Registration No. 333-50657
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 50549
Amendment No. 1 to
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Transnational Financial Corporation
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(Name of small business issuer)
California 6162 94-2964195
- ------------------------------ ---------------------------- -------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
301 Junipero Serra Blvd., Suite 270, San Francisco, CA 94127
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(Address and telephone number of principal executive offices)
Joseph Kristul, 301 Junipero Serra Blvd., Suite 270, San Francisco, CA 94127
(415) 334-7000
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(Name, address and telephone number of agent for service)
Copies of all communications to:
Robert A. Forrester, Esq. Norman R. Miller, Esq.
1215 Executive Dr. West Wolin, Ridley & Miller LLP
Suite 102 3100 Bank One Center
Richardson, TX 75081 1717 Main Street
(972) 437-9898 Dallas, TX 75201-4681
Fax (972) 480-8406 (214) 939-4900
Approximate date of proposed sale to public: As soon as practicable after the
effective date of the Registration Statement. /_/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /_/
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /_/
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of each class Offering Price Per Aggregate Offering
of securities to be Amount to be Security(1) Price Amount of
registered Registered Registration Fee
- ---------------------- -------------------- --------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Common Stock 1,150,000 $9.00 $10,350,000 $3,245
- ---------------------- -------------------- --------------------- --------------------- --------------------
Representative's 100,000 $0.001 $100 $1
Warrants(2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
Common Stock 100,000 $10.80 $1,080,000 $590
underlying
Representative's
Warrants
- ---------------------- -------------------- --------------------- --------------------- --------------------
Total $3,836
- ---------------------- -------------------- --------------------- --------------------- --------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) These shares may be issued upon exercise of the Warrants and the
Representative's Warrant. An additional indeterminate number of shares
of Common Stock are being registered hereby to cover any adjustments in
the number of shares issuable upon exercise of the Warrants and the
Representative's Warrant pursuant to antidilution provisions contained
therein.
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 the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<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 propsectus 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 June 8, 1998
PROSPECTUS
1,000,000 Shares
Transnational Financial Corporation
Common Stock
Transnational Financial Corporation (the "Company") is hereby offering
1,000,000 shares of Common Stock (the "Common Stock"). See "Description of
Capital Stock." Prior to this offering, there has been no public market for the
Common Stock, and there can be no assurance that an active market will develop.
It is presently anticipated that the initial public offering price will be
between $7.00 and $9.00 per share. See "Underwriting" for information relating
to the factors considered in determining the initial public offering price. The
Company has applied to list the Common Stock on the American Stock Exchange
under the symbol "TFN".
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 6 HEREOF CONCERNING THE COMPANY AND THIS OFFERING.
PROSPECTIVE INVESTORS SHOULD ALSO CONSIDER THAT THEIR INVESTMENT WILL RESULT IN
IMMEDIATE SUBSTANTIAL DILUTION. SEE "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Per Share...........................
Total (2)(3).......................
(1) Excludes a nonaccountable expense allowance payable by the Company to the
Representative of 2.0% of the aggregate initial public offering price of
the shares. The Company has also agreed to issue to the Representative
warrants exerciseable for four years commencing one year from the date of
this Prospectus to purchase 100,000 shares of Common Stock at 120% of the
public offering price to the public (the "Representative's Warrants"). The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $600,000 payable by the Company,
including the Representative's 2.0% nonaccountable expense allowance.
(3) The Kristul Family LLC (the "Selling Shareholder") has granted to the
Underwriters an option, exercisable within 45 days from the date of this
Prospectus, to purchase up to 150,000 shares, on the same terms set forth
above, solely for the purpose of covering over-allotments, if any, The
Company will not receive any proceeds from the sale of such shares. If the
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Selling Shareholder
will be $___________, $_________, and $__________ See "Principal and
Selling Shareholders" and "Underwriting."
The shares of Common Stock are being offered severally by the
Underwriters named herein subject to receipt and acceptance by them and to their
right to reject any order, in whole or in part. It is expected that delivery of
the shares of Common Stock will be made against payment therefor at the offices
of the Representative in Austin, Texas on or about _________, 1998.
Tejas Securities Group, Inc.
The date of this Prospectus is _______, 1998.
<PAGE>
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2, (including any amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the shares offered hereby. This
Prospectus 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 shares, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus regarding the contents of any contract or document filed as an
exhibit to the Registration Statement are not necessarily complete and, in each
instance, reference is hereby made to the copy of such contract or document so
filed. Each such statement is qualified in its entirety by such reference. The
Registration Statement and the exhibits and the schedules thereto filed with the
Commission may be inspected, without charge, at the office of the Commission at
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. Copies of such
materials may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.
As a result of this offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith will
file periodic reports, proxy statements and other information with the
Commission. The Company will furnish its shareholders with annual reports
containing audited financial statements certified by independent public
accountants following the end of each fiscal year, proxy statements and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year following the end of such fiscal quarter.
The Company has applied to list the Common Stock on the American Stock
Exchange. If the Company's application is accepted, then reports, proxy
statements and other information concerning the Company will be available for
inspection at the principal office of the American Stock Exchange at 86 Trinity
Place, New York, New York, 10006.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING EXERCISING THE OVER-ALLOTMENT OPTION, EFFECTING
SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES , SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information herein
has been adjusted to reflect (i) the 2,468.75-for-one split of the Common Stock
effected in March 1998, (ii) the change in the Company's status from an S
corporation to a C corporation on April 30, 1998, and (iii) the issuance on May
1, 1998, of 31,250 shares to certain individuals for services rendered to the
Company, and assumes the Underwriters' over-allotment option and the
Representative's Warrants are not exercised. The shares offered hereby involve a
high degree of risk. Investors should carefully consider the information set
forth under "Risk Factors."
Prospective investors should note that this Prospectus contains certain
"forward-looking statements, including without limitation, statements containing
the words "believes," "anticipates," "expects," "intends," "plans," "should,"
"seeks to," and similar words. Prospective investors are cautioned that such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to, the risk factors set forth in this Prospectus. The accompanying
information contained in this Prospectus identifies certain important factors
that could cause such differences. See "Risk Factors."
The Company
The Company is a wholesale and retail mortgage banker which originates,
funds and sells mortgage loans secured by one-to-four family residential
properties in the San Francisco Bay area. The Company sells all of its mortgage
loans in the secondary market and all of the servicing rights associated with
those mortgage loans. Since the Company's inception in 1985, it has not been
required to repurchase any mortgage loan.
Since 1985, the Company has been engaged in retail mortgage banking and
originated mortgage loans that were sold prior to funding. In 1995, the Company
began a wholesale division to close and fund mortgage loans originated by
others. The total loan production volume increased from approximately
$92,000,000 in 1995 to approximately $261,000,000 in 1996 and approximately
$463,000,000 in 1997. For the year ended December 31, 1997, 84% of the Company's
loan production volume was wholesale and 16% was retail.
The Company's marketing strategy is to provide mortgage banking
services to qualified borrowers at favorable rates on large loans. In 1997, the
average size of the mortgage loans funded by the Company was approximately
$280,000. Its underwriters are experienced employees who evaluate the financial
quality of the borrower and the mortgage loan. The Company believes that
qualified lending supported by experienced personnel permits effective,
cost-efficient operations with low fixed-expenses.
The volume of loans the Company may fund is limited by the liquid
capital of the Company. The primary purpose of this offering is to increase the
Company's liquid capital which the Company intends to use to support an increase
in its warehouse lines of credit and the total amount of loans that can be
funded by the Company. See "Use of Proceeds." A warehouse line of credit is a
line of credit on which the Company borrows on a short-term basis so that the
Company has the funds to close a mortgage loan. This short-term loan is repaid
upon the sale of a mortgage loan to an investor. See "Business - Funding of
Mortgage Loans." One of the effects of increased capital, management believes,
will be to lower significantly the Company's cost of borrowing. Following the
completion of this offering, the Company also intends to establish new warehouse
lines of credit at lower interest rates.
The Company is licensed as a mortgage broker by the State of California
and is an approved seller for the Federal National Mortgage Association ("FNMA"
or "Fannie Mae"). Because the Company's market is not oriented to smaller loans,
the Company has not sought to originate mortgage loans insured by the Federal
Housing Authority ("FHA") or guaranteed by the Veterans Administration ("VA").
The Company is also licensed by the Department of Housing and Urban Development
("HUD").
The Company maintains warehouse lines of credit to fund mortgage loans
prior to their sale in the secondary market. Beginning in 1997, the Company
commenced hedging activities to control the risk related to interest rate
changes between the time a mortgage loan is funded and sold. The Company does
not plan, at the present time, to securitize its own loans or engage in
servicing the mortgage loans.
The Company maintains in separate locations a retail office in San
Francisco, a wholesale office in San Francisco, a wholesale office in San Jose,
California and a mortgage loan processing facility in San Francisco. The
Company's executive offices are located at 301 Junipero Serra Blvd., Suite 270,
San Francisco, California 94127, and its telephone number is (415) 334-7000. The
Company was incorporated in California in 1985.
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2
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The Offering
Common Stock offered........................... 1,000,000 shares
Common Stock to be outstanding
after the Offering........................... 3,500,000 shares (1)
Use of Proceeds................................ Working capital and
repayment of subordinated
debt. See "Use of Proceeds."
Risk Factors................................... The shares of Common Stock
offered hereby are
speculative and involve a
high degree of risk and
should not be purchased by
investors who cannot afford
the loss of their entire
investment. See "Risk
Factors."
Proposed American Stock Exchange Symbol........ "TFN"
(1) Based on shares outstanding as of May 1, 1998. Does not include (i) 300,000
shares of Common Stock reserved for issuance under the Company's 1998 Stock
Option Plan (the "Stock Option Plan") or (ii) an aggregate of up to 100,000
shares issuable upon exercise of the Representative's Warrants. The Company
has agreed to grant options to certain employees under the Stock Option
Plan to purchase a total of 45,000 to be effective upon the consummation of
this offering. See "Management - Stock Option Plan," "Certain Relationships
and Related Transactions." and "Underwriting."
4
<PAGE>
Summary Financial Information
The following income statement data has been derived from the audited
income statements of the Company as of December 31, 1996 and 1997 and the
audited balance sheet from December 31, 1997. This summary financial data should
be read in conjunction with and are qualified by reference to the financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
1997 1996 1998 1997
-------------- -------------- -------------- -------------
Income Statement Data: (Unaudited)
Income:
<S> <C> <C> <C> <C>
Net gain from sale of mortgage loans $2,230,309 $ 1,013,579 $ 969,783 $ 428,671
Production Income 943,182 915,505 305,697 229,032
Other 16,346 - 10,784 3,675
------------- ----------- ------------- -----------
Total 3,189,837 1,929,084 1,286,264 661,378
----------- ----------- ----------- ---------
Expenses:
Salaries and benefits (1) 1,262,790 757,755 513,472 244,441
General and administrative 674,962 558,535 314,658 164,446
Interest expense, net of interest income 279,093 146,860 152,431 32,199
Occupancy 125,020 63,860 39,041 20,799
------------ ------------- ------------- ----------
Total Expenses 2,341,865 1,527,010 1,019,602 461,885
----------- ----------- ----------- ---------
Income before income taxes 847,972 402,074 266,662 199,493
Provision for State Income Tax 13,000 6,227 4,000 3,000
------------- -------------- ------------- -----------
Net income $ 834,972 $ 395,847 $ 262,662 $ 196,493
============= ============== ============= ===========
Pro Forma information: (2)
Income before income taxes, as reported $ 847,972 $ 402,074 $ 266,662 $ 199,493
Pro forma provision for income taxes 339,200 158,300 106,000 80,000
------------ ------------ ----------- ---------
Pro forma net income $ 508,772 $ 243,774 $ 160,662 $119,493
=========== =========== =========== ========
Per Share Data:
Pro forma net income per share $ 0.20 $ 0.10 $ 0.06 $ 0.05
Pro forma weighted average shares outstanding 2,500,000 2,500,000 2,500,000 2,500,000
Operating Data (in thousands):
Production volume - Wholesale $ 387,312 $ 206,613 $ 139,783 $ 81,512
Production volume - Retail 75,427 54,686 25,206 14,616
---------- ---------- ---------- --------
Total production volume $ 462,739 $ 261,299 $ 164,989 $ 96,128
======== ======== ======== =======
Average principal balance per loan,
wholesale and retail $ 280,448 $ 261,823 $ 241,124 $ 273,870
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31
1997 1998 1998 1998
------------------ ---------------- --------------- ---------
Balance Sheet Data: (Unaudited) Pro Forma(2) As Adjusted (3)
<S> <C> <C> <C> <C>
Cash and equivalents $ 754,856 $ 1,916,461 $ 1,603,448 $ 6,203,448
Mortgage loans held 50,288,714 37,015,012 37,015,012 37,015,012
Total assets 51,975,783 39,721,077 39,408,064 44,008,064
Warehouse notes payable 50,154,791 36,781,678 36,781,678 36,781,678
Subordinated debt - 1,000,000 1,000,000 -
Shareholders equity 1,338,639 1,461,639 1,148,626 6,848,626
</TABLE>
(1) Not included in salary and benefits are dividend distributions of $381,197
in 1996, $513,073 in 1997 and $139,662 in the first quarter of 1998 which
were distributed to the stockholders for income and to meet tax liabilities
when the Company was an S corporation. See "Dividends" and "Management -
Executive Compensation."
(2) On April 1, 1995, the Company elected to be taxed as an S corporation.
Accordingly, in lieu of payment of income taxes at the corporate level, the
stockholders individually reported their pro rata share of the Company's
income, deductions, losses and credits. Pro forma information reflects
results that would have been reported had the Company not been an S
corporation during the applicable period. In addition the pro forma
information reflects distributions made in April 1998 to the Company's then
shareholders, assumes that these distributions were made from cash
available at March 31, 1998, and that retained earnings since the Company's
inception as an S corporation in excess of distributions during that period
constitute additional paid-in capital.
(3) Adjusted to reflect the sale of the shares offered hereby at an offering
price of $7.00 per share and application of the estimated net proceeds
therefrom of $5,700,000. See "Use of Proceeds."
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE
OTHER INFORMATION SET FORTH IN THE PROSPECTUS BEFORE PURCHASING THE SECURITIES
OFFERED HEREBY.
General Business Risks
The Company's business is subject to various business risks, including
economic risks. Economic conditions affect the overall level of mortgage
business activity. The decisions to buy, sell or refinance residences are
affected by such economic conditions as changes in overall growth of the
economy, the level of consumer confidence, real estate values, prevailing
interest rates and investment returns expected by the financial community. These
conditions could affect the number and size of mortgage loans of the types
originated and purchased by the Company and make these mortgage loans less
attractive to borrowers or investors. In addition, a decline in real estate
values will have an adverse effect on the loan-to-value ratios for the related
mortgage loans, weakening the collateral coverage and resulting in greater
exposure in the event of a default. This greater exposure to default could make
it more difficult for the Company to obtain interim financing for mortgage loans
it originates or purchases or decrease the availability of purchasers of such
mortgage loans or interest expected by the purchasers. See "Business" and "---
Liabilities Under Representations and Warranties."
Mortgage companies often offset the effects of an economic downturn
where the economic downturn is caused by higher interest rates by servicing
mortgages. Such servicers receive from the owners of the mortgages up to
one-half of one per cent of the outstanding mortgage loan balance per annum and
consequently have a continuing revenue stream during periods when the volume of
new originations slows. The Company sells the servicing rights of all of the
mortgage loans it originates or purchases. Not servicing mortgage loans subjects
the Company to reliance upon the generation or purchase of mortgage loans for
revenues and, consequently, subjects the Company to changes in the economic
cycle and the general economic health in the geographic area or areas in which
it operates.
Dependence Upon Wholesale Brokers
During the year ended December 31, 1997, purchased loans from brokers
accounted for approximately 84% of the mortgage loans closed by the Company,
while the Company's retail division originated the remainder, approximately 16%
of such mortgage loans. None of these brokers are contractually obligated to do
business with the Company. Further, the Company's competitors also have
relationships with the Company's brokers and actively compete with the Company
in its efforts to expand its broker relationships. Accordingly, there can be no
assurance that the Company will be successful in maintaining its existing
relationships or expanding its broker and correspondent network. If the Company
is not successful in maintaining or expanding its broker network, its business,
results of operations and financial condition could be materially and adversely
affected. See "Business - Loan Production."
Dependence Upon Funding Sources
The Company's ability to originate and purchase mortgage loans depends
to a large extent upon its ability to fund mortgage loans upon acceptable terms
on an interim basis. The Company funds substantially all of the mortgage loans
it purchases and originates through borrowings under collateralized loan
purchase agreements with several commercial banks and thrifts which provide
primary credit facilities upon which the Company relies. These agreements are
generally terminable at will by either party. The Company's borrowings are in
turn repaid with proceeds received by the Company when such mortgage loans are
sold. The Company has relied upon a few lenders to provide the primary credit
facilities for its loan originations and purchases. Accordingly, any failure to
renew or obtain adequate funding under the Company's financing facilities or
other financing arrangements, or any substantial reduction in the size of or
increase in the cost of such facilities, could have a material adverse effect on
the Company's business, results of operations and financial condition. To the
extent the Company is not successful in maintaining or replacing existing
financing, it may have to curtail its mortgage loan origination and purchase
activities, which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business - Funding
of Mortgage Loans."
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<PAGE>
Dependence on Programs that Purchase Loans or Guarantee Loans
Institutional investors, which purchase all of the mortgage loans
originated by the Company, generate funds by selling mortgage-backed securities
and are largely dependent upon the continuation of programs administered by
Freddie Mac, Fannie Mae and Ginnie Mae, which provide the context and facilitate
the issuance of such securities. Although the Company is not aware of any
proposed actions, the discontinuation of, or a significant reduction in, the
operation of such programs could have a material adverse effect on the Company's
operations. In addition, the mortgage loan products eligible for such programs
may be changed from time to time by the sponsor. The profitability of specific
types of mortgage loan products may vary depending on a number of factors,
including the administrative costs to the Company of purchasing or originating
such types of mortgage loans. See "Business - Mortgage Loan Sales."
Inability to Sustain and Manage Growth
Although the Company has experienced rapid and substantial growth in
total revenues recently, there can be no assurance that the Company can sustain
these rates of growth or that it will be able to continue to recruit and retain
sufficient personnel to keep pace with a prolonged period of growth.
Competition
The Company faces strong competition in originating, purchasing and
selling mortgage loans and the related mortgage servicing rights. The Company's
competition is principally from savings and loans associations, other mortgage
companies, commercial banks and, to a lesser degree, credit unions and insurance
companies, depending upon the type of mortgage loan product offered. Many of
these institutions have greater financial and other resources than the Company
and maintain a significant number of branch offices in the area in which the
Company conducts operations. Increased competition for mortgage loans from other
lenders may result in a decrease in the volume of mortgage loans originated and
purchased by the Company If the Company is unable to compete effectively, its
business, results of operations and financial condition could be materially and
adversely affected. See "Business - Competition."
Liabilities Under Representations and Warranties
In the ordinary course of business, the Company makes representations
and warranties to the purchasers and insurers of mortgage loans and the related
mortgage servicing rights regarding compliance with laws, regulations and
program standards. The Company generally receives similar representations and
warranties from the brokers from whom it purchases mortgage loans. In the event
of a breach of these representations and warranties, the Company may be required
to repurchase these mortgage loans and/or may be liable for certain damages.
However, in its twelve years of business, the Company has not been required to
repurchase any mortgage loans. There can be no assurance that the Company will
not experience any such losses in the future. See "Business."
Interest Rate Fluctuations
Changes in interest rates can have differing effects on various aspects
of the Company's business, particularly in the areas of volume of mortgage loans
originated and purchased, discussed above (See "Risk Factors - General Business
Risks."), as well as net interest income and sales of mortgage loans. When the
Company purchases or originates a loan, it usually has a commitment from a third
party to purchase that loan. Generally, the Company funds the loan using
borrowings from its lines of credit at commercial banks and thrifts known as
warehouse lines of credit. The warehouse line of credit is repaid upon the sale
of the warehoused loans. Before the Company sells the mortgage loan, it is
entitled to receive interest income on the loan from the borrower and
simultaneously pays interest expense to the institution providing the warehouse
line of credit. The interest rate the Company receives during this period and
the interest rate it pays are different. The profitability of the loan is
affected by this difference and the fluctuations in interest rates before the
mortgage loan is sold. Although the Company generally has a commitment to sell
the mortgage loan before it commits to fund the mortgage loan, there are
situations in which the Company does bear a risk in changing interest rates
prior to the mortgage loan being sold. In particular, if the interest rates
increase during the time before the Company sells the uncommitted mortgage loan
but after it has funded the mortgage loan, the Company could sell the principal
7
<PAGE>
of the mortgage loan for less than the Company funded, thereby decreasing the
mortgage loan's profitability or incurring a loss on the mortgage loan's sale.
To manage the risk of interest rate fluctuation between the time the
mortgage loan is funded and sold, the Company engages in certain hedging
activity by entering forward delivery contracts to sell mortgage-backed
securities and forward delivery commitments for the sale of whole loans.
Although this hedging activity is designed to reduce or eliminate risks related
to interest rate fluctuations, there can be no assurance that such hedging
activity will be successful or that the Company will not incur significant
losses in connection therewith. See "--- Sale of Mortgage Loan Servicing."
Sale of Mortgage Loan Servicing
The prices obtained by the Company upon the sale of mortgage loan
servicing rights depend upon a number of factors, including the general supply
of and demand for mortgage servicing rights, as well as prepayment and
delinquency rates on the portfolios of mortgage servicing rights being sold.
Interest rate changes can affect the profitability of the sale of mortgage loan
servicing rights to a third party. Purchasers of mortgage loan servicing rights
analyze a variety of factors to determine the purchase price they are willing to
pay, including prepayment sensitivity of servicing rights. Because of the
increased likelihood of prepayment in periods of declining interest rates, sales
of mortgage loan servicing rights related to higher interest rate mortgage loans
may be sold for less than in times of stable or increasing interest rates, which
could adversely affect the Company's results of operations and financial
condition. See "Business - Mortgage Loan Sales."
Legislation and Regulation
Federal, state and local authorities regulate and examine the
origination, processing, underwriting, selling and servicing of mortgage loans.
The Company is an approved seller/servicer of mortgage loans for Fannie Mae. In
addition, the Company is an approved mortgagee by HUD. Among other consequences,
the failure to comply with HUD or Fannie Mae regulations could prevent the
Company from reselling its mortgage loans or prevent its ability to enter into
the servicing of mortgage loans should it choose to do so. Such failure could
also result in demands for indemnification or mortgage loan repurchase, certain
rights of rescission for mortgage loans, class action law suits and
administrative enforcement actions, any of which could have a material adverse
effect on the Company's business results of operations and financial conditions.
Federal, state and local governmental authorities also regulate the
Company's activities as a lender. The Truth in Lending Act ("TILA") and
Regulation Z promulgated thereunder contain certain requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of mortgage loans and credit transactions. The Equal Credit
Opportunity Act ("ECOA") prohibits creditors from discriminating against
applicants on the basis of race, color, sex, age or marital status, among other
restrictions and requirements. In instances where the applicant is denied
credit, or the rate or charge for a mortgage loan increases as a result of
information obtained from a consumer credit agency, the Fair Credit Reporting
Act of 1970 requires the lender to supply the applicant with a name and address
of the reporting agency. The Real Estate Settlement Procedures Act and the Debt
Collection Practices Act subject the Company to filing an annual report with the
Department of Housing and Urban Development.
There can be no assurance that the Company will maintain compliance
with these requirements in the future without additional expenses, or that more
restrictive local, state or federal laws, rules and regulations will not be
adopted or that existing laws and regulations will not be interpreted in a more
restrictive manner, which would make compliance more difficult and more
expensive for the Company.
Geographic Concentration
All of the Company's mortgage loan originations and purchases for the
year ended December 31, 1997, were derived from the San Francisco Bay area. The
Company currently does no business outside the San Francisco Bay area and
intends to continue its loan origination and purchases activity in the San
Francisco Bay area. The Company is, however, studying business opportunities
outside of the San Francisco Bay area, including other areas of California or
Utah. There is no assurance that the Company will enter these or other markets
or that if the Company does expand to new markets, it will generate sufficient
revenues that exceed the costs associated with activities in such new markets or
that the business activity in those new markets will match that achieved in the
8
<PAGE>
San Francisco Bay area. Whether or not the Company enters into new geographic
markets, the Company's results of operations and financial condition will be
significantly affected by general trends in the economy of the San Francisco Bay
area and its residential real estate market for the foreseeable future.
Year 2000 Compliance
The Company's computer systems may not comply with year 2000 issues.
Over the next few years, the Company may incur additional expenditures to modify
its software to operate correctly for the year 2000. While considered to be
immaterial by management, the Company has not yet quantified such costs, which
will be expensed as incurred. If the Company does not address this issue
successfully, the Company's business could be materially and adversely affected.
Dependence Upon Key Personnel
The Company's business is substantially dependent on the efforts of
Joseph Kristul, its Chief Executive Officer, and Maria Kristul, its President.
Joseph Kristul and Maria Kristul are husband and wife. Both have executed
employment agreements with the Company through December 31, 1999. Each may
terminate the agreement for good reason in the event the executive has a
reduction in title and/or compensation or the assignment of duties not
consistent with those of a senior executive; the material breach by the Company
of any provisions of the employment agreement; the relocation of the Company's
principal executive offices to a location more than 25 miles from its present
location; or a change in control of the Company, as defined. In defined
circumstance the agreements provide for severance payments up to two times the
executive's base salary. The Company has obtained key-man insurance in the face
amount of $3,000,000 on the life of Mr. Kristul. There can be no assurance that
amount will be sufficient to compensate the Company for the loss of Mr.
Kristul's services. See "Management."
Absence of Prior Public Market - American Stock Exchange Listing
Prior to this offering, there has been no public market for the Common
Stock. The Company has applied to have the Common Stock listed on the American
Stock Exchange. There can be no assurance that the Company's Common Stock will
be approved for listing or if approved that the Company will be able to maintain
the criteria for listing. Such listing, if granted, does not imply that a
meaningful, sustained market for the Common Stock will develop. If a meaningful
market does not develop of if the Company is not listed on the American Stock
Exchange, holders of Common Stock may be unable to sell Common Stock or may be
able to sell only at significantly lower prices than the original offering
price. There can be no assurance that an active trading market for the Common
Stock offered hereby will develop or, if it should develop, will continue nor
can there be any assurance that the Common Stock may be sold at its original
offering price or at any other price. From time to time after this offering,
there also may be significant volatility in the market price for the Common
Stock.
Arbitrary Determination of Offering Price
The public offering price for the Common Stock offered hereby was
determined by negotiation between the Company and the Representative. The
factors considered in determining the public offering price include the
Company's revenue growth since its organization, the industry in which it
operates, the Company's business potential and earning prospects and the general
condition of the securities markets at the time of the offering. Prices for the
shares of Common Stock after this offering will be determined in the market and
may be influenced by many factors, including the depth and liquidity of the
market for the Common Stock, investor perception of the Company and the mortgage
banking industry as a whole. See "Underwriting."
Immediate Substantial Dilution
The Company's current shareholders acquired their shares of Common
Stock at a cost substantially below the price at which such shares are being
offered in this offering. Consequently, investors purchasing the shares of
Common Stock offered hereby will incur an immediate and substantial dilution of
their investment. See "Dilution."
Anti-Takeover Provisions in Corporate Charter
The Restated Articles of Incorporation of the Company authorize the
issuance of 2,000,000 shares of preferred stock without shareholder approval and
subject to such terms and conditions as determined by the Board of Directors
which may have the effect of deterring a non-negotiated attempt to acquire
control of the Company. There are currently no shares of preferred stock
outstanding. A series of preferred stock could be issued in the future, for
9
<PAGE>
example, to thwart a possible take-over and may, in any event, operate to the
significant disadvantage of the holders of Common Stock by including
convertibility features which are lower than the market price for the Common
Stock, which would dilute the value of existing shareholdings, including the
shares of Common Stock issued in this offering. See "Description of Capital
Stock - Preferred Stock."
Payment of Dividends
Although the Company has paid dividends in the past as an S
corporation, the Company's Board of Directors presently intends to retain all of
the Company's earnings for the expansion of its business. The Company therefore
does not anticipate the distribution of cash dividends in the foreseeable
future. Any future decision of the Company's Board of Directors to pay cash
dividends will depend, among other factors, upon the Company's earnings,
financial position, and cash requirements. See "Dividend Policy."
Shares Eligible for Future Sale
Upon completion of this offering, the Company's current shareholders
will own 2,500,000 shares of Common Stock, which will represent 71.4% of the
then issued and outstanding shares of Common Stock (67.1% if the over-allotment
option is exercised in full). Of such restricted shares of Common Stock,
2,468,750 have been held for more than one year and will be eligible for resale
under Rule 144 under the Securities Act of 1933, as amended (the "Securities
Act"), subject to volume and other limitations, beginning 90 days after the date
of this Prospectus. All of such shares are held by an affiliate of the Company,
the Kristul Family LLC. Another 31,250 shares will be eligible for sale on May
1, 1999, and the Company has granted options to purchase a total of 45,000
shares effective upon the completion of this offering. All existing shareholders
of the Company have agreed not to sell, offer, contract to sell, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, or otherwise dispose of any of their
shares of Common Stock for a period of one year following the completion of this
offering. The Company has also agreed to grant to the Representative warrants to
acquire 100,000 shares of Common Stock. These shares have certain demand and
piggyback registration rights. Sales of significant amounts of Common Stock by
current shareholders in the public market after this offering or the perception
that such sales could occur could adversely affect the market price of the
Common Stock. See "---Shares Eligible for Future Sale," "--- Effect of
Representative's Warrants, "Principal and Selling Shareholders." and
"Description of Capital Stock."
Control of the Company
The Kristul Family LLC, of which Joseph and Maria Kristul are managing
members, will continue to own 70.5% of the Common Stock of the Company (66.3% if
the Underwriters' over-allotment option is exercised in full). Accordingly, they
will be in a position to elect the Company's directors and officers, to control
the policies and operations of the Company and to determine the outcome of
corporate transactions or other matters submitted for shareholder approval,
including mergers, consolidations, the sale of the Company's assets or a change
in control of the Company. See "Principal and Selling Shareholder."
Benefits to Controlling Shareholders
The Kristul Family LLC has pledged all of the stock owned by it in
connection with certain borrowings of the Company and Joseph and Maria Kristul
have personally guaranteed that debt as well as other debt of the Company. See
"Certain Relationships and Related Transactions." This offering will benefit the
Kristul Family LLC and Joseph and Maria Kristul because the proceeds of this
offering will be used to repay the debt for which the stock is pledged resulting
in the release of the stock pledge and the related personal guarantees. The
existing warehouse lines are also personally guaranteed by Joseph and Maria
Kristul. Upon completion of this offering, the Company will seek to enter into
new warehouse lines without such personal guarantees. In addition, the Kristul
Family LLC will receive proceeds from the sale of the shares, if any, sold in
connection with an exercise of the Underwriters' over-allotment option.
Effect of Representative's Warrants.
Until the date five years following the date of this Prospectus, the
holders of the Representative's Warrants are given an opportunity to profit from
a rise in the market price of the Common Stock, with a resulting dilution in the
interests of the other shareholders. The shares of Common Stock underlying the
Representative's Warrants have certain registration rights. Further, the terms
on which the Company might obtain additional financing during that period may be
10
<PAGE>
adversely affected by the existence of the Representative's Warrants. The
holders of the Representative's Warrants may exercise the Representative's
Warrants at a time when the Company might be able to obtain additional capital
through a new offering of securities on terms more favorable than those provided
herein. The Company has agreed that, under certain circumstances, it will
register under federal and state securities laws the Representative's Warrants
and/or the securities issuable thereunder. Exercise of these registration rights
could involve substantial expense to the Company at a time when it could not
afford such expenditures and may adversely affect the terms upon which the
Company may obtain financing. See "Description of Capital Stock" and
"Underwriting."
Representative's Influence on the Market
A significant amount of the shares of Common Stock offered hereby may
be sold to customers of the Representative. Such customers subsequently may
engage in transactions for the sale or purchase of such Common Stock through or
with the Representative. Although they have no obligation to do so, the
Representative may otherwise effect transactions in such securities. Such market
making activity may be discontinued at any time. If they participate in the
market, the Representative may exert a dominating influence on the market, if
one develops, for the Common Stock described in this Prospectus. The price and
the liquidity of the Common Stock may be significantly affected by the degree,
if any, of the Representative's participation in such market.
11
<PAGE>
USE OF PROCEEDS
The estimated net proceeds of this offering are $5,700,000, assuming a
public offering price of $7.00 per share and after deducting estimated
underwriting discounts and commissions and other offering expenses relating to
this offering. The Company intends to use the net proceeds of this offering as
follows:
<TABLE>
<CAPTION>
Approximate Approximate
Application of Net Proceeds Amount Per cent
------------ -----------
<S> <C> <C>
Repayment of Subordinated Debt to InSouth Bank(1) $1,100,000 19.3%
Working Capital(2) 4,600,000 80.7
----------- ----
$5,700,000 100.0%
========== =====
</TABLE>
(1) The Kristul Family LLC has pledged and guaranteed all of the shares
owned by it as security for this loan as well as guaranteeing that
obligation. Joseph and Maria Kristul have also personally guaranteed
this obligation. Upon repayment, such pledges and guarantees will be
released. See "Certain Relationships and Related Transactions."
(2) The primary purpose of this offering is to increase the Company's
liquidity and capital resources to have larger lines of credit from its
warehouse lenders and to reduce the cost of borrowing. The Company
anticipates that the proceeds from this offering will be adequate for
its liquidity and capital resources for at least twelve months
following the close of this offering. To the extent such amounts are
insufficient, the Company's growth will be slowed.
Pending application of the net proceeds of this offering, the Company
may invest the net proceeds from this offering in short-term, interest-bearing
securities.
DIVIDEND POLICY
The Company does not anticipate paying dividends on the Common Stock at
any time in the foreseeable future. The Company's Board of Directors currently
plans to retain earnings for the development and expansion of the Company's
business. Any future determination as to the payment of dividends will be at the
discretion of the Board of Directors of the Company and will depend on a number
of factors including future earnings, capital requirements, financial conditions
and such other factors as the Board of Directors may deem relevant.
Until April 30, 1998, the Company was treated for federal and certain
state income tax purposes as an S corporation under the Internal Revenue Code.
As a result, earnings of the Company were subject to taxation at the stockholder
rather than the corporate level for federal and, with respect to California
stockholders, certain state income tax purposes. In past years, the Company made
S corporation distributions to provide its stockholders with funds to pay income
taxes on the allocable share of the Company's earnings. See "Management
Executive Compensation."
12
<PAGE>
DILUTION
As of March 31, 1998, after giving effect to the issuance of 31,250
shares of Common Stock in May 1998, the pro forma net tangible book value of the
Company was $1.1 million or $0.46 per share of Common Stock. The net tangible
book value of the Company equals the total tangible assets of the Company less
its total liabilities. The net tangible book value per share represents the net
tangible book value of the Company divided by the number of shares of Common
Stock outstanding. After giving effect to the sale of 1,000,000 shares of Common
Stock at an assumed offering price per share of $7.00, and the application of
the estimated net proceeds therefrom, the net tangible book value of the Company
at March 31, 1998, will be $6.8 million or $1.96 per share. This represents an
immediate increase in net tangible book value of $1.50 per share to current
shareholders and an immediate dilution of $5.04 per share, or 72.0% to new
investors, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share $ 7.00
Pro forma net tangible book value per share as of March 31, 1998 $0.46
Increase per share attributable to new investors 1.50
----
Adjusted net tangible book value per share after this offering 1.96
-----
Dilution per share to new investors $ 5.04
=====
Percentage dilution 72.0%
</TABLE>
The following table sets forth as of March 31, 1998, (i) the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price per share paid by the current shareholders,
and (ii) the number of shares of Common Stock included in the shares to be
purchased from the Company and total consideration to be paid by new investors
in this offering (before deducting underwriting discounts and other estimated
expenses) at an assumed offering price of $7.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ ------------------------ Average Price
Number Percent Amount Percent Per Share
------------ -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Current shareholders 2,500,000 (1) 71.4% $1,148,626 14.1% $0.46
New investors 1,000,000 28.6% 7,000,000 85.9% $7.00
---------- ----- --------- ---------
Total 3,500,000 (2) 100.0% $8,148,626 100.0%
========= =========
</TABLE>
- --------
(1) Includes 31,250 shares of Common Stock issued in May 1998.
(2) Does not include a total of 100,000 shares of Common Stock issuable upon
the exercise of the Representative's Warrants or 300,000 shares reserved
for issuance under the Company's Stock Option Plan.
The computations in the above table are determined after having deducted
the estimated underwriting discount and offering expenses payable by the
Company. Both tables set forth in this section assume no exercise of existing
stock options. To the extent outstanding options are exercised, there will be
further dilution to holders of Common Stock
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual debt and equity
capitalization of the Company as of March 31, 1998, (ii) pro forma equity and
debt capitalization of the Company as of March 31, 1998 adjusted to reflect the
certain distributions made in April 1998 in connection with the Company's
termination as a S corporation and (iii) pro forma as adjusted to give effect to
the sale of 1,000,000 shares offered hereby and the application of the estimated
net proceeds therefrom, giving retroactive effect to the Company's issuance of
1,000,000 shares. See "Use of Proceeds."
<TABLE>
<CAPTION>
March 31, 1998
-------------------------------------------------
Actual Pro Forma(1) As Adjusted
Debt:
<S> <C> <C>
Subordinated debt(1) $ 1,000,000 $ 1,000,000$ -
Real estate mortgage 146,092 146,092 146,092
Warehouse notes payable 36,781,678 36,781,678 36,781,678
----------- ---------- ----------
Total debt 37,927,770 37,927,770 36,927,770
Shareholders' equity:
Common Stock, without par value,
10,000,000 shares authorized, 2,500,000
shares issued and outstanding,
3,500,000 as adjusted (2)(3) 1,000 1,000 5,701,000
Additional paid in capital 1,001,090 1,147,626 1,147,626
Retained earnings 459,549 - -
--------------- ------------- --------------
Total shareholders' equity 1,461,639 1,148,626 6,848,626
-------------- ------------- --------------
Total capitalization $39,389,409 $39,076,396 $43,776,396
=========== =========== ===========
</TABLE>
- -------
(1) Reflects the termination of the Company's status as an S corporation
effective April 30, 1998. In April 1998 the Company distributed
approximately $313,000 to its then existing shareholders. The pro forma
balance sheet assumes that undistributed S corporation earnings constitute
additional paid-in capital. See Use of Proceeds" and "Management's
Discussion and Analysis - Liquidity and Capital Resources."
(2) Does not include 300,000 shares of Common Stock reserved for issuance under
the Stock Option Plan. See "Management - Stock Option Plan" and
"Underwriting."
(3) Upon the Company's formation in 1985, the Common Stock had a par value of
$1.00 per share. California corporate law subsequently eliminated the par
value concept. Upon the split of the Company's shares which occurred in
March 1998, the Common Stock was designated without par value.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in connection with the Company's financial
statements, related notes and other financial information included elsewhere in
this Prospectus.
General
In May of 1995, the Company expanded its operations to include
wholesale mortgage banking in addition to its existing retail mortgage banking.
See "Business - The Wholesale Origination Division." The growth of the Company
has been driven since that time by the wholesale division. The wholesale
division's mortgage loan volume increased to approximately $206,613,000 in 1996
compared to approximately $38,328,000 in 1995. In 1995, the retail division's
mortgage loan volume was approximately $53,380,000 compared to approximately
$54,686,000 in 1996.
The effect of the establishment of the Company's wholesale division has
been to place greater demand on the Company's financial resources as well as the
requirements for additional personnel. The purpose of this offering is to
provide additional capital to facilitate the growth of the wholesale division as
well as lower the Company's overall cost of borrowing.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
The Company's pro forma net income increased during the first quarter
of 1998 to $160,662 from $119,493 in the first quarter of 1997. Gross revenues
grew as mortgage loan production for both wholesale and retail divisions grew by
72% during the first quarter of 1998 as compared to the first quarter of 1997.
Gross revenues for the first quarter of 1998 were $1,286,264 compared to the
first quarter of 1997 of $661,378 or an increase of 94%.
While gross revenues increased, expenses increased approximately 121%.
The increase in expenses was attributable to a hedging loss of $63,798 incurred
prior to the employment of the Company's current director of secondary
marketing. In addition, the net interest expense on the warehouse lines of
credit increased by 373% because of the increased volume and the loans being in
the warehouse line of credit longer than usual while waiting for investors to
purchase these loans. Management of the Company believes that this delay is
attributable to the increase in mortgage lending throughout the United States
with consequent delays in processing. The delay has caused the Company to rely
upon loan participations, buy/sell agreements and other credit facilities during
the first quarter of 1998 which increased the Company's borrowing costs. The
hedging loss and increase in borrowing costs accounted for 18% of the total
reported expenses. See "---Liquidity and Capital Resources" and "Business -
Funding of Mortgage Loans."
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company's pro forma net income increased in 1997 to $508,772 from
$243,774 in 1996. The increase is principally due to the Company's growth in
revenues attributable to its wholesale mortgage loan production. Revenues for
the 1997 fiscal year were $3,189,837 compared to revenues of $1,929,084 in
fiscal 1996. Wholesale mortgage loan production for 1997 was $387,311,770
compared to $206,613,000 for 1996. The average mortgage loan size for the
wholesale operations remained essentially unchanged between 1997 and 1996,
$283,537 and $278,079, respectively.
Although the dominant increase in the Company's revenues is
attributable to growing wholesale operations, the Company's retail operations
also contributed to its increase in revenues in 1997 over 1996. Retail mortgage
loan production increased to $75,427,000 in 1997 compared to $54,686,000 in
1996, an increase of approximately 38%. The number of loans originated by the
retail division increased, however, by approximately 11% reflecting, in
management's opinion, increased housing costs in the San Francisco Bay area.
While revenues grew approximately 65% from 1996 to 1997, expenses grew
approximately 53%. The Company benefited from operational efficiencies relating
to the growth of its wholesale division with salaries and benefits, general and
administrative expenses and occupancy expenses an aggregate of approximately
49.5%. However, the savings that arose from these efficiencies were reduced
because of increased interest costs, which increased to $279,093 in 1997 from
15
<PAGE>
$146,860 in 1996, or approximately 90.0% attributable to the Company's larger
volume of mortgage loans.
Liquidity and Capital Resources
The Company's capital resources substantially are provided by its
warehouse lenders who fund mortgage loans pending resale of those mortgage loans
to investors. The Company presently uses two such warehouse facilities. One of
these lenders has recently committed to the Company to expand its warehouse line
until April of 1999 to $25,000,000 with temporary bulge expansions to
$30,000,000 which would increase the Company's warehouse lines to $37,000,000.
The interest rate for this line will be LIBOR plus 2.75%. To enable the Company
to fund mortgage loans that it closes, the Company has entered into a repurchase
agreement with a financial institution. The interest rate under that repurchase
agreement is at prime plus one quarter per cent.
The purpose of this offering is to increase the Company's liquidity and
capital resources by having larger lines of credit from its warehouse lenders
and to reduce its costs of borrowing and to enable the Company to increase the
volume of its loan production. The existing limitations have inhibited the
Company's growth, and the Company plans to replace its existing warehouse lines
of credit upon the completion of this offering. The Company anticipates that the
proceeds from this offering will be adequate for its liquidity and capital
resources for at least twelve months following the close of this offering.
The primary function of the secondary marketing is to protect the
Company's mortgage position against adverse movements in interest rates and
thereby maintain the Company's net profit margins. Protection is accomplished by
committing to the forward sale of mortgage loans with either a "best efforts"
purchase, that is a purchase whereby the Company commits to use its best efforts
to supply a mortgage loan at a specified interest rate, or a mandatory purchase
by an investor where the interest rate on the sale is not determined until an
investor acquires the mortgage loan. Best efforts transactions transfer the
interest rate risk to the investor and therefore require no hedging activity.
Mortgage loans scheduled for a mandatory sale, that is those mortgage loans that
the Company does not have a commitment to purchase the mortgage loan at a
specified rate, are hedged according to the hedging policy. The hedging policy
is an analytical framework that accurately and systematically quantifies
exposure to interest rate risk. The foundation of the Company's risk analysis
for hedged mortgage loans is the Tuttle & Company Risk Management model. The
hedge involves the sale of the appropriate quantity of mortgage-backed
securities as mortgage loans are committed to by the Company. The Company then
purchases the same securities as mortgage loans are sold on a mandatory basis.
The risks involved include market risk on the unsold portion of the mortgage
loans and the interest rate risk between whole mortgage loan and security
pricing.
16
<PAGE>
BUSINESS
General
The Company is a wholesale and retail mortgage banker which originates,
funds and sells mortgage loans secured by one-to-four family residential
properties in the San Francisco Bay area. Since 1985, when the Company was
incorporated, the Company has been engaged in the retail origination of mortgage
loans. In 1995, the Company began a wholesale division to close and fund loans
originated by mortgage brokers as well as those originated through the Company's
retail division. The Company funds its originations through warehouse lines of
credit. The mortgage loans are subsequently sold together with the mortgage loan
servicing rights to secondary markets. The total loan production volume for 1997
was $463 million which was an increase of 77% compared to 1996, and 1996 was a
185% increase compared to 1995. Wholesale originations accounted for 84% of the
Company's loan production volume for 1997. The Company maintains four offices, a
retail office in San Francisco, wholesale offices in San Francisco and in San
Jose, California, and a mortgage loan processing facility also in San Francisco.
The Company originates a variety of mortgage loan products. Conforming
mortgage loans are those that qualify for inclusion in guarantee programs
sponsored by FNMA. Non-conforming mortgage loans are those that do not conform
to FNMA requirements. The principal deviation from such standards relates to the
size of the mortgage loan although some do not conform because of lower
documentation standards where there is a lower loan-to-value ratio. Those that
exceed the present FNMA guidelines for the San Francisco Bay area, presently
mortgage loans no larger than $227,150, are called Jumbo loans, which comprised
65% of the mortgage loans originated by the Company in 1997. In times of
declining interest rates, the Company's predominant products are fixed rate
mortgages for a term of 15 or 30 years. When interest rates are rising, the
Company's predominant products are adjustable rate mortgages. While the Company
originates some home equity financing through second mortgages and some lines of
credit using the home as a security, these products constitute a small portion
of the Company's business.
From its inception, the Company's marketing niche has been borrowers
who have high credit ratings and require large mortgage loans with low loan to
value ratios. As a consequence, the average loan size originated by the Company
in 1997 was approximately $280,000. Due to the large loan size and operating
efficiencies, the Company has sustained an efficient use of capital while
maintaining service quality combined with competitively priced loans. The
Company generates revenues through gains on the sale of mortgage loans and
servicing rights to investors, interest generated on mortgage loans held or
warehoused from the time the mortgage loan is originated until the mortgage loan
is sold, hedging activities, and, in the case of retail brokerage operations,
origination fees.
The purpose of this offering is to increase the Company's liquid
capital. The total amount available in the Company's warehouse lines is limited
to 15 to 20 times the amount of the Company's capital. By increasing the amount
of capital, the Company believes that it can increase its warehouse lines to
facilitate an increase in its mortgage loan volume. While the Company has
considered the possibility of expanding its operations outside of the San
Francisco area, particularly in selected counties of Southern California and
Utah, its focus for the foreseeable future is to build upon its existing
business in its present location. The Company does not have a definitive plan to
open additional offices in the next twelve months unless management believes
that significant production can be originated from these offices.
The Wholesale Origination Division
In 1997, wholesale mortgage loans constituted 84% of the Company's
mortgage loan originations. Wholesale mortgage loan origination involves the
purchase of loan applications from mortgage brokers for a purchase price less
than what the Company receives when it sells the same mortgage loan to an
investor. The mortgage loan is processed, closed and funded by the Company. To
maintain competitive rates with specific profit margins, the Company prices
mortgage loans on a daily basis.
The Company's wholesale lending division, which was established in May
1995, operates from its executive offices in San Francisco and one other office
in San Jose, California. Currently, the Company obtains mortgage loan volume
through a network of more than 600 independent mortgage brokers and other
financial intermediaries who are all screened and approved by the Company. With
the exception of the Company's retail division, in 1997 no single source of
independent brokers accounted for more than 5% of the Company's total wholesale
mortgage originations.
17
<PAGE>
Mortgage brokers are qualified to participate in the Company's
wholesale program after the completion of an application process which includes
the Company checking and verifying references, resumes, licenses and financial
statements. New broker relationships are established through business
development staff. Approved mortgage brokers are monitored by the Company's
wholesale account representatives and on a yearly basis the broker's financial
statements are updated and re-verified.
Mortgage loans are processed and every mortgage loan is underwritten by
the Company's underwriters, all of whom have many years of experience. Only
those mortgage loan applications which meet the Company's underwriting criteria
are funded. The Company uses the Internal Revenue Service ("IRS") verification
of income program, a particular tool which specifies that brokers must include
in the submitted file an IRS form which the Company uses to confirm with the IRS
certain income data on the mortgage loan application. This mechanism helps
ensure the quality of mortgage loans funded. If the mortgage loan file does not
contain this IRS form, the application is automatically rejected.
Wholesale lending allows the Company to benefit from cost efficiencies
derived from not having to take a mortgage loan application, a labor intensive
function, thereby reducing mortgage loan processing time, while being able to
centralize support functions and reduce fixed operating costs. Wholesale lending
offers the Company economies of scale while building substantial loan volume.
The Retail Origination Division
The Company's retail division was established in 1985 and employs four
commissioned mortgage loan officers located in one office in San Francisco.
While the retail division advertises weekly in San Francisco newspapers, most of
the retail division's business is generated through customer referrals, and a
high percentage of mortgage loans originated by the retail division close.
Approximately 50% of the mortgage loans originated by the retail
division are sold to the Company's wholesale division. The retail division
completes and processes the mortgage loan applications and prepares and
organizes necessary mortgage loan documents. The retail division underwrites
these mortgage loans to conform to either agency guidelines or private investor
guidelines. Mortgage loans acquired by the wholesale division are underwritten
again by the wholesale division. During 1997 the mortgage loans originated by
the retail division were evenly divided between conforming and non-conforming
(Jumbo) mortgage loans, with the average mortgage loan size originated by the
retail division being $265,000 and the average loan-to-value ratio being 80%.
The Company's retail division collects origination fees and closing
costs from the borrower which make the gross revenues larger than the revenues
generated by the wholesale division. However, the additional fees must be split
with commissioned mortgage loan officers and cover the cost of processing the
mortgage loan and assume the fixed operating costs, of the retail office. The
primary financial benefit to the Company of the retail division is as a source
for loans for the wholesale division.
18
<PAGE>
The following table shows mortgage loan production volume by division:
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
December 31, March 31
1997 1996 1995 1998 1997
----------------------------------------------------------------
(Dollars in Thousands)
Retail Division
<S> <C> <C> <C> <C> <C>
Volume $75,427 $54,686 $53,380 $25,206 $14,616
Percentage of Total Volume 16% 21% 58% 15% 18%
Wholesale Division
Volume $387,312 $206,613 $38,328 $139,782 $81,512
Percentage of Total Volume 84% 79% 42% 85% 82%
Total Loan Production
Volume $462,739 $261,299 $ 91,708 $164,989 $96,128
Number of Loans 1,650 998 363 684 351
Average Loan Size $280 $261 $252 $241 $273
----------------------------------------------------------------
Volume Growth 77% 185% 72%
----------------------------------------------------------------
</TABLE>
Loan Production Administration
All mortgage loan applications must be underwritten and approved in
accordance with the Company's underwriting standards and criteria. Underwriting
standards used for conforming loans are those promulgated by FNMA.
Non-conforming (Jumbo) loans are underwritten subject to credit and appraisal
standards established by specific investors. The Company analyzes the borrower's
credit standing, financial resources and repayment ability as well as the risk
of the underlying collateral.
All mortgage loans must have a property appraisal provided by an
independent third party, fee-based appraiser. Nationally recognized credit
reporting agencies provide complete reports of the borrower's credit history
including bankruptcies and delinquencies.
A given borrower may qualify for a mortgage loan through five mortgage
loan documentation programs: full documentation, limited documentation,
alternative documentation, no ratio loan documentation and no income/no asset
verification. Under the full documentation program, the borrower's assets,
income and employment are all verified by written or verbal confirmation. Under
the limited documentation program, more emphasis is placed on the ability to pay
and the property value. Under the alternative documentation program, income and
assets are confirmed by reviewing supporting documentation. Under the no ratio
loan documentation program, no income ratios are calculated. Under the no
income/no asset program, the value of the loan collateral is as critical as the
borrower's credit history. Each program places a heavy emphasis on credit scores
and differing loan to value ratios.
The Company's underwriting department consists of three underwriters
who average eighteen years of experience and who maintain the consistent quality
of mortgage loans expected by secondary market investors. The Company generally
takes five to ten days to underwrite a mortgage loan from the initial date of
the application. Upon completion of the underwriting process, the mortgage loan
is closed by a title agency chosen by the borrower.
The Company performs a pre-funding audit on all mortgage loans which
includes a verification of certain mortgage loan documentation to determine the
integrity of the data and a review for compliance with underwriting guidelines.
Post-funding audits are performed to monitor and evaluate the Company's
origination policies and procedures. Ten percent of all mortgage loans closed
are randomly sampled and are subjected to a full quality control review by an
outside firm including re-underwriting the mortgage loan. Management receives a
monthly report on any deficiencies found in the randomly sampled mortgage loans.
During its twelve years in business, the Company has not had to repurchase any
mortgage loans. Management of the Company believes that its use of the IRS
Verification of Income program increases significantly the quality of its
originators.
19
<PAGE>
Mortgage Loan Sales
The Company originates and purchases all of its mortgage loans with the
intent to sell the mortgage loans, without retaining any interest therein, and
the related servicing rights into the secondary market. The mortgage loans are
sold without recourse primarily to institutional investors, national banks and
mortgage lenders. At any given time there are several investors that have
contacted the Company and seek to purchase mortgage loans or enter into programs
to purchase mortgage loans. As part of the sale, the Company provides
representations and warranties which are customary to the industry and cover
such things as compliance with program standards, laws and regulations as well
as the accuracy of the information. In the event of a breach of these
representations and warranties, the Company may be required to repurchase these
mortgage loans and/or may be liable for certain damages. Normally, any
repurchased mortgage loan can be corrected and resold back to the original
investor. During the twelve years in business, the Company has not had to
repurchase any mortgage loans. See "Business - Loan Production Administration."
The Company holds the originated or purchased mortgage loan for sale
from the time that the mortgage loan application is submitted by the borrower
until the time the mortgage loan is sold to an investor. During that time, the
interest rate on the mortgage loan might be higher or lower than the market rate
at which price the Company can sell the mortgage loan to an investor. Therefore,
a market gain or loss results on the mortgage loan. To protect against interest
rate changes on mortgage loans that are in the warehouse (mortgage loans that
have closed but not sold) and pipeline loans (loans which are not yet closed but
on which an interest rate has been set) the Company often commits to deliver
mortgage loans at a specific price for future delivery to investors through the
use of commitments on a "best efforts" basis where the Company has no obligation
to sell a mortgage loan to an investor unless and until the mortgage loan
closes.
The Company has a hedging program in place which is administered for
the Company by Tuttle & Co. using a managed account. The Company is able to take
advantage of the hedging firm's reporting services, pipeline management, mark to
market, commitment and position reporting. At any one time the Company hedges
approximately 75% of the value of loans warehoused or in the pipeline.
Individual mortgage loans are grouped by note rate, loan type and length of time
in the pipeline. These are then matched based on duration with the appropriate
hedging instrument which reduces risk until the mortgage loan is closed and
delivered to the investor. Gains and losses are recorded at settlement.
Funding of Mortgage Loans
The Company needs substantial cash flow to facilitate the funding and
closing of the originated and purchased loans. These funds are provided on a
short-term basis by financial institutions that specialize in providing lines of
credit known as warehouse lines. During 1997, the Company used warehouse lines
of credit with Warehouse Lending Corporation of America and PNC Mortgage Bank,
National Association.
The amount of the warehouse line provided by a lender is based on the
Company's net worth. Typically the warehouse lender applies a leverage factor of
between fifteen and twenty. As of the date of this Prospectus, the Company has
several warehouse agreements in place which provide warehouse lines with funding
capabilities in the aggregate of $32 million with an additional bulge facility
of $37 million. The warehouse agreements have various financial and operational
covenants with which the Company must comply. In addition, the warehouse
agreements are personally guaranteed by the existing stockholders. The Company
submits the mortgage loan to the warehouse bank for funding along with the
investor commitment to purchase the loan. The warehouse bank receives between
$35 and $40 per loan from the Company plus interest at the London Interbank
Offered Rates ("LIBOR") plus approximately 2.75% per annum on the unpaid
principal balance of the loan for the time the loan is in the warehouse. LIBOR
is the British Bankers' Association average of interbank offered rates for
dollar deposits in the London market based on quotations at 16 major banks and
act as a base lending rate similar to the prime rate. Therefore, during the
period between funding the loan and its sale to investors, the Company, under
existing warehouse agreements, loses as much as two to two and one half percent
on each loan it funds (the difference between the rate charged by the warehouse
bank and the note rate on the loan).
The Company intends to use part of the proceeds from this offering to
obtain additional warehouse lines with better pricing which is expected by
management to reduce the Company's cost of borrowings because the additional
liquidity will reduce the Company's borrowing risk
20
<PAGE>
In addition, the Company will seek to eliminate the personal guarantees
of certain shareholders of the Company from the warehouse agreements. In
accordance with industry practice, the warehouse lines are renewable by the
lenders annually.
Competition
The Company faces strong competition in originating, purchasing and
selling mortgage loans and the related mortgage servicing rights. The Company's
competition is principally from savings and loans associations, other mortgage
companies, commercial banks and, to a lesser degree, credit unions and insurance
companies, depending upon the type of mortgage loan product offered. Many of
these institutions have greater financial and other resources than the Company
and maintain a significant number of branch offices in the area in which the
Company conducts operations. Increased competition for mortgage loans from other
lenders may result in a decrease in the volume of mortgage loans originated and
purchased by the Company If the Company is unable to compete effectively, its
business, results of operations and financial condition could be materially and
adversely affected.
The Company depends primarily on mortgage brokers who are not obligated
by contract to originate or deliver new mortgage loans to the Company. Mortgage
brokers compete on the basis of customer service, range of loan products offered
and pricing. Although the Company emphasizes pricing to brokers, it strives to
offer brokers a variety of competitive products and efficient mortgage loan
processing and closing.
Legislation and Regulation
Federal, state and local authorities regulate and examine the
origination, processing, underwriting, selling and servicing of mortgage loans.
The Company is an approved seller/servicer of mortgage loans for Fannie Mae. In
addition, the Company is an approved mortgagee by HUD and is qualified to
originate mortgage loans insured by FHA and VA. Among other consequences, the
failure to comply with HUD or Fannie Mae regulations could prevent the Company
from reselling its mortgage loans or prevent its ability to enter into the
servicing of mortgage loans should it choose to do so. Such failure could also
result in demands for indemnification or mortgage loan repurchase, certain
rights of rescission for mortgage loans, class action law suits and
administrative enforcement actions, any of which could have a material adverse
effect on the Company's business results of operations and financial conditions.
Federal, state and local governmental authorities also regulate the
Company's activities as a lender. The TILA and Regulation Z promulgated
thereunder contain certain requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
mortgage loans and credit transactions. The ECOA prohibits creditors from
discriminating against applicants on the basis of race, color, sex, age or
marital status, among other restrictions and requirements. In instances where
the applicant is denied credit, or the rate or charge for a mortgage loan
increases as a result of information obtained from a consumer credit agency, the
Fair Credit Reporting Act of 1970 requires the lender to supply the applicant
with a name and address of the reporting agency. The Real Estate Settlement
Procedures Act and the Debt Collection Practices Act subject the Company to
filing an annual report with the Department of Housing and Urban Development.
There can be no assurance that the Company will maintain compliance
with these requirements in the future without additional expenses, or that more
restrictive local, state or federal laws, rules and regulations will not be
adopted or that existing laws and regulations will not be interpreted in a more
restrictive manner, which would make compliance more difficult and more
expensive for the Company.
Employees
As of June 1, 1998, the Company had 50 employees, all of whom worked on
a full-time basis. None of the Company's employees is represented by a union.
21
<PAGE>
The Company considers its relations with its employees to be excellent.
Properties
The Company has offices in three separate locations in San Francisco
which occupy approximately 6,900 square feet of commercial office space. The
Company has one additional office in San Jose. All of the space is leased, and
presently the Company's monthly rental for office space is approximately
$16,000. The last lease term ends in November 2001
In June 1998, the Company entered into a lease for 6,200 square feet of
office space in San Francisco with a monthly rental of approximately $10,000.
The term of the lease is for five years commencing the date of the Company's
occupancy which is anticipated to occur in mid July. The Company plans to
continue conducting its retail operations in the location from which it
presently operates but consolidate the other two San Francisco offices into the
new facility and sublease the two locations at which those operations are now
conducted. This new office space will be used for corporate administrative
offices and for conducting wholesale mortgage lending operations. The Company
believes that the wholesale and retail offices are adequate for the foreseeable
future.
The Company maintains adequate casualty insurance on all its property
Legal Proceedings
The Company is involved in legal proceedings arising in the ordinary
course of business. The ultimate outcome of these proceedings can not be
determined because of the uncertainties that exist. In the opinion of
management, the disposition of matters that are pending or asserted will not
have a material adverse effect on the financial position of the Company.
22
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
Company's directors and executive officers:
Name Age Position
Joseph Kristul 50 Chief Executive Officer
and Treasurer, Director
Maria Kristul 50 President, Director
Robert W. Bronson 41 Senior Vice President
Matthew Heidari 41 Chief Financial Officer
Ronald W. Kiehn 56 Director of Operations
Eugene Kristul 27 Secretary, Director
Hilary Whitley 49 Director
Joseph Kristul, who founded the Company in 1985, has been a director
and officer since that time and has been responsible for the Company's overall
management since the Company's inception, emphasizing mortgage loan pricing,
funding, administration and sales. Beginning in 1995 Mr. Kristul created the
Company's wholesale division, developing the Company's base of brokers, which
deliver loan product, and implementing systems and controls on the quality of
the product delivered by brokers.
Maria Kristul, who founded the Company in 1985, has been a director and
officer since 1991, and has been responsible for the Company's retail division
since the Company's inception. As well as personally originating approximately
60%, in 1996, of the retail division's production, Ms. Kristul oversees the
retail division's day to day operations including training and managing that
divisions sales and loan processing staff and its quality assurance.
Robert W. Bronson joined the Company effective April 1, 1998, and is
the Company's Director of Secondary Marketing. In 1997 and 1998 Mr. Bronson was
an Account Manager for Tuttle & Co., a mortgage trading firm. Prior to joining
Tuttle & Co., Mr. Bronson was Vice President of Secondary Marketing for WMC
Mortgage Corp and that firm's predecessor, Weyerhaeuser Mortgage Company where
he was responsible for that firm's trading operations, responsibilities he
assumed in 1991. Mr. Bronson joined Weyerhaeuser Mortgage Company in 1986, and
prior to assuming responsibilities for that firm's trading operations, Mr.
Bronson held a variety of positions in the corporate finance department.
Matt Heidari joined the Company in April of 1998 as Chief Financial
Officer. Prior to joining the Company, he was the Corporate Controller for
Mortgage Capital Resource, a position he assumed in 1995, where he was
responsible for enhancing and expanding accounting systems and procedures. From
1989 to 1994, Mr. Heidari was the Controller and Chief Financial Officer for CFC
Mortgage Corporation, managing that firm's accounting functions and implementing
systems designed to support operations. Mr. Heidari is also a Certified Public
Accountant.
Ronald W. Kiehn joined the Company in February 1997 and is responsible
for administration of the Company's loan processing. For approximately one year
prior to joining the Company, Mr. Kiehn was a private consultant to the mortgage
banking industry emphasizing sales, marketing, secondary marketing, underwriting
and due diligence. From June of 1991 through December of 1995, Mr. Kiehn was
Vice President of Secondary Marketing for Medallion Mortgage Company, and from
1986 through 1991, Mr. Kiehn held sales and marketing positions as well as
secondary marketing and loan administration responsibilities for Mortgage Loans
America.
Eugene Kristul has been engaged in the private practice of law since
December 1996. Eugene Kristul became a director in March 1998 and Secretary in
1996. Prior to becoming an attorney, Eugene Kristul was a law student.
Joseph and Maria Kristul are husband and wife. Eugene Kristul is their
son.
Hilary Whitley became a director of the Company in April 1998 and is
the founder of Financial Capital Resources, Inc., which was formed in 1988 and
specializes in client representation principally relating to financial matters
within the mortgage banking industry. Prior to founding Financial Capital
Resources, Ms. Whitley focused her career of over fifteen years on financial
management, eight of which were directly involved with mortgage banking with an
emphasis on mergers and acquisitions, business and strategic planning. Ms.
Whitley has held the position of Chief Financial Officer for several companies
and was previously employed by the predecessor of KPMG Peat Marwick LLP.
23
<PAGE>
Outside Directors
The Company has agreed to appoint an additional director who is not an
officer, employee or 5% shareholder or related to an officer, employee or 5%
shareholder upon conclusion of the offering. This director will be appointed by
the Representative of the Underwriters.
Compensation of Directors
Directors who are employees of the Company will not receive any
remuneration for their service as directors. Following completion of this
offering non-employee directors will receive $12,000 annually, and $500 per
meeting attended and related travel expenses. Committees of the Board of
Directors
The Company's Board of Directors has established an Audit Committee and
a Compensation Committee effective upon the closing of this offering. Each
committee consists of at least two directors, none of whom will be an officer or
employee of the Company. The duties of the Audit Committee are to recommend to
the entire Board of Directors the selection of independent certified public
accountants to perform an audit of the financial statements of the Company, to
review the activities and report of the independent certified public
accountants, and to report the results of such review to the entire Board of
Directors. The Audit Committee also monitors the internal controls of the
Company. The duties of the Compensation Committee are to provide a general
review of the Company's compensation and benefit plans to ensure that they meet
corporate objectives and to administer or oversee the Company's Stock Option
Plan and other benefit plans. In addition, the Compensation Committee reviews
the compensation of officers of the Company and the recommendations of the Chief
Executive Officer on (i) compensation of all employees of the Company and (ii)
adopting and changing major Company compensation policies and practices. Except
with respect to the administration of the Stock Option Plan, the Compensation
Committee will report its recommendations to the entire Board of Directors for
approval.
Indemnification and Limitation on Liability
The Company's Restated Articles of Incorporation provide that the
liability of directors of the Corporation for monetary damages will be
eliminated to the fullest extent permissible under California law.
The Bylaws of the Company provide that the Company will indemnify its
directors and officers against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of such person being or having been a director or officer
expenses incurred in defending any such proceeding to the fullest extent
permissible under California law. The Bylaws also provide that the Company may
indemnify its employees and agents for such expenses by resolution of the Board
of Directors.
If available at reasonable cost, the Company intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by any reason of their
positions as officers and directors. The Company does not presently have such
insurance.
Executive Compensation
The following table sets forth the compensation paid to the Company's
Chief Executive Officer and the only other executive officer who earned more
than $100,000 in 1997 (the "Named Executive Officers") for services rendered to
the Company in all capacities for the fiscal years ended December 31, 1997:
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Annual Compensation All Other
Principal Position Fiscal Year Salary Bonus Compensation
- ----------------------- ----------- ------ ----- ------------
<S> <C> <C> <C>
Joseph Kristul (1) 1997 $12,000 - $256,536
Chief Executive Officer
Maria Kristul (1) 1997 $12,000 - $256,537
President
</TABLE>
- ----------------
(1) All Other Compensation represents distributions made to Joseph and
Maria Kristul in connection with the Company's status as an S
corporation.
24
<PAGE>
Employment Agreements
The Company has employment agreements with five people, Joseph Kristul,
Maria Kristul, Robert W. Bronson, Matthew Heidari and Ronald W. Kiehn. Joseph
and Maria Kristul's agreements end December 31, 1999 and may be renewed for an
additional one year term. Beginning May 1, 1998, Mr. Kristul will receive a
salary of $250,000 per year with a bonus equal to 10% of the Company's pretax
profits up to a maximum bonus of $150,000. Beginning May 1, 1998, Maria Kristul
will receive an annual salary of $150,000 plus a bonus equal to 60 basis points
(0.60%) of the mortgage loans originated by her and 10 basis points (0.10%) of
the rest of the mortgage loans originated by the retail division less Ms.
Kristul's annual salary.
Mr. Bronson's agreement's term ends on March 31, 1999 and may be
renewed for an additional one year term. In addition to a signing bonus of
$5,000, Mr. Bronson's agreement calls for an annual salary of $100,000 plus a
bonus of $50,000 provided the Company's trading operations and the increase in
margins, as defined, result in an increased profit of $1,000,000.
Mr. Heidari's agreement's term ends on April 16, 1999 and may be
renewed for an additional one year term. Mr. Heidari will receive an annual
salary of $92,000 plus a travel reimbursement of $6,000 for commuting from his
home in Southern California.
Mr. Kiehn's agreement's term ends on May 1, 1999 and may be renewed for
an additional one year term. Mr. Kiehn will receive an annual salary of $92,000
plus $250 per month car expenses.
Each of the above employment agreements provide that the executive is
entitled to benefits that the Company's Board of Directors or its Compensation
Committee may determine. In defined circumstances, the agreements also provide
severance payments of up to two times the executive's annual base salary upon
termination and immediate vesting of any stock options.
Stock Option Plan
The 1998 Stock Option Plan (the "Stock Option Plan") provides for the
grant to employees, officers, directors, and consultants to the Company or any
parent, subsidiary or affiliate of the Company of up to 300,000 shares of the
Company's Common Stock, subject to adjustment in the event of any subdivision,
combination, or reclassification of shares. The Stock Option Plan will terminate
in 2008. The Stock Option Plan provides for the grant of incentive stock options
("ISO's") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and non-qualified options at the discretion of the Board of
Directors or a committee of the Board of Directors (the "Committee"). The
exercise price of any option will not be less than the fair market value of the
shares at the time the option is granted. The options granted are exercisable
within the times or upon the events determined by the Board or Committee set
forth in the grant, but no option is exercisable beyond ten years from the date
of the grant. The Board of Directors or Committee administering the Stock Option
Plan will determine whether each option is to be an ISO or non-qualified stock
option, the number of shares, the exercise price, the period during which the
option may be exercised, and any other terms and conditions of the option. The
holder of an option may pay the option price in (1) cash, (2) check, (3) other
mature shares of the Company, (4) any combination of the foregoing methods of
payment, or (5) other consideration or method of payment for the issuance of
shares as may be permitted under applicable law. The options are nontransferable
except by will or by the laws of descent and distribution. Upon dissolution,
liquidation, merger, sale of stock or sale of substantially all assets,
outstanding options, notwithstanding the terms of the grant, will become
exercisable in full at least 10 days prior to the transaction. The Stock Option
Plan is subject to amendment or termination at any time and from time to time,
subject to certain limitations.
The plan is administered by the Compensation Committee of the Board of
Directors.
In April of 1998 the Company agreed to grant options for 15,000 shares
each to Messrs. Bronson, Heidari and Kiehn, exercisable at the initial public
offering price of this offering, effective upon the consummation of this
offering.
25
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership as of June 1, 1998, of the Common stock by (a) each person
known by the Company to be a beneficial owner of more than 5% of the outstanding
shares of Common Stock and by each Selling Shareholder, (b) each director of the
Company, (c) each Named Executive Officer, and (d) as directors and executive
officers of the Company as a group. Unless otherwise noted, each beneficial
owner named below has sole investment and voting power with respect to the
Common Stock shown below as beneficially owned by him.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering After Offering
Name and Address of Number of Percent Number of Percent
Beneficial Owner Shares Owned Owned Shares Owned Owned
- ---------------------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Kristul Family LLC(1)(2) (3) 2,468,750 98.75% 2,468,750 70.54%
301 Junipero Serra Blvd.,
Ste. 270
San Francisco CA
Joseph Kristul(1)(2) 2,468,750 98.75 2,468,750 70.54
301 Junipero Serra Blvd.,
Ste 270
San Francisco CA
Maria Kristul(1)(3) 2,468,750 98.75 2,468,750 70.54
301 Junipero Serra Blvd.,
Ste 270
San Francisco CA
Hilary Whitley 18,750 0.75 18,750 0.54
All Executive Officers and
Directors as a group
( 8 persons) 2,487,500 99.5% 2,487,500 71.07%
</TABLE>
- -------------------
(1) The Kristul Family LLC has granted to the Underwriters an option to
purchase 150,000 shares for a 45 day period following the commencement
of this offering at a purchase price equal to the initial price to
public in this offering. If the over-allotment option is exercised in
full, its holdings would be 2,318,750 shares or 66.25% of the total
outstanding shares of the Company's Common Stock.
(2) Joseph Kristul is a managing member of the Kristul Family LLC and the
beneficial owner of 42.5% of the shares held by the Kristul Family LLC
and is jointly with Maria Kristul the beneficiary of a trust that is a
member owning 15% of the Kristul Family LLC.
(3) Maria Kristul is a managing member of the Kristul Family LLC and the
beneficial owner of 42.5% of the shares held by the Kristul Family LLC
and is jointly with Joseph Kristul the beneficiary of a trust that is a
member owning 15% of the Kristul Family LLC.
26
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Joseph and Maria Kristul have each personally guaranteed the Company's
warehouse lines of credit. Upon completion of this offering, the Company plans
to seek larger warehouse lines to replace these lines and obtain the release of
personal guarantees of Joseph and Maria Kristul. See "Business - Funding of
Mortgage Loans."
In 1997 and 1996, certain of the Company's certificates of deposit were
pledged to Wells Fargo Bank, N.A., for the personal indebtedness of Joseph and
Maria Kristul. In March 1998, Wells Fargo released this security interest.
In 1995, Joseph and Maria Kristul contributed to the Company a
residential property located in the San Francisco Bay area which had a fair
market value of approximately $213,000 on the date of contribution and is
subject to a mortgage of approximately $150,000 as of December 31, 1997.
In March 1998, the Company entered into a subordinated debt agreement
with InSouth Bank under which all of the Company's stock at the time, or
2,468,750 shares, was pledged to secure the indebtedness of $1,000,000. Upon
completion of this offering the subordinated debt will be paid, the pledge will
be released and the personal guarantees of the Kristul's released.
The Company has agreed to indemnify Joseph and Maria Kristul for taxes
owing by the Company for which Joseph and Maria Kristul are obligated upon the
termination of the Company's status as an S corporation.
Eugene Kristul receives a monthly retainer of $2,000 for legal services
rendered to the Company.
For the year ended December 31, 1997, the Company paid to Financial
Capital Resources, Inc., an affiliate of Ms. Whitley's, $5,600 for consulting
services. In connection with consulting services to be rendered to the Company
in 1998 by Financial Capital Resources, Inc., the Company has agreed to pay Ms.
Whitley $100,000 and issued 18,750 shares of Common Stock. These services
include assistance in arranging for and negotiating warehouse lending
facilities and the InSouth Loan, reviewing and modifying accounting and
financial systems, personnel evaluation and assistance with this offering.
Effective December 31, 1997, the Company entered into a promissory note
payable to the Company by Joseph and Maria Kristul which matured March 31, 1998
bearing interest at 6.5% per annum. This note has been repaid as of March 31,
1998.
The Board of Directors has adopted a policy that any future
transactions with affiliates of the Company will be on terms no less favorable
to the Company than are reasonably available from unrelated third parties and
shall have been approved by a majority of the Company's directors who do not
have a material interest in the transaction.
DESCRIPTION OF CAPITAL STOCK
The Company has authorized 10,000,000 shares of Common Stock without
par value and 2,000,000 shares of preferred stock without par value. As of June
1, 1998, there were 2,500,000 shares of Common Stock and no shares of Preferred
Stock issued and outstanding. There were three holders of record of Common
Stock, as of June 1, 1998.
Preferred Stock
The Board of Directors is authorized, without further notice or action
of shareholders, to issue shares of Preferred Stock in one or more series and to
determine the relative rights, preferences and privileges of the shares of any
such series. The Company has no present plans to issue any shares of Preferred
Stock.
Common Stock
The holders of outstanding Common Stock are entitled to share ratably
in any dividends paid on the Common Stock when, as and if declared by the Board
of Directors out of funds legally available. Each holder of Common Stock is
entitled to one vote for each share held of record. The Common Stock is not
entitled to cumulative voting or preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding up of the Company, subject
to the prior rights of holders of Preferred Stock, the holders of Common Stock
are entitled to share ratably in the net assets legally available for
distribution. Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
27
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,500,000
shares of Common Stock outstanding. Of these shares, the 1,000,000 shares sold
in this offering will be freely tradable in the public market without
restriction under the Securities Act, except shares purchased by an "affiliate"
(as defined in the Securities Act) of the Company. The remaining 2,500,000
shares (the "Restricted Shares") will be "restricted shares" within the meaning
of the Securities Act and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided by Rule 144 under the Securities Act. The
holders of the Restricted Shares have agreed to not sell shares of Common Stock
for a period of one year following the completion of this offering. See
"Management - Stock Option Plan" and "Underwriting."
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell Restricted Shares if at
least one year has passed since the later of the date such shares were acquired
from the Company or any affiliate of the Company. Rule 144 provides, however
that within any three-month period such person may only sell up to the greater
of 1% of the then outstanding shares of the Company's Common Stock
(approximately 35,000 shares following the completion of this offering) or the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 also are subject to
certain other requirements relating to manner of sale, notice of sale and
availability of current public information. Any person who has not been an
affiliate of the Company for a period of 90 days preceding a sale of Restricted
Shares is entitled to sell such shares under Rule 144 without regard to such
limitations if at least two years have passed since the later of the date such
shares were acquired from the Company or any affiliate of the Company. Shares
held by persons who are deemed to be affiliated with the Company are subject to
such volume limitations regardless of how long they have been owned or how they
were acquired.
Without consideration of contractual restrictions described below, an
aggregate of 2,500,000 shares of Common Stock, representing 71.4% of the
outstanding shares of the Common Stock, or shares representing 67.1% if the
over-allotment option is exercised in full will be eligible for sale in the
public market pursuant to Rule 144 after the completion of this offering. The
Company is unable to estimate the number of shares that may be sold from time to
time under Rule 144, since such number will depend upon the market price and
trading volume for the Common Stock, the personal circumstances of the sellers
and other factors.
After this offering, executive officers, directors and senior
management will own 2,487,500 shares of the Common Stock.
The Company can make no prediction as to the effect, if any, that the
offer or sale of these shares would have on the market price of the Common
Stock. Nevertheless, sales, or the perception that such sales could occur, of
significant amounts of Restricted Shares in the public markets could adversely
affect the market price of Common Stock.
The Company has reserved a total of 300,000 shares for issuance under
its Stock Option Plan. In addition the Company has granted to the Underwriters'
certain registration rights related to the Representative's Warrants.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, 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 Exchange Act, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, 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). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, 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 two-year
minimum holding period requirements.
Options to purchase 45,000 shares of Common Stock are currently
outstanding. Shortly after this Offering, the Company intends to file a
registration statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the Company's Stock Option Plans.
Shares of Common Stock issued upon exercise of options under the Form S-8 will
28
<PAGE>
be available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates and subject to any contractual
restrictions. The options will vest over a five year period.
29
<PAGE>
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell to the Underwriters named
below, and each of the Underwriters, for whom Tejas Securities Group, Inc (the
"Representative") is acting as Representative, has severally agreed to purchase
the number of shares set forth opposite its name in the following table.
Underwriters Number of Shares
--------------
Tejas Securities Group, Inc.
Total.............................. 1,000,000
=========
The Representative has advised the Company that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price per share set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not more than $____ per
share, of which $____ may be reallowed to other dealers. After the initial
public offering, the public offering price, concession and reallowance to
dealers may be reduced by the Representative.
The Selling Shareholders have granted to the Underwriters an option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to 150,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the Company will receive
for the 1,000,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares to be purchased by it shown in the
above table represents as a percentage of the 1,000,000 shares offered hereby.
If purchased, such additional shares will be sold by the Underwriters on the
same terms as those on which the 1,000,000 shares are being sold. All of such
shares will be sold to the Underwriters by Selling Shareholders, and the Company
will not receive any proceeds from the sale of such shares. See "Principal and
Selling Shareholders."
The Underwriting Agreement contains covenants of indemnity by the
Company to the Underwriters against certain civil liabilities, including
liabilities under the Securities Act.
The holders of 2,500,000 shares of the Common Stock (2,350,000 if the
Underwriters' over allotment option is exercised in full) after the offering
have agreed with the Representative that, until one year after the date of this
Prospectus, subject to certain limited exceptions, they will not offer, sell,
contract to sell, or otherwise dispose of any shares of Common Stock, any
options to purchase shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock, owned directly by
such holders or with respect to which they have the power of disposition, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, without the prior written
consent of the Representative, except for shares sold upon exercise of the
over-allotment option. Substantially all of such shares will be eligible for
immediate public sale following expiration of the lock-up periods, subject to
the provisions of Rule 144. In addition, the Company has agreed that until 365
days after the date of this Prospectus, the Company will not, without the prior
written consent of the Representative, subject to certain limited exceptions,
issue, sell, contract to sell, or otherwise dispose of, any shares of Common
Stock, any options to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, other than the Company's
sales of shares in this offering, the issuance of Common Stock upon the exercise
of outstanding options or warrants or the issuance of options under its employee
stock option plan. See "Shares Eligible for Future Sale."
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
30
<PAGE>
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such stabilizing, if commenced, may be
discontinued at any time.
The Representative has informed the Company that they do not expect
sales to accounts over which the Underwriters exercise discretionary authority.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 2.0% of the gross amount of the shares sold at the closing
of the offering. The Underwriters' expenses in excess thereof will be paid by
the Representative. To the extent that the expenses of the underwriting are less
than that amount, such excess shall be deemed to be additional compensation to
the Underwriters.
The Company has agreed that for a period of five years from the closing
of the sale of the shares offered hereby, it will nominate for election as a
director a person designated by the Representative, and during such time as the
Representative has not exercised such right, the Representative shall have the
right to designate an observer, who shall be entitled to attend all meetings of
the Board and receive all correspondence and communications sent by the Company
to the members of the Board. The Representative have not yet identified to the
Company the person who is to be nominated for election as a director or
designated as an observer.
The Underwriting Agreement provides for indemnification among the
Company, the Selling Shareholders and the Underwriters against certain civil
liabilities, including liabilities under the Securities Act. In addition, the
Representative's Warrants provide for indemnification among the Company and the
holders of the Representative's Warrants and underlying shares against certain
civil liabilities, including liabilities under the Securities Act and the
Exchange Act.
Representative's Warrants
Upon the closing of this offering, the Company has agreed to sell to
the Underwriters for nominal consideration, the Representative's Warrants. The
Representative's Warrants will entitle the holder to purchase 100,000 shares of
Common Stock. The Representative's Warrants are exercisable at 120% of the
public offering price for a four-year period commencing one year from the
effective date of this offering. The Representative's Warrants may not be sold,
transferred, assigned or hypothecated for a period of one year from the date of
this offering except to the officers of the Underwriters and their successors
and dealers participating in the offering and/or their partners or officers. The
Representative's Warrants will contain antidilution provisions providing for
appropriate adjustment of the number of shares subject to the Warrants under
certain circumstances. The holders of the Representative's Warrants have no
voting, dividend or other rights as shareholders of the Company with respect to
shares underlying the Representative's Warrants until the Representative's
Warrants have been exercised.
The holders of the Underwriters Warrants have certain demand and
piggyback registration rights with respect to the underlying shares of Common
Stock.
Determination of Offering Price
The initial public offering price was determined by negotiations
between the Company and the Representative. The factors considered in
determining the public offering price include the Company's revenue growth since
its organization, the industry in which it operates, the Company's business
potential and earning prospects and the general condition of the securities
markets at the time of the offering. Prices for the shares of Common Stock after
this offering will be determined in the market and may be influenced by many
factors including the depth and liquidity of the market for the Common Stock,
investor perception of the Company and the mortgage banking industry as a whole.
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance than an active market will develop.
31
<PAGE>
American Stock Exchange
The Company has applied to list the Common Stock on the American Stock
Exchange under the trading symbol "TFN".
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Robert A. Forrester, Esq., Richardson, Texas. Mr.
Forrester owns 12,500 shares of Common Stock. Certain legal matters in
connection with the sale of the Common Stock offered hereby will be passed upon
for the Underwriters by Wolin, Ridley & Miller LLP, Dallas, Texas.
EXPERTS
The balance sheet of the Company as of December 31, 1997, and the
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1997 and 1996 included in this Prospectus have been audited by Moss
Adams LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in auditing and accounting, in giving said report.
32
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
AND MARCH 31, 1998
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT................................................F-1
FINANCIAL STATEMENTS
Balance sheets..........................................................F-2
Statements of income....................................................F-3
Statements of stockholders' equity......................................F-4
Statements of cash flows............................................... F-4
Notes to financial statements...........................................F-6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Transnational Financial Corporation
We have audited the accompanying balance sheets of Transnational Financial
Corporation as of December 31, 1997, and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Transnational Financial Corporation
as of December 31, 1997, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
As described in Note 10, the Company's December 31, 1995 balance sheet has been
restated to reflect the application of accounting principles which require the
deferral of certain loan origination costs and related fee income.
San Francisco, California
June 4, 1998 /s/Moss Adams LLP
- --------------------------------------------------------------------------------
F-1
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROFORMA
DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998
--------------------- ---------------- -----------------
(unaudited)
ASSETS
<S> <C> <C> <C>
Cash and equivalents $ 482,558 $ 1,649,752 $ 1,336,739
Certificates of deposit 272,298 266,709 266,709
Mortgage loans held for sale, pledged 50,288,714 37,015,012 37,015,012
Accrued interest 181,763 168,100 168,100
Notes receivable 135,819 135,819 135,819
Note receivable, stockholders 250,000 - -
Real estate held for investment, net 199,944 198,784 198,784
Property and equipment, net 103,267 110,051 110,051
Other assets 61,420 176,850 176,850
----------------- ---------------- -----------------
TOTAL ASSETS $ 51,975,783 $ 39,721,077 $ 39,408,064
================= ================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Warehouse notes payable $ 50,154,791 $ 36,781,678 $ 36,781,678
Note payable, subordinated - 1,000,000 1,000,000
Accrued interest 202,118 151,500 151,500
Real estate mortgage 146,755 146,092 146,092
Accounts payable and accrued liabilities 133,480 180,168 180,168
----------------- ---------------- -----------------
TOTAL LIABILITIES 50,637,144 38,259,438 38,259,438
----------------- ---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares
authorized; no shares issued or outstanding - - -
Common stock, no par value; 10,000,000 shares
authorized; 2,500,000 shares issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 1,001,090 1,001,090 1,147,626
Retained earnings 336,549 459,549 -
----------------- ---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 1,338,639 1,461,639 1,148,626
----------------- ---------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 51,975,783 $ 39,721,077 $ 39,408,064
================= ================ =================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes
F-2
<PAGE>
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------------ ------------------------------------
1997 1996 1998 1997
----------------- ----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
INCOME
Net gain from sales of mortgage loans $ 2,230,309 $ 1,013,579 $ 969,783 $ 428,671
Production income 943,182 915,505 305,697 229,032
Other 16,346 - 10,784 3,675
----------------- ----------------- ----------------- -----------------
3,189,837 1,929,084 1,286,264 661,378
----------------- ----------------- ----------------- -----------------
EXPENSES
Salaries and benefits 1,262,790 757,755 513,472 244,441
General and administrative 674,962 558,535 314,658 164,446
Interest expense, net of interest income 279,093 146,860 152,431 32,199
Occupancy 125,020 63,860 39,041 20,799
----------------- ----------------- ----------------- -----------------
2,341,865 1,527,010 1,019,602 461,885
----------------- ----------------- ----------------- -----------------
INCOME BEFORE PROVISION FOR
STATE INCOME TAX 847,972 402,074 266,662 199,493
PROVISION FOR STATE INCOME
TAX, current 13,000
6,227 4,000 3,000
----------------- ----------------- ----------------- -----------------
NET INCOME $ 834,972 $ 395,847 $ 262,662 $ 196,493
================= ================= ================= =================
PRO FORMA INFORMATION
Income before income taxes, as reported $ 847,972 $ 402,074 $ 266,662 $ 199,493
Pro forma income tax provision 339,200 158,300 106,000 80,000
----------------- ----------------- ----------------- -----------------
Pro forma net income $ 508,772 $ 243,774 $ 160,662 $ 119,493
================= ================= ================= =================
Pro forma earnings per share $ 0.20 $ 0.10 $ 0.06 $ 0.05
================= ================= ================= =================
Pro forma dividends per share $ 0.21 $ 0.15 $ 0.06 $ 0.18
================= ================= ================= =================
Pro forma weighted average common
shares outstanding 2,500,000 2,500,000 2,500,000 2,500,000
================= ================= ================= =================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes
F-3
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Shares Common Paid-In Retained Stockholders'
Outstanding Stock Capital Earnings Equity
------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 2,468,750 $ 1,000 $ 922,779 $ 16,663 $ 940,442
Prior period adjustment - Note 10 - - (64,689) (16,663) (81,352)
Distributions to stockholders - - - (381,197) (381,197)
Stockholder contributions - - 143,000 - 143,000
Net income - - - 395,847 395,847
------------- ----------- ------------- ----------- ---------------
BALANCE, December 31, 1996 2,468,750 1,000 1,001,090 14,650 1,016,740
Distributions to stockholders - - - (513,073) (513,073)
Net income - - - 834,972 834,972
------------- ----------- ------------- ----------- ---------------
BALANCE, December 31, 1997 2,468,750 1,000 1,001,090 336,549 1,338,639
Distributions to stockholders - - - (139,662) (139,662)
Net income - - - 262,662 262,662
------------- ----------- ------------- ----------- ---------------
BALANCE, March 31, 1998 2,468,750 $ 1,000 $ 1,001,090 $ 459,549 $ 1,461,639
============= =========== ============= =========== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes
F-4
<PAGE>
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------ ----------------------------
1997 1996 1998 1997
------------- --------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 834,972 $ 395,847 $ 262,662 $ 196,493
Adjustments to reconcile net income to net cash
used for operating activities
Depreciation 14,851 11,487 7,935 4,138
Loss from sale of real estate - 35,308 - -
Changes in operating assets and liabilities
Origination of mortgage loans held for sale (399,235,560) (191,331,640) (164,989,035) (96,131,000)
Proceeds from sales of mortgage loans 368,442,507 173,271,367 178,262,737 99,957,142
(Increase) decrease in accrued interest receivable (152,110) (11,281) 13,663 (3,475)
Increase (decrease) in accounts payable and accrued liabilities 23,537 94,000 46,688 (26,372)
Increase (decrease) in accrued interest payable 158,769 - (50,618) (8,883)
Decrease (increase) in other assets 2,344 (17,489) (115,430) 10,634
------------- --------------- ------------- -------------
Net cash (used for) provided by operating activities (29,910,690) (17,552,401) 13,438,602 3,998,677
------------- --------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit (272,298) (221,000) - -
Proceeds from sales and maturities of certificates of deposit 379,095 171,117 5,589 -
Purchase of property and equipment (29,930) (69,178) (13,559) (1,237)
Proceeds from sale of real estate held for investment - 245,000 - -
------------- --------------- ------------- -------------
Net cash provided by (used for) investing activities 76,867 125,939 (7,970) (1,237)
------------- --------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on warehouse notes payable 399,152,597 191,280,680 166,638,925 95,966,691
Payments on warehouse notes payable (368,442,507) (173,271,367) (180,012,038) (99,951,471)
Contributions from stockholders - 143,000 - -
Distributions to stockholders (513,073) (381,197) (139,662) (125,342)
Issuance of note receivable, stockholders (250,000) - - -
Payment of note receivable, stockholders - - 250,000 -
Real estate mortgage loan payments (2,608) (213,606) (663) (629)
Borrowings on note payable, subordinated - - 1,000,000 -
------------- --------------- ------------- -------------
Net cash provided by (used for) financing activities 29,944,409 17,557,510 (12,263,438) (4,110,751)
------------- --------------- ------------- -------------
NET CHANGE IN CASH AND EQUIVALENTS 110,586 131,048 1,167,194 (113,311)
CASH AND EQUIVALENTS, beginning of period 371,972 240,924 482,558 371,972
------------- --------------- ------------- -------------
CASH AND EQUIVALENTS, end of period $ 482,558 $ 371,972 $ 1,649,752 $ 258,661
============= =============== ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ - $ 3,908 $ - $ -
============= =============== ============= =============
Interest $ 1,411,720 $ 617,511 $ 783,923 $ 209,143
============= =============== ============= =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes
F-5
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies
Description of Operations - Transnational Financial Corporation
conducts real estate mortgage banking activities through wholesale and
retail branch operations located in and around the San Francisco Bay
area. The Company's revenues are derived primarily from the origination
and sale of conforming and non-conforming residential real estate loans
for placement in the secondary market.
Cash and Equivalents - Cash and equivalents consist of amounts on
deposit with major regional financial institutions and certificates of
deposit with an original maturity of not greater than 90 days.
Certificates of Deposit - Certificates of deposit generally mature
within 180 days. Certificates of deposit amounting to $318,672 are
subject to restrictions at December 31, 1997, including approximately
$160,000 classified as cash equivalents. These securities were pledged
as collateral for certain obligations of the stockholders. The bank
released this collateral subsequent to December 31, 1997.
Mortgage Loans Held for Sale - All mortgage loans originated are
intended for sale in the secondary market and are carried at the lower
of cost or estimated market value, as determined by quoted market
prices, in aggregate. Substantially all loans are sold servicing
released. The real property of the borrower is pledged as collateral
for mortgage loans.
Loan origination fees and certain direct origination costs are
recognized when the loan is made or when the costs are incurred.
Origination fees earned in excess of direct loan origination costs are
deferred and recognized as income when the related loan is sold. Fees
representing reimbursement for the costs of specific services performed
by third parties (such as for appraisals) are recognized when the
services have been performed. Loan placement fees are recognized when
all significant services have been performed.
Gains or losses realized from mortgage loan sales are recognized at
time of settlement with investors based upon the difference between the
proceeds from sale and the carrying value of the mortgage loan sold,
net of commitment fees paid. The Company reflects the value paid for
servicing rights released in net gain from sales of mortgage loans.
Property and Equipment - Property and equipment is stated at cost and
is depreciated using accelerated depreciation methods over the
estimated useful lives of the assets, which range from five to ten
years. Accumulated depreciation at December 31, 1997 was $58,423.
- --------------------------------------------------------------------------------
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Financial Statement Presentation - The Company prepares its financial
statements using an unclassified balance sheet presentation as is
customary in the mortgage banking industry. A classified balance sheet
presentation would have aggregated current assets, current liabilities
and net working capital as follows at December 31, 1997:
Current Assets $ 51,536,753
Current Liabilities $ 50,493,589
------------
Net Working Capital $ 1,043,164
============
Production Income - Production income consists of fees paid to the
Company by borrowers for the preparation, documentation and
underwriting of loans. These fees and related lending transaction costs
are deferred until the related loan is sold. Upon sale of the loan, the
deferred fees and costs are recognized as production income, and
deferred costs are recognized in the applicable expense
classifications.
Income Taxes - The Company is a Subchapter S corporation and therefore
is not subject to Federal income tax at December 31, 1997.
Distributions are periodically made to cover the Federal and state tax
liability of the stockholders. The California Revenue and Taxation Code
also levies a corporate tax of 1.5% on taxable income for which a
provision has been provided. However, pro forma income tax results are
presented on the statement of income and discussed in Note 16.
Effective April 30, 1998, the Company terminated its S status and
became a C corporation for tax purposes.
Off-Balance-Sheet Financial Instruments - The Company is a party to
financial instruments with off-balance sheet risk in the normal course
of business to meet the real estate mortgage financing needs of its
customers and to reduce its own exposure to market risk resulting from
fluctuations in interest rates. These financial instruments include
commitments to extend credit, commitments to sell whole loans on a
mandatory basis and forward delivery contracts to sell mortgage backed
securities. These instruments involve, to varying degrees, elements of
credit, and market risk resulting from changing interest rates, in
excess of the amount recognized in the financial statements. The
contract or notional amounts of those instruments reflect the extent of
the Company's involvement in particular classes of financial
instruments. Gains and losses resulting from such financial instruments
are recorded in the financial statements when they are funded or
settled.
- --------------------------------------------------------------------------------
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Commitments to Extend Credit - In response to marketplace
demands, the Company routinely makes commitments to extend credit
for fixed rate and variable rate loans with or without rate lock
guarantees. When rate lock guarantees are made to customers, the
Company becomes subject to market risk for changes in interest
rates that occur between the rate lock date and the date that a
firm commitment to purchase the loan is made by a secondary market
investor. Generally, as interest rates increase, the market value
of the loan commitment goes down. The opposite effect takes place
when interest rates go up. As described below, the Company uses a
combination of Financial Futures and Forward Delivery Commitments
to manage this risk. Hedging of the market risk is most successful
when these instruments are matched, resulting in the market values
of the Financial Futures and Forward Delivery Commitments moving
in an inverse relationship with the market value changes of the
Company's loan commitments.
Commitments to extend credit are agreements to lend to a customer
as long as the borrower satisfies the Company's underwriting
standards. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The
Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of
those commitments. The Company uses the same credit policies in
making commitments to extend credit as it does for
on-balance-sheet instruments. Collateral is required for
substantially all loans, and normally consists of real property.
The Company's experience has been that substantially all loan
commitments are completed or terminated by the borrower within
three months. The Company funds these commitments from operating
capital and through short-term borrowings on various warehouse
lines of credit. Sale of loans to permanent investors provides
additional liquidity to the Company.
Financial Futures - Mortgage Backed Securities ("MBS") futures
contracts are entered into by the Company as hedges against
exposure to interest-rate risk and are not for speculation
purposes. Changes in the market value of futures contracts are
deferred while the contracts are open and subsequently recognized
in income or expense after the contract closes and the related
hedged assets are sold. The Company provides collateral in the
form of standby letters of credit to support sales commitments
made to counterparties. However, the Company generally closes out
their financial futures positions and the offsetting standby
letters of credit without actually funding these instruments.
Credit risk on these instruments arise when the Company's position
in these securities becomes positive (i.e. "in-the-money") and the
Company is a net creditor to the counterparty to the agreement. To
manage this risk, the Company only enters into these agreements
with major, well-known financial institutions.
- --------------------------------------------------------------------------------
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Forward Delivery Commitments - The Company uses mandatory sell
forward delivery commitments to sell whole loans. These
commitments are also used as a hedge against exposure to
interest-rate risks resulting from rate locked loan origination
commitments and certain mortgage loans held for sale. Gains or
losses incurred in completing these commitments offset
corresponding gains and losses in the items hedged, and are
deferred and recognized in the statement of income when the
contract is closed and the related assets are sold. Credit risk on
these instruments arise when the Company's position in these
securities becomes positive (i.e. "in-the-money") and the Company
is a net creditor to the counterparty to the agreement. To manage
this risk, the Company only enters into these agreements with
major, well-known financial institutions.
Standby Letters of Credit - The Company uses standby letters of
credit as collateral to support sales commitments of financial
futures. The lender charges a fee to the Company to maintain the
availability of these letters of credit, which generally are
matched against the Company's commitments to sell financial
futures to the lender as part of the Company's hedging strategy.
The Company closes out their standby letters of credit when the
related financial futures are closed, and thus is normally not
required to execute draws or payments on these credit facilities.
The Company contracts with a hedge management firm to carry out their
hedge strategy and to track these off-balance sheet financial
instruments. A market position consisting of Financial Futures and
Forward Delivery Commitments has been established with characteristics
that are designed to offset the market risks which exist with certain
mortgage loans held for sale and commitments to extend credit. All
derivative financial instruments held or issued by the Company are held
or issued for purposes other than trading.
Use of Management 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 on the balance sheet at December 31, 1997 and the statement of
income for the years ended December 31, 1997 and 1996. Actual results
could differ significantly from those estimates.
- --------------------------------------------------------------------------------
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Adoption of New Accounting Pronouncement - On January 1, 1997, the
Company adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard No. 125 ("SFAS 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." This Statement provides guidelines for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS 125 supersedes SFAS 76, 77 and 122, while
amending both SFAS 65 and 115. The Statement is to be applied
prospectively; however, portions of SFAS No. 125 were deferred under
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" until January 1, 1998. Earlier implementation
is not permitted.
Under SFAS 125, a transfer of financial assets in which control is
surrendered is accounted for as a sale to the extent that consideration
other than beneficial interest in the transferred assets is received in
the exchange. Liabilities and derivatives incurred or obtained by the
transfer of financial assets are required to be measured at fair value,
if practicable.
SFAS 125 also requires an assessment of interest-only strips, loans,
other receivables and retained interests in securitizations. If these
assets can be contractually prepaid or otherwise settled such that the
holder would not recover substantially all of its recorded investment,
the asset will be measured like trading securities. This assessment is
required for financial assets held on or acquired after January 1,
1997. Application of the provisions of SFAS 125 did not have a material
effect on the Company's financial position, results of operations or
cash flows.
Basic Earnings Per Share - For the purpose of presenting pro forma
information, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." In February 1998, the
Securities and Exchange Commission (SEC) staff released Staff
Accounting Bulletin (SAB) No. 98, "Computations of Earnings per Share."
SAB No. 98 revised prior SEC guidance concerning presentation of
earnings per share information for companies going public, and requires
all companies to present earnings per share for all periods for which
income statement information is presented in accordance with SFAS No.
128. Basic earnings per share were computed using the pro forma
weighted average number of common shares outstanding.
- --------------------------------------------------------------------------------
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Basis of Note Presentation - The notes to the March 31, 1998 balance
sheet and the statements of income, changes in stockholders' equity and
cash flows for the three months ended March 31, 1998 and 1997 do not
present all disclosures required under generally accepted accounting
principles but, instead, as permitted by Securities and Exchange
Commissions regulations, presume that users of the interim financial
statements have read or have access to the December 31, 1997 audited
financial statements and that the adequacy of additional disclosure
needed for a fair presentation may be determined in that context. In
addition, the accompanying financial statements include all adjustments
which are, in the opinion of management, necessary to the fair
presentation of the results of operations for the periods presented.
All such adjustments are of a normal recurring nature.
Note 2 - Mortgage Loans Held for Sale, Pledged
The cost of mortgage loans held for sale is the outstanding principal
balance of the mortgage loan decreased by fees or discounts collected
and increased by fees and discounts paid, and certain direct costs.
Fees and costs incurred net of discounts collected are deferred and
recognized as adjustments to gain or loss when the related loan is
sold.
Mortgage loans held for sale consisted of the following at December 31,
1997:
Mortgage Loans $ 50,154,791
Deferred Costs, Net of Fees 133,923
------------
$ 50,288,714
============
Substantially all mortgage loans held for sale are pledged as
collateral against the Company's warehouse line of credit. The
collateral is released by the lenders at the time a mortgage loan is
sold and payment is received.
Note 3 - Notes Receivable
Notes receivable represent unsecured principal advances to individuals,
at fixed interest rates of 6% and 8%, due in full in 2000. The advances
were issued with an original maturity of five years. Notes receivable
include principal amounts due from employees of $35,819. Accrued
interest related to these notes totaled $41,763 at December 31, 1997.
- --------------------------------------------------------------------------------
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4 - Note Receivable, Stockholders
Subsequent to year end, but effective as of December 31, 1997, the
Company entered into a promissory note agreement with its stockholders.
The $250,000 note is unsecured, bearing interest at an annual rate of
6.5%, and is due on or before March 31, 1998. The note was paid in full
during March 1998.
Note 5 - Real Estate Held for Investment
Real estate held for investment consists of a residence in Santa Rosa,
California. The real estate was contributed to the Company during 1995
by the stockholders and is subject to a mortgage assumed by the
corporation. The real estate is recorded at the property's estimated
market value at the date of contribution less accumulated depreciation
of $12,556. The property is not currently listed for sale. The mortgage
is due 2018 bearing interest at the 11th District cost of funds. Future
principal payments are due as follows:
Year Ending December 31,
------------------------
1998 $ 3,200
1999 3,500
2000 3,700
2001 4,000
2002 4,300
Thereafter 128,055
---------
$ 146,755
=========
Note 6 - Warehouse Notes Payable
The Company maintains various revolving warehouse lines of credit
agreements, primarily to fund mortgage loan originations. Advances are
made on the warehouse lines for specific properties which are pledged
as collateral. The stockholders personally guarantee borrowings under
the revolving line. Interest accrues monthly on the warehouse lines and
is due at settlement when the underlying loans are sold. All advances
are expected to be repaid within one year.
- --------------------------------------------------------------------------------
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6 - Warehouse Notes Payable (continued)
Warehouse lines available as of December 31, 1997 were as follows:
$11 million revolving mortgage credit
facility with Warehouse Lending
Corporation of America and a temporary
bulge facility of $44 million, interest
on outstanding advances at LIBOR + 3.25%.
The credit facility expires March 15,
1998. $50,154,791
$7 million revolving mortgage credit
facility with PNC Mortgage Bank N.A.,
interest on outstanding advances at LIBOR
+ 2.5%. The credit facility expires May
31, 1998. -
$3 million revolving mortgage credit
facility with Pacific Southwest Bank,
interest on outstanding advances at the
Prime rate plus 1%. The credit facility
expires April 30, 1998. -
------------------
$50,154,791
==================
The Company must comply with covenants provided in its credit
agreements, including restrictions on the payment of dividends and the
maintenance of certain financial ratios and other conditions such as
maintaining minimum amounts of stockholders' equity.
The weighted average nominal interest rate on loans at December 31,
1997 is 9.09%. Interest expense amounted to $1,570,489 and $660,860 for
the years ended December 31, 1997 and 1996, respectively.
Note 7 - Financial Instruments
The following disclosure of the estimated fair value of financial
instruments at December 31, 1997 is made in accordance with the
requirements of SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates
of fair value. These estimates are not necessarily indicative of the
amounts the Company could realize in a current market exchange, and the
use of different market assumptions and/or estimation methodologies
could significantly affect the estimates.
- --------------------------------------------------------------------------------
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7 - Financial Instruments (continued)
Estimated
Carrying Fair
Value Value
------------ ---------
Financial Assets
Cash and equivalents $ 482,558 $ 482,558
Certificates and deposits $ 272,298 $ 272,298
Mortgage Loans held for sale, pledged $ 50,288,714 $ 50,700,000
Notes receivable $ 135,819 $ 110,000
Note receivable, stockholders $ 250,000 $ 250,000
Financial Liabilities
Warehouse notes payable $ 50,154,791 $ 50,154,791
Real estate mortgage note $ 146,755 $ 146,755
Off-Balance-Sheet Instruments
Committments to extend credit $ - $ 300,000
Financial futures $ - $ (65,000)
Foreward delivery committments $ - $ 5,000
Standby letters of credit $ - $ -
The notional amount of the Company's commitments to
extend credit at fixed interest rates were approximately $52,000,000 at
December 31, 1997. The Company also made commitments as of December 31,
1997 to deliver $13,500,000 in loans and $12,000,000 in mortgage backed
securities to various investors, all at fixed interest rates. The
Company has standby letters of credit up to $38,000,000 as of December
31, 1997, of which $12,000,000 are allocated in support of open
financial futures positions.
The fair values presented above represent the Company's best estimate
of fair value using the methodologies discussed below:
Cash and Equivalents and Certificates of Deposit - Due to the
relatively short period of time between the origination of these
instruments and their expected realization, the carrying amount is
estimated to approximate market value.
Notes Receivable - The fair value of notes receivable is estimated by
discounting the future cash flows using current interest rates at which
similar loans would be made to borrowers.
- --------------------------------------------------------------------------------
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7 - Financial Instruments (continued)
Mortgage Loans Held for Sale - Fair values for mortgage loans covered
by investor commitments are based on commitment prices. Fair values for
uncommitted loans are based on management's assessment of current
prices offered for similar loans sold in conjunction with the Company's
own secondary market transactions, adjusted for differences in loan
characteristics. Management's determination of fair value includes
consideration of commitment prices which clearly represent market
conditions at the balance sheet date and market prices and yields
sought by the Company's permanent investors, or other public market
quotations for long-term mortgage loan rates.
Financial Liabilities - The fair value of financial liabilities is
believed to approximate the carrying amount because the terms of the
debt are similar to terms currently offered by lenders, or the interest
rates are variable based on current market rates.
Off-Balance-Sheet Instruments - The fair value of off-balance-sheet
instruments is determined by management's assessment of current prices
offered for similar loans sold in conjunction with the Company's own
secondary market transactions, adjusted for related mandatory forward
commitments and risks associated with borrowers ability to complete
their commitments. The Company also employs pricing models and various
other techniques to determine the fair value of their forward delivery
and futures contracts.
Note 8 - Significant Group Concentrations of Credit Risk
Substantially all of the Company's business activity is with customers
located within the San Francisco Bay area. The loans and commitments
extended to these customers are expected to be repaid from proceeds of
the sale of these loans in the secondary market and are secured by real
estate. The Company's access and rights to this collateral vary and are
legally documented to the extent practicable. Sales agreements with
secondary market investors include limited recourse provisions which
may require the Company to repurchase the loans sold in the event of
certain conditions, the most restrictive of which includes the default
or delinquency of borrowers under the terms of the loan agreements.
Recourse obligations arising pursuant to these agreements are recorded
at estimated fair value using the best information available in the
circumstances when the loans are sold. The Company has not been
required to repurchase any loans sold during the years ended December
31, 1997 and 1996.
The Company has a concentration of credit risk with respect to cash
deposited with a commercial bank in excess of federally insured limits.
- --------------------------------------------------------------------------------
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9 - Commitments and Contingencies
Operating Leases - The Company has entered into various operating lease
agreements for the rental of office space. The following represents
aggregate future minimum lease payments under these agreements:
Year Ending December 31,
------------------------
1998 $ 150,765
1999 88,150
2000 74,940
2001 50,640
---------
$ 364,495
=========
Litigation - The Company is involved in legal proceedings arising in
the ordinary course of business. The ultimate outcome of these
proceedings can not be determined because of the uncertainties that
exist. In the opinion of management, the disposition of matters that
are pending or asserted will not have a materially adverse effect on
the financial position, results of operations or cash flows of the
Company.
Note 10 - Prior Period Adjustment
Loan origination fees, net of certain direct loan origination costs,
are required to be deferred and recognized as an adjustment of yield on
the related loans, using the interest method, or recognized when the
related loan is sold. During 1996, the Company determined that loan
fees and certain direct loan origination costs from prior years were
not properly accounted for in accordance with generally accepted
accounting principles. Accordingly, the Company's financial statements
as of December 31, 1995 have been restated to reflect these
requirements. The effect of the restatement is as follows:
As Previously As
Reported Restated
------------- ---------
Retained earnings as of December 31, 1995 $ 16,663 $ -
============= =========
Additional paid-in-capital $ 922,779 $ 858,090
============= =========
Net income for the nine months ended
December 31,1995 (unaudited) $ 220,919 $ 139,567
------------- ---------
Net income per share for the nine months
ended December 31, 1995 (unaudited) $ 0.09 $ 0.06
============= =========
- --------------------------------------------------------------------------------
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11 - New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting comprehensive income and its components
(revenues, expenses, gains and losses) in financial statements. SFAS
No. 130 requires classification of other comprehensive income in a
financial statement, and the display of the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company believes this
pronouncement will not have a material effect on its financial
statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which established
standards for reporting information about operating segments in annual
financial statements and requires that enterprises report selected
information about operating segments in interim financial reports to
stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997, although earlier application is encouraged. The
Company believes this pronouncement will not have a material effect on
its financial statements.
Note 12 - Year 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Accordingly, over
the next few years, management may incur additional expenditures to
modify its software to operate correctly for the year 2000. While
considered to be immaterial by management, the Company has not yet
quantified such costs, which will be expensed as incurred. If the
Company or other entities not affiliated with the Company do not
address this issue successfully, the Company's business could be
materially affected.
Note 13 - Credit Facilities
Subordinated Debt - In order to obtain additional capital, the Company
has obtained a $1,000,000 short-term note from a bank, subordinated to
warehouse lenders. The note bears interest at the Prime Rate plus 2%,
and is due in full on the earlier of December 31, 1998 or the closing
of an initial public offering of Company stock. The note is
collateralized by a first priority security interest in all of the
stock owned by the stockholders.
- --------------------------------------------------------------------------------
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13 - Credit Facilities (continued)
The note is guaranteed by the stockholders and secured by Company
accounts, equipment and general intangibles as defined in the
agreement. An equity participation fee of $100,000 is due when the loan
matures.
The loan agreement requires the Company to comply with certain
covenants, the most restrictive of which include minimum required
amounts of capital and the maintenance of certain financial ratios and
other conditions.
Loan Participation and Custodian Agreement - During January 1998, the
Company entered into a loan participation and custodian agreement with
a bank to fund the origination and sale of mortgage loans. Under the
terms of the agreement, the bank will purchase from the Company a 100%
loan participation interest and the related firm purchase commitment
obtained from permanent investors. The Company accounts for the
transfer of such loans pursuant to this agreement as sales, and records
the gain or loss at the settlement date, which is the date that the
loan is purchased by the investor. The bank charges the Company
transaction fees on the transfer of each loan and also requires payment
of interest at the rate of prime plus .25% on the outstanding balance
of loans purchased. Recourse provisions require the Company to
reacquire these loans in the event of certain conditions of default as
defined in the agreement. The Company records the estimated fair value
of the recourse obligation when the loans are sold.
Note 14 - Capital Stock
Stock Split and Preferred Stock Authorization - On March 17, 1998, the
Company's Board of Directors amended the Company's Articles of
Incorporation to authorize up to 10,000,000 shares of Common Stock and
approved a 2,468.75 for 1 split, in the form of a stock dividend, of
the Company's outstanding Common Stock. All common shares and per share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to the stock split. In addition, the
Company's Board of Directors amended the Company's Articles of
Incorporation to authorize up to 2,000,000 shares of Preferred Stock.
On May 1, 1998, two individuals were granted, in total, 31,250
shares of Common Stock for services rendered in connection with the
initial Public Offering of the Company's stock.
- --------------------------------------------------------------------------------
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15 - Subsequent Events
Employment Agreements - Subsequent to year end, the Company entered
into employment agreements with two senior executives of the Company
who were the sole stockholders. The agreements commenced on May 1,
1998, and extend through December 31, 1999. Compensation for the senior
executives shall be $250,000 and $150,000 annually. The agreements
include bonus provisions for additional payments to the executives
based on 10% of pretax income up to $150,000 per year for the Chief
Executive Officer and 60 basis points of the mortgage loans originated
by her plus 10 basis points on the mortgage loans originated by the
retail division of the Company in excess of $150,000 for the President.
In addition, employment agreements were entered into with three other
executives during March, April and May 1998 extending through December
31, 1999. Aggregate annual base salaries total $284,000 plus an
incentive performance bonus of $50,000 for one of the executives. All
three executives were granted options to acquire 15,000 shares of stock
each at the initial public offering price pursuant to the Company's
Incentive Stock Option Plan. The options vest at 20% per year beginning
on the date of the closing of the Offering.
In defined circumstances, the agreements also provide severance
payments of up to two times the executive's annual base salary upon
termination and immediate vesting of any stock options outstanding.
Stock Option Plan - On April 20, 1998, the Company's Board of Directors
approved the 1998 Stock Compensation Plan (the "1998 Plan"), which
permits the granting of options to employees of the Company. As of June
2, 1998, a total of 300,000 shares of Common Stock were reserved for
future grants of options under the 1998 Plan. The Company has granted
options for an aggregate of 45,000 shares of Common Stock to certain
employees of the Company, subject to the closing of the Offering. All
of these options will be forfeited if the Offering is not consummated.
The options vest at 20% per year beginning on the date of the closing
of the Offering and have an exercise price equal to the initial public
offering price. No options shall be granted under the plan after April
2008.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. Under SFAS 123, a fair value method is used to determine
compensation cost for stock options or similar equity instruments.
Compensation is measured at the grant date and is recognized over the
service or vesting period. The standard also allows the Company to
account for stock-based compensation under the intrinsic value based
method, with disclosure of the effect of the new standard. Under the
accounting standard used by the Company, compensation cost is the
excess, if any, of the quoted market price of the stock at a
measurement date over the amount that must be paid to acquire the
stock.
- --------------------------------------------------------------------------------
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16 - Pro Forma Information (Unaudited)
Income Taxes - As discussed in Note 1, the Company is an S corporation
for federal and California tax purposes. Accordingly, the accompanying
financial statements do not include a provision for income taxes, with
the exception of the 1.5% California tax on S corporations. Effective
April 30, 1998, the Company terminated its S status and become a C
corporation for tax purposes. The Company will be subject to federal
and state income taxes and will recognize deferred taxes in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires companies subject
to income taxes to adjust their deferred tax assets and liabilities
based on temporary differences between financial statement and tax
basis of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse. For
informational purposes, the statement of income includes an unaudited
pro forma income tax provision on income before income taxes for
financial reporting purposes using federal and state rates that would
have resulted if the Company had filed corporate tax returns during the
period presented.
Earnings Per Share - Pro forma earnings per share is computed by
dividing pro forma net income by the pro forma number of shares of
common stock outstanding during the respective period. The pro forma
number of shares of common stock outstanding represents the number of
shares of common stock outstanding after giving retroactive effect to
the stock split and issuance of 31,250 shares of common stock.
Balance Sheet - Pursuant to the reporting requirements of the
Securities and Exchange Commission, a pro forma balance sheet is
presented as of March 31, 1998 which reflects an assumed distribution
of approximately $459,000 of S corporation dividends, representing the
accumulated undistributed earnings of the Company from April 1, 1994
through March 31, 1998. Distributions of approximately $313,000 were
made related to previous S corporation earnings during the period from
April 1, 1998 to May 31, 1998. The pro forma balance sheet also
reflects the reclassification of approximately $146,000 of remaining
undistributed S corporation earnings from retained earnings to
additional paid-in capital. For the purposes of the pro forma balance
sheet presentation, the above amounts were assumed to have been funded
from the Company's cash balance of $1,649,752 at March 31, 1998.
- --------------------------------------------------------------------------------
F-20
<PAGE>
No dealer, sales person, or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy the shares of Common Stock offered
hereby by anyone in any jurisdiction in which such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such
solicitation or offer. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Additional Information...................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 6
Use of Proceeds............................. 12
Dividend Policy............................. 12
Dilution.................................... 13
Capitalization.............................. 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................ 15
Business.................................... 17
Management.................................. 23
Principal and Selling Shareholders.......... 26
Certain Relationships and
Related Transaction....................... 27
Description of Capital Stock................ 27
Shares Eligible for Future Sale............. 28
Underwriting................................ 30
Legal Matters............................... 32
Experts..................................... 32
Index to Financial Statements............... F-1
Until ______, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution,may be required to deliver a Prospectus. This is in addition to the
obligation of delaers to deliver a Prospectus when acting as Underwriters and
with respect to their unsold allotments or subscriptions.
1,000,000 SHARES
TRANSNATIONAL FINANCIAL CORPORATION
COMMON STOCK
PROSPECTUS
TEJAS SECURITIES GROUP, INC.
(214) 692-3544
____________ __, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Section 204 (a) (10) (A) of the General Corporation Law of the State of
California ("GCL") allows a corporation to eliminate the personal liability of a
director for monetary damages in an action brought by or in the right of the
corporation for breach of a director's duties to the corporation and its
stockholders, except that such provision may not eliminate or limit the
liability of directors for (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its stockholders or that involve the absence of good faith on the part of the
director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for the
director's duty to the corporation or its stockholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the corporation
or its stockholders, (v) acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
corporation or its stockholders, (vi) certain liabilities arising from contracts
with the corporation in which the director has a material financial interest,
(vii) the making of any distributions to stockholders contrary to the law,
(viii) the distribution of assets to shareholders after dissolution proceedings
without paying or adequately providing for all known liabilities of the
corporation within certain time limits, and (ix) the making of any loan or
guaranty contrary to law. The Registrant's Articles of Incorporation contains a
provision which eliminates directors' personal liability as set forth above,
except, as required by Section 204 (a) (10) (B) and (C) of the GCL, any
liability of a director for any act or omission occurring prior to the date of
the provision's effectiveness, or any liability for an officer's acts or
omissions, notwithstanding that the officer is also a director or that the
officer's actions, if negligent or improper, have been ratified by the
directors.
Section 317 of the GCL ("Section 317") empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that he or she is or was
a director, officer, employee or agent of the corporation, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with the proceeding if that person acted in good faith and in a
manner the person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendre or its equivalent does not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably
believed to be in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful. Section 317
empowers the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action by
or in the right of the corporation to procure a judgment in its favor by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of the action if the person
acted in good faith, in a manner the person believed to be in the best interests
of the corporation and its stockholders, provided that (i) the person is
successful on the merits or (ii) such amounts are paid with court approval.
Section 317 also provides that, unless a person is successful on the merits in
defense of any proceeding referred to above, indemnification may be made only if
authorized in the specific case, upon a determination that indemnification is
proper in the circumstances because the indemnified person met the applicable
standard of conduct described above by one of the following: (1) a majority vote
of a quorum consisting of directors who are not parties to such proceedings; (2)
if such quorum is not obtainable, by independent legal counsel in a written
opinion; (3) by approval of stockholders with such indemnified person's shares
not being entitled to vote thereon; or (4) by the court in which the proceeding
is or was pending upon application by or on behalf of the person. Such
indemnification may be advanced to the indemnified person upon the receipt of
the corporation of an undertaking by or on behalf of the indemnified person to
repay such amount in the event it shall be ultimately determined that such
indemnified person is not entitled to indemnification. Section 317 also allows
the corporation, by express provision in its articles, to authorize additional
rights for indemnification pursuant to Section 204 (a) (ii).
The Bylaws of the Registrant provide that the Registrant shall indemnify its
directors and officers against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of such person being or having been a director or officer
expenses incurred in defending any such proceeding to the fullest extent
permissible under California law. The Bylaws also provide that the Registrant
may indemnify its employees and agents for such expenses by resolution of the
Board of Directors.
Reference is also made to the Form of Underwriting Agreement filed as Exhibit
1.1 to this Registration Statement for provisions relating to the
indemnification of directors, officers and controlling persons against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
Item 25. Other Expenses of Issuance and Distribution
Estimated expenses in connection with the public offering by the Company of the
securities offered hereunder are as follows:
Securities and Exchange Commission Filing Fee $ 3,836
NASD Filing Fee 1,535
Blue Sky Fees and expenses 4,000
American Stock Exchange Application and Listing Fee* 35,000
Accounting Fees and Expenses 230,000
Legal Fees and Expenses 95,000
Printing* 85,000
Fees of Transfer Agents and Registrar* 5,000
Underwriters' Non-Accountable Expense Allowance 140,000
Miscellaneous* 629
------------
Total $600,000
- ------------
*Estimated
Item 26. Recent Sales of Unregistered Securities
The following is a summary of the only transaction by the Registrant during the
last three years involving the sale of securities which were not registered
under the Securities Act: In March of 1998 the Company agreed to issue, upon
termination of the Company's status as an S corporation, to its counsel 12,500
shares of Common Stock in consideration of legal services rendered to the
Company and to issue 18,750 shares of Common Stock, upon the same conditions, to
a financial advisor to the Company. These transactions were exempt from
registration under the Securities Act pursuant to Section 4(2) thereunder as
transactions not involving a public offering.
Item 27. Exhibits
Exhibit No. Item
Exhibit 1.1 Form of Underwriting Agreement.(1)
Exhibit 1.2 Form of Underwriters' Warrant Agreement(1)
Exhibit 3.1 Restated Articles of Incorporation(3)
Exhibit 3.2 Bylaws(1)
Exhibit 5.1 Opinion of Robert A. Forrester(1)
Exhibit 10.1 Employment Agreement of Joseph Kristul(1)
Exhibit 10.2 Employment Agreement of Maria Kristul(1)
Exhibit 10.3 Employment Agreement of Robert W. Bronson(1)
Exhibit 10.4 Employment Agreement of Matt Heidari(1)
Exhibit 10.5 Employment of Ronald W. Kiehn(1)
Exhibit 10.6 1998 Stock Option Plan(1)
Exhibit 10.7 Agreement between the Registrant and Warehouse Lending
Corporation of America(1)
Exhibit 10.8 Agreement betweent the Registrant and PNC Mortgage
Bank, National Association(2)
Exhibit 10.9 Letter agreement between the Company and Financial
Capital Resources(1)
Exhibit 23.1 Consent of Moss Adams LLP(1)
Exhibit 23.2 Consent of Robert A. Forrester is contained in his
opinion filed as Exhibit 5.1 to this registration
statement. (1)
Exhibit 27.1 Financial Data Schedule(1)
- ------------
(1) Filed herewith
(2) To be filed by amendment
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows;
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer 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 small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
shares of the securities being registered, the small business issuer
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 issue.
(3) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(4) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, California on June 8, 1998.
Transnational Financial Corporation
By: _/s/ Joseph Kristul______________________
Joseph Kristul, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL. MEN BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints Maria Kristul and Joseph Kristul, and
each for them, his true and lawful attorney's-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (until revoked in writing), to sign any and all
further amendments to this Registration Statement (including post-effective
amendments or registration statements filed pursuant to Rule 462(b) relating to
this Registration Statement), and to file same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person thereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or
their substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Joseph Kristul Director, June 8,1998
Joseph Kristul Chief Executive Officer Principal Accounting and
Financial Officer
/s/ Maria Kristul Director, President June 8, 1998
- -----------------
Maria Kristul
/s/ Eugene Kristul Director, Secretary June 8, 1998
- ------------------
Eugene Kristul
_/s/ Hilary Whitley Director June 8, 1998
Hilary Whitley
<PAGE>
1,000,000 Shares
TRANSNATIONAL FINANCIAL CORPORATION
Common Stock
______________, 1998
UNDERWRITING AGREEMENT
TEJAS SECURITIES GROUP, INC.
As Representative of the Several Underwriters
1250 Capital of Texas Hwy. South
Building Two, Suite 500
Austin, Texas 78746
Dear Sirs:
Transnational Financial Corporation, a California corporation (the
"Company"), proposes to sell to you and the other underwriters named in Schedule
I hereto (collectively, the "Underwriters"), for whom Tejas Securities Group,
Inc. is acting as managing underwriter and representative (the
"Representative"), in the respective amounts set forth opposite each
Underwriter's name in Schedule I hereto, an aggregate of 1,000,000 shares of
Common Stock, no par value (the "Common Stock"), of the Company (such shares are
hereinafter collectively referred to as the "Underwritten Securities"). The
Company also proposes to grant to the Underwriters the Underwriters' Warrants
(defined in Section 7 hereof) to purchase up to 100,000 shares of Common Stock
(such Underwriters' Warrants and shares of Common Stock, are collectively
referred to herein as the "Warrant Securities"). Kristul Family LLC (the
"Selling Shareholder") proposes to grant to the Underwriters the Underwriters'
Option (described in Section 2(b) hereof) to purchase up to an aggregate of
150,000 shares of Common Stock solely to cover over-allotments in the sale of
the Underwritten Securities (such shares are collectively referred to herein as
the "Option Securities"). The Underwritten Securities, the Option Securities and
the Warrant Securities are collectively referred to herein as the "Securities."
The terms which follow, when used in this Agreement, shall have the
meanings indicated. The term "Effective Date" shall mean each date that the
Registration Statement (as defined below) and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean the
date and time that this Agreement is executed and delivered by the parties
hereto. The term "Preliminary Prospectus" shall mean any preliminary prospectus
referred to in Section 1(a) below with respect to the offering of the
Securities, and any preliminary prospectus included in the Registration
Statement on the Effective Date that omits Rule 430A Information (as defined
below). Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the most recent Preliminary Prospectus which predates or
coincides with the Execution Time. "Prospectus" shall mean the final prospectus
with respect to the offering of the Securities that contains the Rule 430A
Information. "Registration Statement" shall mean (a) the registration statement
referred to in Section 1(a) below, including Exhibits and Financial Statements,
in the form in which it has or shall become effective, (b) in the event any
post-effective amendment thereto becomes effective prior to the Closing Date (as
defined in Section 3(a) hereof) or any settlement date pursuant to Section 3(b)
hereof, such registration statement as so amended on such date, and (c) in the
event of the filing of any abbreviated registration statement increasing the
size of the offering (a "Rule 462 Registration Statement"), pursuant to Rule
462(b) (as defined below), which registration statement became effective upon
filing the Rule 462 Registration Statement. Such term shall include Rule 430A
Information (as defined below) deemed to be included therein at the Effective
Date as provided by Rule 430A. "Rule 424," "Rule 462(b)" and "Rule 430A" refer
to such rules promulgated under the Securities Act of 1933, as amended (the
"Act"). "Rule 430A Information" means information with respect to the Securities
and the offering thereof permitted to be omitted from the Registration Statement
when it becomes effective pursuant to Rule 430A.
Underwriting Agreement
25908_2 - 75205/00002
1
<PAGE>
1. Representations and Warranties of the Company and Selling Shareholder.
(I) The Company represents and warrant to, and agrees with, each
Underwriter that:
(a) The Company meets the requirements for the use of Form
SB-2 under the Act and has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, including a
related preliminary prospectus ("Preliminary Prospectus"), on Form SB-2
(Commission File No. 333-50657) (the "Registration Statement") for the
registration under the Act of the Securities. The Company may have
filed one or more amendments thereto, including related Preliminary
Prospectuses, each of which has previously been furnished to you. The
Company will next file with the Commission either prior to
effectiveness of such Registration Statement, a further amendment
thereto (including the form of Prospectus) or, after effectiveness of
such Registration Statement, a Prospectus in accordance with Rules 430A
and 424(b)(1) or (4). As filed, such amendment and form of Prospectus,
or such Prospectus, shall include all Rule 430A Information and, except
to the extent the Representative shall agree in writing to a
modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you in
writing, prior to the Execution Time, will be included or made therein.
(b) The Preliminary Prospectus dated _________________, at the
time of filing thereof, conformed in all material respects with the
applicable requirements of the Act and the rules and regulations
thereunder and did not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. If
the Effective Date is prior to or simultaneous with the Execution Time,
(i) on the Effective Date, the Registration Statement conformed in all
material respects to the requirements of the Act and the rules and
regulations thereunder and did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and (ii) at the Execution Time, the Registration Statement
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b), the Registration Statement and the Prospectus will conform, in
all material respects to the requirements of the Act and the rules and
regulations thereunder, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will
omit, to state a material fact required to be stated therein or
necessary in order to make the statements therein (and, in the case of
the Prospectus, in the light of the circumstances under which they were
made) not misleading. If the Effective Date is subsequent to the
Execution Time, on the Effective Date, the Registration Statement and
the Prospectus will conform in all material respects to the
requirements of the Act and the rules and regulations thereunder, and
neither of such documents will contain any untrue statement of any
material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein (and, in the
case of the Prospectus, in the light of the circumstances under which
they were made) not misleading. The two preceding sentences do not
apply to statements in or omissions from the Registration Statement or
the Prospectus (or any supplements thereto) based upon and in
conformity with information furnished in writing to the Company by or
on behalf of any Underwriter through the Representative specifically
for use in connection with the preparation of the Registration
Statement or the Prospectus (or any supplements thereto).
(c) The Company does not own or control, directly or
indirectly, any corporation, partnership, association or other entity.
(d) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full corporate
power and corporate authority to own its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction in which it conducts its business or owns
property and in which the failure, individually or in the aggregate, to
be so qualified would have a material adverse effect on the properties,
assets, operations, business, condition (financial or otherwise) or
prospects of the Company ("Material Adverse Effect"). The Company has
all necessary authorizations, approvals, orders, licenses, certificates
and permits of and from all government
Underwriting Agreement
25908_2 - 75205/00002
2
<PAGE>
regulatory officials and bodies, to own its properties and conduct its
business as described in the Prospectus except where the absence of any
such authorization, approval, order, license, certificate or permit
would not have a Material Adverse Effect.
(e) The Company's equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus; all
outstanding shares of Common Stock (including, without limitation, the
shares of Common Stock to be sold by the Selling Shareholder hereunder)
have been duly and validly authorized and issued and are fully paid and
nonassessable, and the certificates therefor are in valid and
sufficient form; there are, and, on the Effective Date, the Closing
Date (and any settlement date pursuant to Section 3(b) hereof), there
will be, no other classes of stock outstanding except Common Stock; all
outstanding options to purchase shares of Common Stock have been duly
and validly authorized and issued; except as described in the
Registration Statement, there are, and, on the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), there will be, no
options, warrant or rights to acquire, or debt instruments convertible
into or exchangeable for, or other agreements or understandings to
which the Company is a party, outstanding or in existence, entitling
any person to purchase or otherwise acquire shares of capital stock of
the Company; the issuance and sale of the Securities have been duly and
validly authorized and, when issued and delivered and paid for, the
Securities will be fully paid and nonassessable and free from
preemptive rights, and will conform in all respects to the description
thereof contained in the Prospectus; the Underwriters' Warrants will,
when issued, constitute valid and binding obligations of the Company
enforceable in accordance with their terms and the Company has reserved
a sufficient number of shares of Common Stock for issuance upon
exercise thereunder; the Securities will, when issued, possess the
rights, privileges and characteristics as described in the Prospectus;
and the certificates for the Securities are in valid and sufficient
form. Each offer and sale of securities of the Company referred to in
Item 15 of Part II of the Registration Statement was effected in
compliance with the Act and the rules and regulations thereunder, and
with all applicable blue sky ("Blue Sky") laws.
(f ) The Securities (other than the Underwriters' Warrants)
have been approved for listing on the American Stock Exchange ("AMEX"),
upon notice of issuance thereof.
(g) Other than as described in the Prospectus, there is no
pending or, to the best knowledge of the Company, threatened action,
suit or proceeding before any court or governmental agency, authority
or body, domestic or foreign, or any arbitrator involving the Company
of a character required to be disclosed in the Registration Statement
or the Prospectus. There is no contract or other document of a
character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit that is not described or filed
as required.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as rights of indemnity and contribution
hereunder may be limited by public policy and except as the
enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and general principles of equity.
(i) The Company has full corporate power and corporate
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities in the manner
provided in this Agreement. The Company has taken all necessary
corporate action to authorize the execution and delivery of, and the
performance of its obligations under, this Agreement.
(j) Neither the offering, issuance and sale of the Securities,
nor the consummation of any other of the transactions contemplated
herein, nor the fulfillment of the terms hereof, will conflict with or
result in a breach or violation of, or constitute a default under, or
result in the imposition of a lien on any properties of the Company or
an acceleration of indebtedness pursuant to, the Articles of
Incorporation or bylaws of the Company, as currently in effect, or any
of the terms of any indenture or other agreement or instrument to which
the Company is a party or by which the Company or any of its properties
are bound, or any law, order, judgment, decree, rule or regulation
applicable to the Company of any court, regulatory body, administrative
Underwriting Agreement
25908_2 - 75205/00002
3
<PAGE>
agency, governmental body, stock exchange or arbitrator having
jurisdiction over the Company. The Company is not in violation of its
Articles of Incorporation or bylaws, as currently in effect, or, except
as described in the Prospectus, in breach of or default under any of
the terms of any indenture or other agreement or instrument to which it
is a party or by which it or its properties are bound, which breach or
default would, individually or in the aggregate, have a Material
Adverse Effect.
(k) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to it
any shares of capital stock in consequence of the issue and sale of the
Securities, nor does any person have preemptive rights, or rights of
first refusal or other rights to purchase any of the Securities. Except
as referred to in the Prospectus, no person holds a right to require or
participate in a registration under the Act of Common Stock, Preferred
Stock or any other equity securities of the Company.
(l) The Company has not (i) taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result
in, under the Exchange Act, or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities (other than those actions permitted by
applicable law) or (ii) effected any sales of shares of securities that
are required to be disclosed in response to Item 15 of Part II of the
Registration Statement (other than transactions disclosed in the
Registration Statement or the Prospectus).
(m) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body is
required to be obtained or filed by or on behalf of the Company in
connection with the transactions contemplated herein, except such as
may have been obtained or made and registration of the Securities under
the Act, and such as may be required under the Blue Sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters.
(n) The accountants who have certified the Financial
Statements filed or to be filed with the Commission as part of the
Registration Statement are independent accountants as required by the
Act.
(o) No stop order preventing or suspending the use of any
Preliminary Prospectus has been issued, and no proceedings for that
purpose are pending or, to the best knowledge of the Company,
threatened or contemplated by the Commission; no stop order suspending
the sale of the Securities in any jurisdiction has been issued and no
proceedings for that purpose have been instituted or, to the best
knowledge of the Company, threatened or are contemplated; and any
request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) has been
complied with.
(p) The Company has not sustained, since December 31, 1997,
any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there have not been any changes in the capital stock or long-term debt
of the Company, or any material adverse change, or a development known
to the Company that could reasonably be expected to cause or result in
a material adverse change, in the general affairs, management,
financial position, stockholders' equity, results of operations or
prospects of the Company, otherwise than as set forth in the
Prospectus. Except as set forth in the Prospectus, there exists no
present condition or state of facts or circumstances known to the
Company involving its customers which the Company can now reasonably
foresee would have a Material Adverse Effect or which would result in a
termination or cancellation of any agreement with any customer whose
purchases, individually or in the aggregate, are material to the
business of the Company, or which would result in any material decrease
in sales to any such customer or purchases from any supplier, or which
would prevent the Company from conducting its business as described in
the Prospectus in essentially the same manner in which it has
heretofore been conducted.
(q) The Financial Statements and the related notes of the
Company, included in the Registration Statement and the Prospectus
present fairly the financial position, results of operations, cash flow
and changes in shareholders' equity of the Company at the dates and for
the periods indicated, subject in the case of the
Underwriting Agreement
25908_2 - 75205/00002
4
<PAGE>
Financial Statements for interim periods, to normal and recurring
year-end adjustments. The Financial Statement schedules included in the
Registration Statement present fairly the information required to be
stated therein. Such Financial Statements and schedules were prepared
in conformity with the Commission's rules and regulations and in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as stated
therein. The financial information of the Company set forth in the
Prospectus under the captions "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" fairly present, on the basis stated in the Prospectus, the
information included therein.
(r) The Company owns or possesses, or has the right to use
pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights
necessary to carry on its business as described in the Prospectus, and,
except as set forth in the Prospectus, the Company has not received any
notice of either (i) default under any of the foregoing or (ii)
infringement of or conflict with asserted rights of others with respect
to, or challenge to the validity of, any of the foregoing which, in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could have a Material Adverse Effect, and the Company knows of
no fact which could reasonably be anticipated to serve as the basis for
any such notice.
(s) Subject to such exceptions as are not likely to result in
a Material Adverse Effect, (A) the Company owns all properties and
assets described in the Registration Statement and the Prospectus as
being owned by it and (B) the Company has good title to all properties
and assets owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except as otherwise disclosed in the
Prospectus and except for (i) liens for taxes not yet due, (ii)
mortgages and liens securing debt reflected on the Financial Statements
included in the Prospectus, (iii) materialmen's, workmen's, vendor's
and other similar liens incurred in the ordinary course of business
that are not delinquent, individually or in the aggregate, and do not
have a material adverse effect on the value of such properties or
assets of the Company, or on the use of such properties or assets by
the Company, in its respective business, and (iv) any other liens that,
individually or in the aggregate, are not likely to result in a
Material Adverse Effect. All leases to which the Company is a party and
which are material to the conduct of the business of the Company are
valid and binding and no material default by the Company has occurred
and is continuing thereunder; and the Company enjoys peaceful and
undisturbed possession under all such material leases to which it is a
party as lessee.
(t) The books, records and accounts of the Company accurately
and fairly reflect, in reasonable detail, the transactions in and
dispositions of the assets of the Company. The system of internal
accounting controls maintained by the Company is sufficient to provide
reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(u) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company has not incurred any
liabilities or obligations, direct or contingent, or entered into any
transactions, in each case, which are likely to result in a Material
Adverse Effect, and there has not been any payment of or declaration to
pay any dividends or any other distribution with respect to the shares
of the capital stock of the Company.
(v) The Company is in compliance in all material respects with
all applicable laws, rules and regulations, including, without
limitation, employment and employment practices, immigration, terms and
conditions of employment, health and safety of workers, customs and
wages and hours, and is not engaged in any unfair labor practice. No
property of the Company has been seized by any governmental agency or
authority as a result of any violation by the Company or any
independent contractor of the Company of any provisions of law. There
is no pending unfair labor practice complaint or charge filed with any
governmental agency against the Company. There is no labor strike,
material dispute, slow down or work stoppage actually
Underwriting Agreement
25908_2 - 75205/00002
5
<PAGE>
pending or, to the best knowledge of the Company, threatened against or
affecting the Company; no grievance or arbitration arising out of or
under any collective bargaining agreements is pending against the
Company no collective bargaining agreement which is binding on the
Company restricts the Company from relocating or closing any of its
operations and none of the Company has experienced any work stoppage or
other labor dispute at any time.
(w) The Company has accurately, properly and timely (giving
effect to any valid extensions of time) filed all federal, state, local
and foreign tax returns (including all schedules thereto) that are
required to be filed, and has paid all taxes and assessments shown
thereon. Any and all tax deficiencies asserted or assessed against the
Company by the Internal Revenue Service ("IRS") or any other foreign or
domestic taxing authority have been paid or finally settled with no
remaining amounts owed. Neither the IRS nor any other foreign or
domestic taxing authority has examined any tax returns of the Company
nor has the IRS or any foreign or domestic taxing authority asserted a
position which conflicts with any tax position taken by the Company.
The charges, accruals and reserves shown in the Financial Statements
included in the Prospectus in respect of taxes for all fiscal periods
to date are adequate, and nothing has occurred subsequent to the date
of such Financial Statements that makes such charges, accruals or
reserves inadequate. The Company is not aware of any proposal (whether
oral or written) by any taxing authority to adjust any tax return filed
by the Company.
(x) With such exceptions as are not likely to result in a
Material Adverse Effect, the Company is in compliance with all Federal,
state, foreign and local laws and regulations relating to pollution or
protection of human health or the environment ("Environmental Laws"),
there are no circumstances that may prevent or interfere with such
compliance other than as set forth in the Prospectus, and the Company
has not received any notice or other communication alleging a currently
pending violation of any Environmental Laws. With such exceptions as
are not likely to result in a Material Adverse Effect, other than as
set forth in the Prospectus, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge or disposal of any
chemicals, pollutants, contaminants, wastes, toxic substances,
petroleum and petroleum products, that may result in the imposition of
liability on the Company or any claim against the Company or, to the
Company's best knowledge, against any person or entity whose liability
for any claim the Company has or may have assumed either contractually
or by operation of law, and the Company has not received any notice or
other communication concerning any such claim against the Company or
such person or entity.
(y) Except as set forth in the Prospectus, there are no
outstanding loans, advances or guaranties of indebtedness by the
Company to or for the benefit of its affiliates, or any of its officers
or directors, or any of the members of the families of any of them,
which are required to be disclosed in the Registration Statement or the
Prospectus.
(z) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(aa) Except as set forth in the Prospectus, the Company has
insurance of the types and in the amounts that it reasonably believes
is adequate for its business, including, but not limited to, casualty
and general liability insurance covering all real and personal property
owned or leased by the Company, as applicable, against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against.
(bb) The Company has not at any time (i) made any
contributions to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law; (ii) made
any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or allowed by all applicable laws;
or (iii) violated, nor is it in violation of, any provision of the
Foreign Corrupt Practices Act of 1977.
(cc) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on
behalf of the Company, and the Registration Statement has been duly
executed pursuant to such authorization by and on behalf of the
Company.
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(dd) All documents delivered or to be delivered by the Company
or any of its directors or officers to the Underwriters, the Commission
or any state securities law administrator in connection with the
issuance and sale of the Securities were, on the dates on which they
were delivered, and will be, on the dates on which they are to be
delivered, true, complete and correct in all material respects.
(ee) Except as described in the Prospectus, the Company does
not maintain, nor does any other person maintain on behalf of the
Company, any retirement, pension (whether deferred or non-deferred,
defined contribution or defined benefit) or money purchase plan or
trust. There are no unfunded liabilities of the Company with respect to
any such plans or trusts that are not accrued or otherwise reserved for
on the Financial Statements.
(ff) Any certificates signed by an officer of the Company and
delivered to the Representative or the Underwriters or to counsel for
the Underwriters shall also be deemed a representation and warranty of
the Company to the Underwriters as to the matters covered thereby. Any
certificate delivered by the Company to its counsel for purposes of
enabling such counsel to render the opinions referred to in Section
6(b) will also be furnished to the Representative and counsel for the
Underwriters and shall be deemed to be additional representations and
warranties by the Company to the Underwriters as to the matters covered
thereby.
(gg) The Company has obtained and delivered to the
Representative the written agreements, substantially in the form
attached hereto as Exhibit B, of all of the shareholders of the
Company, except the Selling Shareholder, restricting dispositions of
equity securities of the Company.
(II) The Selling Shareholder represents and warrants to and agrees with
each Underwriter that:
(a) The Selling Shareholder now has, and on the Closing Date
(or any settlement date pursuant to Section 3(b) hereof) will have,
valid marketable title to the Option Securities to be sold by the
Selling Shareholder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest other than pursuant
to this Agreement; and upon delivery of such Option Securities
hereunder and payment of the purchase price as herein contemplated,
each of the Underwriters will obtain valid marketable title to the
Option Securities purchased by it from the Selling Shareholder, free
and clear of any pledge, lien, security interest pertaining to the
Selling Shareholder or the Selling Shareholder's property, encumbrance,
claim or equitable interest, including any liability for estate or
inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of the Selling Shareholder.
(b) The Selling Shareholder has duly authorized, executed and
delivered, in the form heretofore furnished to the Representative, an
irrevocable Power of Attorney (the "Power of Attorney") appointing
______________________ and _________________________ as
attorneys-in-fact (collective, the "Attorneys" and individually, an
"Attorney") and a Letter of Transmittal and Custody Agreement (the
"Custody Agreement") with ____________________________ as custodian
(the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of the
Selling Shareholder, enforceable in accordance with its terms, except
as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles; and each of the Selling Shareholder's Attorneys, acting
alone, is authorized to execute and deliver this Agreement and the
certificate referred to in Section 6(k) hereof on behalf of the Selling
Shareholder, to determine the purchase price to be paid by the several
Underwriters to the Selling Shareholder as provided in Section 3
hereof, to authorize the delivery of the Option Securities to be sold
by the Selling Shareholder under this Agreement and to duly endorse (in
blank or otherwise) the certificate or certificates representing such
Shares or a stock power or powers with respect thereto, to accept
payment therefor, and otherwise to act on behalf of the Selling
Shareholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders
required for the execution and delivery by the Selling Shareholder of
the Power of Attorney and the Custody Agreement, the execution and
delivery by or
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on behalf of the Selling Shareholder of this Agreement and the sale and
delivery of the Option Securities to be sold by the Selling Shareholder
under this Agreement (other than, at the time of the execution hereof
(if the Registration Statement has not yet been declared effective by
the Commission), the issuance of the order of the Commission declaring
the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under the state or other
securities or Blue Sky laws) have been obtained and are in full force
and effect; the Selling Shareholder, if other than a natural person,
has been duly organized and is validly existing in good standing under
the laws of the jurisdiction of its organization as the type of entity
that it purports to be; and the Selling Shareholder has full legal
right, power and authority to enter into and perform its obligations
under this Agreement and such Power of Attorney and Custody Agreement,
and to sell, assign, transfer and deliver the Securities to be sold by
the Selling Shareholder under this Agreement.
(d) The Selling Shareholder will not, during the one (1)-year
period beginning on the date of the Prospectus (the "Lock-Up Period"),
directly or indirectly, offer, sell, contract to sell, grant any option
for the sale of, pledge or otherwise dispose of (individually, a
"Disposition") any Common Stock, or securities exercisable, convertible
or exchangeable for or into Common Stock (collectively, the "Shares"),
that the Selling Shareholder now owns or will own in the future
(beneficially or of record), except (i) as a bona fide gift or gifts,
provided the donee or donees thereof agree in writing to be bound by
this provision, (ii) the sale of Shares to the Underwriters pursuant
hereto, or (iii) with the prior written consent of the Representative.
The foregoing restriction is expressly agreed to preclude the holder of
Shares from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a
Disposition of Shares during the Lock-Up Period even if such Shares
would be disposed of by someone other than the Selling Shareholder.
Such prohibited hedging or other transactions would include, without
limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any security (other than a
broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Shares. The Selling
Shareholder also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of
the securities held by the Selling Shareholder except in compliance
with this restriction.
(e) Certificates in negotiable form for all Securities to be
sold by the Selling Shareholder under this Agreement, together with a
stock power or powers duly endorsed in blank by the Selling
Shareholder, have been placed in custody with the Custodian for the
purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by the Selling
Shareholder and has been duly executed and delivered by or on behalf of
the Selling Shareholder and is a valid and binding agreement of the
Selling Shareholder, enforceable in accordance with its terms, except
as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of or constitute a default
under any bond, debenture, note or other evidence of indebtedness, or
under any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which the
Selling Shareholder is a party or by which the Selling Shareholder, or
any Option Securities to be sold by the Selling Shareholder hereunder,
may be bound or, to the best of the Selling Shareholder's knowledge,
result in any violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the
Selling Shareholder or its properties, or result in any violation of
any provisions of the charter, bylaws or other organizational documents
of the Selling Shareholder.
(g) The Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the
Securities.
(h) The Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with
the offering and sale of the Securities.
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<PAGE>
(i) All information furnished by or on behalf of the Selling
Shareholder relating to the Selling Shareholder and the Option
Securities that is contained in the representations and warranties of
the Selling Shareholder in the Selling Shareholder's Power of Attorney
or set forth in the Registration Statement and the Prospectus is, and
at the time the Registration Statement became or becomes, as the case
may be, effective and at all times subsequent thereto up to and on the
Closing Date (and on any settlement date pursuant to Section 3(b)
hereof) was or will be, true, correct and complete, and does not, and
at the time the Registration Statement became or becomes, as the case
may be, effective and at all times subsequent thereto up to and on the
Closing Date (and on any settlement date pursuant to Section 3(b)
hereof), will not, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make such information not misleading.
(j) The Selling Shareholder will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part
to be complied with or satisfied pursuant to this Agreement on or prior
to the Closing Date and will advise one of its Attorneys and the
Representative prior to the Closing Date (or any settlement date
pursuant to Section 3(b) hereof) if any statement to be made on behalf
of the Selling Shareholder in the certificate contemplated by Section
6(k) hereof would be inaccurate if made as of the Closing Date (or any
settlement date pursuant to Section 3(b) hereof).
(k) The Selling Shareholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the Securities
that are to be sold by the Company to the Underwriters pursuant to this
Agreement; the Selling Shareholder does not have, or has waived prior
to the date hereof, any registration right or other similar right to
participate in the offering made by the Prospectus, other than such
rights of participation as have been satisfied by the participation of
the Selling Shareholder in the transactions to which this Agreement
relates in accordance with the terms of this Agreement; and the Selling
Shareholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any
capital stock, rights, warrants, options or other securities from the
Company, other than those described in the Registration Statement and
the Prospectus.
(l) The Selling Shareholder is not aware that any of the
representations and warranties of the Company set forth in Section 1(I)
above is untrue or inaccurate in any material respect.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to issue and
sell to the Underwriters an aggregate of 1,000,000 shares of Common Stock. Each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company the number of Underwritten Securities set forth opposite its name in
Schedule I hereto. The purchase price per Underwritten Security to be paid by
the several Underwriters to the Company shall be $______ per share.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Selling Shareholder hereby
grants an option (the "Underwriters' Option") to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 150,000 shares of
Common Stock, at the purchase price of $____ per share for use solely in
covering any over-allotments made by the Representative for the account of the
Underwriters in the sale and distribution of the Underwritten Securities. Said
Underwriters' Option may be exercised in whole or in part at any time on or
before the 45th day after the Effective Date upon written or telegraphic notice
by the Representative to the Selling Shareholder setting forth the number of
Option Securities which the several Underwriters are electing to purchase
pursuant to the Underwriters' Option and the settlement date. Delivery of
certificates for such Option Securities by the Selling Shareholder and payment
therefor to the Company shall be made as provided in Section 3 hereof. The
number of Option Securities to be so purchased by each Underwriter pursuant to
the Underwriters' Option shall be determined by multiplying the number of Option
Securities to be sold by the Selling Shareholder pursuant to the Underwriters'
Option, as exercised, by a fraction, the numerator of which is the number of
Underwritten Securities to be purchased by such Underwriter as set forth
opposite its name in Schedule I and the denominator of which is the total number
of Underwritten Securities to be purchased by all of the Underwriters as set
forth on Schedule I (subject to such adjustments to eliminate any fractional
share purchases as the Representative in its discretion may make).
Underwriting Agreement
25908_2 - 75205/00002
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<PAGE>
3. Delivery and Payment.
(a) Delivery of the certificates for the Underwritten Securities
described in Section 2(a) hereof shall be made by the Company through the
facilities of the Depository Trust Company ("DTC"), and payment therefor, shall
be made at the office of the Company at 9:00 a.m. Eastern Standard Time, on
_____________, 1998 or such later date (but not later than _____________, 1998)
as the Representative shall designate, which date and time may be postponed by
agreement among the Representative and the Company or as provided in Section 9
hereof (such date, time of delivery and payment for such Securities being herein
called the "Closing Date"). Delivery of the certificates for such Securities to
be purchased on the Closing Date shall be made as provided in the preceding
sentence for the respective accounts of the several Underwriters against payment
by the several Underwriters through Tejas Securities Group, Inc. of the
aggregate purchase price of such Underwritten Securities being sold by the
Company, to or upon the order of the Company, by wire transfer in federal (same
day) funds. Certificates for such Underwritten Securities shall be registered in
such names and in such denominations as the Representative may request not less
than one full business day in advance of the Closing Date. The Company agrees to
have the certificates for the Underwritten Securities to be purchased on the
Closing Date available at the office of the DTC, not later than 9:00 a.m.
Eastern Standard Time at least one business day prior to the Closing Date.
(b) The certificates in negotiable form for the Option Securities to be
sold by the Selling Shareholder have been placed in custody (for delivery under
this Agreement) under the Custody Agreement. The Selling Shareholder agrees that
the certificates for such shares are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling Shareholder
for such custody, including the Power of Attorney, is to that extent irrevocable
and that the obligations of the Selling Shareholder hereunder shall not be
terminated by the act of the Selling Shareholder or by operation of law, except
as specifically provided herein or in the Custody Agreement. Delivery of
definitive certificates for the Option Securities to be purchased by the several
Underwriters pursuant to the exercise of the option granted by Section 2(b)
shall be made against payment of the purchase price therefor by the several
Underwriters by wire transfer in federal (same day) funds to the Custodian. Such
delivery and payment shall take place (i) on the Closing Date, if written notice
of the exercise of such option is received by the Selling Shareholder at least
three (3) full business days prior to the Closing Date, or (ii) on a date which
shall not be later than the third (3rd) full business day following the date the
Selling Shareholder receives written notice of the exercise of such option, if
such notice is received by the Selling Shareholder less than three (3) full
business days prior to the Closing Date.
The Company agrees to have the certificates for the Option Securities
to be purchased after the Closing Date available at the office of the DTC not
later than 9:00 a.m. Eastern Standard Time at least one business day prior to
the settlement date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the Execution Time, to
become effective as promptly as possible. If the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will file the Prospectus,
properly completed, pursuant to Rule 424(b) within the time period prescribed
and will provide evidence satisfactory to the Representative of such timely
filing. The Company will promptly advise the Representative (i) when the
Registration Statement shall have become effective, (ii) when any post-effective
amendment thereto shall have become effective, (iii) of any request by the
Commission for any amendment or supplement of the Registration Statement or the
Prospectus or for any additional information with respect thereto, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the receipt by the Company of any notification with
respect to the institution or threatening of any proceeding for that purpose and
(v) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose. The Company
will use its best efforts to prevent the issuance of any such stop order or
suspension and, if issued, to obtain as soon as possible the withdrawal thereof.
The Company will not file any amendment to the Registration Statement
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<PAGE>
or supplement to the Prospectus without the prior consent of the Representative.
The Company will prepare and file with the Commission, promptly upon your
request, any amendment to the Registration Statement or supplement to the
Prospectus that you reasonably determine to be necessary or advisable in
connection with the distribution of the Securities by you, and will use its best
efforts to cause the same to become effective as promptly as possible.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it otherwise shall be necessary to supplement the
Prospectus to comply with the Act or the rules or regulations thereunder, the
Company will promptly prepare and file with the Commission, subject to Section
5(a) hereof, a supplement that will correct such statement or omission or a
supplement that will effect such compliance.
(c) As soon as practicable (but not later than eighteen months after
the effective date of the Registration Statement), the Company will make
generally available to its security holders and to the Representative an
earnings statement or statements (which need not be audited) of the Company
covering a period of at least twelve months after the Effective Date (but in no
event commencing later than 90 days after such date), which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 promulgated thereunder.
(d) The Company will furnish to each of you and counsel for the
Underwriters, without charge, one signed copy of the Registration Statement and
any amendments thereto (including exhibits thereto) and to each other
Underwriter a conformed copy of the Registration Statement and any amendments
thereto (without exhibits thereto) and, so long as delivery of a prospectus by
an Underwriter or dealer may be required by the Act, as many copies of the
Prospectus and each Preliminary Prospectus and any supplements thereto as the
Representative may reasonably request.
(e) The Company will take all actions necessary for the registration or
qualification of the Securities for sale under the laws of such jurisdictions
within the United States and its territories as the Representative may
designate, will maintain such qualifications in effect so long as required for
the distribution of the Securities and will pay the fee of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with its
review of the offering, provided that the Company shall not be required to
qualify as a foreign corporation or to consent to service of process under the
laws of any such jurisdiction (except service of process with respect to the
offering and sale of the Securities).
(f) The Company will apply the net proceeds from the offering received
by it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(g) The Company will (i) cause the Securities (other than the
Underwriters' Warrant) to be listed on AMEX and (ii) comply with all
registration, filing and reporting requirements of the Exchange Act, and AMEX
which may from time to time be applicable to the Company.
(h) During the five-year period commencing on the date hereof, the
Company will furnish to its shareholders, as soon as practicable after the end
of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of earnings and will furnish to you and, upon request, to the other
Underwriters hereunder (i) concurrent with furnishing such quarterly reports to
its shareholders, statements of income and other information of the Company for
such quarter in the form furnished to the Company's shareholders; (ii)
concurrent with furnishing such annual reports to its shareholders, a balance
sheet of the Company as at the end of such fiscal year, together with statements
of income and surplus and of cash flow of the Company for such fiscal year, all
in reasonable detail and accompanied by a copy of the certificate or report
thereon of its independent certified public accountants; (iii) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, the NASD, AMEX or any other securities exchange on
which any of the Company's securities may be listed; (iv) every press release
and every material news item or article in respect of the Company or its affairs
which was released or prepared by the Company; and (v) any additional
information of a public nature concerning the Company or its business that you
may reasonably request. During such five-year period, if the Company shall have
active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the
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accounts of the Company and its subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant subsidiary that
is not so consolidated.
(i) The Company will maintain a 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 Securities.
(j) The Company will not, for a period of 365 days following the
Effective Date, without the prior written consent of the Representative, offer,
sell, contract to sell (including, without limitation, any short sale),
transfer, assign, pledge, encumber, hypothecate or grant any option to purchase
or otherwise dispose of, any capital stock, or any options, rights or warrants
to purchase any capital stock of the Company, or any securities or indebtedness
convertible into or exchangeable for shares of capital stock of the Company,
except for (i) sales of Securities as contemplated by this Agreement and (ii)
sales of Common Stock upon the exercise of outstanding options described in the
Prospectus.
(k) The Company has reserved and shall continue to reserve a sufficient
number of shares of Common Stock for issuance upon exercise of the Underwriters'
Warrant.
(l) If the Company elects to rely on Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 p.m., Washington D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(m) For the five year period from the Closing Date, the Company will
nominate for election as a director a person designated by the Representative,
and during such time as the Representative shall not have exercised such right,
the Representative shall have the right to designate an observer, who shall be
entitled to attend all meetings of the Board of Directors and receive all
correspondence and communications sent by the Company to the members of the
Board of Directors.
6. Conditions to the Obligations of the Underwriters. The obligations of the
Underwriters to purchase the Securities described in Sections 2(a) and 2(b)
hereof shall be subject to (i) the accuracy of the representations and
warranties on the part of each of the Company and the Selling Shareholder
contained herein as of the Execution Time, the Closing Date and (in the case of
any Securities delivered after the Closing Date, any settlement date pursuant to
Section 3(b) hereof), (ii) the accuracy of the statements of each of the Company
and the Selling Shareholder made in any certificates delivered pursuant to the
provisions hereof, (iii) the performance by each of the Company and the Selling
Shareholder of its obligations hereunder, and (iv) the following additional
conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective) not later than 5:00
p.m. Eastern Standard Time, on the execution date hereof or at such later date
and time as the Representative may approve in writing and, at the Closing Date
(and any settlement date pursuant to Section 3(b) hereof), no stop order
suspending the effectiveness of the Registration Statement or any qualification
in any jurisdiction shall have been issued and no proceedings for that purpose
shall have been initiated or, to the best knowledge of the Company, threatened
by the Commission.
(b) The Company shall have furnished to the Representative the opinion
of Robert A. Forrester, counsel for the Company, addressed to the Underwriters
and dated the Closing Date (and any settlement date pursuant to Section 3(b)
hereof), or other evidence satisfactory to the Representative to the effect
that:
(i) The Registration Statement has become effective under the
Act; any required filing of the Prospectus or any supplements thereto
pursuant to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); to the best knowledge of such counsel,
no stop order suspending the effectiveness of the Registration
Statement or any qualification in any jurisdiction has been issued and
no proceedings for that purpose have been instituted or threatened; any
request from the Commission for additional information has been
complied with; the Registration Statement and the Prospectus (and any
Underwriting Agreement
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<PAGE>
supplements thereto) comply as to form in all material respects with
the applicable requirements of the Act and the rules and regulations
thereunder (except that such counsel need express no opinion with
respect to the Financial Statements and schedules included in the
Registration Statement and Prospectus).
(ii) The Company does not own or control, directly or
indirectly, any corporation, partnership, association or other entity.
(iii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full corporate
power and corporate authority to own its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction in which it conducts its business or owns
property and in which the failure, individually or in the aggregate, to
be so qualified would have a Material Adverse Effect. The Company has
all necessary and material authorizations, approvals, orders, licenses,
certificates and permits of and from all government regulatory
officials and bodies, to own its properties and conduct its business as
described in the Prospectus, except where failure to obtain such
authorizations, approvals, orders, licenses, certificates or permits
would not have a Material Adverse Effect.
(iv) The Company does not own any shares of capital stock or
any other equity securities of any corporation or any equity interest
in any firm, partnership, association or other entity other than as
described in the Prospectus, except for ownership interests that would
not have a Material Adverse Effect.
(v) The Company has an authorized share capitalization as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; all outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable and
the certificates therefor are in valid and sufficient form in
accordance with applicable state law; there are no other classes of
stock outstanding except Common Stock; all outstanding options to
purchase shares of Common Stock have been duly and validly authorized
and issued; except as described in the Prospectus, there are no
options, warrants or rights to acquire, or debt instruments convertible
into or exchangeable for, or other agreements or understandings to
which the Company is a party, outstanding or in existence, entitling
any person to purchase or otherwise acquire any shares of capital stock
of the Company; the issuance and sale of the Securities have been duly
and validly authorized and, when issued and delivered and paid for, the
Securities will be fully paid and nonassessable and free from
preemptive rights, and will conform in all respects to the description
thereof contained in the Prospectus; the Underwriters' Warrants
constitute valid and binding obligations of the Company enforceable in
accordance with their terms and the Company has reserved a sufficient
number of shares of Common Stock for issuance upon exercise thereof;
the Underwriters' Warrants possess the rights, privileges and
characteristics as represented in the forms filed as Exhibits to the
Registration Statement and as described in the Prospectus; the
Securities (other than the Underwriters' Warrants) have been approved
for listing on AMEX upon notice of issuance thereof; the certificates
for the Securities are in valid and sufficient form. Each offer and
sale of securities of the Company described in Item 15 of Part II of
the Registration Statement was effected in compliance with the Act and
the rules and regulations thereunder and with all applicable Blue Sky
laws.
(vi) Other than as described in the Prospectus, there is no
pending or, to the best knowledge of such counsel after reasonable
investigation, threatened action, suit or proceeding before any court
or governmental agency, authority or body, domestic or foreign, or any
arbitrator involving the Company of a character required to be
disclosed in the Registration Statement or the Prospectus that is not
adequately disclosed in the Prospectus, and, to the best knowledge of
such counsel, there is no contract or other document of a character
required to be described in the Registration Statement or the
Prospectus, or to be filed as an exhibit, which is not described or
filed as required.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
agreement and obligation of the Company enforceable against it in
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accordance with its terms (subject to standard bankruptcy and equitable
remedy exceptions, and limitations under the Act as to the
enforceability of indemnification provisions).
(viii) The Company has full corporate power and corporate
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities in the manner
provided in this Agreement; and the Company has taken all necessary
corporate action to authorize the execution and delivery of, and the
performance of its obligations under, this Agreement.
(ix) Neither the offering, issue and sale of the Securities
nor the consummation of any other of the transactions contemplated
herein, nor the fulfillment of the terms hereof, will conflict with or
result in a breach or violation of, or constitute a default under, or
result in the imposition of a lien on any properties of the Company, or
an acceleration of indebtedness pursuant to, the Articles of
Incorporation (or other charter document) or bylaws of the Company, or
any of the terms of any indenture or other agreement or instrument to
which the Company is a party or by which its properties are bound, or
any law, order, judgment, decree, rule or regulation applicable to the
Company of any court, regulatory body, administrative agency,
governmental body, stock exchange or arbitrator having jurisdiction
over the Company. The Company is not in violation of its Articles of
Incorporation or bylaws or, to the best knowledge of such counsel after
reasonable investigation, in breach of or default under any of the
terms of any indenture or other agreement or instrument to which it is
a party or by which it or its properties are bound, which breach or
default would, individually or in the aggregate, have a Material
Adverse Effect.
(x) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to it
any shares of capital stock in consequence of the issue and sale of the
Securities to be sold by the Company hereunder nor does any person have
preemptive rights, or rights of first refusal or other rights to
purchase any of the Securities. Except as referred to in the
Prospectus, no person holds a right to require or participate in a
registration under the Act of Common Stock or any other equity
securities of the Company.
(xi) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body is
required to be obtained or filed by or on behalf of the Company in
connection with the transactions contemplated herein, except such as
may have been obtained or made and registration of the Securities under
the Act, and such as may be required under the Blue Sky laws of any
jurisdiction.
(xii) To the best knowledge of such counsel after reasonable
investigation, the Company is not in violation of or default under any
judgment, ruling, decree or order or any statute, rule or regulation of
any court or other United States governmental agency or body, including
any applicable laws respecting employment, immigration and wages and
hours, in each case, where such violation or default could have a
Material Adverse Effect. The Company is not involved in any labor
dispute, nor, to the best knowledge of such counsel, is any labor
dispute threatened.
(xiii) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(xiv) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on
behalf of the Company, and the Registration Statement has been duly
executed pursuant to such authorization by and on behalf of the
Company.
(xv) The Company owns or possesses, or has the right to use
pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights
necessary to carry on its business as described in the Prospectus, and,
except as set forth in the Prospectus, neither such counsel nor, to the
knowledge of such counsel, the Company has received any notice of
either (i) default under any of the foregoing or (ii) infringement of
or conflict with asserted rights of others with respect to, or
challenge to the validity of, any of the foregoing which, in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could have a Material
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<PAGE>
Adverse Effect, and counsel knows of no facts which could reasonably be
anticipated to serve as the basis for any such notice.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company
and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs (i)
and (v) above), on the basis of the foregoing and on such counsel's
participation in the preparation of the Registration Statement and the
Prospectus, nothing has come to the attention of such counsel that causes such
counsel to believe that the Registration Statement, at the Effective Date and at
the Closing Date (and any settlement date pursuant to Section 3(b) hereof),
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, at the date
of such Prospectus or at the Closing Date (or any settlement date pursuant to
Section 3(b) hereof), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no comment with respect to the Financial Statements and
schedules and other financial or statistical data derived therefrom included in
the Registration Statement or Prospectus).
References to the Prospectus in this Section 6(b) shall include any
supplements thereto.
(c) The Representative shall have received on the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), the opinion of ______________,
counsel for the Selling Shareholders, addressed to the Underwriters and dated
the Closing Date (or any settlement date pursuant to Section 3(b) hereof), or
other evidence satisfactory to the Representative to the effect that of the
Underwriters, to the effect that:
(i) The Selling Shareholder has full right, power and
authority to enter into and to perform its obligations under the Power of
Attorney and Custody Agreement to be executed and delivered by it in connection
with the transactions contemplated herein; the Power of Attorney and Custody
Agreement of the Selling Shareholder has been duly authorized by the Selling
Shareholder; the Power of Attorney and Custody Agreement of the Selling
Shareholder has been duly executed and delivered by or on behalf of the Selling
Shareholder; and the Power of Attorney and Custody Agreement of the Selling
Shareholder constitutes the valid and binding agreement of the Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles;
(ii) Selling Shareholder has full right, power and authority
to enter into and to perform its obligations under this Agreement and to sell,
transfer, assign and deliver the Option Securities to be sold by it hereunder;
(iii) This Agreement has been duly authorized by the Selling
Shareholder and has been duly executed and delivered by or on behalf of the
Selling Shareholder; and
(iv) Upon the delivery of and payment for the Option
Securities as contemplated in this Agreement, each of the Underwriters will
receive valid marketable title to the Option Securities purchased by it from the
Selling Shareholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest. In rendering such opinion, such
counsel may assume that the Underwriters are without notice of any defect in the
title of the Option Securities being purchased from the Selling Shareholder;
(d) The Representative shall have received from Wolin, Ridley & Miller
LLP, counsel for the Underwriters, an opinion dated the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), with respect to the issuance
and sale of the Securities, and with respect to the Registration Statement, the
Prospectus and other related matters as the Representative may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
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<PAGE>
(e) The Company shall have furnished to the Representative a
certificate of the Company, signed by its Chief Executive Officer and Chief
Financial Officer, dated the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), to the effect that each has carefully examined the
Registration Statement, the Prospectus (and any supplements thereto) and this
Agreement, and, after due inquiry, that:
(i) As of the Closing Date (and any settlement date pursuant
to Section 3(b) hereof), the statements made in the Registration
Statement and the Prospectus are true and correct and the Registration
Statement and the Prospectus do not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(ii) No order suspending the effectiveness of the Registration
Statement or the qualification or registration of the Securities under
the securities or Blue Sky laws of any jurisdiction is in effect and no
proceeding for such purpose is pending before or, to the knowledge of
such officers, threatened or contemplated by the Commission or the
authorities of any such jurisdiction; and any request for additional
information with respect to the Registration Statement or the
Prospectus on the part of the staff of the Commission or any such
authorities brought to the attention of such officers has been complied
with to the satisfaction of the staff of the Commission or such
authorities.
(iii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any change in the capital stock or long-term debt of the Company,
except as set forth in or contemplated by the Registration Statement
and the Prospectus, (y) there has not been any material adverse change
in the general affairs, business, prospects, properties, management,
results of operations or condition (financial or otherwise) of the
Company, whether or not arising from transactions in the ordinary
course of business, in each case, other than as set forth in or
contemplated by the Registration Statement and the Prospectus, and (z)
the Company has not sustained any material interference with its
business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any
court or legislative or other governmental action, order or decree,
which is not set forth in the Registration Statement and the
Prospectus.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has been
no litigation instituted against the Company, any of its respective
officers or directors, or, to the best knowledge of such officers, any
affiliate or promoter of the Company, and since such dates there has
been no proceeding instituted or, to the best knowledge of such
officers, threatened against the Company, any of its officers or
directors, or, to the best knowledge of such officers, any affiliate or
promoter of the Company, before any federal, state or county court,
commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding could have a
Material Adverse Effect.
(v) Each of the representations and warranties of the Company
in this Agreement is true and correct in all material respects on and
as of the Execution Time and the Closing Date (and any settlement date
pursuant to Section 3(b) hereof) with the same effect as if made on and
as of the Closing Date (and any settlement date pursuant to Section
3(b) hereof).
(vi) Each of the covenants required in this Agreement to be
performed by the Company on or prior to the Closing Date (and any
settlement date pursuant to Section 3(b) hereof) has been duly, timely
and fully performed, and each condition required herein to be complied
with by the Company on or prior to the Closing Date (and any settlement
date pursuant to Section 3(b) hereof) has been duly, timely and fully
complied with.
(f) At the Execution Time and on the Closing Date (and any settlement
date pursuant to Section 3(b) hereof), Moss Adams LLP, shall have furnished to
the Representative letters, dated as of such dates, in form and substance
satisfactory to the Representative, confirming that they are independent
accountants within the meaning of the Act and the applicable rules and
regulations thereunder and stating in effect that:
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<PAGE>
(i) In their opinion, the audited Financial Statements of the
Company for the fiscal years ended December 31, 1996 and 1997, and the
notes to the Financial Statements and Financial Statement schedules for
those periods included in the Registration Statement and the
Prospectus, comply in all material respects with generally accepted
accounting principles and the applicable accounting requirements of the
Act and the applicable rules and regulations thereunder.
(ii) On the basis of a reading of the latest unaudited
Financial Statements made available by the Company, carrying out
certain specified procedures (but not an examination in accordance with
generally accepted auditing standards), a reading of the minutes of the
meetings of the shareholders, directors and committees of the Company,
and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the Company,
nothing came to their attention that caused them to believe that: (i)
the unaudited Financial Statements of the Company for the quarter ended
March 31, 1998, and the notes to the Financial Statements and the
Financial Statement Schedules for the period then ended included in the
Registration Statement and Prospectus do not comply in all material
respects with generally accepted accounting principles or the
applicable accounting requirements of the Act and the applicable rules
and regulations thereunder; and (ii) with respect to the period
subsequent to March 31, 1998, at a specified date not more than five
business days prior to the date of the letter, (y) there were any
changes in the long-term debt or capital stock of the Company, or
decreases in net current assets, net assets or stockholders' equity of
the Company as compared with the amounts shown on the March 31, 1998
balance sheets included in the Registration Statement and the
Prospectus or (z) there were any decreases in reserves, sales, net
income or income from operations, of the Company, as compared with the
corresponding period in the preceding year, except for changes or
decreases which the Registration Statement discloses have occurred or
may occur and except for changes or decreases, set forth in such
letter, in which case (A) the letter shall be accompanied by an
explanation by the Company as to the significance thereof unless said
explanation is not deemed necessary by the Representative and (B) such
changes or decreases and the explanation thereof shall be acceptable to
the Representative, in its sole discretion.
(iii) They have performed certain other specified procedures
as a result of which they determined that all information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and specified by you prior to
the Execution Time, agrees with the accounting records of the Company.
The Representative shall also have also received from Moss
Adams LLP, a letter stating that the Company's system of internal accounting
controls taken as a whole are sufficient to meet the broad objectives of
internal accounting control insofar as those objectives pertain to the
prevention or detection of errors or irregularities in amounts that would be
material to the Financial Statements of the Company.
References to the Prospectus in this Section 6(f) shall
include any supplements thereto.
(g) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall not have been (i)
any changes or decreases from that specified in the letters referred to in
Section 6(f) hereof or (ii) any change, or any development involving a
prospective change, in or affecting the properties, assets, results of
operations, business, capitalization, net worth, prospects, general affairs or
condition (financial or otherwise) of the Company, the effect of which is, in
the sole judgment of the Representative, so material and adverse as to make it
impractical or inadvisable to proceed with the public offering or delivery of
the Securities as contemplated by the Registration Statement and the Prospectus.
(h) On or prior to the Effective Date, the Securities (other than the
Underwriters' Warrant) shall have been approved for listing on AMEX.
(i) The Company shall not have sustained any uninsured substantial loss
as a result of fire, flood, accident or other calamity.
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(j) The Company shall have furnished to the Representative a
certificate of the Secretary of the Company certifying as to certain information
and other matters as the Representative may reasonably request.
(k) The Representative shall be satisfied that, and the Representative
shall have received a certificate, dated the Closing Date (or any settlement
date pursuant to Section 3(b) hereof), from the Attorneys for the Selling
Shareholder to the effect that, as of the Closing Date (or any settlement date
pursuant to Section 3(b) hereof):
(i) The representations and warranties made by the Selling
Shareholder herein are true or correct in all material respects on the
Closing Date (or any settlement date pursuant to Section 3(b) hereof);
or
(ii) The Selling Shareholder has complied with all obligations
or satisfied all conditions which are required to be performed or
satisfied on the part of the Selling Shareholder at or prior to the
Closing Date (or any settlment date pursuant to Section 3(b) hereof).
(l) The Company and the Selling Shareholder shall have furnished to the
Representative such further information, certificates and documents as the
Representative may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in any respect when and as provided in this Agreement, or if any
of the opinions and certificates mentioned above or elsewhere in this Agreement
shall not be in all respects reasonably satisfactory in form and substance to
the Representative and its counsel, this Agreement and all obligations of the
Underwriters hereunder may be canceled at, or at any time prior to, the Closing
Date (or any settlement date, pursuant to Section 3(b) hereof), by the
Representative. Notice of such cancellation shall be given to the Company in
writing or by telephone, facsimile or telegraph confirmed in writing.
7. Fees and Expenses and Underwriters' Warrant. The Company agrees to pay
or cause to be paid the following:
(a) the fees, disbursements and expenses of its own counsel and counsel
for the Selling Shareholders and accountants in connection with the registration
of the Securities under the Act and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any Preliminary
Prospectus, any Prospectus, and any drafts thereof, and amendments and
supplements thereto, and the mailing and delivery of copies thereof to the
Underwriters and dealers;
(b) all expenses in connection with the qualification of the Securities
for offering under state securities laws, including the fees and disbursements
of counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky Memorandum;
(c) all filing and other fees in connection with filing with the NASD,
and complying with applicable review requirements thereof;
(d) the cost of preparing and printing certificates for the Securities;
(e) all expenses, taxes, fees and commissions, including, without
limitation, any and all fixed transfer duties sellers' and buyers' stamp taxes
or duties on the purchase and sale of the Securities and stock exchange
brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Securities (the latter to the extent paid and not
reimbursed) (i) incident to the sale and delivery by the Company of the
Securities to the Underwriters and (ii) incident to the sale and delivery of the
Securities by the Underwriters to the initial purchasers thereof;
(f) the costs and charges of any transfer agent and registrar;
(g) the fees and expenses in connection with qualification of the
Securities (other than the Underwriters' Warrant) for listing on the AMEX;
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(h) a nonaccountable expense allowance of 2.0% of the proceeds derived
from the offering (including the Option Securities described in Section 2(b)
hereof) payable to the Representative (reduced by the amount of any payments or
reimbursements made prior to the date of this Agreement); and
(i) all other costs and expenses incident to the performance of the
Company's obligations hereunder which are not otherwise specifically provided
for in this Section 7.
Except as set forth above, the Selling Shareholders agree to pay all
costs and expenses incident to the performance of its obligations hereunder.
In addition to the sums payable to the Representative as provided
elsewhere herein and in addition to the Underwriters' Option, the Underwriters
shall be entitled to receive, as partial compensation for their services,
warrants (the "Underwriters' Warrants") for the purchase of an aggregate of
100,000 shares of Common Stock of the Company. The Underwriters' Warrants shall
be issued pursuant to a Warrant Agreement in the form of Exhibit A attached
hereto and shall be exercisable, in whole or in part, for a period of four years
commencing from the one year anniversary of the date hereof, at 120% of the
initial public offering price for the Common Stock offered pursuant to the
Prospectus. The Underwriters' Warrant, shall be non-transferable for one year
from the date of issuance of the Underwriters' Warrant, except for (i) transfers
to officers or partners of the Underwriters, (ii) in connection with a merger,
consolidation or reorganization of the Company or (iii) transfers occurring by
operation of law. The terms of the Warrant Securities subject to the
Underwriters' Warrant shall be the same as the Underwritten Securities sold to
the public.
Without limiting in any respect the foregoing obligations of the
Company, which obligations shall survive any termination of this Agreement, if
the sale of the Securities provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 6 hereof
is not satisfied, because of any termination pursuant to Section 10 hereof, or
because of any refusal, inability or failure on the part of the Company or the
Selling Shareholder to perform any agreement herein or comply with any provision
hereof to be performed or complied with by the Company or the Selling
Shareholder other than by reason of a default by any of the Underwriters, the
Company agrees to reimburse the Underwriters, upon demand, for all out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities to the extent the amounts paid pursuant to Section 7(h) hereof
are insufficient therefor.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person who controls any Underwriter within the meaning of the Act or
the Exchange Act against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject under the Act,
the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in (i)
Section 1(I) of this Agreement, the Registration Statement, any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or (ii) any application or other document, or any amendment or supplement
thereto, executed by the Company or based upon written information furnished by
or on behalf of the Company filed in any jurisdiction in order to qualify the
Securities under the securities or Blue Sky laws thereof or filed with the
Commission or any securities association or securities exchange, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representative specifically for use in the
Registration Statement or Prospectus; provided further, that with respect to any
untrue statement or omission, or any alleged untrue statement or omission, made
in any Preliminary Prospectus, the indemnity agreement contained in this
subsection (a) shall not inure to the benefit of any Underwriter (or to the
benefit of any person controlling any such Underwriter)
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from whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Securities concerned to the extent that such untrue
statement or omission, or alleged untrue statement or omission, has been
corrected in the Prospectus and the failure to deliver the Prospectus was not a
result of the Company's failure to comply with its obligations under Section
5(d) hereof. The indemnity agreement will be in addition to any liability which
the Company may otherwise have. The Company will not, without the prior written
consent of each Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless the settlement or compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding, satisfactory in form and substance to the Representative.
(b) The Selling Shareholder agrees to indemnify and hold harmless each
Underwriter and each person who controls any Underwriter within the meaning of
the Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
(i) Section 1(II) of this Agreement, the Registration Statement, any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or (ii) any application or other document, or any amendment or supplement
thereto, executed by the Selling Shareholder or based upon written information
furnished by or on behalf of the Selling Shareholder filed in any jurisdiction
in order to qualify the Securities under the securities or Blue Sky laws thereof
or filed with the Commission or any securities association or securities
exchange, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in the case of subparagraphs (ii) and
(iii) of this Section 8(b) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company or such Underwriter by the Selling Shareholder, directly or through
the Selling Shareholder's representatives, specifically for use in the
preparation thereof, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that with respect to any untrue
statement or omission, or any alleged untrue statement or omission, made in any
Preliminary Prospectus, the indemnity agreement contained in this subsection (b)
shall not inure to the benefit of any Underwriter (or to the benefit of any
person controlling any such Underwriter) from whom the person asserting any such
losses, claims, damages, liabilities or expenses purchased the Securities
concerned to the extent that such untrue statement or omission, or alleged
untrue statement or omission, has been corrected in the Prospectus and the
failure to deliver the Prospectus was not a result of the Company's failure to
comply with its obligations under Section 5(d) hereof. This indemnity agreement
shall be in addition to any liabilities which such Selling Shareholder may
otherwise have.
(c) Each Underwriter severally agrees to indemnify and hold harmless
the Company and the Selling Shareholder, each of their directors, each of the
Company's officers who signs the Registration Statement, and each person who
controls the Company or the Selling Shareholder, as the case may be, within the
meaning of the Act or the Exchange Act to the same extent as the foregoing
indemnity from the Company or the Selling Shareholder to each Underwriter, but
only with reference to written information relating to such Underwriter
furnished to the Company by or on behalf of such Underwriter through the
Representative specifically for use in the Registration Statement or Prospectus.
The Company acknowledges that the corporate names of the Underwriters, the
stabilization legend on page 2 and the information under the heading
"Underwriting" in the Prospectus and in any Preliminary Prospectus constitute
the only information furnished in writing by or on behalf of the several
Underwriters. The obligations of each Underwriter under this subsection (c)
shall be in addition to any liability which the Underwriters may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof and the indemnifying party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
the indemnified party and the payment of all expenses; but the omission so to
notify the indemnifying party will not
Underwriting Agreement
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<PAGE>
relieve it from any liability which it may have to any indemnified party, unless
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. All such expenses shall be paid by the indemnifying party as
incurred by an indemnified party. Any such indemnified party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party has agreed
to pay such fees and expenses or (ii) the indemnifying party shall have failed
promptly after notice by such indemnified party to assume the defense of such
action or proceeding and employ counsel reasonably satisfactory to the
indemnified party in any such action, suit or proceeding or (iii) the named
parties in any such action or proceeding (including any impleaded parties)
include both such indemnified party and the indemnifying party, and such
indemnified party shall have been advised by counsel that there may be one or
more legal defenses available to such indemnified party which are different from
or additional to those available to the indemnifying party (in which case, if
such indemnified party notifies the indemnifying party in writing that it elects
to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
or proceeding on behalf of the indemnified party or parties, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for all such indemnified parties, which firm shall be
designated in writing to the indemnifying party). Any such fees and expenses
payable by the indemnifying party shall be paid to or on behalf of the
indemnified party entitled thereto as incurred. An indemnifying party shall not
be liable for any settlement of any action or claim effected without its
consent, which consent shall not be unreasonably withheld.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 8(a), 8(b) or
8(c) is applicable in accordance with its terms but is for any reason held by a
court to be unavailable from the indemnifying party on grounds of policy or
otherwise, the Company, the Selling Shareholder and the Underwriters shall
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) to which the Company, the Selling Shareholder and one or more of
the Underwriters may be subject in such proportion so that the Underwriters are
responsible in the aggregate for that portion represented by the total
underwriting compensation in respect of the Securities bears to the public
offering price appearing thereon and the Company and the Selling Shareholder are
responsible for the balance; provided, however, that (i) in no case shall any
Underwriter (except as may be provided in the Agreement Among Underwriters
relating to the offering of the Securities) be responsible for any amount in
excess of the total underwriting compensation applicable to the Securities to be
purchased by such Underwriter hereunder and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person who controls an
Underwriter within the meaning of the Act shall have the same rights to
contribution as such Underwriter, and each person who controls the Company or
the Selling Shareholder within the meaning of the Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company and the
Selling Shareholder, subject in each case to clause (ii) of this Section 8(e).
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section 8(e), 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 other
obligation it or they may have hereunder or otherwise.
(f) The Company and the Selling Shareholder may agree, as between
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
9. Default by an Underwriter. If any one or more Underwriters shall fail to
purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the number of Underwritten
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate number of Underwritten Securities set forth opposite the names of all
the remaining Underwriters) the Underwritten Securities which the defaulting
Underwriter
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<PAGE>
or Underwriters agreed but failed to purchase; provided, however, that if the
aggregate number of Underwritten Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase shall exceed 10% of the aggregate
number of Underwritten Securities set forth in Schedule I hereto, the remaining
Underwriters shall have the right to purchase all, but shall not be under any
obligation to purchase any, of such Underwritten Securities, and if such
nondefaulting Underwriters do not purchase all of such Underwritten Securities,
this Agreement will terminate without liability to any non-defaulting
Underwriter or the Company except as otherwise provided in Section 7. In the
event of a default by any Underwriter as set forth in this Section 9, the
Closing Date shall be postponed for such period, not exceeding seven days, as
the Representative shall determine in order that the required changes in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall relieve
any defaulting Underwriter of its liability, if any, to the Company or any
nondefaulting Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the absolute
discretion of the Representative, by notice given to the Company prior to
delivery of and payment for the Securities, if prior to such time (a) a
suspension or material limitation in trading in securities generally on the New
York or American Stock Exchange, the Nasdaq National Market or any relevant
over-the-counter market, the Chicago Board Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade shall have occurred, (b) a
banking moratorium shall have been declared by federal, New York or California
state authorities, (c) the United States shall have engaged in hostilities which
shall have resulted in the declaration, on or after the date hereof, of a
national emergency or war, or (d) a change in national or international
political, financial or economic conditions or national or international equity
markets or currency exchange rates shall have occurred, if the effect of any
such event specified above is, in the sole judgment of the Representative, so
material and adverse as to make it impractical or inadvisable to proceed with
the public offering or delivery of the Securities as contemplated by the
Registration Statement and the Prospectus.
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the Company,
its officers and the Underwriters set forth in, referred to in, or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors or controlling persons referred to in Section 8 hereof,
and will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. Notices. All communications hereunder will be in writing and effective
only on receipt, and will be mailed, delivered, telegraphed or sent by facsimile
transmission and confirmed:
to the Representative at:
Tejas Securities Group, Inc.
1250 Capital of Texas Hwy. South
Building Two, Suite 500
Austin, Texas 78746
Attention: Robert A. Shuey, III
Facsimile No. (512) 306-1528
to the Company at:
Transnational Financial Corporation
301 Junipero Serra Boulevard, Suite 270
San Francisco, CA 94127
Attention: Joseph Kristul
Facsimile No. (415) 334-0255
13. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers,
directors and controlling persons referred to in Section 8 hereof, and no other
person will have any right or obligation hereunder.
14. Counterparts. This Agreement may be signed in two or more counterparts,
each of which shall be an original, with the same effect as if the signatures
thereon and hereon were on the same instrument.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas.
Underwriting Agreement
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<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several Underwriters.
Very truly yours,
TRANSNATIONAL FINANCIAL CORPORATION
By:___________________________________________________
Joseph Kristul
Chief Executive Officer and Chief Financial Officer
KRISTUL FAMILY LLC
By:___________________________________________________
Attorney-in-Fact for the Selling Shareholder
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Tejas Securities Group, Inc.
By: _______________________________________
Robert A. Shuey, III
For itself and the other several Underwriters in Schedule I to the foregoing
Agreement.
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<PAGE>
SCHEDULE I
Number of
Underwritten Securities
Underwriters To Be Purchased
------------ ---------------
Tejas Securities Group, Inc.
---------
Total 1,000,000
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<PAGE>
EXHIBIT A
FORM OF WARRANT AGREEMENT
Underwriting Agreement
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<PAGE>
EXHIBIT B
FORM OF LOCK-UP AGREEMENT
Tejas Securities Group, Inc.,
As Representative of the Several Underwriters
c/o Tejas Securities Group, Inc.
1250 Capital of Texas Hwy. South
Building Two, Suite 500
Austin, Texas 78746
Ladies and Gentlemen:
The undersigned understands that you, as Representatives of the several
underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") with Transnational Financial
Corporation, a California corporation (the "Company"), providing for the initial
public offering (the "Offering") by the Underwriters, including yourself, of
Common Stock of the Company (the "Common Stock") pursuant to the Company's
Registration Statement on Form SB-2 (the "Registration Statement") to be filed
with the Securities and Exchange Commission on or about _________, 1998.
In consideration of the Underwriters' agreement to purchase and make
the Offering of the Common Stock, and for other good and valuable consideration,
receipt of which is hereby acknowledged, the undersigned hereby agrees that
during the period beginning on the date of this letter and ending one (1) year
(the "Lock-Up Period") after the date of the final prospectus included in the
Registration Statement (the "Offering Date"), the undersigned will not, directly
or indirectly, offer, sell, contract to sell, grant any option for the sale of,
pledge, or otherwise dispose of (individually, a "Disposition") any Common
Stock, or securities exercisable, convertible, or exchangeable for or into
Common Stock (collectively, the "Securities"), that the undersigned now owns or
will own in the future (beneficially or of record), except (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this Lock-Up Agreement, (ii) up to 150,000 shares of Common Stock in
connection with the exercise of the Underwriters' over-allotment option pursuant
to the Underwriting Agreement, or (iii) with the prior written consent of Tejas
Securities Group, Inc. The foregoing restriction is expressly agreed to preclude
the holder of Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-Up Period even if such Securities would be disposed
of by someone other than the undersigned. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities.
If for any reason the Offering Date does not occur on or before
September 30, 1998, then this Lock-Up Agreement will terminate on that date. I
understand that no assurance can be given that the Offering will be consummated.
Sincerely,
Date: _________ ___, 1998 __________________________________________
By: ______________________________________
Signature
______________________________________
Print Name
Underwriting Agreement
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26
<PAGE>
WARRANT AGREEMENT
___________, 1998
TEJAS SECURITIES GROUP, INC.
As a Representative of the Several Underwriters
c/o Tejas Securities Group, Inc.
1250 Capital of Texas Hwy. South
Building Two, Suite 500
Austin, Texas 78746
Gentlemen:
Transnational Financial Corporation, a California corporation (the
"Company"), hereby agrees to sell to you, and you hereby agree to purchase from
the Company at an aggregate purchase price of $100, stock purchase warrants (the
"Underwriter Warrants") covering 100,000 shares of the Company's Common Stock,
no par value. The Underwriter Warrants will be exercisable by you as to all or
any lesser number of shares of the Company's Common Stock, no par value, covered
thereby, at the Purchase Price per share as defined below, at any time and from
time to time on and after the first anniversary of the date hereof and ending at
5:00 p.m. on the fifth anniversary of the date hereof.
1. Definitions.
As used herein, the following terms, unless the context otherwise
requires, shall have for all purposes hereof the following meanings:
The term "Act" refers to the Securities Act of 1933, as amended.
The term "Affiliate" of any Person refers to any Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with, such other Person. A Person shall be deemed to control a corporation if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.
The term "Commission" refers to the Securities and Exchange Commission.
The term "Common Stock" refers to all stock of any class or classes
(however designated) of the Company, now or hereafter authorized, the holders of
which shall have the right without limitation as to amount, either to all or to
a part of the balance of current dividends and liquidating dividends after the
payment of dividends and distributions on any shares entitled to preference, and
the holders of which shall ordinarily, in the absence of contingency, be
entitled to vote for the election of a majority of the directors of the Company
(even though the right so to vote has been suspended by the occurrence of such a
contingency).
The term "Current Market Price" on any date refers to the average of
the daily Market Price per share for the 30 consecutive Trading Days commencing
45 Trading Days before the date in question.
The term "Exchange Act" refers to the Securities Exchange Act of 1934,
as amended.
The term "Market Price" refers to the closing sale price on the
American Stock Exchange ("AMEX") or, if no closing sale price is reported, the
closing bid price of the Common Stock, as quoted on the Nasdaq National Market,
or, if the Common Stock is not quoted on the Nasdaq National Market, as reported
by the National Quotation Bureau Incorporated. If Market Price cannot be
established as described above, Market Price shall be the fair market value of
the Common Stock as determined in good faith by the Board of Directors whose
determination shall be conclusive.
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<PAGE>
The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holders of the Underwriter Warrants at any time shall be
entitled to receive, or shall have received, upon the exercise of the
Underwriter Warrants, in lieu of or in addition to Common Stock, or which at any
time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 6 below or
otherwise.
The term "Person" refers to an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization and a
government or any department or agency thereof.
The term "Purchase Price" refers to the purchase price, per share, of
the shares of Common Stock subject to this Agreement. The Purchase Price shall
equal to 120% of the initial offering price to public of the Common Stock in the
Company's initial public offering, subject to adjustment as provided in Section
6 below.
The term "Registration Statement" refers to a Registration Statement
filed with the Commission pursuant to the Rules and Regulations of the
Commission promulgated under the Act.
The term "Trading Day" shall mean a day on which the Nasdaq National
Market or the principal national securities exchange on which the Common Stock
is listed or admitted to trading is open for the transaction of business.
The term "Underlying Stock" refers to the shares of Common Stock (or
Other Securities) issuable under this Warrant Agreement pursuant to the
exercise, in whole or in part, of the Underwriter Warrants.
The purchase and sale of the Underwriter Warrants shall take place, and
the purchase price therefore shall be paid by delivery of your check,
simultaneously with the purchase of and payment for any shares of Common Stock
as provided in that certain Underwriting Agreement dated ___________, 1998,
relating to the public offering of shares of the Common Stock pursuant to a
Registration Statement filed under the Act.
2. Representations and Warranties.
The Company represents and warrants to you as follows:
(a) Corporate Action. The Company has all requisite corporate power and
authority, and has taken all necessary corporate action, to execute and deliver
this Agreement, to issue and deliver the Underwriter Warrants and certificates
evidencing same, and to authorize and reserve for issuance, and upon payment
from time to time of the Purchase Price to issue and deliver, the Shares.
(b) No Violation. Neither the execution nor delivery of this Agreement,
the consummation of the actions herein contemplated nor compliance with the
terms and provisions hereof will conflict with, or result in a breach of, or
constitute a default or an event permitting acceleration under, any of the
terms, provisions or conditions of the Articles of Incorporation or Bylaws of
the Company or any indenture, mortgage, deed of trust, note, bank loan, credit
agreement, franchise, license, lease, permit, judgment, decree, order, statute,
rule or regulation or any other agreement, understanding or instrument to which
the Company is a party or by which it is bound.
3. Compliance with the Act.
(a) Transferability of Underwriter Warrants. You agree that the
Underwriter Warrants may not be transferred, sold, assigned or hypothecated for
a period of one (1) year from the date hereof, except to (i) persons who are
officers of you; (ii) a successor to you in a merger or consolidation; (iii) a
purchaser of all or substantially all of your assets; (iv) your shareholders in
the event you are liquidated or dissolved; and (v) persons who are officers of
participating broker-dealers.
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<PAGE>
(b) Registration of Underlying Stock. The Underlying Stock issuable
upon the exercise of the Underwriter Warrants have not been registered under the
Act. You agree not to make any sale or other disposition of the Underlying Stock
except pursuant to a Registration Statement which has become effective under the
Act, setting forth the terms of such offering, the underwriting discount and the
commissions and any other pertinent data with respect thereto, unless you have
provided the Company with an opinion of counsel reasonably acceptable to the
Company that such registration is not required.
(c) Demand Registration. At any time and from time to time after the
first anniversary of the date hereof but prior to the fifth anniversary of the
date hereof, the holders of Underwriter Warrants shall have the right to make
written request of the Company on one occasion to register under the Act at
least fifty percent (50%) of the Underlying Stock which would be issuable upon
exercise of the Underwriter Warrants pursuant to the terms and conditions
hereof. The Underlying Stock specified in such request or a request pursuant to
Section 3(d) hereof is referred to herein as the "Subject Stock." Promptly upon
receipt of such request, the Company shall file with the Commission a
Registration Statement on the applicable form for the registration of the
Subject Stock and use its best efforts to cause such Registration Statement to
become effective (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with the Act and the Rules and
Regulations promulgated thereunder) as soon as practicable to permit or
facilitate the sale and distribution of the Subject Stock. Immediately upon
receipt of a request for registration pursuant to this Section 3(c), the Company
shall notify each of the holders of Underwriter Warrants of such request.
Notwithstanding the provisions of this Section 3(c), if the
Company shall furnish to the holders of Underwriter Warrants a certificate
signed by the Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its stockholders for such a Registration
Statement to be filed and it is therefore essential to defer a filing of such
Registration Statement, the Company shall have the right to defer such filing
for a period of not more than one hundred twenty (120) days after receipt of the
request from the holders of Underwriter Warrants to effect such a registration;
provided, however, that the Company may not utilize the right more than once in
any twenty-four (24) month period; and, provided further, that the holders of
Underwriter Warrants may, at any time in writing, withdraw such request for such
registration and therefore preserve the right provided in this Section 3(c) for
the holders of Underwriter Warrants to request such registration.
(d) Inclusion in Registration of Other Securities. If at any time after
the date hereof but prior to the fifth anniversary of the date hereof, the
Company shall propose the registration on an appropriate form under the Act of
any shares of Common Stock or Other Securities, the Company shall at least 30
days prior to the filing of such Registration Statement give you written notice,
or telegraphic or telephonic notice followed as soon as practicable by written
confirmation thereof, of such proposed registration and, upon written notice, or
telegraphic or telephonic notice followed as soon as practicable by written
confirmation thereof, given to the Company within five business days after the
giving of such notice by the Company, shall include or cause to be included in
any such Registration Statement all or such portion of the Underlying Stock as
you may request, provided, however, that the Company may at any time withdraw or
cease proceeding with any such registration if it shall at the same time
withdraw or cease proceeding with the registration of such Common Stock or such
Other Securities originally proposed to be registered.
Notwithstanding any provision of this Agreement to the
contrary, if any holder of Underwriter Warrants exercises such Underwriter
Warrants but shall not have included all the Underlying Stock in a Registration
Statement which complies with Section 10(a)(3) of the Act, which has been
effective for at least 30 calendar days following the exercise of the
Underwriter Warrants, the registration rights set forth in this Section 3(d)
shall be extended until such time as (i) such a Registration Statement including
such Underlying Stock has been effective for at least 30 calendar days or (ii)
in the opinion of counsel satisfactory to you and the Company, registration is
not required under the Act or under applicable state laws for resale of the
Underlying Stock in the manner proposed.
(e)
Company's Obligations in Registration. In connection with any
offering of Subject Stock pursuant to Section 3(c) or 3(d) above, the Company
shall:
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26047_1 - 75205/00002
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<PAGE>
(i) Notify you as to the filing thereof and of all
amendments or supplements thereto filed prior to the
effective date thereof;
(ii) Comply with all applicable rules and regulations of
the Commission;
(iii) Notify you immediately, and confirm the notice in
writing, (1) when the Registration Statement becomes
effective, (2) of the issuance by the Commission of
any stop order or of the initiation, or the
threatening, of any proceedings for that purpose, (3)
of the receipt by the Company of any notification
with respect to the suspension of qualification of
the Subject Stock for sale in any jurisdiction or of
the initiation, or the threatening, of any
proceedings for that purpose and (4) of the receipt
of any comments, or requests for additional
information, from the Commission or any state
regulatory authority. If the Commission or any state
regulatory authority shall enter such a stop order or
order suspending qualification at any time, the
Company will make every reasonable effort to obtain
the lifting of such order as promptly as practicable.
(iv) During the time when a Prospectus is required to be
delivered under the Act during the period required
for the distribution of the Subject Stock, comply so
far as it is able with all requirements imposed upon
it by the Act, as hereafter amended, and by the Rules
and Regulations promulgated thereunder, as from time
to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Subject
Stock. If at any time when a Prospectus relating to
the Subject Stock 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
your counsel, the Prospectus relating to the Subject
Stock 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 such Prospectus to comply with the Act,
the Company will promptly prepare and file with the
Commission an appropriate amendment or supplement (in
form satisfactory to you).
(v) Endeavor in good faith, in cooperation with you, at
or prior to the time the Registration Statement
becomes effective, to qualify the Subject Stock for
offering and sale under the securities laws relating
to the offering or sale of the Subject Stock of such
jurisdictions as you may reasonably designate and to
continue the qualifications in effect so long as
required for purposes of the sale of the Subject
Stock; provided that no such qualification shall be
required in any jurisdiction where, as a result
thereof, the Company would be subject to service of
general process, or to taxation as a foreign
corporation doing business in such jurisdiction. In
each jurisdiction where such qualification shall be
effected, the Company will, unless you agree that
such action is not at the time necessary or
advisable, file and make such statements or reports
at such times as are or may reasonably be required by
the laws of such jurisdiction. For the purposes of
this paragraph, "good faith" is defined as the same
standard of care and degree of effort as the Company
will use to qualify its securities other than the
Subject Stock.
(vi) Make generally available to its security holders as
soon as practicable, but not later than the first day
of the eighteenth full calendar month following the
effective date of the Registration Statement, an
earnings statement (which need not be certified by
independent public or independent certified public
accountants unless required by the Act or the rules
and regulations promulgated thereunder, but which
shall satisfy the provisions of Section 11(a) of the
Act) covering a period of at least twelve months
beginning after the effective date of the
Registration Statement.
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(vii) After the effective date of such Registration
Statement, prepare, and promptly notify you of the
proposed filing of, and promptly file with the
Commission, each and every amendment or supplement
thereto or to any Prospectus forming a part thereof
as may be necessary to make any statements therein
not misleading; provided that no such amendment or
supplement shall be filed if you shall object thereto
in writing promptly after being furnished a copy
thereof.
(viii) Furnish to you, as soon as available, copies of any
such Registration Statement and each preliminary or
final Prospectus, or supplement or amendment prepared
pursuant thereto, all in such quantities as you may
from time to time reasonably request;
(ix) Make such representations and warranties to any
underwriter of the Subject Stock, and use your best
efforts to cause Company counsel to render such
opinions to such underwriter, as such underwriter may
reasonably request; and
(x) Pay all costs and expenses incident to the
performance of the Company's obligations under
Section 3(c) or 3(d) above and under this Section
3(e), including without limitation the fees and
disbursements of the Company's auditors and legal
counsel, of legal counsel for you and of legal
counsel responsible for qualifying the Subject Stock
under blue sky laws, all filing fees and printing
expenses, all expenses in connection with the
transfer and delivery of the Underlying Stock, and
all expenses in connection with the qualification of
the Subject Stock under blue sky laws; provided,
however, that the Company shall not be responsible
for compensation and reimbursement of expenses to
underwriters or selling agents for the included
Subject Stock.
(f) Agreements by Warrant Holder. In connection with the filing of a
Registration Statement pursuant to Section 3(c) or 3(d) above, if you
participate in the offering of the Subject Stock by including shares owned by
you, you agree:
(i) To furnish the Company all material information
requested by the Company concerning yourself and your
holdings of securities of the Company and the
proposed method of sale or other disposition of the
Subject Stock and such other information and
undertakings as shall be reasonably required in
connection with the preparation and filing of any
such Registration Statement covering all or a part of
the Subject Stock and in order to ensure full
compliance with the Act; and
(ii) To cooperate in good faith with the Company and its
underwriters, if any, in connection with such
registration, including placing the shares of Subject
Stock to be included in such Registration Statement
in escrow or custody to facilitate the sale and
distribution thereof.
(g) Indemnification. The Company shall indemnify and hold harmless you
and any underwriter (as defined in the Act) for you, and each person, if any,
who respectively controls you or such underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
expense whatsoever reasonably incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever), joint
or several, to which any of you or such underwriter or such controlling person
becomes subject, under the Act or otherwise, insofar as such loss, liability,
claim, damage and expense (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in (i) a Registration Statement covering the Subject Stock, in the
prospectus contained therein, or in an amendment or supplement thereto or (ii)
in any application or other document or communication (in this Section
collectively called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Subject Stock under the securities laws
thereof or filed with the Commission, or arise out of or based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the
Warrant Agreement
26047_1 - 75205/00002
5
<PAGE>
statements therein not misleading; provided, however, that the Company shall not
be obligated to indemnify in any such case to the extent that any such loss,
claim, damage, expense or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon, and in conformity with, written information respectively
furnished by you or such underwriter or such controlling person for use in the
Registration Statement, or any amendment or supplement thereto, or any
application, as the case may be.
If any action is brought against a person in respect of which
indemnity may be sought against, the Company pursuant to the foregoing
paragraph, such person shall promptly notify the Company in writing of the
institution of such action and the Company shall assume the defense of the
action, including the employment of counsel (satisfactory to the indemnified
person in its reasonable judgment) and payment of expenses. The indemnified
person 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 person or unless the employment of such counsel shall have been
authorized in writing by the Company in connection with the defense of the
action or the Company shall not have employed counsel to have charge of the
defense of the action or the indemnified person shall have reasonably concluded
that there may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to direct the defense of the action on behalf of the
indemnified person), in any of which events these fees and expenses shall be
borne by the Company. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any claim
or action effected without its written consent. The Company's indemnity
agreements contained in this Section shall remain in full force and effect
regardless of any investigation made by or on behalf of any indemnified person,
and shall survive any termination of this Agreement. The Company agrees promptly
to notify you of the commencement of any litigation or proceedings against the
Company or any of its officers or directors in connection with the Registration
Statement pursuant to Section 3(c) or 3(d) above.
If you choose to include any Subject Stock in a public
offering pursuant to Section 3(c) or 3(d) above, then you agree to indemnify and
hold harmless the Company and each of its directors and officers who have signed
any such Registration Statement, and any underwriter for the Company (as defined
in the Act), and each person, if any, who controls the Company or such
underwriter within the meaning of the Act, to the same extent as the indemnity
by the Company in this Section 3(g) but only with respect to statements or
omissions, if any, made in such Registration Statement, or any amendment or
supplement thereto, or in any application in reliance upon, and in conformity
with, written information furnished by you to the Company for use in the
Registration Statement, or any amendment or supplement thereto, or any
application, as the case may be. In case any action shall be brought in respect
of which indemnity may be sought against you, you shall have the rights and
duties given to the Company, and the persons so indemnified shall have the
rights and duties given to you by the provisions of the first paragraph of this
Section.
The Company further agrees that, if the indemnity provisions
of the foregoing paragraphs are held to be unenforceable, any holder of an
Underwriter Warrant or controlling person of such a holder may recover
contribution from the Company in an amount which, when added to contributions
such holder or controlling person has theretofore received or concurrently
receives from officers and directors of the Company or controlling persons of
the Company, will reimburse such holder or controlling person for all losses,
claims, damages or liabilities and legal or other expenses; provided, however,
that if the full amount of the contribution specified in this Section 3(g) is
not permitted by law, then such holder or controlling person shall be entitled
to contribution from the Company and its officers, directors and controlling
persons to the full extent permitted by law.
4. Exercise of Underwriter Warrants.
(a) Cash Exercise. Each Underwriter Warrant may be exercised in full or
in part (but not as to a fractional share of Common Stock) by the holder thereof
by surrender of the Warrant Certificate, with the form of subscription at the
end thereof duly executed by such holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or bank cashiers' check
payable to the order of the Company, in the respective amount obtained by
multiplying the number of shares of the Underlying Stock to be purchased by the
Purchase Price per share.
Warrant Agreement
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6
<PAGE>
(b) Net Exercise. Notwithstanding anything to the contrary contained in
Section 4(a), any holder of an Underwriter Warrant may elect to exercise the
Underwriter Warrant and receive shares on a "net exercise" basis in an amount
equal to the value of the Underwriter Warrant by delivery of the form of
subscription attached to the Warrant Certificate and surrender of the
Underwriter Warrant at the principal office of the Company, in which event the
Company shall issue to the holder a number of shares computed using the
following formula:
X= (P)(Y)(A-B)
-----------
A
Where: X= the number of shares of Common Stock to be
issued to holder.
P= the portion of the Underwriter Warrant being
exercised (expressed as a fraction).
Y= the total number of shares of Common Stock
issuable upon exercise of the Underwriter
Warrant.
A= the Current Market Price of one share of
Common Stock.
B= Purchase Price.
(c) Partial Exercise. Prior to the expiration of the Underwriter
Warrants, upon any partial exercise, the Company at its expense will forthwith
issue and deliver to or upon the order of the purchasing holder, a new Warrant
Certificate or Certificates of like tenor, in the name of the holder thereof or
as such holder (upon payment by such holder of any applicable transfer taxes)
may request calling in the aggregate for the purchase of the number of shares of
the Underlying Stock equal to the number of such shares called for on the face
of the Warrant Certificate (after giving effect to any adjustment therein as
provided in Section 6 below) minus the number of such shares (after giving
effect to such adjustment) designated by the holder in the aforementioned form
of subscription.
(d) Company to Reaffirm Obligations. The Company will, at the time of
any exercise of any Underwriter Warrant, upon the request of the holder thereof,
acknowledge in writing its continuing obligation to afford to such holder any
rights (including without limitation any right to registration of the shares of
the Underlying Stock issued upon such exercise) to which such holder shall
continue to be entitled after such exercise in accordance with the provisions of
this Agreement; provided, however, that if the holder of an Underwriter Warrant
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to such holder any such rights.
5. Delivery of Certificates, etc, on Exercise.
As soon as practicable after the exercise of any Underwriter Warrant in
full or in part, and in any event within twenty days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the purchasing holder
thereof, a certificate or certificates for the number of fully paid and
nonassessable shares of the Underlying Stock to which such holder shall be
entitled upon such exercise, plus in lieu of any fractional share to which such
holder would otherwise be entitled, cash in an amount determined pursuant to
Section 7(g), together with any other stock or other securities and property
(including cash, where applicable) to which such holder is entitled upon such
exercise pursuant to Section 6 below or otherwise.
6. Anti-dilution Provisions.
The Underwriter Warrants are subject to the following terms and
conditions during the term thereof:
(a) Stock Distributions and Splits. In case (i) the outstanding shares
of Common Stock (or Other Securities) shall be subdivided into a greater number
of shares or (ii) a dividend in Common Stock (or Other Securities) shall be paid
in respect of Common Stock (or Other Securities), the Purchase Price per share
in effect immediately prior to such subdivision or at the record date of such
dividend or distribution shall simultaneously with the effectiveness of
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26047_1 - 75205/00002
7
<PAGE>
such subdivision or immediately after the record date of such dividend or
distribution be proportionately reduced; and if outstanding shares of Common
Stock (or Other Securities) shall be combined into a smaller number of shares
thereof, the Purchase Price per share in effect immediately prior to such
combination shall simultaneously with the effectiveness of such combination be
proportionately increased. Any dividend paid or distributed on the Common Stock
(or Other Securities) in stock or any other securities convertible into shares
of Common Stock (or Other Securities) shall be treated as a dividend paid in
Common Stock (or Other Securities) to the extent that shares of Common Stock (or
Other Securities) are issuable upon the conversion thereof.
(b) Adjustments. Whenever the Purchase Price per share is adjusted as
provided in Section 6(a) above, the number of shares of the Underlying Stock
purchasable upon exercise of the Underwriter Warrants immediately prior to such
Purchase Price adjustment shall be adjusted, effective simultaneously with such
Purchase Price adjustment, to equal the product obtained (calculated to the
nearest full share) by multiplying such number of shares of the Underlying Stock
by a fraction, the numerator of which is the Purchase Price per share in effect
immediately prior to such Purchase Price adjustment and the denominator of which
is the Purchase Price per share in effect upon such Purchase Price adjustment,
which adjusted number of shares of the Underlying Stock shall thereupon be the
number of shares of the Underlying Stock purchasable upon exercise of the
Underwriter Warrants until further adjusted as provided herein.
(c) Reorganizations. In case the Company shall be recapitalized by
reclassifying its outstanding Common Stock (or Other Securities) into a stock
with a different par value or by changing its outstanding Common Stock (or Other
Securities) with par value to stock without par value, then, as a condition of
such reorganization, lawful and adequate provision shall be made whereby each
holder of an Underwriter Warrant shall thereafter have the right to purchase,
upon the terms and conditions specified herein, in lieu of the shares of Common
Stock (or Other Securities) theretofore purchasable upon the exercise of the
Underwriter Warrants, the kind and amount of shares of stock and other
securities receivable upon such recapitalization by a holder of the number of
shares of Common Stock (or Other Securities) which the holder of an Underwriter
Warrant might have purchased immediately prior to such recapitalization. If any
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation, shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such consolidation, merger or sale, lawful and adequate provisions
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in this Warrant Agreement and in lieu of the shares of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such consolidation, merger or sale not taken
place, and in any such case, appropriate provision shall be made with respect to
the rights and interests of the holders of Underwriter Warrants to the end that
the provisions hereof (including without limitation provisions for adjustments
of the Purchase Price and of the number of shares purchasable and receivable
upon the exercise of the Underwriter Warrants) shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof (including an immediate
adjustment, by reason of such consolidation or merger, of the Purchase Price to
the value for the Common Stock reflected by the terms of such consolidation or
merger if the value so reflected is less than the Purchase Price in effect
immediately prior to such consolidation or merger). In the event of a merger or
consolidation of the Company with or into another corporation as a result of
which a number of shares of Common Stock of the surviving corporation greater or
lesser than the number of shares of Common Stock of the Company outstanding
immediately prior to such merger or consolidation are issuable to holders of
Common Stock of the Company, then the Purchase Price in effect immediately prior
to such merger or consolidation shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Common
Stock of the Company. The Company will not effect any such consolidation, merger
or sale, unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument executed
and mailed or delivered to the registered holder hereof at the last address of
such holder appearing on the books of the Company, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to purchase. If a
purchase, tender or exchange offer is made to and accepted by the holders of
more than of the outstanding shares of Common Stock of the
Warrant Agreement
26047_1 - 75205/00002
8
<PAGE>
Company, the Company shall not effect any consolidation, merger or sale with the
Person having made such offer or with any Affiliate of such Person, unless prior
to the consummation of such consolidation, merger or sale the holders of
Underwriter Warrants shall have been given a reasonable opportunity to then
elect to receive upon the exercise of Underwriter Warrants either the stock,
securities or assets then issuable with respect to the Common Stock of the
Company or the stock, securities or assets, or the equivalent issued to previous
holders of the Common Stock in accordance with such offer.
(d) Effect of Dissolution or Liquidation. In case the Company shall
dissolve or liquidate all or substantially all of its assets, all rights under
this Agreement shall terminate as of the date upon which a certificate of
dissolution or liquidation shall be filed with the Secretary of the State of
Texas (or, if the Company theretofore shall have been merged or consolidated
with a corporation incorporated under the laws of another state, the date upon
which action of equivalent effect shall have been taken); provided, however,
that (i) no dissolution or liquidation shall affect the rights under Section
6(c) of any holder of an Underwriter Warrant and (ii) if the Company's Board of
Directors shall propose to dissolve or liquidate the Company, each holder of an
Underwriter Warrant shall be given written notice of such proposal at the
earlier of (x) the time when the Company's shareholders are first given notice
of the proposal or (y) the time when notice to the Company's shareholders is
first required.
(e) Notice of Change of Purchase Price. Whenever the Purchase Price per
share or the kind or amount of securities purchasable under the Underwriter
Warrants shall be adjusted pursuant to any of the provisions of this Agreement,
the Company shall forthwith thereafter cause to be sent to each holder of an
Underwriter Warrant, a certificate setting forth the adjustments in the Purchase
Price per share and/or in such number of shares, and also setting forth in
detail the facts requiring, such adjustments, including without limitation a
statement of the consideration received or deemed to have been received by the
Company for any additional shares of stock issued by it requiring such
adjustment. In addition, the Company at its expense shall within 90 days
following the end of each of its fiscal years during the term of this Agreement,
and promptly upon the reasonable request of any holder of an Underwriter Warrant
in connection with the exercise from time to time of all or any portion of any
Underwriter Warrant, cause independent certified public accountants of
recognized standing selected by the Company to compute any such adjustment in
accordance with the terms of the Underwriter Warrants and prepare a certificate
setting forth such adjustment and showing in detail the facts upon which such
adjustment is based.
(f) Notice of a Record Date. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend payable out of earned surplus of the Company) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, (ii) any capital reorganization of the Company, or any
reclassification or recapitalization of the capital stock of the Company, or any
transfer of all or substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other person or (iii)
any voluntary or involuntary dissolution or liquidation of the Company, then and
in each such event the Company will mail or cause to be mailed to each holder of
an Underwriter Warrant a notice specifying not only the date on which any such
record is to be taken for the purpose of such dividend, distribution or right
and stating the amount and character of such dividend, distribution or right,
but also the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or other Securities) for securities or other property
deliverable upon such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up. Such
notice shall be mailed at least 20 days prior to the proposed record date
therein specified.
7. Further Covenants of the Company.
(a) Reservation of Stock. The Company shall at all times reserve and
keep available, solely for issuance and delivery upon the exercise of the
Underwriter Warrants, all shares of the Underlying Stock from time to time
issuable upon the exercise of the Underwriter Warrants and shall take all
necessary actions to ensure that the par value per share, if any, of the
Underlying Stock is, at all times equal to or less than the then effective
Purchase Price per share.
Warrant Agreement
26047_1 - 75205/00002
9
<PAGE>
(b) Title to Shares. All shares of the Underlying Stock delivered upon
the exercise of the Underwriter Warrants shall be validly issued, fully paid and
nonassessable; each holder of an Underwriter Warrant shall receive good and
marketable title to the Underlying Stock, free and clear of all voting and other
trust arrangements, liens, encumbrances, equities and claims whatsoever; and the
Company shall have paid all taxes, if any, in respect of the issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the Company at
any time shall list any Common Stock on any national securities exchange, the
Company will, at its expense, simultaneously list on such exchange, upon
official notice of issuance upon the exercise of the Underwriter Warrants, and
maintain such listing of, all shares of the Underlying Stock from time to time
issuable upon the exercise of the Underwriter Warrants; and the Company will so
list on any national securities exchange, will so register and will maintain
such listing of, any Other Securities if and at the time that any securities of
like class or similar type shall be listed on such national securities exchange
by the Company.
(d) Exchange of Underwriter Warrants. Subject to Section 3(a) hereof,
upon surrender for exchange of any Warrant Certificate to the Company, the
Company at its expense will promptly issue and deliver to or upon the order of
the holder thereof a new Warrant Certificate or certificates of like tenor, in
the name of such holder or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct, calling in the aggregate for the purchase
of the number of shares of the Underlying Stock called for on the face or faces
of the Warrant Certificate or Certificates so surrendered.
(e) Replacement of Underwriter Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant Certificate and, in the case of any such loss, theft
or destruction, upon delivery of an indemnity agreement reasonably satisfactory
in form and amount to the Company or, in the case of any such mutilation, upon
surrender and cancellation of such Warrant Certificate, the Company, at the
expense of the warrant holder will execute and deliver, in lieu thereof, a new
Warrant Certificate of like tenor.
(f) Reporting by the Company. The Company agrees that, if it files a
Registration Statement during the term of the Underwriter Warrants, it will use
its best efforts to keep current in the filing of all forms and other materials
which it may be required to file with the appropriate regulatory authority
pursuant to the Exchange Act, and all other forms and reports required to be
filed with any regulatory authority having jurisdiction over the Company.
(g) Fractional Shares. No fractional shares of Underlying Stock are to
be issued upon the exercise of any Underwriter Warrant, but the Company shall
pay a cash adjustment in respect of any fraction of a share which would
otherwise be issuable in an amount equal to the same fraction of the highest
market price per share of Underlying Stock on the day of exercise, as determined
by the Company.
8. Other Holders.
The Underwriter Warrants are issued upon the following terms, to all of
which each holder or owner thereof by the taking thereof consents and agrees as
follows: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Section 3(a) hereof, of an Underwriter Warrant properly
endorsed shall take such Underwriter Warrant subject to the provisions of
Section 3(a) hereof and thereupon shall be authorized to represent himself as
absolute owner thereof and, subject to the restrictions contained in this
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; (b) each prior
taker or owner waives and renounces all of his equities or rights in such
Underwriter Warrant in favor of each such permitted bona fide purchaser, and
each such permitted bona fide purchaser shall acquire absolute title thereto and
to all rights presented thereby; (c) until such time as the respective
Underwriter Warrant is transferred on the books of the Company, the Company may
treat the registered holder thereof as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary and (d) all references to
the word "you" in this Warrant Agreement shall be deemed to apply with equal
effect to any person to whom a Warrant Certificate or Certificates have been
transferred in accordance with the terms hereof, and where appropriate, to any
person holding shares of the Underlying Stock.
Warrant Agreement
26047_1 - 75205/00002
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<PAGE>
9. Miscellaneous.
All notices, certificates and other communications from or at the
request of the Company to the holder of any Underwriter Warrant shall be mailed
by first class, registered or certified mail, postage prepaid, to such address
as may have been furnished to the Company in writing by such holder, or, until
an address is so furnished, to the address of the last holder of such
Underwriter Warrant who has so furnished an address to the Company, except as
otherwise provided herein. This Agreement and any of the terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas. The headings in
this Agreement are for reference only and shall not limit or otherwise affect
any of the terms hereof. This Agreement, together with the forms of instruments
annexed hereto as Schedule I, constitutes the full and complete agreement of the
parties hereto with respect to the subject matter hereof.
Warrant Agreement
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Agreement to be
executed on this ____ day of ________, 1998, in San Francisco, California, by
its proper corporate officers thereunto duly authorized.
Transnational Financial Corporation
By:________________________________________
Joseph Kristul
Chief Executive Officer and
Chief Financial Officer
The above Warrant Agreement is confirmed this ____ day of ________, 1998.
Tejas Securities Group, Inc.
By:_________________________________________
Robert A. Shuey, III
Warrant Agreement
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<PAGE>
SCHEDULE I
TRANSNATIONAL FINANCIAL CORPORATION
Stock Purchase Warrant
Certificate Evidencing Right to Purchase 100,000 Shares of Common Stock
This is to certify that Tejas Securities Group, Inc. ("TSG") or
assigns, is entitled to purchase at any time or from time to time after 9 A.M.,
San Francisco, California time, on ___________, 1999 and until 9 A.M., San
Francisco, California time, on ___________, 2003 up to the above referenced
number of shares of Common Stock, no par value, of Transnational Financial
Corporation, a California corporation (the "Company"), for the consideration
specified in Section 4 of the Warrant Agreement dated ___________, 1998 between
the Company and TSG (the "Warrant Agreement"), pursuant to which this Warrant is
issued. All rights of the holder of this Warrant Certificate are subject to the
terms and provisions of the Warrant Agreement, copies of which are available for
inspection at the office of the Company.
The shares of Common Stock issuable upon the exercise of this Warrant
have not been registered under the Securities Act of 1933, as amended (the
"Act"), and no distribution of such shares may be made until the effectiveness
of a Registration Statement under the Act covering such Shares. Transfer of this
Warrant Certificate is restricted as provided in Section 3(a) of the Warrant
Agreement.
This Warrant has been issued to the registered owner in reliance upon
written representations necessary to ensure that this Warrant was issued in
accordance with an appropriate exemption from registration under any applicable
state and federal securities laws, rules and regulations. This Warrant may not
be sold, transferred, or assigned unless, in the opinion of the Company and its
legal counsel, such sale, transfer or assignment will not be in violation of the
Act, applicable rules and regulations of the Securities and Exchange Commission,
and any applicable state securities laws.
Subject to the provisions of the Act and of such Warrant Agreement,
this Warrant Certificate and all rights hereunder are transferable, in whole or
in part, at the offices of the Company, by the holder hereof in person or by
duly authorized attorney, upon surrender of this Warrant Certificate, together
with the Assignment hereof duly endorsed. Until transfer of this Warrant
Certificate on the books of the Company, the Company may treat the registered
holder hereof as the owner hereof for all purposes.
Any shares of Common Stock (or other securities) which are acquired
pursuant to the exercise of this Warrant shall be acquired in accordance with
the Warrant Agreement and certificates representing all securities so acquired
shall bear a restrictive legend reading substantially as follows:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION
OF COUNSEL (SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT
REQUIRED.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed on this ____ day of ________, 1998, in San Francisco, California, by
its proper corporate officer's thereunto duly authorized.
Transnational Financial Corporation
By: _______________________________ Attest:__________________________
Joseph Kristul
Chief Executive Officer and
Chief Financial Officer
Warrant Agreement
26047_1 - 75205/00002
<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: AutoBond Acceptance Corporation
The undersigned, the holder of the enclosed Warrant Certificate, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
Certificate for, and to purchase thereunder, _________________ shares of Common
Stock, no par value, of Transnational Financial Corporation and either tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $______________ therefor or,
if the undersigned elects pursuant to Section 4(b) of the Warrant Agreement to
convert the Warrant into Common Stock by net issuance, the undersigned exercises
the Warrant by exchange under the terms of said Section 4(b), and requests that
the certificate or certificates for such shares be issued in the name of and
delivered to the undersigned.
Date: ______________________________
----------------------------------------
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant
Certificate)
---------------------------------------
---------------------------------------
(Address)
Please indicate in the space below the number of shares called for on
the face of the Warrant Certificate (or, in the case of a partial exercise, the
portion thereof as to which the Warrant is being exercised), in either case
without making any adjustment for additional shares or other securities or
property or cash which, pursuant to the adjustment provisions of the Warrant,
may be deliverable upon exercise and whether the exercise is a cash exercise
pursuant to Section 4(a) of the Warrant Agreement or a net issuance exercise
pursuant to Section 4(b) of the Warrant Agreement.
Number of Shares:__________
Cash:____________________
Net issuance:______________
Warrant Agreement
26047_1 - 75205/00002
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
____________________________________ the right represented by the enclosed
Warrant Certificate to purchase ____________________ shares of Common Stock, no
par value, of Transnational Financial Corporation with full power of
substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in
or in part, of such right to purchase represented by the enclosed Warrant
Certificate is permitted by the terms of the Warrant Agreement pursuant to which
the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant Agreement and agrees to be bound by the terms thereof
with the same force and effect as if a signatory thereto.
Date:___________________
-------------------------------------------
(Signature must conform
in all respects to name of
holder as specified on
the face of the Warrant
Certificate)
--------------------------------------------
(Address)
Signed in the presence of:
Warrant Agreement
26047_1 - 75205/00002
1
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
TRANSNATIONAL FINANCIAL CORPORATION
<PAGE>
TABLE OF CONTENTS
ARTICLE I. CORPORATE OFFICES.................................................5
1.1 PRINCIPAL OFFICE............................................5
1.2 OTHER OFFICES...............................................5
ARTICLE II. MEETINGS OF SHAREHOLDERS.........................................5
2.1 PLACE OF MEETINGS...........................................5
2.2 ANNUAL MEETING..............................................5
2.3 SPECIAL MEETINGS............................................5
2.4 NOTICE OF SHAREHOLDERS' MEETINGS............................6
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................6
2.6 QUORUM......................................................7
2.7 ADJOURNED MEETING; NOTICE...................................7
2.8 VOTING......................................................7
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT...........8
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT
A MEETING...................................................8
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING;
GIVING CONSENTS.............................................9
2.12 PROXIES.....................................................9
2.13 INSPECTORS OF ELECTION......................................10
ARTICLE III. DIRECTORS.......................................................10
3.1 POWERS......................................................10
3.2 NUMBER OF DIRECTORS.........................................10
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS....................11
3.4 REMOVAL.....................................................11
3.5 RESIGNATION AND VACANCIES...................................11
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE,
ELECTRONIC VIDEO SCREEN COMMUNICATION, ETC..................12
3.7 REGULAR MEETINGS............................................13
3.8 SPECIAL MEETINGS; NOTICE....................................13
3.9 QUORUM......................................................13
3.10 WAIVER OF NOTICE............................................13
3.11 ADJOURNMENT.................................................13
3.12 NOTICE OF ADJOURNMENT.......................................13
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING...........14
3.14 FEES AND COMPENSATION OF DIRECTORS..........................14
3.15 APPROVAL OF LOANS TO OFFICERS...............................14
<PAGE>
ARTICLE IV. COMMITTEES.......................................................14
4.1 COMMITTEES OF DIRECTORS.....................................14
4.2 MEETINGS AND ACTION OF COMMITTEES...........................15
ARTICLE V. OFFICERS..........................................................15
5.1 OFFICERS....................................................15
5.2 APPOINTMENT OF OFFICERS.....................................15
5.3 SUBORDINATE OFFICERS........................................15
5.4 REMOVAL AND RESIGNATION OF OFFICERS.........................15
5.5 VACANCIES IN OFFICES........................................16
5.6 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER...........16
5.7 PRESIDENT...................................................16
5.8 VICE PRESIDENTS.............................................16
5.9 SECRETARY...................................................16
5.10 CHIEF FINANCIAL OFFICER.....................................17
ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS.................................17
6.1 INDEMNIFICATION OF DIRECTORS................................17
6.2 INDEMNIFICATION OF OTHERS...................................17
6.3 PAYMENT OF EXPENSES IN ADVANCE..............................18
6.4 INDEMNITY NOT EXCLUSIVE.....................................18
6.5 INSURANCE INDEMNIFICATION...................................18
6.6 CONFLICTS...................................................18
6.7 RIGHT TO BRING SUIT.........................................18
6.8 INDEMNITY AGREEMENTS........................................19
6.9 AMENDMENT, REPEAL OR MODIFICATION...........................19
ARTICLE VII. RECORDS AND REPORTS.............................................19
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER................19
7.2 MAINTENANCE AND INSPECTION OF BYLAWS........................20
7.3 MAINTENANCE AND INSPECTION OF OTHER20
CORPORATE RECORDS20.........................................20
7.4 INSPECTION BY DIRECTORS.....................................20
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.......................20
7.6 FINANCIAL STATEMENTS........................................21
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..............21
ARTICLE VIII. GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE
AND VOTING..................................................21
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS...................22
8.3 CORPORATE CONTRACTS AND INSTRUMENTS:
HOW EXECUTED................................................22
8.4 CERTIFICATES FOR SHARES.....................................22
8.5 LOST CERTIFICATES...........................................22
8.6 CONSTRUCTION; DEFINITIONS...................................22
ARTICLE IX. AMENDMENTS.......................................................23
9.1 AMENDMENT BY SHAREHOLDERS...................................23
9.2 AMENDMENT BY DIRECTORS......................................23
9.3 RECORD OF AMENDMENTS........................................23
ARTICLE X. INTERPRETATION....................................................23
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
TRANSNATIONAL FINANCIAL CORPORATION
ARTICLE I.
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The Board of Directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside California and
the corporation has one or more business offices in California, then the Board
of Directors shall fix and designate a principal business office in California.
1.2 OTHER OFFICES
The Board of Directors may at any time establish branch or subordinate
offices at any place or places.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the Board of Directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation or at any place consented to in writing by
all persons entitled to vote at such meeting, given before or after the meeting
and filed with the Secretary of the corporation.
2.2 ANNUAL MEETING
An annual meeting of the shareholders shall be held each year on the date
and time designated by the Board of Directors. At that meeting, directors shall
be elected. Any other proper business within the power of the shareholders may
be transacted.
2.3 SPECIAL MEETINGS
Special meetings of the shareholders may be called at any time, subject to
the provisions of Sections 2.4 and 2.5 of these Bylaws, by the Board of
Directors, the Chairman of the Board, the President or the holders of shares
entitled to cast not less than ten percent of the votes at that meeting.
If a special meeting is called by anyone other than the Board of Directors
or the President or the Chairman of the Board, then the request shall be in
writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by other written communication to the Chairman of the Board,
the President, any Vice President or the Secretary of the corporation. The
<PAGE>
officer receiving the request forthwith shall cause notice to be given to the
shareholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of these Bylaws, that a meeting will be held at the time requested by
the person or persons calling the meeting, so long as that time is not less than
thirty 35 nor more than 60 days after the receipt of the request. If the notice
is not given within 20 days after receipt of the request, then the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of shareholders called by action of the Board
of Directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 2.5 of these Bylaws not less than ten (or, if sent by
third-class mail pursuant to Section 2.5 of these Bylaws, not less than 30) nor
more than 60 days before the date of the meeting to each shareholder entitled to
vote thereat. Such notice shall state the place, date, and hour of the meeting
and (i) in the case of a special meeting, the general nature of the business to
be transacted, and no business other than that specified in the notice may be
transacted, or (ii) in the case of the annual meeting, those matters which the
Board of Directors, at the time of the mailing of the notice, intends to present
for action by the shareholders, but, subject to the provisions of the next
paragraph of this Section 2.4, any proper matter may be presented at the meeting
for such action. The notice of any meeting at which Directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by the Board for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the California Corporations Code (the
"Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of any outstanding preferred shares, pursuant to
Section 2007 of the Code, then the notice shall also state the general nature of
that proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Notice of a shareholders' meeting shall be given either personally or by
first-class mail, or, if the corporation has outstanding shares held of record
by 500 or more persons (determined as provided in Section 605 of the Code) on
the record date for the shareholders' meeting, notice may be sent by third-class
mail, or other means of written communication, addressed to the shareholder at
the address of the shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice; or if no
such address appears or is given, at the place where the principal executive
office of the corporation is located or by publication at least once in a
newspaper of general circulation in the county in which the principal executive
office is located. The notice shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by other means of
written communication.
If any notice (or any report referenced in Article VII of these Bylaws)
addressed to a shareholder at the address of such shareholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available to the shareholder upon written demand of
the shareholder at the principal executive office of the corporation for a
period of one year from the date of the giving of the notice.
<PAGE>
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 2.5, executed by the Secretary, Assistant Secretary
or any transfer agent, shall be prima facie evidence of the giving of the notice
or report.
2.6 QUORUM
Unless otherwise provided in the Articles of Incorporation of the
corporation, a majority of the shares entitled to vote, represented in person or
by proxy, shall constitute a quorum at a meeting of the shareholders. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares represented either in
person or by proxy, but no other business may be transacted, except as provided
in the last sentence of the preceding paragraph.
2.7 ADJOURNED MEETING; NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy.
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
its time and place are announced at the meeting at which the adjournment is
taken. However, if the adjournment is for more than 45 days from the date set
for the original meeting or if a new record date for the adjourned meeting is
fixed, a notice of the adjourned meeting shall be given to each shareholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation, or in joint
ownership).
Elections for directors and voting on any other matter at a shareholders'
meeting need not be by ballot unless a shareholder demands election by ballot at
the meeting and before the voting begins.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the Articles of Incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any holder of shares entitled to vote on any matter
may vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or may vote them against the proposal other than elections to
office, but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares which the shareholder
is entitled to vote.
The affirmative vote of the majority of the shares represented and voting
at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting by
classes is required by the Code or by the Articles of Incorporation.
Subject to the following paragraph, a shareholders' meeting at which
directors are to be elected, a shareholder shall be entitled to cumulate votes
either (i) by giving one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which that
<PAGE>
shareholder's shares are normally entitled or (ii) by distributing the
shareholder's votes on the same principle among as many candidates as the
shareholder thinks fit, if the candidate or candidates' names have been placed
in nomination prior to the voting and the shareholder has given notice prior to
the voting of the shareholder's intention to cumulate the shareholder's votes.
If any one shareholder has given such a notice, then every shareholder entitled
to vote may cumulate votes for candidates in nomination. The candidates
receiving the highest number of affirmative votes, up to the number of directors
to be elected, shall be elected; votes against any candidate and votes withheld
shall have no legal effect.
Notwithstanding the preceding paragraph, effective at the time the
corporation becomes a listed corporation, cumulative shall be eliminated and no
shareholder shall be entitled to cumulate votes at any meeting held thereafter.
This provision shall become effective only when the corporation becomes a listed
corporation within the meaning of Section 301.5 of the Code.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, are as valid as though they had
been taken at a meeting duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. Neither the business to be
transacted at nor the purpose of any annual or special meeting of shareholders
need be specified in any written waiver of notice or consent to the holding of
the meeting or approval of the minutes thereof, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of notice of
and presence at that meeting, except when the person objects, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
Code to be included in the notice of such meeting but not so included, if such
objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous
written consent of all shares entitled to vote for the election of directors.
However, a director may be elected at any time to fill any vacancy on the Board
of Directors, provided that it was not created by removal of a director and that
it has not been filled by the directors, by the written consent of the holders
of a majority of the outstanding shares entitled to vote for the election of
directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the Secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, the Secretary shall give prompt notice of any corporate
action approved by the shareholders without a meeting by less than unanimous
<PAGE>
written consent to those shareholders entitled to vote who have not consented in
writing. Such notice shall be given in the manner specified in Section 2.5 of
these Bylaws. In the case of approval of (i) a contract or transaction in which
a director has a direct or indirect financial interest, pursuant to Section 310
of the Code, (ii) indemnification of a corporate "agent," pursuant to Section
317 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, the notice shall be given at least ten days before the
consummation of any action authorized by that approval, unless the consents of
all shareholders entitled to vote have been solicited in writing.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the shareholders entitled to
notice of any meeting or to vote, the Board of Directors may fix, in advance, a
record date, which shall not be more than 60 days nor less than ten days prior
to the date of such meeting nor more than 60 days before any other action.
Shareholders at the close of business on the record date are entitled to notice
and to vote, as the case may be, notwithstanding any transfer of any shares on
the books of the corporation after the record date, except as otherwise provided
in the Articles of Incorporation or the Code.
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than 45 days from the date set for the original meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the Board has been taken, shall
be at the close of business on the day on which the Board adopts the resolution
relating thereto, or the 60th day prior to the date of such other action,
whichever is later.
The record date for any other purpose shall be as provided in Section 8.1
of these Bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the Secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name or other
authorization is placed on the proxy (whether by manual signature, typewriting,
telegraphic or electronic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i) the
person who executed the proxy revokes it prior to the time of voting by
delivering a writing to the corporation stating that the proxy is revoked or by
executing a subsequent proxy and presenting it to the meeting or by attendance
at such meeting and voting in person, or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date thereof,
unless otherwise provided in the proxy. The dates contained on the forms of
proxy presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed. The revocability of a proxy
<PAGE>
that states on its face that it is irrevocable shall be governed by the
provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed or designated or if any
persons so appointed fail to appear or refuse to act, then the Chairman of the
meeting may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
to appear) at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed.
The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, and the authenticity, validity, and effect of
proxies, receive votes, ballots or consents, hear and determine all challenges
and questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III.
DIRECTORS
3.1 POWERS
Subject to the provisions of the Cod and any limitations in the Articles
of Incorporation and these Bylaws relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation of the business of the corporation to a
management company or other person provided that the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised under
the ultimate direction of the Board.
3.2 NUMBER OF DIRECTORS
The following paragraph shall apply until the time of closing of the
corporation's initial public offering of its Common Stock, at which time it
shall cease to be effective and shall be deleted from these Bylaws without
further act or deed:
The authorized number of directors of the corporation shall be not less
than two nor more than five (which in no case shall be greater than two times
the stated minimum minus one), and the exact number of directors shall be three
until changed, within the limits specified above, by a resolution amending each
exact number, duly adopted by the Board of Directors or by the shareholders. The
minimum and maximum number of directors may be changed, or a definite number may
be fixed without provision for an indefinite number, by a duly adopted amendment
to the Articles of Incorporation or by an amendment to this Bylaw duly adopted
by the vote or written consent of holders of a majority of the outstanding
shares entitled to vote; provided, however, that an amendment reducing the fixed
number or minimum number of directors to a number less than five cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16 2/3%) of the outstanding shares entitled to
vote thereon.
The following paragraph shall become effective without further act or deed
upon the closing of the corporation's initial public offering of its Common
Stock:
<PAGE>
The authorized number of directors of the corporation shall be not less
than five nor more than nine (which in no case shall be greater than two times
the stated minimum minus one), and the exact number of directors shall be seven
until changed, within the limits specified above, by a resolution amending each
exact number, duly adopted by the Board of Directors or by the shareholders. The
minimum and maximum number of directors may be changed, or a definite number may
be fixed without provision for an indefinite number, by a duly adopted amendment
to the Articles of Incorporation or by an amendment to this Bylaw duly adopted
by the vote or written consent of holders of a majority of the outstanding
shares entitled to vote; provided, however, that an amendment reducing the fixed
number or minimum number of directors to a number less than five cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16 2/3%) of the outstanding shares entitled to
vote thereon.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
At each annual meeting of shareholders, directors shall be elected to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified, except
in the case of the death, resignation, or removal of such a director.
3.4 REMOVAL
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
3.5 RESIGNATION AND VACANCIES
Any director may resign effective upon giving oral or written notice to
the Chairman of the Board, the President, the Secretary or the Board of
Directors, unless the notice specifies a later time for the effectiveness of
such resignation. If the resignation of a director is effective at a future
time, the Board of Directors may elect a successor to take office when the
resignation becomes effective.
Vacancies on the Board of Directors may be filled by a majority of the
remaining directors, or if the number of directors then in office is less than a
quorum by (i) unanimous written consent of the directors then in office, (ii)
the affirmative vote of a majority of the directors then in office at a meeting
held pursuant to notice or waivers of notice, or (iii) a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum), or by the unanimous
written consent of all shares entitled to vote thereon. Each director so elected
shall hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified, or until his or her death, resignation
or removal.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the Board of Directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
<PAGE>
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
elected at that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent, other than to fill a vacancy created by removal, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon. A director may not be elected by written consent to fill a vacancy
created by removal except by unanimous consent of all shares entitled to vote
for the election of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE, ELECTRONIC VIDEO SCREEN
COMMUNICATION, ETC.
Regular meetings of the Board of Directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the Board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the Board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
So long as permitted by statute, directors may participate in a meeting
through any means of communication, including conference telephone, electronic
video screen communications, or other communications equipment. Participating in
a meeting pursuant to this section constitutes presence in person at that
meeting if each participating director is provided the means to communicate with
all of the other directors concurrently and (i) the meeting is held by
conference telephone or video conferencing or other communications mode enabling
participants to determine, through voice or image recognition, that a
participant is or is not a director entitled to participate in the meeting or
(ii) another communications device (such as a computer modem) is used in
conjunction with another method (determined in the discretion of the chairperson
of the meeting) enabling participants to determine that a participant is or is
not a director entitled to participate in the meeting. Such verification method
may include use of passwords or similar codes for gaining access to the meeting
or encryption and authentication technology approved in the discretion of the
chairperson.
<PAGE>
3.7 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice if
the time and place of such meetings are fixed by the Board of Directors.
3.8 SPECIAL MEETINGS; NOTICE
Subject to the provisions of the following paragraph, special meetings of
the Board of Directors for any purpose or purposes may be called at any time by
the Chairman of the Board, the President, any Vice President, the Secretary or
any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telegram, charges prepaid, or by telecopier, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
days before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telecopier or telegram, it shall be delivered
personally or by telephone or by telecopier or to the telegraph company at least
48 hours before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the office of the director who the person giving the notice has reason
to believe will promptly communicate it to the director. The notice need not
specify the purpose of the meeting.
3.9 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.11
of these Bylaws. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present is the act
of the Board of Directors, subject to the provisions of Section 310 of the Code
(as to approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of the Code (as to
appointment of committees), Section 317(e) of the Code (as to indemnification of
directors), the Articles of Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for such meeting.
3.10 WAIVER OF NOTICE
Notice of a meeting need not be given to any director who signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to such
director. All such waivers, consents, and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
Board of Directors.
3.11 ADJOURNMENT
A majority of the directors present, whether or not a quorum is present,
may adjourn any meeting to another time and place.
3.12 NOTICE OF ADJOURNMENT
If the meeting is adjourned for more than 24 hours, notice of any
adjournment to another time and place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
<PAGE>
Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting, if all members of the Board individually or
collectively consent in writing to such action. Such written consent or consents
shall be filed with the minutes of the proceedings of the Board. Such action by
written consent shall have the same force and effect as a unanimous vote of the
Board of Directors.
3.14 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Directors. This Section 3.14 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
If these Bylaws have been approved by the corporation's shareholders in
accordance with the Code, the corporation may, upon the approval of the Board of
Directors alone, make loans of money or property to, or guarantee the
obligations of, any officer of the corporation or of its parent, if any, whether
or not a director, or adopt an employee benefit plan or plans authorizing such
loans or guaranties provided that (i) the Board of Directors determines that
such a loan or guaranty or plan may reasonably be expected to benefit the
corporation, (ii) the corporation has outstanding shares held of record by 100
or more persons (determined as provided in Section 605 of the Code) on the date
of approval by the Board of Directors, and (iii) the approval of the Board of
Directors is by a vote sufficient without counting the vote of any interested
director or directors. Notwithstanding the foregoing, the corporation shall have
the power to make loans permitted by the Code.
ARTICLE IV.
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the Board. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent member at any meeting of the committee. The
appointment of members or alternate members of a committee requires the vote of
a majority of the authorized number of directors. Any such committee shall have
authority to act in the manner and to the extent provided in the resolution of
the Board and may have all the authority of the Board, except with respect to:
(a) The approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares.
(b) The filling of vacancies on the Board of Directors or in any
committee.
(c) The fixing of compensation of the directors for serving on the
Board or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of new
Bylaws.
(e) The amendment or repeal of any resolution of the Board of Directors
which by its express terms is not so amendable or repealable.
(f) A distribution to the shareholders of the corporation, except at a
rate, in a periodic amount or within a price range set forth in the Articles of
Incorporation or determined by the Board of Directors.
(g) The appointment of any other committees of the Board of Directors
or the members thereof.
4.2 MEETINGS AND ACTION OF COMMITTEES
<PAGE>
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.6 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special
meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice),
Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section
3.13 (action without meeting), with such changes in the context of those Bylaws
as are necessary to substitute the committee and its members for the Board of
Directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the Board of Directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the Board of Directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V.
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a President, a Secretary, and a
Chief Financial Officer. The corporation may also have, at the discretion of,
the Board of Directors, a Chairman of the Board, who shall act as Chief
Executive Officer, one or more Vice Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any
number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these Bylaws,
shall be chosen by the Board and serve at the pleasure of the Board, subject to
the rights, if any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The Board of Directors may appoint, or may empower the Chairman of the
Board or the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these Bylaws or as
the Board of Directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, all officers serve at the pleasure of the Board of Directors and any
officer may be removed, either with or without cause, by the Board of Directors
at any regular or special meeting of the Board or, except in case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to that office.
<PAGE>
5.6 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned by the Board
of Directors or as may be prescribed by these Bylaws. If there is no President,
then the Chairman of the Board shall also be the chief executive officer of the
corporation and shall have the powers and duties prescribed in Section 5.7 of
these Bylaws. Any person named to the office of Chief Executive Officer shall
assume the responsibilities of Chairman of the Board and the President shall be
subject to that officers supervisory powers.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the Board
of Directors to the Chairman of the Board, if there be such an officer, the
President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction, and control of the business and the officers of the corporation. The
President shall preside at all meetings of the shareholders and, in the absence
or nonexistence of a Chairman of the Board, at all meetings of the Board of
Directors. The President shall have the general powers and duties of management
usually vested in the office of President of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or these
Bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the President, the Vice Presidents, if
any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a Vice President designated by the Board of Directors, shall perform all
the duties of the President and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the Board of Directors, these Bylaws,
the President or the Chairman of the Board. 5.9 SECRETARY
The Secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of Directors, committees
of directors and shareholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board of Directors required to be given by law or by
these Bylaws. The Secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
<PAGE>
The Chief Financial Officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the Board of Directors. The Chief Financial Officer shall disburse
the funds of the corporation as may be ordered by the Board of Directors, shall
render to the President and directors, whenever they request it, an account of
all of his or her transactions as Chief Financial Officer and of the financial
condition of the corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or these Bylaws.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS
The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors against expenses (as defined in
Section 317(a) of the Code), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding (as defined
in Section 317(a) of the Code), arising by reason of the fact that such person
is or was a director of the corporation. For purposes of this Article VI, a
"director" of the corporation includes any person (i) who is or was a director
of the corporation, (ii) who is or was serving at the request of the corporation
as a director of another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees, officers, and agents
(other than directors) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an employee,
officer, or agent of the corporation. For purposes of this Article VI, an
"employee" or "officer" or "agent" of the corporation (other than a director)
includes any person (i) who is or was an employee, officer, or agent of the
corporation, (ii) who is or was serving at the request of the corporation as an
employee, officer, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee, officer, or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses and attorneys' fees incurred in defending any civil or criminal
action or proceeding for which indemnification is required pursuant to Section
6.1, or if otherwise authorized by the Board of Directors, shall be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to repay
such amount if it shall ultimately be determined that the indemnified party is
not entitled to be indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may been
entitled under any Bylaw, agreement, vote of shareholders or directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of the person.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of that person's status as such, whether or not the
corporation would have the power to indemnify that person against such liability
under the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:
(a) That it would be inconsistent with a provision of the Articles of
Incorporation, these Bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
6.7 RIGHT TO BRING SUIT
If a claim under this Article is not paid in full by the corporation
within 90 days after a written claim has been received by the corporation
(either because the claim is denied or because no determination is made), the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. The corporation shall be entitled to raise as a defense to any such
action that the claimant has not met the standards of conduct that make it
permissible under the Code for the corporation to indemnify the claimant for the
claim. Neither the failure of the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he or she has met the applicable
standard of conduct, if any, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel, or its
shareholders) that the claimant has not met the applicable standard of conduct,
shall be a defense to such action or create a presumption for the purposes of
such action that the claimant has not met the applicable standard of conduct.
6.8 INDEMNITY AGREEMENTS
The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the corporation, or any person who is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, or any person who was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation, providing for indemnification rights equivalent to or, if the Board
of Directors so determines and to the extent permitted by applicable law,
greater than, those provided for in this Article VI.
6.9 AMENDMENT, REPEAL OR MODIFICATION
<PAGE>
Any amendment, repeal or modification of any provision of this Article VI
shall not adversely affect any right or protection of a director or agent of the
corporation existing at the time of such amendment, repeal or modification.
ARTICLE VII.
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the Board of Directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent in the aggregate of the outstanding voting shares of the corporation or
who hold at least one percent of such voting shares and have filed a Schedule
14B with the United States Securities and Exchange Commission relating to the
election of directors, shall have an absolute right to do either or both of the
following (i) inspect and copy the record of shareholders' names, addresses, and
shareholdings during usual business hours upon five days' prior written demand
upon the corporation, or (ii) obtain from the transfer agent for the
corporation, upon written demand and upon the tender of such transfer agent's
usual charges for such list (the amount of which charges shall be stated to the
shareholder by the transfer agent upon request), a list of the shareholders'
names and addresses who are entitled to vote for the election of directors, and
their shareholdings, as of the most recent record date for which it has been
compiled or as of a date specified by the shareholder subsequent to the date of
demand. The list shall be made available on or before the later of five business
days after the demand is received or the date specified therein as the date as
of which the list is to be compiled.
The record of shareholders shall also be open to inspection and copying by
any shareholder or holder of a voting trust certificate at any time during usual
business hours upon written demand on the corporation, for a purpose reasonably
related to the holder's interests as a shareholder or holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California, the original or a copy of these Bylaws as amended
to date, which shall be open to inspection by the shareholders at all reasonable
times during office hours. If the principal executive office of the corporation
is outside the State of California and the corporation has no principal business
office in such state, then it shall, upon the written request of any
shareholder, furnish to such shareholder a copy of these Bylaws as amended to
date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders and the Board of Directors, and committees of the Board of
Directors shall be kept at such place or places as are designated by the Board
of Directors or, in absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form, and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form.
<PAGE>
The minutes and accounting books and records shall be open to inspection
upon the written demand on the corporation of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours, for
a purpose reasonably related to such holder's interests as a shareholder or as
the holder of a voting trust certificate. Such inspection by a shareholder or
holder of a voting trust certificate may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts. Such rights of inspection shall extend to the records of each
subsidiary corporation of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records, and documents of every kind and to inspect
the physical properties of the corporation and each of its subsidiary
corporations, domestic or foreign. Such inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The Board of Directors shall cause an annual report to be sent to the
shareholders not later than 120 days after the close of the fiscal year adopted
by the corporation. Such report shall be sent to the shareholders at least 15
(or, if sent by third-class mail, 35) days prior to the annual meeting of
shareholders to be held during the next fiscal year and in the manner specified
in Section 2.5 of these Bylaws for giving notice to shareholders of the
corporation.
The annual report shall contain a balance sheet as of the end of the
fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report thereon of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit from
the books and records of the corporation. The foregoing requirement of an annual
report shall be waived so long as the shares of the corporation are held by
fewer than 100 holders of record.
<PAGE>
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than 120 days after the close of such fiscal year, deliver or mail to the
person making the request, within 30 days thereafter, a copy of a balance sheet
as of the end of such fiscal year and an income statement and statement of
changes in financial position for such fiscal year.
A shareholder or shareholders holding at least five percent of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the current fiscal year ended more than 30
days prior to the date of the request and a balance sheet of the corporation as
of the end of that period. The statements shall be delivered or mailed to the
person making the request within 30 days thereafter. A copy of the statements
shall be kept on file in the principal office of the corporation for twelve
months and it shall be exhibited at all reasonable times to any shareholder
demanding an examination of the statements or a copy shall be mailed to the
shareholder. If the corporation has not sent to the shareholders its annual
report for the last fiscal year, the statements referred to in the first
paragraph of this Section 7.6 shall likewise be delivered or mailed to the
shareholder or shareholders within 30 days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any Vice President, the Chief
Financial Officer, the Secretary or Assistant Secretary of this corporation, or
any other person authorized by the Board of Directors or the President or a Vice
President, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII.
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than with
respect to notice or voting at a shareholders meeting or action by shareholders
by written consent without a meeting), the Board of Directors may fix, in
advance, a record date, which shall not be more than 60 days prior to any such
action. Only shareholders of record at the close of business on the record date
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or the Code.
If the Board of Directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto or
the 60th day prior to the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
<PAGE>
From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The Board of Directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The Board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the Chairman of the Board or
the Vice Chairman of the Board or the President or a Vice President and by the
Chief Financial Officer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be by facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation or its transfer agent or registrar and canceled
at the same time. The Board of Directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed (as evidenced by
a written affidavit or affirmation of such fact), authorize the issuance of
replacement certificates on such terms and conditions as the Board may require;
the Board may require indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
Bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX.
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
<PAGE>
New Bylaws may be adopted or these Bylaws may be amended or repealed by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the Articles of Incorporation of
the corporation set forth the number of authorized Directors of the corporation,
then the authorized number of Directors may be changed only by an amendment of
the Articles of Incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these Bylaws, Bylaws, other than a Bylaw or an amendment of a Bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a Bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the Board of Directors.
9.3 RECORD OF AMENDMENTS
Whenever an amendment or new Bylaw is adopted, it shall be copied in the
book of minutes with the original Bylaws. If any Bylaw is repealed, the fact of
repeal, with the date of the meeting at which the repeal was enacted or written
consent was filed, shall be stated in said book.
ARTICLE X
INTERPRETATION
10.1 INTERPRETATION
Reference in these Bylaws to any provision of the California Corporations
Code shall be deemed to include all amendments thereof.
<PAGE>
SECRETARY'S CERTIFICATE OF ADOPTION OF BYLAWS
OF
TRANSNATIONAL FINANCIAL CORPORATION
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Transnational
Financial Corporation, a California corporation.
2. That the foregoing Bylaws constitute the Bylaws of said corporation as
adopted by the Directors of said corporation by unanimous written consent on
_______________, 1998.
IN WITNESS WHEREOF, I have hereunto subscribed my name this _____ day of
____________, 1998.
---------------------------------------
Eugene Kristul
<PAGE>
BYLAWS OF
TRANSNATIONAL FINANCIAL CORPORATION
History of Actions Taken
Related to ByLaws
Date
Bylaws Adopted ----
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<PAGE>
ROBERT A. FORRESTER
1215 EXECUTIVE DRIVE WEST, SUITE 102
RICHARDSON, TX 75081
(972) 437-9898
June 8, 1998
Transnational Financial Corporation
301 Junipero Serra Blvd., Ste 270
San Francisco, CA 94127
Gentlemen:
I have acted as counsel to Transnational Financial Corporation, a California
corporation (the "Corporation"), in connection with the offering of 1,000,000
shares of the Corporation's Common Stock, without par value (the "Common
Stock"). Another 150,000 shares of Common Stock will be offered by the Kristul
Family LLC in the event the Underwriters' over allotment is exercised. In
addition, the underwriter is purchasing a warrant to acquire up to shares of
Common Stock at an exercise price of 120% of thepublic offering price of the
shares of Common Stock (the "Underwriters' Warrants").
I have participated in the preparation of the Registration Statement covering
the offering of Common Stock (the "Registration Statement") dated on or around
June 8, 1998, in connection with which this opinion is rendered. As to various
questions of fact material to my opinion, I have examined such certificates of
corporate or public officials, corporate documents and records and other
certificates, opinions and instruments and have made such other investigations
as I have deemed necessary in connection with the opinions hereinafter set
forth.
Based upon the foregoing and upon such investigation as I have deemed necessary,
I give you my opinion as follows:
1. The Corporation is duly organized and validly existing under
the laws of the State of California.
2. The Corporation has 10,000,000 authorized shares of Common
Stock of which 2,500,000 are outstanding. Said 2,500,000
shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable.
3. When the Registration Statement shall have been declared
effective by order of the Securities and Exchange Commission,
the Common Stock, the Underwriters' Warrants, and the Common
Stock to be issued upon exercise of the Underwriters' Warrants
have been issued and sold upon the terms and conditions set
forth in the Registration Statement, then
<PAGE>
Transnational Financial Corporation
June 8, 1998
Page 2
the Common Stock, the Underwriters' Warrants, and the Common
Stock to be issued upon exercise of the Underwriters' Warrants
will be validly authorized and legally issued, fully paid and
nonassessable.
I hereby consent (1) to be named in the Registration Statement or Statements,
and in the prospectus which constitutes a part thereof, as the attorney who will
pass upon legal matters in connection with the sale of the Common Stock, and (2)
the filing of this opinion as Exhibit 5 to any related Registration Statement.
Very truly yours,
Robert A. Forrester
RAF/sw
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the ____ day of
_______________, 1998, is entered into by and between Joseph Kristul
("Executive") and Transnational Financial Corporation, a California corporation
("Company"), and is effective as of the date hereof.
The Company desires to establish its right to the continued services of the
Executive, in the capacity described below, on the terms and conditions and
subject to the rights of termination hereinafter set forth, and the Executive is
willing to accept such employment on such terms and conditions.
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT BY THE COMPANY. The Company does hereby employ, engage and hire
the Executive as Chief Executive Officer of the Company, and the Executive does
hereby accept and agree to such hiring, engagement and employment. The
Executive's duties shall be such executive and managerial duties as the Board of
Directors of the Company or its subsidiaries shall from time to time prescribe
and as provided in the ByLaws of the Company. The terms of this Agreement shall
be subject to the personnel policies of the Company as determined by the Board
of Directors from time to time, except to the extent that any such policy would
have a material adverse effect on the rights of the Executive under the terms of
this Agreement. The Executive shall devote such time, energy and skill to the
performance of his duties for the Company and for the benefit of the Company as
may be necessary or required for the effective conduct and operation of the
Company's business. Furthermore, the Executive shall exercise due diligence and
care in the performance of his duties to the Company under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the
date of the closing of the initial public offering referred to above (the
"Effective Date") and shall continue through December 31, 1999; provided,
however, that on each December 31 commencing December 31, 1998 the Term of the
Agreement shall automatically be extended for one additional year unless, not
later than three months prior to any such December 31, either party shall have
given written notice to the other that it does not wish to extend the Term of
the Agreement.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay the Executive, and the
Executive agrees to accept from the Company, in payment for his services to the
Company beginning on the Effective Date, a base salary at the rate to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to change upon 30
days' notice and shall initially be set at $250,000. Base Salary is payable in
equal semimonthly installments or at such other time or times as the Executive
and Company agree.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The Executive
shall be eligible to receive an incentive performance bonus in accordance with
the Bonus Incentive Compensation Plan established by the Company. Except as
provided in Section 7, any such bonus awarded to the Executive shall be payable
in the amount, in the manner and at the time determined by the Compensation
Committee of the Company's Board of Directors in its sole and absolute
discretion. The Executive's initial bonus shall be set to equal 10% of the
Company's pretax operating profits but not to exceed $150,000 per year.
<PAGE>
(c) ANNUAL REVIEW. The Compensation Committee of the Company's Board
of Directors shall, at least annually, review the Executive's entire
compensation package to determine whether it continues to meet the Company's
compensation objectives. Such annual review will include a determination of (i)
whether to increase the Base Salary set forth in Section 3(a) and (ii) the
incentive performance bonus to be awarded in accordance with Section 3(b).
(d) Notwithstanding the foregoing, the Company shall pay any amounts
based upon the Executive's obligation for taxes as a result of the Company's
status as a subchapter S corporation.
4. FRINGE BENEFITS. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
(a) BENEFIT PLANS. The Executive shall be entitled to participate in
any benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
(b) VACATION. The Executive shall be entitled to the number of weeks
of paid vacation per calendar year as specified in the Company's employee manual
based on the time served as an employee of the Company, with such vacation to be
scheduled and taken in accordance with the Company's standard vacation policies.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive for any and
all necessary, customary and usual expenses, properly receipted in accordance
with Company policies, incurred by the Executive on behalf of the Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
(a) DEATH. If the Executive dies while employed by the Company, his
employment shall immediately terminate. The Company's obligation to pay the
Executive's Base Salary shall cease as of the date of Executive's death.
Thereafter, Executive's beneficiaries or his estate shall receive benefits in
accordance with the Company's retirement, insurance and other applicable
programs and plans then in effect.
(b) DISABILITY.
(i) If, as a result of the Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of his duties with the Company for six consecutive months,
and, within 30 days after written notice is provided to him by the Company, he
shall not have returned to the full-time performance of his duties, the
Executive's employment under this Agreement may be terminated by the Company for
Disability. During any period prior to such termination during which the
Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary at the rate in effect at the commencement of such period of
<PAGE>
Disability. Subsequent to such termination, the Executive's benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
the Executive's employment under this Agreement for "Cause," at any time prior
to expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence, recklessness or willful misconduct on
the part of the Executive in respect of his fiduciary obligations or otherwise
relating to the business of the Company, (ii) the Executive's material breach of
this Agreement, or (iii) the Executive's conviction or entry of a plea of nolo
contendre for fraud, misappropriation or embezzlement. In such a case, the
Executive's employment under this Agreement may be terminated immediately
without any advance written notice, and the Company's obligation to pay the
Executive's Base Salary, any bonus and fringe benefits will cease as of the
termination date.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive shall
have the right to terminate this Agreement for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence, without the Executive's
express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive or
the assignment of duties to the Executive not consistent with those of a senior
executive of the Company, except in connection with the Company's termination of
the Executive's employment for Cause pursuant to Section 6(c) or as otherwise
expressly contemplated herein;
(ii) The Company's material breach of any of the provisions of
this Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date; or a change in the
conditions of the Executive's employment (e.g., including, without limitation, a
failure by the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain incentive
compensation, in each case comparable to those available under benefits programs
in effect as of the Effective Date and at an appropriate level for the duties of
the officer, etc.);
(iii) The relocation of the Company's principal executive offices
to a location more than 25 miles from its location as of the Effective Date or
the Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for requiring travel on the
Company's business to an extent substantially consistent with the Executive's
duties hereunder; or
(iv) A change in control as defined in Section 8 below.
<PAGE>
The Executive agrees to provide the Company with 30 days' prior written notice
of any termination for Good Reason.
(e) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The Executive
may at any time during the Term of this Agreement terminate his employment
hereunder for any reason or no reason by giving the Company notice in writing
not less than 120 days in advance of such termination. Except as may be provided
in Section 9, the Executive shall have no further obligations to the Company
after the effective date of termination, as set forth in the notice.
Notwithstanding the foregoing, in the event any "person" (as defined in Section
8 below) begins a tender or exchange offer, circulates a proxy to shareholders
or takes other steps to effect a Change of Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change of Control or until a Change of Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded bonus unpaid as of the termination date. Fringe benefits which have
accrued and/or vested on the termination date will continue in effect according
to their terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, OR BY THE
EXECUTIVE FOR GOOD REASON. If the Executive's employment shall be terminated (i)
by the Company other than for Cause, or (ii) by the Executive for Good Reason,
the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall immediately pay
the Executive any portion of the Executive's Base Salary or previously awarded
Bonus not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an amount
(the "Severance Amount") equal to two times the Executive's combined Base Salary
and bonus compensation for the preceding fiscal year. The Severance Amount shall
be payable 50% within five 5 days after the termination date and the remaining
50% shall be payable in twelve equal consecutive monthly installments beginning
on the first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall take all
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately vested and exercisable by the
Executive, whether or not the right to exercise such stock options would
otherwise then be vested in the Executive. The provisions of this Section 7(c)
shall constitute an amendment to any existing stock option agreements of the
Company as of the Effective Date. All other stock options owned by the Executive
as of the termination date shall be exercisable in accordance with the Company's
stock option plan and the applicable stock option agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds full-time
employment or (ii) the expiration of 12 months. Notwithstanding the immediately
preceding sentence, if, as the result of termination of the Executive's
employment, the Executive and/or his otherwise eligible dependents or
beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds 200% of
the cost of providing such benefits to other members of senior management, the
<PAGE>
Company, at the Company's option, shall (i) continue to provide the Executive
and his eligible dependents or beneficiaries with benefits at a level at least
equivalent to the level of benefits for which the Executive and his dependents
and beneficiaries were eligible under such plans immediately prior to the
termination date or (ii) for any fringe benefit not so provided, the Company
shall pay the Executive 200% of the cost of providing such fringe benefit to
other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that the Executive becomes
entitled to the benefit payments provided under subparagraphs (a)-(d) of this
Section 7.A ("Benefit Payments"), and if any of the Benefit Payments will be
subject to any excise tax ("Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended from time to time, or successor
sections thereto, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Benefit Payments and any federal, state
and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to
the amount of the Benefit Payments. Upon the Executive's termination date, the
Company shall estimate and pay to the Executive the Gross-Up Payment. In the
event that the Excise Tax is subsequently determined to be less than the amount
estimated at the termination date, the Executive shall repay to the Company, at
the time that the amount of such reduction in Excise Tax is finally determined,
the difference plus interest on the amount of such repayment at 10% per annum.
In the event that the Excise Tax is determined to exceed the amount estimated at
the termination date, the Company shall make an additional Gross-Up Payment in
respect of such excess at the time that the amount of such excess is finally
determined, plus interest at 10% per annum. The Executive and the Company shall
each reasonably cooperate with the other in connection with any administrative
or judicial proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Benefit Payments.
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS
AGREEMENT. The Executive shall not be required in any way to mitigate the amount
of any payment provided for in this Section 7, including, but not limited to, by
seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as a
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred
if the conditions set forth in any one of the following paragraphs shall have
been satisfied.
(a) Any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (other than the
Company; any trustee or other fiduciary holding securities under an Executive
benefit plan of the Company; or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 25% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors and any new director
(other than a director designated by a person who has entered into an agreement
<PAGE>
with the Company to effect a transaction described in clause (a), (c) or (d) of
this section), (i) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved or (ii) whose election is to replace a person who ceases
to be a director due to death, disability or age, cease for any reason to
constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation
of the Company with other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an Executive benefit plan of the Company, at least 75%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50% of
the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR REASON. If the
Executive resigns his employment with the Company alleging in-good faith as the
basis for such resignation any of the "Good Reasons" specified in Section 6(d),
and if the Company then disputes the Executive's right to the payment of
benefits under Section 7, the Company shall continue to pay the Executive the
full compensation (including, but not limited to, his Base Salary) in effect at
the date the Executive provided notice of such resignation, and the Company
shall continue the Executive as a participant in al compensation, benefit and
insurance plans in which the Executive was then a participant, until the earlier
of the expiration of the Term of the Agreement or the date the dispute is
finally resolved, either by jurisdiction which is not appealable or with respect
to which the time for appeal has expired and no appeal has been perfected. For
the purposes of this Section, the Company shall bear the burden of proving that
the grounds for the Executive's resignation do not fall within the scope of
Section 6(d), and there shall be a rebuttable presumption that the Executive
alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
(a) NONCOMPETITION. The Executive agrees that during the Term of this
Agreement prior to any termination of his employment hereunder and for a period
of twelve months following the occurrence of any event entitling the Executive
to Benefit Payments according to the provisions of Section 7 and in
consideration therefor, provided the Company makes all such payments when due,
he will not directly or indirectly, without the prior written consent of the
Company, manage, operate, join, control, participate in, or be connected as a
stockholder (other than as a holder of shares publicly traded on a stock
exchange or the Nasdaq National Market), partner, or other equity holder with,
or as an officer, director or employee of, any other real estate lender whose
business strategy is competitive with that of the Company, as determined by a
majority of the Company's independent directors ("Competing Business"). It is
further expressly agreed that the Company will or would suffer irreparable
injury if the Executive were to compete with the Company or any subsidiary or
affiliate of the Company in violation of this Agreement and that the Company
would by reason of such competition be entitled to injunctive relief in a court
of appropriate jurisdiction, and the Executive further consents and stipulates
to the entry of such injunctive relief in such a court prohibiting the Executive
from competing with the Company or any subsidiary or affiliate of the Company,
in the areas of business set forth above, in violation of this Agreement.
<PAGE>
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all styles,
designs, lists, materials, books, files, reports, correspondence, records and
other documents ("Company Materials") used, prepared or made available to the
Executive, shall be and shall remain the property of the Company. Upon the
termination of employment or the expiration of this Agreement, all Company
Materials shall be returned immediately to the Company, and the Executive shall
not make or retain any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees that
during the noncompetition period defined in paragraph (a) he will not directly
or indirectly solicit any of the Company executives or employees to work for any
Competing Business.
11. NOTICES. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three days after mailing or 24 hours after transmission of a fax to the
respective persons named below:
If to Company: Transnational Financial Corporation
Attn.: Board of Directors
301 Junipero Sera Blvd.
San Francisco, CA 94125
Phone: (415) 334-7000
Fax: (415) 334-0255
If to Executive: Joseph Kristul
San Francisco, CA 94XXX
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of California.
<PAGE>
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by California Law and the Bylaws of the Company.
20. COUNTERPARTS. This Agreement may be executed in counterparts.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer, and the Executive has hereunto signed this Agreement,
as of the date first above written.
TRANSNATIONAL FINANCIAL CORPORATION,
a California corporation
By____________________________________
---------------------------------------
JOSEPH KRISTUL
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the ____ day of
_______________, 1998, is entered into by and between Maria Kristul
("Executive") and Transnational Financial Corporation, a California corporation
("Company"), and is effective as of the date hereof and rescinds and supercedes
any previous agreement between the Executive and the Company.
The Company desires to establish its right to the continued services of the
Executive, in the capacity described below, on the terms and conditions and
subject to the rights of termination hereinafter set forth, and the Executive is
willing to accept such employment on such terms and conditions.
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT BY THE COMPANY. The Company does hereby employ, engage and hire
the Executive as Executive Vice President, Operations, and the Executive does
hereby accept and agree to such hiring, engagement and employment. The
Executive's duties shall be such executive and managerial duties as the Board of
Directors of the Company or its subsidiaries shall from time to time prescribe
and as provided in the ByLaws of the Company. The terms of this Agreement shall
be subject to the personnel policies of the Company as determined by the Board
of Directors from time to time, except to the extent that any such policy would
have a material adverse effect on the rights of the Executive under the terms of
this Agreement. The Executive shall devote such time, energy and skill to the
performance of her duties for the Company and for the benefit of the Company as
may be necessary or required for the effective conduct and operation of the
Company's business. Furthermore, the Executive shall exercise due diligence and
care in the performance of her duties to the Company under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the
date of the closing of the initial public offering referred to above (the
"Effective Date") and shall continue through December 31, 1999; provided,
however, that on each December 31 commencing December 31, 1998 the Term of the
Agreement shall automatically be extended for one additional year unless, not
later than three months prior to any such December 31, either party shall have
given written notice to the other that it does not wish to extend the Term of
the Agreement.
3. COMPENSATION.
(a) BASE SALARY. Beginning May 1, 1998, the Company shall pay the
Executive, and the Executive agrees to accept from the Company, in payment for
her services to the Company beginning on the Effective Date, a base salary at
the rate to be determined by the Compensation Committee of the Board of
Directors and provided to the Executive in writing ("Base Salary"),which is
subject to change upon 30 days' notice and shall initially be set at $150,000
per year. Base Salary is payable in equal semimonthly installments or at such
other time or times as the Executive and Company agree.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The Executive
shall be eligible to receive an incentive performance bonus in accordance with
the Bonus Incentive Compensation Plan established by the Company. Except as
provided in Section 7, any such bonus awarded to the Executive shall be payable
in the amount, in the manner and at the time determined by the Compensation
Committee of the Company's Board of Directors in its sole and absolute
discretion. The Executive's initial bonus shall be set to sixty basis points of
the mortgage loans originated by her plus ten basis points of the mortgage loans
originated by the retail division of the Company to the extent that such amount
exceeds the Executive's Base Salary.
<PAGE>
(c) ANNUAL REVIEW. The Compensation Committee of the Company's Board
of Directors shall, at least annually, review the Executive's entire
compensation package to determine whether it continues to meet the Company's
compensation objectives. Such annual review will include a determination of (i)
whether to increase the Base Salary set forth in Section 3(a) and (ii) the
incentive performance bonus to be awarded in accordance with Section 3(b).
(d) Notwithstanding the foregoing, the Company shall pay any amounts
based upon the Executive's obligation for taxes as a result of the Company's
status as a subchapter S corporation.
4. FRINGE BENEFITS. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
(a) BENEFIT PLANS. The Executive shall be entitled to participate in
any benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
(b) VACATION. The Executive shall be entitled to the number of weeks
of paid vacation per calendar year as specified in the Company's employee manual
based on the time served as an employee of the Company, with such vacation to be
scheduled and taken in accordance with the Company's standard vacation policies.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive for any and
all necessary, customary and usual expenses, properly receipted in accordance
with Company policies, incurred by the Executive on behalf of the Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
(a) DEATH. If the Executive dies while employed by the Company, her
employment shall immediately terminate. The Company's obligation to pay the
Executive's Base Salary shall cease as of the date of Executive's death.
Thereafter, Executive's beneficiaries or her estate shall receive benefits in
accordance with the Company's retirement, insurance and other applicable
programs and plans then in effect.
(b) DISABILITY.
(i) If, as a result of the Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of her duties with the Company for six consecutive months,
and, within 30 days after written notice is provided to her by the Company, she
shall not have returned to the full-time performance of her duties, the
Executive's employment under this Agreement may be terminated by the Company for
Disability. During any period prior to such termination during which the
Executive is absent from the full-time performance of her duties with the
Company due to Disability, the Company shall continue to pay the Executive her
Base Salary at the rate in effect at the commencement of such period of
<PAGE>
Disability. Subsequent to such termination, the Executive's benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from her duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying her job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
the Executive's employment under this Agreement for "Cause," at any time prior
to expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence, recklessness or willful misconduct on
the part of the Executive in respect of her fiduciary obligations or otherwise
relating to the business of the Company, (ii) the Executive's material breach of
this Agreement, or (iii) the Executive's conviction or entry of a plea of nolo
contendre for fraud, misappropriation or embezzlement. In such a case, the
Executive's employment under this Agreement may be terminated immediately
without any advance written notice, and the Company's obligation to pay the
Executive's Base Salary, any bonus and fringe benefits will cease as of the
termination date.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive shall
have the right to terminate this Agreement for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence, without the Executive's
express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive or the assignment
of duties to the Executive not consistent with those of a senior executive of
the Company, except in connection with the Company's termination of the
Executive's employment for Cause pursuant to Section 6(c) or as otherwise
expressly contemplated herein;
(ii) The Company's material breach of any of the provisions of
this Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date; or a change in the
conditions of the Executive's employment (e.g., including, without limitation, a
failure by the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain incentive
compensation, in each case comparable to those available under benefits programs
in effect as of the Effective Date and at an appropriate level for the duties of
the officer, etc.);
(iii) The relocation of the Company's principal executive offices
to a location more than 25 miles from its location as of the Effective Date or
the Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for requiring travel on the
Company's business to an extent substantially consistent with the Executive's
duties hereunder; or
(iv) A change in control as defined in Section 8 below.
<PAGE>
The Executive agrees to provide the Company with 30 days' prior written notice
of any termination for Good Reason.
(e) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The Executive
may at any time during the Term of this Agreement terminate her employment
hereunder for any reason or no reason by giving the Company notice in writing
not less than 120 days in advance of such termination. Except as may be provided
in Section 9, the Executive shall have no further obligations to the Company
after the effective date of termination, as set forth in the notice.
Notwithstanding the foregoing, in the event any "person" (as defined in Section
8 below) begins a tender or exchange offer, circulates a proxy to shareholders
or takes other steps to effect a Change of Control, the Executive agrees that
she will not voluntarily leave the employ of the Company, and will render
services to the Company commensurate with her position, until such "person" has
abandoned or terminated efforts to effect a Change of Control or until a Change
of Control has occurred. In the event of a termination by the Executive under
this paragraph, the Company will pay only the portion of Base Salary or
previously awarded bonus unpaid as of the termination date. Fringe benefits
which have accrued and/or vested on the termination date will continue in effect
according to their terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, OR BY THE
EXECUTIVE FOR GOOD REASON. If the Executive's employment shall be terminated (i)
by the Company other than for Cause, or (ii) by the Executive for Good Reason,
the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall immediately pay the
Executive any portion of the Executive's Base Salary or previously awarded Bonus
not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an amount
(the "Severance Amount") equal to two times the Executive's combined Base Salary
and bonus compensation for the preceding fiscal year. The Severance Amount shall
be payable 50% within five days after the termination date and the remaining 50%
shall be payable in twelve equal consecutive monthly installments beginning on
the first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall take all
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately vested and exercisable by the
Executive, whether or not the right to exercise such stock options would
otherwise then be vested in the Executive. The provisions of this Section 7(c)
shall constitute an amendment to any existing stock option agreements of the
Company as of the Effective Date. All other stock options owned by the Executive
as of the termination date shall be exercisable in accordance with the Company's
stock option plan and the applicable stock option agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds full-time
employment or (ii) the expiration of twelve months. Notwithstanding the
immediately preceding sentence, if, as the result of termination of the
Executive's employment, the Executive and/or her otherwise eligible dependents
or beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds 200% of
the cost of providing such benefits to other members of senior management, the
Company, at the Company's option, shall (i) continue to provide the Executive
<PAGE>
and her eligible dependents or beneficiaries with benefits at a level at least
equivalent to the level of benefits for which the Executive and her dependents
and beneficiaries were eligible under such plans immediately prior to the
termination date or (ii) for any fringe benefit not so provided, the Company
shall pay the Executive 200% of the cost of providing such fringe benefit to
other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that the Executive becomes
entitled to the benefit payments provided under subparagraphs (a)-(d) of this
Section 7.A ("Benefit Payments"), and if any of the Benefit Payments will be
subject to any excise tax ("Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended from time to time, or successor
sections thereto, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Benefit Payments and any federal, state
and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to
the amount of the Benefit Payments. Upon the Executive's termination date, the
Company shall estimate and pay to the Executive the Gross-Up Payment. In the
event that the Excise Tax is subsequently determined to be less than the amount
estimated at the termination date, the Executive shall repay to the Company, at
the time that the amount of such reduction in Excise Tax is finally determined,
the difference plus interest on the amount of such repayment at 10% per annum.
In the event that the Excise Tax is determined to exceed the amount estimated at
the termination date, the Company shall make an additional Gross-Up Payment in
respect of such excess at the time that the amount of such excess is finally
determined, plus interest at 10% per annum. The Executive and the Company shall
each reasonably cooperate with the other in connection with any administrative
or judicial proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Benefit Payments.
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS UNDER
AGREEMENT. The Executive shall not be required in any way to mitigate the amount
of any payment provided for in this Section 7, including, but not limited to, by
seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as a
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred
if the conditions set forth in any one of the following paragraphs shall have
been satisfied.
(a) Any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (other than the
Company; any trustee or other fiduciary holding securities under an Executive
benefit plan of the Company; or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 25% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors and any new director
<PAGE>
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (a), (c) or (d) of
this section), (i) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved or (ii) whose election is to replace a person who ceases
to be a director due to death, disability or age, cease for any reason to
constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation
of the Company with other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an Executive benefit plan of the Company, at least 75%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50% of
the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR GOOD REASON. If
the Executive resigns her employment with the Company alleging in good faith as
the basis for such resignation any of the "Good Reasons" specified in Section
6(d), and if the Company then disputes the Executive's right to the payment of
benefits under Section 7, the Company shall continue to pay the Executive the
full compensation (including, but not limited to, her Base Salary) in effect at
the date the Executive provided notice of such resignation, and the Company
shall continue the Executive as a participant in al compensation, benefit and
insurance plans in which the Executive was then a participant, until the earlier
of the expiration of the Term of the Agreement or the date the dispute is
finally resolved, either by jurisdiction which is not appealable or with respect
to which the time for appeal has expired and no appeal has been perfected. For
the purposes of this Section, the Company shall bear the burden of proving that
the grounds for the Executive's resignation do not fall within the scope of
Section 6(d), and there shall be a rebuttable presumption that the Executive
alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
(a) NONCOMPETITION. The Executive agrees that during the Term of this
Agreement prior to any termination of her employment hereunder and for a period
of twelve months following the occurrence of any event entitling the Executive
to Benefit Payments according to the provisions of Section 7 and in
consideration therefor, provided the Company makes all such payments when due,
she will not directly or indirectly, without the prior written consent of the
Company, manage, operate, join, control, participate in, or be connected as a
stockholder (other than as a holder of shares publicly traded on a stock
exchange or the Nasdaq National Market), partner, or other equity holder with,
or as an officer, director or employee of, any other real estate lender whose
business strategy is competitive with that of the Company, as determined by a
majority of the Company's independent directors ("Competing Business"). It is
further expressly agreed that the Company will or would suffer irreparable
injury if the Executive were to compete with the Company or any subsidiary or
affiliate of the Company in violation of this Agreement and that the Company
would by reason of such competition be entitled to injunctive relief in a court
of appropriate jurisdiction, and the Executive further consents and stipulates
to the entry of such injunctive relief in such a court prohibiting the Executive
from competing with the Company or any subsidiary or affiliate of the Company,
in the areas of business set forth above, in violation of this Agreement.
<PAGE>
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all styles,
designs, lists, materials, books, files, reports, correspondence, records and
other documents ("Company Materials") used, prepared or made available to the
Executive, shall be and shall remain the property of the Company. Upon the
termination of employment or the expiration of this Agreement, all Company
Materials shall be returned immediately to the Company, and the Executive shall
not make or retain any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees that
during the noncompetition period defined in paragraph (a) she will not directly
or indirectly solicit any of the Company executives or employees to work for any
Competing Business.
11. NOTICES. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three days after mailing or 24 hours after transmission of a fax to the
respective persons named below:
If to Company: Transnational Financial Corporation
Attn.: Board of Directors
301 Junipero Serra Blvd.
San Francisco, CA 94125
Phone: (415) 334-7000
Fax: (415) 334-0255
If to Executive: Maria Kristul
San Francisco, CA 95XXX
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of California.
<PAGE>
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by California Law and the Bylaws of the Company.
20. COUNTERPARTS. This Agreement may be executed in counterparts.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer, and the Executive has hereunto signed this Agreement,
as of the date first above written.
TRANSNATIONAL FINANCIAL CORPORATION,
a California corporation
By_____________________________________
---------------------------------------
MARIA KRISTUL
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the ____ day of
_______________, 1998, is entered into by and between Robert W. Bronson
("Executive") and Transnational Financial Corporation, a California corporation
("Company"), and is effective as of the date hereof.
The Company desires to establish its right to the continued services of the
Executive, in the capacity described below, on the terms and conditions and
subject to the rights of termination hereinafter set forth, and the Executive is
willing to accept such employment on such terms and conditions.
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT BY THE COMPANY. The Company does hereby employ, engage and hire
the Executive as Senior Vice President - Director of Secondary Marketing of the
Company, and the Executive does hereby accept and agree to such hiring,
engagement and employment. The Executive's duties shall be such executive and
managerial duties as the Board of Directors of the Company or its subsidiaries
shall from time to time prescribe and as provided in the ByLaws of the Company.
The terms of this Agreement shall be subject to the personnel policies of the
Company as determined by the Board of Directors from time to time, except to the
extent that any such policy would have a material adverse effect on the rights
of the Executive under the terms of this Agreement. The Executive shall devote
such time, energy and skill to the performance of his duties for the Company and
for the benefit of the Company as may be necessary or required for the effective
conduct and operation of the Company's business. Furthermore, the Executive
shall exercise due diligence and care in the performance of his duties to the
Company under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the
date hereof (the "Effective Date") and shall continue through March 31, 1999;
provided, however, that on each March 31 commencing March 31, 1999 the Term of
the Agreement shall automatically be extended for one additional year unless,
not later than three months prior to any such March 31, either party shall have
given written notice to the other that it does not wish to extend the Term of
the Agreement.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay the Executive, and the
Executive agrees to accept from the Company, in payment for his services to the
Company beginning on the Effective Date, a base salary at the rate to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to change at the
end of the Term or with the express written consent of the Executive and shall
initially be set at $100,000. Base Salary is payable in equal semimonthly
installments or at such other time or times as the Executive and Company agree.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The Executive
shall be paid an incentive performance bonus equal to $50,000 provided that the
Company shall receive trading profits from hedging activities plus additional
profits due to increased margins on the sale of mortgages to investors
aggregating $1,000,000, before taxes. Increased margins on the sale of mortgages
to investors shall mean (i) the average margin of sales of mortgages to
investors, excluding repurchase agreements, commencing with the first day of
employment of the Executive minus the average margin of sales of mortgages for
the ninety day period prior to the date of this agreement multiplied by (ii) the
total volume of mortgages sold to investors by the Company commencing the date
of Executive's employment.
(c) ANNUAL REVIEW. The Compensation Committee of the Company's Board
of Directors shall, at least annually, review the Executive's entire
compensation package to determine whether it continues to meet the Company's
<PAGE>
compensation objectives. Such annual review will include a determination of (i)
whether to increase the Base Salary set forth in Section 3(a) and (ii) the
incentive performance bonus to be awarded in accordance with Section 3(b).
(d) SIGNING BONUS. Executive shall be paid, 90 days from the date of
this agreement, a bonus of $5,000.
(e) STOCK OPTIONS. The Company shall grant to Executive options to
acquire 15,000 shares of stock at the Company's initial public offering price
pursuant to the Company's Incentive Stock Option Plan.
4. FRINGE BENEFITS. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
(a) BENEFIT PLANS. The Executive shall be entitled to participate in
any benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
(b) VACATION. The Executive shall be entitled to the number of weeks
of paid vacation per calendar year as specified in the Company's employee manual
based on the time served as an employee of the Company, with such vacation to be
scheduled and taken in accordance with the Company's standard vacation policies.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive for any and
all necessary, customary and usual expenses, properly receipted in accordance
with Company policies, incurred by the Executive on behalf of the Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
(a) DEATH. If the Executive dies while employed by the Company, his
employment shall be entitled to receive the Executive's Base Salary, fringe
benefits and other earned bonus compensation until the end of the Term of this
Agreement. The Company's obligation to pay the Executive's Base Salary shall
cease as of the date of Executive's death. Thereafter, Executive's beneficiaries
or his estate shall receive benefits in accordance with the Company's
retirement, insurance and other applicable programs and plans then in effect.
(b) DISABILITY.
(i) If, as a result of the Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of his duties with the Company for six consecutive months,
and, within 30 days after written notice is provided to him by the Company, he
shall not have returned to the full-time performance of his duties, the
Executive shall be entitled to receive the Executive's Base Salary, fringe
benefits and earned bonus compensation until the end of the Term of this
Agreement. During any period prior to such termination during which the
Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary and fringe benefits. Subsequent to the Term of this Agreement, the
Executive's benefits shall be determined under the Company's retirement,
insurance and other compensation programs then in effect in accordance with the
terms of such programs.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
<PAGE>
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, without any adjustment in compensation prior to the end of the
Term of this Agreement.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
the Executive's employment under this Agreement for "Cause," at any time prior
to expiration of the Term of the Agreement, only in the event of the Executive's
conviction or entry of a plea of nolo contendre for fraud, misappropriation or
embezzlement. In such a case, the Executive's employment under this Agreement
may be terminated immediately without any advance written notice, and the
Company's obligation to pay the Executive's Base Salary, any bonus and fringe
benefits will cease as of the termination date.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive shall
have the right to terminate this Agreement for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence, without the Executive's
express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive or
the assignment of duties to the Executive not consistent with those of a senior
executive of the Company, except in connection with the Company's termination of
the Executive's employment for Cause pursuant to Section 6(c) or as otherwise
expressly contemplated herein;
(ii) The Company's material breach of any of the provisions of
this Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date; or a change in the
conditions of the Executive's employment (e.g., including, without limitation, a
failure by the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain incentive
compensation, in each case comparable to those available under benefits programs
in effect as of the Effective Date and at an appropriate level for the duties of
the officer, etc.);
(iii) The relocation of the Company's principal executive offices
to a location more than 25 miles from its location as of the Effective Date or
the Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for requiring travel on the
Company's business to an extent substantially consistent with the Executive's
duties hereunder; or
(iv) A change in control as defined in Section 8 below.
The Executive agrees to provide the Company with 30 days' prior written notice
of any termination for Good Reason.
(e) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The Executive
may at any time during the Term of this Agreement terminate his employment
hereunder for any reason or no reason by giving the Company notice in writing
not less than 120 days in advance of such termination. Except as may be provided
in Section 9, the Executive shall have no further obligations to the Company
after the effective date of termination, as set forth in the notice.
Notwithstanding the foregoing, in the event any "person" (as defined in Section
8 below) begins a tender or exchange offer, circulates a proxy to shareholders
or takes other steps to effect a Change of Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change of Control or until a Change of Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded bonus unpaid as of the termination date. Fringe benefits which have
accrued and/or vested on the termination date will continue in effect according
to their terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, OR BY THE
EXECUTIVE FOR GOOD REASON. If the Executive's employment shall be terminated (i)
<PAGE>
by the Company other than for Cause, or (ii) by the Executive for Good Reason,
the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall immediately pay
the Executive any portion of the Executive's Base Salary or previously awarded
Bonus not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an amount
(the "Severance Amount") equal to two times the Executive's combined Base Salary
and bonus compensation for the preceding fiscal year. The Severance Amount shall
be payable 50% within five 5 days after the termination date and the remaining
50% shall be payable in twelve equal consecutive monthly installments beginning
on the first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall take all
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately vested and exercisable by the
Executive, whether or not the right to exercise such stock options would
otherwise then be vested in the Executive. The provisions of this Section 7(c)
shall constitute an amendment to any existing stock option agreements of the
Company as of the Effective Date. All other stock options owned by the Executive
as of the termination date shall be exercisable in accordance with the Company's
stock option plan and the applicable stock option agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds full-time
employment or (ii) the expiration of 12 months. Notwithstanding the immediately
preceding sentence, if, as the result of termination of the Executive's
employment, the Executive and/or his otherwise eligible dependents or
beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds 200% of
the cost of providing such benefits to other members of senior management, the
Company, at the Company's option, shall (i) continue to provide the Executive
and his eligible dependents or beneficiaries with benefits at a level at least
equivalent to the level of benefits for which the Executive and his dependents
and beneficiaries were eligible under such plans immediately prior to the
termination date or (ii) for any fringe benefit not so provided, the Company
shall pay the Executive 200% of the cost of providing such fringe benefit to
other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that the Executive becomes
entitled to the benefit payments provided under subparagraphs (a)-(d) of this
Section 7.A ("Benefit Payments"), and if any of the Benefit Payments will be
subject to any excise tax ("Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended from time to time, or successor
sections thereto, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Benefit Payments and any federal, state
and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to
the amount of the Benefit Payments. Upon the Executive's termination date, the
Company shall estimate and pay to the Executive the Gross-Up Payment. In the
event that the Excise Tax is subsequently determined to be less than the amount
estimated at the termination date, the Executive shall repay to the Company, at
the time that the amount of such reduction in Excise Tax is finally determined,
the difference plus interest on the amount of such repayment at 10% per annum.
In the event that the Excise Tax is determined to exceed the amount estimated at
the termination date, the Company shall make an additional Gross-Up Payment in
respect of such excess at the time that the amount of such excess is finally
determined, plus interest at 10% per annum. The Executive and the Company shall
each reasonably cooperate with the other in connection with any administrative
or judicial proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Benefit Payments.
<PAGE>
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS
AGREEMENT. The Executive shall not be required in any way to mitigate the amount
of any payment provided for in this Section 7, including, but not limited to, by
seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as a
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred
if the conditions set forth in any one of the following paragraphs shall have
been satisfied.
(a) Any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (other than the
Company; any trustee or other fiduciary holding securities under an Executive
benefit plan of the Company; or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 25% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (a), (c) or (d) of
this section), (i) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved or (ii) whose election is to replace a person who ceases
to be a director due to death, disability or age, cease for any reason to
constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation
of the Company with other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an Executive benefit plan of the Company, at least 75%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50% of
the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR REASON. If the
Executive resigns his employment with the Company alleging in-good faith as the
basis for such resignation any of the "Good Reasons" specified in Section 6(d),
and if the Company then disputes the Executive's right to the payment of
benefits under Section 7, the Company shall continue to pay the Executive the
full compensation (including, but not limited to, his Base Salary) in effect at
the date the Executive provided notice of such resignation, and the Company
shall continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was then a participant, until the earlier
of the expiration of the Term of the Agreement or the date the dispute is
<PAGE>
finally resolved, either by jurisdiction which is not appealable or with respect
to which the time for appeal has expired and no appeal has been perfected. For
the purposes of this Section, the Company shall bear the burden of proving that
the grounds for the Executive's resignation do not fall within the scope of
Section 6(d), and there shall be a rebuttable presumption that the Executive
alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
(a) NONCOMPETITION. The Executive agrees that during the Term of this
Agreement prior to any termination of his employment hereunder he will not
directly or indirectly, without the prior written consent of the Company,
manage, operate, join, control, participate in, or be connected as a stockholder
(other than as a holder of shares publicly traded on a stock exchange or the
Nasdaq National Market), partner, or other equity holder with, or as an officer,
director or employee of, any other real estate lender whose business strategy is
competitive with that of the Company, as determined by a majority of the
Company's independent directors ("Competing Business"). It is further expressly
agreed that the Company will or would suffer irreparable injury if the Executive
were to compete with the Company or any subsidiary or affiliate of the Company
in violation of this Agreement and that the Company would by reason of such
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and the Executive further consents and stipulates to the entry of
such injunctive relief in such a court prohibiting the Executive from competing
with the Company or any subsidiary or affiliate of the Company, in the areas of
business set forth above, in violation of this Agreement.
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all styles,
designs, lists, materials, books, files, reports, correspondence, records and
other documents ("Company Materials") used, prepared or made available to the
Executive, shall be and shall remain the property of the Company. Upon the
termination of employment or the expiration of this Agreement, all Company
Materials shall be returned immediately to the Company, and the Executive shall
not make or retain any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees that
during the noncompetition period defined in paragraph (a) he will not directly
or indirectly solicit any of the Company executives or employees to work for any
Competing Business.
11. NOTICES. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three days after mailing or 24 hours after transmission of a fax to the
respective persons named below:
If to Company: Transnational Financial Corporation
Attn.: Board of Directors
301 Junipero Sera Blvd.
San Francisco, CA 94125
Phone: (415) 334-7000
Fax: (415) 334-0255
If to Executive: Robert W. Bronson
P.O. Box 1583
Ross, California 94957
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
<PAGE>
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of California.
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by California Law and the Bylaws of the Company.
20. COUNTERPARTS. This Agreement may be executed in counterparts.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer, and the Executive has hereunto signed this Agreement,
as of the date first above written.
TRANSNATIONAL FINANCIAL CORPORATION,
a California corporation
By____________________________________
---------------------------------------
Robert W. Bronson
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the ____ day of
_______________, 1998, is entered into by and between Matt Heidari ("Executive")
and Transnational Financial Corporation, a California corporation ("Company"),
and is effective as of the date hereof.
The Company desires to establish its right to the continued services of the
Executive, in the capacity described below, on the terms and conditions and
subject to the rights of termination hereinafter set forth, and the Executive is
willing to accept such employment on such terms and conditions.
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT BY THE COMPANY. The Company does hereby employ, engage and hire
the Executive as Chief Financial Officer of the Company, and the Executive does
hereby accept and agree to such hiring, engagement and employment. The
Executive's duties shall be such executive and managerial duties as the Board of
Directors of the Company or its subsidiaries shall from time to time prescribe
and as provided in the ByLaws of the Company. The terms of this Agreement shall
be subject to the personnel policies of the Company as determined by the Board
of Directors from time to time, except to the extent that any such policy would
have a material adverse effect on the rights of the Executive under the terms of
this Agreement. The Executive shall devote such time, energy and skill to the
performance of his duties for the Company and for the benefit of the Company as
may be necessary or required for the effective conduct and operation of the
Company's business. Furthermore, the Executive shall exercise due diligence and
care in the performance of his duties to the Company under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the
date of the closing of the initial public offering referred to above (the
"Effective Date") and shall continue through December 31, 1999; provided,
however, that on each December 31 commencing December 31, 1998 the Term of the
Agreement shall automatically be extended for one additional year unless, not
later than three months prior to any such December 31, either party shall have
given written notice to the other that it does not wish to extend the Term of
the Agreement.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay the Executive, and the
Executive agrees to accept from the Company, in payment for his services to the
Company beginning on the Effective Date, a base salary at the rate to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to change upon 30
days' notice and shall initially be set at $92,000 plus $6,000 in travel
reimbursement. Base Salary is payable in equal semimonthly installments or at
such other time or times as the Executive and Company agree.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The Executive
shall be eligible to receive an incentive performance bonus in accordance with
the Bonus Incentive Compensation Plan established by the Company. Except as
provided in Section 7, any such bonus awarded to the Executive shall be payable
in the amount, in the manner and at the time determined by the Compensation
Committee of the Company's Board of Directors in its sole and absolute
discretion.
(c) ANNUAL REVIEW. The Compensation Committee of the Company's Board
of Directors shall, at least annually, review the Executive's entire
compensation package to determine whether it continues to meet the Company's
compensation objectives. Such annual review will include a determination of (i)
whether to increase the Base Salary set forth in Section 3(a) and (ii) the
incentive performance bonus to be awarded in accordance with Section 3(b).
<PAGE>
(d) STOCK OPTIONS. The Company shall grant to Executive options to
acquire 15,000 shares of stock at the Company's initial public offering price
pursuant to the Company's Incentive Stock Option Plan.
4. FRINGE BENEFITS. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
(a) BENEFIT PLANS. The Executive shall be entitled to participate in
any benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
(b) VACATION. The Executive shall be entitled to the number of weeks
of paid vacation per calendar year as specified in the Company's employee manual
based on the time served as an employee of the Company, with such vacation to be
scheduled and taken in accordance with the Company's standard vacation policies.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive for any and
all necessary, customary and usual expenses, properly receipted in accordance
with Company policies, incurred by the Executive on behalf of the Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
(a) DEATH. If the Executive dies while employed by the Company, his
employment shall immediately terminate. The Company's obligation to pay the
Executive's Base Salary shall cease as of the date of Executive's death.
Thereafter, Executive's beneficiaries or his estate shall receive benefits in
accordance with the Company's retirement, insurance and other applicable
programs and plans then in effect.
(b) DISABILITY.
(i) If, as a result of the Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of his duties with the Company for six consecutive months,
and, within 30 days after written notice is provided to him by the Company, he
shall not have returned to the full-time performance of his duties, the
Executive's employment under this Agreement may be terminated by the Company for
Disability. During any period prior to such termination during which the
Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary at the rate in effect at the commencement of such period of
Disability. Subsequent to such termination, the Executive's benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
<PAGE>
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
the Executive's employment under this Agreement for "Cause," at any time prior
to expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence, recklessness or willful misconduct on
the part of the Executive in respect of his fiduciary obligations or otherwise
relating to the business of the Company, (ii) the Executive's material breach of
this Agreement, (iii) the Executive's failure to discharge his duties, or (iv)
the Executive's conviction or entry of a plea of nolo contendre for fraud,
misappropriation or embezzlement. In such a case, the Executive's employment
under this Agreement may be terminated immediately without any advance written
notice, and the Company's obligation to pay the Executive's Base Salary, any
bonus and fringe benefits will cease as of the termination date.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive shall
have the right to terminate this Agreement for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence, without the Executive's
express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive or
the assignment of duties to the Executive not consistent with those of a senior
executive of the Company, except in connection with the Company's termination of
the Executive's employment for Cause pursuant to Section 6(c) or as otherwise
expressly contemplated herein;
(ii) The Company's material breach of any of the provisions of
this Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date; or a change in the
conditions of the Executive's employment (e.g., including, without limitation, a
failure by the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain incentive
compensation, in each case comparable to those available under benefits programs
in effect as of the Effective Date and at an appropriate level for the duties of
the officer, etc.);
(iii) The relocation of the Company's principal executive offices
to a location more than 25 miles from its location as of the Effective Date or
the Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for requiring travel on the
Company's business to an extent substantially consistent with the Executive's
duties hereunder; or
(iv) A change in control as defined in Section 8 below.
The Executive agrees to provide the Company with 30 days' prior written notice
of any termination for Good Reason.
(e) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The Executive
may at any time during the Term of this Agreement terminate his employment
hereunder for any reason or no reason by giving the Company notice in writing
not less than 120 days in advance of such termination. Except as may be provided
in Section 9, the Executive shall have no further obligations to the Company
after the effective date of termination, as set forth in the notice.
Notwithstanding the foregoing, in the event any "person" (as defined in Section
8 below) begins a tender or exchange offer, circulates a proxy to shareholders
or takes other steps to effect a Change of Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change of Control or until a Change of Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded bonus unpaid as of the termination date. Fringe benefits which have
accrued and/or vested on the termination date will continue in effect according
to their terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, OR BY THE
EXECUTIVE FOR GOOD REASON. If the Executive's employment shall be terminated (i)
<PAGE>
by the Company other than for Cause, or (ii) by the Executive for Good Reason,
the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall immediately pay
the Executive any portion of the Executive's Base Salary or previously awarded
Bonus not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an amount
(the "Severance Amount") equal to two times the Executive's combined Base Salary
and bonus compensation for the preceding fiscal year. The Severance Amount shall
be payable 50% within five 5 days after the termination date and the remaining
50% shall be payable in twelve equal consecutive monthly installments beginning
on the first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall take all
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately vested and exercisable by the
Executive, whether or not the right to exercise such stock options would
otherwise then be vested in the Executive. The provisions of this Section 7(c)
shall constitute an amendment to any existing stock option agreements of the
Company as of the Effective Date. All other stock options owned by the Executive
as of the termination date shall be exercisable in accordance with the Company's
stock option plan and the applicable stock option agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds full-time
employment or (ii) the expiration of 12 months. Notwithstanding the immediately
preceding sentence, if, as the result of termination of the Executive's
employment, the Executive and/or his otherwise eligible dependents or
beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds 200% of
the cost of providing such benefits to other members of senior management, the
Company, at the Company's option, shall (i) continue to provide the Executive
and his eligible dependents or beneficiaries with benefits at a level at least
equivalent to the level of benefits for which the Executive and his dependents
and beneficiaries were eligible under such plans immediately prior to the
termination date or (ii) for any fringe benefit not so provided, the Company
shall pay the Executive 200% of the cost of providing such fringe benefit to
other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that the Executive becomes
entitled to the benefit payments provided under subparagraphs (a)-(d) of this
Section 7.A ("Benefit Payments"), and if any of the Benefit Payments will be
subject to any excise tax ("Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended from time to time, or successor
sections thereto, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Benefit Payments and any federal, state
and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to
the amount of the Benefit Payments. Upon the Executive's termination date, the
Company shall estimate and pay to the Executive the Gross-Up Payment. In the
event that the Excise Tax is subsequently determined to be less than the amount
estimated at the termination date, the Executive shall repay to the Company, at
the time that the amount of such reduction in Excise Tax is finally determined,
the difference plus interest on the amount of such repayment at 10% per annum.
In the event that the Excise Tax is determined to exceed the amount estimated at
the termination date, the Company shall make an additional Gross-Up Payment in
respect of such excess at the time that the amount of such excess is finally
determined, plus interest at 10% per annum. The Executive and the Company shall
each reasonably cooperate with the other in connection with any administrative
or judicial proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Benefit Payments.
<PAGE>
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS
AGREEMENT. The Executive shall not be required in any way to mitigate the amount
of any payment provided for in this Section 7, including, but not limited to, by
seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as a
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred
if the conditions set forth in any one of the following paragraphs shall have
been satisfied.
(a) Any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (other than the
Company; any trustee or other fiduciary holding securities under an Executive
benefit plan of the Company; or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 25% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (a), (c) or (d) of
this section), (i) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved or (ii) whose election is to replace a person who ceases
to be a director due to death, disability or age, cease for any reason to
constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation
of the Company with other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an Executive benefit plan of the Company, at least 75%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50% of
the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR REASON. If the
Executive resigns his employment with the Company alleging in-good faith as the
basis for such resignation any of the "Good Reasons" specified in Section 6(d),
and if the Company then disputes the Executive's right to the payment of
benefits under Section 7, the Company shall continue to pay the Executive the
full compensation (including, but not limited to, his Base Salary) in effect at
the date the Executive provided notice of such resignation, and the Company
shall continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was then a participant, until the earlier
of the expiration of the Term of the Agreement or the date the dispute is
<PAGE>
finally resolved, either by jurisdiction which is not appealable or with respect
to which the time for appeal has expired and no appeal has been perfected. For
the purposes of this Section, the Company shall bear the burden of proving that
the grounds for the Executive's resignation do not fall within the scope of
Section 6(d), and there shall be a rebuttable presumption that the Executive
alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
(a) NONCOMPETITION. The Executive agrees that during the Term of this
Agreement prior to any termination of his employment hereunder and for a period
of twelve months following the occurrence of any event entitling the Executive
to Benefit Payments according to the provisions of Section 7 and in
consideration therefor, provided the Company makes all such payments when due,
he will not directly or indirectly, without the prior written consent of the
Company, manage, operate, join, control, participate in, or be connected as a
stockholder (other than as a holder of shares publicly traded on a stock
exchange or the Nasdaq National Market), partner, or other equity holder with,
or as an officer, director or employee of, any other real estate lender whose
business strategy is competitive with that of the Company, as determined by a
majority of the Company's independent directors ("Competing Business"). It is
further expressly agreed that the Company will or would suffer irreparable
injury if the Executive were to compete with the Company or any subsidiary or
affiliate of the Company in violation of this Agreement and that the Company
would by reason of such competition be entitled to injunctive relief in a court
of appropriate jurisdiction, and the Executive further consents and stipulates
to the entry of such injunctive relief in such a court prohibiting the Executive
from competing with the Company or any subsidiary or affiliate of the Company,
in the areas of business set forth above, in violation of this Agreement.
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all styles,
designs, lists, materials, books, files, reports, correspondence, records and
other documents ("Company Materials") used, prepared or made available to the
Executive, shall be and shall remain the property of the Company. Upon the
termination of employment or the expiration of this Agreement, all Company
Materials shall be returned immediately to the Company, and the Executive shall
not make or retain any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees that
during the noncompetition period defined in paragraph (a) he will not directly
or indirectly solicit any of the Company executives or employees to work for any
Competing Business.
11. NOTICES. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three days after mailing or 24 hours after transmission of a fax to the
respective persons named below:
If to Company: Transnational Financial Corporation
Attn.: Board of Directors
301 Junipero Sera Blvd.
San Francisco, CA 94125
Phone: (415) 334-7000
Fax: (415) 334-0255
If to Executive: Matt Heidari
1259 Regent Circle
Corona, CA 91720
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
<PAGE>
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of California.
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by California Law and the Bylaws of the Company.
20. COUNTERPARTS. This Agreement may be executed in counterparts.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer, and the Executive has hereunto signed this Agreement,
as of the date first above written.
TRANSNATIONAL FINANCIAL CORPORATION,
a California corporation
By____________________________________
---------------------------------------
MATT HEIDARI
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the ____ day of
_______________, 1998, is entered into by and between Ronald W. Kiehn
("Executive") and Transnational Financial Corporation, a California corporation
("Company"), and is effective as of the date hereof.
The Company desires to establish its right to the continued services of the
Executive, in the capacity described below, on the terms and conditions and
subject to the rights of termination hereinafter set forth, and the Executive is
willing to accept such employment on such terms and conditions.
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT BY THE COMPANY. The Company does hereby employ, engage and hire
the Executive as Director of Operations of the Company, and the Executive does
hereby accept and agree to such hiring, engagement and employment. The
Executive's duties shall be such executive and managerial duties as the Board of
Directors of the Company or its subsidiaries shall from time to time prescribe
and as provided in the ByLaws of the Company. The terms of this Agreement shall
be subject to the personnel policies of the Company as determined by the Board
of Directors from time to time, except to the extent that any such policy would
have a material adverse effect on the rights of the Executive under the terms of
this Agreement. The Executive shall devote such time, energy and skill to the
performance of his duties for the Company and for the benefit of the Company as
may be necessary or required for the effective conduct and operation of the
Company's business. Furthermore, the Executive shall exercise due diligence and
care in the performance of his duties to the Company under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the
date hereof (the "Effective Date") and shall continue through December 31, 1999;
provided, however, that on each December 31 commencing December 31, 1998 the
Term of the Agreement shall automatically be extended for one additional year
unless, not later than three months prior to any such December 31, either party
shall have given written notice to the other that it does not wish to extend the
Term of the Agreement.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay the Executive, and the
Executive agrees to accept from the Company, in payment for his services to the
Company beginning on the Effective Date, a base salary at the rate to be
determined by the Compensation Committee of the Board of Directors and provided
to the Executive in writing ("Base Salary"), which is subject to change upon 30
days' notice and shall initially be set at $92,000 per year. Base Salary is
payable in equal semimonthly installments or at such other time or times as the
Executive and Company agree. The Company shall also pay $250 per month in travel
expenses.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The Executive
shall be eligible to receive an incentive performance bonus in accordance with
the Bonus Incentive Compensation Plan established by the Company. Except as
provided in Section 7, any such bonus awarded to the Executive shall be payable
in the amount, in the manner and at the time determined by the Compensation
Committee of the Company's Board of Directors in its sole and absolute
discretion.
<PAGE>
(c) ANNUAL REVIEW. The Compensation Committee of the Company's Board
of Directors shall, at least annually, review the Executive's entire
compensation package to determine whether it continues to meet the Company's
compensation objectives. Such annual review will include a determination of (i)
whether to increase the Base Salary set forth in Section 3(a) and (ii) the
incentive performance bonus to be awarded in accordance with Section 3(b).
(d) STOCK OPTIONS. The Company shall grant to Executive options to
acquire 15,000 shares of stock at the Company's initial public offering price
pursuant to the Company's Incentive Stock Option Plan.
4. FRINGE BENEFITS. The Executive shall be entitled to participate in any
benefit programs adopted from time to time by the Company for the benefit of its
executive employees at an appropriate level for the duties of the officer, and
the Executive shall be entitled to receive such other fringe benefits as may be
granted from time to time by the Company's Board of Directors or its
Compensation Committee.
(a) BENEFIT PLANS. The Executive shall be entitled to participate in
any benefit plans relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, education or other retirement
or employee benefits available to other executive employees of the Company at an
appropriate level for the duties of the office, subject to any restrictions
(including waiting periods) specified in such plans. The Company shall make
commercially reasonable efforts to obtain medical and disability insurance, and
such other forms of insurance as the Board of Directors shall determine, for its
employees.
(b) VACATION. The Executive shall be entitled to the number of weeks
of paid vacation per calendar year as specified in the Company's employee manual
based on the time served as an employee of the Company, with such vacation to be
scheduled and taken in accordance with the Company's standard vacation policies.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive for any and
all necessary, customary and usual expenses, properly receipted in accordance
with Company policies, incurred by the Executive on behalf of the Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
(a) NOTICE. Notwithstanding anything to the contrary, each party may
terminate this agreement by giving sixty days notice to the other party, and if
such notice shall be given by the Company, then such termination shall be deemed
for cause as set forth in Section 6(d) hereof.
(b) DEATH. If the Executive dies while employed by the Company, his
employment shall immediately terminate. The Company's obligation to pay the
Executive's Base Salary shall cease as of the date of Executive's death.
Thereafter, Executive's beneficiaries or his estate shall receive benefits in
accordance with the Company's retirement, insurance and other applicable
programs and plans then in effect.
<PAGE>
(c) DISABILITY.
(i) If, as a result of the Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of his duties with the Company for six consecutive months,
and, within 30 days after written notice is provided to him by the Company, he
shall not have returned to the full-time performance of his duties, the
Executive's employment under this Agreement may be terminated by the Company for
Disability. During any period prior to such termination during which the
Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary at the rate in effect at the commencement of such period of
Disability. Subsequent to such termination, the Executive's benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions for which originally
hired ("Partial Disability"), the Company shall make reasonable efforts to
accommodate the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
(d) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
the Executive's employment under this Agreement for "Cause," at any time prior
to expiration of the Term of the Agreement, only in the event of (i) acts or
omissions constituting gross negligence, recklessness or willful misconduct on
the part of the Executive in respect of his fiduciary obligations or otherwise
relating to the business of the Company, (ii) the Executive's material breach of
this Agreement, ,(iii) the Executive's failure to discharge his duties, or (iv)
the Executive's conviction or entry of a plea of nolo contendre for fraud,
misappropriation or embezzlement. In such a case, the Executive's employment
under this Agreement may be terminated immediately without any advance written
notice, and the Company's obligation to pay the Executive's Base Salary, any
bonus and fringe benefits will cease as of the termination date.
(e) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive shall
have the right to terminate this Agreement for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence, without the Executive's
express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive or
the assignment of duties to the Executive not consistent with those of a senior
executive of the Company, except in connection with the Company's termination of
the Executive's employment for Cause pursuant to Section 6(d) or as otherwise
expressly contemplated herein;
(ii) The Company's material breach of any of the provisions of
this Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date; or a change in the
conditions of the Executive's employment (e.g., including, without limitation, a
failure by the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain incentive
<PAGE>
compensation, in each case comparable to those available under benefits programs
in effect as of the Effective Date and at an appropriate level for the duties of
the officer, etc.);
(iii) The relocation of the Company's principal executive offices
to a location more than 25 miles from its location as of the Effective Date or
the Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for requiring travel on the
Company's business to an extent substantially consistent with the Executive's
duties hereunder; or
(iv) A change in control as defined in Section 8 below.
The Executive agrees to provide the Company with 30 days' prior written notice
of any termination for Good Reason.
(f) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The Executive
may at any time during the Term of this Agreement terminate his employment
hereunder for any reason or no reason by giving the Company notice in writing
not less than 120 days in advance of such termination. Except as may be provided
in Section 9, the Executive shall have no further obligations to the Company
after the effective date of termination, as set forth in the notice.
Notwithstanding the foregoing, in the event any "person" (as defined in Section
8 below) begins a tender or exchange offer, circulates a proxy to shareholders
or takes other steps to effect a Change of Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change of Control or until a Change of Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded bonus unpaid as of the termination date. Fringe benefits which have
accrued and/or vested on the termination date will continue in effect according
to their terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, OR BY THE
EXECUTIVE FOR GOOD REASON. If the Executive's employment shall be terminated (i)
by the Company other than for Cause, or (ii) by the Executive for Good Reason,
the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall immediately pay
the Executive any portion of the Executive's Base Salary or previously awarded
Bonus not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an amount
(the "Severance Amount") equal to two times the Executive's combined Base Salary
and bonus compensation for the preceding fiscal year. The Severance Amount shall
be payable 50% within five 5 days after the termination date and the remaining
50% shall be payable in twelve equal consecutive monthly installments beginning
on the first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall take all
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately vested and exercisable by the
Executive, whether or not the right to exercise such stock options would
otherwise then be vested in the Executive. The provisions of this Section 7(c)
shall constitute an amendment to any existing stock option agreements of the
Company as of the Effective Date. All other stock options owned by the Executive
as of the termination date shall be exercisable in accordance with the Company's
stock option plan and the applicable stock option agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after termination of the
Executive's employment, the Company shall continue to provide the Executive with
all life insurance and medical coverage fringe benefits set forth in Section 4
as if the Executive's employment under the Agreement had not been terminated
until the earlier to occur of (i) such time as the Executive finds full-time
employment or (ii) the expiration of 12 months. Notwithstanding the immediately
preceding sentence, if, as the result of termination of the Executive's
employment, the Executive and/or his otherwise eligible dependents or
beneficiaries shall become ineligible for benefits under any one of the
Company's benefit plans or the cost of providing such benefits exceeds 200% of
the cost of providing such benefits to other members of senior management, the
Company, at the Company's option, shall (i) continue to provide the Executive
and his eligible dependents or beneficiaries with benefits at a level at least
equivalent to the level of benefits for which the Executive and his dependents
and beneficiaries were eligible under such plans immediately prior to the
termination date or (ii) for any fringe benefit not so provided, the Company
shall pay the Executive 200% of the cost of providing such fringe benefit to
other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that the Executive becomes
entitled to the benefit payments provided under subparagraphs (a)-(d) of this
Section 7.A ("Benefit Payments"), and if any of the Benefit Payments will be
subject to any excise tax ("Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended from time to time, or successor
sections thereto, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Benefit Payments and any federal, state
and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to
the amount of the Benefit Payments. Upon the Executive's termination date, the
Company shall estimate and pay to the Executive the Gross-Up Payment. In the
event that the Excise Tax is subsequently determined to be less than the amount
estimated at the termination date, the Executive shall repay to the Company, at
the time that the amount of such reduction in Excise Tax is finally determined,
the difference plus interest on the amount of such repayment at 10% per annum.
In the event that the Excise Tax is determined to exceed the amount estimated at
the termination date, the Company shall make an additional Gross-Up Payment in
respect of such excess at the time that the amount of such excess is finally
determined, plus interest at 10% per annum. The Executive and the Company shall
each reasonably cooperate with the other in connection with any administrative
or judicial proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Benefit Payments.
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS
AGREEMENT. The Executive shall not be required in any way to mitigate the amount
of any payment provided for in this Section 7, including, but not limited to, by
seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as a
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred
if the conditions set forth in any one of the following paragraphs shall have
been satisfied.
(a) Any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (other than the
Company; any trustee or other fiduciary holding securities under an Executive
benefit plan of the Company; or any company owned, directly or indirectly, by
<PAGE>
the stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 25% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (a), (c) or (d) of
this section), (i) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved or (ii) whose election is to replace a person who ceases
to be a director due to death, disability or age, cease for any reason to
constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation
of the Company with other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an Executive benefit plan of the Company, at least 75%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50% of
the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR REASON. If the
Executive resigns his employment with the Company alleging in-good faith as the
basis for such resignation any of the "Good Reasons" specified in Section 6(e),
and if the Company then disputes the Executive's right to the payment of
benefits under Section 7, the Company shall continue to pay the Executive the
full compensation (including, but not limited to, his Base Salary) in effect at
the date the Executive provided notice of such resignation, and the Company
shall continue the Executive as a participant in al compensation, benefit and
insurance plans in which the Executive was then a participant, until the earlier
of the expiration of the Term of the Agreement or the date the dispute is
finally resolved, either by jurisdiction which is not appealable or with respect
to which the time for appeal has expired and no appeal has been perfected. For
the purposes of this Section, the Company shall bear the burden of proving that
the grounds for the Executive's resignation do not fall within the scope of
Section 6(e), and there shall be a rebuttable presumption that the Executive
alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
(a) NONCOMPETITION. The Executive agrees that during the Term of this
Agreement prior to any termination of his employment hereunder and for a period
of twelve months following the occurrence of any event entitling the Executive
to Benefit Payments according to the provisions of Section 7 and in
consideration therefor, provided the Company makes all such payments when due,
he will not directly or indirectly, without the prior written consent of the
Company, manage, operate, join, control, participate in, or be connected as a
<PAGE>
stockholder (other than as a holder of shares publicly traded on a stock
exchange or the Nasdaq National Market), partner, or other equity holder with,
or as an officer, director or employee of, any other real estate lender whose
business strategy is competitive with that of the Company, as determined by a
majority of the Company's independent directors ("Competing Business"). It is
further expressly agreed that the Company will or would suffer irreparable
injury if the Executive were to compete with the Company or any subsidiary or
affiliate of the Company in violation of this Agreement and that the Company
would by reason of such competition be entitled to injunctive relief in a court
of appropriate jurisdiction, and the Executive further consents and stipulates
to the entry of such injunctive relief in such a court prohibiting the Executive
from competing with the Company or any subsidiary or affiliate of the Company,
in the areas of business set forth above, in violation of this Agreement.
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all styles,
designs, lists, materials, books, files, reports, correspondence, records and
other documents ("Company Materials") used, prepared or made available to the
Executive, shall be and shall remain the property of the Company. Upon the
termination of employment or the expiration of this Agreement, all Company
Materials shall be returned immediately to the Company, and the Executive shall
not make or retain any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees that
during the noncompetition period defined in paragraph (a) he will not directly
or indirectly solicit any of the Company executives or employees to work for any
Competing Business.
11. NOTICES. All notices and other communications under this Agreement shall be
in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three days after mailing or 24 hours after transmission of a fax to the
respective persons named below:
If to Company: Transnational Financial Corporation
Attn.: Board of Directors
301 Junipero Sera Blvd.
San Francisco, CA 94125
Phone: (415) 334-7000
Fax: (415) 334-0255
If to Executive: Joseph Kristul
San Francisco, CA 94XXX
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each party
shall have the right, in addition to any other relief granted by the court, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes
any and all prior agreements and understandings between the parties with respect
to employment or with respect to the compensation of the Executive by the
Company.
<PAGE>
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided that,
in the event of the merger, consolidation, transfer, or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of California.
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire agreement of
the parties respecting the matters within its scope and may be modified only in
writing. Section headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any statute or public
policy, only the portions of this Agreement that violate such statute or public
policy shall be stricken. All portions of this Agreement that do not violate any
statute or public policy shall continue in full force and effect. Further, any
court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless to
the maximum extent permitted by California Law and the Bylaws of the Company.
20. COUNTERPARTS. This Agreement may be executed in counterparts.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer, and the Executive has hereunto signed this Agreement,
as of the date first above written.
TRANSNATIONAL FINANCIAL CORPORATION,
a California corporation
By____________________________________
---------------------------------------
Ronald W. Kiehn
<PAGE>
1998 STOCK COMPENSATION PLAN
of
TRANSNATIONAL FINANCIAL CORPORATION
(a California corporation)
* * * * *
<PAGE>
TABLE OF CONTENTS
* * *
1998 STOCK COMPENSATION PLAN
of
TRANSNATIONAL FINANCIAL CORPORATION
SECTION SUBJECT PAGE
1. Purpose of Plan 1
2. Stock Subject to the Plan 1
3. Administration of the Plan 1
(a) General 1
(b) Changes in Law Applicable 2
4. Types of Awards Under the Plan 2
5. Persons to Options Shall Be Granted 3
(a) Nonqualified Options 3
(b) Incentive Options 3
6. Factors to Be Considered in Granting Options 3
7. Time of Granting Option 3
8. Terms and Conditions of Options 3
(a) Number of Shares 3
(b) Type of Option 3
(c) Option Period 3
(1) General 3
(2) Termination of Employment 4
<PAGE>
(3) Cessation of Service as Director
or Advisor 4
(4) Disability 4
(5) Death 4
(6) Acceleration and Exercise Upon Change
of Control 5
(d) Option Prices 6
(1) Nonqualified Options 6
(2) Incentive Options 6
(3) Determination of Fair Market Value 6
(e) Exercise of Options 6
(f) Nontransferability of Options 7
(g) Limitations on 10% Shareholders 7
(h) Limits on Vesting of Incentive Options 7
(i) Compliance with Securities Laws 7
(j) Additional Provisions 8
9. Medium and Time of Payment 8
10. Alternate Stock Appreciation Rights 8
(a) Award of Alternate Stock Rights 8
(b) Alternate Stock Rights Agreement 8
(c) Exercise 8
(d) Amount of Payment 9
(e) Form of Payment 9
(f) Termination of SAR 9
(g) Effect of Exercise of SAR 9
(h) Effect of Exercise of Related Option 9
(i) Nontransferability of SAR 9
11. Reload Options
(a) Authorization of Reload Options 10
(b) Reload Option Amendment 10
(c) Reload Option Price 10
(d) Term and Exercise 10
(e) Termination of Employment 10
(f) Applicability of Other Sections 10
12. Rights as a Shareholder 10
13 Optionee's Agreement to Serve 10
14. Adjustments on Changes in Capitalization 11
(a) Changes in Capitalization 11
(b) Reorganization, Dissolution or Liquidation 11
(c) Change in Par Value 11
(d) Notice of Adjustments 11
(e) Effect Upon Holder of Option 12
(f) Right of Company to Make Adjustments 12
15. Investment Purpose 13
16. No Obligation to Exercise Option or SAR 13
<PAGE>
17. Modification, Extension, and Renewal of Options 13
18 Effective Date of the Plan 13
19. Termination of the Plan 13
20. Amendment of the Plan 13
21. Withholding 14
22. Indemnification of Committee 14
23. Application of Funds 14
24. Governing Law 14
<PAGE>
1998 STOCK COMPENSATION PLAN
OF
TRANSNATIONAL FINANCIAL CORPORATION
1. Purpose of Plan. This 1998 Stock Compensation Plan ("Plan") is
intended to encourage ownership of the common stock of TRANSANTIONAL FINANCIAL
CORPORATION ("Company") by certain officers, directors, employees and advisors
of the Company or any Subsidiary or Subsidiaries of the Company (as hereinafter
defined) in order to provide additional incentive for such persons to promote
the success and the business of the Company or its Subsidiaries and to encourage
them to remain in the employ of the Company or its Subsidiaries by providing
such persons an opportunity to benefit from any appreciation of the common stock
of the Company through the issuance of stock options and related stock
appreciation rights to such persons in accordance with the terms of the Plan. It
is further intended that options granted pursuant to this Plan shall constitute
either incentive stock options ("Incentive Options") within the meaning of
Section 422 (formerly Section 422A) of the Internal Revenue Code of 1986, as
amended ("Code"), or options which do not Incentive Options ("Nonqualified
Options") as determined by the Committee (as hereinafter defined) at the time of
issuance of such options. Incentive Options, Nonqualified Options and Reload
Options (as defined in Section 11 hereof) are herein sometimes referred to
collectively as "Options". As used herein, the term Subsidiary or Subsidiaries
shall mean any corporation (other than the employer corporation) in an unbroken
chain of corporations beginning with the employer corporation if, at the time of
granting of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
2. Stock Subject to the Plan. Subject to adjustment as provided in
Section 14 hereof, there will be reserved for the use upon the exercise of
Options to be granted from time to time under the Plan, an aggregate of Three
hundred thousand (300,000) shares of the common stock, without par value, of the
Company ("Common Stock"), which shares in whole or in part shall be authorized,
but unissued, shares of the Common Stock or issued shares of Common Stock which
shall have been reacquired by the Company as determined from time to time by the
Board of Directors of the Company ("Board of Directors"). To determine the
number of shares of Common Stock available at any time for the granting of
Options under the Plan, there shall be deducted from the total number of
reserved shares of Common Stock, the number of shares of Common Stock in respect
of which Options have been granted pursuant to the Plan which remain outstanding
or which have been exercised. If and to the extent that any Option to purchase
reserved shares shall not be exercised by the optionee for any reason or if such
Option to purchase shall terminate as provided herein, such shares which have
not been so purchased hereunder shall again become available for the purposes of
the Plan unless the Plan shall have been terminated, but such unpurchased shares
shall not be deemed to increase the aggregate number of shares specified above
to be reserved for purposes of the Plan (subject to adjustment as provided in
Section 14 hereof).
3. Administration of the Plan.
(a) General. The Plan shall be administered by a Compensation
Committee ("Committee") appointed by the Board of Directors, which
Committee shall consist of not less than two (2) members of the Board
of Directors who are not eligible to participate in the Plan, and have
not, for a period of at least one (1) year prior thereto been eligible
to participate in the Plan, except that if at any time there shall be
less than two (2) who are qualified to serve on the Committee, then the
Plan shall be administered by the full Board of Directors. All
references in this Plan to the Committee shall be deemed to refer
instead to the full Board of Directors at any time there is not a
committee of two (2) members qualified to act hereunder. The Board of
<PAGE>
Directors may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may
fill vacancies, however caused, in the Committee. If the Board of
Directors does not designate a Chairman of the Committee, the Committee
shall select one of its members as its Chairman. The Committee shall
hold its meetings at such times and places as it shall deem advisable.
A majority of its members shall constitute a quorum. Any action of the
Committee shall be taken by a majority vote of its members at a meeting
at which a quorum is present. Notwithstanding the preceding, any action
of the Committee may be taken without a meeting by a written consent
signed by all of the members, and any action so taken shall be deemed
fully as effective as if it had been taken by a vote of the members
present in person at the meeting duly called and held. The Committee
may appoint a Secretary, shall keep minutes of its meetings, and shall
make such rules and regulations for the conduct of its business as it
shall deem advisable.
The Committee shall have the sole authority and power, subject
to the express provisions and limitations of the Plan, to construe the
Plan and option agreements granted hereunder, and to adopt, prescribe,
amend, and rescind rules and regulations relating to the Plan, and to
make all determinations necessary or advisable for administering the
Plan, including, but not limited to, (i) who shall be granted Options
under the Plan, (ii) the term of each Option, (iii) the number of
shares covered by such Option, (iv) whether the Option shall constitute
an Incentive Option or a Nonqualified Option or a Reload Option, (v)
the exercise price for the purchase of the shares of the Common Stock
covered by the Option, (vi) the period during which the Option may be
exercised, (vii) whether the right to purchase the number of shares
covered by the Option shall be fully vested on issuance of the Option
so that such shares may be purchased in full at one time or whether the
right to purchase such shares shall become vested over a period of time
so that such shares may only be purchased in installments, and (viii)
the time or times at which Options shall be granted. The Committee's
determinations under the Plan, including the above enumerated
determinations, need not be uniform and may be made by it selectively
among the persons who receive, or are eligible to receive, Options
under the Plan, whether or not such persons are similarly situated.
The interpretation by the Committee of any provision of the
Plan or of any option agreement entered into hereunder with respect to
any Incentive Option shall be in accordance with Section 422 of the
Code and the regulations issued thereunder, as such section or
regulations may be amended from time to time, in order that the rights
granted hereunder and under said option agreements shall constitute
"Incentive Stock Options" within the meaning of such section. The
interpretation and construction by the Committee of any provision of
the Plan or of any Option granted hereunder shall be final and
conclusive, unless otherwise determined by the Board of Directors. No
member of the Board of Directors or the Committee shall be liable for
any action or determination made in good faith with respect to the Plan
or any Option granted under it. Upon issuing an Option under the Plan,
the Committee shall report to the Board of Directors the name of the
person granted the Option, whether the Option is an Incentive Option or
a Nonqualified Option, the number of shares of Common Stock covered by
the Option, and the terms and conditions of such Option.
(b) Changes in Law Applicable. If the laws relating to
Incentive Options or Nonqualified Options are changed, altered or
amended during the term of the Plan, the Board of Directors shall have
full authority and power to alter or amend the Plan with respect to
Incentive Options or Nonqualified Options, respectively, to conform to
such changes in the law without the necessity of obtaining further
shareholder approval, unless the changes require such approval.
4. Types of Awards Under the Plan. Awards under the Plan may be in the
form of either Options, alternate stock appreciation rights (as described in
Section 10 hereof), or a combination thereof.
<PAGE>
5. Persons to Whom Options Shall be Granted.
(a) Nonqualified Options. Nonqualified Options shall be
granted only to officers, directors (other than "Outside Directors" of
the Company or a Subsidiary [as hereinafter defined]), employees and
advisors of the Company or a Subsidiary who, in the judgment of the
Committee, are responsible for or contribute to the management or
success of the Company or a Subsidiary and who, at the time of the
granting of the Nonqualified Options, are either officers, directors
(other than Outside Directors), employees or advisors of the Company or
a Subsidiary. As used herein, the term "Outside Director" shall mean
any director of the Company or a Subsidiary who is not an employee of
the Company or a Subsidiary.
(b) Incentive Options. Incentive Options shall be granted only
to employees of the Company or a Subsidiary who, in the judgment of the
Committee, are responsible for or contribute to the management or
success of the Company or a Subsidiary and who, at the time of the
granting of the Incentive Option are either an employee of the Company
or a Subsidiary. Subject to the provisions of Section 8(g) hereof, no
individual shall be granted an Incentive Option who, immediately before
such Incentive Option was granted, would own more than ten percent
(10%) of the total combined voting power or value of all classes of
stock of the Company ("10% Shareholder").
6. Factors to Be Considered in Granting Options. In making any
determination as to persons to whom Options shall be granted and as to the
number of shares to be covered by such Options, the Committee shall take into
account the duties and responsibilities of the respective officers, directors,
employees, or advisors, their current and potential contributions to the success
of the Company or a Subsidiary, and such other factors as the Committee shall
deem relevant in connection with accomplishing the purpose of the Plan.
7. Time of Granting Options. Neither anything contained in the Plan or
in any resolution adopted or to be adopted by the Board of Directors or the
Shareholders of the Company or a Subsidiary nor any action taken by the
Committee shall constitute the granting of any Option. The granting of an Option
shall be effected only when a written Option Agreement acceptable in form and
substance to the Committee, subject to the terms and conditions hereof including
those set forth in Section 8 hereof, shall have been duly executed and delivered
by or on behalf of the Company and the person to whom such Option shall be
granted. No person shall have any rights under the Plan until such time, if any,
as a written Option Agreement shall have been duly executed and delivered as set
forth in this Section 7.
8. Terms and Conditions of Options. All Options granted pursuant to
this Plan must be granted within ten (10) years from the date the Plan is
adopted by the Board of Directors of the Company. Each Option Agreement
governing an Option granted hereunder shall be subject to at least the following
terms and conditions, and shall contain such other terms and conditions, not
inconsistent therewith, that the Committee shall deem appropriate:
(a) Number of Shares. Each Option shall state the number of
shares of Common Stock which it represents.
(b) Type of Option. Each Option shall state whether it is
intended to be an Incentive Option or a Nonqualified Option.
(c) Option Period.
(1) General. Each Option shall state the date upon
which it is granted. Each Option shall be exercisable in whole
or in part during such period as is provided under the terms
of the Option subject to any vesting period set forth in the
Option, but in no event shall an Option be exercisable either
in whole or in part after the expiration of ten (10) years
<PAGE>
from the date of grant; provided, however, if an Incentive
Option is granted to a 10% Shareholder, such Incentive Option
shall not be exercisable more than five (5) years from the
date of grant thereof.
(2) Termination of Employment. Except as otherwise
provided in case of Disability (as hereinafter defined), death
or Change of Control (as hereinafter defined), no Option shall
be exercisable after an optionee who is an employee of the
Company or a Subsidiary ceases to be employed by the Company
or a Subsidiary as an employee; provided, however, that the
Committee shall have the right in its sole discretion, but not
the obligation, to extend the exercise period for not more
than three (3) months following the date of termination of
such optionee's employment; provided further, however, that no
Option shall be exercisable after the expiration of ten (10)
years from the date it is granted and provided further, no
Incentive Option granted to a 10% Shareholder shall be
exercisable after the expiration of five (5) years from the
date it is granted.
(3) Cessation of Service as Director or Advisor. In
the event an optionee who was a director or advisor of the
Company or a Subsidiary ceases to be a director or advisor of
the Company or a Subsidiary for any reason, other than
Disability or death, prior to the full exercise of the Option,
such optionee may exercise his Option at any time within
ninety (90) days after such optionee's status as a director or
advisor of the Company or a Subsidiary is so terminated to the
extent he was entitled to exercise such Option at the date
such optionee's status as a director or advisor of the Company
or a Subsidiary terminated; provided, however, that no Option
shall be exercisable after the expiration of ten (10) years
from the date it is granted.
(4) Disability. If an optionee's employment is
terminated by reason of the permanent and total Disability of
such optionee or if an optionee who is a director or advisor
of the Company or a Subsidiary ceases to serve as a director
or advisor by reason of the permanent and total Disability of
such optionee, the Committee shall have the right in its sole
discretion, but not the obligation, to extend the exercise
period for not more than one (1) year following the date of
termination of the optionee's employment or the date such
optionee ceases to be a director or advisor of the Company or
a Subsidiary, as the case may be, subject to the condition
that no Option shall be exercisable after the expiration of
ten (10) years from the date it is granted and subject to the
further condition that no Incentive Option granted to a 10%
Shareholder shall be exercisable after the expiration of five
(5) years from the date it is granted. For purposes of this
Plan, the term "Disability" shall mean the inability of the
optionee to fulfill such optionee's obligations to the Company
or a Subsidiary by reason of any physical or mental impairment
which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less
than twelve (12) months as determined by a physician
acceptable to the Committee in its sole discretion.
(5) Death. If an optionee dies while in the employ of
the Company or a Subsidiary, or while serving as a director or
advisor of the Company or a Subsidiary, and shall not have
fully exercised Options granted pursuant to the Plan, such
Options may be exercised in whole or in part at any time
within one (1) year after the optionee's death, by the
executors or administrators of the optionee's estate or by any
person or persons who shall have acquired the Options directly
from the optionee by bequest or inheritance, but only to the
extent that the optionee was entitled to exercise such Option
at the date of such optionee's death, subject to the condition
that no Option shall be exercisable after the expiration of
ten (10) years from the date it is granted and subject to the
further condition that no Incentive Option granted to a 10%
Shareholder shall be exercisable after the expiration of five
(5) years from the date it is granted.
<PAGE>
(6) Acceleration and Exercise Upon Change of Control.
Notwithstanding the preceding provisions of this Section 8(c),
if any Option granted under the Plan provides for either (a)
an incremental vesting period whereby such Option may only be
exercised in installments as such incremental vesting period
is satisfied or (b) a delayed vesting period whereby such
Option may only be exercised after the lapse of a specified
period of time, such as after the expiration of one (1) year,
such vesting period shall be accelerated upon the occurrence
of a Change of Control (as hereinafter defined) of the
Company, or a threatened Change of Control of the Company as
determined by the Committee, so that such Option shall
thereupon become exercisable immediately in part or its
entirety by the holder thereof, as such holder shall elect.
For the purposes of this Plan, a "Change of Control" shall be
deemed to have occurred if:
(i) Any "person", including a "group" as
determined in accordance with Section 13(d)(3) of the
Securities Exchange Act of 1934 ("Exchange Act") and
the Rules and Regulations promulgated thereunder, is
or becomes, through one or a series of related
transactions or through one or more intermediaries,
the beneficial owner, directly or indirectly, of
securities of the Company representing 25% or more of
the combined voting power of the Company's then
outstanding securities, other than a person who is
such a beneficial owner on the effective date of the
Plan and any affiliate of such person;
(ii) As a result of, or in connection with,
any tender offer or exchange offer, merger or other
business combination, sale of assets or contested
election, or any combination of the foregoing
transactions ("Transaction"), the persons who were
Directors of the Company before the Transaction shall
cease to constitute a majority of the Board of
Directors of the Company or any successor to the
Company;
(iii) Following the effective date of the
Plan, the Company is merged or consolidated with
another corporation and as a result of such merger or
consolidation less than 40% of the outstanding voting
securities of the surviving or resulting corporation
shall then be owned in the aggregate by the former
stockholders of the Company, other than (x) any party
to such merger or consolidation, or (y) any
affiliates of any such party;
(iv) A tender offer or exchange offer is
made and consummated for the ownership of securities
of the Company representing 25% or more of the
combined voting power of the Company's then
outstanding voting securities; or
(v) The Company transfers more than 50% of
its assets, or the last of a series of transfers
result in the transfer of more than 50% of the assets
of the Company, to another corporation that is not a
wholly-owned corporation of the Company. For purposes
of this subsection 8(c)(6)(v), the determination of
what constitutes more than 50% of the assets of the
Company shall be determined based on the sum of the
values attributed to (i) the Company's real property
as determined by an independent appraisal thereof,
and (ii) the net book value of all other assets of
the Company, each taken as of the date of the
Transaction involved.
In addition, upon a Change of Control, any Options
previously granted under the Plan to the extent not already
exercised may be exercised in whole or in part either
immediately or at any time during the term of the Option as
such holder shall elect.
<PAGE>
(d) Option Prices.
(1) Nonqualified Options. The purchase price or
prices of the shares of the Common Stock which shall be
offered to any person under the Plan and covered by a yOption
shall be the price determined by the Committee at the time of
granting of the Nonqualified Option, which price may be less
than, equal to or higher than one hundred percent (100%) of
the fair market value of the Common Stock at the time of
granting the Nonqualified Option.
(2) Incentive Options. The purchase price or prices
of the shares of the Common Stock which shall be offered to
any person under the Plan and covered by an Incentive Option
shall be one hundred percent (100%) of the fair market value
of the Common Stock at the time of granting the Incentive
Option or such higher purchase price as may be determined by
the Committee at the time of granting the Incentive Option;
provided, however, if an Incentive Option is granted to a 10%
Shareholder, the purchase price of the shares of the Common
Stock of the Company covered by such Incentive Option may not
be less than one hundred ten percent (110%) of the fair market
value of such shares on the day the Incentive Option is
granted.
(3) Determination of Fair Market Value. During such
time as the Common Stock of the Company is not listed upon an
established stock exchange, the fair market value per share
shall be deemed to be the closing sales price of the Common
Stock on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") on the day the Option is
granted, as reported by NASDAQ, if the Common Stock is so
quoted, and if not so quoted, the mean between dealer "bid"
and "ask," prices of the Common Stock in the New York
over-the-counter market on the day the Option is granted, as
reported by the National Association of Securities Dealers,
Inc. If the Common Stock is listed upon an established stock
exchange or exchanges, such fair market value shall be deemed
to be the highest closing price of the Common Stock on such
stock exchange or exchanges on the day the Option is granted
or, if no sale of the Common Stock of the Company shall have
been made on established stock exchange on such day, on the
next preceding day on which there was a sale of such stock. If
there is no market price for the Common Stock, then the Board
of Directors and the Committee may, after taking all relevant
facts into consideration, determine the fair market value of
the Common Stock.
(e) Exercise of Options. To the extent that a holder of an
Option has a current right to exercise, the Option may be exercised
from time to time by written notice to the Company at its principal
place of business. Such notice shall state the election to exercise the
Option, the number of whole shares in respect of which it is being
exercised, shall be signed by the person or persons so exercising the
Option, and shall contain any investment representation required by
Section 8(i) hereof. Such notice shall be accompanied by payment of the
full purchase price of such shares and by the Option Agreement
evidencing the Option. In addition, if the Option shall be exercised,
pursuant to Section 8(c)(4) or Section 8(c)(5) hereof, by any person or
persons other than the optionee, such notice shall also be accompanied
by appropriate proof of the right of such person or persons to exercise
the Option. The Company shall deliver a certificate or certificates
representing such shares as soon as practicable after the aforesaid
notice and payment of such shares shall be received. The certificate or
certificates for the shares as to which the Option shall have been so
exercised shall be registered in the name of the person or persons so
exercising the Option. In the event the Option shall not be exercised
in full, the Secretary of the Company shall endorse or cause to be
endorsed on the Option the number of shares which has been exercised
thereunder and the number of shares that remain exercisable under the
Option and return such Option Agreement to the holder thereof.
<PAGE>
(f) Nontransferability of Options. An Option granted pursuant
to the Plan shall be exercisable only by the optionee or the optionee's
court appointed guardian as set forth in Section 8(c)(4) hereof during
the optionee's lifetime and not be assignable or transferable by the
optionee otherwise than by Will or the laws of descent and
distribution. An Option granted pursuant to the Plan shall not be
assigned, pledged or hypothecated in any way (whether by operation of
law or otherwise other than by Will or the laws of descent and
distribution) and shall not be subject to execution, attachment, or
similar process. Any attempted transfer, assignment, pledge,
hypothecation, or other disposition of any Option or of any rights
granted thereunder contrary to the foregoing provisions of this Section
8(f), or the levy of any attachment or similar process upon an Option
or such rights, shall be null and void.
(g) Limitations on 10% Shareholders. No Incentive yOption may
be granted under the Plan to any 10% Shareholder unless (i) such
Incentive Option is granted at an option price not less than one
hundred ten percent (110%) of the fair market value of the shares on
the day the Incentive Option is granted and (ii) such Incentive Option
expires on a date not later than five (5) years from the date the
Incentive Option is granted.
(h) Limits on Vesting of Incentive Options. An individual may
be granted one or more Incentive Options, provided that the aggregate
fair market value (as determined at the time such Incentive Option is
granted) of the stock with respect to which Incentive Options are
exercisable for the first time by such individual during any calendar
year shall not exceed $100,000. To the extent the $100,000 limitation
in the preceding sentence is exceeded, such option shall be treated as
an option which is not an Incentive Option.
(i) Compliance with Securities Laws. The Plan and the grant
and exercise of the rights to purchase shares hereunder, and the
Company's obligations to sell and deliver shares upon the exercise of
rights to purchase shares, shall be subject to all applicable federal
and state laws, rules and regulations, and to such approvals by any
regulatory or governmental agency as may, in the opinion of counsel for
the Company, be required, and shall also be subject to all applicable
rules and regulations of any stock exchange upon which the Common Stock
of the Company may then be listed. At the time of exercise of any
Option, the Company may require the optionee to execute any documents
or take any action which may be then necessary to comply with the
Securities Act of 1933, as amended ("Securities Act"), and the rules
and regulations promulgated thereunder, or any other applicable federal
or state laws regulating the sale and issuance of securities, and the
Company may, if it deems necessary, include provisions in the stock
option agreements to assure such compliance. The Company may, from time
to time, change its requirements with respect to enforcing compliance
with federal and state securities laws, including the request for and
enforcement of letters of investment intent, such requirements to be
determined by the Company in its judgment as necessary to assure
compliance with said laws. Such changes may be made with respect to any
particular Option or stock issued upon exercise thereof. Without
limiting the generality of the foregoing, if the Common Stock issuable
upon exercise of an Option granted under the Plan is not registered
under the Securities Act, the Company at the time of exercise will
require that the registered owner execute and deliver an investment
representation agreement to the Company in form acceptable to the
Company and its counsel, and the Company will place a legend on the
certificate evidencing such Common Stock restricting the transfer
thereof, which legend shall be substantially as follows:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW BUT HAVE BEEN
ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND
MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL EITHER (i) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE
<PAGE>
WITH REGARD THERETO, OR (ii) THE COMPANY SHALL HAVE RECEIVED
AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS
COUNSEL THAT REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION
WITH SUCH PROPOSED OFFER, SALE OR TRANSFER.
(j) Additional Provisions. The Option Agreements authorized
under the Plan shall contain such other provisions as the Committee
shall deem advisable, including, without limitation, restrictions upon
the exercise of the Option. Any such Option Agreement with respect to
an Incentive Option shall contain such limitations and restrictions
upon the exercise of the Incentive Option as shall be necessary in
order that the option will be an "Incentive Stock Option" as defined in
Section 422 of the Code.
9. Medium and Time of Payment. The purchase price of the shares of the
Common Stock as to which the Option shall be exercised shall be paid in full
either (i) in cash at the time of exercise of the Option, (ii) by tendering to
the Company shares of the Company's Common Stock having a fair market value (as
of the date of receipt of such shares by the Company) equal to the purchase
price for the number of shares of Common Stock purchased, or (iii) partly in
cash and partly in shares of the Company's Common Stock valued at fair market
value as of the date of receipt of such shares by the Company. Cash payment for
the shares of the Common Stock purchased upon exercise of the Option shall be in
the form of either a cashier's check, certified check or money order. Personal
checks may be submitted, but will not be considered as payment for the shares of
the Common Stock purchased and no certificate for such shares will be issued
until the personal check clears in normal banking channels. If a personal check
is not paid upon presentment by the Company, then the attempted exercise of the
Option will be null and void. In the event the optionee tenders shares of the
Company's Common Stock in full or partial payment for the shares being purchased
pursuant to the Option, the shares of Common Stock so tendered shall be
accompanied by fully executed stock powers endorsed in favor of the Company with
the signature on such stock power being guaranteed. If an optionee tenders
shares, such optionee assumes sole and full responsibility for the tax
consequences, if any, to such optionee arising therefrom, including the possible
application of Code Section 424(c), or its successor Code section, which negates
any nonrecognition of income rule with respect to such transferred shares, if
such transferred shares have not been held for the minimum statutory holding
period to receive preferential tax treatment.
10. Alternate Stock Appreciation Rights.
(a) Award of Alternate Stock Rights. Concurrently with or
subsequent to the award of any Option to purchase one or more shares of
Common Stock, the Committee may in its sole discretion, subject to the
provisions of the Plan and such other terms and conditions as the
Committee may prescribe, award to the optionee with respect to each
share of Common Stock covered by an Option ("Related Option"), a
related alternate stock appreciation right ("SAR"), permitting the
optionee to be paid the appreciation on the Related Option in lieu of
exercising the Related Option. A SAR granted with respect to an
Incentive Option must be granted together with the Related Option. A
SAR granted with respect to a Nonqualified Option may be granted
together with or subsequent to the grant of such Related Option.
(b) Alternate Stock Rights Agreement. Each SAR shall be on
such terms and conditions not inconsistent with this Plan as the
Committee may determine and shall be evidenced by a written agreement
executed by the Company and the optionee receiving the Related Option.
(c) Exercise. An SAR may be exercised only if and to the
extent that its Related Option is eligible to be exercised on the date
of exercise of the SAR. To the extent that a holder of a SAR has a
current right to exercise, the SAR may be exercised from time to time
by written notice to the Company at its principal place of business.
Such notice shall state the election to exercise the SAR, the number of
shares in respect of which it is being exercised, shall be signed by
the person so exercising the SAR and shall be accompanied by the
agreement evidencing the SAR and the Related Option. In the event the
<PAGE>
SAR shall not be exercised in full, the Secretary of the Company shall
endorse or cause to be endorsed on the SAR and the Related Option the
number of shares which have been exercised thereunder and the number of
shares that remain exercisable under the SAR and the Related Option and
return such SAR and Related Option to the holder thereof.
(d) Amount of Payment. The amount of payment to which an
optionee shall be entitled upon the exercise of each SAR shall be equal
to 100% of the amount, if any, by which the fair market value of a
share of Common Stock on the exercise date exceeds the fair market
value of a share of Common Stock on the date the Option related to said
SAR was granted or became effective, as the case may be; provided,
however, the Company may, in its sole discretion, withhold from such
cash payment any amount necessary to satisfy the Company's obligation
for withholding taxes with respect to such payment. For this purpose,
the fair market value of a share of Common Stock shall be determined as
set forth in Section 8(d) hereof.
(e) Form of Payment. The amount payable by the Company to an
optionee upon exercise of a SAR may be paid in shares of Common Stock,
cash or a combination thereof. The number of shares of Common Stock to
be paid to an optionee upon such optionee's exercise of SAR shall be
determined by dividing the amount of payment determined pursuant to
Section 10(d) hereof by the fair market value of a share of Common
Stock on the exercise date of such SAR. For purposes of this Plan, the
exercise date of a SAR shall be the date the Company receives written
notification from the optionee of the exercise of the SAR in accordance
with the provisions of Section 10(c) hereof. As soon as practicable
after exercise, the Company shall either deliver to the optionee the
amount of cash due such optionee or a certificate or certificates for
such shares of Common Stock. All such shares shall be issued with the
rights and restrictions specified herein.
(f) Termination of SAR. Except as otherwise provided in case
of Disability (as defined in Section 8(c)(4) hereof) or death, no SAR
shall be exercisable after an optionee ceases to be an employee,
director or advisor of the Company or Subsidiary; provided, however,
that the Committee shall have the right in its sole discretion, but not
the obligation, to extend the exercise period for not more than three
(3) months following the date such optionee ceases to be an employee,
director or advisor of the Company or a Subsidiary; provided further,
that the Committee may not extend the period during which an optionee
may exercise a SAR for a period greater than the period during which an
optionee may exercise the Related Option. If an optionee's position as
an employee, director or advisor of the Company is terminated due to
the Disability or death of such optionee, the Committee shall have the
right, in its sole discretion, but not the obligation, to extend the
exercise period applicable to the SAR for a period not to exceed the
period in which the optionee may exercise the Option related to said
SAR as set forth in Sections 8(c)(4) and 8(c)(5) hereof, respectively.
(g) Effect of Exercise of SAR. The exercise of any SAR shall
cancel and terminate the right to purchase an equal number of shares
ycovered by the Related Option.
(h) Effect of Exercise of Related Option. Upon the exercise or
termination of any Related Option, the SAR with respect to such Related
Option shall terminate to the extent of the number of shares of Common
Stock as to which the Related Option was exercised or terminated.
(i) Nontransferability of SAR. A SAR granted pursuant to this
Plan shall be exercisable only by the optionee or the optionee's court
appointed guardian as set forth in Section 8(c)(4) hereof during the
optionee's lifetime and, subject to the provisions of Section 10(f)
hereof, shall not be assignable or transferable by the optionee. A SAR
granted pursuant to the Plan shall not be assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise) and
shall not be subject to execution, attachment, or similar process. Any
attempted transfer, assignment, pledge, hypothecation, or other
disposition of any SAR or of any rights granted thereunder contrary to
<PAGE>
the foregoing provisions of this Section 10(i), or the levy of any
attachment or similar process upon a SAR or such rights, shall be null
and void.
11. Reload Options.
(a) Authorization of Reload Options. Concurrently with the
award of Nonqualified Options and/or the award of Incentive Options to
any participant in the Plan, the Committee may authorize reload options
("Reload Options") to purchase for cash or shares that number of shares
of Common Stock equal to the sum of:
(1) The number of shares of Common Stock used to
exercise the underlying Nonqualifying Option or Incentive
Option; and
(2) To the extent authorized by the Committee, the
number of shares of Common Stock used to satisfy any tax
withholding requirement incident to the exercise of the
underlying Nonqualifying Option or Incentive Options.
The grant of a Reload Option will become effective upon the exercise of
the underlying Nonqualifying Option, Incentive Option or Reload Option
through the use of shares of Common Stock held by the optionee for at
least 12 months. Notwithstanding the fact that the underlying option
may be an Incentive Option, a Reload Option is not intended to qualify
as an "incentive stock option" under Section 422 of the Code.
(b) Reload Option Amendment. Each Option Agreement shall state
whether the Committee has authorized Reload Options with respect to the
underlying Nonqualifying Option and/or Incentive Option. Upon the
exercise of an underlying Option or Incentive Option, the Reload Option
will be evidenced by an amendment to the underlying Option Agreement.
(c) Reload Option Price. The option price per share of Common
Stock deliverable upon the exercise of a Reload Option shall be the
fair market value of a share of Common Stock on the date the grant of
the Reload Option becomes effective.
(d) Term and Exercise. Each Reload Option is fully exercisable
six months from the effective date of grant. The term of each Reload
Option shall be equal to the remaining option term of the underlying
Nonqualifying Option and/or Incentive Option.
(e) Termination of Employment. No additional Reload Options
shall be granted to optionees when Nonqualifying Options, Incentive
Option and/or Reload Options are exercised pursuant to the terms of
this Plan following termination of the optionee's employment.
(f) Applicability of Other Sections. To the extent not
inconsistent with the foregoing provisions of this Section, the other
Sections of this Plan pertaining to Options, including Sections 5, 8,
and 9, are incorporated herein by this reference thereto as through
fully set forth herein.
12. Rights as a Shareholder. The holder of an Option or a SAR shall
have no rights as a shareholder with respect to the shares covered by the Option
or SAR until the due exercise of the Option, Related Option, or SAR and the date
of issuance of one or more stock certificates to such holder for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 14 hereof.
13. Optionee's Agreement to Serve. Each employee receiving an Option
shall, as one of the terms of the Option Agreement agree that such employee will
remain in the employ of the Company or Subsidiary for a period of at least one
(1) year from the date on which the Option shall be granted to such employee;
and that such employee will, during such employment, devote such employee's
entire time, energy, and skill to the service of the Company or a Subsidiary as
<PAGE>
may be required by the management thereof, subject to vacations, sick leaves,
and military absences. Such employment, subject to the provisions of any written
contract between the Company or a Subsidiary and such employee, shall be at the
pleasure of the Board of Directors of the Company or a Subsidiary, and at such
compensation as the Company or a Subsidiary shall reasonably determine. Any
termination of such employee's employment during the period which the employee
has agreed pursuant to the foregoing provisions of this Section 13 to remain in
employment that is either for cause or voluntary on the part of the employee
shall be deemed a violation by the employee of such employee's agreement. In the
event of such violation, any Option or Options held by such employee, to the
extent not theretofore exercised, shall forthwith terminate, unless otherwise
determined by the Committee. Notwithstanding the preceding, neither the action
of the Company in establishing the Plan nor any action taken by the Company, a
Subsidiary or the Committee under the provisions hereof shall be construed as
granting the optionee the right to be retained in the employ of the Company or a
Subsidiary, or to limit or restrict the right of the Company or a Subsidiary, as
applicable, to terminate the employment of any employee of the Company or a
Subsidiary, with or without cause.
14. Adjustments on Changes in Capitalization.
(a) Changes in Capitalization. Subject to any required action
by the Shareholders of the Company, the number of shares of Common
Stock covered by the Plan, the number of shares of Common Stock covered
by each outstanding Option, and the exercise price per share thereof
specified in each such Option, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
of the Company resulting from a subdivision or consolidation of shares
or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such shares effected
without receipt of consideration by the Company after the date the
Option is granted, so that upon exercise of the Option, the optionee
shall receive the same number of shares the optionee would have
received had the optionee been the holder of all shares subject to such
optionee's outstanding Option immediately before the effective date of
such change in the number of issued shares of the Common Stock of the
Company.
(b) Reorganization, Dissolution or Liquidation. Subject to any
required action by the Shareholders of the Company, if the Company
shall be the surviving corporation in any merger or consolidation, each
outstanding Option shall pertain to and apply to the securities to
which a holder of the number of shares of Common Stock subject to the
Option would have been entitled. A dissolution or liquidation of the
Company or a merger or consolidation in which the Company is not the
surviving corporation, shall cause each outstanding Option to terminate
as of a date to be fixed by the Committee (which date shall be as of or
prior to the effective date of any such dissolution or liquidation or
merger or consolidation); provided, that not less than thirty (30) days
written notice of the date so fixed as such termination date shall be
given to each optionee, and each optionee shall, in such event, have
the right, during the said period of thirty (30) days preceding such
termination date, to exercise such optionee's Option in whole or in
part in the manner herein set forth.
(c) Change in Par Value. In the event of a change in the
Common Stock of the Company as presently constituted, which change is
limited to a change of all of its authorized shares with par value into
the same number of shares with a different par value or without par
value, the shares resulting from any change shall be deemed to be the
Common Stock within the meaning of the Plan.
(d) Notice of Adjustments. To the extent that the adjustments
set forth in the foregoing paragraphs of this Section 14 relate to
stock or securities of the Company, such adjustments, if any, shall be
made by the Committee, whose determination in that respect shall be
final, binding and conclusive, provided that each Incentive Option
granted pursuant to this Plan shall not be adjusted in a manner that
causes the Incentive Option to fail to continue to qualify as an
"Incentive Stock Option" within the meaning of Section 422 of the Code.
<PAGE>
The Company shall give timely notice of any adjustments made to each
holder of an Option under this Plan and such adjustments shall be
effective and binding on the optionee.
(e) Effect Upon Holder of Option. Except as hereinbefore
expressly provided in this Section 14, the holder of an Option shall
have no rights by reason of any subdivision or consolidation of shares
of stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class by
reason of any dissolution, liquidation, merger, reorganization, or
consolidation, or spin-off of assets or stock of another corporation,
and any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares of Common Stock subject to the
Option. Without limiting the generality of the foregoing, no adjustment
shall be made with respect to the number or price of shares subject to
any Option granted hereunder upon the occurrence of any of the
following events:
(1) The grant or exercise of any other options which
may be granted or exercised under any qualified or
nonqualified stock option plan or under any other employee
benefit plan of the Company whether or not such options were
outstanding on the date of grant of the Option or thereafter
granted;
(2) The sale of any shares of Common Stock in the
Company's initial or any subsequent public offering,
including, without limitation, shares sold upon the exercise
of any overallotment option granted to the underwriter in
connection with such offering;
(3) The issuance, sale or exercise of any warrants to
purchase shares of Common Stock whether or not such warrants
were outstanding on the date of grant of the Option or
thereafter issued;
(4) The issuance or sale of rights, promissory notes
or other securities convertible into shares of Common Stock in
accordance with the terms of such securities ("Convertible
Securities") whether or not such Convertible Securities were
outstanding on the date of grant of the Option or were
thereafter issued or sold;
(5) The issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether
or not any adjustment in the purchase price was made or
required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible
Securities were outstanding on the date of grant of the Option
or were thereafter issued or sold; or
(6) Upon any amendment to or change in the terms of
any rights or warrants to subscribe for or purchase, or
options for the purchase of, Common Stock or Convertible
Securities or in the terms of any Convertible Securities,
including, but not limited to, any extension of any expiration
date of any such right, warrant or option, any change in any
exercise or purchase price provided for in any such right,
warrant or option, any extension of any date through which any
Convertible Securities are convertible into or exchangeable
for Common Stock or any change in the rate at which any
Convertible Securities are convertible into or exchangeable
for Common Stock.
(f) Right of Company to Make Adjustments. The grant of an
Option pursuant to the Plan shall not affect in any way the right or
power of the Company to make adjustments, reclassification,
reorganizations, or changes of its capital or business structure or to
merge or to consolidate or to dissolve, liquidate or sell, or transfer
all or any part of its business or assets.
<PAGE>
15. Investment Purpose. Each Option under the Plan shall be granted on
the condition that the purchase of the shares of stock thereunder shall be for
investment purposes, and not with a view to resale or distribution; provided,
however, that in the event the shares of stock subject to such Option are
registered under the Securities Act or in the event a resale of such shares of
stock without such registration would otherwise be permissible, such condition
shall be inoperative if in the opinion of counsel for the Company such condition
is not required under the Securities Act or any other applicable law,
regulation, or rule of any governmental agency.
16. No Obligation to Exercise Option or SAR. The granting of an Option
or SAR shall impose no obligation upon the optionee to exercise such Option or
SAR.
17. Modification, Extension, and Renewal of Options. Subject to the
terms and conditions and within the limitations of the Plan, the Committee and
the Board of Directors may modify, extend or renew outstanding Options granted
under the Plan, or accept the surrender of outstanding Options (to the extent
not theretofore exercised). Neither the Committee nor the Board of Directors
shall, however, modify any outstanding Options so as to specify a lower price or
accept the surrender of outstanding Options and authorize the granting of new
Options in substitution therefor specifying a lower price. Notwithstanding the
foregoing, however, no modification of an Option shall, without the consent of
the optionee, alter or impair any rights or obligations under any Option
theretofore granted under the Plan.
18. Effective Date of the Plan. The Plan shall become effective on the
date of execution hereof, which date is the date the Board of Directors approved
and adopted the Plan ("Effective Date"); provided, however, if the Shareholders
of the Company shall not have approved the Plan by the requisite vote of the
Shareholders, within twelve (12) months after the Effective Date, then the Plan
shall terminate and all Options theretofore granted under the Plan shall
terminate and be null and void.
19. Termination of the Plan. This Plan shall terminate as of the
expiration of ten (10) years from the Effective Date. Options may be granted
under this Plan at any time and from time to time prior to its termination. Any
Option outstanding under the Plan at the time of its termination shall remain in
effect until the Option shall have been exercised or shall have expired.
20. Amendment of the Plan. The Plan may be terminated at any time by
the Board of Directors of the Company. The Board of Directors may at any time
and from time to time without obtaining the approval of the Shareholders of the
Company or a Subsidiary, modify or amend the Plan (including such form of Option
Agreement as hereinabove mentioned) in such respects as it shall deem advisable
in order that the Incentive Options granted under the Plan shall be "Incentive
Stock Options" as defined in Section 422 of the Code or to conform to any change
in the law, or in any other respect which shall not change: (a) the maximum
number of shares for which Options may be granted under the Plan, except as
provided in Section 14 hereof; or (b) the option prices other than to change the
manner of determining the fair market value of the Common Stock for the purpose
of Section 8(d) hereof to conform with any then applicable provisions of the
Code or regulations thereunder; or (c) the periods during which Options may be
granted or exercised; or (d) the provisions relating to the determination of
persons to whom Options shall be granted and the number of shares to be covered
by such Options; or (e) the provisions relating to adjustments to be made upon
changes in capitalization. The termination or any modification or amendment of
the Plan shall not, without the consent of the person to whom any Option shall
theretofore have been granted, affect that person's rights under an Option
theretofore granted to such person. With the consent of the person to whom such
Option was granted, an outstanding Option may be modified or amended by the
Committee in such manner as it may deem appropriate and consistent with the
requirements of this Plan applicable to the grant of a new Option on the date of
modification or amendment.
21. Withholding. Whenever an optionee shall recognize compensation
income as a result of the exercise of any Option or SAR granted under the Plan,
the optionee shall remit in cash to the Company or Subsidiary the minimum amount
of federal income and employment tax withholding which the Company or Subsidiary
is required to remit to the Internal Revenue Service in accordance with the then
<PAGE>
current provisions of the Code. The full amount of such withholding shall be
paid by the optionee simultaneously with the award or exercise of an Option or
SAR, as applicable.
22. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as Directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceedings, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such
Committee member is liable for negligence or misconduct in the performance of
his duties; provided that within sixty (60) days after institution of any such
action, suit or proceeding a Committee member shall in writing offer the Company
the opportunity, at its own expense, to pursue and defend the same.
23. Application of Funds. The proceeds received by the Company from
the sale of Common Stock pursuant to Options granted hereunder will be used for
general corporate purposes.
24. Governing Law. This Plan shall be governed and construed in
accordance with the laws of the state of incorporation of the Company.
EXECUTED this 20thth day of April, 1998.
TRANSNATIONAL FINANCIAL CORPORATION
By: ______________________________
Joseph Kristul,
President
ATTEST:
- ------------------------------
Eugene Kristul,
Secretary
<PAGE>
February 27, 1998
Mr. Joseph Kristul
President
Transnational Financial Corporation
301 Junipero Serra Boulevard, Suite 260
San Francisco, CA 94127
Dear Joseph:
This letter ("agreement") is to set forth the terms for our working with
Transnational Financial Corporation (the "Company") in it strategic decision to
pursue an initial public offering (IPO") and to secure additional short term
capital. This agreement will also encompass the work to-date performed by
Financial Capital Resources in it's support of the Company as the Company
pursues it's goals and objectives.
SCOPE OF WORK
This agreement covers without limitation, the search for an underwriter to
undertake the initial public offering; the strategic planning associated with
the IPO; co-ordination and oversight of IPO process including legal, accounting
and operational issues; review of legal documents prepared by legal counsel;
drafting of stock offering prospectus; assistance of additional short term
capital through suggestion of personal loan guaranteed by stock of company;
introduction and assistance with Insouth to secure short term loan and continued
involvement until completion of IPO.
EXPENSES
FCR shall be responsible for all out-to-pocket expenses incurred during the
course of this engagement except that FCR shall be reimbursed for all airfare
and hotel expense incurred on behalf of the Company. These expenses will be
billed on a monthly basis and will be due and payable within five days of
receipt by Company.
FEES
Our fees for the scope of work as presented will be the sum of the following:
1)
an amount equal to three quarters of one percent (3/4%) of the
Company's stock, which in the event that the IPO fails to
close, will be returned by FCR to the Company.
<PAGE>
(the stock calculation will be based on the Company's existing
stock base prior to the IPO conversion rate)
2)
an amount of $75,000 to be paid from the proceeds of the IPO.
This amount is to be paid to FCR within two days of the
Company receiving the IPO proceeds.
3)
an amount of $25,000 on the earlier of the funding of the
subordinate debt or March 15, 1998.
If for any reason the IPO does not close, in addition to the payments under item
three above, FCR will be entitled to an additional cash payment of $25,000 on
July 31, 1998.
I have really enjoyed working with you during the last three years and am
looking forward to a successful completion of the IPO which will give you the
capital base to originate $1.5 billion in loans per annum.
Sincerely,
/s/ Hilary Whitley
Hilary Whitley
President
ACCEPTED AND AGREED TO:
/s/ Joseph Kristul
Joseph Kristul
Transnational Financial Corporation
<PAGE>
EXHIBIT 23.1
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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We consent to the use of our reported dated June 4, 1998, on our audit of
the financial statements of Transnational Financial Corporation included in the
registration statement on Form SB-2 in connection with the offering of common
stock of Transnational Financial Corporation. We also consent to the reference
to our Firm under the caption "Experts."
/s/ Moss Adams LLP
San Francisco, California
June 8, 1998
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