warrants.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement
and any pre-effective or post-effective amendments thereto (two of which copies
will be signed and will include all financial statements and exhibits), each
Preliminary Prospectus, the Prospectus, and all amendments and supplements
thereto, including any prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such quantities
as the Representative may reasonably request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of
duly executed, legally binding and enforceable Lock-up Agreements. On or
before the Closing Date, the Company shall deliver instructions to the Transfer
Agent authorizing it to place appropriate stop transfer orders on the Company's
ledgers.
(l) The Company shall use its best efforts to cause its
officers, directors, stockholders or affiliates (within the meaning of the
Regulations) not to take, directly or indirectly, any action designed to, or
which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of
the Registered Securities substantially in the manner, and subject to the
conditions, set forth under "Use of Proceeds" in the Prospectus.
(n) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under
the Act, the Exchange Act, and the Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Regulations.
(o) The Company shall cause the Registered Securities to be
quoted on the NASDAQ SmallCap Market, and for a period of two (2) years from
the date hereof shall use its best efforts to maintain the quotation of the
Registered Securities to the extent outstanding.
(p) For a period of two (2) years from the Closing Date, the
Company shall furnish to the Representative, at the Company's sole expense,
daily consolidated transfer sheets relating to the Common Stock.
<PAGE>
(q) For a period of five (5) years after the effective date of
the Registration Statement the Company shall, at the Company's sole expense,
take all necessary and appropriate actions to further qualify the Company's
securities in all jurisdictions of the United States in order to permit
secondary sales of such securities pursuant to the Blue Sky laws of those
jurisdictions which do not require the Company to qualify as a foreign
corporation or to file a general consent to service of process.
(r) The Company (i) prior to the effective date of the
Registration Statement, has filed a Form 8-A with the Commission providing for
the registration of the Common Stock under the Exchange Act and (ii) as soon as
practicable, will use its best efforts to take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and
Moody's OTC Manual and to continue such inclusion for a period of not less than
five (5) years.
(s) The Company agrees that for a period of 13 months
following the effective date of the Registration Statement it will not, without
the prior written consent of National, offer, issue, sell, contract to sell,
grant any option for the sale of or otherwise dispose of any Common Stock, or
securities convertible into Common Stock, except for the issuance of the Option
Shares, the Representative's Warrants, and shares of Common Stock issued upon
the exercise of currently outstanding warrants or options issued under any
stock option plan in effect on the Closing Date, shares of Common Stock
automatically granted pursuant to any stock option plan in effect on the
Closing Date, or shares of Common Stock issued pursuant to any employee stock
purchase plan in effect on the Closing Date.
(t) Until the completion of the distribution of the Registered
Securities, the Company shall not without the prior written consent of National
or Underwriters' Counsel, issue, directly or indirectly any press release or
other communication or hold any press conference with respect to the Company or
its activities or the offering contemplated hereby, other than trade releases
issued in the ordinary course of the Company's business consistent with past
practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) five (5) years
from the date hereof, and (ii) the sale to the public of the Representative's
Shares, the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form SB-2 (or other appropriate form) for the
registration under the Act of the Representative's Shares.
(v) The Company agrees that upon the request of National it
shall use its best efforts, which shall include, but shall not be limited to,
the solicitation of proxies, to elect one (1) designee of National to the
Company's Board of Directors for a period of five (5) years following the
Closing, provided that such designee is reasonably acceptable to the Company.
In the event National does not exercise its right to designate a member of the
Board of Directors, then it shall have the right to designate a person to
attend all meetings of the Board of Directors of the Company, and all
committees thereof, as an observer. Such observer shall be entitled to receive
notices of all such meetings, and all correspondence and communications sent by
the Company to members of its Board of Directors, and to attend all
<PAGE>
such meetings. The Company shall reimburse the designee of National for his out-
of-pocket expenses incurred in connection with their attendance at such
meetings.
(w) The Company agrees that within forty-five (45) days after
the Closing it shall retain a public relations firm which is acceptable to
National. The Company shall keep such public relations firm, or any
replacement, for a period of three (3) years from the Closing. Any replacement
public relations firm shall be retained only with the consent of National.
(x) The Company agrees that any and all future transactions
between the Company and its officers, directors, principal stockholders and the
affiliates of the foregoing persons will be on terms no less favorable to the
Company than could reasonably be obtained in arm's length transactions with
independent third parties, and that any such transactions also be approved by a
majority of the Company's outside independent directors disinterested in the
transaction.
(y) The Company shall prepare and deliver, at the Company's
sole expense, to National within the one hundred and twenty (120) day period
after the later of the effective date of the Registration Statement or the
latest Option Closing Date, as the case may be, one bound volume containing all
correspondence with regulatory officials, agreements, documents and all other
materials in connection with the offering as requested by the Underwriters'
Counsel.
5. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay on each of the Closing
Date and each Option Closing Date (to the extent not previously paid) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement, the Warrant Agreement and the Representative's Warrant
Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred
in connection with the preparation, duplication, printing, filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the duplication, mailing (including the payment of postage with
respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealers Agreements, the Powers of Attorney, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the certificates representing the
Registered Securities, (iv) the qualification of the Registered Securities
under state or foreign securities or "Blue Sky" laws and determination of the
status of such securities under legal investment laws, including the costs of
printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental
Blue Sky Memorandum" and "Legal Investments Survey," if any, and reasonable
disbursements and fees of counsel in connection therewith, (v) advertising
costs and expenses, including but not limited to the costs and expenses
incurred by the Company and the Representative in connection with the "road
show," information meetings and presentations, bound volumes and prospectus
<PAGE>
memorabilia and "tombstone" advertisement expenses, (vi) experts, (vii) fees
and expenses of the transfer agent and registrar, (viii) the fees payable to
the Commission and the NASD, (ix) issue and transfer taxes, if any (x) the fees
and expenses incurred in connection with the listing of the Common Stock on the
Nasdaq SmallCap Market or any other market or exchange, and (xi) costs and
expenses in connection with due diligence investigations, including but not
limited to the fees of any independent counsel or consultant retained by
National in connection therewith.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Representative for all of its actual
out-of-pocket expenses on an accountable basis, including the fees and
disbursements of Underwriters' Counsel, less any amounts already paid pursuant
to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Representative on the Closing Date by certified or bank cashier's check or,
at the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Shares[, $20,000 of which has been paid to date. In the event the
Representative elects to exercise the over-allotment option described in
Section 2(b) hereof, the Company further agrees to pay to the Representative on
the Option Closing Date (by certified or bank cashier's check or, at the
Representative's election, by deduction from the proceeds of the offering) a
non-accountable expense allowance equal to three percent (3%)] of the gross
proceeds received by the Company from the sale of the Option Shares.
6. Conditions of the Underwriters' Obligations. The
-------------------------------------------
obligations of the Underwriters hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company herein as of the
date hereof and as of the Closing Date and each Option Closing Date, if any, as
if they had been made on and as of the Closing Date or each Option Closing
Date, as the case may be; the accuracy on and as of the Closing Date or Option
Closing Date, if any, of the statements of officers of the Company made
pursuant to the provisions hereof; and the performance by the Company on and as
of the Closing Date and each Option Closing Date, if any, of its covenants and
obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York City time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Representative,
and, at Closing Date and each Option Closing Date, if any, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel. If the Company has elected
to rely upon Rule 430A of the Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory
<PAGE>
to the Representative of such timely filing, or a post-effective amendment
providing such information shall have been promptly filed and declared effective
in accordance with the requirements of Rule 430A of the Regulations.
(b) The Representative shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representative's opinion, is material, or omits
to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein
not misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representative's reasonable opinion, is
material, or omits to state a fact which, in the Representative's reasonable
opinion, is material and is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
(c) On or prior to the Closing Date, the Underwriters shall
have received from Underwriters' Counsel such opinion or opinions with respect
to the organization of the Company, the validity of the Registered Securities,
the Registration Statement, the Prospectus and other related matters as the
Representative may request and Underwriters' Counsel shall have received from
the Company such papers and information as they request to enable them to pass
upon such matters.
(d) At Closing Date, the Underwriters shall have received the
favorable opinion of Ruskin, Moscou, Evans & Faltischek ("Ruskin, Moscou"),
counsel to the Company, dated the Closing Date, addressed to the Underwriters
and in form and substance satisfactory to Underwriters' Counsel, to the effect
that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, (B) is duly qualified and
licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such
qualification or licensing, and (C) to the best of such
counsel's knowledge, has all requisite corporate power and
authority and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or
regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct
its business as described in the Prospectus;
(ii) except as described in the Prospectus, and to the
best of such counsel's knowledge after reasonable
investigation, the Company does not own an
<PAGE>
interest in any corporation, limited liability company,
partnership, joint venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and
any amendment or supplement thereto, under "Capitalization"
and "Description of Securities," and to the knowledge of such
counsel, the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Representative's
Warrant Agreement, and as described in the Prospectus. The
Registered Securities and all other securities issued or
issuable by the Company conform in all material respects to the
statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly
issued and are fully paid and nonassessable; the holders
thereof are not subject to personal liability by reason of
being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any
security of the Company. The Registered Securities to be sold
by the Company hereunder and under the Representative's Warrant
Agreement are not and will not be subject to any preemptive or
other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in
accordance with their terms, will be validly issued, fully paid
and nonassessable and will conform in all material respects to
the description thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the
authorization, issue and sale of the Registered Securities has
been duly and validly taken; and the certificates representing
the Registered Securities are in due and proper form. The
Representative's Warrants constitute valid and binding
obligations of the Company to issue and sell, upon exercise
thereof and payment therefor, the number and type of securities
of the Company called for thereby (except as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity
or
<PAGE>
contribution may be limited by applicable law). Upon the
issuance and delivery pursuant to this Agreement of the
Registered Securities to be sold by the Company, the Company
will convey, against payment therefor as provided herein, to
the Underwriters and the Representative, respectively, good and
marketable title to the Registered Securities free and clear of
all liens and other encumbrances;
(iv) the Registration Statement is effective under the
Act, and, if applicable, filing of all pricing information has
been timely made in the appropriate form under Rule 430A, and
no stop order suspending the use of the Preliminary
Prospectus, the Registration Statement or Prospectus or any
part of any thereof or suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or, to the
best of such counsel's knowledge, threatened or contemplated
under the Act;
(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or
supplements thereto (other than the financial statements and
other financial and statistical data included therein as to
which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the
Regulations. Such counsel shall state that such counsel has
participated in conferences with officers and other
representatives of the Company and the Representative and
representatives of the independent public accountants for the
Company, at which conferences the contents of the Preliminary
Prospectus, the Registration Statement, the Prospectus, and
any amendments or supplements thereto were discussed, and,
although such counsel is not passing upon and does not assume
any responsibility for the accuracy, completeness or fairness
of the statements contained in the Preliminary Prospectus, the
Registration Statement and Prospectus, and any amendments or
supplements thereto, on the basis of the foregoing, no facts
have come to the attention of such counsel which lead them to
believe that either the Registration Statement or any
amendment thereto, at the time such Registration Statement or
amendment became effective or the Preliminary Prospectus or
Prospectus or amendment or supplement thereto as of the date
of such opinion contained any untrue statement of a material
fact or omitted to state a material fact
<PAGE>
required to be stated therein or necessary to make the
statements therein not misleading (it being understood that
such counsel need express no opinion with respect to the
financial statements and schedules and other financial and
statistical data included in the Preliminary Prospectus, the
Registration Statement or Prospectus, and any amendments or
supplements thereto);
(vi) to the best of such counsel's knowledge after
reasonable investigation, (A) there are no agreements,
contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and
filed as exhibits to the Registration Statement other than
those described in the Registration Statement and the
Prospectus and filed as exhibits thereto; (B) the descriptions
in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other
documents to which the Company is a party or by which it is
bound are accurate in all material respects and fairly
represent the information required to be shown by Form SB-2;
(C) there is not pending or threatened against the Company any
action, arbitration, suit, proceeding, litigation,
governmental or other proceeding (including, without
limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or threatened
against the Company which (x) is required to be disclosed in
the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement
are accurately summarized in all material respects), (y)
questions the validity of the capital stock of the Company or
this Agreement, or the Representative's Warrant Agreement, or
of any action taken or to be taken by the Company pursuant to
or in connection with any of the foregoing; and (D) there is no
action, suit or proceeding pending or threatened against the
Company before any court or arbitrator or governmental body,
agency or official in which there is a reasonable possibility
of an adverse decision which may result in a material adverse
change in the financial condition, business, affairs,
stockholders' equity, operations, properties, business or
results of operations of the Company, which could adversely
affect the present or prospective ability of the Company to
perform its obligations under this Agreement, or the
Representative's Warrant Agreement or which in any manner draws
into
<PAGE>
question the validity or enforceability of this Agreement or
the Representative's Warrant Agreement;
(vii) the Company has the corporate power and authority to
enter into each of this Agreement and the Representative's
Warrant Agreement and to consummate the transactions provided
for therein; and each of this Agreement and the
Representative's Warrant Agreement has been duly authorized,
executed and delivered by the Company. Each of this Agreement
and the Representative's Warrant Agreement, assuming due
authorization, execution and delivery by each other party
thereto, constitutes a legal, valid and binding obligation of
the Company enforceable against the Company in accordance with
its terms (except as the enforceability thereof may be limited
by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application
of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited
by applicable law), and none of the Company's execution,
delivery or performance of this Agreement and the
Representative's Warrant Agreement, the consummation by the
Company of the transactions contemplated herein or therein, or
the conduct of the Company's business as described in the
Registration Statement, the Prospectus, and any amendments or
supplements thereto conflicts with or results in any breach or
violation of any of the terms or provisions of, or constitutes
a default under, or result in the creation or imposition of
any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind
whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (A) the
articles of incorporation or by-laws of the Company, as
amended, (B) any license, contract, indenture, mortgage, deed
of trust, voting trust agreement, stockholders' agreement,
note, loan or credit agreement or any other agreement or
instrument known to such counsel to which the Company is a
party or by which it is bound, or (C) any federal, state or
local statute, rule or regulation applicable to the Company or
any judgment, decree or order known to such counsel of any
arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign,
<PAGE>
having jurisdiction over the Company or any of its activities
or properties;
(viii) no consent, approval, authorization or order, and
no filing with, any court, regulatory body, government agency
or other body (other than such as may be required under Blue
Sky laws, as to which no opinion need be rendered or under
federal securities laws, as to which no opinion need be
rendered pursuant to this subsection (viii) is required in
connection with the issuance of the Registered Securities
pursuant to the Prospectus, and the Registration Statement,
the performance of this Agreement and the Representative's
Warrant Agreement, and the transactions contemplated hereby
and thereby;
(ix) to the best of such counsel's knowledge after
reasonable investigation, the properties and business of the
Company conform in all material respects to the description
thereof contained in the Registration Statement and the
Prospectus;
(x) to the best knowledge of such counsel, and except as
disclosed in Registration Statement and the Prospectus, the
Company is not in breach of, or in default under, any term or
provision of any license, contract, indenture, mortgage,
installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, note, loan or credit
agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the
Company is bound or to which the property or assets (tangible
or intangible) of the Company is subject; and the Company is
not in violation of any term or provision of its articles of
incorporation or by-laws, as amended, and to the best of such
counsel's knowledge after reasonable investigation, not in
violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation;
(xi) the statements in the Prospectus under "Dividend
Policy," "Description of Securities," and "Shares Eligible for
Future Sale" have been reviewed by such counsel, and insofar
as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are
correct in all material respects;
<PAGE>
(xii) the Common Stock has been accepted for quotation on
the NASDAQ SmallCap Market;
(xiii) to the best of such counsel's knowledge and based
upon a review of the outstanding securities and the contracts
furnished to such counsel by the Company, no person,
corporation, trust, partnership, association or other entity
has the right to include and/or register any securities of the
Company in the Registration Statement, require the Company to
file any registration statement or, if filed, to include any
security in such registration statement;
(xiv) assuming due execution by the parties thereto other
than the Company, each Lock-up Agreement is a legal, valid and
binding obligation of the party thereto, enforceable against
the party and any subsequent holder of the securities subject
thereto in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles
in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law);
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws, rules and regulations of
the United States and the laws, rules and regulations of the State of New York,
to the extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
satisfactory to Underwriters' Counsel) of other counsel acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates shall be
delivered to Underwriters' Counsel if requested. The opinion of such counsel
shall state that knowledge shall not include the knowledge of a director or
officer of the Company who is affiliated with such firm in his or her capacity
as an officer or director of the Company. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel.
At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Ruskin, Moscou, counsel to the Company, dated
the Option Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel
<PAGE>
confirming as of such Option Closing Date the statements made by Ruskin, Moscou
in their opinion delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriters' Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(f) Prior to each of the Closing Date and each Option Closing
Date, if any, (i) there shall have been no material adverse change nor
development involving a prospective change in the condition, financial or
otherwise, prospects, stockholders' equity or the business activities of the
Company, whether or not in the ordinary course of business, from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness which default has not been waived; (iv) the Company
shall not have issued any securities (other than the Registered Securities) or
declared or paid any dividend or made any distribution in respect of its
capital stock of any class and there has not been any change in the capital
stock, or any material increase in the debt (long or short term) or liabilities
or obligations of the Company (contingent or otherwise); (v) no material amount
of the assets of the Company shall have been pledged or mortgaged, except as
set forth in the Registration Statement and Prospectus; (vi) no action, suit or
proceeding, at law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or affecting any of its
respective properties or businesses before or by any court or federal, state or
foreign commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except
as set forth in the Registration Statement and Prospectus; and (vii) no stop
order shall have been issued under the Act and no proceedings therefor shall
have been initiated, threatened or contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date,
if any, the Underwriters shall have received a certificate of the Company
signed on behalf of the Company by the principal executive officer of the
Company, dated the Closing Date or Option Closing Date, as the case may be, to
the effect that such executive has carefully examined the Registration
Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of
the Closing Date or the Option Closing Date, as the case may
be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this
Agreement on its part to
<PAGE>
be performed or satisfied at or prior to such Closing Date or
Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued,
and no proceedings for that purpose have been instituted or
are pending or, to the best of each of such person's knowledge
after due inquiry, are contemplated or threatened under the
Act;
(iii) The Registration Statement and the Prospectus and,
if any, each amendment and each supplement thereto, contain
all statements and information required by the Act to be
included therein, and none of the Registration Statement, the
Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading and neither the
Preliminary Prospectus or any supplement, as of their
respective dates, thereto included any untrue statement of a
material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and
including the Closing Date or the Option Closing Date, as the
case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or
contingent; (b) the Company has not paid or declared any
dividends or other distributions on its capital stock; (c) the
Company has not entered into any transactions not in the
ordinary course of business; (d) there has not been any change
in the capital stock or material increase in long-term debt or
any increase in the short-term borrowings (other than any
increase in the short-term borrowings in the ordinary course
of business) of the Company, (e) the Company has not sustained
any loss or damage to its property or assets, whether or not
insured, (f) there is no litigation which is pending or
threatened (or circumstances giving rise to same) against the
Company or any affiliated party of any of the foregoing which
is required to be set forth in an amended or supplemented
Prospectus which has not been set forth,
<PAGE>
and (g) there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable
to the Underwriters.
(i) At the time this Agreement is executed, the Underwriters
shall have received a letter, dated such date, addressed to the Underwriters in
form and substance satisfactory in all respects (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
to the Underwriters and Underwriters' Counsel, from Eisner & Company:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of
the Act and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in
the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the
Act and the Regulations thereunder and that the Representative
may rely upon the opinion of Eisner & Company with respect to
the financial statements and supporting schedules included in
the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim
financial statements of the Company (with an indication of the
date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of the
stockholders and board of directors and the various committees
of the board of directors of the Company, consultations with
officers and other employees of the Company responsible for
financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the unaudited
financial statements and supporting schedules of the Company
included in the Registration Statement, if any, do not comply
as to form in all material respects with the
<PAGE>
applicable accounting requirements of the Act and the
Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements of the Company included in the Registration
Statement, or (B) at a specified date not more than five (5)
days prior to the effective date of the Registration Statement,
there has been any change in the capital stock or material
increase in long-term debt of the Company, or any material
decrease in the stockholders' equity or net current assets or
net assets of the Company as compared with amounts shown in the
[__________ __,] 1997 balance sheet included in the
Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was
any change or decrease, setting forth the amount of such change
or decrease.
(iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and
earnings, statements and other financial information
pertaining to the Company set forth in the Prospectus in each
case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general
accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement; and
(v) statements as to such other material matters incident
to the transaction contemplated hereby as the Representative
may reasonably request.
(j) At the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received from Eisner & Company a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to Subsection (i) of this Section 6, except that the specified date referred to
shall be a date not more than five (5) days prior to Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (iv) of Subsection (i) of this
Section 6 with respect to certain amounts, percentages and financial
information as specified by the Representative and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found such amounts,
<PAGE>
percentages and financial information to be in agreement with the records
specified in such clause (iv).
(k) On each of Closing Date and Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Registered Securities.
(l) No order suspending the sale of the Registered Securities
in any jurisdiction designated by the Representative pursuant to subsection (e)
of Section 4 hereof shall have been issued on either the Closing Date or the
Option Closing Date, if any, and no proceedings for that purpose shall have
been instituted or shall be contemplated.
(m) On or before the Closing Date, the Company shall have
executed and delivered to the Representative, (i) the Representative's Warrant
Agreement, substantially in the form filed as Exhibit 4(b), to the Registration
Statement, in final form and substance satisfactory to the Representative, and
(ii) the Representative's Warrants in such denominations and to such designees
as shall have been provided to the Company.
(n) On or before Closing Date, the Common Stock shall have
been duly approved for quotation on the NASDAQ SmallCap Market.
(o) On or before Closing Date, there shall have been delivered
to the Representative all of the Lock-up Agreements in final form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to
be fulfilled prior to or at the Closing Date or the relevant Option Closing
Date, as the case may be, is not so fulfilled, the Representative may terminate
this Agreement or, if the Representative so elect, they may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each of
the Underwriters (for purposes of this Section 7 "Underwriters" shall include
the officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, from and against any and
all loss, liability, claim, damage, and expense whatsoever (including, but not
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation provided that the
indemnified persons may not agree to any such settlement without the prior
written consent of the Company), as and when incurred, arising out of, based
upon or in connection with (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time
<PAGE>
amended and supplemented); or (B) in any application or other document or
communication (in this Section 7 collectively called "application") executed by
or on behalf of the Company or based upon written information furnished by or on
behalf of the Company in any jurisdiction in order to qualify the Registered
Securities under the securities laws thereof or filed with the Commission, any
state securities commission or agency, The Nasdaq Stock Market, Inc. or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (in the case of the Prospectus, in the light of the circumstances
under which they were made), unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company with respect to any Underwriter by or on behalf of such Underwriter
expressly for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, or in any
application, as the case may be; or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement. The
indemnity agreement in this subsection (a) shall be in addition to any liability
which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors,
each of its officers of the Company who has signed the Registration Statement,
and each other person, if any, who controls the Company, within the meaning of
the Act, to the same extent as the foregoing indemnity from the Company to the
Underwriters but only with respect to statements or omissions, if any, made in
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any application made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to any Underwriter by such Underwriter or the
Representative expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any such application, provided that such written information or
omissions only pertain to disclosures in the Preliminary Prospectus, the
Registration Statement or Prospectus directly relating to the transactions
effected by the Underwriters in connection with this Offering. The Company
acknowledges that the statements with respect to the public offering of the
Registered Securities set forth under the heading "Underwriting" and the
stabilization legend in the Prospectus have been furnished by the Underwriters
expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Underwriters or the Representative for inclusion
in the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against
one or more indemnifying parties under this Section 7, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure to so notify an indemnifying party shall not relieve
it from any liability which it may have otherwise or which it may have under
this Section 7, except to the extent that it has been prejudiced in any
material respect by such failure). In case any such action is brought against
any indemnified party, and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from
such indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified
<PAGE>
party. Notwithstanding the foregoing, the indemnified party or parties shall
have the right to employ its or their own counsel in any such case, but the fees
and expenses of such counsel shall be at the expense of such indemnified party
or parties unless (i) the employment of such counsel shall have been authorized
in writing by the indemnifying parties in connection with the defense of such
action at the expense of the indemnifying party, (ii) the indemnifying parties
shall not have employed counsel reasonably satisfactory to such indemnified
party to have charge of the defense of such action within a reasonable time
after notice of commencement of the action, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events the reasonable fees and
expenses of one additional counsel shall be borne by the indemnifying parties.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. Anything in this Section 7 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld.
-------
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of this Section 7 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of
any indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or
liabilities (or actions in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the offering of the Registered Securities or (B) if the
allocation provided by clause (A) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is a contributing
party and the Underwriters are the indemnified party, the relative benefits
received by the Company on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Registered Securities (before deducting expenses other than
underwriting discounts and commissions) bear to the total underwriting
discounts received by the Underwriters hereunder, in each case as set forth in
the table on the Cover Page of the Prospectus. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or by the
Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or
<PAGE>
payable by an indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred to above in
this subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subdivision (d) the Underwriters shall not be required to contribute any amount
in excess of the underwriting discount applicable to the Registered Securities
purchased by the Underwriters hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 12(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements of the Company
at the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the respective
indemnity and contribution agreements contained in Section 7 hereof shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter, the Company, any controlling person of
either the Underwriter or the Company, and shall survive termination of this
Agreement or the issuance and delivery of the Registered Securities to the
Underwriters and the Representative, as the case may be.
9. Effective Date.
--------------
(a) This Agreement shall become effective at 10:00 a.m., New
York City time, on the date hereof. For purposes of this Section 9, the
Registered Securities to be purchased hereunder shall be deemed to have been so
released upon the earlier of dispatch by the Representative of telegrams to
securities dealers releasing such shares for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Registered Securities.
10. Termination.
-----------
(a) Subject to subsection (b) of this Section 10, the
Representative shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Representative's reasonable
<PAGE>
opinion will in the immediate future disrupt the financial markets; or (ii) any
material adverse change in the financial markets shall have occurred; or (iii)
if trading on the New York Stock Exchange, the American Stock Exchange, or in
the over-the-counter market shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the over-the-counter market by the NASD
or by order of the Commission or any other government authority having
jurisdiction; or (iv) if the United States shall have become involved in a war
or major hostilities, or if there shall have been an escalation in an existing
war or major hostilities or a national emergency shall have been declared in the
United States; or (v) if a banking moratorium has been declared by a state or
federal authority; or (vi) if the Company shall have sustained a loss material
or substantial to the Company by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in the Representative's opinion, make it
inadvisable to proceed with the delivery of the Registered Securities; or (viii)
if there shall have been such a material adverse change in the prospects or
conditions of the Company, or such material adverse change in the general
market, political or economic conditions, in the United States or elsewhere as
in the Representative's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Registered Securities.
(b) If this Agreement is terminated by the Representative in
accordance with any of the provisions of Section 6, Section 10(a) or Section
12, the Company shall promptly reimburse and indemnify the Underwriters
pursuant to Section 5(b) hereof. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6, 10, 11 and 12
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
11. Substitution of the Underwriters. If one or more of the
--------------------------------
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 10 or
Section 12 hereof) to purchase the Registered Securities which it or they are
obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the Representative shall have the right, within 24 hours
thereafter, to make arrangement for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than
all, of the Defaulted Securities in such amounts as may be agreed upon and upon
the terms herein set forth. If, however, the Representative shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the total number of Shares to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to
the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
total number of Shares to be purchased on such date, this Agreement shall
terminate without liability on the part of any nondefaulting Underwriters.
<PAGE>
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the
----------------------
Closing Date or any Option Closing Date, as applicable, to sell and deliver the
number of Registered Securities which it is obligated to sell hereunder on such
date, then this Agreement shall terminate (or, if such default shall occur with
respect to any Option Shares to be purchased on an Option Closing
Date, the Underwriters may at the Representative's option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Shares from the Company on such date) without any liability on
the part of any non-defaulting party other than pursuant to Section 5, Section
7 and Section 10 hereof. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except
-------
as herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative, c/o National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention: Steven A. Rothstein, with a copy,
which shall not constitute notice, to Camhy Karlinsky & Stein LLP, 1740
Broadway, 16th Floor, New York, New York 10019, Attention: Alan I. Annex,
Esq. Notices to the Company shall be directed to the Company at Mortgage Plus
Loan and Equity Holdings Corporation, 6851 Jericho Turnpike, Suite 246,
Syosset, New York 11791, Attention: Steven M. Latessa, with a copy, which
shall not constitute notice, to Ruskin, Moscou, Evans & Faltischek, P.C., 170
Old Country Road, Mineola, New York 11501, Attention: Norman M. Friedland,
Esq.
14. Parties. This Agreement shall inure solely to the benefit
-------
of and shall be binding upon the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Registered Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and
------------
construed and enforced in accordance with the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed to be an original, and
all of which taken together shall be deemed to be one and the same instrument.
<PAGE>
17. Entire Agreement; Amendments. This Agreement and the
----------------------------
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof.
This Agreement may not be amended except in a writing, signed by the
Representative and the Company.
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among us.
Very truly yours,
MORTGAGE PLUS LOAN AND
EQUITY HOLDINGS CORPORATION
By:
-------------------------
Name: Steven M. Latessa
Title:President
CONFIRMED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By:
----------------------------
Name: Steven A. Rothstein
Title: Chairman
For itself and as Representative of the Underwriters named in Schedule A
hereto.
<PAGE>
SCHEDULE A
NUMBER OF SHARES
NAME OF UNDERWRITERS TO BE PURCHASED
-----------------
National Securities Corporation [__________]
[____________________] [__________]
_____________
TOTAL [__________]
----------
SCH. A-1
<PAGE>
EXHIBIT 1.2
DRAFT DATED 11/10/97
- --------------------------------------------------------------------------------
MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP.
AND
NATIONAL SECURITIES CORPORATION
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of ____________, 1997
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of ___________, 1997,
between MORTGAGE PLUS EQUITY AND LOAN HOLDINGS CORP., a Delaware corporation
(the "Company"), and NATIONAL SECURITIES CORPORATION and its assignees or
designees (each hereinafter referred to variously as a "Holder" or
"Representative").
W I T N E S S E T H :
- - - - - - - - -
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") between the Representative and the
Company, to act as the representative of the several underwriters listed therein
(the "Underwriters") in connection with the Company's proposed public offering
of 1,100,000 shares of common stock of the Company, no par value, (the "Common
Stock"), at a public offering price of $____ per share (the "Public Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes
to issue warrants to the Representative to purchase up to an aggregate of
110,000 shares of Common Stock (the "Representative's Warrants").
WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the Representative in consideration
for, and as part of the Underwriters' compensation in connection with, the
Representative acting as the representative pursuant to the Underwriting
Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of Ten dollars ($10.10), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Representative is hereby collectively granted the
-----
right to purchase, at any time from _________, 1998 until 5:30 p.m., New York
time, on ___________, 2002 (5 years from the Effective Date of the registration
statement and any supplement thereto, on Form S-1, No. 333-________), at which
time the Representative's Warrants expire, up to an aggregate 101,000 shares of
Common Stock (subject to adjustment as provided in Section 8 hereof), at an
-------
initial exercise price (subject to adjustment as provided in Section 11 hereof)
-------
of $_______ (120% of the Public Offering price) (the "Exercise Price").
2. Representative's Warrant Certificates. The Representative's
-------------------------------------
warrant certificates (the "Warrant Certificates") delivered and to be delivered
pursuant to this Agreement shall be in the form set forth in Exhibit A, attached
hereto and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. Registration of Warrant. The Representative's Warrants shall be
-----------------------
numbered and shall be registered on the books of the Company when issued.
-2-
<PAGE>
4. Exercise of Representative's Warrant.
------------------------------------
4.1 Method of Exercise. The Representative's Warrants initially
------------------
are exercisable at the Exercise Price (subject to adjustment as provided in
Section 11 hereof) per Representative's Warrant set forth in Section 8 hereof
- ------- -------
payable by certified or official bank check in New York Clearing House funds.
Upon surrender of a Representative's Warrant Certificate with the annexed Form
of Election to Purchase duly executed, together with payment of the Exercise
Price for the shares of Common Stock purchased at the Company's principal
offices in New York (presently located at 6851 Jericho Turnpike, Syosset, New
York 11791) the registered holder of a Representative's Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. The purchase rights
represented by each Representative's Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
shares of Common Stock underlying the Representative's Warrants). In the case
of the purchase of less than all of the shares of Common Stock purchasable under
any Representative's Warrant Certificate, the Company shall cancel said
Representative's Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Representative's Warrant Certificate of like tenor for
the balance of the shares of Common stock purchasable thereunder.
4.2 Exercise by Surrender of Representative's Warrant. In
-------------------------------------------------
addition to the method of payment set forth in Section 4.1 and in lieu of any
cash payment required thereunder, the Holder(s) of the Representative's Warrants
shall have the right at any time and from time to time to exercise the
Representative's Warrants in full or in part by surrendering the Warrant
-3-
<PAGE>
Certificate in the manner specified in Section 4.1 in exchange for the number of
shares of Common Stock equal to the product of (x) the number of shares of
Common Stock as to which the Representative's Warrants are being exercised,
multiplied by (y) a fraction, the numerator of which is the Market Price (as
defined in Section 9.3 (e) hereof) of the shares of Common Stock minus the
Exercise Price of the shares of Common Stock and the denominator of which is the
Market Price per share of Common Stock. Solely for the purposes of this Section
4.2, Market Price shall be calculated either (i) on the date on which the form
of election attached hereto is deemed to have been sent to the Company pursuant
to Section 15 hereof ("Notice Date") or (ii) as the average of the Market Price
for each of the five trading days immediately 3preceding the Notice Date,
whichever of (i) or (ii) results in a greater Market Price.
5. Issuance of Certificates. Upon the exercise of the
------------------------
Representative's Warrant, the issuance of certificates for shares of Common
Stock, properties or rights underlying such Representative's Warrant shall be
made forthwith (and in any event within five (5) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax,
other than income taxes, which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Sections 7
--------
and 9 hereof) be issued in the name of, or in such names as may be directed by,
the Holder thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificates in a name other than that of the
Holder and the Company shall not be required to issue or deliver such
certificates unless or until the person or
-4-
<PAGE>
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Representative's Warrant Certificates and the certificates
representing the shares of Common Stock or other securities, property or rights
issued upon exercise of the Representative's Warrant shall be executed on behalf
of the Company by the manual or facsimile signature of the then present
President or any Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the then
present Secretary or any Assistant Secretary of the Company. Representative's
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
6. Transfer of Representative's Warrant. The Representative's
------------------------------------
Warrant shall be transferable only on the books of the Company maintained at its
principal office, where its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
representative accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration transfer, the Company shall
execute and deliver the new Representative's Warrant to the person entitled
thereto.
7. Restriction On Transfer of Representative's Warrant. The Holder
---------------------------------------------------
of a Representative's Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Representative's Warrant is being acquired as an investment
and not with a view to the distribution thereof, and that the Representative's
Warrant may not be sold, transferred,
-5-
<PAGE>
assigned, hypothecated or otherwise disposed of, in whole or in part, for the
term of the Representative's Warrant, except to officers or partners of the
Underwriters, or by operation of law.
8. Exercise Price and Number of Securities. Except as otherwise
---------------------------------------
provided in Section 10 hereof, each Representative's Warrant is exercisable to
-------
purchase one share of Common Stock at an initial exercise price equal to the
Exercise Price. The Exercise Price and the number of shares of Common Stock for
which the Representative's Warrant may be exercised shall be the price and the
number of shares of Common Stock which shall result from time to time from any
and all adjustments in accordance with the provisions of Section 11 hereof.
-------
9. Registration Rights.
-------------------
9.1 Registration Under the Securities Act of 1933. Each
---------------------------------------------
Representative's Warrant Certificate and each certificate representing shares of
Common Stock and any of the other securities issuable upon exercise of the
Representative's Warrant (collectively, the "Warrant Shares") shall bear the
following legend unless (i) such Representative's Warrant or Warrant Shares are
distributed to the public or sold to the underwriters for distribution to the
public pursuant to Section 9 hereof or otherwise pursuant to a registration
-------
statement filed under the Securities Act of 1933, as amended (the "Act"), or
(ii) the Company has received an opinion of counsel, in form and substance
reasonably satisfactory to counsel for the Company, that such legend is
unnecessary for any such certificate:
-6-
<PAGE>
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE
OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, (II) TO THE EXTENT APPLICABLE, RULE 144
UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (III) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESEN-TATIVE'S WARRANT REPRESENTED
BY THE CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
REPRESENTATIVE'S WARRANT AGREEMENT REFERRED TO HEREIN.
9.2 Piggyback Registration. If, at any time commencing after the
----------------------
effective date of the Registration Statement and expiring five (5) years
thereafter, the Company proposes to register any of its securities under the Act
(other than in connection with a merger or pursuant to Form S-4 or Form S-8 or
successor form thereto) it will give written notice by registered mail, at least
thirty (30) days prior to the filing of each such registration statement, to the
Holders of the Warrant Shares of its intention to do so. If any of the Holders
of the Warrant Shares notify the Company within twenty (20) days after mailing
of any such notice of its or their desire to include any such securities in such
proposed registration statement, the Company shall afford such Holders of the
Warrant Shares the opportunity to have any such Warrant Shares registered under
such registration statement. In the event that the managing underwriter for
said offering advises the Company in writing that in their opinion the number of
securities requested
-7-
<PAGE>
to be included in such registration exceeds the number which can be sold in such
offering without causing a diminution in the offering price or otherwise
adversely affecting the offering, the Company will include in such registration
(a) first, the securities the Company proposes to sell, (b) second, the
----- ------
securities held by the entities that made the demand for registration, (c)
third, the Warrant Shares requested to be included in such registration which in
- -----
the opinion of such underwriter can be sold, pro rata among the Holders of
--- ----
Warrant Shares on the basis of the number of Representative's Warrant Shares
requested to be registered by such Holders, and (e) fourth, other securities
------
requested to be included in such registration.
Notwithstanding the provisions of this Section 9.2, the Company shall
-------
have the right at any time after it shall have given written notice pursuant to
this Section 9.2 (irrespective of whether a written request for inclusion of any
-------
such securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to the
effective date thereof.
9.3 Demand Registration.
-------------------
(a) At any time commencing one (1) year after the effective date of
the Registration Statement and expiring five (5) years from the effective date
of the Registration Statement, the Holders of the Representative's Warrants
and/or Warrant Shares representing a "Majority" (as hereinafter defined) of the
Representative's Warrants and/or Warrant Shares shall have the right (which
right is in addition to the registration rights under Section 9.2 hereof),
-------
exercisable by written notice to the Company, to have the Company prepare and
file with the
-8-
<PAGE>
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale by such Holders and any other Holders of the
Representative's Warrant and/or Warrant Shares who notify the Company within
fifteen (15) days after the Company mails notice of such request pursuant to
Section 9.3(b) hereof (collectively, the "Requesting Holders") of their
- -------
respective Warrant Shares for the earlier of (i) six (6) consecutive months or
(ii) until the sale of all of the Warrant Shares requested to be registered by
the Requesting Holders.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 9.3 by any Holder or Holders
-------
representing a Majority of the Representative's Warrants and/or Warrant Shares
to all other registered Holders of the Representative's Warrants and the Warrant
Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) In addition to the registration rights under Section 9.2 and
-------
subsection (a) of this Section 9.3, at any time commencing one (1) year after
-------
the effective date of the Registration Statement and expiring five (5) years
from the effective date of the Registration Statement, the Holders of a Majority
of the Representative's Warrants and/or Warrant Shares shall have the right on
one occasion, exercisable by written request to the Company, to have the Company
prepare and file with the Commission a registration statement
-9-
<PAGE>
so as to permit a public offering and sale by such Holders of their respective
Warrant Shares for the earlier of (i) six (6) consecutive months or (ii) until
the sale of all of the Warrant Shares requested to be registered by such
Holders; provided, however, that the provisions of Section 9.4(b) hereof shall
-------
not apply to any such registration request and registration and all costs
incident thereto shall be at the expense of the Holder or Holders making such
request. If the Holders have exercised their rights under Section 9.3(a) then
-------
the Holders may not exercise their rights under Section 9.3(c) for a period of
six (6) months following the effective date of any registration statement filed
pursuant to Section 9.3(a).
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Shares
within the time period specified in Section 9.4(a) hereof pursuant to the
-------
written notice specified in Section 9.3(a) of the Holders of a Majority of the
-------
Representative's Warrants and/or Warrant Shares, the Company, at its option, may
repurchase (i) any and all Warrant Shares at the higher of the Market Price (as
defined in Section 9.3(e)) per share of Common Stock on (x) the date of the
-------
notice sent pursuant to Section 9.3(a) or (y) the expiration of the period
-------
specified in Section 9.4(a) and (ii) any and all Representative's Warrant at
-------
such Market Price less the Exercise Price of such Representative's Warrant.
Such repurchase shall be in immediately available funds and shall close within
two (2) days after the later of (i) the expiration of the period specified in
Section 9.4(a) or (ii) the delivery of the written notice of election specified
- -------
in this Section 9.3(d).
-------
-10-
<PAGE>
(e) Definition of Market Price. As used herein, the phrase "Market
--------------------------
Price" at any date shall be deemed to be the last reported sale price, or, in
case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the average closing
sale price as furnished by the NASD through The Nasdaq Stock Market, Inc.
("Nasdaq") or similar organization if Nasdaq is no longer reporting such
information, or if the Common Stock is not quoted on Nasdaq, as determined in
good faith by resolution of the Board of Directors of the Company, based on the
best information available to it.
9.4 Covenants of the Company With Respect to Registration. In
-----------------------------------------------------
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
--------
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within ninety (90) days of receipt of any demand therefor, and to have
any registration statements declared effective at the earliest possible time,
and shall furnish each Holder desiring to sell Warrant Shares such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions, and excluding
roadshow expenses if the only shares to be registered in such Registration
Statement are Warrant Shares),
-11-
<PAGE>
fees and expenses in connection with all registration statements filed pursuant
to Sections 9.2 and 9.3(a) hereof including, without limitation, the Company's
--------
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses (including those of the Company)
in connection with the registration statement filed pursuant to Section 9.3(c).
-------
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Shares included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Shares to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify each of the Underwriters contained in Section 7 of the
-------
Underwriting Agreement.
-12-
<PAGE>
(e) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
-------
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Representative's Warrant prior to the
initial filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Shares to be included in any registration statement filed
pursuant to Section 9.3 hereof, or permit any other registration statement to be
-------
or remain effective during the effectiveness of a registration statement filed
pursuant to Section 9.3 hereof (other than registration statements filed prior
-------
to an exercise of registration rights by a Holder of Representatives Warrants
and/or Warrant Shares pursuant to Section 9.2 hereof), without the
-------
-13-
<PAGE>
prior written consent of National Securities Corporation or as otherwise
required by the terms of any existing registration rights granted prior to the
date of this Agreement by the Company to the holders of any of the Company's
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings
-14-
<PAGE>
statement (which need not be audited) complying with Section 11(a) of the Act
-------
and covering a period of at least 12 consecutive months beginning after the
effective date of the registration statement.
(j) The Company shall enter into an underwriting agreement with the
managing underwriters (in the case of registration rights exercised pursuant to
Section 9.3 hereof, selected for such underwriting by Holders holding a Majority
- -------
of the Warrant Shares requested to be included in such underwriting, which may
be the Representative). Such agreement shall be satisfactory in form and
substance to the Company, each Holder and such managing underwriters, and shall
contain such representations, warranties and covenants by the Company and such
other terms as are customarily contained in agreements of that type used by the
managing underwriter. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Warrant Shares and may, at
their option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriters shall also
be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holders and their
intended methods of distribution.
(k) For purposes of this Agreement, the term "Majority" in reference
to the Representative's Warrants or Warrant Shares, shall mean in excess of
fifty percent (50%) of the then outstanding Representative's Warrants or Warrant
Shares that (i) are not held by the
-15-
<PAGE>
Company, an affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting as nominees
or in conjunction therewith or (ii) have not been resold to the public pursuant
to a registration statement filed with the Commission under the Act.
10. Obligations of Holders. It shall be a condition precedent to the
----------------------
obligations of the Company to take any action pursuant to Section 9 hereof that
-------
each of the selling Holders shall:
(a) Furnish to the Company such information regarding themselves, the
Warrant Shares held by them, the intended method of sale or other disposition of
such securities, the identity of and compensation to be paid to any underwriters
proposed to be employed in connection with such sale or other disposition, and
such other information as may reasonably be required to effect the registration
of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus relating to the
Warrant Shares covered by a registration statement is required to be delivered
under the Act, of the happening of any event with respect to such selling Holder
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
11. Adjustments to Exercise Price and Number of Securities. The
------------------------------------------------------
Exercise Price in effect at any time and the number and kind of securities
purchased upon the exercise
-16-
<PAGE>
of the Representative's Warrant shall be subject to adjustment from time to time
only upon the happening of the following events:
11.1 Stock Dividend, Subdivision and Combination. In case the
-------------------------------------------
Company shall (i) declare a dividend or make a distribution on its outstanding
shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
11.2 Adjustment in Number of Securities. Upon each adjustment of
----------------------------------
the Exercise Price pursuant to the provisions of this Section 11, the number of
-------
Warrant Shares issuable upon the exercise at the adjusted Exercise Price of each
Representative's Warrant shall be adjusted to the nearest number of whole shares
of Common Stock by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares issuable
upon exercise of the Representative's Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
-17-
<PAGE>
11.3 Definition of Common Stock. For the purpose of this Agreement,
--------------------------
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Articles of Incorporation of the Company as amended as of the date
hereof, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
11.4 Merger or Consolidation. In case of any consolidation of the
-----------------------
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of each Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representative's Warrant) to receive, upon exercise of such
Representative's Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock for which such Representative's Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be identical to the adjustments provided in Section 11. The above
-------
provision of this subsection shall similarly apply to successive consolidations
or mergers.
-18-
<PAGE>
11.5 No Adjustment of Exercise Price in Certain Cases. No
------------------------------------------------
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Representative's Warrant
or the Warrant Shares;
(b) Upon the issuance or sale of Common Stock (or any other
security convertible, exercisable, or exchangeable into shares of Common Stock)
upon the direct or indirect conversion, exercise, or exchange of any options,
rights, warrants, or other securities or indebtedness of the Company outstanding
as of the date of this Agreement or granted pursuant to any stock option plan of
the Company in existence as of the date of this Agreement, pursuant to the terms
thereof; or
(c) If the amount of said adjustment shall be less than two
cents ($.02) per share, provided, however, that in such case any adjustment that
would otherwise be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to at least two
cents ($.02) per Representative's Warrant.
11.6 Exchange and Replacement of Representative's Warrant
----------------------------------------------------
Certificates. Each Representative's Warrant Certificate is exchangeable,
- ------------
without expense, upon the surrender thereof by the registered Holder at the
principal executive office of the Company for a new Representative's Warrant
Certificate of like tenor and date representing in the aggregate the right
-19-
<PAGE>
to purchase the same number of Warrant Shares in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Representative's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Representative's Warrant, if mutilated, the Company will make and deliver a
new Warrant Certificate of like tenor, in lieu thereof.
12. Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Representative's Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
13. Reservation and Listing of Securities. The Company shall at all
-------------------------------------
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Representative's
Warrant, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. Every transfer agent
("Transfer Agent") for the Common Stock and other securities of the Company
issuable upon the exercise of the Representative's Warrant will be irrevocably
-20-
<PAGE>
authorized and directed at all times to reserve such number of authorized shares
of Common Stock and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every Transfer Agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Representative's Warrant. The Company will supply every such
Transfer Agent with duly executed stock and other certificates, as appropriate,
for such purpose. The Company covenants and agrees that, upon exercise of the
Representative's Warrant and payment of the Exercise Price therefor, all shares
of Common Stock and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Representative's Warrant shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Representative's Warrant to be
listed (subject to official notice of issuance) on all securities exchanges on
which the Common Stock issued to the public in connection herewith may then be
listed and/or quoted on Nasdaq SmallCap Market.
14. Notices to Representative's Warrant Holders. Nothing contained in
-------------------------------------------
this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however,
at any time prior to the expiration of the Representative's Warrants and their
exercise, any of the following events shall occur:
-21-
<PAGE>
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed;
then in any one or more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or
-22-
<PAGE>
payment of any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
15. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) if to the registered Holder of the Representative's Warrant, to
the address of such Holder as shown on the books of the Company; or
(b) if to the Company, to the address set forth in Section 4 hereof or
-------
to such other address as the Company may designate by notice to the Holders.
16. Supplements; Amendments; Entire Agreement. This Agreement
-----------------------------------------
(including the Underwriting Agreement to the extent portions thereof are
referred to herein) contains the entire understanding between the parties hereto
with respect to the subject matter hereof and may not be modified or amended
except by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
holders of Representative's Warrant Certificates (other than the Representative)
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or
-23-
<PAGE>
questions arising hereunder which the Company and the Representative may deem
necessary or desirable and which the Company and the Representative deem shall
not adversely affect the interests of the Holders of Representative's Warrant
Certificates.
17. Successors. All of the covenants and provisions of this Agreement
----------
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
18. Survival of Representations and Warranties. All statements in any
------------------------------------------
schedule, exhibit or certificate or other instrument delivered by or on behalf
of the parties hereto, or in connection with the transactions contemplated by
this Agreement, shall be deemed to be representations and warranties hereunder.
Notwithstanding any investigations made by or on behalf of the parties to this
Agreement, all representations, warranties and agreements made by the parties to
this Agreement or pursuant hereto shall survive.
19. Governing Law. This Agreement and each Representative's Warrant
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
20. Severability. If any provision of this Agreement shall be held to
------------
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
-24-
<PAGE>
21. Captions. The caption headings of the Sections of this Agreement
--------
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Representative's
Warrant Certificates or Warrant Shares any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Underwriters and any other Holder(s) of
the Representative's Warrant Certificates or Warrant Shares.
-25-
<PAGE>
23. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS OF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ATTEST: MORTGAGE PLUS EQUITY AND
LOAN HOLDINGS CORP.
_________________ By: ________________________________________
Cary Wolen Name: Steven M. Latessa
Secretary Title: President
NATIONAL SECURITIES CORPORATION
By:
-------------------------------------------
Name: Steven A. Rothstein
Title: Chairman
-26-
<PAGE>
EXHIBIT A
[FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE]
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ____________, 2002
Representative's Warrant No. _____
__________ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered
assigns, is the registered holder of Warrants to purchase initially, at any
time from ___________, 1998 until 5:30 p.m., New York time on ____________, 2002
("Expiration Date"), up to 110,000 shares of fully-paid and non-assessable
common stock, no par value (the "Common Stock") of Mortgage Plus Equity and Loan
Holdings Corp., a Delaware corporation (the "Company"), at the initial exercise
price, subject to adjustment in certain events, of $_____ per share of Common
Stock (the "Exercise Price") upon surrender of this Representative's Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the
Representative's Warrant Agreement dated as of February ___, 1997 among the
Company and National Securities Corporation (the "Warrant Agreement"). Payment
of the Exercise Price shall be made by certified or official bank check in New
York Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Representative's Warrant evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
<PAGE>
The Representative's Warrant evidenced by this Warrant Certificate are
part of a duly authorized issue of Representative's Warrant issued pursuant to
the Warrant Agreement, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the
Representative's Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Representative's
Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Representative's Warrant shall be issued to the transferee(s) in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Representative's Warrant
evidenced by this Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Representative's Warrant.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
<PAGE>
This Warrant Certificate does not entitle any holder thereof to any of
the rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of ____________, 1997.
ATTEST: MORTGAGE PLUS EQUITY AND
LOAN HOLDINGS CORP.
_________________ By:______________________________________
Cary Wolen Name: Steven M. Latessa
Secretary Title: President
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _________ Shares and
herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of Mortgage Plus
Equity and Loan Holdings Corp. (the "Company") in the amount of $_____, all in
accordance with the terms of Section 4.1 of the Representative's Warrant
Agreement dated as of ___________, 1997 among the Company and National
Securities Corporation. The undersigned requests that a certificate for such
securities be registered in the name of ___________________________________,
whose address is
_____________________________________________________________________
and that such certificate be delivered to _________________, whose address is
__________________________
______________________, and if said number of shares shall not be all
the shares purchasable hereunder, that a new Warrant Certificate for the balance
of the shares purchasable under the within Warrant Certificate be registered in
the name of the undesigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
Dated: __________________________
Signature:__________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
Address:
_______________________________________
_______________________________________
______________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
Signature Guaranteed:______________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
<PAGE>
FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4.2
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________ Shares all in
accordance with the terms of Section 4.2 of the Warrant Agreement dated
______________, 1997 between Mortgage Plus Equity and Loan Holdings Corp. and
National Securities Corporation. The undersigned requests that certificates for
such securities be registered in the name of ________________ whose address is
____________________________________ and that such certificates be delivered to
_______________________ whose address is __________________________________.
Dated:
Signature________________________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate)
Address:_________________________________________
_________________________________________________
_________________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________ here sells, assigns and transfers unto
[NAME OF TRANSFEREE] this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
__________________________ Attorney, to transfer the within Warrant Certificate
on the books of the within-named Company, with full power of substitution.
Dated: __________________________
Signature:________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
Address:
------------------------------------------------------
(Insert Social Security or Other Identifying Number of
Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15).
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated September 3, 1997 (with respect to Note 1 , 1997), on the
financial statements of Mortgage Plus Equity and Loan Holdings Corp. as at
December 31, 1996 and for the year then ended. We also consent to the
reference to our firm under the caption "Experts."
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
----------------
The foregoing consent is in the form that will be signed upon the completion
of the transaction described in Note 1 to the financial statements.
Florham Park, New Jersey
November 12, 1997
<PAGE>
EXHIBIT 23.2
Levy, Cohen & Gold, LLP
310 Northern Boulevard
Great Neck, New York 11021-4806
November 12, 1997
To the Board of Directors
Mortgage Plus Equity and Loan Corporation
Syosset, New York
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Levy, Cohen & Gold, LLP
Great Neck, New York
November 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 342,881
<SECURITIES> 0
<RECEIVABLES> 12,694,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 541,872
<DEPRECIATION> 118,966
<TOTAL-ASSETS> 13,501,388
<CURRENT-LIABILITIES> 11,942,331
<BONDS> 1,131,594
0
0
<COMMON> 40,000
<OTHER-SE> 387,463
<TOTAL-LIABILITY-AND-EQUITY> 13,501,388
<SALES> 0
<TOTAL-REVENUES> 4,081,723
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,503,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 438,405
<INCOME-PRETAX> 140,069
<INCOME-TAX> 0
<INCOME-CONTINUING> 140,069
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140,069
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
