<PAGE>
As filed with the Securities and Exchange Commission on October 5, 1999
Registration No. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
D.E. FREY GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 6211 84-1122880
- ---------------------------- -------------------------- ----------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Clarification Identification
organization) Code Number) Number)
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
(303) 863-4040
-------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of principal executive offices)
Dale E. Frey
Chairman and Chief Executive Officer
D.E. Frey Group, Inc.
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
(303) 863-4040
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Samuel E. Wing, Esq. John G. Herbert, Esq.
Jones & Keller, P.C. John G. Herbert, P.C.
1625 Broadway, Suite 1600 1675 Larimer, Suite 310
Denver, Colorado 80202 Denver, Colorado 80202
Telephone: (303) 573-1600 Telephone: (303) 534-0522
_______________________________
Approximate date of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [_]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Aggregate Offering Registration
to be Registered Registered Per Security/(1)/ Price Fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,000,000 $7.00 $14,000,000 $3,892
- ------------------------------------------------------------------------------------------------------
Common Stock/(2)/ 300,000 7.00 2,100,000 584
- ------------------------------------------------------------------------------------------------------
Warrants to Purchase
Common Stock/(3)/ 200,000 Nil ---
- ------------------------------------------------------------------------------------------------------
Common Stock/(3)/ 200,000 8.40 1,680,000 467
- ------------------------------------------------------------------------------------------------------
Totals $17,780,000 $4,943
- ------------------------------------------------------------------------------------------------------
</TABLE>
________________
(1) Estimated solely for purposes of calculating the registration fee.
(2) Represents shares of common stock subject to the underwriters' over-
allotment option.
(3) Represents warrants granted to the representative of the underwriters to
purchase common stock and the shares underlying the warrants.
___________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE 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 THE DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER ___, 1999
Prospectus
2,000,000 Shares
D.E. FREY GROUP, INC.
Common Stock
We are a full service retail securities brokerage firm. Because this is
our initial public offering, there is no public market for our common stock. We
intend to apply to have the shares listed on the American Stock Exchange. We
anticipate that the public offering price will be between $5 and $7 per share.
See "Risk Factors" beginning on page 6 to read about risks you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
___________________________
Per
Share Total
----- -----
Public offering price...................... $ $
Underwriting discount......................
Proceeds to us (before expenses)...........
The underwriters have a 45-day option to purchase up to an additional
300,000 shares to cover any over-allotments.
NEIDIGER TUCKER BRUNER, INC. D.E. FREY & COMPANY, INC.
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
The date of this prospectus is ______________, 1999
<PAGE>
inside front cover
map showing branch locations
<PAGE>
SUMMARY
Because this is a summary, it may not contain all the information you
consider important. You should read the entire prospectus carefully to
understand this offering, especially the Risk Factors section beginning on page
6 and the financial statements beginning on page 71. Because we are a holding
company, when we describe our business or refer to ourselves, we generally mean
the business we conduct through our broker-dealer subsidiary, D.E. Frey &
Company, Inc. We often refer to ourselves as the "parent" or "parent company"
and to our broker-dealer subsidiary as our "subsidiary" or the "broker."
Overview of our Company
We are a full service retail securities brokerage firm, formed in 1989,
operating through 93 independent investment professionals in 37 offices in 18
states. Each of these offices except our home office in Denver, Colorado is a
branch office which generally has between one and three independent investment
professionals. In addition to our ongoing retail brokerage activities, we have
since June 1996 participated as a selling group member in more than 80
underwritten public offerings of securities. We offer customers brokerage
services relating to corporate equity and debt securities, U.S. government
securities, municipal securities, mutual funds, variable annuity and variable
life insurance products, general insurance, portfolio planning and management,
cash management services, market information and portfolio tracking and records
management.
We recruit experienced, highly productive investment professionals by
offering them a high commission payout and the independence of owning and
operating their own branch office. Generally, each branch office pays
substantially all costs associated with establishing and operating the branch in
return for a relatively high portion of gross commission revenue, which averages
approximately 90% of commission revenue. We provide regulatory, compliance and
other support services to our investment professionals. This program allows
expansion of our brokerage operations with relatively minimal capital outlay by
our firm. Continuing to add experienced highly productive brokers is an
integral part of our growth strategy.
We have experienced significant revenue growth over the past five years.
Total revenues have increased from $17.4 million in 1994 to $37.0 million in
1998, a compounded growth rate of 21%. Our revenue growth is due to growth in
customer assets, number of customer accounts and increases in the number and
productivity of investment professionals. As of June 30, 1999 we have
approximately 33,000 active customer accounts with account balances aggregating
$3 billion.
1
<PAGE>
Presently, we provide real-time decision support and empower our investment
professionals with relevant and timely information to better serve their
clients. In addition, recently, we began focusing on other rapidly growing
sectors of the securities industry that are related to or dependent on Internet
and electronic commerce technology. Among other plans, which are discussed in
this prospectus, we intend to utilize an on-line brokerage service being
developed by our clearing broker through which individual clients will be able
to trade Nasdaq and exchange listed securities and mutual funds.
Our Goals and Growth Strategy
Our goal is to enhance our position as a full service retail brokerage firm
and grow by capitalizing on changes occurring in the financial services industry
by:
. continuing our strategy of recruiting and retaining investment
professionals who are highly experienced and who have an established
client base
. continuing to emphasize and provide a favorable environment for
cultivating and maintaining the long term relationships between our
investment professionals and their clients, which we believe is
essential to our growth and the success of our overall plans
. developing on-line Internet securities trading capabilities for our
customers, thereby adding new customers and meeting the expectations
of our existing customers
. continuing to emphasize client relationships even with respect to
Internet trading accounts by associating a specific investment
professional with each account, thereby merging the convenience of
Internet based securities trading with the personal relationships
provided by our full service investment professionals
. in connection with the Internet trading capabilities, developing a web
site on which we can provide additional financial information,
services and products to our clients
. entering into relationships with financial service and other companies
which can be accessed by our customers from our web site, thereby
providing additional sources of revenues from such companies
. in connection with changes in our business and shifts in the
securities industry, negotiating new and more advantageous
arrangements with the financial services companies with whom we do
business, thereby increasing revenues and decreasing expenses
2
<PAGE>
. continuing to empower our investment professionals and their clients
with a complete selection of tools and services necessary to meet
their needs, including a full array of market data, trading services,
electronic communications and non-proprietary financial products, as
well as the ability to conduct business in any mode desired, supported
with real time data, from traditional brokerage operations to
electronic and Internet transactions
The Offering
Common stock offered by us.............. 2,000,000
Common stock to be outstanding
after the offering/(1)/................. 6,855,536
Use of proceeds......................... We estimate that the net proceeds to
us from selling our common stock in
the offering, at $5 to $7 per share,
will be approximately $8.4 to $11.9
million. We expect to use the net
proceeds for regulatory capital,
repayment of debt, expansion of
Internet and e-commerce
capabilities, technology
development, marketing, recruitment
of investment professionals and for
general corporate purposes including
overhead. See "Use of Proceeds."
Proposed Trading Symbol................. DEF
_________________
(1) Based on the number of shares outstanding at August 31, 1999, including
283,922 shares to be issued upon conversion of $1,448,000 of debt, assuming
a price per share of $5.10 (85% of an assumed public offering price of
$6.00 per share) simultaneously with this offering (see "Exchange of
Debt"). The number of shares does not take into account:
. shares issuable upon exercise of 941,500 outstanding options and
warrants which have a weighted average exercise price of $2.21 per
share
. the underwriters' 45 day over-allotment option to purchase up to
300,000 additional shares
We are a holding company, D.E. Frey Group, Inc., operating through our
wholly owned subsidiary, D.E. Frey & Company, Inc. We were incorporated under
Delaware law in 1989. Our executive offices are located at 1700 Lincoln Street,
Suite 2200, Denver, Colorado 80203, and our telephone number is (303) 863-4040.
3
<PAGE>
Summary Consolidated Financial and Other Data
You should read the information presented below along with "Selected
Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our unaudited pro forma consolidated
financial statements and our consolidated financial statements and related
notes appearing elsewhere in this prospectus.
Statements of Operations Data:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(in thousands, except per share and other data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Brokerage.......................... $ 15,816 $ 19,851 $ 27,097 $ 31,136 $ 33,045 $ 16,711 $ 20,663
Interest and account fees.......... 1,218 1,535 2,005 2,203 2,880 1,399 1,671
Other.............................. 325 475 942 1,350 1,113 766 563
-------- -------- -------- -------- -------- -------- --------
Total revenues................... 17,359 21,861 30,044 34,689 37,038 18,876 22,897
-------- -------- -------- -------- -------- -------- --------
Expenses:
Commissions and investment
advisory, clearing and execution
fees............................... 13,448 17,177 23,566 27,513 29,470 14,852 18,648
Other expenses..................... 4,158 6,752 7,887 7,329 7,957 3,984 4,327
-------- -------- -------- -------- -------- -------- --------
Total expenses................... 17,606 23,929 31,453 34,842 37,427 18,836 22,975
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................... $ (247) $ (2,068) $ (1,409) $ (153) $ (389) $ 40 $ (78)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common
share, basic and diluted............ $ (0.12) $ (0.86) $ (0.46) $ (0.04) $ (0.09) $ 0.01 $ (0.02)
======== ======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding
Basic.............................. 2,094 2,400 3,052 3,744 4,338 4,178 4,547
======== ======== ======== ======== ======== ======== ========
Diluted............................ 2,094 2,400 3,052 3,744 4,338 4,275 4,547
======== ======== ======== ======== ======== ======== ========
Pro Forma Data:/(1)/
Pro forma net income (loss)........ $ ( 234) $ 0.00
======== ========
Pro forma net income (loss) per
share, basic and diluted........... $ ( 0.05) $ 0.00
======== ========
Shares used in computing pro
forma loss per share:
Basic............................... 4,622 4,831
======== ========
Diluted............................. 4,622 5,357
======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
At December 31, At June 30, 1999
1998 Actual Pro Forma/(1)/
--------------- -------- --------------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents............ $ 733 $ 1,086 $ 11,219
Working capital...................... 582 971 11,141
Total assets......................... 4,945 6,119 16,181
Notes payable........................ 5,470 6,070 4,622
Total liabilities.................... 8,516 9,416 7,931
Shareholders' equity (deficit)....... (3,571) (3,296) 8,250
</TABLE>
<TABLE>
<CAPTION>
At December 31, At
Other Data 1994 1995 1996 1997 1998 June 30, 1999
--------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Number of branches................... 28 23 32 33 36 37
Number of investment
professionals...................... 67 99 99 100 92 93
Recruited during year................ 29 39 18 19 13 10
Terminated or resigned
during year........................ 0 7 18 16 21 9
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
1994 1995 1996 1997 1998 June 30, 1999
--------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Average revenue per
investment professional
which includes commissions,
advisory fees and
investments........................ $236,060 $200,515 $273,707 $311,362 $359,185 $222,180
</TABLE>
- ------------------
(1) Pro forma amounts are calculated after giving effect to:
. the unaudited pro forma adjustments to reflect the issuance of
2,000,000 shares of common stock (without exercise of the
underwriters' over-allotment option) at an assumed price of $6.00
per share, the midpoint of the range of initial public offering
prices, after deducting our estimated offering expenses and
underwriting discounts
. the concurrent issuance of 283,922 shares of common stock, at a
price of $5.10 per share (85% of the above, assumed public offering
price) upon conversion of $1,448,000 of debt; see "Exchange of
Debt"
Pro forma per share amounts are computed by using the weighted average
number of shares of common stock outstanding in the relevant period as
adjusted to give effect to the issuances of stock in the debt exchange, as
if such issuances occurred at the beginning of the periods indicated.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below in considering
whether to invest in our common stock. The risks and uncertainties described
below may not be the only ones we will face. Additional risks and uncertainties
not presently known to us or that we currently deem not material may also impair
our operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be seriously harmed. In that
case, the trading price of our common stock would likely decline and you could
lose all or part of your investment in our company.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements are found
in the material set forth under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in the prospectus generally. When used in this
prospectus, the words "anticipate," "believe," "expect," "estimate," "intend"
and similar expressions are generally intended to identify forward-looking
statements. Our actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors, including the
risks described in "Risk Factors" and elsewhere in this prospectus.
We have no operating history using our planned business strategies, including
electronic commerce, upon which you may evaluate us.
We have no operating history using our planned business strategies,
including electronic commerce, upon which to evaluate the merits of investing in
our common stock. Our prospects are subject to the risks, expenses, and
uncertainties encountered by many companies today, including traditional
operational risks, financial risks and strategic or business-model risks. These
business-model risks include the failure
. to properly recognize and act on patterns of strategic change in our
industry
. to best respond to customer priorities, including expectations as to
price and quality
. to be resource-efficient and obtain profitability
. to maintain and increase our electronic commerce capabilities and
usage
While these risks can affect any business, they are particularly relevant
to companies, like ours, whose future depends on the success of our strategic
business model. We may not be successful in addressing these risks, and our
business and financial condition could suffer.
We have incurred accumulated losses since our inception and we have a
shareholders' deficit.
As of June 30, 1999, we had cumulative losses of $7.7 million and a
shareholders' deficit of $3.3 million. Although our revenue has grown since our
inception, there can be no
6
<PAGE>
assurance that our revenues will continue at their current level or increase in
the future. We have never had a profit for a full fiscal year since our
inception in 1989. We expect to increase our operating expenses through our
recruiting, sales and marketing, automation of internal functions, compliance
and supervision and development of our electronic commerce technology. As a
result, it is uncertain when or if we will become profitable on an ongoing
basis. If such expenses are not followed by increased revenues, our business,
results of operations and financial condition would be negatively impacted.
Our lack of an operating history in conjunction with our business
strategies (including attracting additional, high producing investment
professionals and expansion into Internet trading) and the uncertain nature of
the securities markets make it difficult or impossible to predict future results
of operations. Therefore, our revenue growth should not be taken as an
indicator of the rate of revenue growth or the profitability, if any, we can
expect in the future.
There are significant costs associated with our proposed network infrastructure
expansion and such expansion could cause potential disruptions in service.
We will need to expand our network infrastructure and client support
capabilities in anticipation of an expanded client base and an increase in
client services. Such expansion will require us to make significant
expenditures to develop our interactive website capabilities for Intranet and
Internet features and to hire and train additional service personnel. Such
expansion must be completed without system disruptions, slower response times or
degradation in speed of order fulfillment and levels of client service. System
disruptions, or degradation in the level of client service during this process
could harm our business.
We face adversity if we are insolvent.
After this offering and conversion of some of our debt, we will have
outstanding subordinated notes and senior debt in the aggregate principal amount
of approximately $4.6 million, which contain customary default provisions. Also
the subordinated notes which will amount to approximately $3.0 million after
conversion, contain provisions allowing acceleration of maturity at the option
of the holders in the event we become insolvent and admit our insolvency in
writing. In the event it should ever be determined that we are insolvent, then
the holders of the subordinated notes may have the right to accelerate the
indebtedness and demand immediate payment. If at that time, or at the time of
any other default under our debt agreements, we do not have significant cash
reserves or other sources of immediate capital, acceleration of our indebtedness
would have a material adverse effect on us.
The securities business is highly volatile.
The securities business is, by its nature, subject to significant risks,
particularly in volatile or illiquid markets. These risks include the risks of:
. trading losses . customer fraud
. counterparty failure to meet . employee fraud
commitments . failures in connection with the
. errors and misconduct processing of securities
transactions
. litigation
7
<PAGE>
Our principal business activities are retail securities brokerage, asset
management, and related financial services. These businesses are highly
competitive and subject to various risks, volatile trading markets, and
fluctuations in the volume of market activity. The securities business is
directly affected by many broad factors, including:
. economic and political . broad trends in business and
conditions finance
. legislation and regulation . currency values
affecting the business and . market conditions
financial communities . interest rate levels and volatility
. inflation . technological changes
. the availability and cost of . changes in customer's buying trends
short-term or long-term
funding and capital
These and other factors can contribute to lower price levels for securities
and illiquid markets. Lower price levels of securities may result in:
. reduced securities transactions volumes, with a correlative reduction
in commission revenues
. reduced management fees calculated as a percentage of assets managed
. losses from declines in the market value of securities held for
trading and investment
In low volume periods, profitability levels are further adversely affected
because certain of our expenses remain relatively fixed. Sudden sharp declines
in securities' market values and the failure of persons and counterparties to
perform their obligations can result in illiquid markets. This in turn can make
it difficult for us to sell securities. As a result of the varied risks
associated with the securities business, which are beyond our control, our
commissions and other revenues could be diminished. Revenue reductions and
losses resulting from securities ownership could hurt our business. In
addition, our revenues and operating results may fluctuate from quarter to
quarter and from year to year because of these risks.
We may not be able to keep up with changing trends in the securities business.
Several current trends are affecting the securities industry, including:
. increasing consolidation
. increasing use of technology
. increasing use of discount and on-line electronic brokerage services
. greater self reliance by individual investors seeking to eliminate the
middleman
. greater investment in mutual funds, variable annuities and variable
life insurance products
. downward pressure on commission levels
. a current movement to expand the hours of operations of Nasdaq and
national securities exchanges
8
<PAGE>
These trends could result in our facing increased competition from larger
broker-dealers, a need for increased investment in technology, or potential loss
of customers and reductions in commission income.
Risks associated with our sales structure.
All of our investment professionals are required by law to be licensed with
our subsidiary, a licensed securities broker-dealer. Pursuant to these
requirements, the investment professionals are subject to our supervision in the
area of compliance with federal and applicable state securities laws, rules and
regulations, as well as the rules and regulations of self-regulatory
organization such as the NASD and National Futures Association. The violation
of any regulatory requirements could jeopardize our securities broker-dealer or
other licenses or could subject us to liability.
There is fierce competition in the brokerage industry.
All aspects of our business are highly competitive. We compete directly
with national and regional full service broker-dealers and with discount
brokers, on-line brokers, mutual funds, banks, insurance companies, dealers,
investment banking firms and investment advisors and others. The financial
services industry has become considerably more concentrated as numerous
securities firms have either ceased operations or have been acquired by or
merged into other firms. These mergers and acquisitions have increased
competition from these firms, many of which have significantly greater equity
capital and financial and other resources than we do. With respect to retail
brokerage activities, some regional firms with which we compete have operated in
various markets longer than we have and have established long-standing client
relationships. In addition, we expect competition from commercial banks to
increase because of recent legislative and regulatory initiatives in the United
States to remove or relieve restrictions on commercial banks' securities
activities. We also compete with others in the financial services industry in
recruiting new employees and retaining current employees.
We expect to face increasing competition from companies offering electronic
brokerage services, which is a rapidly developing segment of our industry.
These competitors may have lower costs or provide fewer services, and may offer
certain customers more attractive pricing or other terms, than we offer. It is
imperative that we keep our costs down. However, we may not be able to do so in
comparison to firms more technologically adept. In addition, issuers may bypass
stockbrokers and other investment professionals and sell their securities
directly to purchasers, including sales using electronic media such as the
Internet. To the extent that issuers and purchasers of securities succeed in
transacting business without the assistance of financial intermediaries like us,
our business could be harmed.
We may not be able to keep up in a cost-effective way with rapid technological
change.
The brokerage business and particularly the on-line financial services
industry are characterized by rapid technological change, changes in customer
requirements, frequent new service and product introductions and enhancements
and evolving industry standards. Our
9
<PAGE>
future success will depend, in part, on our ability to develop technologies and
enhance our existing services and products. We must also develop new services
and products that address the increasingly sophisticated and varied needs of our
customers and prospective customers. We must respond to this changing
environment on a timely and cost-effective basis. The development and
enhancement of services and products entails significant technical and financial
risks. We may not be able to:
. effectively use new technologies
. adapt services and products to evolving industry standards
. develop, introduce and market new services and products or enhance new
services and products
In addition, we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of these services and
products, and our new service and product enhancements may not achieve market
acceptance. If we encounter these problems, our business, financial condition
and operating results will be negatively affected.
Operational risks may disrupt our business or limit our growth.
Our business is highly dependent on information processing and
telecommunications systems. We face operational risks arising from mistakes
made in the confirmation or settlement of transactions or from transactions not
being properly booked, evaluated or accounted for. Our business is highly
dependent on our ability, the ability of our clearing firm and other firms which
execute trades for us, to process, on a daily basis, a large and growing number
of transactions across numerous and diverse markets. Consequently, both we and
our clearing firm rely heavily on our respective financial, accounting,
telecommunications and other data processing systems. If any of these systems
do not operate properly or are unavailable due to problems with our physical
infrastructure, we could suffer financial loss, a disruption of our business,
liability to clients, regulatory intervention or reputational damage. In
addition, the rapidly increasing level of telephone and e-mail activity has at
times strained the capacity of our telecommunications system and our customer
service staff. An inability of the systems we use to accommodate an increasing
volume of transactions and customer activity could also constrain our ability to
expand our businesses. We are currently upgrading and expanding the
capabilities of our data and telecommunications systems and other operating
technology. We expect that in the future we will need to continue to automate,
upgrade and expand our systems infrastructure. See "Business - Our Information
Technology and Systems."
We are subject to net capital constraints.
The SEC and the NASD, and various other regulatory bodies in the United
States have rules with respect to net capital requirements that affect us.
These rules require that at least a substantial portion of a broker-dealer's
assets be kept in cash or highly liquid investments. Our broker-dealer
subsidiary must comply with the net capital requirements, which limit operations
that require intensive use of capital, such as in underwriting or trading
activities. See "Business - Effect of Net Capital Requirements." These rules
could also restrict our ability to withdraw capital from our broker-dealer
subsidiary, even in circumstances where this subsidiary has
10
<PAGE>
more than the minimum amount of required capital. This, in turn, could limit our
ability to pay dividends, implement our strategies and pay interest on and repay
the principal of our debt. A change in these rules, or the imposition of new
rules, affecting the scope, coverage, calculation, or amount of the net capital
requirements, could have similar adverse effects. Significant operating losses
or any unusually large charge against net capital could also have a negative
impact on our business.
The failure of our brokerage customers to meet their margin requirements may
cause us to incur significant liabilities.
Our brokerage business, by its nature, is subject to risks related to
defaults by our customers in paying for securities they have agreed to purchase
and deliver securities they have agreed to sell. Correspondent Services
Corporation (CSC), a division of a major brokerage firm, provides clearing
services to our brokerage business, including the confirmation, receipt,
execution, settlement and delivery functions involved in securities
transactions, as well as the safekeeping of customers' securities and assets and
certain customer record keeping, data processing and reporting functions. CSC
makes margin loans to our customers to purchase securities with funds they
borrow from CSC. We must indemnify CSC for, among other things, any loss or
expense incurred due to defaults by our customers in failing to repay margin
loans or to maintain adequate collateral for those loans. We are subject to
risks inherent in extending credit, especially during periods of rapidly
declining markets.
We are dependent on the continued availability of our Chairman and other key
employees.
Our success is highly dependent on the services of our founder and
Chairman, Dale E. Frey, who is 69 years old. We have a $1 million key man life
insurance on him, but this does not obviate the risk of the loss of his
services. Most aspects of our business are also dependent on skilled
individuals. We devote considerable resources to recruiting, training and
compensating these individuals. Competition for key personnel is intense. From
time to time, our investment professionals and employees leave to pursue other
opportunities. We cannot assure that losses of key personnel due to such
competition, or for other reasons, will not occur in the future.
Our growth strategy depends on our ability to attract and retain high producing
investment professionals.
A principal component of our strategy is to increase market penetration by
recruiting experienced investment professionals. We cannot assure that these
recruiting efforts will be successful or, if successful, that they will enhance
our business, results of operations, or financial condition. Investment
professionals leave us periodically for various reasons. If a small number of
our larger-producing investment professionals were to leave, our business could
be critically damaged. We cannot assure that such losses of investment
professionals will not occur.
11
<PAGE>
We may be required to take charges to earnings in connection with stock options
and warrants issued to investment professionals.
We have granted options and warrants to certain investment professionals in
the past as incentive compensation. In addition, in connection with our future
efforts to attract and retain investment professionals, we may wish to offer
incentive compensation to them in the form of stock options and warrants. Under
currently proposed accounting pronouncements it is likely that our investment
professionals may not be considered the functional equivalent of employees.
Therefore, if these proposed rules are adopted we may be required prospectively
to recognize charges to earnings in connection with such stock options and
warrants. Such charges, if they materialize could result in a material negative
effect on the reported results of our operations.
Employee or investment professional misconduct could harm us and is difficult to
detect and deter.
There have been a number of highly publicized cases involving fraud or
other misconduct by employees or investment professionals in the financial
services industry in recent years, and we run the risk that employee or
investment professional misconduct could occur. Misconduct by employees or
investment professionals could include binding us to transactions that exceed
authorized limits or present unacceptable risks, or hiding from us unauthorized
or unsuccessful activities. In either case, this type of conduct could result
in unknown and unmanaged risks or losses. Employee or investment professional
misconduct could also involve the improper use of confidential information,
which could subject us to regulatory sanctions and cause us serious reputational
harm. It is not always possible to deter employee or investment professional
misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases. See "Legal Matters Affecting Us."
Despite our efforts, our systems as well as those of others may prove not to be
Year 2000 compliant, which would significantly disrupt our business.
We may realize exposure and risk if the systems on which we are dependent
to conduct our operations including those of our clearing firm are not Year 2000
compliant. Any significant disruption of our computer infrastructure caused by
the Year 2000 problem could significantly interfere with our business
operations. Our potential areas of exposure include products purchased from
third parties, computers, software, telephone systems and other equipment used
internally and those used by our vendors. We will be negatively impacted if our
present efforts to address Year 2000 compliance issues are not successful, or if
vendors with whom we conduct business do not successfully address such issues.
Our long-term success may depend in part on the development of the Internet and
electronic commerce as a commercial marketplace for securities transactions,
which is uncertain.
The markets for investment banking and brokerage services through the
Internet and electric commerce are at an early stage of development and are
rapidly evolving. Because the markets for our on-line services are new and
evolving, it is difficult to predict the future growth
12
<PAGE>
(if any) and the future size of these markets. We cannot assure that we will be
able to successfully participate in those markets. A number of factors could
prevent widespread acceptance of Internet and electric commerce, including the
following:
. electronic commerce is at an early stage and buyers may be unwilling
to shift their purchasing from traditional vendors to on-line vendors
or share their purchasing with traditional vendors
. the necessary network infrastructure for substantial growth in usage
of the Internet may not be adequately developed
. increased government regulation or taxation may adversely affect the
viability of electronic commerce
. insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times or
increased costs
. adverse publicity and consumer concern about the security of
electronic commerce transactions could discourage its acceptance and
growth
. government and self regulatory organization (SRO) regulation may
adversely affect or otherwise restrict electronic securities
transactions
We rely heavily on CSC and termination of our agreement with CSC could harm our
business.
Our clearing agreement with CSC may be terminated by either party subject
to certain conditions. Termination of this agreement could harm our business.
Moreover, we are heavily relying on CSC to develop on-line, Internet trading
capabilities, which it has indicated will be available in the fourth quarter of
1999. Although we are prepared to seek Internet trading capabilities through
other sources, if necessary, the failure of CSC to develop such capabilities
would delay our entry into this segment of the securities industry. The ability
to offer Internet securities trading to our customers is a significant portion
of our growth strategy.
Pursuant to our clearing agreement, CSC on a fee basis, processes most of
the securities transactions for our account and the accounts of our clients.
Services of CSC include billing and credit extension, control and receipt,
custody and delivery of securities, for which we pay a transaction charge. We
are dependent on the operational capacity and the ability of CSC for the orderly
processing of transactions. In addition, by engaging the processing services of
a clearing firm, we are exempt from certain capital reserve requirements and
other complex regulatory requirements imposed by federal and state securities
laws. Moreover, we have agreed to indemnify and hold CSC harmless from certain
liabilities or claims, including claims arising from the transactions of our
clients.
Our business is subject to stringent regulation.
Our business and the securities industry are subject to extensive
regulation in the United States at both the federal and state levels, as well as
by self-regulatory organizations such as the NASD and National Futures
Association. In addition, the SEC, NASD and various other regulatory agencies
have stringent rules with respect to the protection of customers and
13
<PAGE>
maintenance of specified levels of net capital by broker-dealers. A significant
operating loss or any unusually large charge against net capital could curtail
our ability to expand or even continue our existing level of business. The
regulatory environment in which we operate is subject to change. We may be
adversely affected as a result of new or revised legislation or regulations
imposed by the SEC, other U.S. governmental regulators or SROs, including
legislation or regulations regarding securities transactions via the Internet
and electronic commerce. We also may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by the SEC, other
federal and state governmental authorities and SROs.
We are subject to periodic examination by the SEC, SROs and various state
authorities. Our sales practice operations, trading operations, record-keeping,
supervisory procedures and financial position may be reviewed during such
examinations to determine if they comply with the rules and regulations designed
to protect customers and protect the solvency of broker-dealers. Examinations
may result in issuance of a letter to us noting perceived deficiencies and
requesting us to take corrective action. Deficiencies could lead to further
investigation and the possible institution of administrative proceedings, which
may result in the issuance of an order imposing sanctions upon us and/or our
personnel, including our investment professionals. Sanctions against us may
include a censure, cease and desist order, monetary penalties or an order
suspending us for a period of time from conducting certain or all of our
securities operations. Sanctions against individuals may include a censure,
cease and desist order, monetary penalties or an order restricting the
individual's activities or suspending the individual from association with us.
In egregious cases, either we or our personnel or both could be expelled from an
SRO or barred from the securities industry.
In recent NASD and SEC examinations, the examiners have indicated that we
may not have fully complied with certain regulatory requirements in our
securities placement activities and with respect to our supervisory
responsibilities. See "Legal Matters Affecting Us."
We are in a highly litigious business.
Many aspects of our business involve substantial risks of liability. There
has been an increase in litigation and arbitration within the securities
industry in recent years, including class action suits seeking substantial
damages. Broker-dealers such as us are subject to claims by dissatisfied
customers, including claims alleging they were damaged by:
. improper sales practices such as unauthorized trading
. churning
. sale of unsuitable securities
. use of false or misleading statements in the sale of securities
. mismanagement
. breach of fiduciary duty
14
<PAGE>
In the normal course of business, we are defendants in various civil
actions and arbitrations arising out of our broker-dealer and sales activities,
in our role as an employer, and as a result of other business activities, and we
are presently a defendant in a number of lawsuits and arbitrations. We may be
liable for the unauthorized acts of our retail brokers and independent
contractors if we fail to adequately supervise their conduct. We have incurred
significant legal fees and settlement expenses to resolve disputed claims in the
past. We cannot assure that we will not make significant payments to resolve
disputed claims in the future, and it may be necessary to use some of the
proceeds of this offering to make such payments. See "Legal Matters Affecting
Us" for a discussion of legal and administrative actions to which we are a
party. See also "Use of Proceeds."
As is common in the securities industry, we carry insurance that covers
some payments for liabilities but it may not be sufficient to cover particular
liabilities or the full amount of particular liabilities. From time to time, in
connection with hiring retail brokers, we could be subject to litigation by a
broker's former employer. In addition, our charter documents provide for
indemnification of our officers and directors. The adverse resolution of any
legal proceedings involving us or these persons could have a material adverse
effect on our business, financial condition, results of operations or cash
flows.
There are frequent claims against persons engaged in the sale of securities.
Plaintiffs' attorneys in securities class action lawsuits frequently name
the persons involved in the distribution and sale of securities as defendants.
We have been named as a defendant in three lawsuits related to the distribution
and sale of the same security. See "Legal Matters Affecting Us." Securities
class action lawsuits naming us as a defendant may be filed in the future,
particularly if we increase our activity as an underwriter or selling group
member of securities distributions.
In addition to financial costs and risks, defending litigation, to a
certain extent, diverts the efforts and attention of our management and staff.
Our management and other employees may have to devote substantial time defending
litigation, which might materially divert their attention from other
responsibilities. Securities class action litigation in particular is highly
complex and can extend for a protracted period of time, consuming substantial
management time and effort and substantially increasing the cost of such
litigation.
We may not be able to secure financing if we need it in the future.
We may require additional financing beyond the proceeds of this offering to
support more rapid expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. We can give you no
assurance that additional financing, if needed, will be available to us on
favorable terms or at all.
15
<PAGE>
There are risks associated with our prior activities.
In the three years preceding the date of this prospectus, we have issued
securities in transactions believed by management to have been exempt from the
securities registration requirements under federal and state securities laws.
These exemptions are complex and it is often difficult to determine if their
terms have been fully complied with. If for any reason the claimed exemptions
were not available for the transactions, we could be subject to civil
liabilities, the amount of which could severely damage our business. Also, in
the last three years we have been a selling group member in about 80 offerings
underwritten by other firms. As a seller in these offerings we could incur
liability if any of them were legally defective. See also "Legal Matters
Affecting Us."
Future sales by existing shareholders may depress the market price of our common
stock.
Immediately prior to this offering, we will have about 4.6 million shares
of common stock outstanding, in addition to which approximately 284,000 shares
will be issued simultaneously with the public offering pursuant to our exchange
with debt holders. Shares issued to debt holders will be restricted from resale
for 180 days after the date of this prospectus. See "Exchange of Debt." After
the offering and the concurrent issuance of common stock for debt, approximately
6.9 million shares of our common stock will be outstanding if the underwriters
do not exercise their over-allotment option. The sale of, and the potential for
sale of, our outstanding shares in the market could have a depressive effect on
the price of our shares. See "Shares Eligible for Resale."
We have a conflict of interest in this offering.
Our broker-dealer subsidiary acts as co-managing underwriter of this
offering. Accordingly, we will benefit not only from the proceeds from this
offering, but from underwriting discounts and commissions. This presents
conflicts of interest when our subsidiary and its investment professionals
recommend or solicit their customers to buy our securities. This could have a
negative impact on our proposed offering and its potential success and it could
expose us to legal claims, even if the conflict of interest is made clear to
investors.
We will have broad discretion to spend a large portion of the net proceeds from
this offering.
We estimate that the net proceeds from the sale of the 2,000,000 shares of
common stock offered by us, at a price of $5 to $7 per share, will be
approximately $8.4 to $11.9 million, after deducting underwriting discounts and
estimated offering expenses. We intend to use a substantial portion of the net
proceeds:
. to fund growth in our operations, including marketing and expansion in
the number of our investment professionals
. to add to our regulatory capital
16
<PAGE>
. for technology development, including our Internet and e-commerce
brokerage business and capital expenditures for our Internet and
telecommunications facilities
. for other general corporate purposes
. to repay debt
These are general categories and expenditures within each category may vary
depending on future events. There is also a possibility that we may find it
necessary to use some of the proceeds to satisfy legal claims asserted against
us in lawsuits and arbitrations in which we are involved if several or all of
the existing cases are lost and the claimants or plaintiffs are awarded the full
amount of their alleged losses. See "Legal Matters Affecting Us." Consequently,
our board of directors and management may apply much of the net proceeds of this
offering to uses you may not consider desirable. The failure of management to
apply these funds effectively could have a material adverse effect on our
business, financial condition and operating results. For more information on
how we intend to use proceeds from this offering, see "Use of Proceeds."
An active trading market may not develop or continue.
Before the offering, no public market has existed for our common stock and
an active trading market may not develop or continue. We intend to apply for
listing of our common stock on the American Stock Exchange. However, we cannot
assure that our application for listing will be accepted or that we will be able
to maintain the listing in the future. Even if our stock is listed, that does
not guarantee that an active trading market for our common stock will develop
and continue after the offering.
Our common stock may trade at prices below the initial public offering price.
Together with the underwriters, we will determine the initial public
offering price. The price at which our common stock will trade after this
offering is likely to be volatile and may fluctuate substantially due to factors
such as:
. our historical and anticipated quarterly and annual operating results
. variations between our actual results and the expectations of
investors and analysts
. announcements by us or others and developments affecting our business
. investor perceptions of our company and comparable public business
companies
. conditions and trends in the brokerage business
In particular, the stock market has from time to time experienced
significant price and volume fluctuations affecting the common stock of retail
brokerage companies, like us. These fluctuations may result in a material
decline in the market price of our common stock.
We do not expect to pay dividends.
We have not declared or paid, and for the foreseeable future we do not
anticipate declaring or paying, dividends on our common stock.
17
<PAGE>
An economic downturn may have an adverse effect on our company.
If the general economic health of the United States declines from recent
historically high levels or if investors fear such a decline is imminent, they
may reduce the level of their activity in the stock market. Any decline or
concern about an imminent decline in the economy could delay decisions among
companies to purchase products and services or could delay decisions by
companies to make capital expenditures. Fears of inflation or increased
interest rates could also adversely affect our business. These factors would
have a material adverse effect on the stock market and our business, prospects,
financial condition and results of operations and on the price of our common
stock.
Investors will incur immediate and substantial dilution.
The estimated initial public offering price of our common stock is
substantially higher than the pro forma net tangible book value per share of our
outstanding common stock immediately after the offering. If you purchase common
stock in this offering, you will incur immediate and substantial dilution. At
September 30, 1999 we have outstanding 941,500 options and warrants to purchase
our common stock at an average price of $2.21 per share. To the extent
outstanding warrants and options to purchase our common stock are exercised or
additional equity securities are issued at a price below the price of a share in
this offering, you may experience further dilution. See "Dilution."
Provisions of Delaware law and our certificate of incorporation and bylaws may
delay or prevent a takeover of our firm.
We are organized under the laws of the State of Delaware. Some provisions
of Delaware law may delay or prevent a transaction which would cause a change in
our control. In addition, our certificate of incorporation contains some
provisions which may delay or prevent this type of transaction, even if our
shareholders consider the transaction to be in their best interests. Our
certificate of incorporation authorizes our board to determine the number of
shares and the terms of any unissued series of our preferred stock without any
vote or action by our shareholders. As a result, our board can authorize and
issue shares of preferred stock with voting or conversion rights which may
adversely affect the voting or other rights of holders of our common stock. In
addition, the rights given to the holders of a series of preferred stock may
prohibit a merger, reorganization, sale of all or substantially all of our
assets, liquidation or other extraordinary corporate transaction.
Our certificate of incorporation divides our board into three classes
of directors, so only approximately one-third of the directors will be subject
to reelection each year. Also, we have adopted advance notice provisions in our
bylaws which require our shareholders to present their nominations for directors
or other business proposals within a specified time frame. These provisions
make the removal of incumbent directors and the election of new directors more
time-consuming and difficult, which may discourage third parties from attempting
to obtain control of our firm, even if the change in control would be in the
best interests of our shareholders. See "Description of our Equity Securities."
18
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the 2,000,000 shares of
common stock offered by us, based on an offering price of $5 to $7 per share, of
approximately $8.4 to $11.9 million, and up to $13.8 million if the over-
allotment option granted to the underwriters is exercised in full, after
deducting underwriting discounts and estimated offering expenses payable by us.
The general purposes of this offering are:
. to increase our equity capital
. to facilitate future access by us to public equity markets
. to provide increased visibility and credibility in the marketplace
. to enhance our ability to use common stock as consideration as a means
of attracting and retaining key employees and investment professionals
We currently intend to use approximately $2.5 million of the net proceeds
of this offering to increase the regulatory capital of our broker dealer and
$1.25 million to repay the "Bridge Loan" and to pay debt service costs for 24
months on our Senior Debt and Subordinated Debt.
We currently intend to use the balance of the net proceeds of this offering
for the following:
. enhancement and expansion of our network infrastructure
. construction of an interactive website to facilitate a virtual
operating environment
. development of electronic commerce business opportunities, including
Internet trading capabilities for our customers
. automation of operational practices, such as transferring new
customers to us, commissions, accounting and supervision to realize
economies of scale
. expansion of our sales and marketing efforts, including recruiting
additional investment professionals, and the hiring of additional
personnel engaged in marketing activities
. building transitional support teams for newly recruited investment
professionals
. working capital and general corporate purposes
We have not yet determined the actual expected expenditures and therefore
cannot estimate the amounts to be used for each purpose set forth above with a
substantial degree of accuracy. However, we estimate that the technology
upgrades (network infrastructure, interactive website construction, electronic
commerce development and automation of operational practices) will require a
minimum of $2.5 million, assuming we can substantially depend on CSC, our
clearing broker, to develop Internet trading capabilities for the use of our
customers. We also believe we can productively use a significant portion of the
remaining proceeds for increased marketing efforts and the transitional support
teams for newly recruited investment professionals. This amount will increase to
the extent we achieve greater success in such marketing efforts. There is also a
possibility that we may find it necessary to use some of the proceeds from this
offering to satisfy legal claims asserted against us in lawsuits and
19
<PAGE>
arbitrations in which we are involved if several or all of the existing cases
are lost and the claimants or plaintiffs are awarded the full amount of their
alleged losses. See "Legal Matters Affecting Us" for a discussion of the
proceedings in which we are involved.
The amounts and the timing of the above expenditures will vary
significantly depending upon a number of factors, including, but not limited to,
the success and timing of our recruiting efforts, the development and
implementation of the technology-based measures, negotiations with third parties
and corresponding increases in revenues. If any of these factors change, we may
find it necessary to reallocate a portion of the proceeds within the above-
described categories or use portions of the proceeds for other purposes. Our
estimates may prove to be inaccurate, new programs or activities may be
undertaken which will require considerable additional expenditures or unforeseen
expenses may occur.
Pending the uses of proceeds as described above, we will invest the net
proceeds in short term government, government guaranteed and investment grade
securities.
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<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not expect to do so in the foreseeable future. We currently intend to retain
any earnings to finance the expansion and development of our business. Any
future payment of dividends will be made at the discretion of our board of
directors based upon conditions then existing, including our earnings, financial
condition and capital requirements as well as such economic and other factors as
our board of directors may deem relevant.
DILUTION
The net tangible book value (deficit) of our common stock as of June 30,
1999, was $(3.8) million, or $(0.83) per share of common stock. After giving
effect to:
. the sale of 2,000,000 shares of common stock offered through this
prospectus at an assumed initial public offering price of $6.00 per
share (the mid-point of the pricing range) and deducting underwriting
discounts and estimated offering expenses payable by us
. the conversion of $1.4 million of a debt into 283,922 shares of common
stock at the rate of $5.10 per share (a 15% discount from the
foregoing assumed public offering price)
Our net tangible book value as adjusted, as of June 30, 1999, would have
been $7.9 million, or $1.15 per share of common stock. This represents an
immediate increase of $1.98 per share to existing stockholders, turning the net
tangible book deficit to a net tangible book value as adjusted. This also
represents an immediate dilution in net tangible book value as adjusted of $4.85
per share to new investors purchasing shares of common stock in this offering.
Dilution is determined by subtracting pro forma net tangible book value per
share after this offering from the amount of cash paid by a new investor for a
share of common stock.
The following table illustrates the dilution per share as described above:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price................... $ 6.00
Net tangible book deficit as of June 30, 1999........... $(0.83)
Decrease in net tangible book deficit and increase in
net tangible book value attributable to new investors
and conversion of debt holders......................... 1.98
-------
Pro forma net tangible book value after this
offering and conversion of debt to
common stock........................................... 1.15
------
Dilution to new investors............................... $ 4.85
======
</TABLE>
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<PAGE>
As of June 30, 1999, there were outstanding options and warrants to
purchase an aggregate of 941,500 shares of common stock, all of which were then
exercisable at an average exercise price of $2.21. We had also reserved up to
an additional 400,000 shares of common stock for issuance upon the exercise of
options which had not yet been granted under our stock option plan and 215,000
shares for issuance under the stock purchase plan. To the extent options or
warrants are exercised, there will be further dilution to new investors.
22
<PAGE>
CAPITALIZATION
The following table shows our consolidated capitalization on June 30, 1999,
on a historical basis and on a pro forma basis. The pro forma information gives
effect to:
. the sale of 2,000,000 shares of common stock (without exercise of the
underwriters' over-allotment option) at an assumed price of $6.00 per
share, the midpoint of the range of initial public offering price,
after deducting our estimated offering expenses and underwriting
discounts, resulting in estimated net proceeds of $10.2 million
. the concurrent issuance of 283,922 shares of common stock, at a price
of $5.10 per share (85% of the above, assumed public offering price)
upon conversion of $1,448,000 of debt; see "Exchange of Debt"
You should read this table together with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our unaudited pro forma consolidated financial statements and our
consolidated financial statements and their notes included in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------
(Amounts in thousands)
Actual Pro Forma
------ ---------
<S> <C> <C>
Debt:
Senior debt............................ $ 1,350 $ 1,350
Subordinated debt...................... 4,470 3,022
Bridge loan............................ 250 250
------- -------
Total debt............................ $ 6,070 $ 4,622
======= =======
Shareholders' equity:
Common stock, par value $.10 per
share; 10,000,000 shares authorized;
4,571,614 shares issued
and outstanding (actual); and
6,855,536 shares issued and
outstanding (pro forma)............... $ 457 $ 686
Additional paid-in capital............. 3,954 15,320
Accumulated deficit.................... (7,707) (7,756)
------- -------
Total shareholders'
equity (deficit)/(a)/.................. $(3,296) $ 8,250
======= =======
Total capitalization.................... $ 2,774 $12,872
======= =======
</TABLE>
(a) We intend to amend our articles to authorize 1,000,000 shares of
preferred stock, par value $.001 per share. There are no plans or commitments to
issue shares of preferred stock.
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SELECTED FINANCIAL DATA
We have derived the selected historical consolidated income statement
information for the years ended December 31, 1996, 1997 and 1998 from our
audited consolidated financial statements and their notes. Those audited
financial statements are included in this prospectus. We have derived the
selected historical consolidated income statement information for the years
ended December 31, 1994 and 1995 from our audited consolidated financial
statements and their notes. Those financial statements are not included in this
prospectus.
We have derived the selected historical consolidated income statement
information for the six months ended June 30, 1998 and 1999 and the consolidated
balance sheet information as of June 30, 1999 from our unaudited interim
consolidated financial statements included in this prospectus, and in our
management's opinion, those financial statements include all adjustments, which
are of a normal recurring nature, necessary for a fair presentation. Our
operating results for the six months ended June 30, 1999 do not necessarily
indicate results that we expect for the year ended December 31, 1999.
We have derived the unaudited pro forma information for the year ended
December 31, 1998 and as of and for the six months ended June 30, 1999 from our
unaudited pro forma consolidated financial statements included in this
prospectus. The unaudited pro forma information does not represent our results
of operations for any future date or period.
You should read the selected consolidated financial information together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our unaudited pro forma consolidated financial statements and our
consolidated financial statements and their notes included in this prospectus.
24
<PAGE>
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1994 1995 1996 1997 1998 1998 1999
--------------------------------------------------------- ------- ---------
(unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Brokerage $15,816 $19,851 $27,097 $31,136 $33,045 $16,711 $20,663
Interest and account fees 1,218 1,535 2,005 2,203 2,880 1,399 1,671
Other 325 475 942 1,350 1,113 766 563
------- ------- ------- ------- ------- ------- -------
Total 17,359 21,861 30,044 34,689 37,038 18,876 22,897
------- ------- ------- ------- ------- ------- -------
Expenses:
Commissions and investment
advisory fees 11,897 15,419 21,512 25,194 26,933 13,592 17,093
Clearing and execution fees 1,551 1,758 2,054 2,319 2,537 1,260 1,555
Employee compensation 1,936 2,076 2,641 2,610 2,907 1,467 1,695
Interest 428 475 699 571 698 323 317
Other 1,794 4,201 4,547 4,148 4,352 2,194 2,315
------- ------- ------- ------- ------- ------- -------
Total 17,606 23,929 31,453 34,842 37,427 18,836 22,975
------- ------- ------- ------- ------- ------- -------
Net income (loss) $ (247) $(2,068) $(1,409) $ (153) $ (389) $ 40 $ (78)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common
share, basic and diluted $ (0.12) $ (0.86) $ (0.46) $ (0.04) $ (0.09) $ 0.01 $ (0.02)
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding
Basic 2,094 2,400 3,052 3,744 4,338 4,178 4,547
======= ======= ======= ======= ======= ======= =======
Diluted 2,094 2,400 3,052 3,744 4,338 4,275 4,547
======= ======= ======= ======= ======= ======= =======
Pro forma data (unaudited):/(1)/
Pro forma net income (loss) (234) $ 0.00
======= =======
Pro forma net income (loss) per
share, basic and diluted $ (0.05) $ 0.00
======= =======
Shares used in computing pro
forma loss per share:
Basic 4,622 4,831
======= =======
Diluted 4,622 5,357
======= =======
</TABLE>
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<PAGE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
Year ended December 31, At
1994 1995 1996 1997 1998 June 30, 1999
-------------------------------------------------- --------------------------
(in thousands, except per share data) Actual Pro Forma/(1)/
-------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 220 $ 1,572 $ 307 $ 1,446 $ 733 $ 1,086 $11,219
Working capital............................ 1,322 519 (408) 968 582 971 11,141
Total assets............................... 4,951 5,508 4,969 6,624 4,945 6,119 16,181
Notes payable.............................. 4,906 4,853 4,770 5,570 5,470 6,070 4,622
Total liabilities.......................... 6,886 8,516 8,768 10,102 8,516 9,416 7,931
Shareholders' equity (deficit)............. (1,936) (3,008) (3,008) (3,478) (3,571) (3,296) 8,250
</TABLE>
- ------------------
(1) Calculated after giving effect to:
. the unaudited pro forma adjustments to reflect the issuance of
2,000,000 shares of common stock (without exercise of the
underwriters' over-allotment option) at an assumed price of $6.00 per
share, the midpoint of the range of initial public offering price,
after deducting our estimated offering expenses and underwriting
discounts
. the concurrent issuance of 283,922 shares of common stock, at a price
of $5.10 per share (85% of the above, assumed public offering price)
upon conversion of $1,448,000 of debt; see "Exchange of Debt"
Pro forma per share amounts are computed by using the weighted average
number of shares of common stock outstanding in the relevant period as
adjusted to give effect to the issuances of stock in the debt exchange, as
if such issuances occurred at the beginning of the periods indicated.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our financial statements and
the related notes and other financial information included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including but not limited to those listed under Risk Factors and in other
portions of this prospectus.
Overview
We have been in the full service retail brokerage business for
approximately 10 years. During this time, we have incurred operating losses and
have never had a profit for a full fiscal year. Rather than seeking short-term
profitability, our management has emphasized growing our revenue base, customer
base and asset base and recruiting highly productive, experienced investment
professionals. It was, and continues to be, our objective to increase our
commission revenues to the necessary critical mass and to obtain credability
in the independent retail brokerage business, thus achieving profitability.
Following is a brief discussion of certain factors which have contributed to our
accumulated losses, as well as trends and steps which management has taken or
intends to take to improve operating results. See also "Business--Our Business
Development and Operating Strategy."
One of the factors impacting our operating results was that after
commencing our business, we committed substantial resources to developing the
infrastructure to support our investment professionals. As a result, we had
excess service capacity until approximately 1995, which contributed to our
operating losses.
Debt has also been a significant factor negatively affecting our earnings.
In order to continue our business, including our growth strategy, we incurred
substantial additional debt, in the form of our Subordinated Debt, in 1994 and
we have incurred additional debt since then, thus substantially increasing our
financing costs.
In addition, during 1995 and the next three years, we were named as a party
to numerous NASD arbitrations and lawsuits. Most of these were related to
private placement security offerings and direct participation investments sold
by our investment professionals. Our current management and outside legal
counsel have expended numerous hours to resolve the matters and reduce the
number of pending claims, and the total number of proceedings which are
presently pending has been substantially reduced from the numbers over the past
several years. See "Legal Matters Affecting Us." As a result, legal fees
during this time period substantially exceeded the budgeted amounts, and in
addition it was necessary to pay the associated claims, in part or in whole, in
various instances.
27
<PAGE>
In order to decrease the risks of our being involved in additional
litigation proceedings, along with the risk of the financial exposure which we
have incurred in the past, our current management has implemented new
recruiting, compliance, supervision, product and operational policies and
procedures. See "Business--Regulation of Our Business." Also, our current
general policy is to prohibit our investment professionals from selling direct
participation investments and securities in private placement offerings. The
legal fees and settlement costs have decreased in the last fiscal year, and our
management anticipates that these costs should continue to decrease.
Finally, technology developments over the last few years have substantially
impacted the retail brokerage business. We have not made sufficient investments
in technology to improve our operational efficiency and decrease our operational
costs in line with where we feel they should be. See "Business--Our Information
Technology and Systems." Our management believes that investing in technology,
including automation, should decrease future operating expenses.
Operations
Revenues and Expenses.
We derive our revenues primarily from commissions, investment advisory
services, principal transactions, interest income and broker charges.
Commission revenues are generated on agency transactions in listed exchange
securities and securities traded on Nasdaq. In addition we earn commissions on
mutual fund, variable annuity, variable life and general insurance product
sales. Revenues of investment advisory services are fees based on the dollar
value of assets under management. Principal transactions revenues include net
revenues from trading debt securities, primarily for the benefit of customers.
When we execute transactions as a principal, we charge markups or markdowns.
Broker charges are fees charged to our investment professionals for providing
the infrastructure to serve their clients, including access to real-time data,
execution services, market-maker activities and regulatory oversight
supervision. Interest income is derived principally from interest sharing
agreements with our clearing organization on money lent to customers on margin
from customer accounts and from excess funds in our proprietary accounts.
Account fees are received from the clearing organization and are based on the
volume of transactions cleared.
Since our investment professionals are independent contractors, we collect
the commissions from customers and then remit them to our investment
professionals, net of a fee retained by us. Our share is calculated on a
sliding scale based on the volume generated by each registered representative,
and typically averages 10% of the gross commissions. Commissions expense
represents the net funds remitted to our investment professional's share of the
commissions and is variable in direct relation to commissions revenues.
Clearing and execution fees include the costs of clearing securities, floor
brokerage and exchange fees.
Employee compensation and benefits are salaries paid to employees that
support the investment professionals, including bond and equity trading desks,
cashiering, customer account maintenance, supervisory and compliance, computer
systems, marketing and general
28
<PAGE>
corporation functions. Interest expense reflects finance charges on bank loans,
subordinated debt and proprietary margin accounts used to finance securities
inventory in the proprietary trading accounts.
Results of Operations Comparing the Six Months Ended June 30, 1999 and June
30, 1998.
We recorded a loss of $77,500 in the six months ended June 30, 1999
compared to income of $39,900 in the corresponding 1998 period. Total revenues
increased 21% to $22.9 million in the 1999 period, while expenses increased 22%
to $23.0 million in 1999. Net income in the six months ended June 30, 1998
includes a benefit from the reversal of a $0.1 million customer complaint
reserve established in 1997.
The following table breaks down brokerage revenues by major category:
For the Six Months
Ended June 30,
------------------
1999 1998
------ ------
(in thousands, unaudited)
Commissions $13,557 $10,687
Principal transactions 4,566 3,839
Investment advisory services 2,540 2,185
------- -------
Total $20,663 $16,711
======= =======
Commissions revenues increased in 1999 by $2.9 million or 27% over the
comparable period of the prior year. The increase is attributable to an
increase in revenues from insurance and annuity products of $1.6 million or 94%,
while commissions from equity securities and mutual funds increased $0.8
million and $0.5 million, respectively. The market acceptance of variable life
products and continued strength in the equity markets are primary reasons for
the increase.
Principal transactions revenues were $4.6 million in 1999, representing an
increase of $0.7 million or 19%. The portion of the revenues to the investment
professionals from principal transactions were $1.0 million higher in 1999,
while the portion of the revenues to the firm were slightly lower than in the
comparable 1998 period.
Investment advisory services increased 16% in 1999, continuing the trend of
investment professionals expanding customer assets under management.
Interest and account fees were $1.7 million and $1.4 million for the six
months ended June 30, 1999 and 1998, respectively, representing an increase in
1999 of 19%. The increase was due to an increase in securities transactions and
increased interest received on higher margin and money market balances.
29
<PAGE>
Other income was $0.6 million and $0.8 million for the six months ended
June 30, 1999 and 1998, respectively. The decrease in 1999 is due to the 1998
period benefitting from the reversal of a $0.1 million customer complaint
reserve established in 1997.
Commissions expense was $17.1 million and $13.6 million for the six months
ended June 30, 1999 and 1998, respectively, representing an increase in 1999 of
$3.5 million or 26%, which is consistent with the increase in brokerage
revenues.
Clearing and execution fees were $1.6 million and $1.3 million for the six
months ended June 30, 1999 and 1998, respectively, representing an increase in
1999 of $0.3 million or 23%, which is the result of an increase in the volume of
securities transactions.
Employee compensation and benefits expenses increased by $0.2 million, or
16%, to $1.7 for the six months ended June 30, 1999 as compared to the same
period in 1998. The increase was due to increased staffing to support our
expanding investment professional base, salary increases and bonuses during
1999.
Other expenses were $2.3 million and $2.2 million for the six months ended
June 30, 1999 and 1998, respectively. The increase includes a decline in
customer complaints and legal charges offset by higher computer and wide area
network operating costs to support the expanding level of services and
automation.
Results of Operations Comparing the Years Ended December 31, 1998 and 1997.
The following table breaks down brokerage revenues by major category:
1998 1997
------- -------
(in thousands)
Commissions $22,174 $20,580
Principal transactions 6,514 7,058
Investment advisory services 4,357 3,498
------- -------
$33,045 $31,136
======= =======
Commissions revenues increased by $1.6 million or 8% in 1998. The increase
in commission revenues resulted from growth in sales of mutual funds and other
equity securities. Although the number of investment professionals decreased
from 100 in 1997 to 92 in 1998, commission revenue was not negatively impacted
as we recruit higher producing investment professionals as opposed to lower
producing investment professionals who left us during the year. These increases
were partially offset by decreases in sales of insurance and annuity products
primarily due to the adverse market publicity regarding variable annuity
products.
Principal transactions revenues decreased in the year ended 1998 by $0.6
million or 8%. Revenues in 1998 were down, primarily due to declines in trading
volumes on debt securities caused by continuing weakness in the market for debt
securities.
30
<PAGE>
Investment advisory services increased $0.9 million or 25% as several
investment professionals recruited in 1998 had a large percentage of their
business in investment advisory fees.
Interest and account fees were $2.9 million and $2.2 million in 1998 and
1997, respectively, representing an increase of 31%. The increase resulted from
the continued growth in the number of securities transactions and higher average
proprietary and customer account balances generating increased margin and money
market interest income.
Other income was $1.1 million in 1998 compared to $1.3 million in 1997,
representing a decrease for the year ended 1998 of 18% as the prior year
included higher product and investment banking fees.
Commissions expenses were $26.9 million and $25.2 million for 1998 and
1997, respectively, representing an increase in 1998 of $1.7 million or 7%,
consistent with the increase in brokerage revenues.
Clearing and execution fees were $2.5 million and $2.3 million in 1998 and
1997, respectively, representing an increase in 1998 of 9%, which is the result
of an increase in the volume of equity securities transactions.
Employee compensation and benefits expenses increased by $0.3 million, or
11%, to $2.9 in 1998 as compared to 1997. The Company continues to increase
staff to support revenue growth and its enhanced level of real time data
provided to investment professionals. The change is also attributable to annual
salary increases.
Other expenses were $4.4 million and $4.1 million in 1998 and 1997,
respectively, representing an increase of 5%. The overall increase is a result
of the continued development of a corporate infrastructure to support an
expanding number of investment professionals, offset slightly by a $0.2 million
decrease in legal expenditures to $0.6 million in 1998.
Results of Operations Comparing the Years Ended December 31, 1997 and 1996.
The following table breaks down brokerage revenues by major category:
1997 1996
------- -------
(in thousands)
Commissions $20,580 $16,039
Principal transactions 7,058 7,912
Investment advisory services 3,498 3,146
------- -------
Total $31,136 $27,097
======= =======
Commissions revenues increased in the year ended 1997 by $4.6 million or
28% over the comparable 1996 period. Commissions from insurance and annuity
products increased $1.8 million, or 53% to $5.3 million and general securities
increased $1.6 million or 22%. The addition of several new high producing
investment professionals late in 1996 and early 1997
31
<PAGE>
and increased trading volume for existing investment professionals fueled by
strong equity markets contributed to the increases.
Principal transactions revenues decreased in the year ended 1997 by $0.8
million or 11%. A decline in commissions principal transactions due to a
weakening fixed income market, was partially offset by an increase on the
transactions completed.
Investment advisory fees of $3.5 million in 1997 were $0.4 million or 11%
higher than in 1996 as customer assets under management increased.
Interest and account fees were $2.2 million and $2.0 million in 1997 and
1996, respectively, representing an increase of 10%. The increase is comparable
to the overall revenue growth.
Other income increased 43% to $1.3 million in 1997. The increase was
primarily due to an increase in fees related to enhanced computer and wide area
network services provided to our investment professionals.
Commissions expenses were $25.2 million and $21.5 million in 1997 and 1996,
respectively, representing an increase in 1997 of $3.7 million or 17%, which is
consistent with the increase in brokerage revenues.
Clearing and execution fees were $2.3 million and $2.1 million in 1997 and
1996, respectively. The increase of $0.2 million corresponds with the
increased volume of brokerage transactions.
Employee compensation and benefits expenses were $2.6 million in 1997 and
1996 as employee numbers remained consistent.
Interest expense was $0.6 million and $0.7 million in 1997 and 1996,
respectively. The slight decrease is because of lower margin balances on our
proprietary trading accounts.
Other expenses were $4.1 million and $4.6 million in 1997 and 1996,
respectively, representing a decrease in 1997 of 9%. This decrease was primarily
due to a reduction in equity in losses of affiliates, as the Company terminated
its interest in an investment banking entity and a decrease in recruiting
expense resulting from a decline in the revenue sharing percentage paid to
certain investment professionals for recruiting new brokers. This was partially
offset by increased legal expenditures for the resolution of several legal
matters.
Liquidity and Capital Resources
Since our inception, we have primarily financed our operations through the
private sale of debt and equity securities. As of June 30, 1999, we had cash
and cash equivalents of $1.1 million, an increase of $0.4 million from December
31, 1998. The increase in cash and cash equivalents is primarily attributable
to proceeds of $0.6 million from two new debt facilities.
32
<PAGE>
In May 1999 we entered into a $250,000, one year promissory note, bearing
interest at 13.5% and amended our senior bank debt arrangement adding an
additional $1 million capacity to our revolving line of credit while decreasing
the effective interest rate on the entire $2 million line to 11%. We used
$350,000 of this facility during the second quarter of 1999, bringing the total
borrowings on this facility to $1.35 million. The proceeds of these borrowings
were used in part to meet debt service requirements on the subordinated debt, to
provide financial assistance in the form of loans to investment professionals in
connection with our recruiting activities, acquisition of certain assets and
costs associated with the debt exchange offer and the proposed initial public
offering.
Cash Flow Information
For the six months ended June 30, 1999 and 1998, net cash (used in) or
provided by operations was approximately $(451,000) and $1,135,000,
respectively. The 1999 period included $600,000 of cash used for the purchase
of inventory positions, while the 1998 period included approximately $1.1
million of proceeds from the sale of inventory positions. Net cash used in
investing during the six months ended June 30, 1999 and 1998 was approximately
$100,000 in each period and consisted primarily of expenditures for furniture
and equipment. During the six months ended June 30, 1999 and 1998, cash provided
by (or used in) financing activities was approximately $890,000 and
$(1,800,000), respectively. In 1999 new borrowings of $600,000 were drawn under
two new debt agreements and $300,000 was borrowed from the clearing organization
primarily for financing inventory positions, while the 1998 period included a $2
million repayment to the clearing organization partially for funds used to
finance inventory positions and for working capital.
For the years ended December 31, 1998, 1997 and 1996, net cash provided by
(or used) in operations was approximately $2.0, $(1.2) and $(2.9) million,
respectively. 1998 included $2.3 million in proceeds from the sale of inventory
positions, while 1997 and 1996 included cash used for the purchase of inventory
of approximately $0.8 million and $1.1 million, respectively. In addition, 1997
included $0.7 million in cash used to decrease accounts payable and accrued
expenses. For 1998 and 1997, net cash used in investing activities was $1.0
million and $0.2 million, while 1996 provided cash from investing of $0.4
million. Cash used for the purchase of furniture and equipment was $341,000,
$266,000 and $139,000 in 1998, 1997 and 1996, respectively. The net purchase of
investments used cash of approximately $0.6 million in 1998, and the net sale of
investments generated cash proceeds of $0.2 million and $0.7 million in 1997 and
1996, respectively. During 1998, 1997 and 1996, cash from financing activities
included proceeds from the issuance of common stock of $296,000, $400,000 and
$550,000, respectively. In 1997 the Company borrowed $1.0 million under a
senior debt facility, and in 1998, 1997 and 1996, net (repayments) or borrowings
from the clearing organization for the financing of inventory positions and
working capital was $(1.9) million, $1.3 million and $0.6 million, respectively.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we
33
<PAGE>
. develop on-line trading capabilities for our investment professionals
and customers
. expand services provided to our investment professionals
. increase sales and marketing activities
. improve and automate our operational and financial systems
. expand services provided to our investment professionals
Such operating expenses will consume a material amount of our cash
resources, including a portion of the net proceeds from this public offering. We
believe that the net proceeds from this offering, together with our existing
cash and cash equivalents, will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for the next two years.
Impact of Year 2000 Issue
The Year 2000 issue involves the potential for system and processing
failures of date-related data resulting from computer-controlled systems using
two digits rather than four to define the applicable year. For example,
computer programs that contain time-sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations causing disruptions of our
operations, including, among other things, a temporary inability to process
transactions in connection with our brokerage activities.
Because we are dependent, to a very substantial degree, upon the proper
functioning of computer systems, the failure of any computer system to be Year
2000 compliant could materially adversely affect us. Failure of this kind
could, for example, cause settlement of trades to fail, lead to incomplete or
inaccurate accounting, recording or processing of trades in securities, result
in generation of erroneous results or give rise to uncertainty about our
exposure to trading risks and our need for liquidity. If not remedied,
potential risks include business interruption or shutdown, financial loss,
regulatory actions, reputational harm and legal liability. We have completed
our internal information technology and non-information technology assessment,
and we believe that our internal software and hardware systems will function
properly with respect to dates in the year 2000 and thereafter. There can be no
assurance that our year 2000 remediation program will detect and correct all
potential points of failure by December 31, 1999.
In addition, we depend upon the proper functioning of third-party computer
and non-information technology systems. These parties include depositories,
clearing agencies and firms, clearing houses, commercial banks and other
vendors. We have contacted our vendors with whom we have important financial or
operational relationships to determine the extent to which they are vulnerable
to the Year 2000 issues. These parties have informed us that they have
undertaken programs for preparing and testing their computer systems for
potential Year 2000 problems. As of this date no major vendors have indicated
that their systems will not be
34
<PAGE>
Year 2000 compliant. Contingency plans are being developed for all critical
vendors and third-party systems we use. However, if some of all our vendors
prove not to be Year 2000 compliant and if we experience difficulties in finding
replacement services, then our business could be materially adversely affected.
Disruption or suspension of activity in the world's financial markets is
also possible. In addition, uncertainty about the success of remediation
efforts generally may cause many market participants to reduce the level of
their market activities temporarily as they assess the effectiveness of these
efforts during a "phase-in" period beginning in late 1999 and early 2000. This
in turn could result in a general reduction in trading and other market
activities (and lost revenues) as well as reduced funding availability in late
1999 and early 2000. We cannot predict the impact that such reduction would
have on our business.
Recent Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
all derivatives to be recognized in the statement of financial condition at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999
and should be applied prospectively. In February 1998, the Financial Accounting
Standards Board issued SFAS No. 132, "Employers' Disclosure about Pensions and
Other Postretirement Benefits." This statement revises the disclosure
requirements for pensions and other postretirement plans and is effective for
our December 31, 1999 financial statements. The adoption of these statements are
not expected to have a material adverse effect on our financial statements.
35
<PAGE>
BUSINESS
We are a full service retail securities brokerage firm, formed in 1989,
operating through 93 independent investment professionals in 37 offices in 18
states. Each of these offices except our home office is a branch office which
has generally between one and three independent investment professionals. In
addition to our ongoing retail brokerage activities, we have since June 1996
participated as a member of the selling group in more than 80 underwritten
public offerings of securities.
Our approach to the retail securities brokerage business is to attract and
retain highly productive, experienced brokers. Our retail brokerage business
has developed by establishing and maintaining relationships with high net worth
individuals. Our full service brokerage firm offers customers brokerage
services relating to corporate equity and debt securities, U.S. government
securities, municipal securities, mutual funds, variable annuity and variable
life insurance products, general insurance, portfolio planning and management,
cash management services, market information and portfolio tracking and record
management.
Commissions are charged on agency transactions in exchange listed
securities and securities traded on Nasdaq. We also earn commissions on mutual
fund, variable annuity, variable life, and general insurance product sales. In
addition to retaining commissions, we realize fees from asset-based investment
advisory services. When we execute transactions as a principal, we charge
markups or markdowns.
We recruit experienced, highly productive investment professionals by
offering them a high commission payout and the independence of owning and
operating their own branch office. Generally, each branch office pays
substantially all costs associated with establishing and operating the branch in
return for a relatively high portion of gross commission revenue, which averages
approximately 90% of commission revenues and is on a sliding scale as commission
revenues increase. Generally brokers retain 100% after monthly commission
revenues reach $250,000 per broker. We provide regulatory, compliance and other
support services to our investment professionals. This program allows expansion
of our brokerage operations with relatively minimal capital outlay. Continuing
to add experienced, highly productive brokers is an integral part of our growth
strategy.
We have experienced significant revenue growth over the past five years.
Total revenues have increased from $17.4 million in 1994 to $37.0 million in
1998, a compounded growth rate of 20.85%. Our revenue growth is due in part to
growth in customer assets, number of customer accounts and increases in the
number and productivity of investment professionals. As of June 30, 1999, we
have approximately 33,000 active customer accounts with account balances
aggregating $3 billion.
We believe that our growth has been primarily attributable to our ability
to attract and retain highly productive, experienced investment professionals.
As of June 30, 1999, we had 93 investment professionals. Our investment
professionals generated average commissions of approximately $274,000, $311,000
and $359,000 in fiscal 1996, 1997 and 1998. Revenues from our retail brokerage
business, excluding interest and account fees, grew from $15.8 million
36
<PAGE>
in 1994 to $33.0 million in 1998, a compounded growth rate of 20.2%. Retail
brokerage fees represented approximately 90% of our total revenues for the same
periods.
With the high commission payout, the key to our profitability is to
continue to attract high productivity investment professionals and maintain and
control costs at the lowest level possible without sacrificing customer service.
We believe that the opportunity exists to achieve substantial improvements on
efficiency and productivity by automating more functions. Our investment
professionals are independent contractors compensated solely on a commission
basis without any fringe benefits. In addition, we do not clear securities
transactions for customers but have entered into a clearing agreement with a
subsidiary of a major brokerage firm. This allows us to avoid substantial fixed
costs for back office operations, and maintain our net capital requirements at
the lowest regulatory levels. Finally, we do not maintain a research
department. Acquiring research from outside sources provides greater flexibility
in product selection, results in lower fixed costs to us and better serves the
customers' needs. Our investment professionals are not limited regarding the
products they sell to their customers and they are encouraged to seek a variety
of products from many different sources, almost none of which are originated by
or through us.
Recently, we began focusing on other rapidly growing sectors of the
securities industry that are related to or dependent on Internet and electronic
commerce technology. We are developing an on-line brokerage service through
which individual clients will be able to trade Nasdaq, exchange listed
securities and mutual funds. We provide real-time decision support and empower
our investment professionals with relevant and timely information to better
serve their clients. Our strategy is to join the convenience of Internet based
securities trading while continuing the personal relationships provided by full
service investment professionals. We intend to accomplish this by assigning an
investment professional to each on-line customer.
Competitive Strengths
. Supportive Infrastructure for Large Producers. We have developed an
infrastructure and a culture which supports the relationship between
our investment professionals and their clients. We understand that
customers who are building and maintaining wealth seek trustful long
term relationships with investment professionals based on timely
service, care, knowledge, information and objective advice. We believe
that we are one of the few independent retail brokerage firms that
understands and can provide the services and supportive culture
required for large producers with national retail brokerage
experience. While the infrastructure and culture in themselves may not
provide any sustainable competitive advantage in our business over the
long run, our infrastructure and culture are in place at the present
time. We believe this constitutes a substantial advantage in that we
have the ability to conduct activities today, through our
infrastructure, which would require others months or years to develop.
37
<PAGE>
. Trading Operations. We believe we are unique among independent retail
brokerage firms, because we offer to our investment professionals
direct access to our trading desks and the traders do not compete with
our stockbrokers over customer orders. We believe this operating
practice promotes better selection, price, choice and timely service
to our investment professionals and their clients.
. Experienced and Established Investment Professionals. Our investment
professionals have established their clientele by focusing on the
upper level of the market where customers are building and maintaining
wealth through long term relationships and are less price sensitive.
Our investment professionals have prior experience with national and
regional retail brokerage firms. We believe that our investment
professionals have some of the highest average commission revenues and
service more client assets per investment professional than most other
independent retail brokerage firms.
. Experienced and Innovative Management. Our firm is led by our chief
executive officer and president, Dale E. Frey, who was previously an
executive vice-president and divisional manager for E.F. Hutton &
Company, Inc. Our senior vice president of operations, Scott T.
Gillespie, has numerous years of experience with other broker-dealers.
Paul L. Hocevar, our chief financial officer and senior vice
president, is an entrepreneur with many years of experience with other
business ventures. Larry Hayden, our senior vice president of
administration, has over 30 years of experience in the financial
services industry, including regulatory and compliance matters.
. Low Customer Acquisition Cost. We have experienced growth in our
customer base with limited marketing expenditures by retaining
experienced and established investment professionals who were
affiliated with national or regional retail brokerage firms and who
have already established a long term relationship with their clients.
We have been able to attract such investment professionals not only
through our direct efforts, but also through referrals from our
existing sales force. Hence, we have not found it necessary to conduct
"end customer" marketing to grow and develop our business.
Our Goals
Our goal is to be a highly respected full service retail brokerage firm by
capitalizing on the changes occurring in the financial services industry. We
intend to achieve our goal by:
. cultivating long term relationships and placing the relationship
between the client and our investment professionals first. We believe
this special relationship is the essence of the business. We intend to
maintain this relationship even with respect to Internet securities
trading accounts by associating a specific investment professional
with each such account
38
<PAGE>
. empowering our investment professionals with a complete selection of
tools and services necessary to meet their client's needs by providing
a full array of market data and non-proprietary financial products
. providing trading services, electronic communications and the ability
to conduct electronic commerce to our investment professionals and
their customers. Our goal is to be the full service retail brokerage
firm of choice for highly productive investment professionals
. providing the support mechanisms to our investment professionals and
their clients to conduct business in any mode desired, supported with
real time data, from traditional brokerage operations to electronic
commerce
. merging the convenience of Internet based securities trading to the
personal relationships provided by our full service investment
professionals
. recruiting investment professionals who are experienced with an
established client base
Our Business Development and Operating Strategy
We have developed and expanded our business by recruiting investment
professionals who are experienced, have an established client base and who are
presently employed by national or regional retail brokerage firms. We develop
recruiting leads by advertising in financial publications and through active
involvement of Mr. Frey and other members of management in industry
organizations. Additionally, our independent investment professionals develop a
significant number of our new recruits directly or from referrals.
We have entered into an agreement with four of our investment professionals
to recruit new investment professionals. They are entitled to one-half of the
new investment professionals' gross commissions retained by us in the first year
and 30% and 10% in the second and third years respectively. These investment
professionals agree to pay their own expenses incurred in connection with their
recruiting efforts.
There are two factors of primary importance to the strategy -- high volume
and low capital costs and operating expenses. We seek to recruit
entrepreneurial sales representatives with an established customer base who
generate substantial gross commission income and who desire independence in
conducting their brokerage business. Our investment professionals are
independent contractors compensated on a commission basis without any fringe
benefits. We offer these persons a percentage of their gross commission income
substantially in excess of industry norms, flexibility in selecting investment
products best suited to their customers' investment objectives, and supervision
over branch office operations as required for regulatory compliance. In return,
the investment professionals pay the capital costs and most operating expenses
associated with their branch offices. Independent ownership and operation of
branch offices enables us to expand our business with relatively minimal capital
outlay and without a proportionate increase in either capital costs or operating
expenses.
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A barrier to our growth is the fact that many investment professionals
won't make a decision because of the fear of the unknown in connection with
setting up and operating their own independently operated branch offices. Most
of the investment professionals have not established an office before or
negotiated with telecommunication service providers or purchased computer
equipment with the specifications necessary to properly function with our wide
area network. Consequently, we plan to offer a "turn key" solution to newly-
recruited investment professionals to remove as many of these obstacles as
possible. On behalf of the new investment professional, we plan to secure
office space, purchase and install the computer equipment, negotiate a contract
with a telecommunications service provider and procure other items related to a
complete office. We would use a portion of the proceeds of this offering to
finance the up front costs of setting up these offices, and the investment
professionals would repay us over a reasonable period of time.
Historically, we have not conducted "end customer" marketing to grow and
develop our business. Rather, we market by recruiting experienced and
established investment professionals who already have established a substantial
book of business based on long-term relationships with their clients. We focus
on the upper level of the market where our investment professionals' clients are
less price sensitive. This is because their clients are building and
maintaining wealth through long-term relationships based on quality service,
objective advice, care, knowledge and information.
We believe that it is imperative to add the convenience of Internet based
securities trading to the personal relationships provided by our full service
investment professionals. We anticipate new retail clients because of the new
on-line trading services. As opposed to the practices of most other broker-
dealers that offer on-line trading services, each new on-line retail client will
be assigned to a specific independent investment professional. We believe this
will be an effective recruiting tool for us.
Our Trading Activities
Our trading departments generally do not trade for their own account. The
primary purpose of the trading department is to service our investment
professionals' orders. Most of our listed orders are routed to execution
sources providing superior service, while at the same time being sensitive to
execution costs. Our OTC orders are executed through a network of unaffiliated
Nasdaq market makers with no single market maker executing all trades. This
allows us to fill client orders quickly and efficiently by choosing the market
maker we deem best in each particular stock. Additionally, we offer execution
services through the "Brass" electronic order flow management system, which has
been licensed to us. This system routes orders to market markers and electronic
communication networks.
Our fixed income trading division assists our investment professionals in
buying, selling or shopping for competitive yields and terms of fixed income
securities, including municipal bonds, corporate bonds, U.S. Treasuries,
mortgage-backed securities, government sponsored enterprises, unit investment
trusts and certificates of deposit. If our investment professionals use our
department traders for debt securities, generally we execute the transaction as
a principal and charge markups and markdowns. Our investment professionals have
the choice
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of buying and selling securities from the clearing firm or its affiliates'
inventory or utilizing our traders to shop the street for better product and
prices. Department traders shop for price improvement and superior securities in
the inter-dealer and wholesale markets on behalf of our investment professionals
and negotiate prices and terms. The department traders negotiate prices and
terms with the objective of best possible execution for our investment
professionals' clients.
Product and Services We Offer
We offer our investment professionals a broad array of products and
services designed to assist them with their client's investment needs and allow
them the convenience of maintaining a single brokerage relationship for
simplicity and security. Our investment professionals are able to consolidate
their client's holdings in a single report through our report writing software
package.
A unique benefit for our investment professionals over their counterparts
at national brokerage firms is selection and choice. Our investment
professionals are free to select the products and services that best meet the
needs of their clients. We have selling agreements with over 66 mutual fund
families representing over 5,000 mutual funds. In the variable insurance
product area we have selling agreements with over 46 insurance companies
representing 82 variable annuity products and 38 variable life products.
Additionally, we have agreements with 34 insurance carriers, representing 169
general insurance products. General insurance includes fixed annuities,
universal life, term, long-term care, whole life, immediate annuities, straight
life and health insurance. We participate in eight fee based asset management
programs which provide access to approximately 80 money managers, six mutual
fund asset management programs, including the Charles Schwab One Source program
with 200 mutual fund families and approximately 1,500 mutual funds.
We do not have proprietary products that we induce our investment
professionals to sell to their clients. Thus, the clients' investment decision
for products is not influenced by our need to sell proprietary products. We
place the relationships between our investment professionals and their clients
first.
Our Portfolio Management Services
We have arranged for our investment professionals to offer their clients
portfolio planning and management. We use a consultative approach to portfolio
planning and management for our investment professionals' clients. Generally,
sponsors of asset management programs arrange for a number of well-known
investment advisors to offer their services to clients who have a minimum of
$100,000 to invest. The sponsors will select the investment managers eligible
to participate in the various programs and will perform other services in
connection with the program. This is our comprehensive approach to the total
portfolio planning and management process that allows our investment
professionals to play a key consultative role in the investment decisions of
their clients.
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The strategic alliance with the sponsors of the programs allows us to offer
professional portfolio planning and management through industry leaders and
without the fixed overhead costs. Our independent investment professionals can
offer asset management services to their clients through third party sponsors,
such as CSC Choice, B.C. Ziegler, Portfolio Management Consultants, Lockwood
Financial, Brinker Capital and Charles Schwab. The programs are wrap fee
arrangements where the investment professional's clients are charged generally a
quarterly program fee. The program fee is a fixed fee in which the investment
professional earns a percentage of the program fee.
How We Provide Research
We do not conduct any research activities which can lead to conflicts of
interest. Instead, we procure research and make it available to our investment
professionals. They then have relevant, timely information so they may provide
quality service and advice to their clients. We provide research to the
investment professionals from several sources, including PaineWebber, Standard &
Poor's Reports and Wall Street by Fax. Currently, PaineWebber offers research
on 805 different companies. Standard & Poor's Reports On-Demand offers
independent investment professional current opinion on the stocks it has
recommended to its clients. Standard & Poor's Wall Street Consensus gives the
latest buy/hold/sell recommendation and earnings estimates of key analysts. It
includes 3,500 companies and is updated every 5 days. Standard & Poor's Reports
On-Demand offers Wall Street's current opinion on the stock recommendations to
customers. Reports also include Standard & Poor's widely followed STARS (Stock
Appreciation Ranking System) to guide in making investment choices. Standard &
Poor's also has an Alert Service available that continuously monitors corporate
movement and faxes reports on the companies as soon as they are released. Wall
Street by Fax offers 500,000 reports. The PaineWebber research is sent to the
investment professionals free of charge, whereas the investment professionals
must request the other research services and are charged by report for the
Standard & Poor's Reports and Wall Street by Fax research services.
Our Customer Service Department
We maintain an experienced customer service department that assists our
investment professionals in familiarizing themselves with our vast array tools,
services, policies and procedures. The department also assists in document
management and compliance with regulatory requirements. The department has
developed an excellent working relationship with our clearing firm and provides
valuable assistance to our investment professionals. Similar to trading, the
operations department exists to service the needs of our investment
professionals. As of June 30, 1999, there were approximately 20 employees in the
customer service department. The employees have daily contact with CSC regarding
margin calls, wire transfers, new customer accounts and other operational
matters.
Our Clearing and Settlement Procedures
We are an "introducing broker" and do not clear our own transactions. We
have developed a strategic alliance with Correspondent Services Corporation
(CSC), a subsidiary of
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a major national brokerage firm, as our clearing agent. CSC effects clearance
and settlement of our securities transactions in a cost effective manner. We act
or interface between our independent investment professionals' customers and the
clearing firm. We believe the strategic alliance with CSC has been beneficial in
our recruiting efforts because of the industry name recognition of its parent
corporation. The utilization of the clearing firm also reduces the fixed
overhead costs associated with conducting clearing operations for our investment
professionals. The clearing arrangement enhances our retail brokerage operations
by permitting expanded services, such as customer margin accounts, and a broader
inventory of securities for customer purchases on credit, and a high level of
transaction execution and electronic information services.
Our Information Technology and Systems
Our operations rely heavily on our information and communications systems
to provide the broad array of market data and financial products to our
investment professionals. We have developed and managed a wide area network to
provide market data and financial product information to them. Service
contracts have been negotiated with several information service providers, such
as the New York Stock Exchange, Dow Jones News, Quotron, Bloomberg, the American
Stock Exchange, and Reuters. These services are provided over our network. Our
investment professionals can access customer account information, obtain
securities prices, financial news, financial products information and other
financial information either via our network or the Internet. Clients of the
investment professionals can also access their account information via the
Internet.
Our computers are linked to all major markets and our primary custodians.
Most functions are fulfilled over the network, but the opportunity exists to
achieve substantial improvements in efficiency and productivity by automating
more functions through the network.
To enhance the reliability of the system and integrity of data, we maintain
and carefully monitor backup and recovery functions. These include duplication
and storage of all critical data from the clearing agent and data service firms
on our server in Denver.
The wide area network also provides access to the Internet, individual web
sites, and product information. We download daily the transactional information
from CSC for brokerage account information and DST Systems, Inc., an independent
data bank and reporting service for transactional information from dozens of
mutual fund and annuity companies. Our investment professionals can produce
various reports via this information network for their clients. We are
committed to providing real-time decision support to our investment
professionals through state of the art technology at affordable costs.
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In addition, in the near future, we will create our interactive website
that will have the following capabilities:
. Intranet for internal use (e.g., training, education, communications,
compliance notifications, outsourcing information, etc.)
. Internet for broker recruiting, which would include our brand message
and recruiting story
. Internet for customers to review reports, research via links to third
party providers and other financial information
. Internet for on-line trading
The financial services industry has been dramatically effected by the
Internet and the discount brokerage sector of the securities industry,
characterized by dramatic increases in the volume of on-line trading. We are
committed to empowering our investment professionals and their clients with the
support mechanism to conduct business in any mode they desire. We believe
joining the convenience of Internet based securities trading with the
relationship provided by our experienced full service investment professionals
will provide the ultimate in quality service and advice to clients. We believe
offering on-line trading should be a natural extension to the current services
we provide.
We are in the process of determining the scope of the services and products
that will be offered to our investment professionals and their clients by
electronic commerce. The technology platform of the clearing firm is an
integral part of our overall platform and will determine the technology that we
must develop or acquire from other vendors. CSC has represented to us that it
will have on-line trading capabilities by the fourth quarter of 1999 and will
provide other services by electronic commerce in the future. We are currently
evaluating CSC's technology architecture for its proposed electronic commerce
services. We are also evaluating other clearing firms which have the technology
necessary to offer the overall scope of services and products which we desire,
including on-line trading capabilities.
Assuming CSC is able to provide on-line trading capabilities as and when it
has represented, we hope to begin offering a secure Internet on-line trading
system for our investment professionals' customers by the fourth quarter of
1999. Our current plans are to charge customers $29.95 per Internet trade. We
anticipate that our investment professionals' customers will be able to obtain
account information, quotes and a wide variety of news and research services, as
well as enter orders to buy and sell securities. We will be somewhat unique to
the Internet on-line trading broker dealers, because we will assign an
experienced investment professional to each new client's account. Existing
clients will retain the same investment professionals for their Internet trades.
System enhancements planned for the future include providing our investment
professionals with on-line order entry and trade data, processing and approval;
commission and other accounting data; regulatory compliance controls for our
operations; built in
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trading parameters for clients accounts and the independent investment
professionals; and broker registration information.
The Competition We Face
The financial services industry is highly competitive and we expect
competition to intensify. We encounter direct competition primarily from
established brokerage firms. We compete with some of these firms on a national
basis and with others on a regional basis. Our competitors include large and
well established national and regional retail brokerage firms as well as
relatively new securities firms, a growing number of which are rapidly
developing firms that are using technology to win business away from the more
traditional firms. General financial success with the securities industry and
the increasing popularity of the Internet will together attract additional
competitors for us, such as banks, software development companies, insurance
companies and providers of on-line financial and information services.
In recent years there has been a significant consolidation in the financial
services industry. Commercial banks and other financial institutions have
acquired or established broker-dealer affiliates and begun offering financial
services to individuals traditionally offered by securities firms. These firms
have the ability to offer a wide range of products, including lending, deposit
taking, insurance, brokerage, investment management and investment banking
services. This may enhance their competitive position by attracting and
retaining customers through the convenience of one-stop shopping. They also
have the ability to support investment banking and securities products with
commercial banking, insurance and other financial service revenue to gain market
share.
Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. Some of our competitors also offer a
wider range of products and services than we do and have greater name
recognition, more established reputations and more extensive client and customer
bases. Because of these resources, our competitors may be able to respond more
quickly to new or changing opportunities, technologies and customer requirements
due to superior systems capabilities. They may also be better able to undertake
more extensive promotional activities, offer more attractive terms to customers,
clients, investment professionals, and employees and adopt more aggressive
pricing policies compared to our firm.
In the on-line brokerage business we will be competing with discount
brokerage firms which generally execute transactions for customers without
offering other services such as research, portfolio valuation and investment
recommendations. We will compete directly with the numerous discount brokerage
firms already operating on the Internet. Our principal competitors will include
Charles Schwab, Fidelity Brokerage Services, E*Trade, Waterhouse Investor
Services and Datek On-line. Many of these firms execute transactions for their
customers through the Internet. The number of on-line discount brokerage
brokers will likely increase rapidly if this form of trading continues to gain
market acceptance. The principal competitive factors in on-line discount
brokerage include price, customer service, system reliability, quality of trade
execution, delivery platform capabilities, ease of use, graphical user
interface, range of products and services, innovation, branding and reputation.
In our
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brokerage business we also encounter competition from established full-
commission brokerage firms such as Morgan Stanley Dean Witter, PaineWebber,
Donaldson, Lufkin & Jenerette, Merrill Lynch, and Raymond James. Many of these
brokerage firms have also begun conducting business on-line.
Our Investment Professionals
Our brokers are independent contractors who offer such services as
securities brokerage and asset management, as well as life insurance to
individual, corporate, government and institutional clients. Under our
structure, the investment professionals are independent contractors rather than
employees and are financially responsible for their direct operating expenses
including:
. office facilities
. furniture and equipment
. support personnel
. errors and omissions insurance
. clearing and execution services via our network and other transaction
related services
However, the "payout" percentages of revenues to the investment
professionals, primarily commissions, are, in general, substantially higher in
comparison to other national retail brokerage firms which utilize the
employer/employee structure. Accordingly, under our structure, the investment
professional's income potential, particularly for higher producing individuals,
is generally considerably higher in comparison to income potential under the
prevailing employer/employee structure in the industry, even though our
professionals assume responsibility for their direct operating expenses.
For regulatory purposes, all customer transactions and revenues produced by
our investment professionals are recorded on our books and records and we are
responsible for regulatory compliance supervision of our investment
professionals. We supervise them to the extent necessary to meet the regulatory
requirements of the SEC and NASD. Failure to meet these requirements can result
in censures, fines, civil liability and even suspension or loss of our license
as a registered securities broker-dealer. All branch office managers are
required by us to be qualified as general securities principals and general
securities representatives and, if required by the nature of the business, as
registered options principals and municipal securities principals. They must
pass appropriate qualifying examinations in those categories.
In addition, we charge our investment professionals for clearing,
execution, services offered via our network and other transaction related
services necessary to conduct securities brokerage activities. We are
responsible for providing back office support for our investment professionals,
including trading, due diligence on products and sponsoring investment banking
services, regulatory and compliance matters, and other related services.
For federal and state income tax purposes, our investment professionals
are treated as independent contractors and not employees. In 1989, we received
a determination letter from
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the Denver District of the Internal Revenue Service stating that our brokers
would be treated as independent contractors for federal income tax purposes. We
have consistently relied on the determination letter and the representations
therein when conducting our operations. In 1995, the IRS examined our employment
tax returns for 1993 and 1994. In 1998, the IRS accepted our position that our
investment professionals were independent contractors for federal employment tax
purposes.
Regulation Of Our Business
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
charged with administration of the federal securities laws. We are a broker-
dealer registered with the SEC and a member of the NASD, National Futures
Association and the Commodities Futures Trading Commission. Much of the
regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD. These self-regulatory organizations adopt
rules, subject to approval by the SEC, governing in the industry and conduct
periodic examinations of broker-dealers. Securities firms are also subject to
regulation by state securities authorities in the states in which they do
business. We are registered as a broker-dealer and as an investment advisor in
50 states and the District of Columbia.
The principal purpose of regulating broker-dealers is the protection of
customers and the securities markets, rather than protection of creditors and
shareholders of broker-dealers. The regulations to which broker-dealers are
subject cover all aspects of the securities business, including:
. training of personnel
. sales methods
. trading practices among broker-dealers
. uses and safekeeping of customers' funds and securities
. capital structure of securities firms
. record keeping
. fee arrangements
. disclosure to clients
. the conduct of directors, officers and employees
SEC and self-regulatory actions can result in censure, fine, cease and
desist orders or suspension or expulsion of a broker-dealer or an investment
advisor, its officers or its employees. We have undergone SEC and NASD
examinations within the last few years and the regulatory authorities have
alleged non-compliance violations. See "Legal Matters Affecting Us."
In addition to conducting supervision of our investment professionals as
required by regulatory authorities, the professional qualifications, including
the regulatory records maintained by the NASD and state securities commissions,
of all candidates under consideration to become affiliated with us are subjected
to review by a committee comprised of
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our management personnel and outside legal counsel. These additional procedures
were established to mitigate the risks associated with retaining new investment
professionals.
Effect of Net Capital Requirements
As a registered broker-dealer, we are subject to regulatory net capital
rules administered by the SEC. The rule specifies minimum net capital
requirements for all registered broker-dealers and is designed to measure
financial integrity and liquidity. Our broker is required to maintain net
capital of 6.67% of aggregate indebtedness or $250,000. As of June 30, 1999,
our net capital of $727,077 was 387% of aggregate indebtedness and our net
capital in excess of the minimum requirement was $477,077. Failure to maintain
the required regulatory net capital may subject a firm to suspension or
expulsion by the NASD, certain punitive actions by the SEC and other regulatory
bodies and, ultimately, may require a firm's liquidation.
Properties
Our executive offices are located in Denver where we lease 24,000 square
feet. The terms of the leases expire in 2003 and 2009. Our aggregate monthly
lease payments are about $23,000.
Employees
We believe that one of our strengths is the quality and dedication of our
people and the shared sense of being part of a team that provides timely
quality, service to our clients. We strive to maintain a work environment that
fosters professionalism, excellence, diversity and cooperation among our
employees. We also believe that our employees should have an equity stake in
the firm. Our employees as a group own roughly 25% of our equity on a fully
diluted basis. As of June 30, 1999, we had 52 employees, none of whom is
represented by a labor union.
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LEGAL MATTERS AFFECTING US
We are a party to the following legal proceedings.
U.S. Lending Litigation
Certain individuals who purchased debentures and/or preferred stock issued
by U.S. Lending Corporation ("USL") have brought three lawsuits in state courts
in Colorado, Florida and Texas against us and approximately 30 other broker-
dealers, numerous individual salesmen and former officers and directors of USL.
The three cases assert essentially the same claims under the securities laws of
each state, and common law principles of negligent misrepresentation and
negligent failure to supervise. The individual plaintiffs hope to be designated
class representatives and obtain recission of the purchase of USL securities on
behalf of all of the purchasers from January 1993 to March 1995. The cases are
at various stages of pre-trial proceedings, including limited written discovery
and depositions.
In Florida, the Court dismissed claims against all non-Florida resident
defendants who did not sell securities to at least one of the proposed class
representatives in the State of Florida. The plaintiffs have appealed this
ruling to the Florida Court of Appeals. As a result of this ruling, all of our
officers, directors and investment professionals in that case, except one, have
been dismissed. The Court has denied the plaintiffs' request to certify them as
class representatives but permitted them to renew their request in the future.
In Colorado and Texas, the plaintiffs' request to be certified as class
representatives is pending, but the Courts have deferred ruling on class
certification until after resolution of our motions for summary judgment. We
have moved for summary judgment seeking dismissal of the cases because there is
a substantial question as to the plaintiffs' ability to bring their claims in
light of a plan of reorganization approved by the court in the USL bankruptcy.
In Colorado, the Court ordered the plaintiffs to seek clarification of the
bankruptcy judge's rulings, and our motion was granted to stay the case pending
a final ruling on our motion for summary judgment. In Texas, our motion is
awaiting oral argument before the judge.
We have answered the three complaints and denied liability. At present, it
is difficult to estimate how much is at stake in this litigation. The currently
named plaintiffs invested less than $125,000 through our broker-dealer. We sold
approximately $5,000,000 of the total $28,000,000 raised by USL. The balance
was sold by the other broker-dealers. If the class is ultimately certified
against us, they will likely seek recission of the amount invested through us
plus interest, attorneys' fees and costs.
The investors received a substantial, but presently unknown, amount of
interest and/or return of capital. In addition, we have settled claims with
other plaintiffs or claimants representing approximately $500,000 of USL
securities purchases. These amounts would offset any liability to the class.
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At present, our litigation counsel cannot evaluate the likelihood of an
unfavorable outcome as to these cases. If any or all of the suits are certified
as class actions and if we were to lose at the trials of the cases, the damages
could be material and exceed our current ability to pay without using some of
the proceeds from this offering.
Individual Arbitrations and Litigation
As of September 30, 1999 we are also a defendant or co-defendant in six
separate NASD arbitration actions and one lawsuit brought by certain individuals
alleging various claims against us and/or our investment professionals. We
believe that in each of these pending matters, we have meritorious defense or
offsets that will enable us to settle the cases without a material adverse
effect on us. Our counsel in each of these cases, however, cannot give us an
evaluation of the likelihood of an unfavorable outcome. Although we do not
believe that the loss of any one of the cases would have a material adverse
effect on us, if several or all of the cases were lost and the claimants or
plaintiffs were awarded the full amount of their alleged losses, we might not be
able to pay the full amount of the damages awarded without using some of the
proceeds from this offering, which amount could be material.
NASD and SEC Investigations
We have been the subject of an NASD investigation and an SEC investigation
of various aspects of our business. We settled the NASD investigation by
agreeing to a consent order, which the NASD has not yet signed, in June 1999.
Without admitting or denying the NASD's allegations, we consented to a fine of
$50,000, and our Chief Executive Officer consented to a 30-day suspension from
association in all principal capacities with our broker/dealer. It is customary
that a principal of the firm is sanctioned at the same time. The alleged
violations are for failing to promptly deposit money into an escrow account in
connection with two securities offerings in 1994 and 1995, failure to establish
a qualifying account to receive, hold and distribute investor funds with respect
to two 1994 securities offerings by Nevada Gold & Casinos, Inc. ("Nevada Gold"),
failure to return investor funds when the minimum sales contingency was not met,
permitting persons to function in a principal capacity before such persons
passed the appropriate examinations, failure to supervise a person formerly
associated with us and failure to establish, maintain and enforce adequate
written supervisory procedures.
The SEC investigation partially overlapped the NASD investigation regarding
the two securities offerings of Nevada Gold in which we acted as the selling
agent. The SEC staff was authorized to investigate whether there were
misrepresentations or omissions with respect to the Nevada Gold securities
offerings, whether the Nevada Gold offerings were exempt from registration under
Regulation D, whether certain individuals or entities were acting as
unregistered brokers or dealers in connection with the sale of Nevada Gold
securities and, if so, whether they failed to maintain net capital as required
by the Exchange Act and applicable regulations, whether funds received in
connection with the Nevada Gold offerings were promptly transmitted to an
appropriate escrow account and whether certain individuals may have failed to
supervise persons subject to their supervision who engaged in the alleged
violations described above.
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The SEC staff has now informed us that it has concluded its investigation
and will seek to obtain authority from the Securities & Exchange Commission (the
"Commission") for the filing of an administrative complaint against us and one
or more of our officers, directors and employees. Although the staff has
generally described the results of its investigation to us, we do not know the
precise violations of the securities laws and/or regulations that will be
alleged in the complaint if and when it is authorized by the Commission. We are
therefore unable to describe the allegations that may be made against us or the
financial penalties or other sanctions that may be sought against us and/or our
officers, directors and employees.
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MANAGEMENT
Our Directors and Officers
The following table sets forth certain information concerning our
directors and executive officers:
<TABLE>
<CAPTION>
Beginning Term
Name Age Positions Held of Service
---- --- -------------- ---------------
<S> <C> <C> <C>
Dale E. Frey 69 Chairman of the Board, September 1989
President, Chief Executive
Officer and Director/(1)(2)/
Cornelia F. Eldridge 57 Director/(1)/ September 1989
Michael R. McClurg 59 Director/(1)/ September 1989
Jerome C. Eppler 74 Director/(1)/ January 1991
William R. Tennison, Jr. 57 Director/(1)/ June 1997
Scott T. Gillespie 43 Senior Vice President of March 1995
Operations/(2)/
Paul L. Hocevar 52 Senior Vice President and April 1996
Chief Financial Officer/(2)/
Larry Hayden 63 Senior Vice President of April 1999
Administration/(2)/
</TABLE>
__________________
/(1)/ Director or officer of the parent company.
/(2)/ Officer of the broker subsidiary.
No arrangements exist between directors, officers, or other persons
which resulted in the selection or election of any of the above-named persons.
All directors hold office until the next annual meeting of shareholders or until
their successors are duly elected and qualified. Officers serve at the pleasure
of the board of directors.
The principal occupations of the persons named above for at least the
past five years are as follows:
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Dale E. Frey has been the Chief Executive Officer, President and a Director
of the parent and the broker since inception. From January 1967 until December
1987 he was an Executive Vice-President and Regional Manager of E.F. Hutton &
Company, Inc. and served on its board of directors. From January 1988 until
September 1988, he was an Executive Vice President of Shearson Lehman Hutton,
Inc. While with Hutton, Mr. Frey managed over 1,200 employees who generated
revenues of $150 million per year. His eleven-state region captured 25% of the
total market share (based on gross commission revenues) of the securities
business within that region based upon the McGlagan Report which was a survey
prepared for the securities industry. Mr. Frey graduated from the University of
Colorado in 1958 with a degree in aeronautical engineering.
Cornelia F. Eldridge has been a Director of the parent since September
1989. Since 1987, Ms. Eldridge has been self-employed through Eldridge
Associates, New York, New York, engaged in the business of management
consulting. From August 1984 until December 1986 she was a Partner in Ditri
Associates, New York, New York, engaged in the business of management
consulting. Ms. Eldridge graduated from Ohio Wesleyan University in 1963 with a
Bachelor of Arts degree in Art and French and from the University of
Massachusetts in 1968 with an MBA.
Michael R. McClurg has been a Director of the parent since September 1989.
Since May 1993, Mr. McClurg has served as President, Chief Executive Officer and
Director of DDx & Co., engaged in the business of detecting estrus in cows to
maximize the efficiencies of artificial insemination programs on dairy farms and
beef ranches. Mr. McClurg has 37 years of business management, finance, and
investment experience. From 1962 to 1980 Mr. McClurg was an investment banker on
Wall Street with three different firms. His last and most notable position while
on Wall Street was as Senior Vice President of Dillion, Reed & Co. Inc. From
1980 to 1983 he formed and managed several specially designed oil and gas
limited partnerships for institutional investors. In 1983 he moved to Denver,
Colorado where he served as President, Chief Executive Officer and Director of
High Plains Oil Corporation, a Nasdaq listed oil and gas exploration and
production company that was sold to a New York Stock Exchange listed company in
1987. Since June 1987, Mr. McClurg has served as President, Chief Executive
Officer and a Director of M.R. McClurg & Co., Inc., which provides financial
consulting services to a variety of companies and provides assistance in
arranging financing and mergers and acquisitions. Mr. McClurg graduated in 1962
with a Bachelor of Science degree in finance/marketing from Indiana University.
Jerome C. Eppler has been a Director of the parent since January 1991. From
1953 to 1961, he was a General Partner of Cyrus J. Lawrence & Sons, a registered
securities broker-dealer which was a member of the New York Stock Exchange. In
1961 he formed Eppler & Company, a private investment banking firm of which he
is the sole owner. From 1967 to 1978, he served as Chairman and Chief Executive
Officer of ISI Corp., which was the founder of Life Insurance Group of
California. In 1978, that company was sold to E.F. Hutton Group ISI Corp.,
through a separate subsidiary, managed mutual funds having assets over $1
billion. Mr. Eppler has been associated with companies in various capacities as
a director and otherwise, including Allegheny Airlines (now U.S. Air) from 1961
to 1975; Esmark, Inc. from 1965 to 1984; Gifford-Hill & Co. from 1978 to 1986;
and Telecredit, Inc. from 1976 to 1990. He was a Limited Partner
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<PAGE>
of Alex Brown & Sons, a registered securities broker-dealer from 1982 until
1986. At present, Mr. Eppler is a principal of Olympic Capital Partners, an
investment banking firm; a director of Tessco Inc., a national distributor of
telecommunication devices and equipment; Vision TEK, a software development
company; and Advanced Research Systems, Inc., a medical software development
company. Mr. Eppler received degrees from Texas A&M University in 1947 and the
Wharton Graduate School of Business in 1949.
William Tennison, Jr. has been a Director of the parent since June 1997.
Since 1991, Mr. Tennison has been a registered representative affiliated with
the broker as an independent contractor and has served on the broker's board of
directors since the summer of 1997. He specializes in retirement and estate
planning. He began his professional career in 1971 at E.F. Hutton & Company
advancing to First Vice President and served on the Directors Advisory Council.
In addition to his primary function as an Account Executive, he held numerous
managerial positions at branch, regional and national levels. He developed and
published a highly respected training program, The Bill Tennison Master Class,
utilized throughout the securities industry. He is a frequent speaker at
securities industry sales conferences and other professional conventions. Mr.
Tennison graduated from Arizona State University in 1963 with a Bachelor of
Science degree in industrial management and the University of Arizona in 1965
with an MBA.
Scott T. Gillespie has been employed by the broker since January 1995 and
became an officer in March 1995. From March 1992 through December 1994, he was
employed by Resources Trust Company and was Managing Director of its Investment
Manager Services Division. From June 1990 through March 1992, he was a business
consultant and principal of the Business Planning Group, specializing in
turnaround management. From March 1985 through October 1989, Mr. Gillespie was
President of Drake Capital securities, Inc. From June 1983 through February
1985, Mr. Gillespie was the Chief Financial Officer of First Wilshire Securities
Management, Inc. From September 1978 through June 1983, Mr. Gillespie was a CPA
and audit manager with Deloitte & Touche (formerly Touche Ross & Co.), an
international accounting firm. Mr. Gillespie received a Bachelor of Science and
MBA degrees in finance from the University of Southern California in 1977 and
1978, respectively.
Paul L. Hocevar has been employed by the broker since September 1995 and
has served as a director of the broker and Chief Financial Officer since
February 1996 and August 1996, respectively. From March 1991 to September 1995,
he was President and Director of COMgroup International and affiliates,
privately owned international telecommunication companies, with cellular,
paging, e-mail and Internet access projects in Yugoslavia, Malta, Kuwait, and
other international locations. From January 1983 to February 1991, he was a
Partner with Arthur Andersen & Company, an international accounting firm as a
tax specialist. From September 1973 to April 1982, he was employed by Peat,
Marwick, Mitchell & Co., an international accounting firm. He was promoted to
partner in June 1979, and was a member of the firm's oil and gas tax practice
team from 1973 through 1982. He has been an author, a lecturer, a speaker and an
expert witness on numerous occasions during his professional career. He
graduated from the University of Denver in 1969 with a degree in accounting and
the University of Denver College of Law in 1973 with a Juris Doctorate degree.
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<PAGE>
Larry Hayden has been employed by the broker since April 1999. From
February 1998 to April 1999, he served as Vice President of Compliance for
Fiserv Correspondent Services, Inc. Since 1991, through his consulting firm,
L.D. Hayden & Associates, he has provided independent compliance audits for
brokerage and investment advisory firms as well as management reviews focusing
on strategic planning, employment practices and structured hiring practices.
From 1986 to 1991, he served as President of CFP Board of Standards (formerly
The International Board of Standards and Practices for Certified Financial
Planners). Mr. Hayden was Executive Vice President and a Director of Hanifen,
Imhoff Inc., a regional NYSE member firm from 1977 to 1984. From 1973 to 1977,
he served as Vice President, Treasurer and Director for Westamerican Financial
Corporation, a national distributor of mutual funds. From 1968 through 1973, Mr.
Hayden was employed by the National Association of Securities Dealers as
Assistant District Director in the Denver District office. He was also a member
of the Board of Governors of the NASD. He is an Arbitrator for the NASD and
frequently serves on Nasdaq listing qualification hearing panels. Mr. Hayden
graduated in 1961 from Western State College with a Bachelor degree in Business
Administration and received a Masters degree in organizational management from
the University of Phoenix in 1996. He received his Certified Financial Planner
designation in 1982 and is a member of the Institute of Certified Financial
Planners.
Term and Compensation of Directors
Our five person board of directors is divided into three separate classes
(Class I, Class II and Class III), with one class of directors elected at each
annual meeting to serve a three year term. Each director elected serves in such
capacity until the next annual meeting of our shareholders where that class is
re-elected or until their successors are duly elected and qualified. Directors
that are not employees or investment professionals each receive $2,000 for each
meeting of the board of directors that they attend and $500 for attending a
meeting of a committee of the board of directors. Each of our directors is
reimbursed for any expenses incurred by such director in connection with such
director's attendance at a meeting of the board of directors, or committee
thereof. Directors who are employed by us receive no compensation from us for
serving on the board of directors.
Term of Executive Officers
The board of directors names each of our executive officers at the first
board meeting following our annual meeting of shareholders. Each officer serves
at the behest of the board of directors and until their successors are elected
and appointed or until the earlier of their death, resignation or removal.
Committees of the Board of Directors
We have appointed certain members of our board to serve on various
committees of the board of directors. The board of directors has established
three standing committees: (a) the compensation committee; (b) the audit
committee; and (c) the planning committee.
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<PAGE>
Compensation Committee. The compensation committee is responsible for
reviewing the performance of our chief executive officer; reviewing and
recommending the compensation of our executive officers, including the chief
executive officer; recommending and approving stock option grants and restricted
stock awards to management; reviewing and recommending non-cash compensation
programs including stock option grants, 401(k) contributions and annual bonuses;
reviewing and recommending director compensation; and advising the chief
executive officer on miscellaneous compensation issues. The members of the
compensation committee are Mr. McClurg, Mr. Eppler and Ms. Eldridge.
Audit Committee. The audit committee reports to the board of directors in
discharging its responsibilities relating to our accounting, reporting and
financial control practices. The audit committee has general responsibility for
oversight of financial controls, as well as our accounting, regulatory, and
audit activities, and annually reviews the qualifications of the independent
auditors. The audit committee is composed entirely of outside directors. The
members of the audit committee are Mr. McClurg, Mr. Eppler and Ms. Eldridge.
We have not designated a nominating committee. The entire board of
directors acts to nominate persons for election as directors.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors consists of Mr.
McClurg, Mr. Eppler and Ms. Eldridge, none of whom has been or is an officer or
employee. No interlocking relationship exists between any member of the
compensation committee and any member or any other company's board of directors
or compensation committee.
Indemnification of Officers and Directors
Our amended and restated certificate of incorporation limits, to the
maximum extent permitted under Delaware law, the personal liability of directors
and officers for monetary damages for breach of their fiduciary duties as
directors and officers, except in certain circumstances involving certain
wrongful acts, such as breach of a director's duty of loyalty or acts of
omission which involve intentional misconduct or a knowing violation of law.
Section 145 of the Delaware General Corporation Law permits us to indemnify
officers, directors or employees against expenses (including attorney's fees),
judgements, fines and amounts paid in settlement in connection with legal
proceedings if the officer, director or employee acted in good faith and in a
manner he reasonably believed to be in or not opposed to our best interests, and
with respect to any criminal act or proceeding, he had no reasonable cause to
believe his conduct was unlawful. Indemnification is not permitted as to any
matter as to which the person is adjudged to be liable unless, and only to the
extent that, the court in which such action or suit was brought upon application
that, despite the adjudication of liability, but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper. Individuals who
successfully defend such an action are entitled to indemnification against
expense reasonably incurred in connection therewith.
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<PAGE>
COMPENSATION
The following table sets forth information as to compensation paid by us,
to the named persons.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
---------------------- ------------------ -------------
Other Other All
Annual restricted Other
Name and Fiscal Compens- stock Options/ LTP compen-
principal position year Salary Bonus sation/(1)/ award(s) SARs Payouts sation
- ------------------ ------- ------- ----- ------------ ----------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dale E. Frey 1998 $600,000 -- -- -- --
1997 600,000 $ 37,500 -- 350,000 -- --
1996 600,000 -- -- 100,000 -- --
Scott T. Gillespie 1998 $133,185 $ 9,000 -- 107,500 -- --
1997 133,110 6,250 -- 25,000 -- --
1996 133,110 -- -- -- --
Paul L. Hocevar 1998 $180,100 -- -- -- --
1997 155,000 $ 12,500 -- 150,000 -- --
1996 130,000 -- -- 50,000 -- --
</TABLE>
__________________
(1) Warrants issued and exercised at less than the fair value of the stock.
We have an existing employment agreement with Mr. Frey which has a term of
three years and provides for an annual salary of $600,000 and customary
benefits. We anticipate that the annual salary rate during 1999 for Messrs.
Gillespie, Hocevar and Hayden will be $150,000, $180,000 and $110,000,
respectively. Mr. Hayden was not employed by us until April 1999, and thus he
will not receive his full annual salary for 1999.
We also have Noncompetition and Nonsolicitation Agreements with Messrs.
Gillespie, Hocevar and Hayden, which are contingent upon completion of our
public offering. These agreements are for a term of 30 months commencing on the
date of closing of the public offering, and, if the employment of any of these
individuals were to terminate before the end of the term, they would be
restricted from competing with us or soliciting our clients or investment
professionals for the remainder of the term. If we were to terminate the
employment of any of these individuals other than for cause before the end of
the terms, they would be entitled under these agreements to an additional three
months salary and the salary that would be payable to them if they were to
continue to be employed to the end of the term of the agreements.
The executive officers of the broker participate in an incentive
compensation plan. The incentive compensation is determined annually based on
annual consolidated net income before taxes. On the first $600,000 of incentive
compensation for our executive officers the consolidated net income before taxes
must equal or exceed two times the sum of the aggregate
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base salary plus incentive compensation payable to all executive officers. The
factor increases as the consolidated net income before taxes increases for
succeeding increments of incentive compensation. The following table illustrates
the application of the foregoing formula and shows the aggregate annual
incentive compensation for the first several income ranges, for which the
factors are 2, 2.25 and 2.5, respectively:
Consolidated Net Income Amount of
Before Taxes Incentive Compensation
------------------------ ----------------------
From To From To
---- -- ---- --
$2,400,000 $ 4,200,000 $ 0 $ 600,000
4,650,001 6,600,000 600,001 1,200,000
7,200,001 11,400,000 1,200,001 2,400,00
Stock Options We Have Granted
The following table sets forth certain information with respect to the
options granted during 1998 to each of our executive officers listed in the
Summary Compensation Table above:
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Percent of Annual Rates of
Total Options Stock Price
Granted to Exercise or Appreciation
Options Employees in Base Price Expiration for Option Term/(1)/
------------------------
Name Granted # Fiscal Year $/Sh Date 5%($) 10%($)
- ---- --------- ------------ ----------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Scott T. Gillespie 107,500 97.7% $2.00 03/02/03 $59,340 $131,365
</TABLE>
__________________
/(1)/ These amounts represent assumed rates of appreciation in value from the
date of grant until the end of the option term, at the rates set by the
SEC and, therefore, are not intended to forecast possible future
appreciation, if any, in our shares.
The following table sets forth certain information with respect to the
options exercised by the executive officers named above during 1998 or held by
such persons at year end.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options/(2)/
Acquired Value Options at December 31, 1998 at December 31, 1998
------------------------------------ -----------------------------------
Name on Exercise Realized/(1)/ Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dale E. Frey 2,000 $ 6,000 350,000 -- $980,000 --
Scott T. Gillespie 12,000 45,000 107,500 -- 322,500 --
Paul L. Hocevar -- -- 100,000 -- 300,000 --
</TABLE>
____________________________
/(1)/ The value realized is based on an arbitrary value of $5.00 per share.
/(2)/ The value of unexercised options is based on an arbitrary value of $5.00
per share.
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<PAGE>
Our Stock Option Plan
To attract and retain qualified personnel, we adopted the 1992 stock option
plan. The plan initially covered approximately 300,000 shares. In February 1994,
the number of shares available pursuant to the plan was increased to 600,000
shares and was later increased to 1,000,000 shares in May 1999 subject to
shareholder ratification. The plan allows issuance of both qualified (or
incentive) options and non-qualified options and has a term of ten years.
Options have been and may be granted to employees, independent contractors,
officers, directors and consultants at the discretion of the board of directors.
Subject to the limitations of the Internal Revenue Code, incentive options
will be granted to employees, including officers, at an exercise price not less
than the fair market value of the underlying shares on the date of grant. The
committee may elect varying vesting schedules, although it is anticipated that
most option grants will require deferred vesting. To obtain favorable tax
treatment, the holder of shares acquired through exercise of an incentive option
may not dispose of those shares for two years from the date the option is
granted and for one year from the date of transfer of any shares to the
exercising option holder.
Non-qualified options have been and may be granted under the plan by the
committee to officers, directors, employees consultants and others having a
business relationship with the Company. The option exercise price, option
exercise period, option vesting and other matters will be at the discretion of
the committee.
As of June 30, 1999, options for the purchase of 602,500 shares are
outstanding under the plan at an average exercise price of approximately $2.29
per share. Such options expire at various times between 2000 and 2004.
Our Employee Stock Purchase Plan
In April 1995, our board of directors approved the 1995 Stock Purchase Plan
whereby employees, independent contractors, advisors and consultants of the
parent company or the broker, at their election, may purchase shares and pay for
such shares out of their compensation. The plan will terminate on March 31,
2005, or earlier upon not less than ten days' prior written notice. A maximum of
250,000 shares has been reserved for issuance pursuant to the plan. As of June
30, 1999, 34,527 shares have been issued pursuant to the 1995 plan for an
aggregate of $69,054, or an average of $2 per share. On a quarterly basis, our
board of directors determines the purchase price for shares issued pursuant to
the plan. During 1998 and 1999 there was no material activity in the plan. In
June 1999, the board of directors determined the purchase price for shares
issued pursuant to the plan was $5.00 per share.
Each participant in the plan will receive, within 60 days after the last
day of each fiscal year, a non-transferable option for the purchase of that
number of shares as equals 20% of the total number of shares purchased by the
participant pursuant to the plan during the preceding year. The options will be
exercisable for a period of three years after the issuance date at an exercise
price equal to the then value as established by our board of directors, but only
so long as the holder of the option is employed by us or the broker as an
independent contractor, consultant or advisor associated with us. However, if a
public market exists for our shares, the
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<PAGE>
exercise price will be the closing price on the last business day preceding the
date of issuance of the option. The shares received upon exercise of the options
will be subject to substantial restrictions on transfer.
In the event the employment or independent contractor relationship should
terminate for any reason, we have the option, exercisable within 60 days after
the termination date, to purchase all shares owned by the participant for an
amount equal to the value of such shares on the termination date as determined
by our board of directors.
Our 401(k) Plan
We maintain a 401(k) retirement savings plan. All of our employees meeting
certain minimum eligibility requirements are eligible to participate in the
401(k) plan. Under the 401(k) plan, an employee may contribute up to 15% of his
or her pre-tax gross compensation. The contribution cannot exceed the
statutorily prescribed annual limit. The 401(k) plan permits us, but does not
require us, to make additional contributions to the 401(k) plan. All amounts
contributed by the employee participants in conformance with plan requirements
and earnings on such contributions are fully vested at all times. For the years
ended December 31, 1997 and 1998, we contributed $8,782 and $13,304,
respectively, to the 401(k) plan.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our shares as of the date of this prospectus by:
. each person who is known by us to own beneficially more than
5% of our outstanding shares
. each of our executive officers and directors
. all executive officers and directors as a group
Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire shares within 60 days are treated as outstanding
only when determining the amount and percentage of our shares owned by such
individual. Each person has sole voting and sole investment power with respect
to the shares shown except as noted.
<TABLE>
<CAPTION>
Shares Beneficially/(2)/
Owned Prior To Shares Beneficially
Offering Owned After Offering/(18)/
------------------------ ----------------------------
Name
and Address/(1)/ Number Percent Number Percent
- ---------------- ------ ------- ------ ---------
<S> <C> <C> <C> <C>
Dale E. Frey/(3)(4)(5)(6)(7)(8)(9)/ 861,601 17.5 861,601 12.0
William R. Tennison, Jr./(5)(6)(10)/ 293,153 6.4 326,859 4.8
174 Grand Avenue
Paonia, CO 81428
Robert Tointon/(11)/ 300,000 6.6 300,000 4.4
Post Office Box 1518
Greeley, CO 80632
Scott T. Gillespie/(3)(4)(6)(12)/ 144,500 3.1 144,500 2.1
Paul L. Hocevar/(3)(4)(6)(13)/ 201,292 4.3 201,292 2.9
Larry Hayden/(4)(14)/ 15,000 * 15,000 --
Cornelia Eldridge/(5)(15)/ 15,850 * 17,880 --
2455 E. Sunrise Blvd.
Suite 313
Ft. Lauderdale, FL 33304
Jerome Eppler/(5)(16)/ 82,500 1.8 82,500 1.2
1004 A Hummingbird Dr.
Castle Rock, CO 80104
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Mike McClurg/(5)(17)/ 162,383 3.5 196,744 2.9
2516 Tournament Dr.
Castle Rock, CO 80104
Executive Officers
& Directors as a group
(8 persons) 1,776,279 37.3 2,146,376 30.3
</TABLE>
______________________
/(1)/ The address of each of the persons listed above is 1700 Lincoln Street,
Denver, Colorado 80203, unless indicated otherwise.
/(2)/ Beneficial ownership is determined in accordance with the rules of the
SEC. In general, a person who has voting power and/or investment power
with respect to securities is treated as a beneficial owner of those
securities. Shares of common stock subject to options, warrants or rights
currently exercisable or exercisable within 60 days of the date of this
prospectus are considered as beneficially owned by the person holding
such options, warrants or rights. Unless indicated otherwise, we believe
that the persons named in this table have sole voting and investment
power with respect to the shares of common stock outstanding as of June
30, 1999.
/(3)/ Executive officer of parent.
/(4)/ Executive officer of subsidiary.
/(5)/ Director of parent.
/(6)/ Director of subsidiary.
/(7)/ Includes options to purchase 350,000 shares of common stock.
/(8)/ Includes 60,500 shares of common stock owned by Mr. Frey's minor son.
/(9)/ Includes shares against which Mr. Frey's spouse may have a legal claim.
/(10)/ Includes 46,361 and 15,815 shares of common stock owned by Tennison
Revocable Trust and William R. Tennison IRA. Includes shares of common
stock issued in the conversion to Tennison & Associates of which Mr.
Tennison is an officer and director and warrants to purchase 14,500
shares of common stock.
/(11)/ Includes 150,000 shares of common stock owed by Phelps-Tointon, Inc. of
which Mr. Tointon is a director.
/(12)/ Includes 33,000 shares of common stock owned by Mr. Gillespie's
individual retirement account and options to purchase 107,500 shares of
common stock.
/(13)/ Includes 50,000 shares of common stock owned by Paul L. Hocevar Keogh,
and options to purchase 100,000 shares of common stock.
/(14)/ Includes options to purchase 15,000 shares of common stock.
/(15)/ Includes warrants to purchase 12,500 shares of common stock.
/(16)/ Includes 60,000 and 10,000 shares of common stock owned by the Jerome
Eppler Keogh and Jerome Eppler Trust, respectively. Also, includes 12,500
warrants to purchase common stock.
/(17)/ Includes 70,984 shares of common stock owned by MR McClurg & Co. of which
Mr. McClurg is an officer and director, 10,000 shares of common stock
owned by Emma McClurg, wife, and warrants to purchase 12,500 shares of
common stock.
/(18)/ Takes into account 283,922 shares issued in conversion of debt as
described under "Exchange of Debt."
* Less than 1.0%.
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CERTAIN TRANSACTIONS
During 1997 and 1998, we advanced to a newly formed limited liability
company approximately $518,000 in debt and equity contributions to repurchase
direct participating interests and other securities from claimants of our
broker-dealer subsidiary. We are the manager of the limited liability company,
which was formed by us to hold certain investments that are in the process of
liquidity. The aggregate amount owed by the limited liability company to us has
been reduced to approximately $423,000, as of June 30, 1999. We believe that we
will be able to recover the full amount from the limited liability company as
the investments are liquidated. However, we have recorded a reserve of $215,000
against this investment as of June 30, 1999.
Contingent upon completion of this offering, Messrs. McClurg and Tennison
and Ms. Eldridge have agreed to convert $175,242, $171,900 and $10,355,
respectively, of subordinated debt in our debt exchange for 34,397, 33,706 and
2,030 shares of our common stock, respectively, at an assumed price of $5.10
(85% of our assumed offering price of $6 per share).
We will not enter into transactions or agreements with directors, officers,
principal security holders or other affiliated parties unless the terms thereof
are no less favorable to us than could be obtained from unaffiliated third
parties. In any event, we will not enter into any transaction with directors,
officers or principal security holders without the affirmative vote of a
majority of disinterested directors.
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<PAGE>
DESCRIPTION OF OUR EQUITY SECURITIES
Common Stock
We are authorized to issue 10,000,000 shares of common stock, $.10 par
value, of which 4,571,614 shares are currently issued and outstanding. Holders
of shares are entitled to dividends as and when declared by our board of
directors from funds legally available therefor, and upon our liquidation,
dissolution or winding up, to share ratably in all assets remaining after
payment of liabilities. We have not paid any dividends to date nor do we
anticipate paying any dividends on our shares in the foreseeable future. It is
our present policy to retain earnings, if any, for use in the development and
expansion of our business. The holders of shares are entitled to one vote for
each share held of record by them, and do not have the right to cumulate their
votes for election of directors. The holders of shares do not have preemptive
rights.
Preferred Stock
We intend to amend our certificate of incorporation to authorize 1,000,000
shares of preferred stock, $.001 par value. Our preferred stock may be issued
from time to time by our board of directors as in one or more series. The
description of shares of each series of preferred stock will be as set forth in
resolutions adopted by the board of directors and a certificate of designation
to be filed as required by Delaware law prior to the issuance of any shares of
the series. The certificate of designation will set the number of shares to be
included in each series of preferred stock and set the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications, or terms and conditions of
redemption relating to the shares of each series. However, the board of
directors is not authorized to change the right of the common stock to vote one
vote per share on all matters submitted for shareholder action. The authority
of the board of directors with respect to each series of preferred stock
includes, but is not limited to, setting or changing the following:
. the designation of the series and the number of shares constituting
the series, provided that the aggregate number of shares constituting
all series of preferred stock may not exceed 1,000,000
. the annual distribution rate on shares of the series, whether
distributions will be cumulative and, if so, from which date or dates
. whether the shares of the series will be redeemable and, if so, the
terms and conditions of redemption, including the date or dates upon
and after which the shares will be redeemable, and the amount per
share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates
. our obligation, if any, to redeem or repurchase shares of the series
pursuant to a sinking fund
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<PAGE>
. whether shares of the series will be convertible into, or exchangeable
for, shares of stock of any other class or classes and, if so, the
terms and conditions of conversion or exchange, including the price or
prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any
. whether the shares of the series will have voting rights, in addition
to the voting rights provided by law, and, if so, the terms of the
voting rights
. the rights of the shares of the series in the event of our voluntary
or involuntary liquidation, dissolution or winding up
. any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to the series which may
be authorized or permitted under Delaware law
The shares of preferred stock of any one series will be identical with each
other in all respects except as to the dates from and after which dividends
thereon will cumulate, if cumulative.
Outstanding Options and Warrants
From time to time we have issued options and warrants to purchase our
common stock. As of June 30, 1999, we had outstanding options permitting the
holders to purchase 602,500 shares of our common stock at an average exercise
price of $2.29 per share. See "Compensation - Our Stock Option Plan." We also
had outstanding warrants permitting the holders to purchase 340,000 shares of
our common stock at an average exercise price of $2.20 per share.
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<PAGE>
EXCHANGE OF DEBT
In August 1999, we asked our debt holders to convert their debt into our
common stock at a rate per common share of 85% of the public offering price,
contingent on the closing of this offering. Holders of $1,448,000 of our debt
elected to do so, and based on a public offering price of $5 to $7 per share,
will receive between 341,000 and 243,000 shares upon closing. These shares are
restricted from sale for 180 days following this offering.
66
<PAGE>
SHARES ELIGIBLE FOR RESALE
Prior to this offering, there has been no public market for our common
stock. We cannot provide any assurances that a significant public market for
the common stock will develop or be sustained after this offering. Future sales
of substantial amounts of common stock in the public market, or the possibility
of such sales occurring, could adversely affect prevailing market prices for our
common stock or our future ability to raise capital through an offering of
equity securities.
After this offering and the exchange of $1,448,000 of debt for common stock
(see "Exchange of Debt"), we will have outstanding 6,855,536 shares of common
stock. Of these shares, the 2,000,000 shares to be sold in this offering, or
2,300,000 shares if the underwriters' over-allotment option is exercised in
full, will be freely tradable in the public market without restriction under the
Securities Act, unless such shares are held by any of our "affiliates" as that
term is defined in Rule 144 under the Securities Act.
The remaining 4,855,536 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144. We
issued and sold the restricted shares in private transactions in reliance on
exemptions from registration under the Securities Act. Restricted shares may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 under the Securities Act, as
summarized below.
Pursuant to the "lock-up" agreements between our officers, directors and
the holders of 5% or more of our outstanding shares of common stock and either
ourself or the underwriters, have agreed not to offer, sell, pledge or otherwise
dispose of, directly or indirectly, or announce their intention to do the same,
any of our common stock or securities convertible into, or exchangeable or
exerciseable for any of our securities for a period of 12 months from the date
of this offering. In addition, "lock-up" agreements between converting debt
holders and either ourself or the underwriters, and holders of ________ of the
restricted shares have agreed not to do the same for a period of 180 days from
the date of this offering. The underwriter agrees to release all shareholders
from the lock-up provisions if our common stock trades at a 50% premium above
the public offering price for 20 trading days. However, if the holder of the
restricted shares is an individual, he or she may transfer any such securities
either during his or her lifetime or on death by will or intestacy to his or her
immediate family or to a trust the beneficiaries of which are exclusively the
holder of the securities and/or a member of his or her immediate family. We also
have entered into an agreement with the underwriters that we will not offer,
sell or otherwise dispose of common stock for a period of 180 days from the date
of this offering. On the date of the expiration of the lock-up agreements, all
of the restricted shares will be eligible for immediate sale, although shares
held by affiliates will be subject to some volume, manner of sale and other
limitations under Rule 144.
Shares issued upon exercise of options and warrants we granted prior to the
date of this offering will also be available for sale in the public market under
Rule 144. In general, under Rule 144 as in effect at the closing of this
offering, beginning 90 days after the date of this prospectus, a person, or
persons whose shares are aggregated, who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
who is not an affiliate, would be entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of
67
<PAGE>
. 1% of the then-outstanding shares of common stock or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to the
sale
Sales under Rule 144 are also subject to some manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below, for whom Neidiger Tucker Bruner, Inc. and D.E. Frey &
Company, Inc. are acting as representatives, have severally agreed to purchase
from us, and we have agreed to sell to them, the respective number of shares of
common stock set forth opposite each underwriter's name below.
Number
Underwriters of Shares
------------ ---------
Neidiger Tucker Bruner, Inc......................
D.E. Frey & Company, Inc......................... ---------
Total....................................... 2,000,000
=========
The Underwriting Agreement provides that the obligations of the several
underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The nature of the underwriters'
obligation is such that they are committed to purchase and pay for all shares of
common stock, other than those covered by the over-allotment option discussed
below, if any are purchased.
The underwriters propose to offer the shares of our common stock directly
to the public at the initial public offering price set forth on the cover page
of this prospectus, and to other securities dealers, who may include the
underwriters, at such price, less a concession not in excess of $________ per
share of common stock. The underwriters may allow, and such selected dealers
may reallow, a concession not in excess of $________ per share of common stock
to other brokers and dealers. After this offering, the price to the public,
concession, allowance and reallowance may be changed by the representatives.
The representatives have informed us that they do not intend to confirm sales to
any account over which they exercise discretionary authority.
We have granted the underwriters an option to purchase up to 300,000
additional shares of common stock at the same price per share as we will receive
for the 2,000,000 shares that the underwriters have agreed to purchase. This
option is exercisable during the 45-day period after the date of this
prospectus, solely to cover over-allotments, if any. To the extent that the
underwriters exercise this option, each of the underwriters will be committed,
subject to certain conditions, to purchase such additional shares of common
stock in approximately the same proportions as set forth in the above table. If
purchased, the underwriters will sell the additional shares on the same terms as
the 2,000,000 shares are being sold. If the underwriters exercise the over-
allotment in full, the total public offering price will be $___________, total
underwriting discounts will be $__________, and total proceeds to us will be
$__________.
We have also granted the underwriters warrants to purchase additional
shares of common stock equal to ten percent of the common stock purchased by the
underwriters in the initial public offering, exclusive of the over-allotment
option. The warrants will be exercisable at a price equal to 120% of the initial
public offering price for a period of four years, commencing one year from the
effective date of this Registration Statement. Any holder of the warrants shall
be permitted to exchange, in a cashless transaction, all or part of the warrants
for our common stock. The cashless exchange shall be permitted commencing one
year after the issue date of the warrants and only if our common stock is listed
or approved for trading on an exchange, inter-dealer communication system, or
national quotation bureau.
The underwriter shall have a right of first refusal to act as our
investment banker with respect to future public offerings and/or private
offerings involving our securities or securities of our subsidiaries. The right
of first refusal is valid for one year from the effective date of this
Registration Statement.
We have also entered into a consulting agreement with the underwriter as a
financial consultant at $2,000 per month for a 24 month period. The consulting
agreement will terminate if the offering does not close or either party elects
to terminate the underwriting letter of intent.
69
<PAGE>
The offering of the common stock is made for delivery when, as and if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject any order for the purchase of common stock.
Subject to certain exceptions, we have agreed not to issue, and each of our
officers and directors (and some of our shareholders) have agreed not to offer,
sell or otherwise dispose of any of our shares of common stock or our other
equity securities for a period of 180 days after the date of this prospectus
without the prior written consent of the representatives.
We have agreed to indemnify the underwriters against certain liabilities
under the Securities Act, or to contribute to payments the underwriters may be
required to make in respect thereof.
Prior to this offering, there has been no public market for our common
stock. Consequently, we negotiated the initial public offering price with the
underwriters. Among the factors considered in such negotiations were:
. prevailing market conditions
. an assessment of our management
. our results of operations in recent periods
. the present stage of our development
. the market capitalizations of other companies which we and the
representatives believe to be comparable to us
. estimates of our business potential
There can be no assurance that an active trading market will develop for
our common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price. The
initial public offering price should not be considered an indication of the
actual value of our common stock. Such price is subject to change as a result
of market conditions and other factors. We cannot assure you that our common
stock can be resold at or above the initial public offering price.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of our common stock during and after the offering, such as the
following:
. the underwriters may over-allot or otherwise create a short position
in the common stock for their own account by selling more shares of
common stock than we have been sold to them
70
<PAGE>
. the underwriters may elect to cover any such short position by
purchasing shares of common stock in the open market or by exercising
the over-allotment option
. the underwriters may stabilize or maintain the price of our common
stock by bidding for or purchasing shares of common stock in the open
market
. the underwriter may engage in passive market making transactions
. the underwriters may impose penalty bids, under which selling
concessions allowed to syndicate members of other broker-dealers
participating in this offering are reclaimed if shares of common stock
previously distributed in the offering are repurchased in connection
with stabilization transactions or otherwise
The effect of these transactions may be to stabilize or maintain the market
price at a level about that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of our common stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the American Stock Exchange or otherwise and, if
commenced, may be discontinued at any time.
Because of the relationship between us and our wholly owned subsidiary D.E.
Frey & Company, Inc., the offering is being conducted in accordance with Rule
2720 of the National Association of Securities Dealers. That rule requires that
the initial public offering price can be no higher than that recommended by a
"qualified independent underwriter," as defined by the NASD. Neidiger Tucker
Bruner, Inc. has served in that capacity and performed due diligence
investigations and reviewed and participated in the preparation of the
registration statement of which this prospectus forms a part. Neidiger Tucker
Bruner, Inc. has received $20,000 to date from us as compensation for such role.
71
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock being offered will be passed on
for us by Jones & Keller, P.C. Certain legal matters will be passed on for the
underwriters by John G. Herbert, P.C.
EXPERTS
The financial statements of D.E. Frey Group, Inc. as of December 31, 1998
and 1997 and the years ended December 31, 1998, 1997 and 1996 have been included
herein in reliance on the report of Hein + Associates LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing. With respect to the unaudited interim financial information for the
six months ended June 30, 1999 and 1998, the independent accountants have not
reviewed or audited such financial information and have not expressed an opinion
or any other form of assurance with respect to such financial information.
AVAILABLE INFORMATION
We have filed with the U.S. Securities and Exchange commission a
registration statement on Form S-1 under the Securities Act with respect to the
offer of our common stock. 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 us, please refer to
the registration statement, including the exhibits and schedules thereto, which
may be inspected without charge and copied at prescribed rates at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the Commission's regional offices at 7 World Trade
Center, Suite 1300, New York, New York, 10048, and Northwestern Atrium Center
500 West Madison Street, Suite 140, Chicago, Illinois 60661. The Commission
maintains a website that contains reports, proxy and information statements and
other information filed electronically with the Commission at
http://www.sec.gov.
- ------------------
72
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Pro Forma Condensed Financial Information (Unaudited)
- ----------------------------------------------------
Introduction .................................................................................................... F-2
Pro Forma Condensed Statement of Financial Condition - June 30, 1999 ............................................ F-3
Pro Forma Condensed Statement of Operations - For the Six Months Ended June 30, 1999............................. F-4
Pro Forma Condensed Statement of Operations - For the Year Ended December 31, 1998 .............................. F-5
Notes to Pro Forma Condensed Financial Information .............................................................. F-6
D.E. Frey Group, Inc.
- ---------------------
Independent Auditor's Report..................................................................................... F-7
Consolidated Statements of Financial Condition - December 31, 1997 and 1998 and
June 30, 1999 (Unaudited)............................................................................... F-8
Consolidated Statements of Operations - For the Years Ended December 31, 1996, 1997, and 1998,
and For the Six Months Ended June 30, 1998 and 1999 (Unaudited)......................................... F-9
Consolidated Statements of Shareholders' Deficit - For the Years Ended December 31, 1996, 1997,
and 1998, and For the Six Months Ended June 30, 1999 (Unaudited)........................................ F-10
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996, 1997, and 1998,
and For the Six Months Ended June 30, 1998 and 1999 (Unaudited)......................................... F-11
Notes to Consolidated Financial Statements....................................................................... F-13
Schedule II - Valuation and Qualifying Accounts.................................................................. F-25
</TABLE>
F-1
<PAGE>
INTRODUCTION
D.E. Frey Group, Inc. and Subsidiary
The accompanying unaudited pro forma condensed balance sheet Actual column
reflects the Company's financial condition as of June 30, 1999. The pro forma
debt exchange column reflects the exchange of shares of common stock for certain
subordinated notes. The exchange is subject only to the completion of an
initial public offering and the conversion price of the debt is 85% of the price
at which shares are sold to the public, which has been assumed to be $6.00 per
share. The total debt exchanged was $1,448,000 for 283,922 shares of common
stock. In addition, $49,208 in deferred financing costs has been charged to
equity and $36,200 in interest payable on debt that has been paid. The pro
forma offering adjustment column reflects the sale of 2,000,000 shares of common
stock in this offering (at an assumed offering price of $6.00) after deducting
underwriting discounts and commissions and estimated offering expenses totaling
approximately $1.8 million.
The accompanying unaudited pro forma condensed statements of operations Actual
column reflects operations for the year ended December 31, 1998 and six months
ended June 30, 1999. The adjustments column reflects the exchange of shares of
common stock for certain subordinated notes assuming the conversion occurred at
the beginning of the periods presented. The adjustments include the elimination
of interest expense and amortization of deferred financing charges related to
the debt that will be exchanged.
These statements are not necessarily indicative of future operations or the
actual results that would have occurred had the exchange been consummated at the
beginning of the periods indicated.
The unaudited pro forma condensed financial statements should be read in
conjunction with the historical financial statements and notes thereto, included
elsewhere in this prospectus.
F-2
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
PRO FORMA CONDENSED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
Actual Pro Forma Pro Forma Pro Forma
June 30, Debt Exchange Before Offering
1999 Adjustments Offering Adjustments Pro Forma
------------ --------------- ------------ --------------- ------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,085,683 $ (36,200)/A/ $ 1,049,483 $ 10,170,000 /B/ $11,219,483
Securities owned 1,452,441 - 1,452,441 - 1,452,441
Receivables 2,234,389 - 2,234,389 - 2,234,389
Property and Equipment, at cost, less
accumulated depreciation of $871,189 626,966 - 626,966 - 626,966
Deferred Financing Costs and Other 719,824 (49,208)/C/ 670,616 (22,491)/D/ 648,125
----------- ----------- ----------- ------------ -----------
Total Assets $ 6,119,303 $ (85,408) $ 6,033,895 $ 10,147,509 $16,181,404
=========== =========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Commissions and compensation
payable $ 1,988,966 $ - $ 1,988,966 $ - $ 1,988,966
Accounts payable, accrued expenses
and other 1,356,615 (36,200)/A/ 1,320,415 - 1,320,415
Notes payable to related parties 357,500 (357,500)/E/ - - -
Other notes payable 5,712,517 (1,090,500)/E/ 4,622,017 - 4,622,017
----------- ----------- ----------- ------------ -----------
9,415,598 (1,484,200) 7,931,398 - 7,931,398
Shareholders' Equity:
Common stock 457,161 28,392 /E/ 485,553 200,000 /B/ 685,553
Other (3,753,456) 1,370,400 /E/ (2,383,056) 9,947,509 /B,D/ 7,564,453
----------- ----------- ----------- ------------ -----------
Total shareholders' equity (3,296,295) 1,398,792 (1,897,503) 10,147,509 8,250,006
----------- ----------- ----------- ------------ -----------
Total Liabilities and Shareholders'
Equity $ 6,119,303 $ (85,408) $ 6,033,895 $ 10,147,509 $16,181,404
=========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
------------- ------------ ---------------
<S> <C> <C> <C>
Revenues $ 22,896,672 $ - $ 22,896,672
Expenses:
Commissions, clearing and execution fees 18,647,861 - 18,647,861
Employee compensation 1,694,881 - 1,694,881
Interest 316,626 (72,400)/F/ 244,226
Other 2,314,804 (5,180)/G/ 2,309,624
------------- ------------ ---------------
Total expenses 22,974,172 (77,580) 22,896,592
------------- ------------ ---------------
Net Income (Loss) $ (77,500) $ 77,580 $ 80
============= ============ ===============
Net Income (Loss) Per Share, Basic and Diluted $ (0.02) $ (0.00)
============= ===============
Weighted Average Shares Outstanding:
Basic 4,547,237 4,831,159/H/
============= ===============
Diluted $ 4,547,237 $ 5,357,259/H/
============= ===============
</TABLE>
See accompanying notes to these financial statements
F-4
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 37,037,360 $ - $ 37,037,360
Expenses:
Commissions, clearing and execution fees 29,469,728 - 29,469,728
Employee compensation 2,906,628 - 2,906,628
Interest 697,981 (144,800)/F/ 553,181
Other 4,351,985 (10,359)/G/ 4,341,626
------------- ------------- -------------
Total expenses 37,426,322 (155,159) 37,271,163
------------- ------------- -------------
Net Income $ (388,962) $ 155,159 $ (233,803)
============= ============= =============
Net Income Per Share, Basic and Diluted $ (0.09) $ (0.05)
============= =============
Basic and Diluted Weighted Average Shares
Outstanding 4,338,473 4,622,395/H/
============= =============
</TABLE>
See accompanying notes to these financial statements
F-5
<PAGE>
Notes to Pro Forma Condensed Financial Information
A. Payment of accrued interest on the subordinated debentures converted to
equity.
B. To reflect the sale of 2,000,000 shares of common stock at $6.00 per share,
net of offering costs of approximately $1.8 million, as contemplated in the
proposed public offering.
C. To write off the deferred financing costs associated with the debt to be
exchanged.
D. To net offering costs incurred and capitalized as of June 30, 1999 against
proceeds from the initial public offering.
E. To reflect the exchange of $1,448,000 in subordinated debentures for 283,922
shares of common stock. The debt will be exchanged at 85% of the public
offering price and is contingent on closing of this public offering. The pro
forma adjustment assumes a public offering price of $6 per share.
F. To eliminate interest expense related to debt to be exchanged for shares of
common stock.
G. To eliminate the amortization of deferred financing costs associated with the
debt to be exchanged for shares of common stock.
H. Increase in shares of common stock resulting from the exchange offer,
assuming an initial public offering price of $6 per share and the dilutive
effect of stock options and warrants.
F-6
<PAGE>
Independent Auditor's Report
Board of Directors
D.E. Frey Group, Inc.
Denver, Colorado
We have audited the accompanying consolidated statements of financial condition
of D.E. Frey Group, Inc. and subsidiary (the "Company") as of December 31, 1997
and 1998, and the related consolidated statements of operations, shareholders'
deficit, and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of D.E. Frey Group,
Inc. and subsidiary as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits referred to above include the financial statement schedule listed
under Item 14(a)(2). In our opinion, the financial statement schedule presents
fairly, in all material respects, the information required to be stated therein
in relation to the financial statements taken as a whole.
Hein + Associates LLP
Denver, Colorado
February 5, 1999
F-7
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------
1997 1998 1999
----------- ----------- -----------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Cash and Cash Equivalents $ 1,446,215 $ 732,900 $ 1,085,683
Securities Owned:
Marketable 2,485,756 660,493 1,226,685
Not readily marketable, at estimated fair value 76,839 176,259 225,756
----------- ----------- -----------
Total securities owned 2,562,595 836,752 1,452,441
Receivables:
Clearing organization 947,114 1,467,840 1,250,352
Product sponsors and other 281,656 346,533 486,474
Registered representatives, net of allowance for
uncollectible accounts of $44,193, $149,515, and
$105,513 (unaudited) 262,856 214,464 281,594
Related party - 204,493 206,235
Other accounts receivable, net of allowance for uncollectible
accounts of $48,675, $82,387, and $82,387 (unaudited) 200,879 29,169 9,734
----------- ----------- -----------
Total receivables 1,692,505 2,262,499 2,234,389
Furniture and Equipment, at cost, net of accumulated
depreciation of $557,515, $757,650, and $871,189,
(unaudited), respectively 537,569 658,598 626,966
Deferred Financing Costs, net 241,229 167,895 455,569
Other Assets 144,116 285,940 264,255
----------- ----------- -----------
Total Assets $ 6,624,229 $ 4,944,584 $ 6,119,303
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Liabilities:
Commissions and compensation payable $ 1,494,289 $ 1,873,662 $ 1,988,966
Accounts payable and accrued expenses 722,972 742,957 861,506
Payable to clearing organization 1,976,626 92,362 367,931
Interest payable 338,290 336,782 127,178
Notes payable related parties 357,500 357,500 357,500
Other notes payable 5,212,517 5,112,517 5,712,517
----------- ----------- -----------
Total liabilities 10,102,194 8,515,780 9,415,598
----------- ----------- -----------
Commitments and Contingencies (Note 6)
Shareholders' Deficit:
Common stock, $.10 par value; 10,000,000 shares 408,924 452,661 457,161
authorized; 4,089,249, 4,526,614, and 4,571,614
(unaudited) shares issued and outstanding
Additional paid-in capital 3,353,785 3,605,779 3,953,680
Accumulated deficit (7,240,674) (7,629,636) (7,707,136)
----------- ----------- -----------
Total shareholders' deficit (3,477,965) (3,571,196) (3,296,295)
----------- ----------- -----------
Total Liabilities and Shareholders' Deficit $ 6,624,229 $ 4,944,584 $ 6,119,303
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions $ 16,039,039 $ 20,580,558 $ 22,174,313 $ 10,686,806 $ 13,556,570
Principal transactions 7,912,000 7,058,092 6,513,967 3,839,344 4,566,144
Asset management and advisory 3,145,480 3,498,210 4,356,570 2,184,508 2,539,915
Interest and account fees 2,005,269 2,203,335 2,880,312 1,398,709 1,671,469
Other 941,968 1,348,566 1,112,198 766,219 562,574
------------ ------------ ------------ ------------ ------------
Total revenues 30,043,756 34,688,761 37,037,360 18,875,586 22,896,672
------------ ------------ ------------ ------------ ------------
Expenses:
Commissions 21,511,903 25,193,763 26,932,743 13,591,850 17,092,918
Clearing and execution fees 2,053,678 2,319,390 2,536,985 1,260,477 1,554,943
Employee compensation 2,640,630 2,610,336 2,906,628 1,466,594 1,694,881
Interest 699,389 571,206 697,981 322,674 316,626
Other 4,547,453 4,147,158 4,351,985 2,194,094 2,314,804
------------ ------------ ------------ ------------ ------------
Total expenses 31,453,053 34,841,853 37,426,322 18,835,689 22,974,172
------------ ------------ ------------ ------------ ------------
Net Income (Loss) $ (1,409,297) $ (153,092) $ (388,962) $ 39,897 $ (77,500)
============ ============ ============ ============ ============
Net Income (Loss) Per Share, Basic
and Diluted $ (0.46) $ (0.04) $ (0.09) $ 0.01 $ (0.02)
============ ============ ============ ============ ============
Basic Weighted Average Shares
Outstanding 3,052,022 3,743,546 4,338,473 4,177,749 4,547,031
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
--------------------------
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 2,656,100 $ 265,610 $ 2,404,848 $ (5,678,285) $ (3,007,827)
Issuance of common stock for cash and services 712,207 71,221 546,430 - 617,651
Purchase and retirement of common stock (346) (35) (483) - (518)
Net loss - - - (1,409,297) (1,409,297)
------------ ------------ ------------ ------------- -------------
Balances, December 31, 1996 3,367,961 336,796 2,950,795 (7,087,582) (3,799,991)
Issuance of common stock for cash and services 721,288 72,128 402,990 - 475,118
Net loss - - - (153,092) (153,092)
------------ ------------ ------------ ------------- -------------
Balances, December 31, 1997 4,089,249 408,924 3,353,785 (7,240,674) (3,477,965)
Issuance of common stock for cash 437,365 43,737 251,994 - 295,731
Net loss - - - (388,962) (388,962)
------------ ------------ ------------ ------------- -------------
Balances, December 31, 1998 4,526,614 452,661 3,605,779 (7,629,636) (3,571,196)
Issuance of common stock for cash and services 45,000 4,500 81,754 - 86,254
(unaudited)
Issuance of warrants for services (unaudited) - - 266,147 - 266,147
Net loss (unaudited) - - - (77,500) (77,500)
------------ ------------ ------------ ------------- -------------
Balances, June 30, 1999 (Unaudited) 4,571,614 $ 457,161 $ 3,953,680 $ (7,707,136) $ (3,296,295)
============ ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income (loss) $ (1,409,297) $ (153,092) $ (388,962) $ 39,987 $ (77,500)
Adjustments to reconcile to net cash
from operating activities:
Amortization of deferred financing
costs 87,945 39,878 73,334 47,681 50,973
Depreciation and amortization 209,161 208,668 227,570 104,167 124,735
Equity in losses 185,446 - - - -
Forgiveness of debt (83,333) - - - -
Compensatory stock options 70,000 75,000 - - -
(Increase) decrease in operating assets:
Securities owned, net (1,123,044) (779,197) 2,330,183 1,073,382 (566,192)
Receivables (312,933) 30,369 (365,500) (312,782) (42,490)
Other assets (122,926) 224,973 (224,512) (199,006) 58,979
Increase (decrease) in operating
liabilities:
Commissions and compensation payable 108,816 (73,292) 379,373 358,521 115,304
Accounts payable, accrued expenses
and other (459,898) (783,831) (54,712) 22,623 (114,559)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities (2,850,063) (1,210,524) 1,976,774 1,134,573 (450,750)
------------ ------------ ------------ ------------ ------------
Cash Flows From Investing
Activities:
Purchase of furniture and equipment (138,691) (265,888) (340,980) (125,044) (81,907)
Proceeds from not readily marketable
securities - - - - 44,165
Purchase of not readily marketable
securities - - (99,420) - (44,500)
Proceeds from investments 681,620 666,114 - - -
Purchase of investments - (498,702) (504,920) - -
Loan to related party - - (162,500) - -
Repayment of loan to related party - - 106,266 - -
Investment in equity method investee (136,830) - - - -
Other - (95,416) - 2,896 -
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities 406,099 (193,892) (1,001,554) (122,148) (82,242)
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 546,651 400,119 295,731 225,009 86,254
Proceeds from (payable to) clearing
organization 633,525 1,343,100 (1,884,266) (1,976,626) 275,569
Proceeds from notes payable - 1,000,000 - - 600,000
Payment of notes payable - (200,000) (100,000) (85,000) -
Direct financing costs - - - - (72,500)
Other (518) - - - (3,548)
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
financing activities 1,179,658 2,543,219 (1,688,535) (1,836,617) 885,775
-------------- -------------- -------------- -------------- --------------
Increase (Decrease) In Cash And
Cash Equivalents (1,264,306) 1,138,803 (713,315) (824,192) 352,783
Cash And Cash Equivalents,
beginning of year 1,571,718 307,412 1,446,215 1,446,215 732,900
-------------- -------------- -------------- -------------- --------------
Cash And Cash Equivalents,
end of year $ 307,412 $ 1,446,215 $ 732,900 $ 622,023 $ 1,085,683
============== ============== ============== ============== ==============
Supplemental Disclosures Of Cash
Flow Information:
Cash paid for interest $ 599,203 $ 517,500 $ 699,488 $ 481,763 $ 526,230
============== ============== ============== ============== ==============
Cash paid for income taxes $ - $ - $ - $ - $ -
============== ============== ============== ============== ==============
Noncash Investing And Financing
Activities -
Deferred financing costs in the
form of warrants issued $ - $ - $ - $ - $ 266,147
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Organization and Nature of Presentation - The consolidated financial
---------------------------------------
statements include the accounts of D.E. Frey Group, Inc. (DEFG) and its
wholly-owned subsidiary, D.E. Frey & Company, Inc. (DEF) (together
referred to as the "Company"). DEF is a broker-dealer registered with the
Securities and Exchange Commission (SEC) and is a member of the National
Association of Securities Dealers, Inc. (NASD), National Futures
Association and the Commodities Futures Trading Commission. DEF acts as an
"introducing broker" and utilizes an unaffiliated brokerage firm
("clearing broker") to provide security clearance services and customer
account maintenance. Pursuant to its agreement with its clearing broker,
DEF is liable for amounts uncollected from customers introduced by DEF.
DEF is a Delaware corporation that is a wholly-owned subsidiary of DEFG
(Parent).
DEF is engaged in a single line of business as a retail securities
broker-dealer, which comprises several classes of services, including
principal transactions, agency transactions, investment banking, and
investment advisory businesses. DEF is licensed as an investment
securities broker-dealer, registered investment advisory and as an
insurance broker.
Unaudited Interim Results - The accompanying interim financial statements
-------------------------
as of June 30, 1999, and for the six months ended June 30, 1998 and 1999
are unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position as of June 30, 1999 and results of operations and cash flows for
the six months ended June 30, 1998 and 1999. The financial data and other
information disclosed in these notes to financial statements related to
these periods are unaudited. The results for the six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the
year ending December 31, 1999.
Liquidity - DEF's business strategy since inception has been to generate
---------
revenue growth on a sustained basis and, through economies of scale
inherent in its primarily fixed operating expense structure, to achieve
and maintain growth in profitability. The Company has incurred cumulative
operating losses since inception. Revenue growth over the three-year
period ended December 31, 1998, has been approximately 70% and management
believes that the Company will increase revenues in the future as a result
of expected increases in the Company's registered representatives and
expanded services. The profitability of the Company in the future will be
affected by the Company's expenditures necessary to grow the Company.
Since inception, the Company has raised debt and equity capital on several
occasions, including $1.4 million and $295,731 in 1997 and 1998,
respectively, to sustain operations. During 1999, the Company entered into
a $250,000, one-year promissory note and amended our senior bank debt by
adding an additional $1 million revolving line of credit, and extending
the maturity date of the initial $1 million note. Management anticipates
that future operations will result in positive cash flow on a cumulative
basis. However, to support anticipated growth in operations and to provide
additional services to its brokers and funding that may be necessary
because of certain loss contingencies incurred in the ordinary course of
business (see Note 6), the Company plans to raise additional debt and/or
equity capital between $10.0 million and $15.0 million in 1999.
F-13
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
Although management cannot assure that future operating results will be
cash positive nor that the Company will raise additional debt and/or
equity capital that may be required, based upon the revenue growth and
operating results achieved and the demonstrated ability to raise
sufficient capital to sustain operations, management believes that the
Company's capital resources will be adequate to maintain and fully realize
its business strategy.
Principles of Consolidation - The consolidated financial statements of the
---------------------------
Company include the accounts of DEFG and DEF. All significant intercompany
transactions have been eliminated in consolidation.
Securities Transactions - Commission revenue, principal transaction
-----------------------
revenue and expenses related to securities transactions are recorded on
settlement date, generally the third business day following the
transaction date. Differences between trade date and settlement date are
immaterial to the accompanying financial statements. Investment banking
management fees are recorded on offering date, sales concessions on
settlement date, and underwriting fees at the time the underwriting is
completed and the income is reasonably determinable. Investment advisory
fees are recognized on a pro rata basis over the term of the contract.
Cash and Cash Equivalents - Cash equivalents consist of interest-earning
-------------------------
investments with maturities of less than 90 days. Cash of approximately
$1.5 million and $0.9 million was uninsured as of December 31, 1997 and
1998, respectively.
Securities Owned - Marketable securities owned consist of investments held
----------------
for trading purposes; these are stated at market value and unrealized
gains and losses are included in revenue. Securities not readily
marketable are valued at fair value as determined by management of the
Company. The trading departments were established to promote selection and
choice to the brokers and the Company, as of December 31, 1998, made a
market in six equity securities. The Company does not generally purchase
securities to hold for speculative purposes.
Furniture and Equipment - Furniture and equipment are stated at cost.
-----------------------
Depreciation of furniture and equipment is calculated using the
straight-line method over the estimated useful lives (ranging from 3 to 7
years) of the respective assets. The cost of normal maintenance and
repairs is charged to operating expenses as incurred. The cost of
properties sold, or otherwise disposed of, and the related accumulated
depreciation or amortization are removed from the accounts, and any gains
or losses are reflected in current operations.
Deferred Financing - Costs incurred with respect to the Company's debt
------------------
financing have been capitalized and are amortized over the respective
lives of associated debt using the straight-line method, which
approximates the interest rate method.
Receivable From and Payable to Clearing Organization - Amounts receivable
----------------------------------------------------
from the clearing organization at December 31, 1997 and 1998 includes the
net of commissions and clearing fees recorded on a settlement date basis,
which does not differ materially from a trade date basis. The amount
payable to the clearing organization relates to securities purchased by
DEF and is collateralized by the securities owned by DEF.
F-14
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
Investments - Investments in companies in which the Company's ownership is
-----------
20% to 50% and which the Company does not control, are accounted for by
the equity method.
Income Taxes - The Company accounts for income taxes under the provisions
------------
of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. The Parent and its subsidiaries are included in the
consolidated federal income tax return filed by the Parent. The amount of
current and deferred taxes payable or refundable is recognized as of the
date of the financial statements, utilizing currently enacted tax laws and
rates. Deferred tax expenses or benefits are recognized in the financial
statements for the changes in deferred tax liabilities or assets between
years.
Comprehensive Income (Loss) - In June 1997, the Financial Accounting
--------------------------
Standards Board issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130, which is effective for fiscal years beginning after December 15,
1997, defines comprehensive income as all changes in stockholders' equity
exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain
assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries, and
certain changes in minimum pension liabilities. For all periods presented,
there were no differences between comprehensive and net income (loss).
Net Income (Loss) Per Share - Basic net income (loss) per share and
----------------------------
diluted net income (loss) per share are presented in conformity with SFAS
No. 128, Earnings Per Share, for all periods presented. In accordance with
SFAS No. 128, for periods of net loss the basic and diluted net loss per
share has been computed using the weighted-average number of shares of
common stock outstanding during the period as outstanding stock options
and warrants are excluded from diluted net loss per share calculation as
they are antidilutive. The effect of outstanding stock options and
warrants have been included in the diluted earnings per share calculation
for periods with net income. Basic and diluted earnings per share were the
same for all periods presented. During the six months ended June 30, 1998,
included in diluted earnings per share are common equivalent shares
outstanding of 97,500, determined using the treasury stock method,
consisting of options and warrants to purchase Company shares.
Recently Issued Accounting Pronouncements - SFAS No. 133, Accounting For
-----------------------------------------
Derivative Instruments and Hedging Activities, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending
on whether a derivative is designated as part of a hedge transaction and,
if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a significant effect on the
Company's results of operations or its financial position.
SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, was issued in February 1998. This statement
revises the disclosure requirements for pensions and other postretirement
benefits. This statement is effective for the Company's financial
statements for the year ended December 31, 1999, and the adoption of this
standard is not expected to have a material effect on the Company's
financial statements.
F-15
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
Use of Estimates - The consolidated financial statements are prepared in
----------------
conformity with generally accepted accounting principles and industry
practices which require management to make estimates and assumptions that
affect certain amounts in the financial statements and accompanying notes.
The Company makes significant estimates concerning the ultimate
liabilities associated with asserted claims (see Note 6). Due to the
uncertainties inherent in the estimation process and the significance of
these costs, it is at least reasonably possible that the Company's
estimates in connection with these items could be further materially
revised within the next year.
Reclassification - Amounts in prior years are reclassified as necessary to
----------------
conform with the current period's presentation. Such reclassifications had
no effect on the net loss.
2. MARKETABLE SECURITIES OWNED:
---------------------------
Marketable securities owned consist of:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------- ----------
1997 1998 1999
--------------- ---------------- ----------
<S> <C> <C> <C>
United States Treasury Bill $ - $ 508,342 $ 518,279
Municipal Bond 2,355,552 81,659 442,991
Collateralized mortgage obligations - - 234,994
Equity securities 130,204 61,492 22,902
Corporate bonds - 9,000 7,519
---------- ---------- ----------
Total $2,485,756 $ 660,493 $1,226,685
========== ========== ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS:
--------------------------
During 1997 and 1998, DEFG and DEF advanced funds to a newly formed
limited liability company (LLC) to repurchase securities from claimants
of DEF. The LLC was formed by DEFG and DEFG is the manager of the LLC.
Under the terms of the LLC, after allowable expenses have been paid,
earnings will be paid 100% to the members until they have achieved a 14%
non-compounded capital return, then to DEFG until a 14% non-compounded
capital return has been met and then earnings will be allocated 50% to
the limited partners and 50% to DEFG. No equity in earnings will be
recognized by DEFG until the limited partners have achieved a 14% capital
return and all receivables have been repaid. DEFG has made capital
contributions of approximately $215,000, which have been fully reserved.
DEF has advanced $206,000 that is recorded as a receivable from
affiliate. Based on the value of the assets contributed to the LLC,
DEFG's ownership interest is approximately 36%.
F-16
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
Following is summarized (unaudited) financial information for the LLC:
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
---------------------------- --------------
1997 1998 1999
----------- ----------- --------------
<S> <C> <C> <C>
Revenues $ - $ 111,238 $ 63,388
Net income - 60,394 23,774
Dividends received - - -
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------- ---------------
1997 1998 1999
----------- ----------- ---------------
<C> <C> <C>
<S>
Current assets $ 100 $ 112,548 $ 68,260
Investments in partnership units - 1,366,324 1,213,739
Other assets - 140,400 140,699
Current liabilities - 206,235 226,861
Long term debt - 300,000 200,000
Member's equity 100 1,113,037 995,837
</TABLE>
4. Income Taxes:
The Company's actual effective tax rate differs from the U.S. Federal
corporate income tax rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Statutory rate (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal income tax
benefit (3.3)% (3.3)% (3.3)%
Net increase in valuation allowance related to
net operating loss carryforwards and
change in temporary differences 37.3% 37.3% 37.3%
-------- ------- -------
0.00% 0.00% 0.00%
======== ======= =======
</TABLE>
F-17
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------
1996 1997 1998
----------- ------------- ------------
<S> <C> <C> <C>
Net operating loss carryforward $ 1,510,000 $ 1,825,000 $ 1,876,000
Litigation reserves 703,000 151,000 112,000
Leasehold improvements - 82,000 89,000
Other 109,000 23,000 24,000
Valuation allowance (2,322,000) (2,081,000) (2,101,000)
------------ ----------- -----------
$ - $ - $ -
============ =========== ===========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the deferred tax assets as of December 31,
1996, 1997, and 1998, has been established to reflect these uncertainties.
The change in the valuation allowance was a net increase (decrease) of
$500,000, $(241,000), and $20,000 for the years ended December 31, 1996,
1997, and 1998, respectively.
The Company's net operating loss carryforward for Federal income tax
purposes was approximately $5,000,000 as of December 31, 1998, which unless
utilized, expires from 2005 to 2018.
5. Notes Payable:
--------------
Notes payable consist of:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------- ----------
1997 1998 1999
----------- ----------- ----------
<S> <C> <C> <C>
Senior subordinated debentures, interest payable
annually, due in 2004 $ 4,470,017 $ 4,470,017 $ 4,470,017
Senior bank debt, interest payable monthly, due in
1998 subject to renewal options 1,000,000 1,000,000 1,350,000
Unsecured bridge loan, interest payable quarterly,
due in 2000 - - 250,000
Promissory notes, paid in 1998 100,000 - -
----------- --------- ----------
TOTAL $ 5,570,017 $ 5,470,017 $ 6,070,017
=========== =========== ===========
</TABLE>
Subordinated Debentures - Unsecured debentures in the amount of $4.47
-----------------------
million were issued in 1994, maturing in 10 years and bearing interest at
10%. Participating additional interest of up to 5% is payable from 10% of
the Company's annual consolidated pre-tax income. Using prevailing interest
rates on similar instruments, the fair value of the debentures was $3.9
million and $4.0 million at December 31, 1997 and
F-18
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
December 31, 1998, respectively. Board of Directors hold $357,500 of these
notes.
In August 1999, the Company asked the debtholders to convert their debt
into our common stock at a rate per common share of 85% of the public
offering price, contingent on the completion of the Company's proposed
initial public offering. Holders of $1,448,000 of the subordinated debt
elected to convert their debt to common shares of which $357,500 relate to
directors.
Senior Bank Debt - In August 1997, the Company entered into a $1 million
----------------
debt facility with a bank, collateralized by a $1 million certificate of
deposit pledged by a third party investor, which matures in August 2000 and
is subject to one year renewal options. Including the interest paid to the
bank and pledge fee paid to the third party, the effective interest rate
was 13.5%. In May 1999 a $1 million line of credit was entered into with
the same bank and the same third party pledged a certificate of deposit in
the amount of $2 million to collateralize both debt facilities, $350,000
has been drawn on this new line of credit as of June 30, 1999. Pursuant to
the new pledge agreement the combined effective interest rate for both
facilities is 11%. The new line of credit matures in May 2000 and is
subject to four one-year renewal options. In connection with the new pledge
agreement, 50,000 warrants and cash with a combined value of approximately
$200,000 were issued to a registered representative for services related to
obtaining the pledge agreement (see Note 8). These costs have been
reflected in deferred financing costs and will be amortized over the term
of the pledge agreement. The fair value of the senior debt at December 31,
1997 and 1998 approximates the carrying value.
Bridge Loan - In May 1999, the Company entered into a $250,000 loan, which
-----------
matures in one year and bears interest at 13.5%, payable quarterly. The
note includes a prepayment penalty of 3% on the outstanding principal
balance. 50,000 warrants, valued at approximately $120,000 were issued to
the debtholder and 8,000 warrants and cash with a combined value of
approximately $22,000 were issued to a registered representative for
services related to obtaining the bridge loan (see Note 8). These costs
have been reflected in deferred financing costs and will be amortized over
the one-year term of the note.
6. Commitments And Contingencies:
-----------------------------
Leases - DEF leases office space and equipment under leases which are
------
classified as operating leases and expire in various years through 2009.
Certain leases have escalation clauses and renewal options.
Future minimum lease payments under non-cancelable leases as of December
31, 1998, are as follows:
1999 $ 268,243
2000 272,312
2001 301,657
2002 307,180
2003 291,905
Thereafter 1,390,947
-----------
Total $ 2,832,244
===========
F-19
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
DEF subleases a portion of its office space to the Denver retail branch for
approximately $3,400 per month. The lease payments in the schedule above
have not been reduced by the sublease payments.
Rental expense, net of sublease income, was approximately $292,000,
$278,000, and $305,000 for the years ended December 31, 1996, 1997, and
1998, respectively.
DEF is a guarantor of rental obligations pursuant to office space leases of
certain independent contractor registered representatives. Future minimum
payments of those leases are as follows at December 31, 1998:
1999 $ 175,014
2000 175,014
2001 149,365
-----------
Total $ 499,393
===========
Customer Litigation - DEF is a defendant or co-defendant in three purported
-------------------
class action lawsuits in which the class representatives seek rescission
for the purchase of securities from DEF in connection with a private
placement underwriting. The Courts have not certified the classes. DEF is
unable to estimate the magnitude of its exposure at this time. At present,
DEF's litigation counsel can not evaluate the likelihood of an unfavorable
outcome as to the these cases. If any or all of the suits are certified as
class actions and if DEF were to lose at the trials of the cases, the
damages could exceed DEF's current ability to pay without further capital
or financing arrangements.
DEF is subject to other legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated.
Some of the actions seek substantial damages and the Company is unable to
estimate the magnitude of its exposure at this time. Management believes,
based upon discussion with counsel, that the outcome of these matters will
not have a material effect on the Company's financial position; however,
there can be no assurance in this regard.
Subsequent to June 30 , 1999, the Company settled seven claims totaling
$237,000.
NASD and SEC Examinations - DEF has been the subject of an NASD
-------------------------
investigation and an SEC investigation of various aspects of its business.
DEF settled the NASD investigation by agreeing to a consent order, which
the NASD has not yet signed. Without admitting or denying the NASD's
allegations, DEF consented to a fine and principal of DEF consented to a
30-day suspension from association in all principal capacities with DEF.
The SEC investigation partially overlapped the NASD investigation regarding
the two securities offerings in which DEF acted as the selling agent. The
SEC staff was authorized to investigate alleged violations of the
securities laws regarding two securities offerings and whether or not
certain DEF principals failed to supervise persons subject to their
supervision who engaged in the alleged violations. The SEC staff has
informed the Company that it has concluded its investigation. Management of
DEF is unable to describe the allegations that may be made against DEF or
the financial penalties or other sanctions that be sought against DEF, its
officer, directors and
F-20
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
employees. No provision for liability with respect to this matter has been
made in the accompanying financial statements and management believes the
ultimate outcome of such examination will not have a material adverse
effect on its financial condition or results of operations.
Year 2000 - The Company is currently using computer hardware and software
---------
that is not in compliance with the year 2000 dating issues. The Company has
incurred approximately $150,000 of costs to replace non-compliant computer
hardware and software. Management has estimated that it will incur up to
$90,000 of additional costs to be year 2000 compliant.
7. FINANCIAL INSTRUMENTS:
---------------------
Off-Balance Sheet Risk and Concentration of Credit Risk - DEF records
-------------------------------------------------------
customer transactions on a settlement date basis, generally three business
days after trade date. The risk of loss on unsettled transactions is
identical to settled transactions and relates to customers' and other
counterparties' inability to fulfill their contracted obligations.
In the normal course of business, DEF also executes customer transactions
involving the sale of securities not yet purchased and the writing of
option contracts on securities. In the event customers or other
counterparties, such as broker/dealers or clearing organizations, fail to
satisfy their obligations, DEF may be required to purchase or sell
financial instruments underlying the contract loss.
Customer securities may be pledged as collateral to satisfy margin
deposits, settlement and other financing activities at various clearing
organizations. To the extent these counterparties are unable to fulfill
their contracted obligations to return securities pledged, DEF is exposed
to the risk of obtaining securities at prevailing market prices to meet its
customer obligations.
Securities sold but not yet purchased represent obligations of DEF and its
clearing agents to deliver specified securities at contracted prices.
Settlement of such obligations may be at amounts greater than those
recorded in customer accounts and in the balance sheet.
8. STOCK PURCHASE PLAN AND STOCK OPTION PLAN:
-----------------------------------------
Stock Purchase Plan - In April 1995, the Company's Board of Directors
-------------------
approved the 1995 Stock Purchase Plan (the "1995 Plan") whereby employees
and independent contractors, advisors and consultants of the Company, at
their election, could purchase shares of the Company's common stock, par
value $.10 per share, and pay for such shares out of their compensation by
means of a withholding therefrom. The shares have not been registered under
federal or applicable state securities laws and will be, when issued,
"restricted securities" subject to substantial restrictions on transfer.
The Plan is not subject to the Employee Retirement Income Security Act of
1974 and is not qualified under Sections 401(a) or 423 of the Internal
Revenue Code.
F-21
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
Additionally, within 60 days after each fiscal year end, each 1995 Plan
participant will be issued a non-transferable three-year option for the
purchase of twenty percent of the number of shares purchased by such
participant pursuant to the 1995 Plan during the preceding year. The
Company's Board of Directors has reserved a maximum of up to 250,000 shares
of common stock for issuance pursuant to the 1995 Plan. During 1996, 1997
and 1998 $29,798, $20,547 and $8, respectively, had been contributed under
the 1995 Plan in exchange for 14,899, 10,274 and 4 shares, respectively. A
total of 34,527 shares have been issued pursuant to the 1995 Plan.
Stock Option Plan - The Company has a Stock Option Plan ("Plan") which
-----------------
provides for the grant of options to purchase up to 600,000 shares of the
Company's common stock to officers, employees, directors and registered
representatives of the Company. As of December 31, 1998, options to
purchase 572,500 shares have been granted under this plan. In June 1999
shares under this plan were increased to 1,000,000, subject to ratification
of the shareholders. The Plan provides for immediate vesting with a maximum
exercise period of five years and expire on termination of employment. It
is intended that certain options issued to employees and officers may
constitute incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 and that other options issued pursuant to the
Plan shall constitute non-qualified options. The Board of Directors shall
determine which options are to be incentive stock options and which are to
be non-qualified options. During the six months ended June 30, 1999,
options to purchase 35,000 shares were issued to officers and employees of
the Company with an exercise price of $5 per share, which options expire in
2004.
In November 1997, the Company granted incentive stock options to employees
for the purchase of 350,000 shares of common stock at a weighted average
exercise price of $2.15 per share, which options expire in 2002. In January
and March 1998, the Company granted incentive stock options to an employee
and an officer for the purchase of 110,000 shares of common stock at a
weighted average exercise price of $2.00 per share, which options expire in
2003.
Warrants to Officers, Employees, Directors, and Registered Representatives-
--------------------------------------------------------------------------
In February 1996, the Company granted warrants to purchase 95,500 shares at
an exercise price of $2.00 per share to officers and employees of the
Company. In May 1996, the Company issued warrants to purchase 200,000
shares at an exercise price of $.25 to three officers of the Company. In
August 1996, the officers exercised 130,000 of the warrants. In September
1996, 70,000 warrants were extended and, as a result, the Company
recognized $70,000 in compensation expense. These warrants were exercised
in 1997. In December 1996, the Company issued warrants to purchase 4,000
shares at an exercise price of $2.00 per share to two registered
representatives for recruiting services performed in 1995. During 1996, the
Company caused 95,000 warrants to be assigned from a terminated employee of
the Company to registered representatives of DEF. The Company paid $80,000
to this individual.
During 1997, 315,000 warrants were granted to officers, employees and
directors, of which 297,000 were exercised and 18,000 expired without being
exercised. The weighted average market price of the Company's common stock
on grant date exceeded the weighted average exercise price of $.25 by $.25.
In 1999, 60,500 warrants were granted to registered representative which
expire in 2004. Warrants for the purchase of 10,500 shares of common stock
are exercisable at $5.00 per share. Warrants for 50,000 shares
F-22
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
of common stock are exercisable at $2.25 per share or $1.75 less than the
Company's initial public offering price, if completed. Additionally,
warrants for the exercise of 40,000 shares of common stock were exercised.
For all options granted during the calendar years 1996, 1997 and 1998, the
weighted average market price of the Company's common stock on the grant
date was equal to or less than the weighted average exercise price. Due to
the limited activity of the Company's common stock because the shares are
not publicly traded, for the purpose of pricing the grants, the fair
market value of DEFG's common stock is determined by the Company's
management and the compensation committee and approved by DEFG's Board of
Directors.
The following table sets forth the option activity under the 1995 Plan and
the Plan and warrants issued to officers, employees, directors, and
registered representatives:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 1,099,911 $1.39 898,411 $ $1.17 816,411 $ $1.97
Granted to:
Officers 200,000 $0.25 200,000 $0.25 107,500 $2.00
- 350,000 $2.14 - -
Employees, directors and 95,500 $2.00 115,000 $0.25 2,500 $2.00
registered representatives 4,000 $2.00 50,000 $2.00 - -
Reassigned 95,000 $1.25 - - - -
Exercised (350,000) $0.82 (432,574) $0.49 (137,361) $1.40
Redeemed (95,000) $1.25 - - - -
Forfeited (151,000) $1.05 (364,426) $1.41 (48,050) $1.72
-------------- -------------- -------------- -------------- -------------- --------------
Outstanding, end of period 898,411 $1.17 816,411 $1.97 741,000 $2.09
============== ============== ==============
</TABLE>
As of December 31, 1998, 5,000 of the options outstanding have an exercise
price of $1.25 per share and a weighted average remaining contractual life
of one month. These options were exercised in 1999. The remaining options
and warrants outstanding as of December 31, 1998, under these plans have
exercise prices ranging from $2.00 to $2.20 per share, a weighted average
remaining contractual life of 37 months and a weighted average exercise
price of $2.09. At December 31, 1998, options and warrants for 741,000
shares were exercisable and if not previously exercised will expire as
follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
--------------------------------------
<S> <C> <C>
1999 5,000 $ 1.25
1999 40,000 $ 2.00
2000 182,000 $ 2.11
2002 404,000 $ 2.12
2003 110,000 $ 2.00
</TABLE>
F-23
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1998 is Unaudited)
Warrants to Non-related Parties - In addition to the above amounts, there
-------------------------------
are outstanding at December 31, 1997, 1998, and June 30, 1999, warrants
for the purchase of 400,000, 100,000 and 150,000 shares, respectively, at
a weighted average price of $.325, $1.00 and $1.83 per share,
respectively. During 1998, 300,000 of these warrants were exercised for an
average price of $.10 per share.
In 1999, 50,000 warrants were granted to a debtholder related to the
arrangement of new financing for the Company. These warrants are
exercisable at $3.50 per share and expire in May 2004.
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
----------------------------------------------
Opinion 25 and related interpretations in accounting for its stock options
and warrants which are granted to employees, directors and registered
representatives. Had compensation cost been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of SFAS No. 123 (Black Scholes American formula), the Company's net
loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss applicable to common shareholders:
As reported $ (1,409,297) $ (153,092) $ (388,962)
Pro forma $ (1,465,188) $ (153,092) $ (441,856)
</TABLE>
For purposes of this disclosure, the weighted average fair value of the
options granted at market price in 1996, and 1998 was $.65 and $.48,
respectively. The weighted average fair value of options granted below
market price was $.25 in 1997. The fair value of each employee option
granted was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Expected volatility 0% 0% 0%
Risk-free interest rate 6.5% 5.4% 5.5%
Expected dividends - - -
Expected terms (in years) 1.9 2.9 5
</TABLE>
9. REGULATORY CAPITAL REQUIREMENTS:
-------------------------------
DEF is subject to regulatory net capital rules administered by the SEC's
Uniform Net Capital Rule (Rule 15c3-1). Under such rules, DEF is required
to maintain minimum net capital of 6% of aggregate indebtedness as defined
or $250,000. As of December 31, 1998, DEF=s net capital of $448,373 was
506% of aggregate indebtedness and its net capital in excess of the
minimum requirement was $198,373.
F-24
<PAGE>
Schedule II
D.E. Frey Group, Inc. And Subsidiaries
Valuation And Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Year Ended December 31, Beginning of Year Costs and Expenses Other End of Year
---------------------- ----------------- ------------------ ------------ -----------
<S> <C> <C> <C> <C>
1996 $ 146,571 $ 41,586 $ (76,746) $ 111,411
1997 $ 111,411 $ 39,439 $ (57,982) $ 92,868
1998 $ 92,868 $ 48,712 $ 90,322 $ 231,902
_______________________________________________
</TABLE>
F-25
<PAGE>
================================================================================
No dealer, salesperson or other person is authorized to give any
information or to repre sent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
_______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 6
Use of Proceeds............................................................ 19
Dividend Policy............................................................ 21
Dilution................................................................... 21
Capitalization............................................................. 23
Selected Financial Data.................................................... 24
Management's Discussion and
Analysis of Financial Condition and
Results of Operations..................................................... 27
Business................................................................... 36
Legal Matters Affecting Us................................................. 49
Management................................................................. 52
Compensation............................................................... 57
Principal Shareholders..................................................... 61
Certain Transactions....................................................... 63
Description of our Equity Securities....................................... 64
Exchange of Debt........................................................... 66
Shares Eligible for Resale................................................. 67
Underwriting............................................................... 69
Legal Matters.............................................................. 72
Experts.................................................................... 72
Available Information...................................................... 72
Financial Statements.......................................................F-1
</TABLE>
Through and including _____________, 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold allotment
or subscription.
================================================================================
2,000,000 Shares
D.E. FREY GROUP, INC.
Common Stock
NEIDIGER TUCKER
BRUNER, INC.
D.E. FREY & COMPANY, INC.
Co-managers
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 4,943
NASD fee......................................................... 2,278
American Stock Exchange Listing fee.............................. 20,000
Legal fees and expenses.......................................... 100,000
Accounting fees and expenses..................................... 50,000
Printing expenses................................................ 75,000
Transfer agent fees.............................................. 5,000
Blue sky filing fees and legal expenses.......................... 30,000
Miscellaneous expenses........................................... 162,779
--------
Total....................................................... $450,000
========
</TABLE>
All of the above items except the registration fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's Certificate of Incorporation exculpates directors from
personal liability to the fullest extent permitted by Section 102(b)(7) of the
Delaware General Corporation Law. This provision provides that a corporation may
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the directors derived an improper personal benefit.
The registrant's Bylaws and Certificate of Incorporation provide that the
registrant shall indemnify, to the fullest extent authorized by the Delaware
General Corporation Law, each person who is involved in any litigation or other
proceeding because he or she is or was a director or officer of the registrant
against all expense, loss or liability in connection therewith.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any director or officer of the corporation against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or was a director
or officer of the corporation, if such person acted in good faith and in a
manner that he or she reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his conduct was unlawful. In
a derivative action, i.e., one by or in the right of the corporation,
indemnification may be made only for expenses actually and reasonably incurred
by any director or officer in connection with the defense or settlement of an
action or suit, if such
II-1
<PAGE>
person has acted in good faith and in a manner that he or she reasonably
incurred by any director or officer in connection with the defense or settlement
of an action in or not opposed to the best interests of the corporation, except
that no indemnification shall be made if such person shall have been adjudged to
be liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine upon application that the
defendant is reasonably entitled to indemnity for such expenses despite such
adjudication of liability. The right to indemnification includes the right to be
paid expenses incurred in defending any proceeding in advance of its final
disposition upon the delivery to the corporation of an undertaking, by or on
behalf of the director or officer, to repay all amounts so advanced if it is
ultimately determined that such director or officer is not entitled to
indemnification.
The registrant will obtain directors' and officers' liability insurance.
The Underwriting Agreement, filed as Exhibit 1, provides that the
Underwriter named therein will indemnify us and hold us harmless and each of our
directors, officers or controlling persons from and against certain liabilities,
including liabilities under the Securities Act. The Underwriting Agreement also
provides that such Underwriter will contribute to certain liabilities of such
persons under the Securities Act.
Section 7 of the proposed Underwriting Agreement filed herewith as Exhibit
1.1 contains customary cross indemnification provisions as between the
Underwriters and the registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) In January through December of 1996, the registrant issued
712,207 shares of its common stock to 37 persons in consideration of
$546,651 cash and services valued at $71,000.
(b) In January through December of 1997 the registrant issued 721,288
shares of its common stock to 58 persons in consideration of $400,119 cash
and services valued at $75,000.
(c) In May through December 1998, the registrant issued 437,365
shares of its common stock to 11 persons for $295,731 cash.
(d) In January through May 1999, the registrant issued 45,000 shares
of its common stock to three persons for $86,254.
II-2
<PAGE>
(e) Also included above but under its employee's stock purchase plan,
the registrant issued the following shares of its common stock:
<TABLE>
<CAPTION>
Number of Shares Amount
Year Employee/Purchasers Purchased Paid
---- ------------------- --------- -------
<S> <C> <C> <C>
1996 4 14,370 $28,740
1997 2 12,642 25,284
1998 1 4 8
1999 -- -- --
</TABLE>
(f) The registrant has issued warrants and options under its
incentive stock option plan during the last three years; any exercises have
been included in (a) through (d) above.
(g) In September 1999, the registrant offered to exchange shares of
its common stock for conversion of debt, contingent on the consummation of
an initial public offering by the registrant. A total of 43 persons holding
$1,448,000 of subordinated notes accepted the contingent offer.
No underwriters or broker-dealers were involved in the offers or sales
described above. The issuances in (a) through (f) were made in transactions
exempt from the registration requirements of Section 5 of the Securities Act,
pursuant to Section 4(2) and in reliance in some cases under Regulation D
adopted thereunder. With regard to the registrant's reliance upon such
exemption, it made certain inquiries to establish that such sales qualified for
the exemption. In particular, the registrant received written representations
from each person, among other things, that he was an experienced and
sophisticated investor not in need of the protection afforded investors by the
Securities Act and that he had made available all information necessary in order
to make an informed investment decision to purchase the securities. The
registrant further obtained a representation from each person of his intent to
acquire the securities for purposes of investment only and not with a view
toward any distribution or public resale, and each of the certificates
representing the securities has been embossed with a restrictive legend
restricting transfer of the securities. With respect to the exchange offering
in (g), the registrant relied on Sections 3(a)(9) and 4(2) of the Securities Act
and Rule 506 adopted under Section 4(2). No additional consideration was paid
in connection with the exchange.
ITEM 16. EXHIBITS
(a) Exhibits filed herewith unless otherwise noted are:
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement.
1.2 Co-Manager Agreement.*
II-3
<PAGE>
1.3 Agreement Among Underwriters.
1.4 Selling Dealers Agreement.*
1.5 Underwriter's Warrant Agreement.
3.1 Restated and Amended Certificate of Incorporation of the
registrant.
4.1 Specimen common stock certificate.*
4.2 Form of Subordinated Promissory Note.
5 Form of opinion of Jones & Keller, P.C.*
10.1 Officer's Incentive Compensation Agreement.
10.2 Employment Agreement, as Amended and Restated and Proposed
Addendum--D.E. Frey.
10.3 Proposed Form of Noncompetition and Nonsolicitation Agreement--
--Paul L. Hocevar, Scott T. Gillespie and Larry Hayden.
10.4 1992 Stock Option Plan.
10.5 1995 Stock Purchase Plan.
10.6 Recruiting Agreement.
10.7 Form of Investment Professional's Independent Contractor
Agreement.
10.8 Form of Branch Office Agreement.
10.9 DEF Fund LLC Operating Agreement.
10.10 CSC Clearing Agreement.
10.11 Senior Debt Agreement, May 1999.
10.12 Senior Debt Agreement, August 1999.
10.13 Senior Debt Pledge Agreement.
10.14 Bridge Loan Agreement.
21 Subsidiaries of registrant.
23.1 Consent of Hein + Associates LLP.
23.2 Consent of Jones & Keller, P.C. (included in Exhibit 5)*.
II-4
<PAGE>
24 Power of attorney (included on the signature page).
27 Financial Data Schedule (per Appendix D).
______________
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information in the registration statement; and (iii) to include any additional
or changed material information with respect to the plan of distribution.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To provide to the Underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
II-5
<PAGE>
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to the directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant 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 Securities Act and will be governed by the final
adjudication of such issue.
(6) 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 registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act as part of this Registration Statement as of the time
it was declared effective.
(7) 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 at that time as the initial bona fide
offering of those securities.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on this 4th day of October, 1999.
D.E. FREY GROUP, INC.
By: /s/ D. E. Frey
-----------------------------
D. E. Frey, President
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints D.E. Frey and Paul L. Hocevar and each of them,
his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and to sign any
registration statement and amendments thereto for the same offering filed
pursuant to Rule 462(b), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting upon said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or either of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ D. E. Frey Director, Chairman and Chief October 4, 1999
- --------------------------
D.E. Frey Executive Officer (Principal
Executive Officer)
/s/ Paul L. Hocevar Chief Financial Officer; October 4, 1999
- --------------------------
Paul L. Hocevar Principal Accounting Officer
/s/ Cornelia F. Eldridge Director October 4, 1999
- --------------------------
Cornelia F. Eldridge
/s/ Michael R. McClurg Director October 4, 1999
- --------------------------
Michael R. McClurg
/s/ Jerome C. Eppler Director October 4, 1999
- --------------------------
Jerome C. Eppler
/s/ William R. Tennison Director October 4, 1999
- --------------------------
William R. Tennison
II-7
<PAGE>
Exhibit 1.1
2,000,000 Shares
D.E. FREY GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
NEIDIGER, TUCKER, BRUNER, INC.
with FREY & COMPANY, INC., as co-manager
as Representative of the
several Underwriters named in
Schedule I attached hereto
c/o Neidiger, Tucker, Bruner, Inc.
300 Plaza Level
1675 Larimer Street
Denver, Colorado 80202
__________________, 1999
Gentlemen:
D.E. Frey Group, Inc., a corporation organized and existing under the laws
of the State of Delaware (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the several underwriters named in
Schedule I hereto (the "Underwriters"), on whose behalf Neidiger, Tucker,
Bruner, Inc. ("NTB") is acting as representative (the "Representative"), an
aggregate of 2,000,000 shares (the "Firm Shares") of its common stock, par value
$.10 per share (the "Common Stock"). The Underwriters will have the option to
purchase from the Company up to an additional 300,000 shares of Common Stock
(the "Additional Shares") solely to cover over-allotments in the sale of the
Firm Shares. The Firm Shares and any Additional Shares to be purchased by the
Underwriters are referred to collectively herein as the "Shares". The Shares
are more fully described in the Registration Statement, as defined below. The
Company also proposes to sell to NTB individually, and not in its capacity as
Representative, five-year warrants (the "Representative's Warrants") to purchase
for 120% of the public offering price of the Firm Shares, an aggregate of
200,000 shares of Common Stock as provided in Section 2 hereof. The
Representative's Warrants and the shares of Common Stock issuable upon exercise
of the Representative's Warrants are referred to collectively herein as the
Representative's Securities".
D.E. Frey and Company, Inc., a wholly-owned subsidiary of the Company, will
be a co-manager of the offering subject to the Representative.
The Representative has advised the Company that it is authorized to enter
into this Agreement on behalf of the several Underwriters and that the several
Underwriters are willing, severally and not jointly, to purchase the number of
Firm Shares set forth opposite their respective names on Schedule I. The term
"Underwriters" refers to any individual member of the underwriting syndicate and
includes any party or parties substituted for an Underwriter pursuant to Section
10 hereof.
<PAGE>
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No. 333-
_____), and an amendment or amendments thereto, for the registration of the
Shares under the Securities Act of 1933, as amended (the "Act"). Such
registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as amended
at the time of effectiveness of the registration statement, including any
information deemed to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A of the Rules and Regulations of the Commission
under the Act (the "Regulations"), is herein called the "Registration
Statement"; and the prospectus, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) filing is required, is
herein called the "Prospectus". The term "preliminary prospectus" as used herein
means a preliminary prospectus as described in Rule 430 of the Regulations.
(b) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the Commission
pursuant to Rule 424(b)) of the Regulations, when any supplement to or amendment
of the Prospectus is filed with the Commission and at the Closing Date and the
Additional Closing Date, if any (as hereinafter respectively defined), the
Registration Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and did not or will not
contain an untrue statement of a material fact and did not or will not omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration Statement, not
misleading and (iii) in the case of the Prospectus, in light of the
circumstances under which they were made, not misleading. When the preliminary
prospectus dated _________________, 1999 relating to the Shares was first filed
with the Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment thereof or supplement thereto was
first filed with the Commission, such preliminary prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representative expressly for use in connection with the
preparation thereof.
(c) Hein & Associates LLP, who have certified the financial
statements and supporting schedules included in the Registration Statement, are
independent public accountants with respect to the Company as required by the
Act and the Regulations.
(d) The Company has no subsidiaries other than D.E. Frey &
Company, Inc., a corporation organized and existing under the laws of the State
of Delaware (the "Subsidiary"). Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
disclosed in the Registration Statement and the Prospectus, there has been no
material adverse change or any development involving a prospective material
adverse change in the business, prospects, properties, operations, condition
(financial or other) or results of operations of the Company and the Subsidiary
taken as a whole, whether or not arising from transactions in the ordinary
course of business (a
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"Material Adverse Effect"), and since the date of the latest balance sheet
presented in the Registration Statement and the Prospectus, neither the Company
nor the Subsidiary has incurred or undertaken any liabilities or obligations,
direct or contingent which are material to the Company and the Subsidiary taken
as a whole, except for liabilities or obligations which are reflected in the
Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated herein have
been duly and validly authorized by the Company and this Agreement has been duly
and validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated hereby do not and will not
(i) conflict with or result in a breach of any of the terms and provisions of,
or constitute a default (or an event which with notice or lapse of time, or
both, would constitute a default) under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company or
the Subsidiary pursuant to any agreement, instrument, franchise, license or
permit to which the Company or the Subsidiary is a party or by which either of
such corporations or their respective properties or assets may be bound or (ii)
violate or conflict with any provision of the certificate of incorporation or
by-laws of the Company or the Subsidiary or any judgment, decree or order of any
court, or, rule or regulation of any governmental or regulatory agency or body
having jurisdiction over the Company or the Subsidiary or any of their
respective properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or the Subsidiary or any of their respective properties or assets is
required for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the issuance,
sale and delivery of the Shares to be issued, sold and delivered by the Company
hereunder, except the registration under the Act of the Shares and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws and the rules of the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the purchase and distribution of
the Shares by the Underwriters.
(g) All of the outstanding shares of the Company's Common Stock
are duly and validly authorized and issued, fully paid and nonassessable and
were not issued and are not now in violation of or subject to any preemptive
rights, except such rights as have been waived. The Shares, when issued,
delivered and sold in accordance with this Agreement, will be duly and validly
issued and outstanding, fully paid and nonassessable, and will not have been
issued in violation of or be subject to any preemptive rights, except such
rights as have been waived. The Company had, at ________________, 1999, an
authorized and outstanding capitalization as set forth in the Registration
Statement and the Prospectus. The holders of the outstanding shares of Common
Stock have no rights of rescission with respect to such shares. There is no
commitment, plan or arrangement to issue, and no outstanding option, warrant,
convertible security or other instrument which is convertible into or
exercisable or exchangeable for capital stock of the Company, except as
described in the Prospectus. Common Stock, the Firm Shares, the Additional
Shares and the Representatives Warrants conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(h) Each of the Company and the Subsidiary has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and the
Subsidiary is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in good
standing which will not, individually or in the aggregate, have a Material
Adverse Effect. Each of the
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<PAGE>
Company and the Subsidiary has all requisite power and authority, and all
necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its properties and
conduct its business as now being conducted and as described in the Registration
Statement and the Prospectus, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration Statement
and the Prospectus.
(i) Neither the Company nor the Subsidiary is in violation or
default of (i) any provision of its certificate of incorporation or bylaws (or
other organizational documents), (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which it is a party
or bound or to which its property is subject or (iii) any statute, law, rule,
regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or the Subsidiary or any of their properties, as
applicable, except, with respect to clauses (ii) and (iii) only, for violations
or defaults that would not, individually or in the aggregate, have a material
Adverse Effect.
(j) Except as described in the Prospectus, there is no litigation
or proceeding by a governmental or regulatory agency to which the Company or the
Subsidiary is a party or to which any property of the Company or the Subsidiary
is subject or which is pending or, to the knowledge of the Company, contemplated
against the Company or the Subsidiary which might reasonably be expected to
result in a Material Adverse Effect or which is required to be disclosed in the
Registration Statement and the Prospectus.
(k) There is no statute, regulation, contract or other document
of a character required to be described in the Registration Statement or the
Prospectus, or, in the case of a contract or other document to be filed as an
exhibit to the Registration Statement, that is not described or filed, as the
case may be, as required.
(l) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of shares of Common Stock to facilitate the sale or
resale of the Shares.
(m) The financial statements, including the notes thereto, and
the supporting schedule included in the Registration Statement and the
Prospectus present fairly the consolidated financial position of the Company and
the Subsidiary as of the dates indicated and the consolidated results of their
operations and cash flows for the periods specified; except as otherwise stated
in the Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and the supporting schedule included in the Registration Statement
presents fairly the information required to be stated therein; and the other
financial and statistical information and data included in the Registration
Statement and the Prospectus is, in all material respects, accurately presented
and prepared on a basis consistent with such financial statements and the books
and records of the Company.
(n) Except such rights as have been waived or as described in the
Prospectus, no holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
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(o) The Company is not and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an investment
company under the Investment Company Act of 1940.
(p) The Common Stock of the Company, including the Shares, has
been approved for listing on the American Stock Exchange, subject only to
official notice of issuance.
(q) No labor dispute with the employees of the Company or the
Subsidiary exists or, to the knowledge of the Company, is imminent, and the
Company is not aware of any existing, threatened or imminent labor dispute or
disturbance by the employees of any of its principal customers, suppliers,
contractors or providers of outsourced services that might have a Material
Adverse Effect.
(r) The Company and the Subsidiary own, possess, license or have
rights to use all patents, patent applications, trade and service marks, trade
and service mark registrations, trade names, copyrights, licenses, inventions,
technology, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) and
other intellectual property (collectively, the "Intellectual Property")
necessary for the conduct of the Company's business as now conducted or as
proposed in the Prospectus to be conducted. Except as described in the
Prospectus, (i) to the Company's knowledge, there is no material infringement by
third parties of any such Intellectual Property, (ii) there is no pending or, to
the Company's knowledge, threatened action, suit, proceeding or claim by others
challenging the Company's rights in or to any such Intellectual Property, and
the Company is unaware of any facts which would form a reasonable basis for any
such claim, (iii) there is no pending or, to the Company's knowledge, threatened
action, suit, proceeding or claim by others challenging the validity or scope of
any such Intellectual Property, and the Company is unaware of any facts which
would form a reasonable basis for any such claim, (iv) there is no pending or,
to the Company's knowledge, threatened action, suit, proceeding or claim by
others that the Company infringes or otherwise violates any patent, trademark,
copyright trade secret or other proprietary rights of others, and the Company is
unaware of any other fact which would form a reasonable basis for any such
claim, (v) to the Company's knowledge, there is no U.S. patent or published U.S.
patent application which contains claims that dominate or may dominate any
Intellectual Property described in the Prospectus as being owned by or licensed
to the Company or that interferes with the issued or pending claims of any such
Intellectual Property and (vi) there is no prior art of which the Company is
aware that may render any U.S. patent held by the Company invalid or any U.S.
patent application held by the Company unpatentable which has not been disclosed
to the U.S. Patent and Trademark Office. True and correct copies of all material
licenses and other material agreements between the Company, the Subsidiary and
any third parties relating to the Intellectual Property, and all amendments and
supplements thereto, have been provided to the Underwriters or their counsel.
(s) The Company and the Subsidiary (i) are in compliance in all
material respects with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all material permits,
licenses or other approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (iii) are in compliance with all
terms and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not individually or in
the aggregate, have a Material Adverse Effect
(t) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for cleanup, closure of properties or
5
<PAGE>
compliance with Environmental Laws or any permit license or approval, any
related constraints on operating activities and any potential liabilities to
third parties) which would, individually or in the aggregate, have a Material
Adverse Effect.
(u) The Company and the Subsidiary own no real property and have
good and marketable title to all personal property owned by them which is
material to the business of the Company and the Subsidiary, in each case free
and clear of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not materially affect the value of such property
and do not materially interfere with the use made of such property by the
Company and the Subsidiary; and any real property and buildings held under lease
by the Company and the Subsidiary are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and the Subsidiary, in each case except as
described in or contemplated by the Prospectus.
(v) The Company and the Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as (i) the Company believes are prudent and customary in the businesses
in which it is engaged and (ii) are consistent with insurance coverage
maintained by similar companies in similar businesses; neither the Company nor
the Subsidiary has been refused any insurance coverage sought or applied for,
and neither the Company nor the Subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not result in a Material
Adverse Effect.
(w) The Company and the Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with managements general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (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.
(x) No relationship, direct or indirect, exists between or among
the Company or the Subsidiary on the one hand, and the directors, officers,
stockholders, customers, suppliers or providers of outsourced services of the
Company or the Subsidiary on the other hand, which is required by the Act to be
described in the Registration Statement and the Prospectus which is not so
described.
(y) The Company and the Subsidiary have implemented a
comprehensive program to analyze and address the risk that their internal
information technology and non-information technology systems may be unable to
recognize and properly execute date-sensitive functions involving certain dates
prior to and any dates after December 31, 1999 (the "Year 2000 Problem"), and
the Company believes, based on such assessment, that it and the Subsidiary's
computer hardware and software systems are and will be able to process date
information prior to and after December 31, 1999 without any errors, aborts,
delays or other interruptions in operations associated with the Year 2000
Problem; and the Company has contacted those of its vendors with whom it has
important financial or operational relationships and believes (i) based on
information received from such vendors, that each such vendor has remedied or
wilt remedy on a timely basis the Year 2000 Problem and (ii) that it could find
a suitable replacement vendor without significant delay or expense in the event
that any such vendor fails to remedy on a timely basis the Year 2000 Problem.
(z) Each of the Company and the Subsidiary has filed with the
appropriate federal, state and local governmental agencies, and all appropriate
foreign countries and political subdivisions thereof, all
6
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tax returns, including franchise tax returns, which are required to be filed or
have duly obtained extensions of time for the filing thereof and have paid all
taxes shown on such returns and all assessments received by them to the extent
that the same have become due; and the provisions for income taxes payable, if
any, shown on the consolidated financial statements filed with or as part of the
Registration Statement are sufficient for all accrued and unpaid foreign and
domestic taxes, whether or not disputed, and for all periods to and including
the dates of such consolidated financial statements. Neither the Company nor the
Subsidiary has executed or filed with any taxing authority, foreign or domestic,
any agreement extending the period for assessment or collection of any income
taxes and is not a party to any pending action or proceeding by any foreign or
domestic governmental agency for assessment or collection of taxes; and no
claims for assessment or collection of taxes have been asserted against the
Company or the Subsidiary.
(aa) The Subsidiary is not currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on the Subsidiary's capital stock, from repaying to the Company any
loans or advances to the Subsidiary from the Company or from transferring any of
the Subsidiary's property or assets to the Company, except as described in or
contemplated by the Prospectus.
(bb) Each of the Company and the Subsidiary has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of the
Employee Income Security Act of 1974, as amended ("ERISA") and the regulations
thereunder with respect to each "plan" (as defined in Section 3(3) of ERISA and
such regulations) in which employees of the Company and the Subsidiary are
eligible to participate and each such plan is in compliance in all material
respects with the presently applicable provisions of ERISA and such regulations.
The Company and its Subsidiary have not incurred any unpaid liability to the
Pension Benefit Guaranty Corporation (other than for the payment of premiums in
the ordinary course) or to any such plan under Title IV of ERISA.
(cc) Neither the Company nor any of its affiliates has incurred
any liability or obligation for any finder's fees or similar arrangements in
connection with the transactions herein contemplated.
(dd) There are no agreements, claims, payments, arrangements or
understandings, whether oral or written, with respect to the sale of the Shares
by, between or otherwise with respect to the Company or the Subsidiary or any
officer, director, shareholder, partner, employee or affiliate of the Company or
the Subsidiary that may affect the Underwriters' compensation in connection with
the sale and distribution of the Shares as determined by the National
Association of Securities Dealer's, Inc. ("NASD") or for which the Company or
any Underwriter may be responsible.
(ee) The minute books and stock record books of the Company and
the Subsidiary are complete and correct and accurately reflect all material
corporate actions authorized or approved by their respective shareholders and
Board of Directors and all committees thereof, including the audit committee and
compensation committee of the Board of Directors, and all issuances and transfer
of shares of the capital stock of the Company and the Subsidiary.
(ff) Except as disclosed in the Registration Statement and the
Prospectus, the Company has not issued, sold or offered for sale within the last
three years any shares of its Common Stock, any right to acquire any shares of
its Common Stock or any securities or instrument exercisable for or convertible
into any shares of its Common Stock.
(gg) Neither the Company nor to best of the Company's knowledge
any officer, director or employee of or agent acting on behalf of the Company or
the Subsidiary has at any time (i) made any contributions to any candidate for
political office in violation of law, or failed to disclose fully any
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<PAGE>
contributions to any candidate for political office in accordance with any
applicable statute, rule, regulation or ordinance requiring such disclosure,
(ii) made any payment to any governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or allowed by applicable law, (iii) made any payment outside the ordinary course
of business to any purchasing or selling agent or person charged with similar
duties of any entity to which the Company sells or from which the Company buys
products for the purpose of influencing such agent or person to buy products
from or sell products to the Company, or (iv) engaged in any transaction on
behalf of the Company, maintained any bank account for the Company, or used any
corporate funds of the Company, except for transactions, bank accounts and funds
which have been and are reflected in the normally maintained books and records
of the Company.
(hh) The Company is not, and upon completion of the transactions
contemplated hereby will not be, required to register as an investment company
under the Investment Company Act of 1940, as amended.
(ii) The Company has obtained from each shareholder of the
Company an enforceable written agreement that for the agreed upon terms, such
shareholder will not, without the Representative's prior written consent, offer,
pledge, sell, contract to sell, grant any option for the sale of, or other
dispose of, directly or indirectly, any shares of Common Stock or any security
or other instrument which by its terms is convertible into, exercisable for or
exchangeable for shares of Common Stock.
(jj) The Company has (i) entered into an employment agreement
with each of _______________, ______________, and ______________ the forms filed
as Exhibits _____, _____ and _____, respectively, to the Registration Statement,
and (ii) purchased term key-person insurance on the lives of __________________
and ________________ each in the amount of $1,000,000, which policies name the
Company as the beneficiary thereof.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $.____, the number of Firm Shares set forth opposite the
respective names of the Underwriters on Schedule I hereto subject to adjustments
in accordance with Section 10 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the offices of the Representative,
300 Plaza Level, 1675 Larimer Street, Denver, Colorado 80202, or at such other
place as shall be agreed upon by the Representative and the Company, at _______
a.m. on the third or fourth full business day (unless postponed in accordance
with the provisions of Section 10 hereof) following the date of the
effectiveness of the Registration Statement, or such other time not later than
10 business days after such date as shall be agreed upon by the Representative
and the Company (such time and date of payment and delivery being herein called
the "Closing Date"). Payment shall be made to the Company by wire transfer of
immediately available funds to an account designated by the Company, against
delivery to the Representative for the respective accounts of the Underwriters
of certificates for the Firm Shares to be purchased by them. Certificates for
the Firm Shares shall be registered in such name or names and in such authorized
denominations as the Representative may request in writing at least two full
business days prior to the Closing Date. The Company will permit the
Representatives to examine and package such certificates for delivery at least
one full business day prior to the Closing Date. If the Representative so
elects, delivery of the Firm Shares purchased from the Company may be made by
credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representative.
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(c) In addition, the Company hereby grants to the Underwriters
the option to purchase up to 300,000 Additional Shares at the same purchase
price per share to be paid by the Underwriters to the Company for the Firm
Shares as set forth in this Section 2, for the sole purpose of covering over-
allotments in the sale of Firm Shares by the Underwriters. This option may be
exercised at any time, in whole or in part, on or before 45 days following the
date of the Prospectus, by oral notice by the Representative to the Company,
which must be confirmed in writing. Such notice shall set forth the aggregate
number of Additional Shares as to which the option is being exercised and the
date and time, as reasonably determined by the Representative, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the ("Additional Closing Date"); provided, however, that the
Additional Closing Date will not be earlier than the Closing Date or earlier
than the third full business day after the date on which the option shall have
been exercised nor later than the ten full business days after the date on which
the option shill have been exercised (unless such time and date are postponed in
accordance with the provisions of Section 10 hereof). Certificates for the
Additional Shares shall be registered in such name or names and in such
authorized denominations as the Representative may request in writing at least
two full business days prior to the Additional Closing Date. The Company will
permit the Representative to examine and package such certificates for delivery
at least one full business day prior to the Additional Closing Date, if the
Representative so elects, delivery of the Additional Shares purchased from the
Company may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representative. The number of
Additional Shares to be sold to each Underwriter shall be the number which bears
the same ratio to the aggregate number of Additional Shares being purchased as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number increased as set forth in Section 10 hereof)
bears to 2,000,000, subject, however, to such adjustments to eliminate any
fractional shares as the Representative in its sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer of immediately
available funds to an account designated by the Company, and the closing shall
take place at the offices of the Representative, 300 Plaza Level, 1675 Larimer
Street, Denver, Colorado 80202, or such other location as may be mutually
acceptable, upon delivery of the certificates for the Additional Shares to the
Representative for the respective accounts of the Underwriters.
(d) On the Closing Date, the Company will sell the
Representative's Warrants to the Representative or to the Representatives'
permitted designees limited to officers of the Representative, members of the
selling group and/or their officers or partners (collectively, the
"Representative's Designees"). The Representative's Warrants will be in the form
of, and substantially in accordance with, the provisions of the Representative's
Warrants filed as an exhibit to the Registration Statement. The purchase price
for the Representative's Warrants is One Hundred Dollars ($100.00). The
Representative's Warrants will be restricted from sale, transfer, assignment or
hypothecation for a period of one (1) year from the date of effectiveness of the
Registration Statement except to the Representative's Designees. Payment for the
Representative's Warrants will be made to the Company by check or checks payable
to its order on the Closing Date against delivery of the certificates
representing the Representative's Warrants. The certificates representing the
Representative's Warrants will be in such denominations and such names as the
Representative mutually instructs the Company in writing.
3. Offering by Underwriters. Upon the Representative's authorization
of the release of the Firm Shares, the Underwriters propose to offer the Shares
for sale to the public upon the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
the Underwriters that:
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(a) If the Registration Statement has not yet been declared
effective the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is otherwise
required under Rule 424(b), the Company will file the Prospectus (properly
completed if Rule 430A has been used) pursuant to Rule 424(b) within the
prescribed time period and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will notify the
Representative immediately (and, if requested by the Representative, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission,
and (vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will
make every reasonable effort to prevent the issuance of any such stop order and,
if issued, to obtain the filing of such order as soon as possible. The Company
will not file any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b)) that differs from the prospectus on file at the time of
the effectiveness of the Registration Statement before or after the effective
date of the Registration Statement to which the Representative shall reasonably
object in writing after being timely furnished in advance a copy thereof.
(b) If at any time when a Prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Representative or the Company, include an 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, or if it shall be necessary, in the
judgment of the Representative or the Company, at any time to amend or
supplement the Prospectus or Registration Statement to comply with the Act or
the Regulations, the Company will notify the Representative promptly and prepare
and file with the Commission an appropriate amendment or supplement (in form and
substance satisfactory to the Representative) which will correct such statement
or omission and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to each of the
Representative one signed copy of the Registration Statement including exhibits
and all amendments thereto, and will maintain in the Company's files manually
signed copies of such documents for at least five years from the date of filing.
The Company will promptly deliver to each of the Underwriters such number of
copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, as
the Representative may reasonably request.
(d) If the Representative shall request within a reasonable time
before the effective date of the Registration Statement, the Company shall cause
to be prepared and delivered, at its expense, within one business day from the
effective date of this Agreement, to the Representative an "electronic
Prospectus" to be used by the Underwriters in connection with the offering and
sale of the Shares. As used herein, the term "electronic prospectus" means a
form of Prospectus, and any amendment or supplement thereto, that meets each of
the following conditions: (i) it shall be encoded in an electronic format,
satisfactory to the Representative that may be transmitted electronically by the
Representative and the other Underwriters to offerees and purchasers of the
Shares for at least during the period when the Prospectus is required to be
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delivered under the Act or the Exchange Act (the " Prospectus Delivery Period");
(ii) it shall disclose the same information as the paper Prospectus and
Prospectus filed with the Commission through its "EDGAR" system (as such term is
defined in Regulation S-T promulgated by the Commission), except to the extent
that graphic and image material cannot be disseminated electronically, in which
case such graphic and image material shall be replaced in the electronic
Prospectus with a fair and accurate narrative description or tabular
representation of such material, as appropriate and (iii) it shall be in or
convertible into a paper format or an electronic format, reasonably satisfactory
to the Representative that will allow investors to store and have continuously
ready access to the Prospectus at any future time, without charge to investors
(other than any fee charged for subscription to the system as a whole and for
on-line time).
(e) The Company will endeavor in good faith, in cooperation with
the Representative and counsel for the Underwriters, at or prior to the time of
effectiveness of the Registration Statement, to qualify the Shares for offering
and sale under the securities laws of such jurisdictions as the Representative
may designate and to maintain such qualification in effect for so long as
required for the distribution thereof, but in no event for longer than one year;
except that in no event shall the Company be obligated in connection therewith
to qualify as a foreign corporation or to execute a general consent to service
of process in actions other than those arising out of the offering or sale of
the Shares.
(f) The Company will make generally available (within the meaning
of Section 11(a) of the Act) to its security holders and to the Representative
as soon as practicable, but not later than 45 days after the end of its fiscal
quarter in which the first anniversary date of the effective date of the
Registration Statement occurs, an earnings statement (in form complying with the
provisions of Rule 158 of the Regulations) covering a period of at least 12
consecutive months beginning after the effective date of the Registration
Statement.
(g) During a period of three years from the effective date of the
Registration Statement, the Company shall engage and maintain, at its expense,
(i) American Securities Transfer & Trust, Inc., Denver, Colorado as the
registrar and transfer agent for the Common Stock; and (ii) a financial public
relations firm and acceptable to the Company and the Representative. Such public
relations firm, or its successor, will be engaged for a period of four
consecutive six-month terms commencing with the Closing Date; provided that any
renewal of such firm's engagement shall be subject to approval by the
Representative.
(h) During the period of 180 days from the date of the
Prospectus, the Company will not, without the prior written consent of the
Representative issue, offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock provided, however, that the Company may (i) sell
the Shares and the Representative's Warrants hereunder, (ii) issue Common Stock
pursuant to any employee stock option plan, stock ownership plan, retirement
plan or dividend reinvestment plan of the Company in effect on the date of this
Agreement and described in the Prospectus, (iii) issue Common Stock issuable
upon the conversion of securities or the exercise of warrants outstanding on the
date of this Agreement and described in the Prospectus and (iv) issue and sell
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant or issue any options, rights or warrants
to purchase shares of Common Stock and issue shares of Common Stock upon
conversion, exercise of exchange thereof in connection with raising additional
capital or making acquisitions (all such shares of Common Stock referred to in
clauses (ii), (iii) and (iv) are collectively referred to as "Supplemental
Shares") so long as each person who acquires any Supplemental Shares enters into
an agreement with the Company that contains provisions to the effect that such
person may not sell, offer to sell, solicit an offer to buy, contract to sell,
pledge, grant any option to purchase, or otherwise transfer or dispose of, any
such Supplemental Shares, without the prior written consent of the
Representative at any time during the period of 12 months from the date of the
Prospectus
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(which agreement shall provide that such provisions may not be amended, nor may
the performance of any obligations under such provisions be waived, without the
prior written consent of the Representative), and the certificates evidencing
such Supplemental Shares bear a legend that sets forth such restrictions on
transfer or disposition.
(i) The Company shall cause (i) each officer and director of the
Company and each holder of 5% or more of the Company's Common Stock (or
securities convertible into shares Common Stock) to furnish to the
Representative, prior to the date of this Agreement, in form and substance
satisfactory to Representative's counsel, whereby each such person shall agree
not to offer for sale, contract to sell, sell, distribute, grant any option or
other right to purchase or otherwise dispose of or contract to dispose of any of
their shares of the Company's Common Stock (or any security convertible into
shares of the Company's Common Stock) without the Representative's prior written
consent during the 12 month period following the effective date of the
Registration Statement; and (ii) at least 75% of the other holders of the
Company's Common Stock (or other security convertible into Common Stock) to
furnish to the Representative, prior to the date of this Agreement, a written
agreement, in form and substance satisfactory to Representative's counsel
whereby each such person shall agree not to offer for sale, contract to sell,
sell, distribute, grant any option or other right to purchase or otherwise
dispose of or contract to dispose of any of their shares of the Company's Common
Stock (or any security convertible into shares of the Company's Common Stock)
for a period of 180 days from the effective date of the Registration Statement
without the Representative's prior written consent. Except as the Representative
may consent, in its sole discretion, the foregoing agreements shall also provide
that any sale of shares of the Company's Common Stock by any such person during
the 18 month period from the effective date of the Registration Statement, and
which sale is made pursuant to Rule 144 under the Act (or comparable provision
under the Act) shall be made only in a transaction or transactions by or
directly with the Representative or D.E. Frey and Company, Inc., provided the
compensation charged by the Representative or D.E. Frey and Company, Inc., as
the case may be, is competitive with other broker-dealers.
(j) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to the Representative copies of
(i) all reports to the Company's shareholders; (ii) all reports, financial
statements and proxy or information statements filed by the Company with the
Commission or any national securities exchange; and such additional information
concerning the business and financial condition of the Company as the
Representative may reasonably request and which can be prepared or obtained by
the Company without unreasonable effort or expense.
(k) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(l) The Company will use its best efforts to maintain the
inclusion of the Common Stock for listing on the American Stock Exchange.
(m) The Company shall take all necessary action, on an expedited
basis, to be included in Standard and Poor's Corporate Records, Stock Quotes and
Stock Guide published by Standard and Poor's Corporation and to continue such
inclusion for a period of not less than seven years from the Closing Date.
(n) Until that date which is 90 days after the Closing Date, the
Company shall not, without the prior approval of the Representative issue or
permit any press release or other communication or hold any press conference
with respect to the Company or its activities or the offering of the Shares,
other than trade releases issued in the ordinary course of the Company's
business and approved by the Company's counsel.
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(o) During a period of 12 months from the Closing Date, the
Company will not authorize or otherwise effect any change in the compensation to
any officer and/or director of the Company without 30 days' prior written notice
to the Representativ e.
(p) On the Closing Date, the Company shall enter into a
consulting agreement, retaining the Representative as a financial consultant to
the Company for a period of 24 months at a fee of $48,000 payable in full on the
Closing Date. Such consulting agreement shall also provide for compensation to
the Representative as follows: 5% of the first $3 million, 2.5% of any
consideration between $3 million and $5 million; 2% of any consideration between
$5 million and $10 million; and 1% of any consideration greater than $10 million
paid or received by the Company (or its shareholders) in any transaction
(including mergers, asset sales and acquisitions) accepted by the Company (or
its shareholders) within 36 months from the Closing Date, provided Neidiger,
Tucker, Bruner, Inc. introduced the other party to the Company.
(q) For a period of three years from the Closing Date, the
Company shall notify Neidiger, Tucker, Bruner, Inc. in writing at least 30 days
before a proposed public offering or private offering involving securities of
the Company or any subsidiary (other than bank debt or similar financing,
securities offered solely to Company employees or securities issuable in
transactions enumerated in Rule 145(a) under the Act) so that Neidiger, Tucker,
Bruner, Inc., individually and not in its capacity as Representative or, at
Neidiger, Tucker, Bruner, Inc.'s option, with a group of investment bankers
associated with Neidiger, Tucker, Bruner, Inc., shall have the right of first
refusal to effect the offering on terms at least as favorable to the Company as
those set forth in such notice (which notice will specify the price to the
underwriter or other method of determining the underwriting discount or fee).
Neidiger, Tucker, Bruner, Inc. will notify the Company if Neidiger, Tucker,
Bruner, Inc. intends to exercise its right of first refusal within 15 days of
receipt by Neidiger, Tucker, Bruner, Inc. of such notice from the Company. If
Neidiger, Tucker, Bruner, Inc. fails to exercise the right of first refusal
within the 15 day period and the terms of the proposed subsequent financing
thereafter are altered in any material respect, the Company shall again offer to
Neidiger, Tucker, Bruner, Inc., individually and not in its capacity as
Representative, the right of first refusal to effect the financing transaction
upon such altered terms and Neidiger, Tucker, Bruner, Inc. shall have 15 days
from the date of receipt of such notice to notify the Company of its acceptance.
The foregoing preferential rights provided to Neidiger, Tucker, Bruner, Inc.
shall continue in effect during the entire three year period despite any
exercise or failure to exercise the preferential right granted herein during the
stated term.
5. Payment of Costs and Expenses.
(a) Whether or not the transactions contemplated in this
Agreement are consummated, the Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Company under this
Agreement, including, without limiting the generality of the foregoing, the
following: (i) all expenses (including stock transfer taxes, if any) incurred in
connection with the delivery of the Firm Shares and Additional Shares to the
Underwriters, (ii) all fees and expenses (including, without limitation, fees
and expenses of the Company's accountants and counsel, but excluding fees and
expenses of counsel for the Underwriters, except as provided in (iii) below) in
connection with the preparation, printing, filing, delivery and shipping of the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), each preliminary prospectus and the Prospectus
as amended or supplemented, and the printing, delivery and shipping of this
Agreement and other underwriting documents, including Underwriters'
Questionnaires, Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreement
Among Underwriters and Selected Dealer Agreements and any letters transmitting
the offering material to selling group members (including costs of shipment and
delivery), (iii) all filing fees and fees and disbursements of Underwriters'
counsel incurred in connection with the qualification of the Securities under
state securities laws as provided in Section 4(e) hereof, (iv) the filing fees
of the Commission and
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NASD, (v) the fees and expenses of inclusion of the Common Stock on the NASDAQ
SmallCap Market as well as and any other securities exchange, (vi) the cost of
printing certificates representing the Common Stock, (vii) the cost and charges
of the transfer agent or registrar, (viii) the costs of "tombstone"
advertisements in such publications as the Representative shall reasonably
request, as well as the costs of any other advertising undertaken at the
Company's request, (ix) the costs of preparing, printing and distributing two
bound volumes for the Representative and Underwriter's counsel, (x) all fees and
costs for due diligence information, examinations, (xi) the costs and expenses
associated with the production of materials related to and travel expenses
incurred by the Company's management and the Representative in connection with,
the various meetings to be held between the Company's management and prospective
investors; and (xii) all other costs and expenses incident to the performance of
the obligations of the Company hereunder which are not otherwise provided for in
this section. In addition, the Company shall also pay the Representative, at the
applicable Closing Date, a non-accountable expense allowance equal to 2 1/2% of
the initial public offering price of the Shares purchased on such Closing Date
(including Additional Shares purchased pursuant to the option granted pursuant
to Section 2 hereof). If the sale of the Shares provided for herein is not
consummated by reason of any termination of this Agreement pursuant to Section
12 hereof, or by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or
because any condition of the Underwriters' obligations set forth in Section 6
herein is not fulfilled, the Company shall reimburse Neidiger, Tucker, Bruner,
Inc. for all of Neidiger, Tucker, Bruner, Inc.'s accountable out-of-pocket
expenses (including fees and disbursements of its counsel) actually incurred by
Neidiger, Tucker, Bruner, Inc. in connection with the investigation, preparing
to market and marketing of the Shares or in contemplation of performing its
obligations hereunder, such reimbursement not to exceed in the aggregate
$75,000. Neidiger, Tucker, Bruner, Inc. acknowledges that $45,000 has been paid
to it pursuant to the Company's prior agreement that this amount is to be
applied against the expense allowance and toward the reimbursement of Neidiger,
Tucker, Bruner, Inc. Neidiger, Tucker, Bruner, Inc. agrees that any portion of
such $45,000 that is not necessary to reimburse it for its out-of-pocket
expenses actually incurred if the sale of the Shares, as contemplated by this
Agreement, is not consummated for any reason shall be repaid to the Company.
6. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of each of the
representations and warranties on the part of the Company contained herein as of
the date of this Agreement and as of the Closing Date (for purposes of this
Section 6 "Closing Date" shall refer to the Closing Date for the Firm Shares and
any Additional Closing Date, if different, for the Additional Shares), to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) The Registration Statement thereto shall have become
effective not later than 5:30 p.m., Washington, D.C. time, on the date of this
Agreement or such later date and time as shall have been consented to in writing
by the Representative; the Prospectus shall have been filed with the Commission
in accordance with Section 4(a) hereof; and at or prior to the Closing Date no
stop order suspending the effectiveness of the Registration Statement or any
post-amendment thereof shall have been issued and no proceedings therefore shall
have been initiated or threatened by the Commission.
(b) The Representative shall not have advised the Company that
the Prospectus contains an untrue statement of fact which, in Representative's
reasonable opinion, is material, or omits to state a fact which, is material and
is required to be stated therein or is necessary to make the statements therein,
in light of the circumstances under which they were made not misleading.
(c) All proceedings in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to the Representative and to John G. Herbert, P.C.
("Underwriters' Counsel"), and the Underwriters shall have received from
Underwriters'
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Counsel a favorable opinion, dated as of the Closing Date, with respect to the
issuance and sale of the Shares, the Registration Statement and the Prospectus
and such other related matters as the Representative may reasonably require, and
the Company shall have furnished to Underwriters' Counsel such documents as such
counsel may request for the purpose of enabling them to pass upon such matters.
(d) At or prior to the date of this Agreement, the Representative
shall have received from Underwriters' Counsel, a memorandum or written summary,
in form and substance satisfactory to the Representative, with respect to the
qualification for offering and sale of the Shares by the Underwriters under the
state securities or Blue Sky laws of such jurisdictions as the Representative
may reasonably have designated to the Company.
(e) At the Closing Date, the Representative shall have received
the opinion of Jones & Keller, P.C., counsel for the Company, dated such Closing
Date, addressed to the Representative covering the matters set forth on Annex A
attached hereto.
(f) The Representative shall have received at the Additional
Closing Date the favorable opinion of the Company's counsel addressed to the
Representative, confirming as of such Additional Closing Date the statements
made by such counsel in its opinion delivered on the Closing Date.
(g) At the Closing Date, (i) there shall have been no
transaction; not in the ordinary course of business, entered into by the Company
after the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and Prospectus that is materially adverse to
the Company; (ii) the Company shall not be in material breach or material
default under any provision of any instrument relating to any outstanding
indebtedness; (iii) the Company shall not have issued any securities (other than
as described in the Registration Statement and other than the Shares and the
Representative's Warrants) or declared or paid any dividend or made any
distribution in respect of its capital stock of any class and there shall not
have been any change in the capital stock or any material change in the debt
(long or short term) or liabilities or obligations of the Company (contingent or
otherwise); (iv) no material amount of the assets of the Company shall have been
pledged or mortgaged, except as set forth in the Registration Statement and
Prospectus; and (v) no action, suit or proceeding, at law or in equity, shall
have been pending or threatened (or circumstances giving rise to same) against
the Company, or involving or affecting its business or properties, before or by
any court or federal, state or foreign commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding could have a material
adverse effect on the Company, except as set forth in the Registration Statement
and Prospectus.
(h) At the Closing Date the Representative shall have received a
certificate of the Chief Executive Officer and the Chief Financial Officer of
the Company, dated the Closing Date to the effect that (i) the condition set
forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the
date hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date
the obligations of the Company to be performed hereunder on or prior to the
Closing Date have been duly performed and (iv) subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, the Company and the Subsidiary have not sustained any material loss
or interference with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and there has
not been any Material Adverse Effect, or any development involving a prospective
Material Adverse Effect, in the business prospects, key personnel, operations,
condition (financial or otherwise), properties or results of operations of the
Company and the Subsidiary taken as a whole, except in each case as described in
or contemplated by the Prospectus.
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(i) At the time this Agreement is executed and at the Closing
Date, the Representative shall have received a letter, from Hein & Associates
LLP, independent public accountants for the Company, dated, respectively, as of
the date of this Agreement and as of the Closing Date addressed to the
Representative and in form and substance satisfactory to the Representative, to
the effect that: (i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the Regulations and
stating that the answer to Item ____ of the Registration Statement is correct
insofar as it relates to them; (ii) stating that, in their opinion, the
financial statements and schedules of the Company included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
form in all material respects with the applicable accounting requirements of the
Act and the applicable Regulations of the Commission thereunder; (iii) on the
basis of procedures and inquiries (not constituting an examination in accordance
with generally accepted auditing standards) consisting of a reading of the
latest available unaudited interim consolidated financial statements of the
Company and the Subsidiary, a reading of the minutes of meetings and consents of
the shareholders and boards of directors of the Company and the Subsidiary and
the committees of such boards subsequent to _____________, 1999, inquiries of
officers and other employees of the Company and the Subsidiary who have
responsibility for financial and accounting matters of the Company and the
Subsidiary with respect to transactions and events subsequent to
_____________,1999 and other specified procedures and inquiries to a date not
more than five days prior to the date of such letter, nothing has come to their
attention that would cause them to believe that: (A) the unaudited consolidated
financial statements and schedules of the Company presented in the Registration
Statement and the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the applicable
published Regulations of the Commission thereunder or that such unaudited
consolidated financial statements are not fairly presented in conformity with
generally accepted accounting principles and practices applied on a basis
substantially consistent with that of the audited consolidated financial
statements of the Company and the Subsidiary included in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent to
____________, 1999 there were, as of the date of the most recent available
monthly consolidated financial statements of the Company and the Subsidiary, if
any, and as of a specified date not more than five days prior to the date of
such letter, any changes in the capital stock or long-term indebtedness of the
Company or any decrease in the net current assets or stockholders' equity of the
Company, in each case as compared with the amounts shown in the most recent
balance sheet presented in the Registration Statement and the Prospectus, except
for changes or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter; or
(C) that during the period from ____________, 1999 to the date of the most
recent available monthly consolidated financial statements of the Company and
the Subsidiary and to a specified date not more than five days prior to the date
of such letter, there was any decrease, as compared with the corresponding
period in the prior fiscal year, in total revenues, or any increase, as compared
with the corresponding period in the prior fiscal year, in operating loss or
total or per share net loss, except for decreases or increases, as the case may
be, which the Registration Statement and the Prospectus disclose have occurred
or may occur or which are set forth in such letter; and (iv) stating that they
have compared specific dollar amounts, numbers of shares, percentages of
revenues and earnings, and other financial information pertaining to the Company
and the Subsidiary set forth in the Registration Statement and the Prospectus,
which have been specified by the Representative prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
the Company and the Subsidiary or from schedules furnished by the Company, and
excluding any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries, and
other appropriate procedures specified by the Representative set forth in such
letter, and found them to be in agreement.
(j) No order suspending the offering or sale of the Securities in
any jurisdiction designated by the Representative pursuant to Section 4(e)
hereof shall have been issued and no proceedings for that purpose shall have
been instituted or shall be threatened.
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(k) On the Closing Date, the Company shall have executed and
delivered to Neidiger, Tucker, Bruner, Inc. the Representative's Warrants in
such denominations and in the names of such permitted designees as shall have
been instructed by Neidiger, Tucker, Bruner, Inc. in writing.
(l) At the time this Agreement is executed, the Common Stock
shall have been duly approved for listing on the American Stock Exchange subject
to official notice of issuance.
(m) Since the effective date of the Registration Statement,
neither the Company nor the Subsidiary shall have sustained any loss by fire,
flood, accident or other calamity, nor shall either of them have become a party
to or the subject of any litigation, individually or in the aggregate, which is
materially adverse to the Company or the Subsidiary nor shall there have been a
material adverse change in the general affairs, business, key personnel,
capitalization, financial position or net worth of the Company or the
Subsidiary, whether or not arising in the ordinary course of business, which
loss, litigation or change, in the reasonable judgment of the Representative,
shall render it inadvisable to proceed with the delivery of the Shares.
(n) Subsequent to the date of this Agreement or, if earlier, the
dates as of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in the
letter or letters referred to in Section (i) or (ii) any change, or any
development involving a prospective change, in or affecting the business or
properties of the Company the effect of which, in any case referred to in clause
(i) or (ii) above, is, in the judgment of the Representative, so material and
adverse as to make it impractical or inadvisable to proceed with the offering or
delivery of the Shares as contemplated by the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto).
(o) At or prior to the Closing Date, Neidiger, Tucker, Bruner,
Inc. shall have received the written agreements and performance of the matters
specified in Section 4 and ___ hereof.
(p) Prior to the Closing Date, the Company shall have furnished
to the Representatives such further information, certificates and documents
confirming the representations and warranties of the Company and compliance with
the conditions contained herein as the Representative may reasonably have
requested.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement or if any of the certificates,
opinions, written statements or letters furnished to the Representative or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to the Representative and
to Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by the Representative at or at any time prior to the Closing Date and
the obligations of the Underwriters to purchase the Additional Shares may be
canceled by the Representative at or at any time prior to, the Additional
Closing Date. Notice of such cancellation shall be given to the Company by
telephone or facsimile, confirmed in writing.
7. Indemnification.
(a) The Company will indemnify and hold harmless each
Underwriter, its officers, directors and each person, if any, who controls any
Underwriter (including each person who may be substituted for an Underwriter as
provided in Section 10 hereof) within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, from and against any losses, claims, damages,
expenses, liabilities or
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actions in respect thereof ("Claims"), joint or several, to which such
Underwriter, its officers, directors or counsel or each such controlling person
may become subject under the Act, the Exchange Act, Blue Sky Laws or under any
other statute or regulation, at common law or otherwise (including payments made
in settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such Claims arise out of or are based upon
any breach of any representation, warranty or covenant made by the Company in
this Agreement, or any untrue statement or alleged untrue statement of any
material fact contained in the registration statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus or in any supplement thereto or
amendment thereof or in any application or other document executed by the
Company or based upon written information furnished by the Company and filed in
any state or other jurisdiction to qualify any of the Shares for offering and
sale under the securities laws thereof or filed with the Commission or any
securities association or exchange (any such document, application or
information being hereinafter called an "Application") 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 (with respect to the Prospectus, in light of the circumstances under
which they were made); provided, however, the Company will not be liable in any
such case to the extent that any such Claims arise out of or are 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 expressly for use therein. The Company agrees to reimburse
each such indemnified party for any legal fees or other expense as incurred by
such indemnified party in connection with investigating, preparing to defend or
defending against or appearing as a third-party witness in connection with such
Claims. The indemnification obligations of the Company as provided herein will
be in addition to any liability the Company may otherwise have including under
this Agreement.
(b) Each Underwriter, severally and not jointly, will indemnify
and hold harmless the Company, each of its directors and officers and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 (a) of the Exchange Act against any Claim to which the
Company, or any such director, officer or controlling person may become subject
under the Act, the Exchange Act, Blue Sky Laws or under any other statute or
regulations or at common law or otherwise (including payments made in settlement
of any litigation, if such settlement is effected with the written consent of
such Underwriter and the Representative), insofar as such Claim arises out of or
is based upon any untrue or alleged untrue statement of any material fact
contained in the registration statement for the registration of the Shares, as
originally filed or any amendment thereof, or any related preliminary prospectus
or the Prospectus, or in any amendment thereof or supplement thereto, or any
amendment or supplement thereto or any Application, or arises out of or is based
upon the omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein (with respect to the
Prospectus, in light of the circumstances under which they were made), not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
therein in the reliance solely upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through the
Representative expressly for use therein; provided, however, that in no case
shall any Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have including under this Agreement.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action in
respect of a Claim, such indemnified party shall, if a claim in respect thereof
is to be made against an indemnifying party under such subsection, notify each
party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure so to notify an indemnifying party shall
not relieve it from any liability which it may have under this Section 7).
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In case any such action is brought against any indemnified party, and it
notifies an indemnifying party of the commencement thereof; the indemnifying
party will be entitled to participate therein, and to the extent it may elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof with
counsel satisfactory to such indemnified party. Notwithstanding the foregoing,
the indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses shall be borne by the indemnifying parties.
Anything in this subsection to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
8. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company and one or more of
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company and the Underwriters from
the offering of the Shares or, if such allocation is not permitted by applicable
law or indemnification is not available as a result of the indemnifying party
not having received notice as provided in Section 7 hereof; in such proportion
as is appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company and the Underwriters in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts and commissions but before deducting expenses)
received by the Company and (y) the underwriting discounts and commissions
received by the Underwriters, respectively, in each case as set forth on the
cover page of the Prospectus. The relative fault of the Company and of the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission;
provided, however that no intent or knowledge of, or access to information or
opportunity to correct or prevent any such statement or omission by, D.E. Frey
and Company, Inc. shall be attributed to any other Underwriter. The Company and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such
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<PAGE>
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. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwater has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of The Exchange Act, 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, subject in each case
to clauses (i) and (ii) of the second preceding sentence. 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, notify each party or
parties from whom contribution may be sought, but the omission to so notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any obligation it or they may have under this Section 8 or
otherwise. No party shall be liable for contribution with respect to any action
or claim settled without its consent; provided, however, that such consent was
not unreasonably withheld.
9. Qualified Independent Underwriter.
(a) The Company hereby confirms its engagement of the services of
Neidiger, Tucker, Bruner, Inc. as, and Neidiger, Tucker, Bruner, Inc. hereby
confirms its agreement with the Company to render services as a "qualified
independent underwriter" (in such capacity, the "QIU") within the meaning of
Rule 2720(b)(15) of the Conduct Rules of the NASD with respect to the offering
and sale of the Shares.
(b) The QIU hereby represents and warrants to, and agrees with,
the Company and the other Underwriters that with respect to the offering and
sale of the Shares as described in the Prospectus:
(i) the QIU qualifies as, and constitutes, a "qualified
independent underwriter" within the meaning of Rule 2720(b)(l5) of the
Conduct Rules of the NASD;
(ii) the QIU has participated in the preparation of the
Registration Statement and the Prospectus and has exercised the usual
standards of "due diligence" in respect thereto;
(iii) the QIU has agreed in acting as a "qualified
independent underwriter" within the meaning of Rule 2720(b)(l5) of the
Conduct Rules of the NASD to undertake the legal responsibilities and
liabilities of an underwriter under the Act specifically including those
inherent in Section 11 thereof;
(iv) based upon, among other factors, the information set
forth in the Prospectus and its review of such other documents and the
taking of such other actions as the QIU, in its sole discretion, has
deemed necessary or appropriate for the purposes of delivering its
recommendation hereunder, the QIU recommends, as of the date of the
execution and delivery of this Agreement, that the price at which the
Shares are to be distributed to the public shall not be higher than that
set forth on the cover page of the Prospectus, which price should in no
way be considered or relied upon as an indication of the value of the
Shares; and
20
<PAGE>
(v) the QIU will furnish to the other Underwriters on the
Closing Date a letter, dated the date thereof; in form and substance
satisfactory to D.E. Frey and Company, Inc. to the effect of clauses (i)
through (iv) above.
(c) The Company, the QIU and the other Underwriters agree to
comply in all material respects with all of the requirements of Rule 2720 of the
Conduct Rules of the NASD applicable to them in connection with the offering and
sale of the Shares. The Company agrees to cooperate with the Underwriters,
including the QIU, to enable the Underwriters to comply with Rule 2720 of the
Conduct Rules of the NASD and to enable the QIU to perform the services
contemplated by this Agreement.
(d) The Company agrees promptly to reimburse the QIU for all out-
of-pocket expenses, including fees and disbursements of QIU's counsel,
reasonably incurred in connection with the services to be rendered as QIU
hereunder.
(e) The QIU hereby consents to the references to it in its
capacity as "qualified independent underwriter" as set forth under the caption
"Underwriting" in the Prospectus.
(f) The Company will indemnify and hold harmless the QIU against
any losses, claims, damages or liabilities, joint or several, to which the QIU
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon the QIU's acting (or alleged failing to act) as "qualified independent
underwriter" within the meaning of Rule 2720(b)(15) of the Conduct Rules of the
NASD with respect to the offering and sale of the Shares and will reimburse the
QIU for any legal or other expenses reasonably incurred by the QIU in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred.
10. Default by an Underwriter; Substitution.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default relates
do not (after giving effect to arrangements, if any, made by the Representative
pursuant to subsection (b) below) exceed in the aggregate 10% of the number of
Firm Shares or Additional Shares, the Firm Shares or Additional Shares to which
the default relates shall be purchased by the non-defaulting Underwriters in
proportion to the respective proportions which the numbers of Firm Shares set
forth opposite their respective names in Schedule I hereto bear to the aggregate
number of Firm Shares set forth opposite the names of the non-defaulting
Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Additional Shares, as the case may be, the Representative may
in its discretion arrange for itself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase such
Firm Shares or Additional Shares, as the case may be, to which such default
relates on the terms contained herein. In the event that within five calendar
days after such a default the Representative does not arrange for the purchase
of the Firm Shares or Additional Shares, as the case may be to which such
default relates as provided in this Section 10, this Agreement or, in the case
of a default with respect to the Additional Shares, the obligations of the
Underwriters to purchase and of the Company to sell the Additional Shares shall
thereupon terminate, without liability on the part of the Company with respect
thereto (except in each case as provided in Section 5, 7(a) and 8 hereof) or the
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter or Underwriters of its or their liability, if any, to the other
Underwriters and the Company for damages occasioned by its or their default
hereunder.
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(c) In the event that the Firm Shares or Additional Shares to
which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
the Representative or the Company shall have the right to postpone the Closing
Date or Additional Closing Date, as the case may be, for a period, not exceeding
ten business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the Prospectus which,
in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 10 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares and Additional
Shares.
11. Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement including the agreements contained in Section 5, the
indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
officer, director or controlling person thereof or by or on behalf of the
Company, any of its officers and directors or any controlling person thereof;
and shall survive delivery of and payment for the Stares to and by the
Underwriters. The representations contained in Section 1 and the agreements
contained in Sections 5, 7, 8 and 12(d) hereof shall survive the termination of
this Agreement including termination pursuant to Section 10 or 12 hereof.
12. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the later of when
(i) Representative and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price per
Share has not been agreed upon prior to 5:00 P.M., Washington, D.C. time, on the
fifth full business day after the Registration Statement will have become
effective, this Agreement shall thereupon terminate without liability to the
Company or the Underwriters except as herein expressly provided. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying the Representative or by the Representative by notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 12 and of Sections
1, 5, 7 and 8 hereof shall at all times be in full force and effect.
(b) Without limiting the right to terminate this Agreement
pursuant to any other provision hereof, the Representative shall have the right
to terminate this Agreement at any time on or before the Firm Closing Date or
terminate any obligation of the Underwriters to purchase the Additional Shares
at any time on or before the Additional Closing Date, as the case may be, if any
of the following has occurred since the since the effective date hereof: (A) the
Company shall have failed, refused or been unable to perform any agreement or
condition on its part to be performed hereunder unless compliance therewith or
performance or satisfaction thereof shall have been expressly waived in writing
by the Representative; (B) any other condition of the obligations of the
Underwriters is not fulfilled; (C) any event shall have occurred or shall exist
which makes untrue or incorrect in any material respect any statement or
information contained in the Registration Statement or which is not reflected in
the Registration Statement but should be reflected therein (exclusive of any
amendment or supplement thereto) to make the statements or information contained
therein not misleading in any material respect; (D) any outbreak or escalation
of major hostilities in which the United States is involved, a declaration of
war by the United States or any other substantial national calamity or
emergency; (E) any suspension or limitation of trading in securities generally
on the New York Stock Exchange, the American Stock Exchange or the NASDAQ or any
suspension of listing in the Common Stock of the Company on the American Stock
Exchange; or (F) declaration of a banking moratorium by
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<PAGE>
either federal or state authorities or a moratorium in foreign exchange trading
by major international banks or persons has been declared.
(c) if this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to notification by the Representative
as provided in Section 10(b) hereof), or if the sale of the Shares provided for
herein is not consummated because any condition to the obligations of the
Underwriters set forth herein is not satisfied or because of any refusal,
inability or failure on the part of the Company to perform any agreement herein
or comply with any provision hereof, the Company will, subject to demand by
Neidiger, Tucker, Bruner, Inc., reimburse Neidiger, Tucker, Bruner, Inc. for all
out-of-pocket expenses (including the fees and expenses of counsel), incurred by
Neidiger, Tucker, Bruner, Inc. in connection herewith in the maximum amount of
$75,000, inclusive of the $45,000 previously paid to Neidiger, Tucker, Bruner,
Inc. by the Company.
(d) Any notice of termination pursuant to this Section 12 shall be by
telephone or facsimile and confirmed in writing.
13. Notices. All communications hereunder except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter; shall be mailed, delivered, or facsimile and confirmed in writing,
to such Underwriter c/o Neidiger, Tucker, Bruner, Inc., 300 Plaza Level, 1675
Larimer Street, Denver, Colorado 80202, Attention of Corporate Finance
Department; if sent to the Company, shall be mailed, delivered, or facsimilied
and confirmed in writing to the Company, 1700 Lincoln Street, Suite 2200,
Denver, Colorado 80202, Attention of Dale E. Frey, Chief Executive Officer.
14. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors and officers referred to in Sections 7 and 8, and their
respective successors and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. The
term "successors and assigns " shall not include a purchaser, in its capacity as
such, of Shares from any of the Underwriters.
15. Entire Agreement; Amendments. This Agreement, the Representative's
Warrant and the Financial Consultant Agreement constitute the entire agreement
of the parties hereto and supersede all prior written or oral agreements,
understandings, and negotiations with respect to the subject matter hereof,
including without limitation a letter of intent dated April 28, 1999 and
accepted May 19, 1999 between the Company and NTB. This Agreement may not be
amended except in a writing signed by the Representative and the Company.
16. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement. The parties agree, however, that in the
event any provision of this Agreement shall be declared invalid or
unenforceable, the parties shall negotiate a new provision achieving to the
extent possible the purpose of the invalid provision.
17. Definition of Business Day. For purposes of this Agreement, "Business
Day" means any day on which the New York Stock Exchange, Inc. is open for
trading.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado without giving any effect to
any choice of law or conflict of law provision or rule whether of the state of
Colorado or any other jurisdiction that would cause the application of the laws
of any jurisdictions other than the State of Colorado.
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If the foregoing correctly sets forth the understanding between the
Representative and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among the Company and each of the several Underwriters.
Very truly yours,
D.E. FREY GROUP, INC.
By:_____________________________________
Name:
Title:
Accepted as of the date
first above written:
NEIDIGER, TUCKER, BRUNER, INC.
D.E. Frey and Company, Inc., as e-Manager Thomas Weisel Partners LLC
On behalf of themselves and the other
Underwriters named in Schedule I hereto
BY: NEIDIGER, TUCKER, BRUNER, INC.
By:_____________________________________
Name:
Title:
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<PAGE>
SCHEDULE I
Number of Firm
Shares to be
Name of Underwriter Purchased
- ------------------- ---------
Neidiger, Tucker, Bruner, Inc.
D.E. Frey and Company, Inc.
Total 2,000,000
-----
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<PAGE>
Exhibit 1.3
2,000,000 Shares of Common Stock
D.E. FREY GROUP, INC.
----------------------------------
AGREEMENT AMONG UNDERWRITERS
----------------------------------
_____________________, 1999
Neidiger, Tucker, Bruner, Inc.
As Representative of the Several Underwriters
300 Plaza Level
1675 Larimer Street
Denver, Colorado 80202
To the Underwriters named in Schedule I
to the attached Underwriting Agreement
Ladies and Gentlemen:
1. Underwriting Agreement. We understand that D.E. Frey Group, Inc.,
a Delaware corporation (the "Company"), proposes to enter into an underwriting
agreement (the "Underwriter Agreement") in substantially the form attached to
this Agreement Among Underwriters (the "Agreement') with you and other
prospective underwriters (including us) (collectively, the "Underwriters")
providing for the several, and not joint, purchase by the Underwriters from the
Company of 2,000,000 shares of its Common Stock, $.10 par value, upon the terms
stated in the Underwriting Agreement (such 2,000,000 shares of Common Stock are
herein referred to as the "Firm Shares"), in which we will agree in accordance
with the terms thereof to purchase the number of Firm Shares set forth opposite
our name in Schedule I thereto. In addition, the Company proposes to grant to
the Underwriters, upon the terms stated in the Underwriting Agreement, the right
to purchase up to an additional 300,000 shares of Common Stock (the "Additional
Shares") for the sole purpose of covering over-allotments in the sale of the
Firm Shares. We will agree in accordance with the terms of the Underwriting
Agreement to purchase our proportionate share of the Option Shares which you
determine to be purchased. The Firm Shares and the Additional Shares are
collectively referred to herein as the "Shares."
2. Registration Statement and Prospectus. The Shares are more
particularly described in a registration statement on Form S-1 (Registration No.
333-______) filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933 (the "Act"). Amendments to such registration
statement have been or are being filed, or a form of prospectus is being filed
pursuant to Rule 424(b) and Rule 430A under the Act, or a Term Sheet or
Abbreviated Term Sheet is being filed pursuant to Rule 424(b)(7) under the Act,
in which, with our consent hereby confirmed, we have been named as one of the
Underwriters of the Shares. A copy of the registration statement as filed and a
copy of each amendment as filed (excluding exhibits) have heretofore been
delivered to us. We confirm that we have examined the registration statement,
including amendments thereto, relating to the Shares, as filed with the
Commission,
<PAGE>
that we are willing to accept the responsibilities of an Underwriter under the
Act in respect of the registration statement, and we are willing to proceed with
a public offering of the Shares in the manner contemplated therein. The
registration statement and the related prospectus may be further amended, but no
such amendment or change shall release or affect our obligations hereunder or
under the Underwriting Agreement. As used herein, the terms "Registration
Statement," "Prospectus," "preliminary prospectus," "Term Sheet" and
"Abbreviated Term Sheet" shall have the same meanings as specified in the
Underwriting Agreement.
3. Authority of Neidiger, Tucker, Bruner, Inc. We hereby authorize
Neidiger, Tucker, Bruner, Inc., acting on our behalf, as our representative (a)
to complete, execute. and deliver the Underwriting Agreement, to determine the
public offering price of the Shares, concessions and any reallowances to
Selected Dealers (as hereinafter defined) and the underwriting' discount with
respect thereto and to make such variations, if any, as in your judgment are
appropriate and are not material, provided that the respective amount of Shares
set forth opposite our name in Schedule I thereto shall not be increased without
our consent, except as provided herein or in the Underwriting Agreement, (b) to
waive performance or satisfaction by the Company of obligations; or conditions
included in the Underwriting Agreement if in your judgment such waiver will not
have a material adverse effect upon the interests of the Underwriters, and (c)
to take such action as in your discretion may be necessary or advisable to carry
out the Underwriting Agreement, this Agreement and the transactions for the
accounts of the several Underwriters contemplated thereby and hereby. We also
authorize you to determine all matters relating to the public advertisement of
the Shares
4. Public Offering. We authorize you, with respect to any Shares
which we so agree to purchase, to reserve for sale, and on our behalf sell, to
dealers selected by you (including you or any of the other Underwriters, such
dealers so selected being hereinafter called "Selected Dealers") and to others
all or part of our Shares as you may determine. Reservations for sales to
persons other than Selected Dealers shall be as nearly as practicable in
proportion to the respective underwriting obligations of the Underwriters,
unless you agree to a smaller proportion at the request of an Underwriter.
Reservations for sales to Selected Dealers need not be in such proportion. All
sales of reserved Shares shall be as nearly as practicable in proportion to the
respective reservations as calculated from day to day.
In your discretion, from time to time, you may add to the reserved
Shares any Shares retained by us remaining unsold, and you may upon our request
release to us any of our Shares reserved but not sold. Any Shares so released
shall not thereafter be deemed to have been reserved. Upon termination of this
Agreement, or prior thereto at your discretion, you shall deliver to our account
any of our Shares reserved but not sold and delivered, except that if the
aggregate of all reserved but unsold and undelivered Shares is less than 300,000
Shares, you are authorized to sell such Shares for the accounts of the several
Underwriters at such price as you may determine.
Sales of reserved Shares shall be made to Selected Dealers at the public
offering price less the Selected Dealers' Concession (herein so called) pursuant
to the Selected Dealer Agreement in substantially the form attached hereto, and
to others at the public offering price. Underwriters and Selected Dealers may
reallow a concession to other dealers as set forth in the Selected Dealer
Agreement.
After advice from you that the Shares are released for sale to the
public, we will offer to the public in conformity with the terms of the offering
set forth in the Prospectus such of our Shares as you advise us are not
reserved. We authorize you after the Shares are released for sale to the public,
in your discretion, to change the public offering price of the Shares and the
Concession, and to buy Shares for our account from Selected Dealers at the
public offering price less such amount not in excess of the Selected Dealers'
Concession as you may determine.
2
<PAGE>
Sales of Shares between Underwriters may be made with your prior
consent, or as you deem advisable for blue sky purposes.
We agree that we will not sell to any accounts over which we exercise
discretionary authority any Shares which we have agreed to purchase under the
Underwriting Agreement.
5. Additional Provisions Regarding Sales. You may, in your
discretion, charge our account with an amount equal to the Selected Dealers'
Concession in respect of each Share purchased under the Underwriting Agreement
by you and not sold by you for our account (and each Share which you believe has
been substituted therefor) which may be delivered against a purchase contract
made by you for our account prior to the later of (a) the termination of all of
the provisions referred to in Section 10 hereof or (b) the covering by you of
any short position created by you for our account, or in lieu of such charge,
require us to repurchase on demand at the total cost thereof (including
commissions), plus transfer taxes, any such Share so delivered.
6. Payment and Delivery. At or before 8:00 a.m., Denver, Colorado
time, on the Closing Date (as defined in the Underwriting Agreement) and on each
Additional Closing Date (as defined in the Underwriting Agreement), we will
deliver to you at your office at 300 Plaza Level, 1675 Larimer Street, Denver,
Colorado 80202, by wire transfer or a certified or bank cashiers' check payable
to your order, in clearing house funds, in the amount equal to the initial
offering price set forth in the Prospectus less the Selected Dealers' Concession
in respect of the number of Firm Shares or Additional Shares, as the case may
be, to be purchased by us pursuant to the Underwriting Agreement. We authorize
you for our account to make payment of the purchase price for the Shares to be
purchased by us against delivery to you of such Shares, and the difference
between such price and the amount of our check delivered to you therefor shall
be credited to our account. Unless we notify you at least two full business days
prior to such Closing Date (or, if applicable, such Additional Closing Date) to
make other arrangements, you may, in your discretion, advise the Company to
prepare our certificates in our name. If you have not received our funds as
requested, you may in your discretion make such payment on our behalf, in which
event we will reimburse you promptly. Any such payment by you shall not relieve
us from any of our obligations hereunder or under the Underwriting Agreement.
We authorize you for our account to accept delivery of our Shares from
the Company and to hold such of our Shares as you have reserved for sale to
Selected Dealers and others and to deliver such Shares against such sales. You
will deliver to us our unreserved Shares as promptly as practicable.
Notwithstanding the foregoing provisions of this Section 6, if you so
notify us, payment for and delivery of our Shares may be made through the
facilities of The Depository Trust Company, if we are a member, unless we have
otherwise notified you prior to a date to be specified by you, or, if we are not
a member, settlement may be made through a correspondent who is a member
pursuant to instructions we may send to you prior to such specified date.
As promptly as practicable after you receive payment for reserved Shares
sold for our account, you will remit to us the purchase price paid by us for
such Shares and credit or debit our account with the difference between the sale
price and such purchase price.
7. Authority to Borrow. In connection with the transactions
contemplated in the Underwriting Agreement or this Agreement, we authorize you,
in your discretion, to advance your own funds for our account, charging current
interest rates, to arrange loans for our account and in connection therewith to
execute and deliver any notes or other instruments and hold or pledge as
security any of our Shares or any
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<PAGE>
Common Stock of the Company purchased for our account. Any lender may rely upon
your instructions in all matters relating to any such loan.
Any of our Shares and any Common Stock of the Company purchased for our
account held by you may from time to time be delivered to us for carrying
purposes, and any such securities will be delivered to you upon demand.
8. Stabilization and Other Matters. We authorize you in your
discretion to make purchases and sales of the Common Stock of the Company for
our account in the open market or otherwise, for long or short account, on such
terms as you deem advisable and in arranging sales to over-allot. If you have
purchased Common Stock for stabilizing purposes prior to the execution of this
Agreement, such purchases shall be treated as having been made pursuant to the
foregoing authorization. We also authorize you, either before or after the
termination of the offering provisions of this Agreement, to cover any short
position incurred pursuant to this Section on such terms as you deem advisable.
All such purchases and sales and over-allotments shall be made for the accounts
of the several Underwriters as nearly as practicable in proportion to their
respective underwriting obligations. Our net commitment under this Section
(excluding any commitment incurred under the Underwriting Agreement upon
exercise of the right to purchase Option Shares) shall not, at the end of any
business day, exceed 10% of our maximum underwriting obligation. We will on your
demand take up and pay for at cost any Common Stock so purchased or sold or
over-allotted for our account, and, if any other Underwriter defaults in its
corresponding obligation, we will assume our proportionate share of such
obligation without relieving the defaulting Underwriter from liability. We will
be obligated in respect of purchases and sales made for our account hereunder
whether or not any proposed purchase of the Shares from the Company is
consummated. The existence of this provision is no assurance that the price of
the Shares will be stabilized or that, if stabilizing is commenced, it may not
be discontinued at any time.
We agree to advise you, from time to time upon your request, during the
term of this Agreement, of the number of Shares retained by us remaining unsold,
and will, upon your request, sell to you for the accounts of one or more of the
several Underwriters such number of such Shares as you may designate at such
prices, not less than the net price to Selected Dealers nor more than the public
offering price, as you may determine.
If you effect any stabilizing purchase pursuant to this Section 8, you
will notify us promptly of the date and time when the first stabilizing purchase
was effected and the date and time when stabilizing was terminated. You will
retain such information as is required to be retained by you as "Manager"
pursuant to Rule 17a-2 under the Securities Exchange Act (the "Exchange Act").
We agree that we will not effect any stabilizing purchases without your express
authorization, and, if any purchases are effected, we agree to furnish to you
not later than three business days following the date upon which stabilization
was commenced such information as is required under Rule 17a-2(d).
With respect to the Underwriting Agreement, you are also authorized in
your discretion (a) to exercise the option therein as to all or any part of the
Option Shares, and to terminate such option in whole or in part prior to its
expiration, (b) to postpone the (Closing Date and any Additional Option Closing
Date referred to in the Underwriting Agreement, and any other time or date
specified therein, (c) to exercise any right of cancellation or termination, (d)
to arrange for the purchase by other persons (including yourselves or any other
Underwriter) of any Shares not taken up by any defaulting Underwriter, and (e)
to consent to such other changes in the Underwriting Agreement as in your
judgment do not materially adversely affect the substance of' our rights and
obligations thereunder.
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We further agree that (a) prior to the termination of this Agreement we
will not, directly or indirectly, bid for or purchase any Shares for our own
account, except as provided in this Agreement and in the Underwriting Agreement,
and (b) prior to the completion (as defined in Regulation M promulgated under
the Exchange Act) of our participation in this distribution, we will otherwise
comply with Regulation M promulgated under the Exchange Act.
9. Allocation of Expenses and Settlement. We authorize you to charge
our account with (a) all transfer taxes on Shares purchased by us pursuant to
the Underwriting Agreement and sold by you for our account, (b) Selected
Dealers' Concessions in connection with the purchase, marketing and sale of the
Shares for our account, and (c) our proportionate share (based upon our
underwriting obligation) of all other expenses incurred by you under this
Agreement and in connection with the purchase, carrying, sale and distribution
of the Shares. Your determination of the amount and allocation of such expenses
shall be conclusive. In the event of the default of any Underwriter in carrying
out its obligations hereunder, the expenses chargeable to such Underwriter
pursuant to this Agreement and not paid by it, as well as any additional losses
or expenses arising from such default, may be proportionately charged by you
against the other Underwriters not so defaulting (including such other persons
who purchase Shares upon a default by an Underwriter pursuant to Section 11
hereof), without, however, relieving such defaulting Underwriter from its
liability therefor.
As soon as practicable after termination of this Agreement, the accounts
hereunder will be settled, but you may reserve from distribution such amount as
you deem necessary to cover possible additional expenses. You may at any time
make partial distributions of credit balances or call for payment of debit
balances. Any of our funds in your hands may be held with your general funds
without accountability for interest. Notwithstanding the termination of this
Agreement or any settlement, we will pay (a) our proportionate share (based on
our underwriting obligation) of all expenses and liabilities which may be
incurred by or for the accounts of the Underwriters, including any liability
based on the claim that the Underwriters constitute an association,
unincorporated business or other separate entity, and of any expenses incurred
by you or any other Underwriter with your approval in contesting any such claim
or liability, and (b) any transfer taxes paid after such settlement on account
of any sale or transfer for our account.
10. Termination. The offering provisions of this Agreement shall
terminate 45 days from the date hereof unless extended by you. You may extend
said provisions for a period or periods not exceeding an additional 30 days in
the aggregate, provided that the Selected Dealer Agreements, if any, are
similarly extended. Whether extended or not, said provisions may be terminated
in whole or in part by notice from you.
11. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations hereunder or under the Underwriting Agreement shall
not release us from any of our obligations or in any way affect the liability of
any defaulting Underwriter to the other Underwriters for damages resulting from
such default. In case of such default by one or more Underwriters, you are
authorized to increase, pro rata with other non-defaulting Underwriters, the
number of Shares which we shall be obligated to purchase pursuant to the
Underwriting Agreement, provided that the aggregate amount of all such increases
for our account shall not exceed 10% of our total commitment to purchase the
Firm Shares set forth opposite our names on Schedule I of the Underwriting
Agreement; and you are further authorized to arrange, but shall not be obligated
to arrange, for the purchase by other persons, who may include yourselves or
other Underwriters, of all or a portion of any aggregate amount not taken up. In
the event any such arrangements are made, the respective numbers of Shares to be
purchased by the non-defaulting Underwriters and by any such other persons shall
be taken as the basis for the underwriting obligations under this Agreement.
5
<PAGE>
12. Position of Neidiger, Tucker, Bruner, Inc. Except as otherwise
specifically provided in this Agreement, you shall have full authority to take
such action as you may deem advisable in respect of all matters pertaining to
the Underwriting Agreement and this Agreement and in connection with the
purchase, carrying, sale, and distribution of the Shares (including authority to
terminate the Underwriting Agreement as provided therein). You shall be under no
liability to us for or in respect of the value of the Shares or the validity or
the form thereof, the Registration Statement, any preliminary prospectus, the
Prospectus, the Underwriting Agreement, or other instruments executed by the
Company or others; or for or in respect of the issuance, transfer, or delivery
of the Shares; or for the performance by the Company or others of any agreement
on its or their part; nor shall you be liable under any of the provisions hereof
or for any matters connected herewith, except for your own want of good faith,
for obligations expressly assumed by you in this Agreement and for any
liabilities imposed upon you by the Act. No obligations on your part shall be
implied or inferred herefrom. Authority with respect to matters to be determined
by you, or by you and the Company, pursuant to the Underwriting Agreement, shall
survive the termination of this Agreement.
In taking all actions hereunder, except in the performance of your own
obligations hereunder and under the Underwriting Agreement, you shall act only
as the representative of each of the Underwriters. The commitments and
liabilities of each of the several Underwriters are several in accordance with
their respective purchase obligations and are not joint or joint and several.
Nothing contained herein shall constitute the Underwriters partners or render
any of them liable to make payments otherwise than as herein provided. If for
federal income tax purposes the Underwriters should be deemed to constitute a
partnership, then each Underwriter elects to be excluded from the application of
Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as
amended, and agrees not to take any position inconsistent with such election.
Each Underwriter authorizes Neidiger, Tucker, Bruner, Inc., in its discretion on
behalf of such Underwriter, to execute such evidence of such election as may be
required by the Internal Revenue Service.
13. Compensation to Neidiger, Tucker, Bruner, Inc. As compensation for
your services in connection with the purchase of the Shares and the management
of the public offering of the Shares, we agree to pay you and authorize you to
charge our account with an amount equal to $_______ per share of the Shares
which we have agreed to purchase pursuant to the Underwriting Agreement.
14. Indemnification and Future Claims. Each underwriter, including
you, agrees to indemnify, hold harmless and reimburse each other Underwriter and
each person, if any, who controls any other Underwriter within the meaning of
Section 15 of the Act, and any successor of any other Underwriter, to the extent
that, and upon the terms upon which, each Underwriter will be obligated pursuant
to the Underwriting Agreement to indemnify, hold harmless and reimburse the
Company, its directors, officers, and controlling persons therein specified.
In the event that at any time any person other than an Underwriter
asserts a claim against one or more of the Underwriters or against you as
representatives of the Underwriters arising out of an alleged untrue statement
or omission in the Registration Statement (or any amendment thereto) or in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or relating to any transaction contemplated by this Agreement, we
authorize you to make such investigation, to retain such counsel for the
Underwriters and to take such action in the defense of such claim as you may
deem necessary or advisable. You may settle such claim with the approval of a
majority in interest (based upon underwriting obligations) of the Underwriters.
We will pay our proportionate share (based upon our underwriting obligation) of
all expenses incurred by you (including the fees and expenses of counsel for the
Underwriters) in investigating and defending against such claim and our
proportionate share of the aggregate liability incurred by all Underwriters in
respect of such claim (after deducting any contribution or indemnification
obtained pursuant to the Underwriting Agreement, or otherwise, from persons
other than Underwriters), whether such liability
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<PAGE>
is the result of a judgment against one or more of the Underwriters or the
result of any such settlement. There shall be credited against any amount paid
or payable by us pursuant to this paragraph any loss, damage, liability, or
expense which is incurred by us as a result of any such claim asserted against
us, and if such loss, claim, damage, liability, or expense is incurred by us as
a result of any such claim against us, and if such loss, claim, damage,
liability, or expense is incurred by us subsequent to any payment by us pursuant
to this Section, appropriate provision shall be made to effect such credit, by
refund or otherwise. Any Underwriter may retain separate counsel at its own
expense. A claim against or liability incurred by a person who controls an
Underwriter shall be deemed to have been made against or incurred by such
Underwriter. In the event of default by any Underwriter in respect of its
obligations under this Section, the non-defaulting Underwriters shall be
obligated to pay the full amount thereof in the proportions that their
respective underwriting obligations bear to the underwriting obligations of all
non-defaulting Underwriters, without relieving such defaulting Underwriter of
its liability hereunder. Our agreements contained in this Section will remain in
full force and effect regardless of any investigation made by or on behalf of
such other Underwriter or controlling person and will survive the delivery of
and payment for the Shares and the termination of this Agreement and the similar
agreements entered into with the other Underwriters.
15. Blue Sky and Other Matters. You will not have any responsibility
with respect to the right of any Underwriter or other person to sell the Shares
in any jurisdiction notwithstanding any information you may furnish in that
connection. We authorize you to file a New York Further State Notice, if
required, and to make and carry out on our behalf any agreements which you may
deem necessary in order to procure registration or qualification of any of the
Shares in any jurisdiction, and we will at your request make such payments, and
furnish to you such information, as you may deem required by reason of any such
agreements.
We authorize you to file on behalf of the several Underwriters with the
National Association of Securities Dealers, Inc, (the "NASD") such documents and
information, if any, which are available or have been furnished to you for
filing pursuant to the applicable rules, statements, and interpretations of the
NASD.
16. Title to Shares. The Shares purchased by the respective
Underwriters shall remain the property of such Underwriters until sold and no
title to any such Shares shall in any event pass to you by virtue of any of the
provisions of this Agreement.
17. Capital Requirements. We confirm that the incurrence by us of our
obligations under this Agreement and under the Underwriting Agreement will not
place us in violation of Rule l5c3-l under the Exchange Act or of any applicable
rules relating to capital requirements of any securities exchange or association
to which we are subject.
18. Liability for Future Claims. Neither any statement by you of any
credit or debit balance in our account nor any reservation from distribution to
cover possible additional expenses relating to the Shares will constitute any
representation by you as to the existence or nonexistence of possible unforeseen
expenses or liabilities of or charges against the several Underwriters.
Notwithstanding the distribution of any net credit balance to us, we will be and
remain liable for, and will pay on demand, (a) our proportionate share (based
upon our underwriting obligation) of all expenses and liabilities which may be
incurred by or for the accounts of the Underwriters, including any liability
which may be incurred by the Underwriters or any of them based on the claim that
the Underwriters constitute an association, unincorporated business,
partnership, or any separate entity, and (b) any transfer taxes paid after such
settlement on account of any sale or transfer for our account.
19. Acknowledgment of Registration Statement, Etc. We hereby confirm
that we have examined the Registration Statement (including any amendments or
supplements thereto) and Prospectus
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<PAGE>
relating to the Shares filed with the Commission, that we are willing to accept
the responsibilities of an underwriter thereunder and that we are willing to
proceed as therein contemplated. We confirm that we have authorized you to
advise the Company on our behalf (a) as to the statements to be included in any
preliminary prospectus and in the Prospectus (including any supplement thereto)
relating to the Shares, insofar as they relate to us, and (b) that there is no
information about us required to be stated in said Registration Statement or
said preliminary prospectus or the Prospectus (including any supplement thereto)
other than as set forth in the Underwriters' Questionnaire previously delivered
by us to you and the Company. We understand that the aforementioned documents
are subject to further change and that we will be supplied with copies of any
amendment or amendments to the Registration Statement and of any amended
Prospectus promptly, if and when received by you, but the making of such changes
and amendments will not release us or affect our obligations hereunder or under
the Underwriting Agreement.
20. Notices and Governing Law. Any notice from you to us shall be
mailed, telephoned, or telegraphed to us at our address as set forth in the
Underwriters' Questionnaire. Any notice from us to you shall be deemed to have
been duly given if mailed, telephoned or facsimile to you at 300 Plaza Level,
1675 Larimer Street, Denver, Colorado 80202, Attention: Corporate Finance. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Colorado.
21. Other Provisions. We represent that we are actually engaged in the
investment banking or securities business and that we are a member in good
standing of the NASD or, if we are not such a member, that we are a foreign
dealer not eligible for membership in the NASD and that we will not offer or
sell any Shares in, or to persons who are nationals or residents of the United
States of America. In making sales of Shares, if we are such a member, we agree
to comply with all applicable rules of the NASD, including, without limitation,
the Interpretation of Rule 2110 of the NASD's Rules of Conduct with respect to
Free-Riding and Withholding (IM-2110-1) and Rule 2740 of such rules, or if we
are a foreign dealer, we agree to comply with such Interpretation and Rules
2730, 2740 and 2750 of such Rules as though we were such a member, and with Rule
2420 as that Rule applies to a non-member broker or dealer in a foreign country.
We confirm that you have heretofore delivered to us such number of copies of the
Prospectus as have been reasonably requested by us, and we further confirm that
we have complied and will comply with Rule 15c2-8 under the Exchange Act
concerning delivery of each preliminary prospectus and the Prospectus, and that
we will furnish to persons who receive a confirmation of sale (i) a copy of the
Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under the Act or (ii) if
a Term Sheet or Abbreviated Term Sheet is used, a copy of the Term Sheet or
Abbreviated Term Sheet and the last preliminary prospectus filed with the
Commission prior to the time the Registration Statement became effective.
We are aware of our statutory responsibilities under the Act, and you are
authorized on our behalf to so advise the Commission.
22. Counterparts. This Agreement may be signed in any number of
counterparts which, taken together, shall constitute one and the same
instrument, and you may confirm the execution of such counterparts by facsimile
signature.
[Signature page follows]
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<PAGE>
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart.
--------------------------------------------
As Attorney-in-Fact for each of the several
Underwriters named in Schedule I to the
Underwriting Agreement
Confirmed as of the date first above written:
Neidiger, Tucker, Bruner, Inc.
As Representative of the Several
Underwriters
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
9
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Ex 1.5
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT,
OR AN OPINION OF COUNSEL SATISFACTION TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED UNDER THE ACT.
D.E. FREY GROUP, INC.
Common Stock Purchase Warrant
D.E. FREY GROUP, INC., a Delaware corporation (the "Company"), hereby
certifies that, for value received, Neidiger, Tucker, Bruner, Inc. or its
registered assigns (the "Holder"), is entitled, on the terms and subject to the
conditions set forth herein, to purchase from the Company at any time commencing
__________, 2000 and before 5:00 p.m., Denver, Colorado time, on ________, 2004,
200,000 fully paid and nonassessable shares of Common Stock (as hereinafter
defined) at a Purchase Price of $____ per share. The number of such shares of
Common Stock and the Purchase Price are subject to adjustment as provided in
this Warrant.
As used herein the following terms, unless the context otherwise requires,
have the indicated meanings:
"Company" means D.E. Frey Group, Inc. and any person (corporate or
otherwise) that shall succeed to or assume the obligations of D.E. Frey Group,
Inc. hereunder in accordance with the terms hereof.
"Common Stock" means the Company's Common Stock, $.10 par value per share,
as authorized on the date hereof, and any other securities into which or for
which the Common Stock may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" means ________, 2004.
"Holder" or "Holders" means the holder or holders of the Registerable
Securities, including the holder or holders of Warrants to purchase Registerable
Securities not then issued.
"Issue Date" means the ________, 1999 date of the original issuance of this
Warrant.
"Majority Holders" means the holder or holders of Warrants and Registerable
Securities theretofore issued upon exercise or conversion of Warrants, who own
or have the right to acquire upon exercise or conversion of Warrants not less
than 51% of the Registerable Securities that would be outstanding if all of the
outstanding Warrants were exercised in full on the date as of which the
determination is being made.
"Other Securities" means any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the
Holder at any time shall be entitled to receive, or shall have received, on the
exercise of this Warrant, in lieu of or in addition to Common Stock, or which at
any
<PAGE>
time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities as a result of the provisions of
Section 4.
"Prospectus" means the prospectus included in the Registration Statement as
of the date it becomes effective under the Securities Act ("SEC Effective
Date"), including financial statements and all documents incorporated by
reference therein. In the case of references to the Prospectus as of a date
subsequent to the SEC Effective Date, Prospectus means as supplemented as of
such subsequent date.
"Purchase Price" means $_____ per share which is equal to 120% of the
public offering price per share of the Company's Common Stock covered by the
Company's Registration Statement Form S-1 (SEC File No. 333-_________)
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement or statements in
compliance with the Securities Act and the declaration or ordering of
effectiveness of such registration statement by the United States Securities and
Exchange Commission (the "SEC").
"Registerable Securities" means the shares of Common Stock issued or
issuable upon exercise or conversion of the Warrant and Other Securities issued
or issuable as a result of the provisions of Sections 4 or 5 hereof. References
herein to amounts or percentages of Registerable Securities as of or on any
particular date shall be deemed to refer to amounts or percentages after giving
effect to any applicable events contemplated by the preceding sentence. As to
any particular Registerable Securities, such securities shall cease to be
Registerable Securities when they have been sold pursuant to an effective
registration statement or in compliance with Rule 144 or are eligible to be sold
pursuant to subsection (k) of Rule 144.
"Registration Period" means the period from the Issue Date to the earliest
of (i) the date which is three years after the SEC Effective Date, (ii) the date
on which the Holder may sell all of Holder's Registerable Securities without
registration under the Securities Act pursuant to subsection (k) of Rule 144,
without restriction on the manner of sale or the volume of securities which may
be sold in any period and without the requirement for the giving of any notice
to, or the mailing of any filing with the SEC and (iii) the date on which the
Holder no longer owns any Registerable Securities.
"Registration Statement" means a registration statement of the Company
under the Securities Act on such form for which the Company then qualifies and
which permits the secondary resale thereunder of Registerable Securities
required by, the provisions hereof to be included therein. The term
"Registration Statement" shall also include any amendment thereto and all
exhibits and financial statements and schedules and documents incorporated by
reference in such Registration Statement as of the SEC Effective Date. In the
case of references to the Registration Statement as of a date subsequent to the
SEC Effective Date, Registration Statement means as amended or supplemented as
of such subsequent date.
"Rule 144" means Rule 144 promulgated under the Securities Act or any other
similar rule or regulation of the SEC that may at any time permit a holder of
securities of the Company to sell such Company securities to the public without
registration under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"SEC" means the United States Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is declared
effective by the SEC.
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"SEC Filing Date" means the date the Registration Statement is first filed
with the SEC pursuant to the provisions of Section 20.
"Trading Day" means a day on which the principal securities market for the
Common Stock is open for general trading of securities.
"Warrants" means this Warrant and any other warrants derived from this
Warrant originally issued by the Company to Neidiger, Tucker, Bruner, Inc. on
the Issue Date.
1. Exercise of Warrant.
1.1 Exercise. This Warrant may be exercised by the Holder, in
--------
full or in part, at any time, or from time to time, commencing 12 months from
the Issue Date to and including the Expiration Date by surrender of this Warrant
and the subscription form annexed hereto (completed and signed by the Holder) to
the principal office of the Company or the Company's transfer agent and
registrar for the Common Stock, and by making payment by certified or official
bank check payable to the order of the Company, in the amount obtained by
multiplying (a) the number of shares of Common Stock designated by the Holder in
the subscription form by (b) the Purchase Price then in effect. The Holder shall
provide a copy of the subscription form to the Company at the time of exercise
and the Company will confirm the exercise instructions given therein by notice
to the Company's transfer agent within one Trading Day after receiving such
subscription form. On any partial exercise the Company will promptly issue and
deliver to or upon the order of the Holder hereof a new Warrant or Warrants of
like tenor, in the name of the Holder hereof or as the Holder (upon payment by
the Holder of any applicable transfer taxes) may request, providing in the
aggregate on the face or faces thereof for the purchase of the number of shares
of Common Stock for which such Warrant or Warrants may still be exercised.
1.2 Cashless Exercise. Notwithstanding anything to the contrary
-----------------
contained in Section 1.1, the Holder may elect to exercise this Warrant in whole
or in part by receiving shares of Common Stock equal to the net issuance value
(as determined below) of this Warrant, or any part hereof upon surrender of this
Warrant to the principal office of the Company or the Company's transfer agent
and registrar for the Common Stock together with the subscription form annexed
hereto (completed and signed by the Holder), in which event the Company shall
issue to the Holder a number of shares of Common Stock equal to X in the
following formula:
X = Y (A-B)
-------
A
Where:
Y = the number of shares of Common Stock as to which this
Warrant is to be exercised.
A = the current fair market value of one share of Common Stock
calculated as of the last Trading Day immediately
preceding the exercise of this Warrant.
B = the Purchase Price.
As used herein, current fair market value of Common Stock as of a
specified date shall mean with respect to each share of Common Stock the closing
sale price of the Common Stock on the principal securities market on which the
Common Stock may at the time be listed or, if there have been no sales on any
such exchange on such day, the average of the reported closing bid and asked
prices on the principal securities market at the end of such day, or, if on such
day the Common Stock is not so listed, the average
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<PAGE>
of the representative bid and asked prices quoted in the Nasdaq System as of
2:00 p.m., Denver, Colorado time, or, if on such day the Common Stock is not
quoted in the Nasdaq System, the average of the highest bid and lowest asked
price on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each such case averaged over a period of five consecutive Trading Days
consisting of the day as of which the current fair market value of a share of
Common Stock is being determined (or if such day is not a Trading Day, the
Trading Day next preceding such day) and the four consecutive Trading Days prior
to such day. If on the date for which current fair market value is to be
determined the Common Stock is not listed on any securities exchange or quoted
in the Nasdaq System or the over-the-counter market, the current fair market
value of Common Stock shall be the highest price per share which the Company
could then obtain from a willing buyer (not a current employee or director) for
shares of Common Stock sold by the Company from authorized but unissued shares,
as determined in good faith by the Board of Directors of the Company, unless
prior to such date the Company has become subject to a merger, acquisition or
other consolidation transaction pursuant to which the Company is not the
surviving party, in which case the current fair market value of the Common Stock
shall be deemed to be the value received or agreed to be paid by the holders of
the Company's Common Stock for each share thereof pursuant to such transaction.
2. Delivery upon Exercise. As soon as practicable after the exercise of
this Warrant, and in any event within three (3) Trading 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 Holder, or as
the Holder (upon payment by the Holder of any applicable transfer taxes) may
direct, a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock (or Other Securities) to which the Holder
shall be entitled on such exercise, in such denominations as may be requested by
the Holder plus, in lieu of any fractional share to which the Holder would
otherwise be entitled, cash equal to such fraction multiplied by the then
current fair market value (as determined in accordance with subsection 1.2) of
one full share, together with any other stock or other securities and property
(including cash where applicable) to which the Holder is entitled upon such
exercise pursuant to Section 1 or otherwise. Upon exercise of this Warrant as
provided herein, the Company's obligation to issue and deliver the certificates
for Common Stock shall be absolute and unconditional, irrespective of the
absence of any action by the Holder to enforce the same, any waiver or consent
with respect to any provision thereof the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Company to the Holder, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other person of any obligation to the Company, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with such exercise. If the
Company fails to issue and deliver the certificates for the Common Stock to the
Holder pursuant to the first sentence of this paragraph as and when required to
do so, in addition to any other liabilities the Company may have hereunder and
under applicable law, the Company shall pay or reimburse the Holder on demand
for all out-of-pocket expenses including, without limitation, reasonable fees
and expenses of legal counsel incurred by the Holder as a result of such
failure.
3. Adjustment for Dividends in Other Stock, Property etc.;
Reclassification etc. In case at any time, or from time to time, after the Issue
Date, all the holders of Common Stock (or Other Securities) shall have received,
or (on or after the record date fixed for the determination of stockholders
eligible to receive) shall have become entitled to receive, without payment
therefor:
3.1 other or additional stock or other securities or property
(other than cash) by way of dividend, or
3.2 any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
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3.3 other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder, on the exercise hereof
as provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subsections 3.2 and 3.3 of this Section 3) which the Holder would hold on the
date of such exercise if on the date thereof the Holder had been the holder of
record of the number of shares of Common Stock called for on the face of this
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subsections 3.2 and 3.3 of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4. Notwithstanding anything in this Section 3
to the contrary, no adjustments pursuant to this Section 3 shall actually be
made until the cumulative effect of the adjustments called for by this Section 3
since the date of the last adjustment actually made would change the amount of
stock or other securities and property which the Holder would hold by more than
1%.
4. Exercise upon Reorganization, Consolidation, Merger etc. In case at
any time or from time to time after the Issue Date, the Company shall (a) effect
a reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, merger, sale or conveyance the Company shall cause lawful and
adequate provisions to be made whereby the Holder hereof shall thereafter have
the right to receive upon exercise of this Warrant, in addition to or in lieu of
(as the case may be) the shares of Common Stock of the Company immediately
issuable upon such exercise, such securities or other property receivable upon
such reorganization, consolidation, merger, sale or conveyance as though the
Holder had exercised the Warrant and was the owner of the shares of Common Stock
issuable hereunder immediately prior to any such events at a price equal to the
product of (x) the number of shares issuable upon exercise of the Warrant and
(y) the Purchase Price applicable immediately prior to the record date for such
reorganization, consolidation, merger, sale or conveyance as though Holder had
exercised the Warrant. The provisions of this Section shall apply to successive
reorganizations, consolidations, mergers, sales or conveyances.
5. Adjustment for Extraordinary Events. In the event that after the
Issue Date the Company shall (i) issue additional shares of Common Stock as a
dividend or other distribution on outstanding Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock, or (iii) combine its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, then, in each event, the Purchase Price shall, simultaneously with the
happening of such event, be adjusted by multiplying the Purchase Price in effect
immediately prior to such event by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
event, and the denominator of which shall be the number of shares of Common
Stock outstanding immediately after such event. and the product so obtained
shall thereafter be the Purchase Price then in effect. The Purchase Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described in this Section 5. The Holder shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive that number of shares of Common Stock determined by multiplying the
number of shares of Common Stock which would be issuable on such exercise
immediately prior to such issuance by a fraction of which (i) the numerator is
the Purchase Price in effect immediately prior to such issuance and (ii) the
denominator is the Purchase Price in effect on the date of such exercise.
6. Adjustment for Certain Stock Issuances.
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6.1 In case at any time the Company shall issue shares of its
Common Stock or debt or equity securities convertible into or exercisable or
exchangeable for shares of Common Stock (collectively, the "Newly Issued
Shares") after the Issue Date other than (i) an issuance pro rata to all holders
of its outstanding Common Stock, (ii) issuances pursuant to options, warrants
and convertible securities outstanding on the Issue Date and (iii) issuances
pursuant to employee stock option plans (other than in connection with any
corporate financing or acquisition transaction), at a price below the Purchase
Price in effect at the time of such issuance, then, following such issuance of
Newly Issued Shares, the number of shares of Common Stock which the Holder shall
be entitled to receive upon exercise of this Warrant shall be increased and the
Purchase Price shall be decreased to the respective amounts determined pursuant
to this Section 6. The number of shares of Common Stock purchasable upon the
exercise of this Warrant following any such adjustment shall be determined by
multiplying the number of shares purchasable upon exercise of this Warrant
immediately prior to such adjustment by a fraction, the numerator of which shall
be the sum of (a) the number of shares of Common Stock outstanding or authorized
to be outstanding immediately prior to the issuance of the Newly Issued Shares
(calculated on a fully-diluted basis assuming the exercise or conversion of all
options, warrants, purchase rights or convertible securities which are
exercisable at the time of the issuance of the Newly Issued Shares), plus (b)
the number of Newly Issued Shares, and the denominator of which shall be the sum
of (a) the number of shares of Common Stock outstanding immediately prior to the
issuance of the Newly Issued Shares (calculated on a fully-diluted basis
assuming the conversion of all options, warrants, purchase rights or convertible
securities which are exercisable at the time of the issuance of the Newly Issued
Shares), plus (b) the number of shares of Common Stock which the aggregate
consideration, if any, received by the Company for the number of Newly Issued
Shares would purchase at a price equal to the Purchase Price in effect at the
time of such issuance. Upon any adjustment under this Section 6, the number of
shares of Common Stock purchasable upon exercise of this Warrant in full
immediately after such adjustment shall be rounded to the nearest one-one-
hundredth of a share of Common Stock subject, however, to Section 2 of this
Warrant relating to fractional shares of Common Stock. Such adjustment of the
number of shares purchasable provided for in this Section 6 may be expressed in
the following formula:
X = W x [O+N]
----------
[O+(C/P)]
Where:
C = aggregate consideration received by the Company for the
Newly Issued Shares.
N = number of Newly Issued Shares.
O = number of shares of Common Stock outstanding or authorized
to be outstanding (on a fully diluted basis, as described
above) immediately prior to the issuance of the Newly
Issued Shares.
P = Purchase Price in effect immediately prior to the time of
the issuance of the Newly Issued Shares.
W = number of shares of Common Stock issuable upon exercise of
this Warrant prior to the issuance of the Newly Issued
Shares.
X = number of shares of Common Stock issuable upon exercise of
this Warrant after the issuance of the Newly Issued
Shares.
Upon the issuance of such Newly Issued Shares, the Purchase Price shall,
simultaneously with the happening of such event, be adjusted by multiplying the
Purchase Price in effect immediately prior to such event by a
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fraction, the numerator of which shall be the number of shares of Common Stock
issuable upon exercise of this Warrant prior to the issuance of the Newly Issued
Shares and the denominator of which shall be the number of shares of Common
Stock issuable upon the exercise of this Warrant after the issuance of the Newly
Issued Shares as provided in this Section 6, and the product so obtained shall
thereafter be the Purchase Price then in effect. The number of shares of Common
Stock issuable upon exercise of this Warrant and the Purchase Price, as each is
so adjusted, shall be readjusted in the same manner upon the happening of any
successive issuances of Newly Issued Shares described in this Section 6.
7. Further Assurances. The Company will take all action that may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock, free from all taxes, liens and
charges with respect to the issue thereof, on the exercise of all or any portion
of this Warrant from time to time outstanding.
8. Notices of Record Date, etc. In the event of:
8.1 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 on, 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, or
8.2 any capital reorganization of the Company, 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 (other than a wholly-owned
subsidiary of the Company), or
8.3 any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, then and in each such event the Company will mail or
cause to be mailed to the Holder, at least ten days prior to such record date, a
notice specifying (i) 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, (ii) 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 is to be fixed 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 on such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up, and (iii) the amount and
character of any stock or other securities or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall also state that the action in
question or the record date is subject to the effectiveness of a registration
statement under the Securities Act, or a favorable vote of stockholders if
either is required. Such notice shall be mailed at least ten days prior to the
date specified in such notice on which any such action is to be taken or the
record date, whichever is earlier.
9. Reservation of Stock Issuable on Exercise. The Company will at all
times reserve and keep available out of its authorized but unissued shares of
capital stock solely for issuance and delivery on the exercise of this Warrant,
a sufficient number of shares of Common Stock (or Other Securities) to effect
the full exercise of this Warrant and the exercise, conversion or exchange of
any other warrant or security of the Company exercisable for, convertible into,
exchangeable for or otherwise entitling the holder to acquire shares of Common
Stock (or Other Securities), and if at any time the number of authorized but
unissued shares of Common Stock (or Other Securities) shall not be sufficient to
effect such exercise, conversion or exchange, the Company shall take such action
as may be necessary to increase its authorized but unissued shares of Common
Stock (or Other Securities) to such number as shall be sufficient for such
purposes.
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10. Transfer Restrictions. This Warrant and/or the underlying securities
may not be sold, transferred, assigned, pledged or hypothecated during the first
12 months from the Issue Date except to one or more persons, each of whom on the
date of sale, transfer, assignment or hypothecation is an officer of Neidiger,
Tucker, Bruner, Inc., an officer or partner of an underwriter or an officer or
partner of a dealer who participates in the offering of the securities of D.E.
Frey Group, Inc. covered by its Registration Statement on Form S-1 (SEC File No.
333-_______); a person or persons who receive the Warrant and/or the underlying
securities pursuant to operation of law; or except by reason of reorganization
of the Company. Thereafter, the Warrant and/or the underlying securities may be
transferred upon compliance with applicable federal and state securities laws
and subject to the terms and conditions of this Agreement. This Warrant shall
inure to the benefit of the successors to and assigns of the Holder. This
Warrant and all rights hereunder, in whole or in part, are registerable at the
principal office of the Company or the office of the Company's transfer agent
and registrar by the Holder hereof in person or by his duly authorized attorney,
upon surrender of this Warrant properly endorsed.
11. Register of Warrants. The Company shall maintain, at the principal
office of the Company (or such other office or agency as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner of such Warrant.
The Company shall be entitled to treat the person in whose name this Warrant is
so registered as the sole and absolute owner of this Warrant for all purposes.
12. Exchange of Warrant. This Warrant is exchangeable, upon the surrender
hereof by the Holder hereof at the principal office of the Company or the office
of the Company's transfer agent and registrar, for one or more new Warrants of
like tenor representing in the aggregate the right to subscribe for and purchase
the number of shares of Common Stock which may be subscribed for and purchased
hereunder, each of such new Warrants to represent the right to subscribe for and
purchase such number of shares as shall be designated by said Holder hereof at
the time of such surrender.
13. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
14. Warrant Agent. American Securities Transfer & Trust. Inc., 1825
Lawrence Street, Suite 444, Denver, Colorado 80202, has been appointed the
Company's Transfer Agent and Registrar and the Company's exercise agent for
purposes of issuing shares of Common Stock (or Other Securities) on the exercise
of this Warrant pursuant to Section 1. The Company may, by notice to the Holder,
appoint an agent having an office in the United States of America for the
purpose of exchanging this Warrant pursuant to Section 12 and replacing this
Warrant pursuant to Section 13, or either of the foregoing, and thereafter any
such exchange or replacement, as the case may be, shall be made at such office
by such agent.
15. Remedies. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
16. No Rights or Liabilities as a Stockholder. This Warrant shall not
entitle the Holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the
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<PAGE>
absence of affirmative action by the Holder hereof to purchase Common Stock, and
no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of the Holder for the Purchase Price or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
17. Notices. etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed to be sufficiently
given when delivered personally (by hand, by courier or by facsimile, with
answer back confirmation) and shall be effective upon receipt, addressed: (i) if
to the Company, at 1700 Lincoln Street, Suite 2200, Denver, Colorado 80202,
Attn: President, facsimile number (303) 863-4-56 and (ii) if to the Holder, at
300 Plaza Level, 1675 Larimer Street, Denver, Colorado 80202, Attn: President,
facsimile number (303) 623-9310, or at such other address or facsimile number as
a party shall have provided to the other party by written notice given in
accordance with these provisions.
18. Securities Law Restrictions. By acceptance of this Warrant, the
Holder represents to the Company that this Warrant is being acquired for the
Holder's own account and for the purpose of investment and not with a view to,
or for sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling this Warrant or the Common Stock issuable
upon exercise of this Warrant. Neither this Warrant nor the shares of Common
Stock issuable upon the exercise or conversion of this Warrant have been
registered under the Securities Act or under the securities laws of any state.
Neither this Warrant, nor the shares of Common Stock issuable upon the exercise
or conversion of this Warrant, may be sold, transferred, hypothecated, assigned,
offered for sale or otherwise disposed of unless registered pursuant to the
Securities Act and applicable state securities laws or unless in the opinion of
counsel who is reasonably satisfactory to the Company an exemption from such
registration is available. Certificates representing securities issued upon
exercise or conversion of this Warrant shall bear a legend as provided in
Section 19 hereof.
19. Legend. Unless theretofore registered for resale under the Securities
Act, each certificate for shares issued upon exercise of this Warrant shall bear
the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act").
The securities have been acquired for investment and may not be
resold, transferred or assigned in the absence of an effective
registration statement for the securities under the Act, or an
opinion of counsel satisfactory to the issuer that registration is
not required under the Act.
20. Registration Rights. Nothing contained herein shall be construed as
requiring the exercise of this Warrant prior to the initial filing of any
registration statement provided herein or the effectiveness thereof.
20.1 Demand Registration. At any time commencing ________________,
2000 (one year after the Issue Date) and on or before _______________, 2004
(five years after the Issue Date), a Majority of the Holders shall have the
right to request registration under the Securities Act for all or any portion of
the Registerable Securities upon the terms and conditions set forth in this
subsection 20.1. Promptly after receipt of a request for registration pursuant
to this subsection 20.1 the Company shall notify all other Holders in writing of
such request for registration. Upon receipt of such notice from the Company (the
"Company Notice"), each such holder may give the Company a written request to
register all or some of such holder's Registerable Securities in the
Registration Statement described in the Company Notice, provided that such
written request is given within 10 days after the date on which the Company
Notice is given (with such request stating (i) the amount of Registerable
Securities to be included and (ii) any other information reasonably requested by
the Company to properly effect the registration of such Registerable
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<PAGE>
Securities). The Company shall as soon as practicable after the date on which
the Company Notice is given, file with the SEC and use its best efforts to cause
to become effective a Registration Statement which shall cover the Registerable
Securities specified in the Demand Notice and in any written request from any
other holder received by the Company within 10 days of the date on which the
Company Notice is given. No right to registration of Registerable Securities
under this subsection 20.1 shall be construed to limit any registration required
under subsection 20.2 hereof. The obligations of the Company under this
subsection 20.1 shall expire after the Company has afforded the Holder the
opportunity to exercise registration rights under this subsection 20.1 for one
registration.
20.2 Piggy-back Registration. If at any time commencing
______________, 2000 (one year after the Issue Date) and on or before
________________, 2006 (seven years after the Issue Date), the Company shall
determine to prepare and file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the Securities
Act of any securities of the Company, other than on Form S-4 or Form S-8 or
their then equivalents relating to equity securities to be issued solely in
connection with any acquisition of any entity or business or equity securities
issuable in connection with employee benefit plans, the Company shall send to
the Holder and each other holder who is entitled to registration rights under
this subsection 20.2 written notice of such determination and if, within 10 days
after receipt of such notice, Holder shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registerable
Securities the Holder requests to be registered, except that if, in connection
with any underwritten public offering for the account of the Company, the
managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock (or Other Securities) which may be included in the
Registration Statement because, in such underwriter(s)' judgement, such
limitation is necessary to effect an orderly public distribution, then the
Company shall be obligated to include in such Registration Statement only such
limited portion of the Registerable Securities with respect to which Holder has
requested inclusion. Any exclusion of Registerable Securities shall be made pro
rata among all holders who have requested that Registerable Securities be
included, in proportion to the number of Registerable Securities specified in
their respective requests; provided, however, that the Company shall not exclude
any Registerable Securities unless the Company has first excluded all
outstanding securities the holders of which are not entitled by right to
inclusion of securities in such Registration Statement; and provided further,
however, that, after giving effect to the immediately preceding proviso, any
exclusion of Registerable Securities shall be made pro rata with holders of
other securities having the right to include such securities in the Registration
Statement, based on the number of securities for which registration is requested
except to the extent such pro rata exclusion of such other securities is
prohibited under any written agreement entered into by the Company with the
holder of such other securities prior to the Issue Date of this Certificate, in
which case such other securities shall be excluded, if at all, in accordance
with the terms of such agreement. No right to registration of Registerable
Securities under this subsection 20.2 shall be construed to limit any
registration required under subsection 20.1 hereof. The obligations of the
Company under this subsection 20.2 may be waived by a Majority of the Holders
and such obligations of the Company shall expire after the Company has afforded
the opportunity to the holders to exercise registration rights under this
subsection 20.2 for two registrations; provided, however, that any Holder who
shall have had any Registerable Securities excluded from any Registration
Statement in accordance with this subsection 20.2 shall be entitled to include
in an additional Registration Statement filed by the Company the Registerable
Securities so excluded.
20.3 Obligations of the Company. In connection with the registration
of the Registerable Securities, the Company shall:
20.3.1 prepare promptly and file with the SEC the Registration
Statement provided in Section 20.1 with respect to the Registerable Securities
and thereafter to use its best efforts to cause such Registration Statement
relating to the Registerable Securities to become effective as soon as possible
after such filing, and keep the Registration Statement effective at all times
during the Registration
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Period; submit to the SEC, within three Business Days after the Company learns
that no review of the Registration Statement will be made by the staff of the
SEC or the staff of the SEC has no further comments on the Registration
Statement, as the case may be, a request for acceleration of the effectiveness
of the Registration Statement to a time and date not later then 48 hours after
the submission of such request; notify the Holder of the effectiveness of the
Registration Statement on the date the Registration Statement is declared
effective; and, the Company represents and warrants to, and covenants and agrees
with the Holder that the Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein, at the time it is first
filed with the SEC, at the time it is ordered effective by the SEC and at all
times during which it is required to be effective hereunder) and each such
amendment and supplement at the time it is filed with the SEC and all times
during which it is available for use in connection with the offer and sale of
Registerable Securities shall 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 the statements therein, in light of the circumstances in which
they were made, not misleading;
20.3.2 prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registerable Securities of the Company covered by the Registration Statement
until such time as all of such Registerable Securities have been disposed of in
accordance with the intended methods of disposition by the Holder or Holders
thereof as set forth in the Registration Statement;
20.3.3 furnish to each Holder whose Registerable Securities are
included in the Registration Statement and its legal counsel, (i) promptly after
the same is prepared and publicly distributed, filed with the SEC or received by
the Company, one copy of the Registration Statement and any amendment thereto,
each preliminary prospectus and prospectus and each amendment or supplement
thereto, each letter written by or on behalf of the Company to the SEC or the
staff of the SEC and each item of correspondence from the SEC or the staff of
the SEC relating to such Registration Statement (other than any portion of any
thereof which contains information for which the Company has sought confidential
treatment) and (ii) such number of copies of a prospectus, including a
preliminary prospectus and all amendments and supplements thereto and such other
documents, as such Holder reasonably may request in order to facilitate the
disposition of the Registerable Securities owned by such Holder;
20.3.4 use reasonable efforts to (i) register and qualify the
Registerable Securities covered by the Registration Statement under such
securities or blue sky laws of such jurisdictions as the Holders who hold a
majority of the Registerable Securities being offered reasonably request, (ii)
prepare and file in those jurisdictions such amendments (including post-
effective amendments) and supplements to such registrations and qualifications
as may be necessary to maintain the effectiveness thereof at all times until the
end of the Registration Period, (iii) take such other actions as may be
necessary to maintain such registrations and qualifications in effect at all
times during the Registration Period and (iv) take all other actions reasonably
necessary or advisable to qualify the Registerable Securities for sale in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto (I) to qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this subsection 20.3.3, (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, or (IV) to make any change in its Articles of Incorporation or
Bylaws which the Board of Directors of the Company determines to be contrary to
the best interests of the Company and its stockholders;
20.3.5 in the event that the Registerable Securities are being
offered in an underwritten offering, enter into and perform its obligations
under an underwriting agreement in usual and
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customary form, including, without limitation, customary indemnification and
contribution obligations, with the underwriters of such offering;
20.3.6 as promptly as practicable after becoming aware of such
event or circumstance, notify each Holder of any event or circumstance of which
the Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, file such supplement or amendment with the SEC at
such time as shall permit the Holder to sell Registerable Securities pursuant to
the Registration Statement as promptly as practicable, and deliver a number of
copies of such supplement or amendment to each Holder as such Holder may
reasonably request;
20.3.7 as promptly as practicable after becoming aware of such
event, notify each Holder who holds Registerable Securities being sold (or, in
the event of an underwritten offering the managing underwriters) of the issuance
by the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
20.3.8 permit one legal counsel designated as selling
stockholders' counsel by the Holder(s) holding a majority of the Registerable
Securities being sold to review and comment on the Registration Statement and
all amendments and supplements thereto a reasonable period of time prior to
their filing with the SEC;
20.3.9 make generally available to its security holders as soon
as practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
20.3.10 at the request of the Holder(s) who hold a majority of
the Registerable Securities being sold, furnish on the date that Registerable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Holders;
20.3.11 make available for inspection by Holder, any underwriter
participating in any distribution or disposition pursuant to the Registration
Statement, and any attorney, accountant or other agent retained by Holder or
underwriter (collectively, the "Inspectors"), all pertinent financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to enable Holder
to exercise Holder's due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information which any Inspector
may reasonably request for purposes of such due diligence; provided, however,
that each Inspector shall hold in confidence and shall not make any disclosure
(except to a Holder) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (iii)
the information in such Records has
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<PAGE>
been made generally available to the public other than by disclosure in
violation of this or any other agreement. The Company shall not be required to
disclose any confidential information in such Records to any Inspector until and
unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto;
20.3.12 use its best efforts (i) to cause all the Registerable
Securities covered by the Registration Statement to be listed on the American
Stock Exchange or such other principal securities market on which securities of
the same class or series issued by the Company are then listed or traded or (ii)
if securities of the same class or series as the Registerable Securities are not
then listed on the American Stock Exchange or any such other securities market,
to cause all of the Registerable Securities covered by the Registration
Statement to be listed on the NASDAQ, New York Stock Exchange or the American
Stock Exchange;
20.3.13 provide a transfer agent and registrar, which may be a
single entity, for the Registerable Securities not later than the effective date
of the Registration Statement;
20.3.14 cooperate with the Holder and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registerable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Holder may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Holder may request;
20.3.15 during the period the Company is required to maintain
effectiveness of the Registration Statement pursuant to subsection 20.3.1, the
Company shall not bid for or purchase any Common Stock or Other Securities or
any right to purchase Common Stock or Other Securities or attempt to induce any
person to purchase any such security or right if such bid, purchase or attempt
would in any way limit the right of the Holder to sell Registerable Securities
by reason of the limitations set forth in Regulation M under the Exchange Act;
and
20.3.16 take all other reasonable actions necessary to expedite
and facilitate disposition by the Holder of the Registerable Securities pursuant
to the Registration Statement.
20.3.17 With a view to making available to the Holders the
benefits of Rule 144, the Company agrees to: (i) make and keep public
information available, as those terms are understood and defined in Rule 144;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and (iii)
furnish to each Holder so long as such Holder owns Registerable Securities,
promptly upon request, (I) a written statement by the Company that it has
complied with the reporting requirements of Rule 144 and the Exchange Act, (II)
a copy of the most recent annual or quarterly report of the Company and such
other reports and documents so filed by the Company and (III) such other
information as may be reasonably requested to permit the Holders to sell such
securities pursuant to Rule 144 without registration.
20.4 Obligations of the Holder. In connection with the registration of the
Registerable Securities, the Holder shall have the following obligations:
20.4.1 it shall be a condition precedent to the obligations of
the Company to complete the registration pursuant hereto with respect to the
Holder's Registerable Securities that the Holder shall furnish to the Company
such information regarding Holder, the Registerable Securities held by Holder
and the intended method of disposition of the Registerable Securities held by
Holder as shall be reasonably required to effect the registration of such
Registerable Securities and shall execute such documents in
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<PAGE>
connection with such registration as the Company may reasonably request. At
least five days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify the Holder of the information the Company
requires from the Holder (the "Requested Information") if any of Holder's
Registerable Securities are eligible for inclusion in the Registration
Statement. If at least two Business Days prior to the filing date the Company
has not received the Requested Information from the Holder (at such time Holder
becoming a "Non-Responsive Holder"), then the Company may file the Registration
Statement without including Registerable Securities of Non-Responsive Holder but
shall not be relieved of its obligation to file a Registration Statement with
the SEC relating to the Registerable Securities of Non-Responsive Holder
promptly after Non-Responsive Holder provides the Requested Information;
20.4.2 by Holder's acceptance of the Registerable Securities,
Holder agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless Holder has notified the Company in writing of such
Holder's election to exclude all of Holder's Registerable Securities from the
Registration Statement;
20.4.3 in the event Holder(s) holding a majority of the
Registerable Securities being registered determine to engage the services of an
underwriter, each Holder agrees to enter into and perform such Holder's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registerable Securities, unless such Holder has notified the
Company in writing of such Holder's election to exclude all of such Holder's
Registerable Securities from the Registration Statement;
20.4.4 Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in subsections
20.3.6 or 20.3.7, Holder will immediately discontinue disposition of
Registerable Securities pursuant to the Registration Statement covering such
Registerable Securities until Holder's receipt of the copies of the supplemented
or amended prospectus contemplated by subsections 20.3.6 or 20.3.7 and, if so
directed by the Company, Holder shall deliver to the Company (at the expense of
the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Holder's possession of the prospectus covering
such Registerable Securities current at the time of receipt of such notice;
20.4.5 Holder may not participate in any underwritten
registration hereunder unless Holder (i) agrees to sell Holder's Registerable
Securities on the basis provided in any underwriting arrangements approved by
the Holders entitled hereunder to approve such arrangements, (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses to
the underwriters applicable with respect to its Registerable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement; and
20.4.6 Holder agrees to take all reasonable actions necessary
to comply with the prospectus delivery requirements of the Securities Act
applicable to its sales of Registerable Securities.
20.5 Expenses of Registration. All costs and expenses, other than
underwriting or brokerage discounts, commissions and other fees related to the
distribution of the Registerable Securities, incurred in connection with
registrations, filings or qualifications pursuant to subsections 20.1 and 20.2,
including, without limitation, all registration, listing and qualifications
fees, printers and accounting fees and the fees and disbursements of counsel for
the Company shall be borne by the Company, provided, however,
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<PAGE>
that the Holder(s) shall bear the fees and out-of-pocket expenses of the one
legal counsel selected by the Holder(s) pursuant to subsection 20.3.8 hereof.
20.6 Indemnification. In the event any Registerable Securities are
included in a Registration Statement under this Agreement:
20.6.1 To the extent permitted by law, the Company will
indemnify and hold harmless each Holder who holds such Registerable Securities,
the directors, if any, of such Holder, the officers, if any, of such Holder,
each person, if any, who controls any Holder within the meaning of the
Securities Act or the Exchange Act, any underwriter (as defined in the
Securities Act) for the Holders, the directors, if any, of such underwriter and
the officers, if any, of such underwriter, and each person, if any, who controls
any such underwriter within the meaning of the Securities Act or the Exchange
Act (each, an "Indemnified Person"), against any losses, claims, damages,
liabilities or expenses (joint or several) incurred (collectively, "Claims") to
which any of them may become subject under the Securities Act, the Exchange Act
or otherwise, insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations in the Registration
Statement, or any post-effective amendment thereof, or any prospectus included
therein: (i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any post-effective amendment thereof
or 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
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus if used prior to the effective date of
such Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in subsection 20.6.4 with respect to the number of
legal counsel, the Company shall reimburse the Holders and the other Indemnified
Persons, promptly as such expenses are incurred and are due and payable, for any
legal fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
subsection 20.6.1: (I) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person or underwriter for
such Indemnified Person expressly for use in connection with the preparation of
the Registration Statement, the prospectus or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to subsection 20.3.3 hereof; (II) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Person if the
untrue statement or omission of material fact contained in the preliminary
prospectus was corrected in the prospectus, as then amended or supplemented, if
such prospectus was timely made available by the Company pursuant to subsection
20.3.3 hereof; and (III) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registerable Securities by a Holder pursuant to Section 10.
20.6.2 In connection with any Registration Statement in which a
Holder is participating, each such Holder agrees to indemnify and hold harmless,
to the same extent and in the same manner set forth in subsection 20.6.1, the
Company, each of its directors, each of its officers who signs the Registration
Statement, each person on, if any, who controls the Company within the meaning
of the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant
15
<PAGE>
to the Registration Statement or any of its directors or officers or any person
who controls such stockholder or underwriter within the meaning of the
Securities Act or the Exchange Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any of
them may become subject, under the Securities Act, the Exchange Act or
otherwise, insofar as such Claim arises out of or is based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Holder expressly for use in connection with such Registration
Statement; and such Holder will reimburse any legal or other expenses reasonably
incurred by any Indemnified Party, promptly as such expenses are incurred and
are due and payable, in connection with investigating or defending any such
Claim; provided, however, that the indemnity agreement contained in this
subsection 20.6.2 shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of such Holder,
which consent shall not be unreasonably withheld; provided, further, however,
that the Holder shall be liable under this subsection 20.6.2 for only that
amount of a Claim as does not exceed the amount by which the net proceeds to
such Holder from the sale of Registerable Securities pursuant to such
Registration Statement exceeds the cost of such Registerable Securities to such
Holder. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of the Registerable Securities by the Holders pursuant to Section
10. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this subsection 20.6.2 with respect to
any preliminary prospectus shall not inure to the benefit of any Indemnified
Party if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
20.6.3 The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
20.6.4 Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 20.6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under Section 20.6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel selected by the indemnifying party
but reasonably acceptable to the Indemnified Person or the Indemnified Party, as
the case may be; provided, however, that an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for only one
separate legal counsel for the Holders; such legal counsel shall be selected by
the Holders holding a majority in interest of the Registerable Securities
included in the Registration Statement to which the Claim relates. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
20.6, except to the extent that the indemnifying party is prejudiced in its
ability to defend such action. The indemnification required by Section 20.7
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
20.7 The agreements, representations and warranties of the Company and the
Holder set forth or provided in this Section 20 shall survive any exercise of
this Warrant and the delivery of and
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<PAGE>
payment for the Registerable Securities hereunder and shall remain in full force
and effect, regardless of any investigation made by or on behalf of the Company
and the Holder.
21 Miscellaneous. This Warrant and any term 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 Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of Colorado. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on
its behalf by one of its officers thereunto duly authorized.
Dated: ______________, 1999 D.E. FREY GROUP, INC.
__________________________________
_______________________, President
FORM OF SUBSCRIPTION
D.E. FREY GROUP, INC.
(To be signed only on exercise of Warrant)
TO: D.E. Frey Group, Inc.
1700 Lincoln Street, Suite 2200
Denver, Colorado 80202
Attn: President
1. The undersigned Holder of the attached original, executed Warrant hereby
elects to exercise its purchase right under such Warrant with respect to
_______________ shares of Common Stock, as defined in the Warrant, of D.E.
Frey Group, Inc., a Delaware corporation (the "Company").
2. The undersigned Holder (check one):
[_] (a) elects to pay the aggregate purchase price for such shares of
Common Stock (the "Exercise Shares") (i) by lawful money of the
United States or the enclosed certified or official bank check
payable in United States dollars to the order of the Company in
the amount of $____________, or (ii) by wire transfer of United
States funds to the account of the Company in the amount of
$_____________, which transfer has been made before or
simultaneously with the delivery of this Form of Subscription
pursuant to the instructions of the Company;
or
[_] (b) elects to receive shares of Common Stock having a value equal
to the value of the Warrant calculated in accordance with Section
1.2 of the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned
or in such other name as is specified below:
17
<PAGE>
Name:
------------------------------------------------
Address:
---------------------------------------------
---------------------------------------------
Dated:_________________ _________________________________________
(Signature must conform to name of Holder
as specified on the face of the Warrant)
-----------------------------------------
-----------------------------------------
(Address)
18
<PAGE>
CERTIFICATE OF INCORPORATION
OF
D.E. FREY GROUP, INC.
A STOCK CORPORATION
FIRST:
The name of this Corporation is D.E. FREY GROUP, INC.
SECOND:
Its Registered office in the State of Delaware is to be located at 229
South State Street, in the City of Dover, County of Kent, zip code 19901. The
Registered Agent in charge thereof is The Prentice-Hall Corporation System, Inc.
THIRD:
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
FOURTH:
The amount of total authorized capital stock of this Corporation is One
Hundred Fifty Thousand Dollars ($150,000) divided into 1,500,000 shares of
common stock, $.10 par value.
FIFTH:
The name and mailing, address of the incorporator are as follows:
Name: Cathryn B. Mayers
Mailing
Address: 2222 One United Bank Center
1700 Lincoln Street
Denver, Colorado 80203
<PAGE>
SIXTH:
The powers of the incorporator are to terminate upon filing of the
Certificate of Incorporation. The name and address of the person who is to serve
as the sole director until the first annual meeting of shareholders, or until
his successor is elected and qualified, is as follows:
Dale E. Frey
29 Castle Pines Drive North
Castle Rock, CO 80104
SEVENTH:
No person who is or was a director of the corporation shall be personally
liable to the Corporation or to the shareholders for monetary damages for breach
of fiduciary duty as a director.
A person who is or was a director of the Corporation shall be personally
liable to the Corporation or to the shareholders for monetary damages for any
breach of such director's duty of loyalty to the Corporation or to the
shareholders, any act or omission not in good faith or which involves
intentional misconduct or a knowing violation of the law, any act specified in
Section 174 of the Delaware General Corporation Law, or, any transaction from
which such director derived an improper personal benefit.
EIGHTH:
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he
-2-
<PAGE>
is or was a director, officer, employee or agent of the Corporation, or 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, against expenses, including attorney fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Determination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
plea of nolo contendere or its equivalent, shall not, of itself, create a
---- ----------
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation or he 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
-3-
<PAGE>
against expenses (including attorney fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation only and to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses (including attorney
fees) actually and reasonably incurred by him in connection therewith.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding shall be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation. Such expenses incurred by other employees and
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<PAGE>
agents shall be paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
NINTH:
In the event that the Corporation's board of directors is divided into
classes in the manner set forth in Section 141 of the Delaware General
Corporation Law, then the holders of a majority of the shares then entitled to
vote at an election of directors may effect the removal of any director or the
entire board of directors, with or without cause.
TENTH:
Special meetings of the shareholders may be called by the president of the
Corporation, the board of directors, or by the record holder or holders of at
least 33% of all shares entitled to vote at such meeting.
ELEVENTH:
The power to adopt, amend, or repeal the bylaws of the Corporation is
conferred upon the board of directors.
I, the undersigned, for the purpose of forming a corporation under the laws
of the State of Delaware, do make, file and record this Certificate, and do
certify that the facts herein stated are true, and I have accordingly hereunto
set my hand this 14th day of August, 1989.
/s/ Cathryn B. Mayers
-----------------------------------------
Cathryn B. Mayers,
Incorporator
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<PAGE>
Breza & Winters
One United Bank Center
1700 Lincoln Street - Suite 2222
Denver, Colorado 80203
attn: Roberta J. Feezor
envelope in Box
STATE OF DELAWARE
INDEXED
KENT COUNTY
RECORDED In the Office for the Recording of the Deeds, Etc.
at Dover, In and for the said County of Kent, In Corp.
Record X Vol. 135 Page 337 Etc.
----- ----- -----
the 29th day of July A.D. 19 91
-------- -------- ----
WITNESS my Hand and the Seal of said office.
/s/ Michael T. Scure, Recorder
--------------------
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
D.E. FREY GROUP, INC.
D.E. Frey Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the state of Delaware (the "Company"),
does hereby certify:
FIRST: That the Board of Directors of said corporation, by the written
unanimous consent of its members, filed with the minutes of the board, adopted a
resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc. be
amended by changing the Fourth Article thereof so that, as amended said Article
shall be and read as follows:
"The amount of total authorized capital stock of this Corporation is Four
Hundred Sixty Eight Thousand Seven Hundred Fifty Dollars ($468,750), divided
into 1,500,000 shares of common stock, $.10 par value, and 318,750 shares of
preferred stock, $1.00 par value, which preferred shares have the following
rights and preferences:
1. Designation. This resolution shall provide for a single series of
-------------
preferred stock, the designation of which shall be "Series 1989-A Preferred
Stock" (hereinafter the "Preferred Shares") and the number of authorized shares
constituting the
<PAGE>
Preferred Shares is 318,750. The number of authorized Preferred Shares may be
reduced by a further resolution duly adopted by the Board of the Company and by
the filing of a certificate pursuant to the provisions of the Delaware General
Corporation Law stating that such reduction has been so authorized.
2. Voting. Except as otherwise expressly provided herein or as required by
------
law, the holders of Preferred Shares shall have no voting rights. In the event
the holders of Preferred Shares are entitled to vote, each Preferred Share shall
be entitled to one vote, either in person or by proxy, and the holders of
Preferred Shares and common stock shall vote together and not as separate
classes unless otherwise expressly provided herein or required by law.
3. Dividends.
---------
3.1 The holders of then outstanding Preferred Shares shall be entitled
to receive, when and as declared by the Board out of any funds legally available
therefor, cumulative dividends at the annual rate of $.9667 per share payable
in cash annually on each October 1, commencing October 1, 1990. Such dividends
shall accrue on each share from and after the date of issuance and shall accrue
from day-to-day whether or not earned or declared. Such dividends shall be
cumulative so that, except as provided in Section 3.2 below, if such dividends
in respect of any previous or
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<PAGE>
current annual dividend period at the annual rate specified above shall not have
been paid or declared and a sum sufficient for the payment thereof set apart,
the deficiency shall first be fully paid before any dividend or other
distribution shall be paid on or declared and set apart for the common stock,
par value $.10 per share, of the Company ("Common Stock"). Any accumulation of
dividends on the Preferred Shares shall not bear interest.
3.2 Unless full dividends on the Preferred Shares for all past
dividend periods and the then current dividend period shall have been paid or
declared and a sum sufficient for the payment thereof set apart: (i) no dividend
whatsoever (other than dividend payable solely in Common Stock) shall be paid or
declared and no distribution shall be made on any Common Stock; and (ii) no
shares of Common Stock shall be purchased, redeemed or acquired by the Company
and no funds shall be paid into or set aside or made available for a sinking
fund for the purchase, redemption or acquisition thereof; provided, however,
that this restriction shall not apply to the repurchase of shares of Common
Stock held by employees, officers directors, consultants, or other persons
performing services for the Company or any subsidiary of the Company
("Subsidiary," defined herein as any corporation at least 50% of whose
outstanding voting stock shall at the time be owned directly or indirectly by
the Company or by one of more of its Subsidiaries) that are subject to
agreements under which the
-3-
<PAGE>
Company has the option to repurchase such shares at cost upon the occurrence of
certain events such as the termination of employment. After cumulative dividends
on the Preferred Shares for all past dividend periods and the then current
dividend period shall have been declared and paid or set apart, if the Board
shall elect to declare additional dividends out of funds legally available
therefor, not less than fifty percent (50%) of such additional dividends shall
be declared in equal amounts per share on all Preferred Shares and the balance,
if any, may be distributed to holders of the Common Stock.
3.3 Each holder of Preferred Shares shall be deemed to have consented,
for purposes of Sections 502, 503 and 506 of the Delaware General Corporation
Law to distributions made by the company in connection with the repurchase of
shares of Common Stock from employees, officers, directors, consultants or other
persons performing services for the Company or any Subsidiary upon termination
of their employment or services pursuant to agreements providing for the right
of repurchase, provided that such repurchases are not prohibited as provided
herein.
4. Mandatory Redemption. On October 1, 1994, the Company will redeem all of
--------------------
the Preferred Shares at the time issued and outstanding for an amount in cash
equal to $1.00 per share plus any accrued and unpaid dividends thereon, whether
or not earned or
-4-
<PAGE>
declared, to and including that date. Written notice of redemption stating the
date and place of redemption and the amount of the redemption price shall be
mailed by the Company not less than 30 days nor more than 60 days prior to the
redemption date to the record holders of the shares to be redeemed directed to
their last known address as shown by the Company records. If notice of
redemption is given as provided above and if on the redemption date the Company
has set apart in trust for that purpose sufficient funds for such redemption,
then from and after the redemption date, notwithstanding that any certificate
for such shares has not been surrendered for cancellation, the Preferred Shares
called for redemption shall no longer be deemed to be outstanding and all rights
with respect to such shares shall forthwith cease and terminate, except only the
right of the holders thereof to receive the redemption price without interest
upon surrender of certificates representing the shares called for redemption.
Any monies remaining in trust after one year from the redemption date shall be
returned to the Company and thereafter holders of certificates for such shares
shall look only to the Company for the redemption price thereof.
5. Rights on Liquidation. In the event of the liquidation, dissolution or
---------------------
winding up of the Company, whether voluntary or involuntary, resulting in any
distribution of its assets to its shareholders, the holders of the Preferred
Shares then issued and
-5-
<PAGE>
outstanding shall be entitled to receive an amount equal to $1.00 per Preferred
Share plus accrued and unpaid dividends thereon, and no more, before any payment
or distribution of the assets of the Company is made to or set apart for the
holders of Common Stock. If the assets of the Company distributable to the
holders of Preferred Shares are insufficient for the payment to them of the full
preferential amount described above, such assets shall be distributed ratably
among the holders of the Preferred Shares. The holders of the Common Stock shall
be entitled to the exclusion of the holders of the Preferred Shares to share in
all remaining assets of the Company in accordance with their respective
interests. For purposes of this paragraph, a consolidation or merger of the
Company with any other corporation or corporations shall not be deemed to be a
liquidation, dissolution or winding up of the Company.
6. Restrictions and Limitations.
----------------------------
6.1 So long as any Preferred Shares remain outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to, without the vote or
written consent by the holders of at least seventy percent (70%) of the then
outstanding Preferred Shares:
-6-
<PAGE>
6.1.1 Redeem, purchase or otherwise acquire for value any Preferred
Share or Shares other than by redemption in accordance with Section 4 hereof
other than as may be required by law;
6.1.2 Purchase, redeem or otherwise acquire (or pay into or set aside
for a sinking fund for such purpose), any of the Common Stock; provided,
however, that this restriction shall not apply to the repurchase of shares of
Common Stock from employees, officers, directors, consultants, or other persons
performing services for the Company or any subsidiary of the Company pursuant to
agreements under which the Company has the option to repurchase such shares at
cost upon the occurrence of certain events such as the termination of
employment;
6.1.3 Authorize or issue or obligate itself to issue any other equity
security (including any security convertible into or exercisable for any equity
security) senior to or on a parity with the Preferred Shares as to dividend or
redemption rights and liquidation preferences;
-7-
<PAGE>
6.1.4 Alter or change the rights, preferences or privileges of the
Preferred Shares, whether by amendment to its articles of incorporation or
otherwise;
6.1.5 Effect any sale, lease, assignment, transfer or other conveyance
of all or substantially all of the assets of the Company or any Subsidiary other
than in the ordinary course of business, or any consolidation or merger
involving the Company or any Subsidiary, or any reclassification or other change
of any stock or any recapitalization of the Company;
6.1.6 Permit any Subsidiary to issue or sell, or obligate itself to
issue or sell, except to the Company or any wholly-owned Subsidiary, any stock
of such subsidiary; or
6.1.7 Increase the total number of authorized Preferred Shares.
7. Notice. Any notice required to be given to the holders of Preferred
--------
Shares shall be deemed to have been given upon the earlier of personal delivery
or three business days after deposit in the United States mails by registered or
certified mail, return receipt requested, with postage fully prepaid, and
addressed to each holder of record at his address as it appears on the stock
-8-
<PAGE>
transfer records of the Company. Any notice to the Company shall be in writing
and shall be deemed to have been given only upon actual receipt thereof."
SECOND: That in lieu of a meeting and vote of stockholders, the sole
stockholder has given unanimous written consent to said amendment in accordance
with the provisions of Section 228 of the General Corporation Law of the State
of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Sections 242 and 228 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, said D.E. Frey Group, Inc. has caused this Certificate
to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla,
its Assistant Secretary, this 11th day of September, 1989.
---- ---------
D.E. FREY GROUP, INC.
By: /s/ Dale E. Frey, President
--------------------------------
Dale E. Frey, President
ATTEST
/s/ Jose A. Padilla
- --------------------
Jose A. Padilla, Assistant Secretary
-9-
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 04/30/1990
901215189 - 2205026
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
D.E. FREY GROUP, INC.
D.E. Frey Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the state of Delaware (the "Company"),
does hereby certify:
FIRST: That the Board of Directors of said corporation, by the written
unanimous consent of its members, filed with the minutes of the board, adopted a
resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc. be
amended by changing paragraph 3.1 of the Fourth Article thereof so that, as
amended said Article shall be and read as follows:
3. Dividends.
----------
3.1 The holders of then outstanding Preferred Shares shall be entitled
to receive, when and as declared by the Board out of any funds legally available
therefor, cumulative dividends at the annual rate of 53.3% per share payable
in cash annually on each October 1, commencing October 1, 1990. Such dividends
shall accrue on each share from and after the date of issuance and shall accrue
from day-to-day whether or not earned or declared. Such dividends shall be
cumulative so that, except as provided in Section 3.2 below, if such dividends
in respect of any previous or current annual dividend period at the annual rate
specified above shall not
<PAGE>
have been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency shall first be fully paid before any dividend or other
distribution shall be paid on or declared and set apart for the common stock,
par value $.10 per share, of the Company ("Common Stock"). Any accumulation of
dividends on the Preferred Shares shall not bear interest.
SECOND: That in lieu of a meeting and vote of stockholders, the sole
stockholder has given unanimous written consent to said amendment in accordance
with the provisions of Section 228 of the General Corporation Law of the State
of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Sections 242 and 228 of the General Corporation Law of
the State of Delaware.
IN WITNESS WFEREOF, said D.E. Frey Group, Inc. has caused this Certificate
to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla,
its Assistant Secretary, this 23 day of April, 1990.
-- -----
D.E. FREY GROUP, INC.
BY: /s/ Dale E. Frey
---------------------
Dale E. Frey, President
ATTEST:
/s/ Jose A. Padilla
- --------------------
Jose A. Padilla, Assistant Secretary
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 11/14/1990
903205317 - 2205026
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
D.E. FREY GROUP, INC.
D.E. Frey Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the state of Delaware (the "Company"),
does hereby certify:
FIRST: That the Board of Directors of said corporation, by the written
unanimous consent of its members, filed with the minutes of the board, adopted
a resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc.
be amended by changing the Fourth Article thereof so that, as amended said
Article shall be and read as follows:
"The total authorized capital stock of this Corporation consists of
1,500,000 shares of common stock, $.10 par value; 318,750 shares of Series 1989-
A Preferred Stock, $1.00 par value ("1989 Preferred Shares"), and 1,100,000
shares of Series 1990-A Preferred Stock, $1.00 par value ("1990 Preferred
Shares"), which preferred shares have the following rights and preferences:
1. Designation. This Fourth Article provides for a series of preferred
-----------
stock, the designation of which shall be "Series 1989-A Preferred Stock"
(hereinafter the "1989 Preferred Shares") and the number of authorized shares
constituting the 1989 Preferred Shares is 318,750. This Fourth Article also
provides for a series of preferred stock, the designation of which shall be
"Series 1990-A Preferred Stock" (hereinafter the "1990 Preferred Shares") and
the numbcr of authorized shares constituting the 1990 Preferred Shares is
1,100,000. The 1989 Preferred Shares and 1990 Preferred Shares may be
collectively referred to herein as "Preferred Shares." The number of authorized
Preferred Shares may be reduced by a further resolution duly adopted by the
Board of the Company and by the filing of a certificate pursuant to the
provisions of the Delaware General Corporation Law stating that such reduction
has been so authorized.
2. Voting. Except as otherwise expressly provided herein or as required
------
by law, the holders of Preferred Shares shall have no voting rights. In the
event the holders of Preferred Shares are entitled to vote, each Preferred Share
shall be entitled to one vote, either in person or by proxy, and the holders of
Preferred
<PAGE>
Shares and common stock shall vote together and not as separate classes or
series unless otherwise expressly provided herein or required by law.
3. Dividends
---------
3.1 The holders of then outstanding 1989 Preferred Shares shall be
entitled to receive, when and as declared by the Board out of any funds legally
available therefor, cumulative dividends at the annual rate of 53.3% per
share payable in cash annually on each October 1, commencing October 1, 1990.
The holders of then outstanding 1990 Preferred Shares shall be entitled to
receive, when and as declared by the Board out of any funds legally available
therefor, cumulative dividends at the annual rate of 10% per share payable in
cash annually on each January 1, commencing January 1, 1992. Dividends shall
accrue on 1989 Preferred Shares and 1990 Preferred Shares from and after their
respective dates of issuance and shall accrue from day-to-day whether or not
earned or declared. Such dividends shall be cumulative so that, except as
provided in Section 3.2 below, if such dividends in respect of any previous or
current annual dividend periods at the annual rates specified above shall not
have been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency or deficiencies shall first be fully paid before any
dividend or other distribution shall be paid on or declared and set apart for
the common stock, par value $.10 per share, of the Company ("Common Stock"). Any
accumulation of dividends on the Preferred Shares shall not bear interest.
3.2 Unless full dividends on the 1989 Preferred Shares and 1990
Preferred Shares for all their respective past dividend periods and their
respective then current dividends period shall have been paid or declared and a
sum sufficient for the payment thereof set apart: (i) no dividend whatsoever
(other than dividend payable, solely in Common Stock) shall be paid or declared
and no distribution shall be made on any common stock; and (ii) no shares of
common stock shall be purchased, redeemed or acquired by the Company and no
funds shall be paid into or set aside or made available for a sinking fund for
the purchase, redemption or acquisition thereof; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock held by
employees, officers, directors, consultants, or other persons performing
services for the Company or any subsidiary of the Company ("Subsidiary," defined
herein as any corporation at least 50% of whose outstanding voting stock shall
at the time be owned directly or indirectly by the Company or by one of
-2-
<PAGE>
more of its Subsidiaries) that are subject to agreements under which the Company
has the option or obligation to repurchase such shares at cost upon the
occurrence of certain events such as the termination of employment. Cumulative
dividends on the 1989 Preferred Shares and 1990 Preferred Shares must be paid
concurrently by the Company to the holders thereof unless one of the series of
Preferred Shares has been previously redeemed. The Company shall calculate the
total amount of dividends payable to the holders of Preferred Shares based upon
(i) the amount of accrued and unpaid dividends on the 1989 Preferred Shares, and
(ii) the amount of accrued and unpaid dividends on the 1990 Preferred Shares, on
the record date. If the aggregate dollar amount allocated by the Board of
Directors to be paid as dividends to the holders of Preferred Shares is
insufficient for the payment of the full amount calculated in (i) and (ii) in
the preceding sentence, such dividend shall be distributed pro rata between the
holders of the 1989 Preferred Shares and the 1990 Preferred Shares. Within each
series of Preferred Shares, the dividend shall be distributed ratably among the
holders of the shares in accordance with their respective interests. After
cumulative dividends on the Preferred Shares for all past dividend periods and
the then current dividend period shall have been declared and paid or set apart,
if the Board shall elect to declare additional dividends out of funds legally
available therefor, not less than fifty percent (50%) of such additional
dividends shall be declared in equal amounts per share on all Preferred Shares
and the balance, if any, may be distributed to holders of the Common Stock.
3.3 Each holder of Preferred Shares shall be deemed to have consented
to distributions made by the Company in connection with the repurchase of shares
of Common Stock from employees, officers, directors, consultants or other
persons performing services for the Company or any Subsidiary upon termination
of their employment or services pursuant to agreements providing for the right
or obligation of repurchase, provided that such repurchases are not prohibited
as provided herein.
4. Mandatory Redemption. The Company will redeem all then issued and
--------------------
outstanding shares of 1989 Preferred Shares and 1990 Preferred Shares on October
1, 1994, and January 1, 1996, respectively. The redemption price for both the
1989 Preferred Shares and 1990 Preferred Shares shall be an amount in cash equal
to $1.00 per share plus any accrued and unpaid dividends thereon, whether or not
earned or declared, to and including the date of redemption. Written notice of
redemption of either the 1989 Preferred Shares or 1990
-3-
<PAGE>
Preferred Shares stating the date and place of redemption and the amount of the
redemption price shall be mailed by the Company not less than 30 days nor more
than 60 days prior to the redemption date to the record holders of the shares to
be redeemed directed to their last known address as shown by the Company
records. If notice of redemption is given as provided above and if on the
redemption date the Company has set apart in trust for that purpose sufficient
funds for such redemption, then from and after the redemption date,
notwithstanding that any certificate for such shares has not been surrendered
for cancellation, the 1989 Preferred Shares or 1990 Preferred Shares called for
redemption, as the case may be, shall no longer be deemed to be outstanding and
all rights with respect to such shares shall forthwith cease and terminate,
except only the right of the holders thereof to receive the redemption price
without interest upon surrender of certificates representing the shares called
for redemption. Any monies remaining in trust after one year from the redemption
dates of either the 1989 Preferred Shares or 1990 Preferred Shares shall be
returned to the Company and thereafter holders of certificates for such shares
shall look only to the Company for the redemption price thereof.
5. Rights on Liquidation. In the event of the liquidation, dissolution or
---------------------
winding up of the Company, whether voluntary or involuntary, resulting in any
distribution of its assets to its shareholders, (i) the holders of the 1989
Preferred Shares then issued and outstanding shall be entitled to receive an
amount equal to $1.00 per 1989 Preferred Share plus accrued and unpaid dividends
thereon; and (ii) the holders of the 1990 Preferred Shares then issued and
outstanding shall be entitled to receive an amount equal to $1.00 per 1990
Preferred Share plus accrued and unpaid dividends thereon. If the assets of the
Company to be distributed to the holders of Preferred Shares are insufficient
for the payment to them of the full preferential amount described in (i) and
(ii) in the preceding sentence, such assets shall be distributed pro rata
between the holders of 1989 Preferred Shares and 1990 Preferred Shares based
upon the total amounts due each series as calculated in (i) and (ii). Within
each series of Preferred Shares, these assets of the Company shall be
distributed ratably among the holders of the shares in accordance with their
respective interests. Distributions to holders of the Preferred Shares shall be
made before any payment or distribution of the assets of the Company is made to
or set apart for the holders of Common Stock. The holders of the Common Stock
shall be entitled, to the exclusion of the holders of the Preferred Shares, to
share in all remaining assets of the Company in accordance with their
-4-
<PAGE>
respective interests. For purposes of this paragraph, a consolidation or merger
of the Company with any other corporation or corporations shall not be deemed
to be a liquidation, dissolution or winding up of the Company.
6. Restriction and Limitations.
---------------------------
6.1 So long as any Preferred Shares remain outsranding, the Company shall
not, and shall not permit any of its Subsidiaries to, without the vote or
written consent by the holders of at least seventy percent (70%) of the then
outstanding 1989 Preferred Shares and 1990 Preferred Shares:
6.1.1 Redeem, purchase or otherwise acquire for value any Preferred
Share or Shares other than by redemption in accordance with Section 4 hereof or
other than as may be required by law.
6.1.2 Purchase, redeem or otherwise acquire (or pay into or set
aside a sinking fund for such purpose), any of the Common Stock: provided,
however, that this restriction shall not apply to the repurchase of shares of
Common Stock from employees, officers, directors, consultants, or other persons
performing services for the Company or any subsidiary of the Company pursuant,
to agreements under which the Company has the option or obligation to repurchase
such shares at cost upon the occurrence of certain events such as the
termination of employment:
6.1.3 Authorize or issue or obligate itself to issue any other
equity security (including any security convertible into or exercisable for any
equity security) senior to or on a parity with the Preferred Shares as to
dividend or redemption rights and liquidation preferences;
6.1.4 Alter or change the rights, preferences or privileges of the
Preferred Shares, whether by amendment to its articles of incorporadon or
otherwise;
6.1.5 Effect any sale, lease, assignment transfer or other
conveyance of all or substantially all of the assets of the Company or any
Subsidiary other than in the ordinary course of business or any consolidation or
merger involving the Company or any Subsidiary, or any reclassification or other
change of any stock or any recapitalization of the Company;
6.1.6 Permit any Subsidiary to issue or sell, or obligate itself to
issue or sell, except to the Company or any wholly-owned Subsidiary, any stock
of such subsidiary; or
6.1.7 Increase the total number of authorized Preferred Shares.
-5-
<PAGE>
7. Notice. Any notice required to be given to the holders of Preferred
------
Shares shall be deemed to have been given upon the earlier of personal delivery
or three business days after deposit in the United States mails by registered
or certified mail, return receipt requested, with postage fully prepaid, and
addressed to each holder of record at his address as it appears on the stock
transfer records of the Company. Any notice to the Company shall be in writing
and shall be deemed to have been given only upon actual receipt thereof."
SECOND: That in lieu of a meeting and vote of stockholders, the holders of
not less than 70% of the outstanding shares of Common Stock and 1989 Preferred
Shares have given their written consent to said amendment in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware, such percentage constituting the minimurn number of votes that would
be necessary to authorize such amendment at a meeting of shareholders.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, said D.E. Frey Group, Inc. has caused this Certificate
to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla,
its Assistant Secretary, this 13th day of November, 1990.
D.E. FREY GROUP, INC.
By: /s/ Dale E. Frey
-------------------------
Dale E. Frey, President
ATTEST:
/s/ Jose A. Padilla
- ----------------------------------------
Jose A. Padillia, Assistant Secretary
-6-
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/11/1991
911925035 - 2205026
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
D.E. FREY GROUP, INC.
D.E. Frey Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the state of Delaware (the "Company"),
does hereby certify:
FIRST: That the Board of Directors of said corporation, by a unanimous vote
of its members at the annual meeting on May 20, 1991, adopted a resolution
proposing and declaring advisable the following amendment to the Certificate of
Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc.
be amended by changing the first paragraph of the Fourth Article thereof so
that, as amended said paragraph shall be and read as follows:
"The total authorized capital stock of this Corporation consists of
10,000,000 shares of common stock, $.10 par value and 318,750 shares of Series
1989-A Preferred Stock, $1.00 par value ("1989 Preferred Shares") which
preferred shares have the following rights and preferences:"
All references to the Series 1990-A Preferred Stock, and any and all rights and
preferences appurtenant thereto, are deleted in their entirety.
SECOND: At the annual meeting of shareholders held on May 20, 1991, the
holders of more than 70% of the outstanding shares of Common Stock and 1989
Preferred Shares approved said amendment in accordance with the provisions of
Section 222 of the General
<PAGE>
Corporation Law of the State of Delaware, such percentage constituting the
minimum number of votes required to approve such amendment.
THIRD: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, said D.E. Frey Group, Inc. has caused this Certificate
to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla,
its Assistant Secretary, this 29th day of June, 1991.
D.E. FREY GROUP, INC.
By: /s/ Dale E. Frey
-------------------------
Dale E. Frey, President
ATTEST:
/s/ Jose A. Padilla
- --------------------------------------
Jose A. Padilla, Assistant Secretary
-2-
<PAGE>
EXHIBIT 4.2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT")
AND IS A "RESTRICTED SECURITY" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE
ACT. THE NOTE MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
D.E. FREY GROUP, INC.
10% SENIOR SUBORDINATED PARTICIPATING PROMISSORY NOTE
-----------------------------------------------------
$15,000 July 02 1999
D.E. FREY GROUP, INC. (herein sometimes called the "Company" or
"Borrower"), a corporation duly organized and validly existing under the laws of
the State of Delaware, for value received, hereby, absolutely and
unconditionally promises to pay to the order of (herein sometimes called
"Lender" or "Holder" or "Owner"), the principal sum of FIFTEEN THOUSAND DOLLARS
AND NO/100 ($15,000), and to pay interest on said principal sum, at the rate of
ten percent (10%) per annum, with interest only payable annually, commencing
March 31, 2000, and on the 31st day of each March thereafter until paid in full
(the "Interest Payment Date"). All principal and accrued and unpaid interest
shall be due and payable in full on March 31 2004. Both the principal of and the
interest on this Note shall be payable in lawful money of the United States of
America at the principal office of the Holder hereof, or such other place as the
Holder hereof may, from time to time, designate. This Note is one of a series of
identical notes (except as to principal amount) aggregating a minimum of
$2,500,000 and a maximum of $5,000,000 in principal amount (collectively, the
"Notes").
Additional provisions are set forth below and incorporated herein by this
reference.
IN WITNESS WHEREOF, this Note has been duly executed and delivered as of
the day and year first above written.
D.E. FREY GROUP, INC.
___________________________________
By: Dale E. Frey, President
ATTEST:
_______________________
1
<PAGE>
Paul Hocevar, Secretary
ADDITIONAL PROVISIONS OF 10% SENIOR SUBORDINATED
PARTICIPATING PROMISSORY NOTES
1. Additional Interest. In addition to the stated rate of interest, the
--------------------
Company shall pay to the Holder of this Note on the Interest Payment Date
additional interest in an amount equal to 10% of the Company's consolidated pre-
tax net profit, if any, for the preceding fiscal year, not to exceed an
aggregate return, including interest at the stated rate, to holders on the Notes
of 15% for any year (prorated from the date of issuance of the Notes for 1994)
("Additional Interest"). Pre-tax net profit shall be determined in accordance
with generally accepted accounting principles consistently applied as stated in
the Company's annual audited consolidated financial statements. However, if the
annual audited financial statements are not available on the Interest Payment
Date, then the Additional Interest shall be based upon the Company's unaudited
consolidated financial statements subject to adjustment when the audited
financial statements are available. Any overpayment of Additional Interest will
be applied against interest due on the next Interest Payment Date. Any other
payment of Additional Interest will be due and payable in full within ten days
after receipt by the Company of the annual audited consolidated financial
statements.
2. Redemption.
-----------
(a) Optional Redemption. The Notes are redeemable, in whole or in part, at
any time and from time to time after the date of issuance and prior to maturity
at the option of the Company at the following redemption prices (expressed as
percentages of the principal amount redeemed), if redeemed at any time during
the indicated year, but prior to the stated maturity date.
<TABLE>
<CAPTION>
If Redeemed But no later than Premium
----------- ----------------- -------
<S> <C> <C>
0 years after issuance 2 years after issuance 105%
2 years after issuance 4 years after issuance 104%
4 years after issuance 6 years after issuance 103%
6 years after issuance 8 years after issuance 102%
8 years after issuance 10 years after issuance 101%
</TABLE>
together with accrued interest to the Redemption Date (the "Redemption Price").
Notice of redemption shall be given to all Holders at their address of record
not more than 60 nor less than 30 days prior to the Redemption Date.
(b) Extraordinary Redemption. In the event (i) the Company voluntarily or
2
<PAGE>
involuntarily sells, assigns, transfers or conveys all of the capital stock or
all or substantially all of the assets of its wholly-owned subsidiary, to D.E.
Frey & Company, Inc. (the "Broker"), a Delaware corporation and a securities
broker-dealer registered with the Securities and Exchange Commission ("SEC") and
a member of the National Association of Securities Dealers, Inc. ("NASD"), or
(ii) the registration of the Broker with the SEC or the membership of the Broker
with the NASD shall terminate or shall be suspended for more than 30 days, then
the Company shall redeem all of the Notes at a Redemption Price equal to the
principal amount redeemed together with accrued and unpaid interest to the
Redemption Date. Notice of redemption shall be given to all Holders at their
address of record not less than 30 days after the date of any such transaction
or occurrence and the Redemption Date shall not be less than 60 days after the
date of any such transaction or occurrence.
(c) Form of Notice. The notice of redemption shall state the Redemption
Date, the Redemption Price; an identification of the Note or Notes to be
redeemed and the principal amount to be redeemed if less than the entire
principal amount; that interest will cease to accrue on the principal amount to
be redeemed on and after the Redemption Date; and the place where the Notes are
to be surrendered for payment of the Redemption Price. In the event of
redemption of this Note in part only, a new Note for the unredeemed portion
hereof will be issued in the name of the Holder upon cancellation hereof.
(d) Deposit of the Redemption Price. At least one business date prior to
the Redemption Date the Company shall deposit with a paying agent (which shall
be a bank or trust company having trust powers conferred under federal or state
law) or, if the Company is acting as its own paying agent, segregate and hold in
trust an amount of money sufficient to pay the Redemption Price, together with
an officer's certificate to the effect that such redemption is not prohibited by
the terms of any outstanding Senior Indebtedness. The Notes to be redeemed
shall become due and payable on the Redemption Date and shall cease to bear
interest as of such date; provided, however, if the Notes to be redeemed are not
paid upon surrender, they shall continue to bear interest at the interest rate
provided herein until paid.
(e) Partial Redemption. If the Notes are to be redeemed in part and not in
whole, then the Notes to be redeemed shall be determined by lot or by another
fair and equitable manner by an independent third party selected by the Company.
3. Subordination. Anything in this Note to the contrary notwithstanding,
--------------
the indebtedness evidenced by this Note shall be subordinate and junior in right
of payment, to the extent and in the manner hereinafter set forth, to all
indebtedness of the Company constituting Senior Indebtedness after the date of
this Note:
(a) Occurrences Precluding Payment on Notes. No payment on account of
principal, premium, if any, or interest on this Note shall be made unless full
payment of amounts then due for principal, premium, if any, and interest on all
Senior Indebtedness has been made or duly provided for in money or money's
worth. No payment on account of principal, premium, if any,
3
<PAGE>
or interest on this Note shall be made if, at the time of such payment or
immediately after giving effect thereto, there shall have occurred an event of
default with respect to any Senior Indebtedness, as defined in any instrument
evidencing such Senior Indebtedness or in the instrument under which the same is
outstanding, permitting any holder thereof to accelerate the maturity thereof
and such event of default shall not have been cured or waived and shall not have
ceased to exist.
(b) Prior Payment of Senior Indebtedness. Upon (i) any acceleration of the
principal amount due on this Note or (ii) any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities, to creditors upon any dissolution or winding up or total or partial
liquidation or reorganization of the Company, whether voluntary or involuntary,
or in bankruptcy, insolvency, receivership, or other proceedings, or upon any
assignment for the benefit of creditors of the Company or any other marshalling
of the assets and liabilities of the Company, all principal, premium, if any,
and interest due or to become due upon the Senior Indebtedness shall be first
paid in full or payment thereof provided for in money or money's worth before
any payment is made on account of the principal of or interest on the
indebtedness evidenced by this Note; and upon any such dissolution or winding
up, or liquidation or reorganization, or any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or securities
(other than securities of the Company as reorganized or readjusted, or
securities of the Company or any other corporation provided for by a plan or
reorganization or readjustment, the payment of which is subordinate to the
payment of all Senior Indebtedness at the time outstanding), to which the Holder
of this Note would be entitled except for the provisions hereof, shall be paid
by the Company or by any receiver, trustee in bankruptcy, liquidating trustee,
agent or other person making such payment or distribution, or by the Holder of
this Note, if received by him, directly to the holders of Senior Indebtedness
(pro rata to each such holder on the basis of the respective amounts of Senior
Indebtedness held by such holders) or their representatives, to the extent
necessary to pay all Senior Indebtedness in full in money or money's worth after
giving effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness before any payment or distribution is made to the Holders of
the indebtedness evidenced by this Note.
(c) Subrogation. Subject to the payment in full of all Senior
Indebtedness, the Holder of this note shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of assets of
the Company made on the Senior Indebtedness until the principal of and premium,
if any, and interest on this Note shall be paid in full; and for the purposes of
such subrogation, no payments or distributions to the holders of Senior
Indebtedness of any cash, property or securities to which the Holder of this
Note would be entitled except for the provisions hereof and no payment over
pursuant to the provisions hereof to the holders of Senior Indebtedness by the
Holder of this Note shall, as between the Company, its creditors, other than the
holders of Senior Indebtedness, and the Holder of this Note be deemed to be a
payment by the Company to or on account of Senior Indebtedness, it being
understood that the foregoing provisions hereof are and are intended solely for
the purpose of defining the relative rights of the Holder of this Note, on the
one hand, and the holders of Senior Indebtedness, on the
4
<PAGE>
other hand.
(d) No Impairment of Obligation to Pay Notes. Nothing herein contained is
intended to or shall impair, as between the Company, its creditors, other than
the holders of Senior Indebtedness, and the Holder of this Note, the obligation
of the Company which is absolute and unconditional to pay to the Holder of this
Note the principal of and premium, if any, and interest on this Note as and when
the same shall become due and payable strictly in accordance with its terms or
to affect the relative rights of the Holder of this Note and creditors of the
Company, other than the holders of Senior Indebtedness, nor shall anything
herein or therein prevent the Holder of this Note from exercising all remedies
otherwise permitted by applicable law upon default under this note, subject to
the rights, if any, under this section of the holders of Senior Indebtedness in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy.
(e) Definition. As used herein, "Senior Indebtedness" shall mean all
indebtedness of the Company, whether outstanding on the date of issuance of this
Note or hereafter created, for (i) short-term and long-term borrowings
(including interest and collection costs) from financial institutions, including
banks, savings and loan associations, insurance companies and the like, incurred
in connection with the acquisition of any asset by the Company (other than this
or any other Note) or by the Broker or to provide capital to the Broker; and
(ii) purchase money indebtedness (including interest and collection costs),
incurred in connection with the acquisition of any asset by the Company (other
than this or any other Note) or by the Broker and any deferrals, renewals or
extensions of any such Senior Indebtedness.
4. Seniority. Anything in this Note to the contrary notwithstanding, the
----------
indebtedness evidenced by this Note shall be senior and prior in right of
payment, to the extent and in the manner hereinafter set forth, to all
indebtedness of the Company (which, for purposes of this Section 4 shall include
any subsidiary of the Company) for money borrowed constituting Subordinated Debt
after the date of this Note:
(a) Occurrences Precluding Payment on Subordinated Debt. No payment on
account of principal, premium, if any, or interest on Subordinated Debt shall be
made unless full payment of amount then due for principal, premium, if any, and
interest on all Notes has been made or duly provided for in money or money's
worth. No payment on account of principal, premium, if any, or interest on
Subordinated Debt shall be made if, at the time of such payment or immediately
after giving effect thereto, there shall have occurred an event of default with
respect to the Notes or if interest on this Note shall not have been paid for a
period of one year or more.
(b) Priority in Payment of Notes. Upon (i) any acceleration of the
principal amount due on this Note or (ii) any payment or distribution of assets
of the Company of any kind or
5
<PAGE>
character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership, or other proceedings, or upon any assignment for the benefit of
creditors of the Company or any other marshalling of the assets and liabilities
of the Company, all principal, premium, if any, and interest due or to become
due upon this Note shall be first be paid in full or payment thereof provided
for in money or money's worth before any payment is made on account of the
principal of or interest on the indebtedness evidenced by any Subordinated Debt;
and upon any such dissolution or winding up, or liquidation or reorganization,
or any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (other than securities of the
Company as reorganized or readjusted, or securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment, the
payment of which is subordinate to the payment of all Notes at the time
outstanding), to which the holders of Subordinated Debt would be entitled except
for the provisions hereof, shall be paid by the Company or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, or by the holders of Subordinated Debt, if received by
them, directly to the Holders of the Notes (pro rata to each such Holder on the
basis of respective amounts of Notes held by such Holders) or their
representatives, to the extent necessary to pay all Notes in full in money or
money's worth after giving effect to any concurrent payment or distribution to
or for the holders of the Notes before any payment or distribution is made to
the holders of the Subordinated Debt.
(c) Subrogation. Subject to the payment in full of all Notes, the holder
of Subordinated Debt shall be subrogated to the rights of the Holders of the
Notes to receive payments or distributions of assets of the Company made on the
Notes until the principal of and premium, if any, and interest on the
Subordinated Debt shall be paid in full; and for the purposes of such
subrogation, no payments or distributions to the holders of the Notes of any
cash, property or securities to which the holder of the Subordinated Debt would
be entitled except for the provisions hereof and no payment over pursuant to the
provisions hereof to the Holder of this Note by the holders of the Subordinated
Debt shall, as between the Company, its creditors, other than the holders of
Subordinated Debt, and the Holder of this Note be deemed to be a payment by the
Company to or on account of this Note, it being understood that the foregoing
provisions hereof are and are intended solely for the purpose of defining the
relative rights of the Holder of this Note, on the one hand, and the holders of
Subordinated Debt, on the other hand.
(d) No Impairment. Nothing herein contained is intended to or shall
impair, as between the Company, its creditors, other than the holders of
Subordinated Debt, and the Holder of this Note, the obligation of the Company
which is absolute and unconditional to pay to the holder of the Subordinated
Debt the principal of and premium, if any, and interest on the Subordinated Debt
as and when the same shall become due and payable strictly in accordance with
its terms or to affect the relative rights of the holders of the Subordinated
Debt and creditors of the Company, other than the Holder of this Note, nor shall
anything herein or therein prevent the holders of the Subordinated Debt from
exercising all remedies otherwise permitted by applicable law upon default under
the Subordinated Debt, subject to the rights, if any, under this
6
<PAGE>
section of the Holder of this Note in respect of cash, property or securities of
the Company received upon the exercise of any such remedy.
(e) Definition. As used herein, "Subordinated Debt"shall mean short-term
and long-term borrowings (including interest and collection costs) from any
person whatsoever, excluding (i) Senior Indebtedness; (ii) accounts payable
arising in the ordinary course of business; (iii) wage and other compensation
claims of employees and registered representatives who are associated with the
Company as independent contractors; and (iv) any indebtedness which has a
priority in payment as a matter of law.
(f) Acknowledgment of Subordination. To the extent practicable, any
promissory note or other evidence of indebtedness representing Subordinated Debt
shall contain provisions substantially similar to the foregoing and effectuating
the intention of this Section 4 that the Subordinated Debt be subordinated in
payment to this Note as provided herein.
5. Covenants of the Company.
--------- -- --- --------
(a) Mergers and Sales of Assets by the Company. If the Company is
recapitalized, consolidated with or merged into any other corporation, or sells
or conveys to any other corporation all or substantially all of its property as
an entity, then the obligation to pay the principal of (and premium, if any) and
interest on the Notes and the performance of the other covenants of the Company
under the Notes shall remain in full force and effect.
(b) Stock of Broker. The Company agrees not to sell, transfer, convey,
distribute, pledge, hypothecate or otherwise dispose of all or any portion of
the capital stock of the Broker owned by the Company or any interest therein,
nor to cause or allow the Broker to issue, sell, transfer, convey, pledge,
hypothecate or otherwise dispose of any of its capital stock or any interest
therein to any person other than the Company. Notwithstanding the foregoing but
subject to Section 2(b) herein, the Company may dispose of all of the Broker's
capital stock owned by the Company in a single transaction.
(c) Assets of Broker. Subject to Section 2(b) herein, the Company agrees
not to cause or allow the Broker to sell, transfer, convey, distribute, pledge,
hypothecate or otherwise dispose of all or substantially all of its assets.
Notwithstanding the foregoing and subject to Section 2(b) herein, the Company
may cause or allow the Broker's to dispose of all or substantially all of its
assets in a single transaction for such consideration as the board of directors
of the Broker shall determine, in good faith, to be fair and reasonable.
6. Tender upon Warrant Exercise. Notwithstanding anything herein
------ ---- ------- ---------
contained to the contrary, the Holder may apply all or a portion of the
principal amount of this Note in payment of all or a portion of the exercise
price of those certain Stock Purchase Warrants of even date herewith for the
purchase of shares of the Company's common stock, par value $.10 per
7
<PAGE>
share, at an exercise price of $1.50 per share, subject to adjustment as
provided therein. Accrued and unpaid interest on the principal amount of this
Note so applied shall be paid to the Holder within 30 days following the date of
tender of this Note to the Company for that purpose.
7. Demand Registration Rights.
------ ------------ -------
(a) Company Registration. If at any time after December 31, 1994, to and
including December 31, 1995, the Company shall receive from the Holders of not
less than a majority in principal amount of the Notes then outstanding a notice
requesting registration of their Notes under the Act for public sale, the
Company shall promptly give each other Holder written notice of such request.
The Company shall, one time only, use its best efforts to cause to be registered
under the Act all of the Notes that the Holders have requested to be registered,
including Holders who made written request therefor within twenty (2) days after
mailing of such notice to them by the Company.
(b) Obligations of the Company. Whenever required to use its best efforts
to effect the registration of the Notes, the Company shall, as expeditiously as
reasonably possible:
(i) Prepare and file with the Securities and Exchange Commission ("SEC") a
registration statement with respect to such Notes and use its best efforts to
cause such registration statement to become and remain effective; provided,
however, that in connection with any proposed registration intended to permit an
offering of any securities from time to time (i.e., a so-called "shelf
registration"), the Company shall in no event be obligated to cause any such
registration to remain effective for more than 180 days.
(ii) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(iii) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Notes owned by them.
(iv) Use its best efforts to register and qualify the securities covered
by such registration statement under such other securities or blue-sky laws of
such jurisdictions as shall be reasonably appropriate for the distribution of
the securities covered by the registration statement, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions, and further provide that (anything in this Section
7(b)(iv) to the contrary notwithstanding with respect to the bearing of
expenses) if any jurisdiction in which the securities shall be qualified shall
require that expenses incurred in connection with the
8
<PAGE>
qualification of the securities in that jurisdiction be borne by selling
shareholders pro rata, to the extent required by such jurisdiction.
(c) Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action that the Holders shall furnish to
the Company such information regarding them, the Notes held by them, and the
intended method of disposition of such securities as the Company shall
reasonably request and as shall be required in connection with the action to be
taken by the Company.
(d) Company Registration Expenses. The Company shall bear all registration
and qualification fees and expenses (excluding underwriters' discounts,
commissions and expenses), and any additional costs and disbursements of counsel
for the Company in connection with such registration; provided, however, that if
any such cost or expense is attributable solely to one selling Holder and does
not constitute a normal cost or expense of such a registration, such cost or
expense shall be paid by that selling Holder. In addition, each selling Holder
shall bear the fees and costs of its own counsel.
(e) Delay of Registration. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 7.
(f) Indemnification.
(i) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder, any underwriter (as defined in the Act) for it, and each
such person, if any, who controls such Holder or underwriter within the meaning
of the Act, against any losses, claims, damages, or liabilities, joint or
several, to which they may become subject under the Act or otherwise, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based on any untrue or alleged untrue statement of any
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, 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 will reimburse
each such Holder, such underwriter, or controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Section 7(f) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld) nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon an untrue statement or
9
<PAGE>
alleged untrue statement or omission or alleged omission made in connection with
such registration statement, preliminary prospectus, final prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter, or controlling person.
(ii) To the extent permitted by law, each Holder requesting or joining in
a registration will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the Act, and each
agent and any underwriter for the Company (within the meaning of the Act)
against any losses, claims, damages, or liabilities to which the Company or any
such director, officer, controlling person, agent, or underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, 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 each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in such registration statement, preliminary or final
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in connection with such registration; and each such Holder will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, agent, or underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 7(f)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld).
(iii) Promptly after receipt by an indemnified party under this Section
7(f) of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against any indemnifying party under
this paragraph, notify the indemnifying party in writing of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties. The failure to notify an indemnifying
party promptly of the commencement of any such action, if prejudicial to his
ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this paragraph, but the omission to so
notify the indemnifying party will not relieve him of any liability that he may
have to any indemnified party otherwise than under this paragraph.
(g) Termination of the Company's Obligations. The Company shall have no
obligations pursuant to this Section 7 after December 31, 1995.
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<PAGE>
(h) Lockup Agreement. In consideration for the Company agreeing to its
obligations under this Section 7, each Holder agrees in connection with any
registration of the Company's securities, upon the request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Notes (other than those included in the registration)
without the prior written consent of the Company or such underwriters, as the
case may be, for such period of time (not to exceed 180 days from the effective
date of such registration) as the Company or the underwriters may specify.
8. Default Interest. In the event of an uncured event of default under
------- ---------
this Note, the interest on the principal amount of this Note shall be computed
at the default rate of 15% per annum, and no Additional Interest shall accrue
thereafter as long as the default rate of interest remains effective.
9. Default Provisions. All principal and accrued and unpaid interest on
------- -----------
this Note shall become and be due and payable immediately upon demand of the
Holder if any one or more of the following "events of default" shall occur:
(a) Payment Default. Default in the payment of any principal or interest
on this Note when and as the same becomes due and payable and the continuance
thereof for sixty (60) days after receipt of written notice by the Borrower from
the Holder hereof;
(b) Other Default. Default in the due observance or performance of any of
the other agreements, covenants, warranties, representations, terms or
conditions contained in this Note and the continuance thereof for sixty (60)
days after written notice from the Holder hereof; provided, however, that the
cure period shall be extended for a reasonable period (but in no event for a
period longer than 180 days from the date of the initial default notice) if:
(i) such event of default cannot be cured within the applicable cure period
despite the Company's diligent and good faith effort; (ii) the Company
commences all actions necessary to cure such default immediately upon receipt of
Holder's written notice and provides Holder with its written plan to cure; and
(iii) so long as the Company diligently pursues such cure to its completion;
(c) Dissolution or Insolvency. The dissolution, liquidation, termination
of existence, or admission in writing of insolvency (defined as the Company
generally not paying its debts as they become due, excluding its 45%
subordinated notes due October 1, 19--, and its 1989-A Series Preferred Stock,
par value $1.00 per share, redeemable on October 1, 19--) of, or the making of
an assignment for the benefit of creditors, by the Company or the Broker;
(d) Voluntary Bankruptcy. The institution of bankruptcy proceedings or
proceedings for a reorganization, liquidation, composition, receivership or
other similar debtor relief under any other law or regulation, federal or state,
by the Company or the Broker; or
11
<PAGE>
(e) Involuntary Bankruptcy. The institution of bankruptcy proceedings or
proceedings for a reorganization, liquidation, composition, receivership or
other similar debtor relief under any other law or regulation, federal or state,
instituted against the Company or the Broker and such proceeding shall continue
unstayed and in effect for any period of sixty (60) consecutive days; or
(f) Default on Senior Indebtedness. There shall have occurred an event of
default under any instrument evidencing Senior Indebtedness or in the instrument
under which the same is outstanding permitting any holder thereof to accelerate
the maturity thereof until such time as such event of default shall have been
cured or waived and shall have ceased to exist, provided that the 1989 Preferred
Stock shall not be deemed to be Senior Indebtedness.
The Company shall, within 90 days after the occurrence of any Event of
Default known to it, give to the Holder of this Note notice of such default.
10. Transfer. Subject to the appropriate provisions of the Act, and the
---------
provisions of applicable state blue-sky laws, this Note or any portion of the
principal amount hereof equal to $1,000 or integral multiples thereof is
transferable on the records of the Company upon presentation of this Note,
properly endorsed, at its principal executive offices. Upon such presentation
and transfer a new Note or Notes will be issued. For the purposes of payment
and all other purposes, the Company shall deem and treat the person in whose
name this Note is registered as the absolute owner hereof and the Company shall
not be affected by any notice to the contrary.
11. No Waiver. Except as provided in Section 12 below, no failure to
-- -------
exercise, and no delay in exercising any right, power or remedy hereunder shall
impair any right, power or remedy which the Holder may have, nor shall any such
delay be construed to be a waiver of any of such rights, powers or remedies, or
an acquiescence in any breach or default under this Note, nor shall any waiver,
which, except as provided in Section 12 below, must be in writing signed by the
Holder, of any breach or default hereunder be deemed a waiver of any default or
breach subsequently occurring. The rights and remedies herein specified are
cumulative and not exclusive of any rights or remedies which the Holder would
otherwise have.
12. Amendments and Waivers.
---------- --- --------
(a) Amendment by the Company. The Company may amend or supplement the
Notes without notice to or the consent of the holders of the Notes (i) to cure
any ambiguity, omission, defect or inconsistency and (ii) to make any other
change that does not adversely affect the rights of the holders of the Notes.
The Company may similarly waive compliance with any provision of the Notes which
waiver does not adversely affect the rights of the Note holders.
(b) Amendments to Comply with the Trust Indenture Act of 1940. In
connection with registration of the Notes for public sale or if it should ever
be determined that the Notes were or
12
<PAGE>
are subject to provisions of the Trust Indenture Act of 1940, the Company may
find it necessary or desirable to cause the Notes to be covered by a trust
indenture administered by an independent trustee. Accordingly, the Holders agree
that the Company shall have the right and power to enter into a trust indenture
meeting the applicable requirements of the Trust Indenture Act of 1940, to
appoint an independent trustee thereunder and, subject to Section 12(c) herein,
to make such modifications and amendments to the Notes as the Board of Directors
of the Company, in the exercise of its discretion, shall deem necessary or
desirable without any requirement for approval by the holders of the Notes.
(c) Amendments Requiring Holder Approval. The Company may otherwise amend
the Notes only with the written consent of the holders of at least a majority of
the principal amount of the Notes then outstanding; provided, however, that
without the consent of the holder of each Note affected, however, no such
amendment may (i) reduce the rate or extend the time for payment of interest on
the Notes, (ii) reduce the principal of or extend the maturity of the Notes,
(iii) decrease the redemption premium to be paid by the Company or (iv) reduce
the required percentage for waiver or modification of the Notes.
(d) Waivers. Except as otherwise provided in Section 12(c) above, the
observance of any term or provision of this Note may be waived (either generally
or in a particular instance and either retroactively or prospectively) and any
default or event of default may be waived with the written consent of the
Borrower and the Holders of at least a majority in principal amount of Notes
then outstanding.
(e) Amendments and Waivers Binding on all Holders. Except as otherwise
provided in Section 12(c) above, any amendment or waiver effected in accordance
with this Section 12 shall be binding upon each Holder of any Notes at the time
outstanding, each future holder of all such Notes and the Company. Each Holder
acknowledges and agrees that by operation of this Section, the Holders of a
majority in principal amount of Notes then outstanding will have the right and
power to diminish or eliminate certain material rights of the Holder hereunder.
13. Notices. All notices, requests, consents and demands hereunder shall
--------
be effective upon the earlier of personal delivery (including telex, telecopier,
telegram, overnight courier or other acknowledged receipt) or three business
days after deposit in the United States mails, registered or certified mail,
postage fully prepaid, return receipt requested, addressed to the Holder or the
Company at the address set forth below:
Company: D.E. Frey Group, Inc.
1700 Lincoln Street
Suite 2200
Denver, Colorado 80203
Attention: President
13
<PAGE>
Holder:
Any address may be changed by notice, in writing, given in accordance with this
Section.
14. Severability of Provisions. In case any one or more of the provisions
------------ -- -----------
contained in this Note should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
15. Successors and Assigns. This Note shall be binding upon, enforceable
---------- --- --------
by and against, and inure to the benefit of the Holder and the Company, and
their respective heirs, personal representatives, successors and assigns.
16. Choice of Law. This Agreement shall be governed by and construed in
------ -- ----
accordance with the laws of the State of Colorado.
17. Amendment and Priority. No provision of this Note may be amended,
--------- --- ---------
except with the written consent of the Holder or as provided in Section 12
above. No such amendment shall extend to or affect any obligation, covenant,
agreement, event of default or any provision of this Note not expressly amended
nor impair any right consequent thereon.
18. Collection Costs. In the event this Note is placed in the hands of an
---------- ------
attorney for collection following the occurrence of an event of default, the
Company agrees to pay all costs of collection incurred by the Holder including
reasonable attorneys' fees.
14
<PAGE>
Exhibit 10.1
- --------------------------------------------------------------------------------
D.E. Frey & Company, Inc.
DEFrey One Norwest Center
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
MEMORANDUM TO FILE (303) 863-4040
- --------------------------------------------------------------------------------
To: D.E. Frey & Company, Inc. ("Company") Files Member NASD/ SIPC
From: Paul L. Hocevar
Date: November 18, 1996
Subject: Employment Agreements
On November 15, 1996 the undersigned met with Mr. Mike McClurg, member of the
Company's Compensation Committee, to discuss the suggested revisions to the
employment agreements. It was agreed that the following amendments to the THIRD
AMENDED AND RESTATED EMPLOYMENT AGREEMENT shall be made, effective January 1,
1996:
1) The base compensation pool for all executives would be $100,000 per
month regardless of the profitability of Company or consolidated group and
the individual executive's base compensation would be a percentage of the
base compensation pool. The base compensation pool of $100,000 will be
reduced to X amount, if consolidated gross revenue for a six month period
is less than the aggregate employee percentages times $100,000 times 10
times 6. For example, Dale's percentage of the compensation pool is 50% and
the aggregate percentages for all executive's is 75% at this time. If the
consolidated group revenue for a six month period was less than $4,500,000
(.75 x $100,000 x 10 x 6) the base compensation pool for the month would
be the average consolidated gross revenue for the six month period times
10%. This provision is intended to provide some downside protection to the
Company. The term consolidated gross revenue has the same meaning as the
term is defined in the THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT
between the Company and Dale E. Frey.
2) The incentive compensation pool for the executives would be determined
annually based on annual consolidated net income before taxes. Each
executive's share of the incentive compensation pool would be his/her
percentage, as determined above, of the pool. The attached table reflects
the incentive compensation pool. For example, the consolidated net income
must equal or exceed two times the aggregate base and incentive
compensation payable to all Executive Officers for the incentive
compensation pool up to $600,000. Therefore, consolidated net income before
taxes must exceed 2 times the base compensation before the Company
executives are entitled to incentive compensation. The factor increases as
consolidated net income increases.
3) All other provisions of the agreement would remain the same.
<PAGE>
D.E. FREY & COMPANY, INC.
-------------------------
INCENTIVE COMPENSATION
----------------------
<TABLE>
<CAPTION>
Consolidated Net Income Aggregate
Base Compensation (1) Incentive Compensation Factor Before Taxes Incentive Compensation
- -------------------- ---------------------- ------ ------------ ----------------------
Lower Upper Lower Upper
Range Range Range Range
----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
$1,200,000 $0 $600,000 2 $2,400,000 $3,600,000 $600,000
$1,200,000 $600,001 $1,200,000 2.25 $4,050,000 $5,400,000 $1,200,000
$1,200,000 $1,200,001 $2,400,000 2.5 $6,000,000 $9,000,000 $2,400,000
$1,200,000 $2,400,001 $3,600,000 3 $10,800,000 $14,400,000 $3,600,000
$1,200,000 $3,600,001 $4,800,000 4 $19,200,000 $24,000,000 $4,800,000
$1,200,000 $4,800,001 $8,400,000 5 $30,000,000 $48,000,000 $8,400,000
$1,200,000 $8,400,001 $22,800,000 5 $48,000,000 $120,000,000 $22,000,000
</TABLE>
The maximum aggregate monthly base compensation payable to Management Executive
Officers excluding the General Counsel is $100,000 per month, regardless of the
profitability of Group and Company. Incentive compensation above the aggregate
of Management Executive officers monthly compensation shall not be deemed to
have been earned and shall not be payable unless Group's consolidated net income
before taxes computed for the fiscal year (but after the deduction for the
incentive compensation) equals or exceeds 2; 2.25; 2.5; 3.0; 4.0; and 5.0 times
the aggregate base compensation and incentive compensation payable to Management
Executive officers excluding the General Counsel (Management Compensation), if
Management compensation is $1,200,000 to $1,800,000; $1,800,001 to $2,400,000;
$2,400,001 to $3,600,000; $3,600,001 to $4,800,000; $4,800,001 to $6,000,000;
$6,000,001 to $9,600,000; $9,600,001 to $24,000,000 and Management
compensation in excess of $24,000,000 respectively.
(1) Assumes base compensation of $100,000 per month
<PAGE>
EXHIBIT 10.2
THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------------
THIS THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Amended Agreement")
between D.E. FREY & COMPANY, INC., ("Employer"), a Delaware corporation, and
DALE E. FREY ("Employee") is dated this ______ day of _________________, 1994.
WITNESSETH:
----------
WHEREAS, Employee is operating and managing the securities brokerage
business of Employer, and performs services for D.E. Frey Group, Inc. ("Group");
and
WHEREAS, Employer desires to have Employee continue to operate and manage
the business of Employer; and
WHEREAS, Employee desires to continue his services as Chairman of the Board
and Chief Executive Officer of Employer, with such services to be rendered in
the various corporate areas that are generally handled by the aforesaid
designated positions and Employee desires to accept such employment, and in
furtherance thereof Employer and Employee entered into a Second Amended and
Restated Employment Agreement dated February 12, 1994;
WHEREAS, Employer and Employee desire to amend and modify the Second
Amended and Restated Employment Agreement, as set forth in this Third Amended
and Restated Employment Agreement; and
WHEREAS, Employee understands that, in his service for Employer, he is
forever surrendering and waiving any rights to utilize, directly or indirectly,
the name D.E. Frey & Company, except as otherwise provided herein, or any other
name so similar thereto as to create confusion in the public's mind, in the
acquisition or ownership or the opening and operation of any business whose
principal feature is conducting business dealings within or with the financial
services industry; and
WHEREAS, Employer understands that Employee does not wish, without its
permission, to perform any services for any person or entity other than Employer
during the term of this Amended Agreement as it may be extended or modified; and
WHEREAS, Employee further understands that the term "Employer" shall
include any corporation with which Employer may be merged or consolidated, any
corporation which may acquire all or a substantial portion of the assets or
goodwill of such corporation, or any corporation which may result from any
corporate reorganization or other corporate restructuring; and
WHEREAS, Employee recognizes the significance of not disclosing to any
other person or entity, during or after the term of his employment with
Employer, any confidential business information or trade secrets of Employer
obtained or learned by Employee during his employment.
<PAGE>
NOW, THEREFORE, in consideration of the premises as hereinabove set forth,
the parties do agree as follows:
1. TERM. Employer hereby employs Employee for a period of five (5) years
----
commencing on July 16, 1993 through July 15, 1998, unless earlier terminated in
the manner specified in this Amended Agreement.
2. COMPENSATION.
------------
(a) Salary. Subject to paragraph 10(f) herein, that as and for a
------
monthly salary for Employee's services to be rendered under this Amended
Agreement, Employee shall receive (I) base compensation equal to 5.0% of Group's
consolidated gross revenue up to $1,000,000 per month payable regardless of the
profitability of Employer or Group plus (II) incentive compensation equal to
5.0% of Group's consolidated gross revenue over $6,000,000 for a six month
period; provided, however, that incentive compensation shall not be deemed to
have been earned and shall not be payable unless Group's consolidated net income
computed biannually before taxes and after deduction of the aggregate base and
incentive compensation payable to all Executive Officers of Employer and of
Group, including Employee, (the "Management Pool") equals or exceeds the amounts
determined as follows:
Consolidated Gross Group Consolidated
Revenue for a Six Month Period Net Income
- ------------------------------ ------------------
Over $6,000,000 up to $9,000,000 2.00X the Management Pool
Over $9,000,000 up to $12,000,000 2.25X the Management Pool
Over $12,000,000 up to $18,000,000 2.50X the Management Pool
Over $18,000,000 up to $24,000,000 3.00X the Management Pool
Over $24,000,000 up to $30,000,000 4.00X the Management Pool
Over $30,000,000 5.00X the Management Pool
The term "consolidated gross revenues" shall mean the sum of (I) gross
commissions earned by Employer's brokerage offices located in Denver, Colorado,
Colorado Springs, Colorado, Houston, Texas and Tallahassee, Florida; (II) net
receipts from flagship offices. Flagship offices pay Employer a percentage of
their gross commission revenues from all transactions that have settled and not
cancelled or otherwise been adjusted; (III) net profits from securities trading
which shall be defined as the difference between the purchase or sale price of
securities transactions and the price offered to Employer's brokers or other
dealers and shall exclude the costs of generating those revenues such as
interest, clearing costs, and similar costs; (IV) corporate finance fees; (V)
other income and (VI) all other gross revenues earned by any and all other
subsidiaries of Group.
-2-
<PAGE>
(b) Method of Payment. Employee shall be paid his monthly salary on
-----------------
the 15th of each month. Incentive compensation under paragraph 2(a)(II) shall
be calculated based on a six month period commencing January 1, 1994 through
June 30, 1994, and continuing thereafter. The incentive compensation shall be
paid on the 15th day of the month following the end of a six month period. Such
salary shall be subject to the usual and required employee payroll deductions
and withholding. Employee's compensation shall be paid in the following form:
(I) the first $1,500,000 of annual compensation shall be payable in cash; (II)
all amounts over $1,500,000 up to $2,000,000 shall be paid 80% in cash and 20%
in the Common Stock of Group; (III) over $2,000,000 and up to $3,000,000 shall
be paid 50% in cash and 50% in the Common Stock of Group; (IV) over $3,000,000
and up to $5,000,000 shall be paid 25% in cash and 75% in the Common Stock of
Group; and (V) all amounts over $5,000,000 shall be paid in the Common Stock of
Group. The Common Stock of Group shall be valued at its fair value determined as
follows:
(i) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange, the
current value shall be the last reported sale price of the Common Stock on
the composite tape of such exchange on the last trading day prior to the
compensation payment date or if no such sale is made on such day, the
average closing bid and asked prices for such day on the composite tape of
such exchange; or
(ii) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current value shall be the mean of the
last reported bid and asked prices reported by the National Association of
Securities Dealers Quotation System (or, if not so quoted on NASDAQ, by the
National Quotation Bureau, Inc. or on the OTC Bulletin Board) on the last
trading day prior to the compensation payment date, or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported,
the current value shall be an amount, not less than book value, determined
in such reasonable manner as may be prescribed by the board of directors of
Group, such determination to be final and binding on Employee.
Notwithstanding the foregoing, in the event a majority of the disinterested
members of the board of directors of Group shall determine that issuance of the
Common Stock would result in value dilution to existing shareholders, then such
members may cause Employer to pay all or any portion of the Common Stock portion
of Employee's compensation in cash rather than in Common Stock.
(c) Warrants. In addition, Employee shall receive as compensation,
--------
ten (10) percent of any warrants and/or other equity
-3-
<PAGE>
participation earned by Employer through its underwriting and syndicate
activities.
(d) Payment of Loan. On April 14, 1989, the effective date of its
---------------
registration with the NASD as a broker/dealer, Employer loaned to Employee the
sum of Two Hundred Fifty Thousand Dollars ($250,000.00), the unpaid balance of
which, as of the date of this Agreement, is $194,373. The loan is evidenced by a
non-interest bearing promissory note, the entire amount of which is to be
forgiven upon the death of Employee. The parties agree that the promissory note
shall be modified to incorporate the following payment terms:
In each month in which Employee's net salary (gross
salary less the usual and required employee payroll
deductions and withholding taxes) exceeds $30,000, Employer
shall withhold from Employee's salary for that month and
apply against the loan an amount equal to 50% of such
excess. In any event, the loan shall be due and payable in
full no later than April 14, 1998.
3. OTHER POSITIONS. During the term of this Amended Agreement, Employer
---------------
agrees to nominate Employee for election to the board of directors of Employer
and to use its best efforts to cause such election. In addition, Group agrees to
employ Employee as Chairman and Chief Executive Officer of Group having similar
duties and responsibilities as under this Amended Agreement in consideration of
the acquisition of Common Stock granted in paragraph 2 herein. During the term
of this Agreement, Group also agrees to nominate Employee for election to the
board of directors of Group and to use its best efforts to cause such election.
Upon termination of this Amended Agreement for any reason, the employment of
Employee as Chairman and Chief Executive Officer of Group and Employer shall
terminate. Employee shall also be deemed to simultaneously resign his position
on the board of directors of Employer and Group.
4. VACATION. Employee shall be entitled to such vacation with pay during
--------
each year of this Amended Agreement as may be determined by the board of
directors of Employer, and at such times as Employee and Employer may mutually
agree upon, but in no event less than four (4) weeks during each calendar year.
5. EMPLOYMENT. Employee agrees to perform the services requested of him
----------
by the board of directors of Employer. Employee will open, operate and manage
the securities brokerage business of Employer, commencing his services hereunder
as Chairman of the Board and Chief Executive Officer, and that all such services
so
-4-
<PAGE>
rendered to Employer shall be consistent with the services that are customarily
rendered in the different corporate areas, which are usually handled by the
positions designated aforesaid. It is further understood, that the term
"Employer" shall include any corporation with which Employer may be merged or
consolidated, any corporation which may acquire all or a substantial portion of
the assets or goodwill of Employer, or any corporation which may result from any
corporate reorganization or other corporate restructuring.
6. THE NAME "FREY." Employee understands and agrees that the name "Frey,"
---------------
either alone or in combination with any other words including the name of
Employer and its parent company (the "Name"), is the sole and exclusive property
of Employer in connection with the direct or indirect ownership and/or operation
of any business in the financial services industry. In the event Employer or any
person using the Name with the consent of Employer should cease to be in the
financial services industry, then such person shall cease using the Name and, if
no person is eligible to use the Name, then ownership of the Name shall
automatically revert to Employee or his heirs. In addition, should any person
using the Name be determined by final order of a court of competent jurisdiction
to have committed, conspired to commit or aided and abetted the commission of
any fraud or to have violated any criminal law (other than misdemeanor
violations) under circumstances which would cause embarrassment or humiliation
to Employee or his heirs, then Employer and any person affiliated or associated
with Employer shall cease using the Name forthwith upon the giving of written
notice by Employee or by any of his heirs to Employer and ownership of the Name
shall forthwith revert to Employee or his heirs upon the giving of such notice.
The parties further agree that the use of the Name by Employer or any
other person after such notice has been given, would invariably and inevitably
cause irreparable injury to Employee or his heirs, and Employer and any other
person using the Name consents to the District Court in and for the City and
County of Denver as having jurisdiction to enter any temporary and/or permanent
injunction against Employer and/or any such person prohibiting use of the Name,
but only after notice to Employer or any such person and the opportunity to be
heard.
Employer agrees that it will cause the forgoing provisions regarding
use and termination of use of the Name to be incorporated into all agreements
whereby Employer authorizes or allows the Name to be used by any other person.
The provisions of this Section 6 and of Section 11 shall survive
termination of this Agreement.
7. BUSINESS EXPENSES. Employer shall reimburse Employee for any
-----------------
reasonable and necessary business expenses incurred by Employee in connection
with his services hereunder in accordance with its then prevailing policy,
provided that Employee shall submit to
-5-
<PAGE>
Employer a written itemization as provided by the policies and procedures for
such expense reimbursement by Employer.
8. AUTOMOBILE. Employer shall furnish Employee an automobile or allowance
----------
for automobile expense to the extent permitted by the Internal Revenue Code and
regulations promulgated thereunder. Employer shall also reimburse Employee for
the costs of automobile maintenance, insurance, and license plates.
9. BENEFITS. During the term hereof and as long as Employee is not in
--------
default hereunder, he shall be entitled to participate in any plans and benefits
(or to the equivalent thereof) generally available to senior corporate officers
of Employer, subject to the terms and conditions of such plans.
10. TERMINATION.
-----------
(a) Events of Termination. Employer may terminate Employee's services
---------------------
for "Cause" upon 10 days written notice of termination ("Notice of Termination")
setting forth the reason(s) for and date of termination ("Date of Termination").
Examples of termination for "Cause" include, but are not limited to, the
following: (I) an act or acts of dishonesty, a breach of fiduciary duty to
Employer, or acts contrary to the best interest of Employer; or (II) the
commission of a felony. Employee's services shall also be deemed terminated
upon his death or disability. Employee may also voluntarily terminate his
employment upon thirty (30) days written Notice of Termination delivered to
Employer.
(b) Compensation upon Termination Voluntarily by Employee or for
------------------------------------------------------------
Cause. If Employee's employment shall be terminated voluntarily by Employee or
- -----
if Employee's employment is terminated for Cause, then Employer shall pay
Employee's salary in accordance with subparagraph 2(a) above during the pay
period through the Date of Termination, together with any accrued benefits
pursuant to all other non-cash benefit plans through the Date of Termination,
but in accordance with the provisions of such benefit plans regarding
distribution in the event of termination and Employer shall have no further
obligation to Employee under this Amended Agreement.
(c) Compensation upon Termination for Disability, for Death, or
-----------------------------------------------------------
Involuntarily for Other than Cause. If Employee's employment shall be
- ----------------------------------
terminated by disability, for death, or involuntarily for other than Cause, then
Employee shall be entitled to:
(i) Severance pay in a lump sum on or before the thirtieth (30th)
day following the Date of Termination in an amount equal to the amount
earned as salary by Employee for the preceding twelve months.
-6-
<PAGE>
(ii) Any stock of Employer earned by or awarded to Employee, as
of the Date of Termination, under any stock bonus plan, in accordance with
and pursuant to the provisions of such stock plan, it being understood and
agreed, however, that any and all options for the purchase of the stock of
Employer that Employee might be entitled to can only be exercised by
Employee while Employee is still employed by the Employer or in accordance
with the terms of the option agreement, whichever is longer.
(iii) Have Employer maintain in full force and effect, for the
continued benefit of Employee for ninety (90) days after the Date of
Termination at respective contribution levels of Employer and of employees
in comparable positions, and for ninety (90) consecutive and additional
days at Employee's sole expense, all medical insurance and all non-cash
benefit plans and programs or arrangements in which Employee was entitled
to participate immediately prior to the Date of Termination, other than
life insurance benefit plans; provided, however, that if Employee becomes
eligible to participate in a benefit plan, program or arrangement of
another employer which confers substantially similar benefits upon
Employee, Employee shall cease to receive benefits under this subparagraph
in respect of such plan, program or arrangement; provided, further, that
Employee's participation in life insurance benefit plans allows Employee to
convert his group participation therein to one or more individual, non-
group life insurance policies, in which event Employer shall maintain for
ninety (90) consecutive days immediately following the Date of Termination,
such life insurance benefits at the respective contribution levels of
Employer and Employee which were applicable immediately prior to the Date
of Termination.
(d) Mitigation. Employee shall not be required to mitigate the amount
----------
of any payment or benefits provided for in this Amended Agreement by seeking,
after the Date of Termination, other employment or otherwise, nor except as may
be otherwise provided herein, shall the amount of any payment or benefit
provided for in subparagraph 10(c) be reduced by any compensation earned by
Employee as the result of employment by another employer after the Date of
Termination, or otherwise.
(e) Cash Option. Notwithstanding anything to the contrary herein,
-----------
with respect to any non-cash compensation benefits payable under Paragraph 9
herein, Employer shall have the right, but not the obligation, to pay to
Employee the cash equivalent of such compensation and benefits.
(f) Definition. For purposes of this Amended Agreement, the term
----------
"disability" shall mean such medically determinable degree of physical or mental
impairment as renders the Employee unable to perform his regular or normal
duties as an officer, director or
-7-
<PAGE>
employee of Employer or as shall be otherwise defined in any policy or policies
of disability insurance now or hereafter obtained by the Employer with respect
to Employee. Except as otherwise provided in any such policy or policies of
disability insurance, for the purposes of this Amended Agreement the event of
disability shall not, however, be deemed to have taken place until such
condition as described above has persisted for a cumulative period of six
months. The compensation payable to Employee pursuant to paragraph 2 above shall
be reduced to the extent of payments made to Employee under any such disability
policy or policies or otherwise relating to any disability of Employee.
11. NON-DISCLOSURE. Employee agrees that neither during nor after the
--------------
term of his employment with Employer herein will he use or disclose to any other
person any confidential business information or trade secrets of Employer, or
affiliated companies, obtained or learned by him during his employment.
12. COSTS OF ENFORCEMENT. If any dispute or controversy arises concerning
--------------------
this Amended Agreement, the parties shall be subject to binding arbitration in
accordance with industry rules. In the event arbitration proceedings are
commenced by either party against the other party to enforce the rights and
obligations set forth in this Amended Agreement, the costs of such litigation or
other proceedings, including reasonable attorneys' fees, shall be ultimately
borne by the non prevailing party as adjudged by the arbitration panel.
13. APPLICABLE LAW. All matters pertaining to this Amended Agreement
--------------
(including its interpretation, applications, validity, performance and breach)
in whatever jurisdiction action may be brought, shall be governed by the laws of
the State of Colorado applicable to contracts made and to be wholly performed in
Colorado.
Nothing in this Amended Agreement shall be construed to require the
commission of any act contrary to law, and wherever there is any conflict
between any provision of this Amended Agreement and any material present or
future statute, law, governmental regulation, or ordinance contrary to which the
parties have no legal right to contract or perform, the latter shall prevail,
but in such event the provision(s) of this Amended Agreement affected shall be
curtailed and limited only to the extent necessary to bring it or them within
the legal requirements. If any term or provision of this Amended Agreement or
the application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Amended Agreement or the
application of such term or provision to the persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Amended Agreement shall be valid
and enforced to the fullest extent permitted by law.
-8-
<PAGE>
14. ENTIRE AGREEMENT. This Amended Agreement embodies the entire
----------------
understanding of the parties, and there are no agreements, representations, or
warranties concerning the subject matter of this Amended Agreement, other than
those contained herein.
15. PRIOR AGREEMENTS. This Amended Agreement supersedes and replaces any
----------------
and all prior understandings or employment agreements with Employer.
16. SUCCESSORS; BINDING AGREEMENT. This Amended Agreement shall inure to
-----------------------------
the benefit of and be binding upon Employer and its successors and by Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees, and legatees. If Employee should die while amounts would
still be payable to Employee hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Amended Agreement to Employee's devisee, legatee, or other
designee or, if there be no such designee, to Employee's estate.
This Amended Agreement shall remain in full force and effect, except
as the terms of this Amended Agreement may otherwise provide, in the event of
any sale of all or a substantial portion of Employer's assets or goodwill, or
merger or consolidation involving Employer or divisive or other reorganization
or change in control of the board of directors of Employer.
17. NOTICE. Notices and all other communications provided for in this
------
Amended Agreement shall be in writing and shall be deemed to have been duly
given when delivered or three (3) days following being mailed by United States
mail, registered mail, return receipt requested, postage prepaid, and addressed
to the respective addresses as set forth on the last page of this Amended
Agreement; provided that all notices to Employer shall be directed to the
attention of the Secretary of Employer or to such other address as each party
may have furnished to the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon receipt.
18. RIGHTS TO RESULT AND PROCEEDS OF SERVICES. Employer shall own all
-----------------------------------------
rights of every kind in and to all results and proceeds of Employee's services
hereunder.
19. MODIFICATION, WAIVER. No provision of this Amended Agreement may be
--------------------
modified, waived, or discharged unless such modification, waiver or discharge is
agreed to in writing signed by Employee and a written resolution by the board of
directors of Employer. No waiver by any party hereto at any time of any breach
by any other party hereof of, or failure to comply with any condition or
provision of this Amended Agreement to be performed by such other party, shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
-9-
<PAGE>
20. LEGAL REPRESENTATION. Employee acknowledges that legal counsel for
--------------------
Employer prepared this Amended Agreement; that such counsel does not and will
not represent Employee; and the Employee has been advised and encouraged to
obtain the services of his own legal counsel with respect to this Amended
Agreement.
IN WITNESS WHEREOF, Employee and Employer have executed this Amended
Agreement this _____ day of ____________________, 1994.
EMPLOYER:
D.E. FREY & COMPANY, INC.
ATTEST:
______________________________ By: /s/ Kevin L. Spencer
_______________, _____________ ___________________________
Kevin L. Spencer, President
Employer's Address:
1700 Lincoln Street, Suite 2220
Denver, Colorado 80203
EMPLOYEE:
/s/ Dale E. Frey
______________________________
Dale E. Frey
Employee's Address:
1700 Lincoln Street, Suite 2220
One Norwest Center
Denver, Colorado 80203
-10-
<PAGE>
The undersigned agrees to issue its Common Stock in accordance with
the provisions of Paragraph 2 and to employ Employee and to initiate the
director nomination covenant contained in Paragraph 3 of the above Amended
Agreement.
D.E. FREY GROUP, INC.
ATTEST
______________________________ By: /s/ Kevin L. Spencer
__________________, __________ ___________________________
Kevin L. Spencer, President
Address:
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
-11-
<PAGE>
ADDENDUM TO THIRD AMENDED AND RESTATED
--------------------------------------
EMPLOYMENT AGREEMENT
--------------------
THIS ADDENDUM TO THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Addendum") between D.E. Frey & Company, Inc. ("Employer"), a Delaware
corporation, D.E. Frey Group, Inc. ("Group"), a Delaware corporation, and Dale
E. Frey ("Employee"), is dated this _________ day of September, 1999.
WITNESSETH:
----------
WHEREAS, Employer and Employee entered into a Third Amended And Restated
Employment Agreement dated October 27, 1994 ("Amended Agreement") whereby
Employer employed Employee for a period of five years commencing on July 16,
1993, and continuing, unless otherwise terminated, until July 15, 1998;
WHEREAS, in a separate document Group agreed to abide by certain provisions
in the Amended Agreement;
WHEREAS, Employer and Employee and Group continued to operate in accordance
with the terms of the Amended Agreement from July 16, 1998, until the date of
this Addendum notwithstanding the absence of any writing extending the term of
the Amended Agreement;
WHEREAS, pursuant to the provisions of the Amended Agreement and during the
term of the Amended Agreement, Employee and, until the date of this Addendum,
Employee operated and managed the securities brokerage business of Employer and
also performed services for Group;
WHEREAS, Employer and Employee desire to extend the term of the Amended
Agreement to include the period of Employee's employment from the end of the
term of the Amended Agreement to the date of this Addendum and for a period of
five years commencing with the date of this Addendum;
WHEREAS, Employer and Employee desire to continue their employment
relationship under the same terms and conditions as provided in the Amended
Agreement except as expressly modified herein; and
WHEREAS, Employee and Group desire to continue their employment
relationship as described by the Amended Agreement.
-12-
<PAGE>
NOW, THEREFORE, consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Employer and Employee and Group
agree as follows:
1. Acceptance of the Amended Agreement. Employer and Employee hereby
-----------------------------------
accept each of the terms and conditions of the Amended Agreement as binding on
both parties, except as any of the terms or conditions of the Amended Agreement
is expressly modified by this Addendum. A copy of the Amended Agreement is
attached hereto as Exhibit A.
2. Agreement of the Group. Group agrees (a) to issue its Common Stock in
----------------------
accordance with the provisions of paragraph 2 of the Amended Agreement; (b) to
employ Employee as Chairman and Chief Executive Officer of Group as described in
paragraph 3 of the Amended Agreement; (c) to nominate Employee for election to
the board of directors of Group and use its best efforts to cause such election;
(d) to take any other action which it is required to take by the Amended
Agreement; and (e) to be bound to the agreement contained in this paragraph
during the term of the Amended Agreement as extended by this Addendum.
3. Term. Paragraph 1 of the Amended Agreement is hereby modified to read
----
the "Employer hereby employs Employee for the period from July 16, 1998 through
the date of the Addendum to this Amended Agreement and further, for the period
from the date of the Addendum through September 15, 2002, unless earlier
terminated in the manner specified in this Amended Agreement."
4. Payment of Loan. Paragraph 2(d) of the Amended Agreement is hereby
---------------
struck from the Amended Agreement in that the loan described in the paragraph is
fully paid.
5. Legal Representation. Employee acknowledges that legal counsel for
--------------------
Employer and Group prepared this Addendum; that such counsel does not and will
not represent Employee; and the Employee has been advised and encouraged to
obtain the services of his own legal counsel with respect to this Addendum.
-13-
<PAGE>
IN WITNESS WHEREOF, Employee and Employer and Group have executed this
Addendum this _______ day of _______________, 1999.
EMPLOYER: D.E. FREY & COMPANY, INC.
ATTEST:
By: __________________________________
___________________________
Its: __________________________________
Employer's Address:
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
EMPLOYEE:
__________________________________
Dale E. Frey
Employee's Address:
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
D.E. FREY GROUP, INC.
ATTEST:
By: __________________________________
___________________________
Its: __________________________________
Group's Address:
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
-14-
<PAGE>
EXHIBIT 10.3
NONCOMPETITION AND NONSOLICITATION AGREEMENT
--------------------------------------------
THIS NONCOMPETITION AND NONSOLICITATION AGREEMENT (the "Agreement") between
D.E. Frey & Company, Inc. ("Frey"), a Delaware corporation, and Paul L. Hocevar
("Employee"), is dated this _________ day of September, 1999.
WITNESSETH:
WHEREAS, Employee has been and is presently employed by Frey; and
WHEREAS, Frey proposes to effect a recapitalization of its business, in
light of which both Frey and Employee have an interest in entering into an
agreement reflecting their respective obligations to one another in the event of
termination of their employment relationship during the Term (defined below),
and the other matters set forth below.
NOW, THEREFORE, for and in consideration of the foregoing premises and for
other good and valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, Frey and Employee hereby agree as follows:
1. Term; Condition Precedent.
-------------------------
1.1 The Term. The term of this Agreement shall be the thirty-month
--------
period that commences on the date of closing of a firm commitment underwritten
public offering of shares of common stock of Frey in which the aggregate gross
proceeds to Frey from such offering shall be approximately $10,000,000 to
$14,000,000 (the "Term"), and which shall have occurred on or before (an "IPO
Closing").
1.2 The Condition Precedent. The obligations of Frey and Employee
-----------------------
under this Agreement shall be subject to an IPO Closing. In the event that an
IPO Closing does not occur on or before, this Agreement shall be null and void,
and shall have no further force or effect.
2. Definition of "Frey".
--------------------
For purposes of subsection 4.2, subsection 4.3 and subsection 4.4 hereof,
"Frey" shall include any subsidiaries of Frey (whether existing currently or in
the future), any parent corporation of Frey and any business ventures in which
Frey, its subsidiaries or its parent corporation may participate (whether
existing currently or in the future) (Frey, any direct or
<PAGE>
indirect subsidiary thereof and any parent corporation thereof, may hereinafter
be referred to as a "Frey Group Entity").
3. Termination of Employment Relationship; Effect of Termination of
----------------------------------------------------------------
Employment Relationship; Notice of Termination; Termination Payments;
---------------------------------------------------------------------
Cause.
-----
3.1 Termination of Employment Relationship. Pursuant to this
--------------------------------------
Agreement, the employment relationship between Frey and Employee may be
terminated by either party.
3.1.1 Termination by Frey. With or without Cause (as defined
-------------------
below), Frey may terminate the employment of Employee at any time during the
Term upon giving Notice of Termination (as defined below).
3.1.2 Termination by Employee. Employee may Employee's
-----------------------
employment at any time, for any reason, upon giving Notice of Termination.
3.1.3 Automatic Termination. This Agreement and Employee's
---------------------
employment hereunder shall terminate automatically upon the death or total
disability of Employee. The term "total disability" as used herein shall mean
Employee's inability to perform the duties normally performed in Employee's
employment with Frey for a period or periods aggregating 90 calendar days in any
12-month period as a result of physical or mental illness, loss of legal
capacity or any other cause beyond Employee's control, unless Employee is
granted a leave of absence by the Board of Directors of Frey. Termination
hereunder shall be deemed to be effective (a) at the end of the calendar month
in which Employee's death occurs or (b) immediately upon a determination by the
Board of Directors of Frey of Employee's total disability, as defined above.
3.2 Effect of Termination of Employment Relationship. The provisions
------------------------------------------------
of Section 3 hereof shall survive the termination of Employee's employment for
any and all of the period from Employee's employment termination date until the
end of the Term, except that (a) the provisions of subsections 4.2 and 4.3 shall
not survive Frey's termination of Employee's employment without Cause, as
defined below, and (b) the provisions of subsection 4.5 shall survive the
termination of Employee's employment and the end of the Term. The provisions of
Section 8 hereof shall survive the termination of Employee's employment and the
end of the Term.
-2-
<PAGE>
3.3 Notice of Termination. The term "Notice of Termination" shall
---------------------
mean at least 14 days' written notice of termination of Employee's employment,
during which period Employee's employment and performance of services will
continue; provided, however, that Frey may, upon notice to Employee and without
reducing Employee's compensation during such period, excuse Employee from any or
all of Employee's duties during such period. The effective date of the
termination of Employee's employment hereunder shall be the date on which such
14 day period expires.
3.4 Termination Payments. In the event of termination of the
--------------------
employment of Employee, all compensation and benefits set forth in this
Agreement shall terminate except as specifically provided in this Subsection
3.4.
3.4.1 Termination by Frey. If Frey terminates Employee's
-------------------
employment without Cause during the Term, Employee shall be entitled to receive
(a) termination payments equal to the lesser of (i) three months' annual base
salary, or (ii) the annual base salary Employee would have received if
Employee's employment hereunder had continued until the end of the term, and (b)
any unpaid annual base salary which has accrued for services already performed
as of the date termination of Employee' employment becomes effective. If
Employee is terminated by Frey for Cause, Employee shall not be entitled to
receive any of the foregoing benefits, other than those set forth in clause (b)
above.
3.4.2 Termination by Employee. In the case of the termination of
-----------------------
Employee's employment by Employee, Employee shall not be entitled to any
payments hereunder, other than those set forth in clause (b) of subsection
3.4.1.
3.4.3 Termination after the End of the Term. In the case of a
-------------------------------------
termination of Employee's employment after the end of the Term, Employee shall
not be entitled to receive any payments hereunder, other than those set forth in
clause (b) of subsection 3.4.1.
3.4.4 Payment Schedule. All payments under this subsection 3.4
----------------
shall be made to Employee at the same intervals as payments of salary were made
to Employee immediately prior to termination.
3.5 Cause. Wherever reference is made in this Agreement to
-----
termination being with or without Cause, "Cause" shall include, without
limitation, the occurrence of one or more of the following events:
-3-
<PAGE>
(a) Failure or refusal to carry out the lawful duties normally performed
in Employee's position with Frey or any lawful directions of the Board of
Directors of Frey;
(b) Except by reason of death or disability, failure by Employee in any
material respect to devote Employee's full business attention and time to the
business and affairs of Frey or to use Employee's reasonable best efforts to
perform his or her professional or job responsibilities in a professional
manner;
(c) The rendering of any business, commercial or professional services
to any other firm or business without the prior written consent of Frey;
(d) Temporary loss (for a period of at least 90 days) or permanent loss of
Employee's license or other such qualification or authorization to do business,
or Employee's causing Frey or any other Frey Group Entity (as defined in Section
2) to so lose (or to be declined in an application or notice to acquire) a
license or such other qualification or authorization to do business that is
material to Frey or any other Frey Group Entity, provided that whether a license
or other qualification or authorization to do business is material to Frey shall
be determined by the Board of Directors of Frey and such determination shall be
binding on the parties hereto;
(e) Conviction of or entry of a plea of nolo contendere by Employee in a
proceeding alleging violation by Employee of a state or federal criminal law
involving the commission of a crime against Frey or any other Frey Group Entity,
or a felony;
(f) Current use by Employee of illegal substances; deception, fraud,
misrepresentation or dishonesty by Employee; any incident materially
compromising Employee's reputation or ability to represent Frey with the public;
any act or omission by Employee which substantially impairs the business, good
will or reputation of Frey or any other Frey Group Entity; or any other
misconduct; or
(g) Any other material violation of any provision of this Agreement.
-4-
<PAGE>
4. Applicability and Scope of Noncompetition, Nonsolicitation,
-----------------------------------------------------------
Nondisparagement, and Nondisclosure and Return of Materials
-----------------------------------------------------------
Provisions; Equitable Relief; Effect of Violation.
-------------------------------------------------
4.1. Applicability. If Employee's employment with Frey terminates
-------------
for any reason during the Term, Employee's obligations under this Section 4
shall continue in full force and effect until the end of the Term, except that
in the event of Frey's termination of Employee's employment without Cause, as
defined above, the Employee's obligations under subsections 4.2 and 4.3 shall
terminate.
4.2. Scope of Noncompetition. Employee agrees that Employee will
-----------------------
not, directly or indirectly, during Employee's employment and, if Employee's
employment terminates before the end of the Term, the remaining period of time
until the end of the Term, be employed by, consult with or otherwise perform
services for, own, manage, operate, join, control or participate in the
ownership, management, operation or control of or be connected with, in any
manner, any organization which, by reason of its activities as a broker, dealer,
investment advisor, investment company, underwriter or related business, is
subject to regulation by the Securities and Exchange Commission and which
conducts business in any state or province in which Frey conducts business (a
"Competitor"). Employee shall be deemed to be related to or connected with a
Competitor if such Competitor is (a) a partnership in which Employee is a
general or limited partner, member or employee, (b) a corporation, limited
liability company or association of which Employee s a shareholder, member,
officer, manager, employee or director, or (c) a partnership, corporation,
limited liability company or association of which Employee is a consultant or
agent; provided, however, that nothing herein shall prevent the purchase or
ownership by Employee of shares which constitute less than five percent of the
outstanding equity securities of a publicly or privately held corporation, if
Employee has no other relationship with such corporation.
4.3 Scope of Nonsolicitation. Employee shall not directly or
------------------------
indirectly solicit, influence or entice, or attempt to solicit, influence or
entice, any employee or consultant of Frey to cease his or her relationship with
Frey or solicit, influence, entice or in any way divert any client, customer,
distributor, partner, joint venturer, supplier or service provider of Frey to do
business or in any way become associated with any Competitor. This subsection
4.3 shall apply during the time period and geographical area described in
subsection 4.2 hereof.
4.4. Nondisparagement. Employee agrees that Employee will not at any
----------------
time before the end of the Term make any statements that disparage Frey, its
directors, officers,
-5-
<PAGE>
employees and representatives or that damage the reputation or goodwill of Frey.
4.5. Nondisclosure and Return of Materials. During the term of
-------------------------------------
Employee's employment by Frey and following termination of such employment,
Employee will not disclose (except as required by Employee's duties to Frey),
any concept, design, process, technology, trade secret, customer list, plan,
embodiment, or invention, any other intellectual property or any other
confidential information, whether patentable or not, of any Frey Group Entity of
which Employee becomes informed or aware during Employee's employment, whether
or not developed by Employee. In the event of the termination of Employee's
employment with Frey, Employee will return all documents, data and other
materials of whatever nature, including, without limitation, drawings,
specifications, research, reports, embodiments, software and manuals to Frey
which pertain to Employee's employment with Frey or to any intellectual property
and shall not retain or cause or allow any third party to retain photocopies or
other reproductions of the foregoing.
4.6. Equitable Relief. Employee acknowledges that the provisions of
----------------
this Section 4 are essential to Frey, that Frey would not enter into this
Agreement if it did not include this Section 4 and that damages sustained by
Frey as a result of a breach of this Section 4 cannot be adequately remedied by
damages, and Employee agrees that Frey, notwithstanding any other provision of
this Agreement, including, without limitation, Section 8 hereof, and in addition
to any other remedy it may have under this Agreement or at law, shall be
entitled to injunctive and other equitable relief to prevent or curtail any
breach of any provision of this Agreement, including, without limitation, this
Section 4.
4.7. Effect of Violation. Employee and Frey acknowledge and agree
-------------------
that additional consideration has been given for Employee entering into this
Section 4, such additional consideration including, without limitation, certain
provisions for termination payments pursuant to Section 3 of this Agreement.
Violation by Employee of this Section 4 shall relieve Frey of any obligation it
may have to make such termination payments, but shall not relieve Employee of
Employee's obligations under this Section 4.
5. Form of Notice.
--------------
All notices given hereunder shall be given in writing, shall specifically
refer to this Agreement and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, at the address set forth below or at such other
address as may hereafter be designated by notice given in compliance with the
terms hereof:
-6-
<PAGE>
If to Employee: Paul L. Hocevar
If to Frey: D.E. Frey & Company, Inc.
Attn: General Counsel
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
If notice is mailed, such notice shall be effective upon mailing, or if
notice is personally delivered or sent by telecopy or other electronic facsimile
transmission, it shall be effective upon receipt.
6. Assignment.
-----------
This Agreement is personal to Employee and shall not be assignable by
Employee. Frey may assign its rights hereunder to (a) any corporation resulting
from any merger, consolidation or other reorganization to which Frey is a party,
(b) any parent corporation of Frey whether existing currently or in the future,
or (c) any corporation, partnership, association or other person to which Frey
may transfer all or substantially all of the assets and business of Frey
existing at such time. All of the terms and provisions of this Agreement shall
be binding upon, shall inure to the benefit of and be enforceable by the parties
hereto and their respective successors and permitted assigns.
7. Waivers.
-------
No delay or failure by any party hereto in exercising, protecting or
enforcing any of his, her or its rights, titles, interests or remedies
hereunder, and no course of dealing or performance with respect thereto, shall
constitute a waiver thereof. The express waiver by a party hereto of any right,
title, interest or remedy in a particular instance or circumstance shall not
constitute a waiver thereof in any other instance or circumstance. All rights
and remedies shall be cumulative and not exclusive of any other rights or
remedies.
8. Arbitration.
-----------
Subject to the provisions of subsection 4.6 hereof, any controversies or
claims arising out of or relating to this Agreement shall be fully and finally
settled by final and binding arbitration in accordance with the rules,
constitutions, or bylaws of the National Association
-7-
<PAGE>
of Securities Dealers, Inc., as may be amended from time to time. The prevailing
party shall be entitled to costs, expenses and reasonable attorneys' fees.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. The provisions of this Section 8 continue in effect
for any and all covered controversies or claims, whether before or after the end
of the Term.
9. Amendments in Writing.
---------------------
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified, waived, terminated or discharged and signed by Frey and
Employee, and each such amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by Frey and Employee.
10. Applicable Law.
---------------
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the State of Colorado, without regard
to any rules governing conflicts of laws.
11. Severability.
------------
If any provision of this Agreement shall be held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without
limitation, the duration of such provision, its geographical scope or the extent
of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof shall remain in full force and
effect in such jurisdiction and shall be liberally construed in order to carry
out the intent of the parties hereto as nearly as may be possible, (b) such
invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision hereof, and (c) any court or
arbitrator having jurisdiction thereover shall have the power to reform such
provision to the extent necessary for such provision to be enforceable under
applicable law.
-8-
<PAGE>
12. Headings.
--------
All headings used herein are for convenience only and shall not in any way
affect the construction of, or be taken into consideration in interpreting, this
Agreement.
13. Counterparts.
------------
This Agreement, and any amendment or modification entered into pursuant to
Section 8 hereof, may be executed in any number of counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an original
and all of which counterparts, taken together, shall constitute one and the same
instrument.
14. Integration.
-----------
Except as set forth in the following sentence, this Agreement on and as of
the date of the commencement of the Term shall constitute the entire agreement
between Frey and Employee with respect to the subject matter hereof and all oral
or written communications, understandings or agreements between Frey and
Employee prior or contemporaneous to the commencement of the Term with respect
to such subject matter shall be hereby, as of the commencement of the Term,
superseded and nullified in their entireties. Notwithstanding the foregoing
sentence, this Agreement supplements and does not supersede any previously
executed, written employment agreement between Frey and Employee that may be
currently in effect; to the extent of any inconsistency or conflict between the
terms of this Agreement and the terms of any such previously executed employment
agreement, the terms of this Agreement shall, as of the commencement of the
Term, control and govern.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
EMPLOYEE:
_________________________________________
Paul L. Hocevar
-9-
<PAGE>
D.E. FREY & COMPANY, INC.
By: _________________________________________
Its: _________________________________________
-10-
<PAGE>
Exhibit 10.4
D.E. FREY GROUP, INC.
1992 STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
-------------------------
1.1 Establishment. D.E. Frey Group, Inc., a Delaware corporation
-------------
("Company"), hereby establishes a stock option plan for key directors,
employees, independent contractors and consultants providing material services
to the Company and its wholly-owned subsidiary, D.E. Frey and Company, Inc., a
Delaware corporation, as described herein, which shall be known as the "1992
STOCK OPTION PLAN" (the "Plan"). It is intended that certain of the options
issued to employees pursuant to the Plan may constitute incentive stock options
within the meaning of Section 422 of the Internal Revenue Code and that other
options issued pursuant to the Plan shall constitute non-qualified options. The
Board of Directors shall determine which options are to be incentive stock
options and which are to be non-qualified options and shall enter into option
agreements with recipients accordingly.
1.2 Purpose. The purpose of this Plan is to enhance shareholder
-------
investment by attracting, retaining and motivating key employees, directors and
consultants of the Company, and to encourage stock ownership by such persons by
providing them with a means to acquire a proprietary interest in the Company's
success.
ARTICLE II
DEFINITIONS
-----------
2.1 Definitions. Whenever used herein, the following terms shall
-----------
have the respective meanings set forth below, unless the context clearly
requires otherwise, and when said meaning is intended, the term shall be
capitalized.
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" shall mean the Committee provided by Article IV
---------
hereof, which may be created at the discretion of the Board.
(d) "Company" means D.E. Frey Group, Inc., a Delaware corporation.
-------
(e) "Consultant" means any person or entity, including a Parent
----------
Corporation or a Subsidiary Corporation, who provides services (other
than as an Employee) to the Company, a Parent Corporation or a
Subsidiary Corporation, and shall include independent contractors,
Non-Employee Officers and Non-Employee Directors, as defined
subsequently.
(f) "Date of Exercise" means the date the Company receives notice,
----------------
by an Optionee, of the exercise of an Option pursuant to Section 8.1
of this Plan. Such notice shall indicate the number of shares of Stock
the Optionee intends to exercise.
(g) "Employee" means any person, including an officer or director
--------
of the Company or a Subsidiary Corporation, who is employed by
the Company or a Subsidiary Corporation.
(h) "Fair Market Value" means the fair market value of Stock upon
-----------------
which an option is
<PAGE>
granted under this Plan, determined as follows:
(i) If the Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange,
the Fair Market Value shall be the last reported sale price of the
Stock on the composite tape of such exchange on the last trading day
prior to the date of issuance of this option, or if no such sale is
made on such day, the average closing bid and asked prices for such
day on the composite tape of such exchange; or
(ii) If the Stock is not so listed or admitted to unlisted
trading privileges, the Fair Market Value shall be the mean of the
last reported bid and asked prices reported by the National
Association of Securities Dealers Quotation System (or, if not so
quoted on NASDAQ, by the National Quotation Bureau, Inc.) on the last
trading day prior to the date of issuance of the option; or
(iii) If the Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
Fair Market Value shall be an amount, not less than book value,
determined by the Board of Directors of the Company, such
determination to be final and binding on the Holder.
(i) "Incentive Stock Option" means an Option granted under this Plan
----------------------
which is intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code.
(j) "Non-Employee Director" means a member of the Board who is not an
---------------------
employee of the Company at the time an Option is granted hereunder.
(k) Non-Employee Officer" means an officer of the Company who is not
--------------------
an employee of the Company at the time an Option is granted hereunder.
(l) "Non-qualified Option" means an Option granted under this Plan
--------------------
which is not intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code. Non-qualified Options may be granted
at such times and subject to such restrictions as the Board shall determine
without conforming to the statutory rules of Section 422 of the Code
applicable to incentive stock options.
(m) "Option" means the right, granted under this Plan, to purchase
------
Stock of the Company at the option price for a specified period of time.
For purposes of this Plan, an Option may be either an Incentive Stock
Option or a Non-qualified Option.
(n) "Optionee" means an Employee or Consultant holding an Option under
--------
the Plan.
(o) "Parent Corporation" shall have the meaning set forth in Section
------------------
424(e) of the Code with the Company being treated as the employer
corporation for purposes of this definition.
(p) "Subsidiary Corporation" shall have the meaning set forth in
----------------------
Section 424(f) of the Code with the Company being treated as the employer
corporation for purposes of this definition.
(q) "Significant Shareholder" means an individual who, within the
-----------------------
meaning of Section 422(b)(6) of the Code, owns stock possessing more than
ten percent of the total combined voting power of all classes of stock of
the Company or of any Parent Corporation or Subsidiary Corporation of the
Company. In determining whether an individual is a Significant
Shareholder, an individual shall be treated as owning stock owned by
certain relatives of the individual and certain
-2-
<PAGE>
stock owned by corporations in which the individual is a shareholder,
partnerships in which the individual is a partner, and estates or
trusts of which the individual is a beneficiary, all as provided in
Section 424(d) of the Code.
(r) "Stock" means the $.10 par value common stock of the Company.
-----
2.2 Gender and Number. Except when otherwise indicated by the
-----------------
context, any masculine terminology when used in this Plan also shall include the
feminine gender, and the definition of any term herein in the singular also
shall include the plural.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Eligibility and Participation. All Employees are eligible to
-----------------------------
participate in this Plan and receive either or both Incentive Stock Options and
Non-qualified Options under the Plan. All Consultants are eligible to
participate in this Plan and receive Non-qualified Options hereunder. Optionees
in the Plan shall be selected by the Board, in its sole discretion, from among
those Employees and Consultants who, in the opinion of the Board, are in a
position to contribute materially to the Company's continued growth and
development and to its long-term financial success.
ARTICLE IV
ADMINISTRATION
--------------
4.1 Administration. The Board shall be responsible for administering
--------------
the Plan.
(a) The Board is authorized to interpret the Plan; to prescribe,
amend, and rescind rules and regulations relating to the Plan; to
provide for conditions and assurances deemed necessary or advisable to
protect the interests of the Company; and to make all other
determinations necessary or advisable for the administration of the
Plan. Determinations, interpretations, or other actions made or taken
by the Board, pursuant to the provisions of this Plan, shall be final
and binding and conclusive for all purposes and upon all persons.
(b) At the discretion of the Board this Plan may be administered
by a Committee which shall be an executive committee of the Board,
consisting of not less than three members of the Board. The members of
such Committee may be directors who are eligible to receive Options
under this Plan, but Options may be granted to such persons only by
action of the full Board and not by action of the Committee. Such
Committee shall have full power and authority, subject to the
limitations of the Plan and any limitations imposed by the Board, to
construe, interpret and administer this Plan and to make
determinations which shall be final, conclusive and binding upon all
persons, including, without limitation, the Company, the shareholders,
the directors and any persons having any interests in any Options
which may be granted under this Plan, and, by resolution or resolution
providing for the creation and issuance of any such Option, to fix the
terms upon which, the time or times at or within which, the price or
prices at which any such shares may be purchased from the Company upon
the exercise of such Option. Such terms, time or times and price or
prices shall, in every case, be set forth or incorporated by reference
in the instrument or instruments evidencing such Option, and shall be
consistent with the provisions of this Plan.
(c) If the Committee has been appointed, the Board may from time
to time remove members from, or add members to, the Committee. The
Board may terminate the Committee at any time. Vacancies on the
Committee, howsoever caused, shall be filled by the Board. The
Committee shall select one of its members as Chairman, and shall hold
meetings at such times and places as the Chairman may determine. A
majority of the Committee at which a quorum is present, or acts
-3-
<PAGE>
reduced to or approved in writing by all of the members of the
Committee, shall be the valid acts of the Committee. A quorum shall
consist of two-thirds (2/3) of the members of the Committee.
(d) Where the Committee has been created by the Board, references
in this Plan to actions to be taken by the Board shall be deemed to
refer to the Committee as well, except where limited by this Plan or
by the Board.
(e) The Board shall have all of the enumerated powers of the
Committee, but shall not be limited to such powers. No member of the
Board 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.
ARTICLE V
STOCK SUBJECT TO THE PLAN
-------------------------
5.1 Number. The total number of shares of Stock hereby made
------
available and reserved for issuance under the Plan upon exercise of Incentive
Stock Options shall be 300,000, less the number of shares issued and reserved
for issuance upon exercise of outstanding Non-qualified Options. The aggregate
number of shares of Stock available under this Plan shall be subject to
adjustment as provided in Section 5.3. The total number of shares of Stock may
be authorized but unissued shares of Stock, or Shares acquired by purchase as
directed by the Board from time to time in its discretion, to be used for
issuance upon exercise of Options granted hereunder.
5.2 Unused Stock. If an Option shall expire or terminate for any
------------
reason without having been exercised in full, the unpurchased shares of Stock
subject thereto shall (unless the Plan shall have terminated) become available
for other Options under the Plan.
5.3 Adjustment in Capitalization. In the event of any change in the
----------------------------
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of shares of Stock set forth in Section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided however, that fractional shares shall be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to any
Option (including any Option outstanding after termination of employment) and
the Option price per share shall be proportionately and appropriately adjusted
without any change in the aggregate Option price to be paid therefor upon
exercise of the Option.
ARTICLE VI
DURATION OF THE PLAN
--------------------
6.1 Duration of the Plan. Subject to approval of shareholders, the
--------------------
Plan shall be in effect for ten years from the date of its adoption by the
Board. Any Options outstanding at the end of said period shall remain in effect
in accordance with their terms. The Plan shall terminate before the end of said
period if all Stock subject to it has been purchased pursuant to the exercise of
Options granted under the Plan.
ARTICLE VII
TERMS OF STOCK OPTIONS
----------------------
7.1 Grant of Options. Subject to Section 5.1, Options may be granted
----------------
to Employees or Consultants at any time and from time to time as determined by
the Board; provided, however, that Consultants may receive only Non-qualified
Options and may not receive Incentive Stock Options. The Board shall have
complete discretion in determining the terms and conditions and number of
Options granted to each Optionee. In making such determinations, the Board may
take into account the nature of services rendered by such Employees or
Consultants, their present and potential contributions to the Company and its
-4-
<PAGE>
Subsidiary Corporations, and such other factors as the Board in its discretion
shall deem relevant. The Board also shall determine whether an Option is to be
an Incentive Stock Option or a Non-qualified Option.
(a) In the case of Incentive Stock Options, the total Fair Market
Value (determined at the date of grant) of shares of Stock with
respect to which incentive stock options granted after December 31,
1986 are exercisable for the first time by the Optionee during any
calendar year under all plans of the Company under which incentive
stock options may be granted (and all such plans of any Parent
Corporations and any Subsidiary Corporations of the Company) shall not
exceed $100,000. Hereinafter, this requirement is sometimes referred
to as the "$100,000 Limitation".
(b) Nothing in this Article VII of the Plan shall be deemed to
prevent the grant of Options permitting exercise in excess of the
maximums established by the preceding paragraph where such excess
amount is treated as a Non-qualified Option.
(c) The Board is expressly given the authority to issue amended
or replacement Options with respect to shares of Stock subject to an
Option previously granted hereunder. An amended Option amends the
terms of an Option previously granted and thereby supersedes the
previous Option. A replacement Option is similar to a new Option
granted hereunder except that it provides that it shall be forfeited
to the extent that a previously granted Option is exercised, or except
that its issuance is conditioned upon the termination of a previously
granted Option.
7.2 No Tandem Options. Where an Option granted under this Plan is
-----------------
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422 of the Code.
7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
----------------------------------------------------------------
Specified. As determined by the Board on the date of grant, each Option shall
- ---------
be evidenced by an Option agreement (the "Option Agreement") that includes the
non-transferability provisions required by Section 10.2 hereof and specifies:
whether the Option is an Incentive Stock Option or a Non-qualified Option; the
Option price; the duration of the Option; the number of shares of Stock to which
the Option applies; any vesting or exercisability restrictions which the Board
may impose; in the case of an Incentive Stock Option, a provision implementing
the $100,000 Limitation; and any other terms or conditions which the Board may
impose. All such terms and conditions shall be determined by the Board at the
time of grant of the Option.
(a) If not otherwise specified by the Board, the following terms
and conditions shall apply to Options granted under the Plan:
(i) Term. The duration of the Option shall be five years
----
from the date of grant.
(ii) Exercise of Option. Unless an Option is terminated as
------------------
provided hereunder, an Optionee may exercise his Option for up to, but
not in excess of, the amounts of shares subject to the Option
specified hereafter, based on the Optionee's number of years of
continuous service with the Company or a Subsidiary Corporation from
the date on which the Option is granted. In the case of an Optionee
who is an Employee, continuous service shall mean continuous
employment; in the case of an Optionee who is a Consultant, continuous
service shall mean the continuous provision of consulting services.
In applying said limitations, the amount of shares, if any, previously
purchased by the Optionee under the Option shall be counted in
determining the amount of shares the Optionee can purchase at any
time. The Optionee may exercise his Option in the following amounts:
-5-
<PAGE>
(A) After one year of such continuous services, up to
but not in excess of twenty percent of the shares originally
subject to the Option;
(B) After two years of such continuous services, up to
but not in excess of forty percent of the shares originally
subject to the Option;
(C) After three years of such continuous services, up
to but not in excess of sixty percent of the shares
originally subject to the Option;
(D) After four years of such continuous services, up to
but not in excess of eighty percent of the shares originally
subject to the Option; and
(E) At the expiration of the fifth year of such
continuous services, the Option may be exercised, in whole or
in part, and at any time and from time to time within its
term but it shall not be exercisable after the expiration of
five years from the date on which it was granted.
(b) The Board shall be free to specify terms and conditions other
than those set forth above, in its discretion.
(c) All Option Agreements shall incorporate the provisions of
this Plan by reference, with certain provisions to apply depending
upon whether the Option Agreement applies to an Incentive Stock Option
or to a Non-qualified Option.
7.4 Option Price. No Option granted pursuant to this Plan shall have
------------
an Option price that is less than the Fair Market Value of Stock on the date the
Option is granted. Incentive Stock Options granted to Significant Shareholders
shall have an Option price of not less than 110% of the Fair Market Value of
Stock on the date of grant. The Option exercise price shall be subject to
adjustment as provided in Section 5.3 above.
7.5 Term of Options. Each Option shall expire at such time as the
---------------
Board shall determine when it is granted, provided however that under no
circumstances shall a Non-qualified Option be exercisable later than the tenth
anniversary date of its grant, nor by its terms, shall an Incentive Stock Option
granted to a Significant Shareholder be exercisable later than the fifth year
from the anniversary date of its grant.
7.6 Exercise of Options. Options granted under the Plan shall be
-------------------
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.
7.7 Payment. Payment for all shares of Stock shall be made at the
-------
time that an Option, or any part thereof, is exercised, and no shares shall be
issued until full payment therefor has been made. Payment shall be made (i) in
cash, or (ii) if acceptable to the Board, in Stock or in some other form;
provided, however, in the case of an Incentive Stock Option, that said other
form of payment does not prevent the Option from qualifying for treatment as an
"incentive stock option" within the meaning of the Code.
ARTICLE VIII
WRITTEN NOTICE, ISSUANCE OF STOCK
---------------------------------
CERTIFICATES, SHAREHOLDER PRIVILEGES
------------------------------------
8.1 Written Notice. An Optionee wishing to exercise an Option shall
--------------
give written notice to the Company, in the form and manner prescribed by the
Board. Full payment for the shares exercised pursuant to the Option must
accompany the written notice.
-6-
<PAGE>
8.2 Issuance of Stock Certificates. As soon as practicable after the
------------------------------
receipt of written notice and payment, the Company shall deliver to the Optionee
or to a permitted nominee of the Optionee a certificate or certificates for the
requisite number of shares of Stock.
8.3 Privileges of a Shareholder. An Optionee or any other person
---------------------------
entitled to exercise an Option under this Plan shall not have stockholder
privileges with respect to any Stock covered by the Option until the date of
issuance of a stock certificate for such stock.
ARTICLE IX
TERMINATION OF EMPLOYMENT OR SERVICES
-------------------------------------
9.1 Death. If an Optionee's employment in the case of an Employee,
-----
or provision of services as a Consultant in the case of a Consultant, terminates
by reason of death, the Option may thereafter be exercised at any time prior to
the expiration date of the Option or within 12 months after the date of such
death, whichever period is the shorter, by the person or persons entitled to do
so under the Optionee's will or, if the Optionee shall fail to make a
testamentary disposition of an Option or shall die intestate, the Optionee's
legal representative or representatives. The Option shall be exercisable only
to the extent that such Option was exercisable as of the date of death.
9.2 Termination other than for Cause or Due to Death. In the event
------------------------------------------------
of an Optionee's termination of employment in the case of an Employee, or
termination of the provision of services as a Consultant in the case of a
Consultant, other than by reason of death, the Optionee may exercise such
portion of his Option as was exercisable by him at the date of such termination
(the "Termination Date") at any time within three months of the Termination
Date; provided, however, that where the Optionee is an Employee, and is
terminated due to disability within the meaning of Code ? 422, he may exercise
such portion of his Option as was exercisable by him on his Termination Date
within one year of his Termination Date. In any event, the Option cannot be
exercised after the expiration of the term of the Option. Options not exercised
within the applicable period specified above shall terminate.
(a) In the case of an Employee, a change of duties or position
within the Company or an assignment of employment in a Subsidiary
Corporation or Parent Corporation of the Company, if any, or from such
a Corporation to the Company, shall not be considered a termination of
employment for purposes of this Plan.
(b) The Option Agreements may contain such provisions as the
Board shall approve with reference to the effect of approved leaves of
absence upon termination of employment.
9.3 Termination for Cause. In the event of an Optionee's termination
---------------------
of employment in the case of an Employee, or termination of the provision of
services as a Consultant in the case of a Consultant, which termination is by
the Company or a Subsidiary Corporation for cause, any Option or Options held by
him under the Plan, to the extent not exercised before such termination, shall
terminate upon notice of termination for cause.
9.4 Call Option of the Company. In the event the employee,
--------------------------
independent contractor, advisor, consultant or similar relationship between the
Company or a Subsidiary Corporation and any Optionee should terminate for any
reason at any time the Company shall have the option, exercisable within 90 days
after the termination date (or within 90 days after the exercise date, whichever
is later), to purchase all shares of the Company's common stock owned by the
Participant, including all Stock acquired by the Optionee pursuant to this Plan
for an amount equal to the Fair Market Value thereof on the termination date.
The Company shall have no obligation to exercise this option. Each stock
certificate evidencing the shares will bear a legend referring to the Company's
option to purchase the shares.
-7-
<PAGE>
ARTICLE X
RIGHTS OF OPTIONEES
-------------------
10.1 Service. Nothing in this Plan shall interfere with or limit in
-------
any way the right of the Company or a Subsidiary Corporation to terminate any
Employee's employment, or any Consultant's services, at any time, nor confer
upon any Employee any right to continue in the employ of the Company or a
Subsidiary Corporation, or upon any Consultant any right to continue to provide
services to the Company or a Subsidiary Corporation.
10.2 Non-transferability. All Options granted under this Plan shall
-------------------
be nontransferable by the Optionee, other than by will or the laws of descent
and distribution, and shall be exercisable during the Optionee's lifetime only
by the Optionee.
ARTICLE XI
OPTIONEE-EMPLOYEE'S TRANSFER
----------------------------
OR LEAVE OF ABSENCE
-------------------
11.1 Optionee-Employee's Transfer or Leave of Absence. For purposes
------------------------------------------------
of this Plan:
(a) A transfer of an Optionee who is an Employee from the
Company to a Subsidiary Corporation or Parent Corporation, or from one
such Corporation to another, or
(b) A leave of absence for such an Optionee (i) which is duly
authorized in writing by the Company or a Subsidiary Corporation, and
(ii) if the Optionee holds an Incentive Stock Option, which qualifies
under the applicable regulations under the Code which apply in the
case of incentive stock options, shall not be deemed a termination of
employment. However, under no circumstances may an Optionee exercise
an Option during any leave of absence, unless authorized by the Board.
ARTICLE XII
AMENDMENT, MODIFICATION, AND
----------------------------
TERMINATION OF THE PLAN
-----------------------
12.1 Amendment, Modification, and Termination of the Plan.
----------------------------------------------------
(a) The Board may at any time terminate, and from time to time
may amend or modify the Plan, provided, however, that no such action
of the Board, without approval of the shareholders, may:
(i) increase the total amount of Stock which may be
purchased through Options granted under the Plan, except as provided
in Article V;
(ii) change the class of Employees or Consultants eligible
to receive Options;
(b) No amendment, modification, or termination of the Plan shall
in any manner adversely affect any outstanding Option under the Plan
without the consent of the Optionee holding the Option.
ARTICLE XIII
ACQUISITION, MERGER OR LIQUIDATION
----------------------------------
13.1 Acquisition.
-----------
-8-
<PAGE>
(a) In the event that an Acquisition occurs with respect to the
Company, the Company shall have the option, but not the obligation, to
cancel Options outstanding as of the effective date of Acquisition,
whether or not such Options are then exercisable, in return for
payment to the Optionees of an amount equal to a reasonable estimate
of an amount (hereinafter the "Spread") equal to the difference
between the net amount per share payable in the Acquisition or as a
result of the Acquisition, less the exercise price of the Option. In
estimating the Spread, appropriate adjustments to give effect to the
existence of the Options shall be made, such as deeming the Options to
have been exercised, with the Company receiving the exercise price
payable thereunder, and treating the shares receivable upon exercise
of the Options as being outstanding in determining the net amount per
share.
(b) For purposes of this section, an "Acquisition" shall mean any
transaction in which substantially all of the Company's assets are
acquired or in which a controlling amount of the Company's outstanding
shares are acquired, in each case by a single person or entity or an
affiliated group of persons and entities. For purposes of this
section, a controlling amount shall mean more than 50% of the issued
and outstanding shares of stock of the Company. The Company shall have
such an option regardless of how the Acquisition is effectuated,
whether by direct purchase, through a merger or similar corporate
transaction, or otherwise. In cases where the acquisition consists of
the acquisition of assets of the Company, the net amount per share
shall be calculated on the basis of the net amount receivable with
respect to shares upon a distribution and liquidation by the Company
after giving effect to expenses and charges, including but not limited
to taxes, payable by the Company before the liquidation can be
completed.
(c) Where the Company does not exercise its option under this
Section 13.1 the remaining provisions of this Article XIII shall
apply, to the extent applicable.
13.2 Merger or Consolidation. Subject to any required action by the
-----------------------
shareholders, if the Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to the
Option would have been entitled in such merger or consolidation.
13.3 Other Transactions. A dissolution or a liquidation of the
------------------
Company or a merger and consolidation in which the Company is not the surviving
corporation shall cause every Option outstanding hereunder to terminate as of
the effective date of such dissolution, liquidation, merger or consolidation.
However, the Optionee either (i) shall be offered a firm commitment whereby the
resulting or surviving corporation in a merger or consolidation will tender to
the Optionee an option (the "Substitute Option") to purchase its shares on terms
and conditions both as to number of shares and otherwise, which will
substantially preserve to the Optionee the rights and benefits of the Option
outstanding hereunder granted by the Company, or (ii) shall have the right
immediately prior to such dissolution, liquidation, merger, or consolidation to
exercise any unexercised Options whether or not then exercisable, subject to the
provisions of this Plan. The Board shall have absolute and uncontrolled
discretion to determine whether the Optionee has been offered a firm commitment
and whether the tendered Substitute Option will substantially preserve to the
Optionee the rights and benefits of the Option outstanding hereunder. In any
event, any Substitute Option for an Incentive Stock Option shall comply with the
requirements of Code Section 424(a).
ARTICLE XIV
SECURITIES REGISTRATION
-----------------------
14.1 Securities Registration. In the event that the Company shall
-----------------------
deem it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such
-9-
<PAGE>
Options or Stock under the Securities Act of 1933, as amended, or any other
statute, then the Optionee shall cooperate with the Company and take such action
as is necessary to permit registration or qualification of such Options or
Stock.
14.2 Representations. Unless the Company has determined that the
---------------
following representation is unnecessary, each person exercising an Option under
the Plan may be required by the Company, as a condition to the issuance of the
shares pursuant to exercise of the Option, to make a representation in writing
(i) that he is acquiring such shares for his own account for investment and not
with a view to, or for sale in connection with, the distribution of any part
thereof, (ii) that before any transfer in connection with the resale of such
shares, he will obtain the written opinion of counsel for the Company, or other
counsel acceptable to the Company, that such shares may be transferred. The
Company may also require that the certificates representing such shares contain
legends reflecting the foregoing.
ARTICLE XV
TAX WITHHOLDING
---------------
15.1 Tax Withholding. Whenever shares of Stock are to be issued in
---------------
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state, and local withholding tax requirements.
ARTICLE XVI
INDEMNIFICATION
---------------
16.1 Indemnification. To the extent permitted by law, each person
---------------
who is or shall have been a member of the Board shall be indemnified and held
harmless by the Company against and from any loss, cost, liability, or expense
that may be imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may be a party
or in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of judgment in any such action, suit, or proceeding against him, provided he
shall give the Company an opportunity, at its own expense, to handle and defend
the same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
articles of incorporation or bylaws, as a matter of law, or otherwise, or any
power that the Company or any Subsidiary Corporation may have to indemnify them
or hold them harmless.
ARTICLE XVII
REQUIREMENTS OF LAW
-------------------
17.1 Requirements of Law. The granting of Options and the issuance
-------------------
of shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. The Plan, and all agreements hereunder, shall be
-------------
construed in accordance with and governed by the laws of the State of Colorado.
ARTICLE XVIII
EFFECTIVE DATE OF PLAN
----------------------
18.1 Effective Date. The Plan shall be effective on March 3, 1992.
--------------
-10-
<PAGE>
ARTICLE XIX
COMPLIANCE WITH CODE
--------------------
19.1 Compliance with Code. Incentive Stock Options granted hereunder
--------------------
are intended to qualify as "incentive stock options" under Code ? 422. If any
provision of this Plan is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with Incentive Stock
Options granted under this Plan being treated as incentive stock options under
the Code.
ARTICLE XX
NO OBLIGATION TO EXERCISE OPTION
--------------------------------
20.1 No Obligation to Exercise. The granting of an Option shall
-------------------------
impose no obligation upon the holder thereof to exercise such Option.
ARTICLE XXI
STOCKHOLDER APPROVAL
--------------------
21.1 Stockholder Approval. This Plan shall be submitted for approval
--------------------
and ratification by a vote of the holders of a majority of the shares of Common
Stock of the Company no later than March 3, 1993; provided, however, that
failure to timely obtain such shareholder approval shall result in all Options
granted hereunder being deemed to be Non-qualified Options and shall not affect
the validity of any Option issued under this Plan.
THIS 1992 STOCK OPTION PLAN was adopted by the Board of Directors of
D.E. Frey Group, Inc. on March 3, 1992, to be effective as of March 3, 1992.
D.E. FREY GROUP, INC.
/s/ Dale E. Frey
By:
Dale E. Frey, President
-11-
<PAGE>
EXHIBIT 10.5
D.E. FREY GROUP, INC.
1995 STOCK PURCHASE PLAN
---------------------
250,000 Shares
Common Stock, $.10 Par Value
---------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
PLAN INFORMATION....................................................... 1
SECURITIES TO BE OFFERED AND PERSONS WHO MAY PARTICIPATE IN THE PLAN... 1
PURCHASE OF AND PAYMENT FOR SECURITIES PURSUANT TO THE PLAN............ 2
FEDERAL INCOME TAX CONSEQUENCES........................................ 3
RESALES OF SHARES...................................................... 3
CALL OPTION OF THE COMPANY............................................. 4
CONFIDENTIALITY AGREEMENT.............................................. 4
ADMINISTRATION OF THE PLAN............................................. 4
ADDITIONAL INFORMATION................................................. 4
</TABLE>
----------------------
THIS PLAN IS REQUIRED TO BE ACCOMPANIED BY AND IS A PART OF A PRIVATE PLACEMENT
MEMORANDUM OR OTHER DISCLOSURE DOCUMENT PREPARED BY THE COMPANY. PARTICIPANTS
ARE URGED TO CAREFULLY REVIEW THE DISCLOSURE DOCUMENT. NO OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IS MADE IN ANY STATE OR
JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL.
The date of this Plan is April 1995
<PAGE>
D.E. FREY GROUP, INC.
PLAN INFORMATION
The principal executive offices of D.E. Frey Group, Inc., a Delaware
corporation (the "Company"), are located at One Norwest Center, Suite 2200, 1700
Lincoln Street, Denver, Colorado 80203. The telephone number of the Company is
(303) 863-4040.
Management believes it is very important to allow employees, independent
contractors and other advisors and consultants to the Company the opportunity to
participate in the growth of the Company. Accordingly, in April 1995, the Board
of Directors of the Company approved the 1995 Stock Purchase Plan (the "Plan")
whereby employees ("Employees") and independent contractors, advisors and
consultants (collectively, "Consultants") of the Company and its subsidiaries,
at their election, may purchase shares of the Company's Common Stock, par value
$.10 per share (the "Shares"), and pay for such Shares out of their compensation
by means of a withholding therefrom. Employees and Consultants who elect to
participate in the Plan may be collectively referred to herein as the
"Participants." Within 60 days after the end of each fiscal year of the
Company, it will issue to each Participant a non-transferable three-year option
("Option") for the purchase of that number of shares of the Company's Common
Stock ("Option Stock") as equals 20% of the total number of Shares purchased by
that Participant pursuant to the Plan during the preceding year. The exercise
price will be the then value as established by the Board of Directors or the
current market price if a market exists for the Common Stock. The Options may
be exercised only so long as the holder is employed by or an independent
contractor, consultant or advisor associated with the Company or any of its
subsidiaries. The Shares, Options and Option Stock (collectively referred to as
the "Securities") have not been registered under federal or applicable state
securities laws and will be, when issued, "restricted securities" subject to
substantial restrictions on transfer.
The Plan will terminate on March 31, 2005, or earlier upon not less than
ten days' prior written notice given to all Participants. A participation
election is effective until terminated. Either the Company or a Participant can
terminate the participation of that Participant on not less than 30 days written
notice given prior to the last day of any fiscal quarter of the Company,
effective as of the first day of the following fiscal quarter. The Company may
suspend the Plan if, in the opinion of management, a material event requires
that a new stock value be established by the Board of Directors. Any new value
will be effective as of the date of occurrence of any such material event unless
determined otherwise by the Board of Directors.
The Plan is not subject to the Employee Retirement Income Security Act of
1974 and is not qualified under Section 401(a) of the Internal Revenue Code (the
"Code").
SECURITIES TO BE OFFERED AND
PERSONS WHO MAY PARTICIPATE IN THE PLAN
The Board of Directors of the Company has reserved a maximum of up to
250,000 Shares of its Common Stock for issuance pursuant to the Plan. No
Participant may commit more than ten percent of his or her gross income (before
taxes and other withholdings required by law but after deduction of expenses and
other amounts payable to the Company or any subsidiary of the Company) for the
purchase of Shares pursuant to the Plan. The Plan does not limit the number of
Shares which may be purchased by any one Participant.
<PAGE>
All Employees to and Consultants of the Company are eligible to participate
in the Plan. Each Consultant will be required to certify to the Company that
the fees to be used to purchase the Shares by that Consultant pursuant to the
Plan will have been earned for bona fide services rendered to the Company by the
Consultant otherwise than in connection with offer or sale of securities in a
capital-raising transaction.
Shares may be sold only to Participants who reside in states where such
securities have been qualified for sale or are exempt from such qualification.
Employees and Consultants who desire to participate in the Plan should contact
the Plan administrator to determine if the securities have been qualified for
sale in their state of residence. No offer to sell or solicitation of an offer
to buy securities is made in any state or jurisdiction where the offer would be
unlawful.
Attached to this Plan is the Company's Private Placement Memorandum (the
"Memorandum") dated April 1995. Persons eligible to participate in the Plan are
urged to thoroughly read the Memorandum and to ask of management any questions
they may have regarding the Company and its management, operations and financial
condition. The Company will provide, upon request, to any person eligible to
participate in the Plan copies of all documents referred to in the Memorandum.
PURCHASE OF AND PAYMENT FOR SECURITIES
PURSUANT TO THE PLAN
Employees and Consultants may elect to participate in the Plan by entering
into written agreements with the Company (the "Participation Agreement")
pursuant to which a specified percentage (whole numbers only) of compensation
then or thereafter owed to the Participant by the Company or by any subsidiary
of the Company shall be deducted from such compensation and applied for the
purchase of Shares. Such election will continue indefinitely until terminated
by either the Company or the Participant upon not less than 30 days written
notice given prior to the last day of any fiscal quarter of the Company,
effective as of the first day of the following fiscal quarter.
The Shares shall be issuable as of the date of the deduction from the
Participant's compensation (the "Issuance Date"). The purchase price shall be
the value per share as determined by the Company's Board of Directors, which
determination shall be conclusive. The value will be determined not less
frequently than quarterly in advance and, in any event, as soon as practicable
after the occurrence of a material event. On the occurrence of an event deemed
by management to be material, the Company may suspend the Plan until the Board
of Directors has had the opportunity to establish a revised value. Any such
revised value will be retroactive to the date such event occurred unless
otherwise determined by the Board of Directors. The Company will advise all
participants of the value as soon as practicable after established by the Board
of Directors and, in any event, will advise them of the value established for
each fiscal quarter on or before the first day of that quarter. For the quarter
ending June 30, 1995, the board has determined the value to be $2.00 per Share.
Stock certificates evidencing the Shares will not be issued except upon
written request by the Participant, but not more frequently than quarterly.
Fractional shares will not be issued. Any fractional shares will be paid in
cash.
Each Participant will be advised by the Company promptly after the end of
each fiscal year of the price per Share and the number of Shares purchased by
that Participant during that year, and the total number of Shares credited to
the Participant's account. Fractional shares will be credited to the
Participant's account calculated to two decimal places. Even though
certificates evidencing such Shares may not have
2
<PAGE>
been delivered, the Participants shall have all rights of shareholders under
Delaware law, including voting of the Shares and the right to receive dividends
or other distributions thereon.
Each Participant in the Plan will receive, within 60 days after the last
day of each fiscal year of the Company, a non-transferable option ("Option") for
the purchase of that number of whole shares of the Company's Common Stock
(rounded down to the nearest whole share) as equals 20% of the total number of
Shares purchased by the Participant pursuant to the Plan during the preceding
year. The Options will be exercisable for a period of three years after the
issuance date at an exercise price equal to the then value as established by the
Board of Directors, but only so long as the holder of the Option is employed by
or an independent contractor, consultant or advisor associated with the Company
or any of its subsidiaries. However, should a public market then exist for the
Common Stock, the exercise price will be the closing price on the last business
day preceding the date of issuance of the Option. The Common Stock received
upon exercise of the Options will be subject to substantial restrictions on
transfer.
No commissions or other fees will be charged to a Participant in connection
with such purchases.
FEDERAL INCOME TAX CONSEQUENCES
There is no tax benefit associated with the Plan. Any gain or loss upon
sale of the Shares will be capital gain or loss under the Internal Revenue Code.
RESALES OF SHARES
The Securities will be issued pursuant to the exemptions from securities
registration provided by Rule 701 under the Securities Act of 1933 (the "1933
Act") and/or Regulation D promulgated thereunder and under applicable state
laws. The Securities will be "restricted securities" as defined in Rule 144
under the 1933 Act, and subject to substantial restrictions on transfer. In the
Participation Agreement, each Participant will be required to warrant and
represent to the Company that, among other things, he or she has received all
information about the Company and its subsidiaries deemed necessary by the
Participant to the making of an informed investment decision; the Participant is
acquiring the Securities for investment and not for distribution or resale; the
Participant understands that the Securities are subject to substantial
restrictions on transfer; and the Participant is willing and able to assume all
the risks of the investment, including loss of all of his or her invested
capital. Each stock certificate evidencing ownership of any Securities will
bear a restrictive legend regarding these restrictions on transfer.
The Options will never be transferable and the Shares and Option Stock will
not be transferable so long as the Company has the purchase option described
below under "CALL OPTION OF THE COMPANY."
The Company reserves the right to alter, amend or terminate the Plan or to
restrict the participation of any person in the Plan for any reason including
legal requirements under federal and applicable state securities laws, rules and
regulations. This may include limiting the number of Participants who are not
"accredited investors" (as defined in the Participation Agreement) to 35 or
fewer on a first-come, first-served basis.
3
<PAGE>
CALL OPTION OF THE COMPANY
In the event the employee, advisor or consultant relationship between the
Company and any Participant should terminate for any reason at any time the
Company shall have the option, exercisable within 90 days after the termination
date, to purchase all shares of the Company's common stock owned by the
Participant, including all Shares and Option Stock acquired by that Participant
pursuant to the Plan, for an amount equal to the value thereof on the
termination date determined by the Board of Directors of the Company as set
forth above. The Company shall have no obligation to exercise the option. Each
stock certificate evidencing the Shares and Option Stock will bear a legend
referring to the Company's option to purchase the Securities.
CONFIDENTIALITY AGREEMENT
The Participation Agreement contains a covenant of confidentiality whereby
each Participant agrees that any information provided to him or her regarding
the Company, its business, operations, management, financial condition or
otherwise, will be kept strictly confidential by the Participant during and at
all times after his or her participation in the Plan. In the event of violation
of this confidentiality agreement, the Company may exercise all remedies
available to it including temporary restraining orders and injunctive relief,
recovery of damages and otherwise. In the event of litigation under or arising
out of the confidentiality covenant, the prevailing party is entitled to recover
its costs, including reasonable legal fees, from the other party.
ADMINISTRATION OF THE PLAN
The Plan will be administered and managed by Paul Hocevar. The address of
the administrator of the Plan is One Norwest Center, Suite 2200, 1700 Lincoln
Street, Denver, Colorado 80203, telephone number (303) 863-4040. The
administrator is designated by the Company's President and may be removed at any
time by the President.
ADDITIONAL INFORMATION
The Company will provide without charge to each Participant a copy of the
following documents:
1. Within 90 days after the end of each fiscal year, the Company's
audited consolidated financial statements for such fiscal year and the
fiscal year prior thereto;
2. Upon written request made no earlier than 30 days after the end of
each fiscal quarter, the Company's unaudited consolidated financial
statements for the quarter then ended and the comparable period for the
preceding fiscal year, together with a year-to-date consolidated statement
of operations.
4
<PAGE>
EXHIBIT 10.6
TO: McAst Inc.
FROM: Dale E. Frey
RE: Recruiting Agreement
DATE: May 1, 1995
D.E. Frey & Company, Inc. would like to enter into an agreement with McAst, Inc.
to recruit registered representatives into the firm. For the service we offer
the following:
A) Either 5% of the registered representative's gross commission revenues
received by D.E. Frey & Company, Inc. after affiliation and NASD approval in
months 4 through 15, or 50% of the amount D.E. Frey & Company, Inc. receives
on such gross commission revenues over this same period of time, whichever
is less.
B) Either 3% of the registered representative's gross commission revenues
received by D.E. Frey & Company, Inc. in months 16 through 27, or 30% of the
amount D.E. Frey & Company, Inc. receives on such gross commission revenues
over this same period of time, whichever is less.
C) Either 1% of the registered representative's gross commission revenues
received by D.E. Frey & Company, Inc. in months 28 through 39, or 10% of the
amount D.E. Frey & Company, Inc. receives on such gross commission revenues
over this same period time, whichever is less.
D) Either 1/2 of 1% of the registered representative's gross commission
revenues received by D.E. Frey & Company, Inc. in months 40 as long as
registered representative is affiliated with D.E. Frey & Company, Inc., or
5% of the amount D.E. Frey & Company, Inc. receives on such gross commission
revenues over the same period of time, whichever is less.
E) D.E. Frey & Company, Inc. is not responsible for any of McAst, Inc.
operating expenses (I.E. travel, entertainment, meals, lodging, etc.).
F) McAst, Inc. will be paid each month their share of the gross commission
revenues.
If the above is acceptable please sign and return to D.E. Frey & Company, Inc.
to the attention of Dale E. Frey.
/s/ Dale E. Frey /s/ Bill Tennison
____________________________ _____________________________
Dale E. Frey Bill Tennison
Chairman McAst, Inc.
Chief Executive Officer
/s/ James Sarkauskas
_____________________________
James Sarkauskas
McAst, Inc.
/s/ Dick McAllaster
____________________________
Dick McAllaster /s/ Mike Robertson
McAst, Inc. _____________________________
Mike Robertson
McAst, Inc.
<PAGE>
EXHIBIT 10.7
D.E. FREY & COMPANY, INC.
1700 Lincoln Street, Suite 2200 Reg. Rep. ____Office
Denver, CO 80203
INDEPENDENT CONTRACTOR AGREEMENT
___________________________________________ Date of Agreement__________________
Name of Independent Contractor
Number:____________________________
___________________________________________
Street Address
___________________________________________
City State Zip
This Agreement is made by and between D.E. Frey & Company, Inc., a
corporation organized and existing under the laws of Delaware (Company), and the
person whose name appears above (Contractor).
Background Circumstances:
The Company is engaged in business as a securities broker-dealer licensed
and qualified to transact business pursuant to laws, statutes, rules,
regulations and interpretations (collectively called Rules) promulgated by the
Securities and Exchange Commission (SEC), the National Association of Securities
Dealers, Inc. (NASD), and various other state, local and federal government
agencies (Regulators). Contractor wishes to become affiliated with the Company
as an independent contractor in order to effect securities transactions through
the facilities of the Company and its clearing broker-dealer, or either of them.
In consideration of the background circumstances and the following
agreements, the undersigned parties agree as follows:
1. Authority.
(a) During the term hereof, the Company authorizes the Contractor, as an
independent contractor, to represent it in securities transactions.
Such representation shall be subject to all of the terms, conditions,
and covenants contained in this Agreement, and is specifically limited
to include only those activities that are approved and authorized by
the Company as set forth on Exhibit A attached hereto and incorporated
herein by this reference and those securities that the Contractor is
qualified to deal in under applicable Rules.
(b) The Contractor shall not solicit any securities until duly registered
under applicable state and federal laws unless exempt from
registration, and until any license or permit required by law has been
obtained and is then in effect.
(c) The Contractor shall not represent any other broker/dealer or issuer
doing securities business unless agreed to in writing by the Company.
<PAGE>
(d) The Contractor shall have no power or authority to incur any
indebtedness or liability of any kind in the name of the Company, nor
have the power to bind the Company in any manner not specified in this
contract.
2. Independent Contractor.
(a) THE CONTRACTOR RECOGNIZES, UNDERSTANDS AND AGREES THAT: (1) AS AN
------------------------------------------------------------------
INDEPENDENT CONTRACTOR, CONTRACTOR IS NOT ENTITLED TO UNEMPLOYMENT
------------------------------------------------------------------
INSURANCE BENEFITS UNLESS UNEMPLOYMENT COMPENSATION COVERAGE IS
---------------------------------------------------------------
PROVIDED BY THE CONTRACTOR OR SOME OTHER ENTITY; (2) CONTRACTOR IS NOT
----------------------------------------------------------------------
ENTITLED TO WORKERS' COMPENSATION BENEFITS; AND (3) CONTRACTOR IS
-----------------------------------------------------------------
OBLIGATED TO PAY FEDERAL AND STATE INCOME TAX ON ANY MONEYS PAID
----------------------------------------------------------------
PURSUANT TO THE CONTRACT RELATIONSHIP.
-------------------------------------
(b) Nothing herein shall be construed to create the relationship of
employer and employee between the Company and the Contractor.
(c) The Contractor, as an independent contractor, shall be free to
determine, within the scope of this Agreement, the persons from whom
to solicit business and the method, time, place and manner of the
Contractor's performance, subject to compliance with all applicable
Rules adopted by the SEC, NASD and Regulators, all as from time to
time amended, and standard rules of procedures from time to time
adopted by the Company.
(d) In the course of the Contractor's business conduct, the Contractor
shall in no manner represent to the public that any relationship,
other than that of independent contractor, exists between the Company
and the Contractor.
(e) The Company enters into this Agreement for the sole purpose of
retaining Contractor to engage in securities transactions. The
Company has no right to control or direct the Contractor in the sales
of securities, or as to the result to be accomplished by the work, or
as to the details and means by which the result is accomplished,
excepting that the Company shall have the responsibility and right to
perform such supervisory overview as required by the Regulators and
the Rules. The Company's compliance manual is intended solely to
provide procedures reasonably designed to prevent violations of the
Rules and is not intended to otherwise control or supervise the
activities of Contractor. The Company shall also be permitted to
issue such instructions as may be necessary to explain, clarify and,
as required by Regulators, to ensure compliance with directives
promulgated by the Regulators. Except for such provisions, the
Contractor shall be completely free from the will and control of the
Company.
3. Procedures.
(a) All customer account applications are subject to acceptance by the
Company, and no transactions shall be deemed to be made until approved
and executed by the Company or its clearing firm. The Company
reserves the right in its sole discretion at any time to reject any
and all applications transmitted to it by the Contractor and to refund
to customers any payments made by them. If the Contractor has
received commissions on such refunded payments, the Contractor agrees
to repay such commissions to the Company, and the
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<PAGE>
Company is hereby authorized to deduct the amount thereof from
commissions due or to become due the Contractor.
(b) The Contractor will forward immediately to the Company all buy and
sell orders for approved securities transactions solicited by the
Contractor for the Company, together with any payment received by the
contractor from the customer, without any deduction whatsoever and
without commingling with the Contractor's own funds. In the event of
the Contractor's failure to do so, all rights under this Agreement,
including accrued and accruing commissions, shall immediately
terminate at the Company's election.
(c) The Contractor shall cause all checks or other orders for the payment
of money received in connection with applications or orders to be made
payable to such custodian bank, underwriter, issuer or broker-dealer
as directed by the Company. The contractor shall not collect cash
from the customer in payment of purchases or sales.
(d) The Contractor shall not forward the Contractor's own funds to the
Company for or on behalf of any customer or otherwise directly or
indirectly furnish funds for any customer in connection with any
purchase. The Contractor shall not directly or indirectly arrange
for, or assist in arranging for, the extension or maintenance of
credit to, for, or on behalf of any person in connection with the
purchase of securities, other than in a margin account carried by the
Company or one of its correspondents in compliance with Regulation T
of the Federal Reserve Board.
4. Commissions.
(a) Compensation payable to Contractor shall be determined solely on the
basis of a written agreement entered into between the Branch Office
manager and me. Such compensation shall be paid from Office Income,
as hereinafter defined. All income derived from Branch Office
operations, including brokerage commissions, investment advisory
compensation, and all other income relating to the securities business
(the "Office Income") shall be routed through the Company and shall
not be under the direct or indirect control of the Branch Office or
manager of the Branch Office.
(b) Notwithstanding section 4(a), the Company shall retain certain amounts
from Contractor's personal production, for purposes of covering the
costs of due diligence, compliance and legal counsel in connection
with operation of the Branch Office in which Contractor conducts his
activities; provided, however, that such monthly fee shall be phased
in as set forth on Exhibit B attached hereto and incorporated herein
by reference.
(c) The Company retains a certain percentage from the production generated
by Contractor. The percentage retained shall fluctuate per increment
of monthly production for contractor as set forth on Exhibit C
attached hereto and incorporated herein by this reference.
(d) Contractor is required to carry errors and omissions insurance and
premiums for such insurance shall be deducted from contractor's
production as set forth on Exhibit D attached hereto and incorporated
herein by this reference.
(e) Unless otherwise agreed in writing, any payment made to or for the
account of the Contractor in excess of commissions actually earned
shall be repayable on demand or
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<PAGE>
immediately upon termination of this Agreement and shall be a first
lien upon any funds which, for any reason, then or thereafter become
due to the contractor by the Company. The Contractor shall have no
right to assign or otherwise encumber the Contractor's right to
receive commissions without the express written consent of the
Company.
(f) Except as subsequently provided in this Agreement, the Contractor
shall have no right to receive commissions after ceasing to be a sales
representative of the Company except as to cash sales or open account
sales made before that time, but when and only to the extent that
payment has been received by the Company.
(g) The Company will, from time to time, furnish to the Contractor a
statement of the Contractor's account showing earnings and payments
made, the balance due from the Company or the amount of any balance
due from the Contractor to the Company. The Contractor agrees to
notify the company in writing within 30 days of any disagreement with
such statement in any respect.
(h) The Contractor agrees to repay the Company for any losses incurred by
it as a result of losses incurred in the Contractor's customer
accounts.
5. Sales Practices.
(a) The Contractor, in making solicitations, shall not take or recommend
any action which the Contractor may have reason to believe is not in
the best interests of the client or customer. The Contractor will not
make any untrue statement or misrepresentation, or omit any material
facts concerning the securities involved, and will comply in all
respects with the Company's compliance procedures, applicable rules
of the NASD, and with applicable Rules adopted by the SEC, NASD and
Regulators and modifications and supplements thereto, with respect to
securities transactions.
(b) The Contractor shall make no written or oral representations
concerning the approved products offered for sale by the Company
except those contained in the current prospectuses and supplementary
sales literature authorized by the Company. The Contractor shall not
solicit business through mailings or advertisements or other media
unless the contents thereof have previously been examined and approved
by the Company.
(c) The Contractor shall prepare and maintain such records as will comply
with applicable securities laws and Company policies and procedures
and shall open such records to inspection and review by the Company as
it shall deem advisable from time to time.
(d) The Company's compliance manual contains the operational rules and
regulations required by the rules and Regulators. The Contractor
acknowledges receipt of the manual and agrees to follow the procedures
and requirements contained therein, as amended from time to time.
Failure to comply with the provisions of the manual constitutes a
material breach of this Agreement. The Company manual, as published,
and as modified and amended from time to time, is incorporated into
this contract by reference as though fully set out.
(e) Full and complete disclosure of Contractor's other business interests
is set forth on Exhibit E attached hereto and incorporated into this
contract by reference as though fully set out.
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<PAGE>
6. General Provisions.
(a) Nothing in this Agreement shall be interpreted as relieving either
party from its obligations to comply with all applicable securities
laws of the United States, the laws of the states in which either or
both parties are or may be registered or licensed or that may be
applicable to any particular transaction, or the Rules of the SEC,
NASD or any other Regulator with which the parties are, or may be
required to be, registered.
(b) The terms, conditions and covenants contained in this Agreement
comprise the entirety of the agreement between the parties to this
instrument. All understandings, either oral or in writing, that have
previously existed or been reached prior to or simultaneously with the
acceptance by the Company of this Agreement, are expressly abrogated
and superseded by the terms, conditions, and covenants herein
contained. This Agreement may not be modified except in writing
jointly executed by the parties.
(c) The parties agree that any dispute or claim arising out of the terms
of this Agreement shall be submitted to binding arbitration and
settled in accordance with the Code of Arbitration Procedure of the
NASD. Any arbitration, legal suit or other proceeding arising out of
or relating in any way to this Agreement shall be instituted and held
in Denver, Colorado. The construction and interpretation of this
Agreement shall be determined in accordance with the laws of the State
of Colorado, including the arbitration law of the State of Colorado,
and its provisions prohibiting the award of punitive damages in
arbitration. The prevailing party may be awarded attorneys' fees and
costs. Contractor waives any objection that Contractor now has or
might subsequently make to such laying of venue.
(d) This Agreement shall take effect on the date of the execution thereof
and shall not be deemed accepted by the Company until and unless
subscribed with the signature of a duly authorized officer thereof.
In the event that any provisions of this Agreement are held to be in
contravention of any laws or rulings presently in force or hereinafter
existing, such provisions may be deemed to be void. In such event,
however, no other provision of this Agreement shall be deemed affected
by such holding.
(e) The Contractor shall not, either during the period of this Agreement
or subsequent to discharge of the Contractor, directly or indirectly,
communicate or divulge to or use for the benefit of the Contractor or
any other person, firm or corporation, the names of customers of the
Company or any other confidential information or data that may have
been communicated to or acquired by the Contractor by virtue of this
Agreement, or use any information acquired by the Contractor during
the period of this Agreement or subsequent to termination. The
Contractor will not induce any person to terminate an agreement with
the Company, and will not make, or solicit, or recommend the making of
unwarranted claims against the Company. The Contractor further agrees
that following termination from the Company, or in contemplation
thereof, the Contractor will not solicit or recommend the sale,
surrender, or redemption of securities that are underwritten,
distributed, or managed by affiliates of the Company, and that the
Contractor will not cause or attempt to cause the owner or holder of
such securities to cease performance of any investment programs
related to them.
(f) The Company shall not be responsible for the Contractor's expenses of
any type, including, but not limited to, dues and registration fees,
bonding, transportation, office, secretarial,
-5-
<PAGE>
postage, advertising, telephone charges, and other expenses incidental
to the Contractor's solicitation of business.
(g) Contractor shall reimburse the Company for all losses and charges
incurred due to the actions of Contractor's customers, including, but
not limited to, sell-outs, buy-ins, reneges, late charges and
extensions. Contractor specifically authorizes the Company to
withhold from commissions amounts reasonably estimated by the Company
to be sufficient or necessary to indemnify the Company hereunder or to
secure any indebtedness of the Contractor to the Company. Contractor
also grants a security interest to the Company in any brokerage or
other account held by the Company in the name of, the joint name of,
or for the benefit of Contractor, to secure any indebtedness of the
Contractor to the Company.
(h) This Agreement is not assignable or transferable by the Contractor,
and no rights, interests or benefits accruing to Contractor shall be
subject to assignment or transfer without the written consent of the
Company.
(i) The Contractor shall indemnify and save the Company and its agents,
affiliates, successors and assigns harmless from any and all expenses,
costs, causes of action and damages resulting from or growing out of
unauthorized acts or transactions by the Contractor.
7. Termination.
(a) This Agreement may be terminated at any time by either party upon
written notice to the other given 10 business days in advance, and may
be terminated immediately by the Company for cause. Notice of any
such termination shall be deemed to be given on the day mailed or
delivered. If mailed to the Company, it shall be addressed to the
principal office of the Company, 1700 Lincoln Street, Suite 2200,
Denver, CO 80203, and if mailed to the Contractor, shall be addressed
to the Contractor's last known address as shown on the records of the
Company.
(b) Upon termination of this Agreement as previously provided, the account
of the Contractor with the Company shall be settled within 45 days.
The Company shall furnish the Contractor by ordinary mail a statement
of the Contractor's account as of the effective date of the
termination, showing the balance due the Contractor from the Company,
or the amount of the Contractor's indebtedness to the Company, as the
case may be. The Contractor agrees, within 15 days thereafter, to
notify the Company in writing of any objection or exception that the
Contractor may have to the statement, setting forth the specific
grounds of the Contractor's objection and the particular items
involved. If the Contractor fails to give the required notice within
15 days, the Contractor shall be deemed to have waived all rights to
any claim based upon such objection or exception. If a balance is due
the Contractor from the Company, the Company shall remit the amount of
said balance to the Contractor. If the Contractor is indebted to the
Company, the Company has the right to offset such indebtedness against
amounts otherwise payable to the Contractor by the Company. If any
amounts payable to Contractor are insufficient to cover Contractor's
outstanding indebtedness to the Company, the Contractor shall
forthwith remit the amount of such indebtedness to the Company, and if
the indebtedness is not paid within 30 days, interest shall accrue at
the rate of 6% per annum, or at such rate provided for in any
instrument evidencing such indebtedness, and the Contractor agrees to
pay the Company's reasonable attorneys' fees and costs incurred in
collection of the account.
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<PAGE>
(c) Upon notice of termination of this Agreement by the Contractor or the
Company, all supplies and equipment furnished by the Company and all
original records, holding pages, customer and client lists, accounts,
holding pages and similar records, files and manuals furnished by the
Company shall be surrendered to the Company and remain the property of
the Company as valuable, special and unique assets that constitute
trade secrets owned exclusively by the Company. Notwithstanding
anything to the contrary, Contractor may retain a duplicate copy of
such client lists, books, records, documents and other information for
Contractor's personal use and client development.
IN WITNESS WHEREOF, the parties hereto have executed the foregoing
Agreement.
_________________________________________________ Date:_______________________
Independent Contractor
D.E. FREY & COMPANY, INC.
By:______________________________________________ Date:_______________________
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<PAGE>
Exhibit 10-8
D.E. FREY & COMPANY, INC.
1700 Lincoln Street, Suite 2200
Denver, CO 80203
BRANCH OFFICE AGREEMENT
__________________________________________ Date of Agreement:________________
Name of Branch Manager
__________________________________________ Number: __________________________
Street Address
__________________________________________
City State Zip
This Agreement is made and entered into this ____________ day of
________________, 19 ____ between D.E. Frey & Company, Inc., a corporation
organized and existing under the laws of Delaware (Company), and
_______________________________, (Manager).
Background Circumstances:
A. The Company is engaged in business as a securities broker-dealer
licensed and qualified to transact business pursuant to laws, statutes, rules,
regulations and interpretations (collectively called Rules) promulgated by the
Securities and Exchange Commission (SEC), the National Association of Securities
Dealers, Inc. (NASD), and various other state, local and federal government
agencies (Regulators).
B. Manager is knowledgeable and experienced in all aspects of the
securities business, including sales, administration and compliance.
C. Company desires to open a branch office in or about ______________,
(the Branch Office), and Manager desire to manage the Branch Office.
Now, therefore, in consideration of the background circumstances and the
following agreements, the parties agree as follows:
1. Engagement of Manager. Subject to all terms, conditions and provisions
hereof, the Company hereby engages Manager as resident agent manager of the
Branch Office, and Manager hereby accepts and agrees to such engagement.
2. Term. The term of this Agreement shall be for a period of one year from the
date given above. Thereafter, this Agreement shall be automatically renewed for
consecutive one-year terms unless either party, by notice duly given to the
other party not less than 30 days prior to expiration of the then one-year term,
elects to terminate this Agreement effective upon such expiration. However, in
the even of breach of any term, provisions or condition of this Agreement, the
non-breaching party may give the breaching party notice identifying the breach
in reasonable detail and the opportunity to cure the breach within ten days of
<PAGE>
the notice. If the breach is not timely cured, the non-breaching party shall
have the right, for a period of 30 days thereafter and upon not less than ten
days' notice given to the breaching party, to terminate this Agreement.
3. Payment of Costs. All costs associated with establishing, operating and
terminating the Branch Office shall be paid by the Manger. The Manger is not
authorized to, and shall not, create or allow the creation of any debt,
liability or obligation of any nature whatsoever on the part of the Company
relating to or arising from the Branch Office of its operation. All obligations
relating to the Branch Office shall be in the name of and shall be paid by the
Manager or the Manager's nominee, and the Company shall not have any liability
therefor. Such obligations shall include, but not by way of limitation,
purchase or lease of office space, furnishings and equipment; employment
arrangements or agreements with all personnel; workers' compensation,
unemployment or similar insurance; health, life and disability insurance;
property damage and liability insurance; utilities and supplies; telephone;
advertising; licenses and dues; and all other capital and operating expenses of
any nature.
4. Name and Signage. Manager may elect to form a partnership, corporation or
other entity for the sole purpose of owning the assets located at the Branch
Office and incurring the debts, liabilities and obligations relating to the
establishment, operation and termination of the Branch Office. Such entity
shall not engage in any other business or activity without the prior written
consent of the Company. The name of such entity likewise shall be subject to
the prior written consent of the Company, which shall not be unreasonably
withheld, but which, in any event, shall not state or imply that such entity is
engaged in the investment, securities or commodities business. Manager shall be
required to use the name of the Company in connection with the Branch Office as
required by the Rules of NASD and the Regulators.
5. Office of Supervisory Jurisdiction. For a period of 90 days from the date
of this Agreement, the Branch Office shall not be designated as an office of
supervisory jurisdiction. During such 90 days period, Manager agrees to use his
or her best efforts to bring the Branch Office into compliance with the
standards for operation established by the company from time to time in order to
comply with various federal, state, and regulatory guidelines. If, in the sole
discretion of the Company, the Manager has attained the necessary standards for
operation at the end of the 90 day period, the Branch Office may be designated
as an Office of Supervisory Jurisdiction. Manager agrees to be directly
responsible for implementation of procedures and the review and supervision of
the activities of the registered representatives and other persons associated
with the Branch Office as specified in the written procedures from time to time
promulgated by the Company. The Branch Office shall be subject to the
supervision by a principal designated by the Company. The Manager acknowledges
receipt of the written procedures and agrees to keep them in the Branch Office.
6. Independent Contractor. The Manager and each registered representative at
or associated with the Branch Office shall enter into an independent contractor
agreement with the Company in the form specified by it from time to time.
Compensation payable to registered representatives shall be determined solely
between the Manager and each registered representative and shall be in writing
signed by the Manager and each registered representative. Such compensation
shall be paid by the Company from Office Income (as hereinafter defined). The
parties acknowledge and agree that while the Company may make suggestions from
time to time, the Manager shall assume and make all decisions regarding
operation of the Branch Office, including hours of operation, dress code,
furnishings and equipment. The parties acknowledge and agree that the Manager
is an independent contractor, and not an employee, agent or partner of the
Company, and has no power or authority to bind the Company to any extent
whatsoever.
7. Covenants of Manager.
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7.1 Manager will cause the Branch Office to be operated at all times in
full compliance with all federal and applicable state laws, rules and
regulations and agrees to assume primary responsibility for such compliance.
Without limiting the generality of the foregoing, Manager will strictly comply
with the written procedures specified by the Company from time to time; will
institute and continue training programs for all Branch Office personnel
regarding compliance with Rules of the NASD, SEC and the Regulators; and will
institute procedures designed to monitor and assure compliance by such persons.
7.2 Manager will not, at any time during the term of this Agreement or at
any time thereafter, disparage or defame the Company of any of its personnel or
take or allow to be taken any action which could have that effect.
7.3 Manager will allow the Company full and complete access to any and all
books, records and personnel at or relating to the Branch Office at any time.
7.4 All contractual obligations relating to the Branch Office shall
include the following language:
Neither D.E. Frey & Company, Inc., a Delaware corporation (the Company), nor any
of its officers, directors, employees, shareholders, associates or affiliates
shall have any duty, liability or obligation of any nature whatsoever under this
Agreement. In the event of any default or breach by __________________ under
this Agreement, then __________________ agrees to give the Company written
notice specifying such default in reasonable detail and the opportunity for a
period of 10 days after receipt of such notice within which to cure the same.
Notice shall be delivered to the Company at 1700 Lincoln Street, Suite 2200,
Denver, Colorado 80203, Attention: President.
7.5 Manager shall not enter into any contractual obligations or agree to
do so for or on behalf of the Branch Office that will or may create any
liability for the Company without the express written consent of the Company,
which consent shall not be unreasonable withheld unless the Company determines
that such contractual obligations will not be in the best interests of the
Company.
7.6 The facilities occupied by the Branch Office shall not be used for any
purpose or business other than operation of a securities broker-dealer subject,
in any event, to policies from time to time established by the Company.
7.7 Office income, as hereafter defined, for any period of three
consecutive months during the term of this Agreement shall not be less than
$__________ gross.
8. Representation and Warranties of Manager.
8.1 The Manager is, and at all time during the term of this Agreement
shall be, licensed as a general securities principal and, if required by the
nature of the business conducted, either is also licensed as a registered
options principal or will engage individuals so registered at all times during
the term of this Agreement.
8.2 The Manger has no history of violations reported or required to be
reported on the Manager's Form U-4.
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8.3 The Manager has adequate financial resources required to perform the
duties and obligations of the Manager under this Agreement, and will provide
adequate proof thereof to the Company at any time upon its request.
9. Duties of the Company. The Company shall pay from Office Income all costs
incurred by the Branch Office in connection with clearing, confirmations,
account statements, and other costs directly related to providing transactional
and other services to customers of the Branch Office and all compensation
payable to persons employed by or otherwise associated with the Branch Office,
including non-registered persons and the registered representatives. In
addition, the Company shall pay the cost of registration of the Company as a
securities broker-dealer under the laws of the state in which the Branch Office
is located and under the laws of such other states as the Manager and the
Company shall mutually agree. The Company shall also pay the cost of
registration of the Company as an investment advisor under the laws of such
states as Manager and the Company shall mutually agree. The Company shall
provide such additional services to the Branch Office and to the Manager at such
cost as the Company and the Manager shall from time to time agree.
10. Manager Compensation. All brokerage commissions and investment advisory
compensation from Branch Office operations (Office Income) shall be routed
through the Company and shall not be under the direct or indirect control of the
Branch Office or the Manger. The Company shall retain such percentages of
Office Income as may be negotiated from time to time between the parties, and
after payment of the Branch Office costs pursuant to paragraph 9, shall pay the
balance remaining to the Manager, as compensation for the Manger's services, at
such times as the parties may mutually agree; provided, however, that the
Company is authorized to retain and expend such portions of the balance as it
deem necessary or advisable in order to pay any costs and expenses associated
with the Branch Office that arise or may rise as a result of any breach or
default by Manager under this Agreement.
11. Indemnification. Manager agrees to indemnify and hold harmless the Company
and its officers, directors, shareholders, employees, independent contractors,
consultants, agents, associates, affiliates, successors and assigns, past,
present and future, from and against any and all claims, demands, judgments,
liabilities, costs and expenses of any nature whatsoever, including, without
limitation, costs of investigation and reasonable attorneys' fees incurred by
any of the indemnified persons as a result of the breach by the Manager of any
term provision or condition contained in this Agreement.
12. Arbitration. In the event of any differences, claims or disputes between
the parties hereto arising out of this Agreement or related to it, the parties
agree to submit such matters to arbitration by the NASD or its successor in
Denver, Colorado. The arbitrators shall be governed by the duly promulgated
rules and regulations of the NASD or its successor, and the pertinent provisions
of the laws of the State of Colorado, relating to arbitration, including
provisions of the arbitration law of the State of Colorado that prohibit the
award of punitive damages. The decision of the arbitrators may be entered in a
judgment in any court of the State of Colorado or elsewhere and such decision
shall be final and absolute.
13. Miscellaneous. (i)This Agreement sets forth the understanding of the
parties and supersedes all prior written or oral understandings and agreements
and may be modified only by a writing signed by all parties; (ii) Neither party
shall have the right to assign all or any portion of that person's interest in
this Agreement to any other person. Subject to the foregoing, all terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the personal representatives, successors, and assigns of
the parties thereto; (iii) This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado; (iv) The failure of any party
to insist in any one or more instances upon performance of any terms or
conditions of this Agreement shall not be construed as a waiver of future
performance of such or any
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other term, covenant or condition; (v) In the event any party takes legal action
against any other party to enforce the terms of this Agreement, the party in
whose favor a final judgment or order is rendered shall be entitled to recover
reasonable attorneys' fees and costs from the other party in amounts to be fixed
by the occur or arbiter that renders the judgment or order. Such fees and costs
shall include those incurred in connection with any appeal or appeals; (vi)
Should any term or condition of this Agreement be determined by a court of
competent jurisdiction to be void or unenforceable, all other provisions of this
Agreement shall remain in full force and effect; (vii) All notices required
hereunder shall be deemed to have been given when in writing upon the earlier of
personal delivery or three days following deposit in the United States mail by
certified or registered mail, postage prepaid, to the party at the address set
forth herein. Each party hereto, by notice duly given, may change their address
for the giving of notice.
Executed as of the date first set forth above.
COMPANY: MANAGER:
D.E. FREY & COMPANY, INC., a ____________________________________
Delaware corporation
By: _________________________________ By: ________________________________
Title:_______________________________ Title:______________________________
1700 Lincoln Street, Suite 2200
Denver, Colorado 80203
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EXHIBIT 10.9
DEF SPECIAL FUND, LLC
LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
THIS OPERATING AGREEMENT ("Agreement" or "Operating Agreement") of DEF
Special Fund, LLC (the "Fund") is made the 16th day of October, 1997, by D.E.
Frey & Group, Inc. ("Frey" or "Manager"), a Colorado corporation and the Members
on Exhibit A hereto (referred to individually as a "Member" and collectively as
the "Members").
1. Name, Principal Place of Business and Agent for Service of Process
------------------------------------------------------------------
1.1 The Fund is hereby formed as a limited liability company under
the Colorado Limited Liability Company Act (the "Colorado Act") concurrently
with the filing of the Fund's Articles of Organization with the Colorado
Secretary of State as provided in the Colorado Act, which Articles are hereby
adopted and approved by the Members. The Members hereby enter into this
Agreement to provide for the governance of the Fund and the conduct of its
business, and to specify the Members' respective rights and obligations.
1.2 The name of the limited liability company formed hereby DEF
SPECIAL FUND, LLC and its principal place of business 1700 Lincoln, Suite 2200,
Denver, Colorado 80203, or such other place or places as the Manager may
hereafter determine.
1.3 The agent for service of process on the Fund shall be Dale Frey,
1700 Lincoln, Suite 2200, Denver, Colorado 80203 or such other eligible person
as the Manager shall designate.
2. Definition of Terms
-------------------
2.1 Unless otherwise expressly provided herein or unless the context
otherwise requires, the terms with initial capital letters in this Operating
Agreement shall be defined as follows:
"Accredited Investor" shall mean any investor accepted into the Fund as a
Member who is both an "accredited investor" as that term is defined in Rule
501(a) under Regulation D promulgated under the Securities Act of 1933, as
amended.
"Additional Members" shall mean any persons to whom the Fund sells and
issues Units, other than the Original Members; "Additional Member" shall
mean any one of the Additional Members.
"Adjusted Asset Value" shall mean the Gross Proceeds multiplied by the
ratio of number of Interests owned by the Fund at the beginning of each
given year divided by the number of all Interests in which the Fund has
invested during its term. The Adjusted Asset Value shall be calculated
yearly.
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"Adjusted Capital Account" shall mean, with respect to each Member, the
balance of their original capital account reduced by any return of capital
distributions made on a quarterly basis.
"Adjusted Capital Account Deficit" shall mean, with respect to each Member,
the deficit balance in his Capital Account as of the end of the relevant
fiscal period of the Fund, after giving effect to the following
adjustments:
(a) Increasing such Capital Account by any amount such Member is
obligated to restore under the standards set by Section 1.704-
1(b)(2)(ii)(c) of the Regulations (or is deemed obligated to
restore under Section 1.704-2(g)(l) and (i)(5) of the
Regulations); and
(b) Decreasing such Capital Account by the items described in
Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and
1.704-1(b)(2)(ii)(d)(6) of the Regulations.
"Administration Fee" shall mean the fee payable to the Manager pursuant to
Paragraph 9.3 of the Operating Agreement.
"Affiliate" or "Affiliates" of any person shall mean: (i) any other person
directly controlling, controlled by or under common control with such
person, (ii) any other person owning or controlling 10% or more of the
outstanding voting securities of such person, (iii) any executive officer,
director or general partner of such person, and (iv) if such person is an
executive officer, director or general partner, any company for which such
person acts in such capacity.
"Agreement" shall mean this operating agreement for DEF Special Fund, LLC.
"Assignee" shall mean a person who has acquired a beneficial interest in
one or more Units but who is not a substituted Member.
"Capital Account" shall mean the account established and maintained for
each Member pursuant to Paragraph 12.1.
"Colorado Regulations" shall mean the regulations promulgated by the State
of Colorado under the Colorado Securities Act.
"Colorado Securities Act" shall mean the Colorado Corporate Securities Law
of 1968, as amended.
"Cash From Operations" shall mean the excess of Gross Cash From Operations
over: (i) operational cash disbursements of the Fund (excluding cash
disbursements of Net Proceeds and any return to Members of Uninvested Net
Capital), and (ii) a reasonable allowance for reserves, contingencies and
anticipated obligations, as determined by the Manager.
"Closing Date" shall mean the date one year from the date of the Memorandum
or such earlier date as may be designated as the Closing Date by the
Manager; provided that such date may be extended by the Manager on one or
more occasions to a date no later than two years from the date of the
Memorandum.
"Code" shall mean the Internal Revenue Code of 1986, as amended to date, or
corresponding
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provisions of subsequent, superseding revenue laws.
"Distributions" shall mean cash or other property, from any source,
distributed by the Fund to the Unit Holders, but shall not include any
payments to the Manager made under the provisions of Paragraph 9 or
Paragraph 10.
"Economic Risk of Loss" shall mean the extent to which a Member or Related
Person bears the economic risk of loss for a Fund liability as determined
under Treasury Regulation Section 1.752-2.
"Fund" shall mean DEF Special Fund, LLC, the limited liability company
governed by this Agreement.
"Fund Minimum Gain" shall mean the amount determined in accordance with the
principles of Treasury Regulation Section 1.704-2(d).
"Future Funds" shall mean such other investment entities as may be formed
in the future as to which the Manager and/or its Affiliates may act
directly or indirectly as sponsors and/or investment advisors.
"Gross Cash From Operations" shall mean the sum of the cash received by the
Fund from (i) its operations and the operations of the issuers of Interests
in which the Fund invests, (ii) the net cash distributed to the Fund by the
issuer of an Interest from the sale, refinancing or other disposition of
property owned by the issuer of the Interest (whether upon liquidation or
otherwise), and (iii) interest income received by the Fund and any portion
of Working Capital Reserves which the Manager determines no longer to
maintain pursuant to Paragraph 16.1.14.
"Gross Proceeds" shall mean the aggregate dollar amount of the
consideration paid to the Fund by the Members for Units, without reduction
for any Selling Commissions or for any waiver of Selling Commissions
otherwise payable with respect to such Units pursuant to Paragraph 9.2.
"Group Selling Agreement" shall mean the Agreement between the Manager and
the Selling Broker-Dealers.
"Income" or "Loss" shall mean, for each fiscal year or other relevant
period, an amount equal to the Fund's taxable income or loss for such year
or period determined in accordance with Section 703(a) of the Code (for
this purpose all items of income, gain, loss or deduction required to be
stated separately pursuant to Section 703(a)(1) of the Code shall be
included in taxable income or loss), with the following adjustments: (i)
any income of the Fund that is exempt from federal income tax and not
otherwise taken into account in computing Income or Loss pursuant to this
definition shall be added to such taxable income or loss; (ii) any
expenditures of the Fund described in Section 705(a)(2)(B) of the Code or
treated as such pursuant to Treasury Regulation Section 1.704-
1(b)(2)(iv)(i), and not otherwise taken into account in computing Income or
Loss pursuant to this definition, shall be subtracted from such taxable
income or loss; (iii) any adjustment pursuant to Section 743(b) of the Code
shall be allocated solely to the Member to which such adjustment relates
and shall not be taken into account in computing Income or Loss; (iv) any
gain or loss which would have been realized by the Fund on the sale of
assets distributed in kind to Members, determined with reference to the
fair market value and the adjusted tax basis of such property for federal
income tax purposes immediately prior to such distribution, shall be
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added to or subtracted from such taxable income or loss; and (v)
notwithstanding any other provision of this definition, any items that are
specially allocated pursuant to Paragraph 11.7 hereof shall not be taken
into account in computing Income or Loss.
"Interests" shall mean those limited partnership units, trust interests and
other similar debt or equity interests issued by unaffiliated real estate
limited partnerships, other real estate-based investment entities or other
non-real estate-based entities, which have been acquired by the Fund.
"Investor" shall mean a Member of the Fund other than the Original Members.
"Majority Vote" shall mean the vote of Members who own more than 50% of the
Total Outstanding Units held by Members.
"Manager" shall mean Frey, or any other person or entity which succeeds
Frey in its capacity as manager of the Fund.
"Member Nonrecourse Debt" shall have the meaning given it in Treasury
Regulation Section 1.704-2(b)(4).
"Member Nonrecourse Debt Minimum Gain" shall mean the amount determined in
accordance with the principles of Treasury Regulation Section 1.704-
2(i)(3).
"Members" shall mean the Original Members and all persons admitted to the
Fund as Additional Members or as substituted Members; "Member" shall mean
any one of the Members.
"Memorandum" shall mean the private placement memorandum, as amended or
supplemented, which is delivered to prospective Investors for their review
prior to a purchase of the Fund's Units.
"MPI" shall mean MacKenzie Patterson, Inc., the Administrator.
"Net Proceeds" shall mean the Gross Proceeds less Selling Commissions and
all Organizational Expenses payable by the Fund.
"Net Proceeds Available For Investment" shall mean the sum of the Net
Proceeds, less (i) the Selling Commissions, allowances, fees and other
Organizational Expenses paid to the Manager, Affiliates and others pursuant
to Paragraphs 9.2, 9.3, 9.4 and 10.1 herein, and (ii) amounts set aside by
the Manager for Working Capital Reserves, operational expenses and payment
of fees to the Manager, Affiliates and others pursuant to Paragraph 10.1.2
herein.
"Nonrecourse Deductions" shall have the meaning given it in Treasury
Regulation Section 1.704-2(b)(1).
"Offering" shall mean the offering of Units in the Fund.
"Operational Expenses" shall mean all operating expenses of the Fund,
except those deemed to be Organizational Expenses as defined herein, and
shall include, without limitation, the items set forth in Paragraph 10.1.2.
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"Organizational Expenses," which shall not include Operational Expenses as
defined herein, shall mean those expenses incurred directly or indirectly
in connection with the formation of the Fund and in qualifying and
marketing Units under applicable federal and state law, and any other
expenses actually incurred and directly related to the offering and sale of
Units, including such expenses as: (i) filing and recording fees and taxes,
(ii) the costs of distributing the Memorandum, (iii) the costs of obtaining
any permits which may be necessary or desirable in connection with the
issuance of Units, and (iv) accounting fees incurred in connection
therewith.
"Original Invested Capital" shall mean the amount in cash contributed to
the capital of the Fund by each Member for his Units, which amounts
contributed for Units shall be attributed to such Units in the hands of a
successor Unit Holder.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
"Purchaser Representative" shall mean, collectively, a "purchaser
representative" under Regulation D or a "professional advisor" under the
Colorado Securities Act.
"Qualified Plans" shall mean, collectively, qualified pension, profit-
sharing, stock bonus, Keogh and similar retirement plans.
"Regulation D" shall mean the rules governing the limited offer and sale of
securities without registration under the Securities Act of 1933, and set
forth at 17 CFR (S) 230.501, et seq.
"Related Person" shall mean a Person having a relationship with a Partner
that is described in Treasury Regulation Section 1.752-4(b).
"SEC" shall mean the Securities and Exchange Commission.
"Selling Broker-Dealer" shall mean any NASD-registered broker-dealer
entering into the Group Selling Agreement with the Manager to sell Units in
the Fund.
"Selling Commissions" shall mean the commissions payable to the Selling
Broker-Dealer pursuant to Paragraph 9.2 herein.
"Subscription Agreement" or "Subscription Documents" shall mean the
Subscription Agreement, the form of which is attached as Exhibit B to the
Memorandum, which is to be completed and delivered by each prospective
Investor.
"Syndication Expenses" shall mean all expenditures classified as
syndication expenses pursuant to Treasury Regulation Section 1.709-2(b).
Syndication Expenses shall be taken into account herein at the time they
would be taken into account under the Fund's method of accounting if they
were deductible expenses.
"Total Outstanding Units" shall mean all Units of the Fund which are issued
and outstanding from time to time.
"Treasury Regulations" or "Regulations" shall mean the Income Tax
Regulations promulgated under the Code, as such regulations may be amended
from time to time (including corresponding provisions of succeeding
regulations).
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"UBTI" shall mean unrelated business taxable income as that term is defined
in Sections 511-514 of the Code.
"Unit" shall mean that ownership interest in the Fund acquired by a capital
contribution of $500 to the Fund (computed without reduction for any waiver
of the Selling Commission otherwise payable with respect to such Unit
pursuant to Paragraph 9.2) and shall entitle the holder thereof to an
interest in the Income, Loss and Distributions of the Fund attributable to
the number of Units held, without regard to Capital Accounts.
"Unit Holders" shall mean owners of Units who are either Members or
Assignees; "Unit Holder" shall mean any one of the Unit Holders. Each of
the Original Members shall be considered to be a Unit Holder with respect
to its respective Units. The Manager shall be considered to be a Unit
Holder only to the extent it owns Units.
"Working Capital Reserves" shall mean any working capital reserves
established pursuant to the provisions of Paragraph 16.1.14.
3. Business and Purpose
--------------------
The Fund intends to primarily acquire Interests from the Manager
as specified in the Offering Memorandum as Attachment A.
The Fund expects to receive cash distributions from the Interests
in which it invests, including distributions arising out of the operations sale
and refinancing of real property held by the issuers of the Interests and/or the
liquidation of the Interests. The Fund may also be entitled to other allocations
and/or distributions allocable to holders of such Interests.
As of the date hereof, the Fund does not expect to engage in the
active trading of Interests.
The Manager may cause the Fund to reimburse the Manager for out-
of-pocket expenses paid or incurred in connection with the acquisition of
Interests, including interest charges and transfer fees incurred by the Manager.
Such fees and commissions will be paid in addition to the other fees authorized
by Paragraph 9 herein. In addition, the Fund may do any and all acts and things
which may be necessary, incidental or convenient to carry on the Fund's purpose
and business as specified in this Operating Agreement and as permitted under the
Colorado Act; provided, however, that the distributions generated from
operations of the issuers of Interests and received by the Fund shall not be
reinvested in other Interests.
It is the intention of the Fund to be taxed as a "partnership"
under the provisions of the Code, and the Manager is authorized and directed to
file such notices and take such other actions as may be required to achieve the
Fund's desired characterization for federal income tax purposes.
4. Term
----
The term of the Fund shall commence as of the date of filing of
the articles of organization and shall continue until December 31, 2027, unless
sooner terminated in accordance with the provisions of this Operating Agreement.
Pursuant to Paragraph 18.2.7 of this Agreement, five years
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from the Closing Date the Members will vote upon whether to liquidate, wind-up
and dissolve the Fund.
5. Manager
-------
5.1 The Manager and its Affiliates shall have the right to purchase
and hold Units on the same terms and basis as other Members; provided, however,
that such parties may purchase Units at a price reduced by the amount of the
Selling Commission otherwise payable with respect to such subscription. Except
to the extent that it purchases Units, the Manager shall make no contribution to
the capital of the Fund.
5.2 The Manager shall have fiduciary responsibility for the safe-
keeping and use of all assets of the Fund, whether or not in its immediate
possession or control, and shall not employ such assets in any manner except for
the exclusive benefit of the Fund.
6. Members
-------
6.1 Subject to the other terms and conditions of this Operating
Agreement, the Fund intends to sell and issue Units to, and to admit as
Additional Members, such persons who contribute cash to the capital of the Fund
for such Units. The Fund shall not admit as Additional Members more than 35
persons excluding Accredited Investors, nor more than 99 persons including
Accredited Investors (as computed in accordance with Regulation D (as amended)
promulgated under the Securities Act of 1933, as amended, the Colorado Corporate
Securities Law of 1968, as amended, other applicable state securities and "blue
sky" laws and the 1940 Act. No more than 2,400 Units will be issued.
6.2 The purchase price for each Unit shall be $500 payable in cash,
reduced to the extent that fee-only planners, investment advisors and/or Selling
Broker-Dealers waive part or all of the Selling Commissions otherwise payable to
them with respect to such Unit pursuant to Paragraph 9.2. The minimum investment
shall be 10 Units ($5,000) although the Manager, in its discretion may accept a
subscription for fewer than 10 Units.
6.3 A person seeking admittance to the Fund as a Member will not be
sold any Units until such time as (i) he has offered to purchase at least 10
Units (subject to the right of the Manager in its discretion to allow a purchase
of fewer than 10 Units), (ii) he has tendered $500 in cash to the Fund for each
Unit that he has offered to purchase (reduced to the extent that the Manager,
pursuant to request by a Selling Broker-Dealer or investment advisor, waives the
Selling Commissions or any portion thereof otherwise payable with respect to
such Unit pursuant to Paragraph 9.2), which amount shall be returned to him
without interest in the event and at such time as the Manager elects not to sell
him any Units, (iii) he has executed and filed with the Fund a written
instrument which sets forth his intention to become a Member, requests admission
to the Fund in that capacity and verifies that he meets the requirements of the
limited and non-public offering exemptions under applicable federal and state
securities laws, together with such other instruments and documents as the
Manager may deem necessary or desirable to effect such admission, including a
special and limited power of attorney, the form, style and content of which are
more fully described herein, and a written acceptance and adoption by him of the
provisions of this Operating Agreement, and (iv) the Manager has accepted and
approved, in its absolute discretion, the sale of Units to him.
6.4 No person shall be accepted and admitted to the Fund until such
time as the Manager has accepted and approved the sale of 2,400 Units. Upon
acceptance of subscriptions for 2,400 Units, the Fund shall commence business.
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6.5 The Manager has the right, in its absolute discretion, to approve
or disapprove any person's admittance to the Fund as a Member for any reason
whatsoever.
7. Status of Members
-----------------
Except as otherwise required by law, Members shall not be bound
by, or be personally liable for, the expenses, liabilities or obligations of the
Fund.
8. Status of Units and Redemption
------------------------------
8.1 Except as otherwise required by law, each Unit, when issued,
shall be fully paid and non-assessable. No Member shall be required or permitted
to make any contribution to the capital of the Fund except through the purchase
of Units.
8.2 Beginning two years after the close of the Fund's offering,
during each subsequent calendar quarter, the Fund may, at the discretion of the
Manager, redeem up to two and one-half percent (2.5%) of the outstanding Units
in the Fund. Any redemption will be subject to the laws and regulations of any
state or federal regulatory agency having jurisdiction. To redeem Units, a
Member (the "Redeeming Member") shall submit to the Manager a written redemption
request on or before 60 days prior to the end of the calendar quarter.
8.3 The Manager, in its sole discretion, may accept or refuse a
request for redemption of Units and shall provide written notice within 60 days
of receipt of the request.
8.4 The redemption price for Units to be redeemed by the Fund shall
be the estimated asset value of the Fund represented by the Units, as determined
by the Manager using then-current dealer bids for each Interest held by the
Fund. In the absence of dealer bids for some or all interests, the Manager, in
its sole discretion, shall establish a fair redemption price for the Units. Any
and all Manager compensation which would be due on a liquidation of a pro rata
portion of the assets represented by the redeemed Units will be calculated, and
the Redeeming Member will be paid the redemption price less any compensation
which would have been due the Manager or Affiliates under such circumstances and
less a surrender charge of two and one-half percent (2.5%) of the original
subscription price for the Units.
8.5 Upon the Manager's acceptance of the redemption request, the Redeeming
Member shall tender the Units to be redeemed and the Fund shall pay the
redemption price for the redeemed Units within 90 days of the end of the
calendar quarter in which the request was received. A Redeeming Member may
cancel the redemption request by giving written notification to the Manager
within 30 days of the Manager's mailing of its notice of acceptance of the
redemption request.
8.6 Following the Fund's redemption of Units, each tendered Unit shall be
cancelled and shall cease to represent an equity ownership interest in the Fund.
9. Compensation to the Manager and Affiliates
------------------------------------------
9.1 The Manager and its Affiliates will receive compensation from the
Fund only as specified by this Operating Agreement. The Manager and its
Affiliates shall have the right to assign all or any portion of any of the fees
or compensation to which any of them is entitled pursuant to this
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Paragraph 9 to any person or entity. The amount and/or kind of Manager's
compensation may be required to be restructured in the event that an unfavorable
ruling is received from the Internal Revenue Service or Department of Labor. If
the ruling is unfavorable, the Manager will be required to restructure the
compensation sections of the Operating Agreement. If restructuring is necessary
and the change in compensation results in an overall decrease in compensation
expense to the Fund, the restructuring would be implemented unilaterally by the
Manager pursuant to its authority contained in Paragraph 16 of the Operating
Agreement. Alternatively, if restructuring is necessary and the change in
compensation results in an overall increase in compensation expense to the Fund,
the restructuring would be implemented only upon majority approval by the
Members other than the Manager and its Affiliates.
9.2.1 A Selling Commission in an amount equal to 5% of the gross
subscription price of each Unit sold shall be payable to the Selected Dealers,
for services performed in connection with the sale of Units; provided, however,
that the Selling Commission may be reduced as to certain sales of Units when
payment is waived by the Selling Broker-Dealer.
9.3 During the term of this Operating Agreement, the Manager shall
receive monthly an Administration Fee equal to one sixth of one percent
(0.1666%) of the Adjusted Asset Value as of the end of the most recent year for
administrative services rendered in handling the day-to-day operations of the
Fund. The Manager intends to hire MacKenzie Patterson, Inc. to administer to the
Fund and will accordingly re-allow the Administration Fee to MPI.
9.4 Interest at the legal rate may be paid by the Fund on any loans
made to it by the Manager or Affiliate, subject to the provisions of Paragraph
16.2.3.
10. Fund Expenses
-------------
10.1 All Fund expenses are incorporated into this document and no
additional expenses will be charged.
11. Distributions of Cash From Operations, Capital Transactions and
---------------------------------------------------------------
Allocations of Income and Loss
------------------------------
11.1 Distributions and Allocations Among Unit Holders. Income, Loss
and Distributions of the Fund shall be apportioned among the Unit Holders based
on the number of Units owned by each and on the number of months within the
fiscal year of the Fund that they were Unit Holders beginning with the day they
are first deemed to be Unit Holders, without regard to Capital Accounts;
provided, however, that Income attributable to the sale of Interests shall first
be allocated among the Unit Holders so as to take into account the varying
Distributions and allocations of Income and Loss among the Unit Holders prior to
the Closing Date. For purposes of this apportionment, a person who is admitted
to the Fund as an Additional Member shall be deemed to have become a Unit Holder
as of the date of his admission to the Fund pursuant to Paragraph 6.5, and an
Assignee shall be deemed to have become a Unit Holder on the effective date of
the assignment to him, as determined pursuant to Paragraph 13.3. Distributions
from Operations will be allocated first 100% to the Members until a 14% non-
compounded return on Adjusted Capital, the next 100% to the Manager until a 14%
non-compounded return on its Adjusted Capital, thereafter 50% to the Members and
50% to the Manager. Distributions from Capital will be allocated first 100% to
the Members until a complete return of original capital, the next 100% to the
Manager until it receives a complete return of their capital, thereafter, 50% to
the Members and 50% to the Manager.
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11.2 Character of Income and Loss. Except as otherwise required by
Code Section 704,1245 or 1250 (or any successor provisions thereto) or Treasury
Regulation promulgated thereunder, the character of Income and Loss (as ordinary
income or capital gains) shall be allocated among the Members in the same
proportion as recognized by the Fund.
11.3 Timing of Distributions. The Fund intends to make quarterly cash
Distributions, beginning with the first full fiscal quarter after the close of
escrow, to the Unit Holders of substantially all of the Cash from Operations
under this Paragraph 11; provided, however, that the final decision with respect
to the timing and amount of Distributions, if any, shall be subject to the
results of Fund operations and in the sole discretion of the Manager.
11.4 Expenses and Reserves. All Distributions are subject to the
payment of Organizational Expenses and Operational Expenses and to the
establishment of Working Capital Reserves and the establishment and maintenance
of such other reserves as the Manager may determine in its sole discretion.
11.5 Return of Certain Distributions. Notwithstanding any other
provision of this Operating Agreement, a Member shall be obligated to return a
Distribution from the Fund to the extent that, immediately after giving effect
to the Distribution, all liabilities of the Fund, other than liabilities to
Members on account of their interests in the Fund and liabilities as to which
recourse of creditors is limited to specified property of the Fund, exceed the
fair value of the Fund assets, provided that the fair value of any property that
is subject to a liability as to which recourse of creditors is so limited shall
be included in the Fund assets only to the extent that the fair value of the
property exceeds this liability.
11.6 Special Allocations
-------------------
11.6.1 In the event any Unit Holders unexpectedly receive any
adjustments, allocations, or distributions described in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d)(4)-(ii)(d)(6), items of Fund income and gain
(consisting of a pro rata portion of each item of the Fund's income, including
gross income, and gain for such year) shall be specially allocated to such Unit
Holders in an amount and manner sufficient to eliminate the negative Capital
Account balances (or any increase in the amount thereof) created by such
adjustments, allocations, or distributions as quickly as possible.
11.6.2 The Capital Account of each Unit Holder shall be reduced by a
charge equal to the amount of the Selling Commission paid by the Fund that is
properly allocable to the Units held by such Unit Holder. All other Syndication
Expenses for any fiscal year or other period shall be specially allocated to the
Members in proportion to their Units, provided that if Unit Holders are admitted
to the Fund on different dates, all of such other Syndication Expenses shall be
divided among the Unit Holders who own Units from time to time so that, to the
extent possible, the cumulative amount of such other Syndication Expenses
allocated with respect to each Unit at any time is the same amount. In the event
the Manager shall determine that such result is not likely to be achieved
through future allocations of such other Syndication Expenses, the Manager may
allocate a portion of Income and Losses so as to achieve the same effect on the
Capital Accounts of the Unit Holders.
11.6.3 Except as otherwise provided in Treasury Regulation Section
1.704-2(f), if there is a net decrease in Fund Minimum Gain during a fiscal year
of the Fund, each Member shall be allocated items of Partnership income and gain
for such year (and, if necessary, subsequent years) in proportion to, and to the
extent of, an amount equal to the portion of such Member's share of the net
decrease in Fund Minimum Gain during such year.
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11.6.4 Except as otherwise provided in Treasury Regulation Section
1.704-2(h), if there is a net decrease in Member Nonrecourse Debt Minimum Gain
during a fiscal year of the Fund determined in accordance with the principles of
Section 1.704-2(i) of the Regulations, each Member who had a share of Member
Nonrecourse Debt Minimum Gain at the beginning of such year shall be allocated
items of Fund income and gain for such year (and, if necessary, subsequent
years) in proportion to, and to the extent of, an amount equal to the portion of
such Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain
during such year that is allocable (in accordance with the principles set forth
in Treasury Regulation Section 1.704-2(i)) to the disposition of Fund property
subject to the related Member Nonrecourse Debt.
11.6.5 The allocations set forth in Paragraph 11.6 herein, other than
this Paragraph 11.6.5 (the "Regulatory Allocations"), are intended to comply
with certain requirements of Treasury Regulations. It is the intent of the Fund
that, to the extent possible, all Regulatory Allocations shall be offset either
with other Regulatory Allocations or with special allocations of other items of
Fund income, gain, loss or deduction pursuant to this Paragraph 11.6.5.
Therefore, notwithstanding any other provision of Paragraph 11 (other than the
Regulatory Allocations), the Manager shall make such offsetting special
allocations of Fund income, gain, loss or deductions in whatever amount it
determines appropriate so that, after such offsetting allocations are made, each
Member's Capital Account balance is, to the extent possible, equal to the
Capital Account balance such Fund would have had if the Regulatory Allocations
were not part of this Agreement and all Fund items were allocated pursuant to
the provisions of Paragraph 11 other than the Regulatory Allocations. In
exercising its discretion under this Paragraph 11.6.5, the Manager shall take
into account future Regulatory Allocations that, although not yet made, are
likely to offset other Regulatory Allocations previously made.
11.6.6 Notwithstanding the proceeding, any deduction attributable to
Member Nonrecourse Debt shall be allocated to the Members that bear the Economic
Risk of Loss for the Member Nonrecourse Debt.
11.7 Withholding. All amounts withheld pursuant to the Code or any
provisions of any state or local tax law with respect to any distribution to, or
allocable share of, the Members shall be treated as amounts distributed to the
Members pursuant to Paragraph 11 for all purposes under this Agreement. The
Manager may allocate any such amounts among the Members in any manner that is in
accordance with applicable law.
12. Capital Accounts
----------------
12.1 A Capital Account shall be established and maintained for each
Member in accordance with the principles described in Treasury Regulation
Section 1.704-1(b). The Capital Account of each Member (a) shall be credited
with (i) the amount of cash and the agreed upon fair market value of property
contributed by such Member to the Fund, if any (net of liabilities secured by
such contributed property that the Fund is considered to assume or take subject
to under Code Section 752), and (ii) such Member's distributive share of Fund
Income; and (b) shall be debited with (i) the amount of cash and the fair market
value of property distributed to such Member (net of liabilities secured by such
distributed property that such Member is considered to assume or take subject to
under Code Section 752), and (ii) such Member's distributive share of Fund Loss.
The foregoing provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts are intended to comply with the applicable
Treasury Regulations, including Treasury Regulation Section 1.704-1(b), and
shall be interpreted and applied in a manner consistent with such regulations.
The allocation of
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income, loss, and credits will be apportioned between Members and Manager
consistent with the allocation of the Distributions From Operations.
12.2 The Assignee of all or a portion of a Member's interest shall
succeed to that portion of the Member's Capital Account which is allocable to
the portion of the interest transferred.
13. Assignment and Transfer of Units
--------------------------------
13.1 Unit Holders shall not have the right or power, except by will or
by the laws of descent and distribution, to assign any Units unless they have
met the following terms and conditions:
13.1.1 The assignment shall be by a duly executed written instrument of
assignment filed with the Fund, the terms of which are not in contravention of
any of the provisions of this Operating Agreement, and shall specify the number
of Units being assigned.
13.1.2 The assignment shall be made pursuant to a validly filed and
effective registration statement under the Securities Act of 1933, as amended,
or an exemption therefrom, and any other applicable sections of the Securities
Act of 1933, as amended, and regulations promulgated pursuant thereto and the
provisions of any applicable California or other state securities laws or
regulations, and shall not jeopardize the availability of the limited and non-
public offering exemptions to the Fund in connection with any issuance of Units.
13.1.3 The assignment does not violate, and will not cause the Fund to
violate, any federal or state securities laws, and the Unit Holder shall have
provided assurances, which may include, in the discretion of the Manager, an
opinion of counsel acceptable to the Fund, that the assignment will not cause a
termination of the Fund under Code Section 708, will not cause the Fund to be
treated as publicly traded under Code Section 7704 and will not cause the Fund
to be beneficially owned by more than 99 persons, as calculated under the 1940
Act.
13.1.4 The Unit Holder, if he assigns fewer than all his Units, and his
Assignee shall each own at least ten Units subsequent to the assignment. No
assignment of any fractional Units shall be permitted.
13.1.5 The Unit Holder shall have notified the Manager of the transfer
of a beneficial interest in any Units which occurs without a transfer of record
ownership.
13.1.6 The Unit Holder shall have paid to the Fund a transfer fee,
determined and collected by the Manager, to cover all reasonable expenses of the
Fund connected with the transfer.
13.2 The Manager may, in its sole discretion:
13.2.1 Waive in whole or in part any or all of the requirements set
forth in this Operating Agreement with respect to any proposed assignment by a
Unit Holder; and, in particular,
13.2.2 Waive the requirement set forth in Paragraph 13.1.4 with respect
to any proposed assignment by a Unit Holder to any of the members of his
immediate family or any trust established for the benefit of such persons or by
way of gift to any person. No such waiver shall constitute a waiver as to any
future proposed assignment.
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13.3 An Assignee of whom the Fund has actual written notice shall be
entitled to receive Distributions of cash or other property from the Fund
attributable to the Units acquired by reason of the assignment from and after
the effective date of the assignment of such Units to him; provided, however,
that the Fund and the Manager shall be entitled to treat the assignor of such
Units as the absolute owner thereof in all respects, and shall incur no
liability for allocations or Distributions which are made in good faith to such
assignor until such time as all of the requirements of Paragraph 13.1 have been
satisfied or waived and the written instrument of the assignment has been
received by the Fund and the effective date of assignment has passed. The
effective date of an assignment of Units which complies with the provisions of
Paragraph 13 of this Operating Agreement shall be the first day of the calendar
quarter immediately following the calendar quarter set forth on the written
instrument of assignment or the quarter during which a transfer by operation of
law occurs.
13.4 Under the 1940 Act, the Fund may not, without registering
thereunder, have more than 99 beneficial owners. At any time following the
Closing Date, should the Manager determine that more than 99 persons own the
securities of the Fund, the Manager may, in its sole discretion, cause the Fund
to repurchase the Units of each Member who was admitted or acquired such
beneficial ownership after the 99th person became a beneficial owner of the
Fund's securities. Each such Member hereby agrees to sell its Units to the Fund
upon receipt of written notice from the Manager that its Units are being
repurchased pursuant to this Paragraph. The price for any such repurchase shall
be an amount which after taking into account the period of ownership and the
cumulative amount of all Distributions previously received by such selling
Member will result in such selling Member receiving a cash return on its
investment in the Fund equaling its Original Invested Capital and an 14% per
annum non-compounded return on remaining Original Invested Capital.
14. Substituted Members
-------------------
14.1 No Assignee shall have the right to become a substituted Member
in place of his assignor unless all of the following conditions are first
satisfied:
14.1.1 His assignor was a Member;
14.1.2 A duly executed and acknowledged written instrument of assignment
shall have been filed with the Fund, which instrument shall set forth the
intention of the assignor that the Assignee succeed to the assignor's interest
as a substituted Member in his place;
14.1.3 The assignor and Assignee shall have executed and acknowledged
such other instruments as the Manager may deem necessary or desirable to effect
such substitution, including the written acceptance and adoption by the Assignee
of the provisions of this Operating Agreement and his execution and delivery to
the Manager of a special and limited power of attorney, the form and content of
which shall be prescribed by the Manager;
14.1.4 The written consent of the Manager to such substitution shall
have been obtained; and
14.1.5 A transfer fee shall have been paid to the Fund which is
sufficient to cover all reasonable expenses connected with such substitution.
14.2 By executing or adopting this Operating Agreement, each Member
hereby consents to the admission of additional or substituted Members by the
Manager and to any Assignee of
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Units who holds at least ten Units becoming a substituted Member.
15. Books, Records, Accounting and Reports
--------------------------------------
15.1 The Manager shall keep, or cause to be kept, at the principal
place of business of the Fund as set forth in Paragraph 1.1, all of the
following:
(a) A current list of the full name and last known business or
residence address of each Member set forth in alphabetical order together with
the contribution and the share in profits and losses of each Member;
(b) A copy of the articles of organization and all amendments
thereto, together with executed copies of any powers of attorney pursuant to
which any certificate has been executed;
(c) Copies of the Fund's federal, state and local income tax or
information returns and reports, if any, for the six most recent taxable years;
(d) Copies of the original Operating Agreement and all amendments
thereto;
(e) Financial statements of the Fund for the six most recent
fiscal years; and
(f) The Fund's books and records for at least the current and
four most recent fiscal years.
15.2 Upon the request of a Member, for any purpose reasonably related
to the interest of that person as a Member of the Fund, the Manager shall
promptly deliver to the requesting Member a copy of the information required to
be maintained by subdivisions (a), (b) or (d) of Paragraph 15.1. Each Member has
the right upon reasonable request for such a purpose, and upon reasonable
advance notice, to inspect and copy during normal business hours any of the Fund
records required to be maintained by Paragraph 15.1. The Manager shall promptly
furnish to a Member a copy of any amendments to this Operating Agreement
executed by the Manager pursuant to the power of attorney from the Member
contained in Paragraph 22.
15.3 The Manager shall cause to be compiled, at Fund expense, and
shall attempt to distribute to the Members within 90 days after the end of each
fiscal year, all financial information regarding the Fund that is necessary for
the preparation of the Members' federal and state income tax or information
returns, and shall also attempt to distribute to the Members within said 90-day
period copies of the Fund's federal, state and local income tax or information
returns for the year; provided, however, that in the event the Manager is unable
to provide such information to the Members within such 90-day period it shall
provide such information as soon thereafter as is reasonably practicable.
15.4 The Manager shall cause to be prepared, at Fund expense, and
shall distribute to the Members within 120 days after the end of each fiscal
year, an annual report containing financial statements of the Fund (balance
sheet, statement of income or loss, and statement of Members' equity) prepared
on an appropriate accounting basis selected by the Manager.
15.5 The Manager, at the Fund's expense, shall cause to be prepared
income tax returns for the Fund and shall further cause such returns to be
timely filed with the appropriate
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authorities.
16. Rights, Authority, Powers, Responsibilities and Duties of the Manager
---------------------------------------------------------------------
16.1 Subject only to the provisions of Paragraph 16.4, the Manager
shall have all authority, rights and powers conferred by law and those required
or appropriate to the management of the Fund business which, by way of
illustration but not by way of limitation, shall include the rights, authority
and powers:
16.1.1 To cause the Fund to acquire and enter into any contract of
insurance which the Manager deems necessary or appropriate for the protection of
the Fund and the Manager, or either of them, for the conservation of Interests,
or for any purpose convenient or beneficial to the Fund;
16.1.2 To cause the Fund to, and itself to, employ persons in the
operation and management of the business of the Fund on such terms and for such
compensation as the Manager shall determine;
16.1.3 To prepare or cause to be prepared reports, statements and other
relevant information for distribution to Members;
16.1.4 To open accounts and deposits and maintain accounts in the name
of the Fund in any bank or savings and loan association, provided however, that
the Fund's monies shall not be commingled with the monies of any other person or
entity;
16.1.5 To cause the Fund to make or revoke any of the elections referred
to in Section 754 of the Code or any similar provisions enacted in lieu thereof;
16.1.6 To select the Fund's accounting year;
16.1.7 To determine the appropriate accounting method or methods to be
used by the Fund for the purposes of preparing financial statements and tax
returns (the Manager currently intends to utilize the accrual method of
accounting in maintaining the Fund's books and records);
16.1.8 To require in any or all Fund contracts that the Manager shall
not have any personal liability thereon but that the person or entity
contracting with the Fund is to look solely to the Fund and its assets for
satisfaction;
16.1.9 To purchase or cause any of its Affiliates to purchase for
investment for their own accounts Units upon the terms described in Paragraph
5.1;
16.1.10 Notwithstanding anything herein to the contrary, subject to
Paragraph 16.4.11, to amend this Operating Agreement without the consent or vote
of any of the Members: (i) to reflect the addition or substitution of Members,
the repurchase of Units of Members pursuant to Paragraph 13.4 or 16.3 or the
reduction of the Capital Accounts upon the return of Uninvested Net Capital to
Members, (ii) to add to the representations, duties or obligations of the
Manager or surrender any right or power granted to the Manager herein, for the
benefit of the Members, (iii) to cure any ambiguity, to correct or supplement
any provision herein which may be inconsistent with any other provision herein
or to add any other provisions with respect to matters or questions arising
under this Operating Agreement which will not be inconsistent with the
provisions of this Operating Agreement, (iv) to delete or add any provision
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from or to this Operating Agreement requested to be so deleted or added by a
federal or state securities commissioner or other regulatory agency, the
deletion or addition of which provision is deemed by such regulatory agency to
be for the benefit or protection of the Members, and (v) to delete or add any
provision from or to the Operating Agreement, including restructuring the kind
and amount of compensation pursuant to Paragraph 9.1 of this Agreement, if
deemed necessary by the Manager to comply with applicable laws and regulations
provided that such deletion or addition does not have a material adverse effect
on the Members;
16.1.11 To execute, acknowledge and deliver any and all instruments to
effectuate the foregoing, and to take all such action in connection therewith as
the Manager shall deem necessary or appropriate;
16.1.12 To prepare, file and publish any and all instruments or documents
necessary or appropriate to enable the Fund to transact business or otherwise to
exist;
16.1.13 To establish a Working Capital Reserve in an amount as the
Manager in its sole judgment shall determine advisable;
16.1.14 To make short-term (for periods of one year or less), unsecured,
interest-bearing loans to the Fund, either before or after the admission of
Members pursuant to Paragraph 6, for the purposes deemed appropriate by the
Manager, which loans, together with accrued interest thereon, may be repaid from
amounts contributed to the Fund by the Additional Members; provided, however,
that the amount of any interest charged for any such loans shall be subject to
Paragraph 16.4.3;
16.1.15 To act on behalf of the Fund in all dealings with the Internal
Revenue Service, as designated tax matters "partner" as that term is used in the
Code;
16.2 Neither the Manager nor any of its Affiliates shall have the
authority:
16.2.1 Except as contemplated by this Operating Agreement, to cause the
Fund to enter into contracts with, sell or lease property to or buy or lease
property from, the Manager or any of its Affiliates without obtaining the
approval by Majority Vote of the Members;
16.2.2 To alter the primary purpose of the Fund as set forth in
Paragraph 3;
16.2.3 To make long-term loans to the Fund or short-term secured loans
to the Fund or, on short-term unsecured loans made to the Fund, receive interest
or other financing charges or fees in excess of those amounts which would be
charged by third party financing institutions on comparable loans for the same
purpose in the same geographic area;
16.2.4 Except as provided in Article 8 and Paragraph 13.4, to cause the
Fund to redeem or repurchase Units;
16.2.5 To do any act in contravention of the articles of organization or
this Operating Agreement or which would make it impossible to carry on the
ordinary business of the Fund;
16.2.6 To cause the Fund to confess a judgment against the Fund in
connection with any threatened or pending legal action;
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16.2.7 To possess or use the Interests or assign the rights of the Fund
in the Interests for other than an appropriate Fund purpose;
16.2.8 To admit new Members after the Closing Date (except for
substituted Members admitted in accordance with Paragraph 14) or cause the Fund
to offer or issue other securities, except with the consent of the Members as
provided in this Operating Agreement;
16.2.9 To cause the Fund to, or to itself, employ the assets of the Fund
in any manner except for the exclusive benefit of the Fund;
16.2.10 To cause the Fund to, or to itself, commingle the monies of the
Fund with those of any other person or entity, provided that, a joint venture or
investment complying with Paragraph 16.1.22 shall not be deemed commingling of
funds;
16.2.11 To amend the Operating Agreement without the consent of each
Member who would be adversely affected thereby, to:
(i) eliminate or decrease the limited liability of a Member, or
(ii) affect the status of the Fund as a partnership for federal
income tax purposes;
16.2.12 To borrow money from the Fund; or
16.2.13 To cause the Fund to invest in general partnerships, joint
ventures or other entities which do not purport generally to afford limited
liability to investors such as the Fund.
16.3 The Manager and its Affiliates shall not receive any rebates or
give-ups in connection with the sale of Interests in the Fund nor shall they
engage in any reciprocal business arrangements which would circumvent the
restrictions contained herein against dealing with the Manager or any of its
Affiliates. Neither the Manager nor any of its Affiliates shall directly or
indirectly pay or award any finder's fees, commissions or other compensation to
any person engaged by a potential investor in the Fund for investment advice as
an inducement to such advisor to advise the purchase of Units in the Fund;
provided, however, that this clause shall not prohibit the payment of Selling
Commissions to a registered broker-dealer or other properly licensed person for
selling Units or the assignment by the Manager of a portion of its fees from or
interest in the Fund to any registered broker-dealer participating in the
offering of Units.
16.4 If the Members vote to remove the Manager, the Manager shall
within 90 days from the date of such vote prepare financial statements of the
Fund, at Fund expense, and shall cause such statements to be mailed to the
Members as soon as reasonably possible.
16.5 The Manager shall be authorized and have the duty and
responsibility for providing continuing administrative support, advice,
consultation, analysis and supervision with respect to the functions of the Fund
as an owner of the Interests in such a manner as the Manager deems appropriate,
including authorization and responsibility for making all decisions with respect
thereto and voting the same when permissible and deemed appropriate, and
complying with federal, state and local regulatory requirements and procedures.
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16.6 The Manager and its Affiliates shall not be bound to devote all
of their business time to affairs of the Fund, it being understood that the
Manager and Affiliates are and will continue to be engaged in other activities
and in other employment, some of which are or may be in connection with business
investments and other enterprises which are or may be in competition with the
Fund.
17. Return of Uninvested Net Capital to Members
-------------------------------------------
There will be no Return of Univested Net Capital to Members as
the portfolio is a specified offering and all of the Interests in Attachment A
will be purchased upon full capital raising.
18. Rights, Powers and Voting Rights of the Members
-----------------------------------------------
18.1 Members other than the Manager shall take no part in the control,
conduct or operation of the Fund and shall have no right or authority to act for
or bind the Fund. Without limiting the generality of the foregoing, the Members
other than the Manager acknowledge and agree that they do not have the right to
bring any cause of action in the name of the Fund or on behalf of the Members as
a group against any of the issuers of Interests in which the Fund invests or the
management of such Interests.
18.2 Members shall have the right, by Majority Vote, to vote only upon
the following matters affecting the basic structure of the Fund:
18.2.1 Removal of the Manager as manager of the Fund;
18.2.2 Election of a successor manager, subject to the provisions of
Paragraph 19;
18.2.3 Dissolution and termination of the Fund;
18.2.4 Sale of all or substantially all of the Interests at any one time
provided that no such vote shall be required if the purchase price of the
Interests as of the date of such sale is less than 20% of the Net Proceeds;
18.2.5 Amendment of the Operating Agreement, except for the matters set
forth in Paragraph 16.1.11, as to which the Manager alone may adopt amendments,
and except for the matters set forth in Paragraph 16.2.11 hereof, as to which
the approval of all Members who would be adversely affected is required for
amendment; and
18.2.6 The extension of the term of the Fund.
18.2.7 Five years after the Closing Date, the Manager shall submit for
vote of the Members a proposal to liquidate, wind-up and dissolve the Fund. As
part of the proposal the Manager shall calculate the amount of estimated net
proceeds which the Fund could receive from a sale of all remaining Interests.
The liquidation proposal approved by a Majority Vote of the Members and
liquidating distributions will be subject to the actual proceeds realized by the
Fund in liquidating all or a portion of the remaining Interests. If the
liquidation proposal is not approved, the Manager shall resubmit a liquidation
proposal to the Members every two years thereafter.
18.3 The Manager may at any time call a meeting of the Members, or
call for a vote of the Members without a meeting, on matters on which they are
entitled to vote, and shall call for such
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meeting or vote following receipt of written request therefor by Members holding
10% or more of the Units held by all Members as of the date of receipt of such
written request (the "Notice Date"). Within 10 days of the Notice Date, the
Manager shall notify all Members of record as of the Notice Date regarding the
time and place of the Fund meeting, if called, and the general nature of the
business to be transacted thereat, or, if no such meeting has been called, the
Manager shall notify all Members of the matter or matters to be voted upon and
the date upon which the votes will be counted. Any Fund meeting or the date upon
which such votes, without a meeting, will be counted shall be no less than 15
nor more than 60 days following mailing of the notice thereof by the Manager.
All expenses of the voting and such notification shall be borne by the Fund.
18.4 A Member shall be entitled to cast one vote for each Unit which
he owns in the following manner: (i) at a meeting, in person, by written proxy
or by a signed writing directing the manner in which he desires that his vote be
cast, which writing must be received by the Manager prior to such meeting, or
(ii) without a meeting, by a signed writing directing the manner in which he
desires that his vote be cast, which writing must be received by the Manager
prior to the date upon which the votes of Members are to be counted. Only the
votes of Members of record on the Notice Date, whether at a meeting or
otherwise, shall be counted. The laws, rules and regulations of the State of
Colorado pertaining to the validity and use of corporate proxies shall govern
the validity and use of proxies given by Members.
18.5 No Member shall have the right or power to: (i) withdraw or
reduce his contribution to the capital of the Fund except as a result of the
dissolution of the Fund or as otherwise provided by law, (ii) bring an action
for partition against the Fund, (iii) cause the termination and dissolution of
the Fund other than by the right specified in Paragraph 18.2, or (iv) demand or
receive property other than cash in return for his contribution. No Member in
his capacity as such shall have priority over any other Member either as to the
return of contributions of capital or as to Income, Loss or Distributions. Other
than upon the dissolution and termination of the Fund as provided by this
Operating Agreement, there has been no time agreed upon when the contribution of
each Member is to be returned.
18.6 Nothing contained in this Paragraph 18 shall be deemed to limit a
broker/dealer's authority under the Group Selling Agreement.
19. Removal of Manager
------------------
19.1 As provided in Paragraph 18.2.1, the Manager may be removed as
manager of the Fund, which removal shall not otherwise affect the Manager's
status or rights as a Member.
19.2 Written notice of the removal of the Manager shall be served upon
the Manager either by certified or by registered mail, return receipt requested,
or by personal service. Such notice shall set forth the date upon which the
removal is to become effective.
19.3 Upon the removal of the Manager, the interest of the Manager in
the Income, and Loss and Distributions of the Fund shall be purchased by the
Fund for a purchase price equal to the fair market value thereof determined
according to the provisions of Paragraph 19.4. Unless otherwise agreed, 50% of
the purchase price of such interest shall be paid by the Fund to the Manager in
cash if available and the balance by a promissory note of the Fund, payable to
the Manager or its order in a face amount equal to said market value and
containing provisions as would be usual and customary in a commercial promissory
note, with principal and accrued interest payable from time to time from Cash
From Operations. Interest on said promissory note shall accrue at the rate of 2%
above the rate announced
A-19
<PAGE>
from time to time by The Bank of America as its prime or base rate or the
maximum rate permitted by law, whichever is less. Any remaining unpaid principal
and accrued interest on such promissory note shall be due and payable on the
earlier of the date of liquidation of the Fund or a date three years from the
date of the Manager's removal.
19.4 The fair market value of the Manager's interest purchased by the
Fund according to the provisions of Paragraph 19.3 above shall be determined by
agreement between such Manager and the Fund (which agreement shall require
approval by a Majority Vote). If said parties cannot agree upon the fair market
value of such interest within 30 days after the occurrence of the event upon
which such interest of the Manager is to be purchased by the Fund, the fair
market value thereof shall be determined in the manner provided by the laws of
the State of California for the determination of controversies by arbitration,
the Manager to choose one arbitrator, the Fund to choose one arbitrator and the
two arbitrators so chosen to choose a third arbitrator. The decision of a
majority of said arbitrators as to the fair market value of the Manager's
interest shall be final and binding and may be enforced by legal proceedings.
The Fund and the Manager shall each compensate the arbitrator appointed by it
and the compensation of the third arbitrator shall be borne equally by such
parties.
20. Certain Transactions
--------------------
The Manager, any Member, and any Affiliate, shareholder, officer,
director or employee thereof, may engage in or possess an interest in any other
business or venture of every nature and description, independently or with
others, regardless of whether or not competitive with the business of the Fund.
21. Dissolution and Termination of the Fund
---------------------------------------
21.1 The Fund shall be dissolved and terminated upon the earliest to
occur of the following:
21.1.1 The retirement (provided there has been 90 days' prior written
notice to the Members) or removal of the Manager, unless a new Manager elected
in place thereof within 120 days of the date of such event by Majority Vote of
the Members elects to continue the business of the Fund. Expenses incurred in
the reformation, or attempted reformation, of the Fund shall be deemed expenses
of the Fund;
21.1.2 A Majority Vote in favor of dissolution and termination of the
Fund;
21.1.3 The expiration of the term of the Fund; or
21.1.4 The sale or other disposition of all of the Interests (or
liquidation of all of the Interests in which the Fund invests).
21.2 Upon any dissolution and termination of the Fund, the Manager
shall (i) take full account of the Fund assets and liabilities, (ii) liquidate
the assets, if possible, as promptly as is consistent with obtaining the fair
value thereof (but the Fund, or a successor liquidating trust or liquidation
agent, may hold Interests until liquidation of the Interests, if deemed
advisable), and (iii) apply and distribute the proceeds therefrom in the
following order:
21.2.1 To the payment of creditors of the Fund, but excluding secured
creditors whose
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<PAGE>
obligations will be assumed or otherwise transferred on the liquidation of Fund
assets;
21.2.2 To the repayment of any outstanding loans made by the Manager to
the Fund;
21.2.3 To the Unit Holders in proportion to, and to the extent of, the
positive balances in their respective Capital Accounts.
22. Special and Limited Power of Attorney
-------------------------------------
22.1 The Manager shall at all times during the existence of the Fund
have a special and limited power of attorney as the attorney-in-fact for each
Member, with power and authority to act in the name and on the behalf of each
Member, to make, execute, acknowledge and file the following documents and any
other documents deemed by the Manager to be necessary or appropriate for the
business of the Fund:
22.1.1 The Operating Agreement, as well as any amendments to the
foregoing, which, under the laws of the State of California or the laws of any
other state, are required to be filed or which the Manager deems it advisable to
file;
22.1.2 Any other instrument or document which may be required to be
filed by the Fund under the laws of any state or by any governmental agency, or
which the Manager deems it advisable to file; and
22.1.3 Any instrument or document which may be required to effect the
continuation of the Fund, the admission of an Additional Member or substituted
Member or the dissolution and termination of the Fund (provided such
continuation, admission or dissolution and termination are in accordance with
the terms of this Operating Agreement).
22.2 The special and limited power of attorney granted to the Manager
hereby:
22.2.1 Is a special and limited power of attorney coupled with an
interest, is irrevocable, shall survive the death or dissolution and liquidation
of the granting Member and is limited to those matters herein set forth;
22.2.2 May be exercised by the Manager for each Member by a facsimile
signature or by listing all of the Members and executing any instrument with a
single signature of the Manager, acting as attorney-in-fact for all of them; and
22.2.3 Shall survive an assignment by a Member of all or any portion of
his Units except that, where the Assignee of any Units owned by a Member has
been approved by the Manager for admission to the Fund as a substituted Member,
the special and limited power of attorney shall survive such assignment for the
purpose of enabling the Manager to execute, acknowledge and file any instrument
or document necessary to effect such substitution, as well as for the purposes
set forth in Paragraph 22.1.
23. Indemnification and Exculpation
-------------------------------
23.1. The Manager and its "Affiliates" (as defined for purposes of this
Paragraph in Paragraph 23.5 below) shall have no liability to the Fund or to any
Member for any loss suffered by the
A-21
<PAGE>
Fund which arises out of any action or inaction of the Manager and its
Affiliates, if the Manager and its Affiliates, in good faith, determined that
such course of conduct was in the best interest of the Fund, and such course of
conduct did not constitute negligence or misconduct of the Manager and its
Affiliates. To the extent permitted by law, the Manager and its Affiliates shall
be indemnified by the Fund against any losses, judgments, liabilities, expenses
(including legal fees and costs), and amounts paid in settlement of any claims
sustained by them in connection with the Fund; provided that the same were not
the result of breach of fiduciary duty where the Manager and its Affiliates
personally benefited.
23.2. Notwithstanding the foregoing Paragraph 23.1, the Manager and its
Affiliates, and any person acting as a Broker-Dealer, shall not be indemnified
for any losses, liabilities or expenses arising from or out of an alleged
violation of federal or state securities laws unless (1) there has been a
successful adjudication on the merits of each count involving alleged securities
law violations as to the particular indemnitee, or (2) such claims have been
dismissed with prejudice as to the particular indemnitee or (3) a court of
competent jurisdiction approves a settlement of the claims against a particular
indemnitee.
23.3. In any claim for indemnification for federal or state securities
law violations, the party seeking indemnification shall place before the court
the position of the Securities and Exchange Commission with respect to the issue
of indemnification for securities law violations.
23.4 The Fund shall not incur the cost of that portion of any
insurance, other than public liability insurance, which insures any party
against any liability the indemnification of which is herein prohibited.
23.5. For purposes of this Paragraph, the term "Affiliates" shall mean
any person performing services on behalf of the Fund who (1) directly or
indirectly controls, is controlled by, or is under common control with the
Manager; or (2) owns or controls 10% or more of the outstanding voting
securities of the Manager; or (3) is an officer, director, partner or trustee of
the Manager; or (4) any company for which the Manager is a partner or
shareholder.
24. Miscellaneous
-------------
24.1 This Operating Agreement may be executed in several counterparts,
and all so executed shall constitute one Operating Agreement, binding on all of
the parties hereto, notwithstanding that all of the parties are not signatory to
the original or to the same counterpart.
24.2 Subject to the restrictions on transfer contained herein, the
terms and provisions of this Operating Agreement shall be binding upon and shall
inure to the benefit of the successors and assigns of the respective Members,
and shall be construed in accordance with, and governed by, the laws of the
State of Colorado.
24.3 In the event that any provision of this Operating Agreement or
the application thereof to any person or in any circumstances shall be
determined to be invalid, unlawful or unenforceable to any extent, the remainder
of this Operating Agreement, and the application of such provision to persons or
circumstances other than those as to which it is determined to be invalid,
unlawful or unenforceable, shall not be affected thereby, and each remaining
provision of this Operating Agreement shall continue to be valid and may be
enforced to the fullest extent permitted by law.
24.4 All notices under this Operating Agreement shall be in writing
and shall be given
A-22
<PAGE>
to the Members entitled thereto, by personal service or by mail, posted to the
address maintained by the Fund for such person or at such other address as he
may specify in writing.
24.5 Paragraph titles or captions contained in this Operating
Agreement are inserted only as a matter of convenience and for reference. Such
titles and captions in no way define, limit, extend or describe the scope of
this Operating Agreement nor the intent of any provision of this Operating
Agreement.
24.6 Whenever required by the context of this Operating Agreement, the
singular shall include the plural, and vice versa; the masculine gender shall
include the feminine and neuter genders, and vice versa; and the word "person"
shall include a corporation, partnership, firm or other form of association.
24.7 The names, addresses and capital contributions of the Members are
or will be set forth on Exhibit 1 attached hereto, as it may be amended from
---------
time to time, which exhibit shall be maintained at the principal place of
business of the Fund.
24.8 Notwithstanding the place where this Operating Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed under the laws of the State of
Colorado and that the Colorado Act shall govern this Operating Agreement.
25. Power to Bind the Fund
----------------------
The Manager acting alone shall have the authority, right and
power to negotiate and execute any and all contracts and other documents on
behalf of the Fund, subject to the limitations set forth in Paragraph 16.2.
26. Arbitration. The Members and Manager agree that any dispute, claim or
-----------
controversy arising out of a purchase of Units or the Operating Agreement shall
be resolved by submission to binding arbitration in Denver, Colorado before a
retired judge or justice. If the parties are unable to agree on a retired judge
or justice each party shall name one retired judge or justice and the two
persons so-named shall select a neutral judge or justice who will act as the
sole arbitrator. The arbitrator selected shall agree to follow Colorado law. The
parties shall be entitled to take discovery in accordance with the provisions of
the Colorado Code of Civil Procedure, but either party may request that the
arbitrator limit the amount and scope of such discovery and in determining
whether to do so, the arbitrator shall balance the need for this discovery
against the parties' mutual desire to resolve all disputes expeditiously and
inexpensively. The arbitrator shall follow California law and shall render his
decision in writing, explaining the legal and factual basis for decision as to
each of the principal controverted issues. The arbitrator's decision shall be
final and binding upon the parties. A judgment upon any award may be entered in
a court of competent jurisdiction. Each party shall be responsible for all of
its own costs, including all attorneys fees, of arbitration.
SIGNATURES OF MEMBERS:
MANAGER: D.E. Frey & Group, Inc.
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<PAGE>
By:
---------------------------
Dale E. Frey
Its: PRESIDENT
A-24
<PAGE>
Exhibit 10.10
CLEARING AGREEMENT
This agreement, made this _____17_____ day of ______June________, 1994 (the
"Agreement") between Correspondent Services Corporation (hereinafter referred to
as "CSC"), and D.E. Frey & Company, Inc. (hereinafter referred to as the
"Correspondent").
WITNESSETH THAT:
WHEREAS, the Correspondent is desirous of availing itself of clearing, execution
and other services related to the securities business as more fully set forth
herein; and Whereas, CSC desires to extend the foregoing types of services to
the Correspondent. Now Therefore, in consideration of the mutual covenants
hereinafter set forth and other good and valuable consideration the receipt of
which is hereby acknowledged, the parties hereto hereby covenant and agree as
follows:
I. Services
--------
A. Services to be Performed by CSC
-------------------------------
(i) CSC will execute orders for the Correspondent's proprietary accounts
and for the Correspondent's customers whose cash or margin accounts
have been accepted by CSC ("Introduced Accounts"), but only insofar as
such orders are transmitted by the Correspondent to CSC.
(ii) CSC will generate, prepare and, to the extent mutually agreed upon by
the parties hereto, mail confirmations respecting each of the
Introduced Accounts.
(iii) CSC will prepare and mail the summary monthly statements (or quarterly
statements if no activity in any Introduced Account occurs during any
quarter covered by such statement) to every Introduced Account.
(iv) CSC will settle contracts and transactions in securities (including
options to buy or sell securities) (i) between the Correspondent and
other brokers and dealers, (ii) between the Correspondent and the
Introduced Accounts, and (iii) between the Correspondent and persons
other than the Introduced Accounts or other brokers and dealers.
<PAGE>
(v) CSC will engage in all cashiering functions for the Introduced
Accounts, including the receipt, delivery and transfer of securities
purchased, sold, borrowed and loaned, receiving and distributing
payment therefore, holding in custody and safekeeping all securities
and payments so received, the handling of margin accounts, including
paying and charging of interest, the receipt and distribution of
dividends and other distributions, and the processing of exchange
offers, rights offerings, warrants, tender offers and redemptions. For
purposes of the Securities Investor Protection Act of 1970, as
amended, and the financial responsibility rules of the Securities and
Exchange Commission, the Correspondent's customers will be the
customers of CSC. Upon mutual agreement of the parties hereto, the
cashiering functions with respect to the receipt of securities and the
making and receiving payments therefor may be relinquished to the
Correspondent.
(vi) CSC will construct and maintain books and records of all transactions
executed or cleared through it and not specifically charged to the
Correspondent pursuant to the terms of this Agreement, including a
daily record of required margin and other information required by Rule
432(a) of the rules of the Board of Directors of the New York Stock
Exchange, Inc. (the "Rules"), or by the constitution, articles of
incorporation, by-laws (or comparable instruments) or rules,
regulations or other instruments corresponding to the foregoing, and
the stated policies or practices of any other securities exchange (the
"Standards"), including but not otherwise limited to any national
securities exchanges registered under the Securities Exchange Act of
1934, as amended ("National Securities Exchange").
B. Services Which Shall Not be Performed by CSC
--------------------------------------------
Unless otherwise agreed to in a writing executed by the parties hereto, CSC
shall not engage in any of the following services on behalf of the
Correspondent:
(i) Accounting, bookkeeping or recordkeeping, cashiering, or any other
services with respect to commodity transactions, and/or any
transaction other than securities transactions.
(ii) Preparation of the Correspondent's payroll records, financial
statements or any analysis or review thereof or any recommendations
relating thereto.
2
<PAGE>
(iii) Preparation or issuance of checks in payment of the Correspondent's
expenses, other than expenses incurred by CSC on behalf of the
Correspondent pursuant to this Agreement.
(iv) Payment of commissions, salaries or other remuneration to the
Correspondent's salespersons or any other employees of the
Correspondent.
(v) Preparation and filing of reports (the "Reports") with the Securities
and Exchange Commission, any state securities commission, any
National Securities Exchange, or other securities exchange or
securities association or any other regulatory or self-regulatory
body or agency with which the Correspondent is associated and/or by
which it is regulated. Furthermore, CSC will, at the request of the
Correspondent, furnish the Correspondent with any necessary
information and data contained in books and records kept by CSC and
not otherwise reasonably available to the Correspondent if such
information is required in connection with the preparation and fling
of Reports by the Correspondent.
(vi) Making and maintaining reports and records required to be kept by the
Correspondent by the Currency and Foreign Transactions Reporting Act
of 1970 and the regulations promulgated pursuant thereto, or any
similar laws or regulations enacted or adopted hereafter.
(vii) Verification of the address changes of any Introduced Account.
(viii) Obtaining and verifying new account information, and insuring that
such information meets the requirements of Rule 405 { 1 } of the
Rules and any other Rules or applicable standards.
(ix) Maintaining a record of all personal and financial information
concerning any Introduced Account and all orders received therefrom,
and maintaining all documents and agreements executed by any
Introduced Account.
(x) Holding for safekeeping of the securities of any Introduced Account
registered in the name of the Introduced Account.
(xi) Accepting deposits from the Correspondent in the form of coin or
currency of the United States or any other country.
II. Clearing Charges
----------------
3
<PAGE>
See Schedule "A" attached hereto and incorporated herein by reference.
Correspondent shall have sole discretion to determine the amount of
commission/mark up charged to its Introduced Accounts cleared by CSC. CSC agrees
to pay Correspondent certain commissions and/or sales credits received by CSC
less any amounts due to CSC under this Agreement or otherwise and any expenses
or other sums to third parties paid on the Correspondent's behalf by CSC.
In no event shall the fees charged in this Article II for the above services be
in contravention of the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, the Investment Advisers Act of 1940, as amended, and the
Employee Retirement Income Security Act of 1974, as amended, or any rules or
regulations thereunder, or any other law, rule or regulation, Federal, State or
Local, or any constitution, by-law, rule, regulation or instrument correspondent
to the foregoing, or stated policy or practice of any national securities
exchange or other securities exchange or association or other regulatory or
self-regulatory body or agency ("Laws and Regulations"). In the event that such
fees are deemed by CSC or the Correspondent to be in contravention of the Laws
and Regulations, they shall be replaced with fees mutually agreed upon by CSC
and the Correspondent.
III. Notation on Statements, Confirmation and Other Written Material
---------------------------------------------------------------
CSC shall carry all Introduced Accounts in the names of the Correspondent's
customer, with a notation on its books and records that such Introduced
Accounts were introduced by the Correspondent, and all monthly or quarterly
statements, confirmations relating to such Introduced Accounts shall also
indicate that the Introduced Accounts were introduced by the Correspondent.
In addition, account statements will indicate that customer funds and
securities received by CSC will be held at CSC and will contain the
telephone number of a contact area at CSC. Inadvertent omission of such
notations shall not be deemed to constitute a breach of this Agreement.
Copies of the forms covering the foregoing shall be furnished by CSC to the
Correspondent.
IV. Opening of Accounts
-------------------
(i) At the time of the opening of each Introduced Account, Correspondent
shall furnish CSC with all financial and personal information
concerning such Introduced Accounts as CSC may reasonably require. At
the time of the opening of Introduced Accounts which are margin
accounts, the Correspondent shall furnish CSC with executed
customers' agreements, hypothecation agreements and consents to loans
of securities (collectively, the
4
<PAGE>
"margin agreement"). CSC shall supply the Correspondent with margin
agreement forms regarding margin accounts in sufficient quantities,
such forms to be submitted to CSC upon their completion by the
Correspondent. If any Introduced Account may have been opened without
CSC having previously received a properly executed margin agreement,
failure of CSC to receive such margin agreements shall not be deemed
to be a waiver of the information requirements set forth herein. Upon
the written or oral request of CSC, the Correspondent shall furnish
CSC with any other documents and agreements executed by the
Introduced Account on forms which shall be supplied by CSC in
sufficient quantities and which may reasonably be required by CSC in
connection with the opening, operating or maintaining of Introduced
Accounts. CSC may, at its option, mail margin agreements or "new
account" forms directly to the Introduced Accounts upon notification
by the Correspondent, and/or require completion of its own margin
agreement or "new account" forms and, if required, option account
agreements for the Introduced Accounts. The Correspondent shall
promptly provide CSC with basic data and copies of documents relating
to each of the Introduced Accounts, including, but not otherwise
limited to, copies of records of any receipts of the Introduced
Accounts' funds and/or securities received directly by the
Correspondent, as shall be necessary for CSC to discharge its service
obligations hereunder.
(ii) All transactions in any Introduced Account are to be considered cash
transactions until such time as CSC has received margin agreements,
duly and validly executed in respect of such Introduced Account.
Nevertheless, it is intended that Correspondent will obtain executed
margin agreements within the time periods set forth in procedural
manuals provided by CSC or any entity affiliated with CSC. In the
event credit is inadvertently extended with respect to such
Introduced Accounts, Correspondent shall indemnify and hold CSC
harmless from and against all loss, liability, damage, cost and
expense (including but not otherwise limited to fees and expenses of
legal counsel) arising therefrom.
(iii) At the time of the opening of any Introduced Account, the
Correspondent shall furnish CSC with the name of any principal other
than the account name for whom the Correspondent is acting as agent,
and written evidence of such authority.
(iv) The Correspondent shall have the sole and exclusive responsibility
for compliance with Rule 405(3) of the Rules and shall specifically
approve the opening of any new account before forwarding such
5
<PAGE>
account to CSC as a potential Introduced Account. CSC, in its
reasonable business judgement, reserves the right to reject any
account which the Correspondent may forward to CSC as a potential
Introduced Account. CSC also reserves the right to terminate any
account previously accepted by it as an Introduced Account.
(v) Pursuant to written notification received by the Correspondent and
forwarded to CSC, any account of the Correspondent may choose to
reject the services to be performed by CSC pursuant to this Agreement
and thus choose not to be serviced as an Introduced Account pursuant
hereto. Upon notice from another member organization that an
Introduced Account intends to transfer his account thereto, CSC shall
expedite such transfer and shall have the sole and exclusive
responsibility for compliance with Rule 412 of the Rules.
(vi) It shall be the sole and exclusive responsibility of the
Correspondent to make every reasonable effort to ascertain the
essential facts relative to any Introduced Account and any order
therefore, in compliance with Rule 405(1) of the Rules, including but
not otherwise limited to ascertaining the authority of all orders for
Introduced Accounts, and the genuineness of certificates, papers and
signatures provided by each Introduced Account. Any investment advice
furnished to an Introduced Account by the Correspondent shall be the
sole and exclusive responsibility of the Correspondent.
(vii) The Correspondent shall be solely and exclusively responsible for the
handling and supervisory review of any Introduced Accounts over which
the Correspondent's partners, officers or employees have
discretionary authority, as required by Rule 408 of the Rules and any
other applicable Laws and Regulations. The Correspondent shall
furnish CSC with such documentation with respect thereto as may be
requested by CSC. The Correspondent hereby agrees to indemnify and
hold CSC harmless against any loss, liability, damage, cost or
expense (including but not otherwise limited to fees and expenses of
legal counsel) suffered or incurred by CSC directly or indirectly as
a result of any liabilities or claims arising from the exercise by
the Correspondent, its partners, officers or employees of
discretionary authority over Introduced Accounts. The Correspondent
hereby warrants that with regard to any orders or instructions given
by the Correspondent with respect to such discretionary accounts, its
partners, officers or employees shall have been fully and properly
authorized relative thereto and that the
6
<PAGE>
execution of such orders shall not be in violation of the Laws and
Regulations. Furthermore, the Correspondent hereby agrees to
indemnify and hold CSC harmless against any loss, liability, damage,
cost or expense (including but not otherwise limited to fees and
expenses to legal counsel) suffered or incurred by CSC directly or
indirectly as a result of any breach of the Correspondent's said
warranty.
(viii) The Correspondent shall have the sole and exclusive responsibility
for the handling and supervisory review of any Introduced Account for
an employee or officer of any member organization, self-regulatory
organization, bank, trust company, insurance company or other
organization engaged in the securities business, and for compliance
with Rule 407 of the Rules relating thereto. The Correspondent shall
furnish CSC with such documentation with respect thereto as may be
requested by CSC.
(ix) The Correspondent shall have the sole and exclusive responsibility to
insure that those of its customers who become Introduced Accounts
hereunder shall not be minors or subject to those prohibitions
existing under the Laws and Regulations generally relating to the
incapacity of any Introduced Account or any conflict of interest
relating to such Introduced Account
(x) The Correspondent shall be solely and exclusively responsible for any
loss, liability, damage, cost or expense (including but not otherwise
limited to fees and expenses of legal counsel) sustained or incurred
by either the Correspondent or CSC, arising out of or resulting from
any orders the Correspondent has taken from Introduced Account
residing or being domiciled in jurisdictions in which the
Correspondent has not been or is no longer authorized to do business.
(xi) It shall be the sole and exclusive responsibility of the
Correspondent to comply with the Laws and Regulations relating to
each Introduced Account which effect listed option transactions
including, but not limited to, approval by the Correspondent's
Registered Options Principal or Senior Registered Options Principal
(as applicable), delivery of required Options Disclosure Documents
(and Supplements where applicable) and option documentation.
V. Transactions and Margin
-----------------------
(i) It is understood that with respect to Introduced Accounts which are
margin accounts, CSC is responsible for compliance with Regulation T,
12 C.F.R. Part 220, the Federal margin regulation promulgated by the
Board of Governors of the Federal Reserve System (the "Board"), and
any
7
<PAGE>
interpretative ruling issued by the Board, and letter rulings of the
Federal Reserve Bank of New York, Rules and Interpretations of the
New York Stock Exchange, Inc. and any other applicable margin and
margin maintenance requirements of the Laws and Regulations. The
Correspondent is responsible to CSC for the collection of the margin
required to support each transaction for, and to maintain margin in,
each Introduced Account and such margin, in conformity with the above
margin and margin maintenance requirements. After such initial margin
on each transaction has been received, maintenance margin calls shall
be generated by CSC and made by CSC or by the Correspondent at the
instructions of CSC. CSC shall have the right to modify, in its sole
discretion, the margin requirements of any Introduced Account from
time to time so that CSC may call for additional margin. Therefore,
CSC shall be the sole judge as to the amount of margin to be required
of and maintained by Introduced Accounts. CSC may impose such margin
by individual security within an account or by a specified Introduced
Account and such margin need not be of general application to all
accounts.
CSC shall impose no fees on the Correspondent, other than any fees or
charges imposed directly or by any regulatory body with regard to
margin extensions obtained by CSC pursuant to written requests from a
principal of the Correspondent.
(ii) On all transactions, the Correspondent shall be solely and
exclusively responsible to CSC for any loss, liability, damage, cost
or expense (including but not otherwise limited to fees and expenses
of legal counsel) incurred or sustained by the Correspondent or CSC
as result of the failure of any Introduced Account to make timely
payment for the securities purchased by it or timely and good
delivery of securities sold for it, or timely compliance by it with
margin or margin maintenance calls (provided that CSC has timely
issued such call and/or given notice thereof to the Correspondent or
if conditions creating such call should be reasonably known by
Correspondent), whether or not any margin extensions have been
granted by CSC pursuant to the request of the Correspondent, except
that no interest will be charged by CSC for cash shorts in Introduced
Accounts. The Correspondent agrees to be solely and exclusively
responsible for the payment and delivery of all "when issued" or
"when distributed" transactions which CSC may accept, forward or
execute for Introduced Accounts.
(iii) On all over-the-counter transactions for Introduced Accounts, the
Correspondent shall furnish CSC with the names of the respective
purchasing and selling broker-dealers (except as otherwise provided
in paragraph (iv) of this Section, as set forth below), the names of
the purchasing and selling customers, and the wholesale and retail
purchase and sale prices.
8
<PAGE>
(iv) Should the Correspondent entrust the execution of an order in an
over-the-counter security to CSC or any entity affiliated with CSC
and the counter party is left at CSC's discretion. CSC will assume
the responsibility of paying the Correspondent that which the counter
party has failed to pay pursuant to the over-the-counter order
transaction (counter party risk). In the case the Correspondent
executes its own over-the-counter order or designates the counter
party, it shall be understood that in the event the over-the-counter
dealer with whom the Correspondent dealt or whom it designated fails
to live up to its part of the transaction, the Correspondent will
assume the counter party risk and reimburse CSC for any loss
sustained thereby.
(v) The Correspondent shall be solely and exclusively responsible for
approving all orders for the Introduced Accounts and for establishing
procedures to insure that such approved orders are transmitted
properly to CSC for execution. CSC, in its reasonable business
judgement, reserves the right to reject any order which the
Correspondent may transmit to CSC for execution.
(vi) The Correspondent shall be solely and exclusively responsible for the
supervisory review of all orders for the Introduced Accounts and
shall insure that any orders and instructions given by it or any of
its employees to CSC pursuant to the terms of this Agreement shall
have been properly authorized in advance.
(vii) The Correspondent shall be solely and exclusively responsible for
sales and purchases for the Introduced Accounts that may create or
result in violation of any of the Laws and Regulations.
(viii) All transactions pursuant to the terms of this Agreement shall be
subject to the constitution, rules, by-laws, regulations, stated
practices, and customs and any modifications thereof of any national
securities exchange or other securities exchange or market and its
clearing house, if any, where executed, and the Laws and Regulations.
It is understood that the Correspondent assumes sole and exclusive
responsibility for compliance with the Laws and Regulations in the
same manner and to the same degree as if the Correspondent were
performing the services for the Introduced Accounts that have been
assumed by CSC pursuant to this Agreement, except insofar as CSC may
pursuant to paragraph (iv) of this Section, as set forth above,
select the counter party to a particular transaction.
(ix) All transactions heretofore had between the Correspondent and CSC
with respect to orders given by or for the Introduced Accounts and
cleared through CSC shall be subject to the Provisions of this
Agreement.
VI. Supervisory Responsibility
--------------------------
9
<PAGE>
(i) Correspondent shall have the sole and exclusive responsibility for
the review of all Introduced Accounts and for compliance with any
supervisory responsibilities under Rule 405(2) of the Rules,
including but not otherwise limited to matters involving the
investment objectives of the Introduced Accounts, the reasonable
basis for recommendations made to Introduced Accounts, and the
frequency of trading in the Introduced Accounts, whether or not such
transactions are instituted by the Correspondent, its partners,
officers, employees or any registered investment advisor.
(ii) The Correspondent and CSC shall each be responsible for compliance
with any supervisory procedures under Rule 342 of the Rules and, to
the extent applicable, any other provisions of the Laws and
Regulations, including but not otherwise limited to supervising the
activities and training of their respective registered
representatives, as well as all of their other respective employees
in the performance of functions specifically allocated to them
pursuant to the terms of this Agreement.
VII. Information to be provided by the Correspondent
-----------------------------------------------
(i) The Correspondent shall provide CSC with copies of all financial
information and reports filed by the Correspondent with the New York
Stock Exchange, Inc. (if a member), the National Association of
Securities Dealers, Inc., the Securities and Exchange Commission, and
any other National Securities Exchange (where a member) (including
but not otherwise limited to monthly and quarterly Financial and
Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports)
simultaneous with the filing therewith.
(ii) The Correspondent shall submit to CSC on an annual basis the audited
financial statements of the Correspondent, its parent organization
(if applicable) and, when requested by CSC, its affiliated entities.
In addition, the Correspondent shall submit to CSC upon request,
information and reports relating to the financial integrity of
Correspondent, its parent organization (if applicable) and its
affiliated entities, including but not otherwise limited to
information regarding the Correspondent's aggregate indebtedness
ratio and net capital.
(iii) The Correspondent shall provide CSC with all appropriate data in its
possession pertinent to the performance and supervision of any
10
<PAGE>
function or responsibility specifically allocated to CSC pursuant to
the terms of this Agreement.
(iv) The Correspondent shall provide CSC with any amendment or supplement
to the Form BD of the Correspondent.
VIII. Information to be provided by CSC
---------------------------------
CSC shall provide the Correspondent with all appropriate data in its possession
pertinent to the proper performance and supervision of any function specifically
allocated to the Correspondent pursuant to the terms of this Agreement. The
Correspondent shall be responsible for and shall promptly reimburse CSC for all
costs incurred by CSC in connection with the preparation and mailing of such
information.
IX. Customer Notification and Correspondence
----------------------------------------
(i) The Correspondent shall be solely and exclusively responsible for
informing its customers in a written correspondence, the form and
substance of which will be mutually agreed upon, prior to the
effective date of this Agreement, as to the general nature of the
services to be provided by CSC pursuant to this agreement and the
right of such customers to reject the services provided herein. Any
new customers of the Correspondent shall also be informed as
provided herein, verbally prior to such customers becoming
Introduced Accounts and in writing, once the new accounts have been
opened and accepted. The Correspondent shall be solely and
exclusively responsible for the payment of all costs incurred in
connection with the preparation and mailing of such customer
correspondence.
(ii) The Correspondent shall inform its customers pursuant to such
written correspondence that all inquiries and correspondence should
be directed to the Correspondent. All customer correspondence shall
be reviewed and responded to by the party responsible for the
specific area to which the inquiry or complaint relates pursuant to
the terms of this Agreement. In the event such correspondence is not
directed to such party originally, the Correspondent or CSC shall
expeditiously forward such correspondence to the appropriate party.
X. Errors Controversies and Indemnification
----------------------------------------
11
<PAGE>
(i) Errors, misunderstandings or controversies, except those specifically
otherwise covered in this Agreement, between the Introduced Accounts
and the Correspondent or any of its employees, which shall arise out
of acts or omissions or the Correspondent or any of its employees
(including, without limiting the foregoing, the failure of the
Correspondent to deliver promptly to CSC any instructions received by
the Correspondent from an Introduced Account with respect to the
voting, tender or exchange of shares held in such Introduced
Account), shall be the sole and exclusive responsibility and
liability of the Correspondent. In the event, however, that by reason
of such error, misunderstanding or controversy, the Correspondent in
its discretion deems it advisable to commence an action or proceeding
against an Introduced Account, the Correspondent shall indemnify and
hold CSC harmless from any loss, liability, damage, cost or expense
(including but not otherwise limited to fees and expenses of legal
counsel) which CSC may incur or sustain in connection therewith or
under any settlement thereto. If such error, misunderstanding or
controversy shall result in the bringing of an action or proceeding
against CSC, the Correspondent shall indemnify and hold CSC harmless
from any loss, liability, damage, cost or expense (including but not
otherwise limited to reasonable fees and expenses of legal counsel)
which CSC may incur or sustain in connection therewith or under any
settlement thereof.
(ii) Errors, misunderstandings or controversies, except those specifically
otherwise covered in this Agreement, between the Introduced Accounts
and the Correspondent or any of its employees, which shall arise out
of acts or omissions of CSC or any of its employees, shall be the
sole and exclusive responsibility and liability of CSC. In the event,
however, that by reason of such error, misunderstanding or
controversy, CSC in its discretion deems it advisable to commence an
action or proceeding against an Introduced Account, CSC shall
indemnify and hold the Correspondent harmless from any loss,
liability, damage, cost or expense (including but not otherwise
limited to reasonable fees and expenses of legal counsel) which the
Correspondent may incur or sustain in connection therewith or under
any settlement thereof. If such error, misunderstanding or
controversy shall result in the bringing of an action or proceeding
against the Correspondent, CSC shall indemnify and hold the
Correspondent harmless from any loss, liability, damage, cost or
expense (including but not otherwise limited to reasonable fees and
expenses of legal counsel) which the
12
<PAGE>
Correspondent may incur or sustain in connection therewith or under
any settlement thereof.
(iii) CSC and the Correspondent both agree to indemnify the other and hold
the other harmless from and against any loss, liability, damage, cost
or expense (including but not otherwise limited to reasonable fees
and expenses of legal counsel) arising out of or resulting from any
failure by the indemnifying party or any of its employees to carry
out fully the duties and responsibilities assigned to the
indemnifying party herein or any breach of any representation or
warranty herein by the indemnifying party under this Agreement. The
Correspondent hereby agrees to indemnify and hold CSC harmless from
and against any loss, liability, damage, cost or expense (including
but not otherwise limited to reasonable fees and expenses of legal
counsel) sustained or incurred in connection herewith in the event
any Introduced Account fails to meet any initial margin call or
subsequent maintenance calls, in conformity with Section V hereof.
(iv) The indemnification provisions in this Agreement, shall remain
operative and in full force and effect, regardless of the termination
of this Agreement, and shall survive any such termination.
(v) Correspondent agrees to maintain, and to provide evidence thereof to
CSC, at least $250,000 blanket bond indemnity bond insurance covering
any and all acts of its employees, agents and partners, with an
insurance company reasonably acceptable to CSC, listing CSC as an
insured party and permitting CSC to assume the policy in the event of
the Correspondent ceasing operations.
XI. Representations and Warranties
------------------------------
(a) The Correspondent represents and warrants as follows:
(i) The Correspondent will maintain at all times while this Agreement is
in full force and effect stated net capital of not less than $100,000
unless CSC has otherwise agreed in writing. The Correspondent will
not carry customer, broker or dealer accounts and will not receive or
hold funds under Rule 15c3- 1 of the Securities Exchange Act of 1934,
as amended, for those persons. The Correspondent will immediately
notify CSC when [i] its Aggregate Indebtedness Ratio reaches or
exceeds 10 to 1, [ii] if the Correspondent has elected to operate
under paragraph [f] or Rule 15c3- 1 of the Securities Exchange Act of
1934, as amended, when its net capital is less than 5% of aggregate
debit items computed in accordance with Rule 15c3-
13
<PAGE>
3, [iii] when the aggregate amount of any withdrawals of equity
capital and/or unsecured advances or loans exceed 20% of excess net
capital in any 30 day period or 30% of excess net capital in any 90
day period or [iv] its stated net capital is less than the minimum
amount required under this Agreement.
(ii) The Correspondent is a member of good standing of the National
Association of Securities Dealers, Inc. The Correspondent will
promptly notify CSC of any additional exchange memberships or
affiliations. The Correspondent shall also comply with whatever non-
member access rules have been promulgated by any National Securities
Exchange or any other securities exchange of which it is not a
member.
(iii) The Correspondent is and during the term of this Agreement will
remain duly registered or licensed and in good standing as a
broker/dealer under all applicable Laws and Regulations.
(iv) The Correspondent has all the requisite authority in conformity with
all applicable Laws and Regulations to enter into this Agreement and
to retain the services of CSC in accordance with the term thereof.
(v) The Correspondent is in compliance, and during the term of this
Agreement will remain in compliance with [i] the capital and
financial reporting requirements of every National Securities
Exchange or other securities exchange and/or securities association
of which the Correspondent is a member, [ii] the capital requirements
of the Securities and Exchange Commission, and [iii] the capital
requirements of every state in which the Correspondent is licensed as
a broker/dealer.
(vi) The Correspondent shall not generate and/or prepare any statements,
billings or confirmations respecting any Introduced Account unless
expressly so instructed in writing by CSC.
(vii) The Correspondent shall keep confidential any information it may
acquire as a result of this Agreement regarding the business and
affairs of CSC, which requirement shall survive the life of this
Agreement.
(b) CSC represents and warrants as follows:
(i) CSC is a member in good standing of the National Association of
Securities Dealers, Inc., and the New York Stock Exchange, Inc.
14
<PAGE>
(ii) CSC is and during the term of this Agreement will remain duly
licensed and in good standing as a broker/dealer under all
applicable Laws and Regulations.
(iii) CSC has all the requisite authority, in conformity with all
applicable Laws and Regulations, to enter into and perform this
Agreement.
(iv) CSC is in compliance, and during the term of this Agreement, will
remain to compliance, with [i] the capital and financial reporting
requirements of every National Securities Exchange and/or other
securities exchange or association of which it is a member, [ii] the
capital requirements of the Securities and Exchange Commission, and
[iii] the capital requirements of every state in which it is
licensed as a broker/dealer.
(v) CSC represents and warrants that the names and addresses of the
Correspondent's customers which have or which may come to its
attention in connection with the clearing and related functions it
has assumed under this Agreement are confidential and shall not be
utilized by CSC except in connection with the functions performed by
CSC pursuant to this Agreement. CSC shall send no written
information to such customers other than statements, bills or
notices of transactions in connection with its role as clearing
agent. Notwithstanding the foregoing, should an Introduced Account
request, on an unsolicited basis, that CSC or any entity affiliated
with CSC become its broker, acceptance or such Introduced Account by
CSC or any entity affiliated with CSC shall in no way violate this
representation and warranty, nor result in a breach of this
Agreement.
(vi) CSC shall keep confidential any information it may acquire as a
result of this Agreement regarding the business and affairs of the
Correspondent, which requirement shall survive the life of this
Agreement.
XII. Termination - Event of Default
------------------------------
Notwithstanding any provision in this Agreement, the following events or
occurrences shall constitute an Event of Default under this Agreement:
(i) Either CSC or the Correspondent shall fail to perform or observe any
term, covenant or condition to be performed or observed by it
hereunder and such failure shall continue to be unremedied for a
15
<PAGE>
period of 30 days after written notice from the non-defaulting party
to the defaulting party specifying the failure and demanding that
the same be remedied; or
(ii) Any representation or warranty made by either CSC or the
Correspondent herein shall prove to be incorrect at any time in any
material respect; or
(iii) A receiver, liquidator or trustee of either CSC or the
Correspondent, or of its property, held by either party, is
appointed by court order and such order remains in effect for more
than 30 days; or either CSC or the Correspondent is adjudicated
bankrupt or insolvent; or any of its property is sequestered by
court order and such order remains in effect for more than 30 days;
or a petition is filed against CSC or the Correspondent under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of
debt, dissolution or liquidation law of any jurisdiction, whether
now or hereafter in effect, and is not dismissed within 30 days
after such filing; or
(iv) Either CSC or the Correspondent files a petition in voluntary
bankruptcy or seeking relief under any provision of any bankruptcy,
reorganization. arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now or
hereinafter in effect, or consents to filing of any petition against
it under any such law; or
(v) Either CSC or the Correspondent makes an assignment for the benefit
of its creditors, or admits in writing its inability to pay its
debts generally as they become due, or consents to the appointment
of a receiver, trustee or liquidator of either CSC or the
Correspondent, or of any property held by either party; or
(vi) Either party hereto knowingly and willfully solicits or causes to
solicit for employment the employees of either party or their
affiliates, subsidiaries, successors or assignees without prior
consent of the other party; or
(vii) If research is provided by CSC or any entity affiliated with CSC to
the Correspondent and the Correspondent knowingly and willfully
reproduces or reprints in any fashion same or represents to
customers or to an unrelated third party that the research supplied
by CSC or such affiliated entity is that of the Correspondent.
16
<PAGE>
Upon the occurrence of any such Event of Default, the non-defaulting party may,
at its option, by notice to the defaulting party declare that this Agreement
shall be thereby terminated and such termination shall be effective as of the
date such notice has been sent or communicated to the defaulting party.
XIII. Remedies Cumulative
-------------------
The enumeration herein of specific remedies shall not be exclusive of any other
remedies. Any delay or failure by any party of this Agreement to exercise any
right, power, remedy or privilege herein contained, or now or hereafter existing
under any applicable statute or law, shall not be construed to be a waiver of
such right, power, remedy or privilege or to limit the exercise of such right,
power, remedy or privilege. No single, partial or other exercise of any such
right, power, remedy or privilege shall preclude the further exercise thereof or
the exercise of any other right, power, remedy or privilege.
XIV. Miscellaneous
-------------
(i) As of the effective date of this Agreement CSC will not convert or
allow to be converted to its records as Introduced Accounts customer
accounts of the Correspondent that are partially or totally
unsecured, securities in the name of the Correspondent's customers,
or legal transfer securities (securities in the name of estates,
trust, joint ownership, foreign ownership and such), unless
previously approved in writing by CSC. If in error such accounts are
converted to CSC books or records, CSC reserves the right to convert
back to the Correspondent or its clearing agent said customer
accounts and the positions.
(ii) CSC shall have the power to place open orders as instructed by the
Correspondent as of the effective date of this Agreement, and
appropriate adjustments shall be made by CSC to reflect that CSC has
acted as broker on the open orders with specialists on any national
securities exchange or other securities exchange.
(iii) CSC shall have the power to effect appropriate adjustments with
respect to pending dividends and other distributions from the
effective date of this Agreement through the last payable date of
such pending dividends.
(iv) The Correspondent shall be responsible for providing annual dividend
and distribution information as contained in IRS Form l087 (to
include individual l099 filings) and any other information required
to be reported by Federal, state or local tax laws, rules or
17
<PAGE>
regulations, to its customers until the effective date of this
Agreement, whereupon CSC shall assume this function as to Introduced
Accounts.
(v) CSC shall have the power to allocate and make appropriate
adjustments for fails, reorganization accounts, other work in
process accounts, and overages relating to accounts of the customers
of the Correspondent that have become Introduced Accounts pursuant
to the terms of this Agreement.
(vi) The Correspondent shall assume all liabilities in connection with
the bad debts of all Introduced Accounts. Unsecured debits in the
Introduced Accounts shall be paid within 30 days of their origin
date, and it shall be the responsibility of the Correspondent to
collect such payments from its customers and transmit them to CSC
within such 30-day period. If any unsecured debit balances remain
outstanding beyond such 30-day period, CSC is authorized to apply as
payment of such debit balances commission fees owed to the
Correspondent in connection with transactions pursuant to this
Agreement.
(vii) Transfers of securities relating to introduced accounts shall tee
frozen ten business days prior to the effective date of this
Agreement.
(viii) CSC shall limit its services pursuant to the terms of this Agreement
to that of clearing functions and the related services expressly set
forth herein and the Correspondent shall not hold itself out as an
agent of CSC or any of the subsidiaries or companies controlled
directly or indirectly by or affiliated with CSC or its parent.
(ix) This Agreement supersedes any previous agreement and may be modified
only by a writing signed by both parties to this Agreement. Such
modification shall not be deemed as a cancellation of this
Agreement.
(x) This Agreement shall be submitted to and/or approved by any national
securities exchange, or other regulatory and self-regulatory bodies
vested with the authority to review and/or approve this Agreement or
any amendment or modifications hereto. In the event of any such
disapproval, the parties hereto agree to bargain in good faith to
achieve the requisite approval. CSC will file a fully executed copy
of this agreement with the New York Stock Exchange.
18
<PAGE>
(xi) This Agreement may be canceled by either of the parties hereto upon
one hundred eighty (180) days' written notice; provided, however,
that this Agreement may be canceled by either party upon thirty (30)
days' written notice if (i) the net capital ratio of the other party
exceeds 10 to 1, (ii) if the other party has elected to operate
under paragraph [f] of Rule 15c3- 1 of the Securities Exchange Act
of 1934, as amended, when its net capital is less than 5% of
aggregate debit items computed in accordance with Rule 15c3-3, (iii)
when the aggregate amount of any withdrawals of equity capital
and/or unsecured advances or loans exceed 20% of excess net capital
in any 30 day period or 30% of excess net capital in any 90 day
period or (iv) its stated net capital is less than the minimum
amount required under this Agreement; and provided, further, that
this Agreement may be canceled by CSC at any time between the date
on which this Agreement is executed and the effective date of this
Agreement, if there is a material change in the control or
management of the Correspondent.
(xii) Any dispute or controversy between the Correspondent and CSC
relating to or arising out of this Agreement shall be settled by
arbitration before and under the rules of the Arbitration Committee
of the New York Stock Exchange, Inc., unless the transaction which
gave rise to such dispute or controversy was effected in another
exchange or market which provides arbitration facilities, in which
case it shall be settled by arbitration under such facilities.
(xiii) CSC will not be bound to make any investigation into the facts
surrounding any transaction that it may have with the Correspondent
on a principal or agency basis or that the Correspondent may have
with its customers or other persons, nor will CSC be under any
responsibility for compliance by the Correspondent with any Laws and
Regulations which may be applicable to the Correspondent. It is
understood that CSC will assist the Correspondent in any
investigation conducted by the Correspondent.
(xiv) To facilitate the keeping of records by CSC the Correspondent will
turn over promptly to CSC any and all cash remittances and
securities which the Correspondent receives from its customer.
Concurrently with the delivery of such funds or securities to the
Correspondent, it shall furnish CSC with such information as may be
relevant or necessary to enable CSC to record promptly and properly
such cash remittances and securities in the respective Introduced
Accounts.
19
<PAGE>
(xv) This Agreement shall be binding upon all successors, assigns or
transferees of both parties hereto, irrespective of any change with
regard to the name of or the personnel of the Correspondent or CSC.
Any assignments of this Agreement shall be subject to the requisite
review and/or approval of any regulatory or self-regulatory agency
or body whose review and/or approval must be obtained prior to the
effectiveness and validity of such assignment. Except as indicated
below, no assignment of this Agreement by either party shall be
valid unless consented to in writing by the other party. Any
assignment by CSC to any subsidiary or to a company affiliated with
or controlled directly or indirectly by CSC will be deemed valid
and enforceable in the absence of any consent from Correspondent.
Neither this Agreement nor any operation hereunder is intended to
be, shall not be deemed to be, and shall not be treated as a
general or limited partnership, association or joint venture or
agency relationship between the Correspondent and CSC.
(xvi) Should the Correspondent in any way attempt to hold itself out as,
advertise or in any way represent that it is the agent of CSC, CSC
shall have the power, at is option, to terminate the Agreement and
the Correspondent shall be liable for any loss, liability, damage,
cost or expense (including but not otherwise limited to reasonable
fees and expenses of legal counsel) sustained or incurred by CSC as
a result of such representation of agency or apparent authority to
act as an agent of CSC or agency by estoppel.
(xvii) The Correspondent shall not, without having obtained the prior
written approval of CSC, agree to place or place any advertisement
in any newspaper, publication, periodical or any other media if
such advertisement in any manner makes reference to CSC, to any
person or entity that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common
control with CSC and to the clearing arrangements and/or any of the
services embodied in this Agreement.
(xviii) The Laws and Regulations require that CSC must have proper
documentation to support any account opened on its books, including
Introduced Accounts. If, after reasonable requests therefor, the
necessary documents so as to enable CSC to comply with such account
documentation requirements of the Laws and Regulations have not
been received by CSC, the Correspondent shall receive notification
that no further orders will be accepted for the Introduced Accounts
involved. Should it happen that inadvertent orders are placed for
such accounts after this notice is received, no
20
<PAGE>
commission credit will be granted from such order. On receipt of
the necessary documents, this restriction will be lifted on future
commissions, but any commissions withheld will be credited or paid.
This Agreement is not in any way intended to limit the
responsibility of CSC under the Laws and Regulations with respect
to Introduced Accounts.
(xix) The construction and effect of every provision of this Agreement,
the rights of the parties hereunder and any questions arising out
of this Agreement, shall be subject to the statutory and common law
of the State of New York.
(xx) The headings preceding the text, articles and sections hereof have
been inserted for convenience and reference only and shall not be
construed to affect the meaning, construction or effect of this
Agreement.
(xxi) This Agreement shall cover only the type of services set forth
herein and is in no way intended nor shall be construed to bestow
upon the Correspondent any special treatment regarding any other
arrangements, agreements or understandings which presently exist
between Correspondent and CSC or which may hereinafter exist. The
Correspondent shall be under no obligation whatsoever to deal with
CSC or any of its subsidiaries or any companies controlled directly
or indirectly by or affiliated with CSC or its parent, in any
capacity other than as set forth in this Agreement. Likewise, CSC
shall be under no obligation whatsoever to deal with the
Correspondent or any of its affiliates in any capacity other than
as set forth in this Agreement.
(xxii) If any provision or condition of this Agreement shall be held to be
invalid or unenforceable by any court, or regulatory or self-
regulatory agency or body, such invalidity or unenforceability
shall attach only to such provision or condition. The validity of
the remaining provisions and conditions shall not be affected
thereby and this Agreement shall be carried out as if any such
invalid or unenforceable provision or condition were not contained
herein.
(xxiii) In the event that CSC assumes any contractual obligation on behalf
of the Correspondent relative to communication equipment, the
Correspondent hereby agrees to immediately absorb the remaining
portion of said contract if Correspondent terminates the
relationship with CSC. The Correspondent further agrees to absorb
any and all costs associated with the removal or relocation of any
21
<PAGE>
communication equipment installed by or at the direction of CSC, if
this agreement is terminated by the Correspondent.
(xxiv) Any unsecured debit residing in a customer account as a result of
the failure to perform on behalf of the customer and/or the
Correspondent will be the responsibility of the Correspondent.
Thirty (30) calendar days will be allowed for collection. If funds
are not received, CSC reserves the right to debit the
Correspondent; bad debit, collateral and/or commission refund
account the amount of the unsecured balance plus interest at the
rate of l/2% above the prevailing broker call loan rate.
(xxv) The interest and handling expense (to include day charges) for any
DVP transaction that does not settle on a normal or regular way
basis or is rejected by the agent for any reason other than CSC
negligence is the responsibility of the Correspondent.
(xxvi) For the purposes of any and all notices, consents, directions,
approvals, restrictions, requests or other communications required
or permitted to be delivered hereunder, CSC's address shall be 120
Broadway, 27th Floor, New York, New York, 10271 and the
Correspondent's address shall be 1700 Lincoln Street, Suite 2200.
--------------------------------
Denver, CO 80203, and either party may change its address for
----------------
notice purposes by giving written notice pursuant to registered
mail of the new address to the other party.
(xxvii) This Agreement shall become effective on or about_6/1/94____ or
such date mutually agreed upon by the parties hereto.
Made and executed at _____Denver__________ on the date hereinabove set forth.
Accepted and Agreed to:
CORRESPONDENT SERVICES CORPORATION (CSC)
By: /s/ Robert Basso
Title: President
Date: 7/11/94
Accepted and Agreed to:
22
<PAGE>
D.E. FREY & COMPANY, INC.
By: /s/ Kevin L. Spencer
Title: President
Date 6/17/94
23
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,000,000 05-20-1999 05-20-2000 1741-38185 53 6B 1741-38185 JEB
- ------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Borrower: D.E. FREY GROUP, INC. Lender: COLORADO STATE BANK AND TRUST
1700 LINCOLN STREET, SUITE 2200 1600 BROADWAY
DENVER, CO 80203-4522 DENVER, CO 80202-4999
<S> <C> <C> <C> <C> <C>
Principal Amount: $1,000,000.00 Interest Rate: 5.400% Date of Note: May 20, 1999
</TABLE>
PROMISE TO PAY. D.E.FREY GROUP, INC. ("Borrower") promises to pay to COLORADO
STATE BANK and TRUST ("Lender"), or order, in lawful money of the United States
of America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00)
or so much as may be outstanding, together with interest at the rate of 5.400%
per annum on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of each
advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on May 20, 2000. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
June 20, 1999, and all subsequent interest payments are due on the same day of
each month after that. The annual interest rate for this Note is computed on a
365/360 basis; that is, by applying the ratio of the annual interest rate over a
year of 360 days, multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a minimum interest
charge of $25.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment or $15.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
<PAGE>
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b)
if the cure requires more than fifteen (15) days, immediately initiates steps
which Lender deems in Lender's sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonable practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on the Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the interest rate on this Note to 18.000% per annum.
The interest rate will not exceed the maximum rate permitted by applicable law.
Lender may hire or pay someone else to help collect this Note if Borrower does
not pay. Borrower also will pay Lender that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will
pay any court costs, in addition to all other sums provided by law. This note
has been delivered to Lender and accepted by Lender in the State of Colorado.
If there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Denver County, the State of Colorado. This Note
shall be governed by and construed in accordance with the laws of the State of
Colorado.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $17.00 if Borrower
makes a payment on Borrower's loan and the check or pre authorized charge with
which the Borrower pays is later dishonored.
COLLATERAL. This Note is secured by CSB CERTIFICATE OF DEPOSIT #70-19150.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: DALE E. FREY, PRESIDENT
and PAUL L. HOCEVAR. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (a)
Borrower or any guarantor is in default under the terms of this Note or any
agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing or this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement between Lender and Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length or
time) this loan, or release any party or guarantor or collateral: or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
<PAGE>
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
D.E. FREY GROUP, INC.
By: /s/ Dale E. Frey
________________________
DALE E. FREY, PRESIDENT
<PAGE>
EXHIBIT 10.12
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,000,000 08-07-1999 08-14-2000 1741-37818 53 6B 1741-37818 JEB
- ------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Borrower: D.E. FREY GROUP, INC. Lender: COLORADO STATE BANK AND TRUST
1700 LINCOLN STREET, SUITE 2200 1600 BROADWAY
DENVER, CO 80203-4522 DENVER, CO 80202-4999
<S> <C> <C> <C> <C> <C>
Principal Amount: $1,000,000.00 Interest Rate: 5.260% Date of Note: August 7, 1999
</TABLE>
PROMISE TO PAY. D.E.FREY GROUP, INC. ("Borrower") promises to pay to COLORADO
STATE BANK and TRUST ("Lender"), or order, in lawful money of the United States
of America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00)
or so much as may be outstanding, together with interest at the rate of 5.260%
per annum on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of each
advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on August 14, 2000. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
September 14, 1999, and all subsequent interest payments are due on the same
day of each month after that. The annual interest rate for this Note is
computed on a 365/360 basis; that is, by applying the ratio of the annual
interest rate over a year of 360 days, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a minimum interest
charge of $25.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment or $15.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
<PAGE>
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on the Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the interest rate on this Note to 18.000% per annum.
The interest rate will not exceed the maximum rate permitted by applicable law.
Lender may hire or pay someone else to help collect this Note if Borrower does
not pay. Borrower also will pay Lender that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will
pay any court costs, in addition to all other sums provided by law. This note
has been delivered to Lender and accepted by Lender in the State of Colorado.
If there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Denver County, the State of Colorado. This Note
shall be governed by and construed in accordance with the laws of the State of
Colorado.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $17.00 if Borrower
makes a payment on Borrower's loan and the check or pre authorized charge with
which the Borrower pays is later dishonored.
COLLATERAL. This Note is secured by CSB CERTIFICATE OF DEPOSIT #70-17518.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: DALE E. FREY, PRESIDENT.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing or this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower.
SPECIAL COVENANT. IN THE EVENT THE LOAN BALANCE IS LESS THAN $1,000,000, THE
BORROWER AGREES TO PAY THE BANK INTEREST ON THE DIFFERENCE AT 1.0% THE BANK
WILL INVOICE THE BORROWER ON A MONTHLY BASIS IN THIS EVENT.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length or
time) this loan, or release any party or guarantor or collateral: or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
<PAGE>
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
D.E. FREY GROUP, INC.
By: /s/ Dale E. Frey
________________________
DALE E. FREY, PRESIDENT
<PAGE>
EXHIBIT 10.13
AGREEMENT
This Agreement is made and entered into as of this 9th day of March, 1999,
by and between LOUISE H. ROGERS, ("Pledgor") and D.E. FREY GROUP, INC., a
Delaware corporation (the "Company"), having its principal place of business at
1700 Lincoln Street, Suite 2200, Denver, Colorado 80203.
RECITALS:
A. The Company owns all of the outstanding capital stock of D.E. Frey &
Company, Inc., a Delaware corporation (the "Broker"), which is a securities
broker-dealer registered with the Securities and Exchange Commission, licensed
under the laws of all 50 states and a member of the National Association of
Securities Dealers, Inc. ("NASD").
B. The Pledgor and the Company executed an agreement dated August 7, 1997
for Pledgor to provide $1,000,000 in capital to the Company, which was amended
by an agreement dated August 7, 1998 (collectively,"Original Agreement").
Pursuant to the Original Agreement, the Company obtained a revolving loan from
Colorado State Bank, Denver, Colorado (the "Bank") in the principal amount of
$1,000,000 bearing interest at 1% over the annual rate paid by the Bank on one-
year certificates of deposit issued by the Bank ("Original Loan"). The Company
has drawn down $1,000,000 of the Original Loan from the Bank. The Company has
made to Broker a $500,000 subordinated loan as defined in 17 CFR (S) 240. 15c3-
1d. As required by the Original Agreement, the Broker filed the documents
required under 17 CFR 240.15c3-1d with the NASD and obtained the NASD's
approval.
C. The Pledgor assisted the Company in obtaining the Original Loan by
pledging, as collateral securing repayment of the Original Loan, a certificate
of deposit issued by the Bank in the amount of $1,000,000 ("the Original CD").
The Company has paid the Pledgor, concurrently with Company's payments of
interest on the Original Loan to the Bank, an amount equal to the difference
between 10% per annum and the interest rate payable to the Pledgor on the
Original CD on the amount of the outstanding balance due on the Loan to the Bank
("pledge fees").
D. The Company and the Broker wish to obtain additional capital in the
conduct of their respective securities brokerage and related businesses.
Pledgor is willing to assist the Company in acquiring such additional capital on
an arrangement similar to that for the Original Loan.
E. The Company wishes to consolidate the Original Loan and the new loan
for additional capital, and Pledgor is willing to pledge an additional
certificate of deposit to secure the consolidated loan on the terms and
conditions of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
<PAGE>
1. Consolidation. The Company and the Pledgor agree that Original
Agreement shall be superseded in its entirety by this Agreement effective as of
the closing of the transaction contemplated hereby.
2. The New Loan. The Company will make application for a revolving loan
from Colorado State Bank, Denver, Colorado for a new loan, which includes and is
consolidated with the Original Loan, in the principal amount of $2,000,000
bearing interest at 1% over the annual rate paid by the Bank on one-year
certificates of deposit issued by the Bank, with interest only payable monthly
and with principal and accrued and unpaid interest due and payable in full one
year from the date of making of the loan (the "Loan"), subject to renewals for
four years. If the Loan is approved by the Bank, the Company will have drawn
$1,000,000 from the Bank, as of the closing of the transaction contemplated
hereby, by virtue of the Original Loan. Any future borrowings on the Loan from
the Bank must be approved by the Pledgor. Any net proceeds from the Loan used
to provide capital to the Broker shall be in the form of a subordinated loan
agreement as defined in 17 CFR 240. 15c3-1d. The Broker shall file the
documents required under 17 CFR 240.15c3-1d with NASD for approval. The
proposed agreement shall not be a satisfactory subordination agreement until the
NASD has found the agreement acceptable and such agreement has become effective
in the form found acceptable.
3. Use of New Loan Proceeds. The Company may use the proceeds of the Loan
to provide financial assistance to registered representatives that the Broker
recruits and that become affiliated with the Broker. The Company agrees not to
provide financial assistance to the registered representative until the
registered representative has resigned from his existing broker dealer and upon
registration with the NASD, the Securities and Exchange Commission, all
necessary Securities Exchanges, and all necessary State Securities Commissions.
The Company's financial assistance will be in the form of a personal recourse
loan recoverable from the gross commissions of the registered representative.
Loans shall not exceed 50% of a registered representative's trailing commissions
for the last twelve month period. The term of a loan shall not exceed five
years. Pursuant to the terms of a loan the Company shall have the right to
declare the principal balance of the loan immediately due and payable without
notice or demand if (i) the registered representative's affiliation or
association with the Broker shall terminate for any reason whatsoever prior to
the due date of the loan; (ii) if the registered representative has not retained
all licenses and registrations issued by the NASD, Securities and Exchange
Commission, all necessary Securities Exchanges, and all necessary State
Securities Commissions; or (iii) if the registered representative shall be in
breach or default under any agreement with the Company or Broker. The
registered representative shall agree to assign to the Company the right to
apply his gross commissions as recorded on the Broker's books and records
against the outstanding principal balance, and that the Company shall have a
security interest in all his gross commissions, if he is in default of the loan.
The Company agrees to require the registered representative to execute a
promissory note with these provisions and to file an appropriate financing
statement to preserve a first lien security interest in favor of the Company
against the gross commissions of the registered representative.
-2-
<PAGE>
4. Pledge of CD. Pledgor agrees to assist the Company in obtaining the
Loan by pledging, as collateral securing repayment of the Loan, a certificate of
deposit issued by the Bank in the amount of $2,000,000 (the "CD"). Pledgor
agrees that the CD shall remain on deposit with the Bank at all times during the
term of the Loan and until the Loan are paid in full. Pledgor agrees to deposit
an additional $1,000,000 in an interest bearing Escrow Account at Colorado State
Bank until closing of the loan and issuance of the CD. The cash deposit with
interest will be returned if the transaction does not close. By written notice
to the Company at its principal office, no sooner than six months after the
effective date of this Agreement, the Pledgor may accelerate the withdrawal of
the CD as collateral for the Loan upon occurrence of an Event of Acceleration as
defined in this paragraph. The Pledgor may accelerate such withdrawal of the CD
as collateral to the last business day of a calendar month not less than six
months after the receipt of such notice by the Company. Events of Acceleration
which may be included shall be limited to:
(a) Failure to pay the pledge fees provided in this Agreement as
scheduled;
(b) Failure to pay when due other money obligations of a specified
material amount;
(c) Discovery that any material, specified representation or warranty of
the Company which is included in this Agreement and on which this
Agreement was based or continued was inaccurate in a material respect
at the time made;
(d) The following specified and clearly measurable event(s), which the
Pledgor and the Company agree (i) is a significant indication that the
financial position of Company and/or the Broker has changed materially
and adversely from agreed upon specified norms; or (ii) could
materially and adversely affect the ability of the Broker to conduct
its business as conducted on the effective date of this Agreement;
(iii) is a significant change in the senior management or in the
general business conducted by the Broker from date this Agreement
became effective; or (iv) constitute continued failure to perform
agreed-upon covenants included in this Agreement relating to the
maintenance and reporting by the Company of its financial position or
relating to the conduct of its business.
The events of Acceleration as discussed in paragraphs 4 (a) through
(d) are enumerated below:
(i) The filing of an application by the Securities Investor
Protection Corporation for a decree adjudicating that
customers of the Broker are in need of protection under the
Securities Investor Protection Act of 1970 and the failure
of the Broker to obtain the dismissal of such application
within 30 days;
-3-
<PAGE>
(ii) The aggregate indebtedness of the Broker exceeding 1500
percent of its net capital or, in the case the Broker has
elected to operate under Section 17 CFR (S) 240.15c3-
1(a)(2)(vi), its net capital computed in accordance
therewith is less than 2 percent of its aggregate debit
items computed in accordance with 17 CFR (S) 240.15c3-3a,
if greater, throughout a period of 15 consecutive business
days, commencing on the day the Broker first determines and
notifies the Company and the Pledgor of such fact.
(iii) Revocation by the Commission of the registration of the
Broker;
(iv) Suspension by the NASD (without reinstatement within 30
days) or revocation of the Broker's status as a member
thereof; and
(v) Receivership, insolvency, liquidation pursuant to the
Securities Investor Protection Act of 1970 or otherwise,
bankruptcy, assignment for the benefit of creditors,
reorganization whether or not pursuant to bankruptcy laws,
or any other marshaling of assets and liabilities of the
Broker.
5. Fees to Pledgor. The Company agrees to pay all pledge fees due under
the Original Agreement to the Pledgor on or before closing of the transaction
contemplated hereby. Pledgor requires a return of 10% per annum on the
$2,000,000 principal amount of the CD. Therefore, the Company agrees to pay the
Pledgor, concurrently with the Company's payments of interest on the Loan to the
Bank, an amount equal to the difference between 10% per annum and the interest
rate payable to the Pledgor on the CD on the amount of the outstanding balance
due on the Loan to the Bank ("pledge fees").
6. Closing. Closing of the transactions contemplated hereby shall occur
as soon as possible but not later than May 31, 1999. Closing shall take place
at such other time or place as the parties shall mutually agree. Each party
shall promptly cooperate with the Bank and the other party with a view toward
expediting the closing. The obligations of the Company and the Pledgor at
closing shall be subject to the conditions that all representations and
warranties of the other party shall be true as if then given and the other party
shall have performed or observed all terms, conditions and obligations hereunder
to be performed or observed by it on or prior to closing.
7. Representations, Warranties and Obligations of the Company. The
Company represents and warrants to Pledgor, which representations and
warranties shall survive the closing, as follows:
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has all requisite
corporate power and authority to carry on its business as now conducted and as
proposed to be conducted, and is duly qualified as a
-4-
<PAGE>
foreign corporation and in good standing in all other jurisdictions in which
such qualification is required. The Company owns all of the issued and
outstanding capital stock of the Broker.
(b) All corporate action on the part of the Company and its officers,
directors and shareholders necessary for the authorization, execution, delivery
and performance of all obligations of the Company under this Agreement has been
taken. This Agreement, when executed and delivered, shall constitute a valid
and legally binding obligation of the Company.
(c) All consents, approvals, orders or authorizations of or registrations,
qualifications, designations, declarations or filings with any federal or state
governmental authority on the part of the Company required in connection with
the consummation of the transactions contemplated by this Agreement shall have
been obtained prior to, and be effective as of, the closing.
(d) The Company will furnish monthly consolidated financial statements
prepared under general accepted accounting principles and a quarterly update on
all customer complaints and/or litigation.
8. Representations and Warranties of Pledgor. Pledgor represents and
warrants to the Company as follows:
(a) Pledgor is domiciled in and is a bona fide resident of the State of
Texas.
(b) Pledgor acknowledges that the pledge fees ("the Securities") will be
acquired as an investment for Pledgor's own account, not as a nominee or agent,
and not with a view to the sale or distribution of any part thereof, and Pledgor
has no present intention of selling, granting participation in, or otherwise
distributing the same; that the Securities are restricted securities within the
meaning of Rule 144 promulgated pursuant to the Securities Act of 1933 (the
"Securities Act") and are subject to substantial restrictions on transfer; and
that any and all certificates representing the Securities and any and all
securities issued in replacement thereof or in exchange therefor shall bear the
following legend, or one substantially similar thereto, which the Pledgor has
read and understands:
The Securities represented by this Certificate have not been registered
under the Securities Act of 1933 (the "Act") and are "restricted
securities" as that term is defined in Rule 144 under the Act. The
Securities may not be offered for sale, sold or otherwise transferred
except pursuant to an effective registration statement under the Act or
pursuant to an exemption from registration under the Act, the
availability of which is to be established to the satisfaction of the
Company.
-5-
<PAGE>
(c) The Pledgor further agrees that the Company shall have the right to
give stop transfer instructions in its records against any transfer of the
pledge fees, and acknowledges that the Company has informed Pledgor of its
intention to issue such instructions.
(d) The Pledgor has been furnished with the Company's Confidential
Business Plan dated December 12, 1997, audited financial statements for D.E.
Frey Group, Inc. as of December 31, 1997 and unaudited monthly financial
statements for D.E. Frey Group, Inc. and subsidiaries since August 1997. Pledgor
acknowledges that the Company will, upon written request made by Pledgor,
provide without charge copies of all documents identified in the Confidential
Business Plan.
(e) Pledgor has had an opportunity to ask questions of and receive
satisfactory answers from duly designated representatives of the Company and has
been afforded an opportunity to examine such documents and other information
which she has requested for the purpose of verifying the information set forth
in the referred to above and for the purpose of answering any question she may
have concerning the business, affairs and financial condition of the Company.
Pledgor understands that the Confidential Business Plan does not, and does not
purport to, contain all information material to the making of an informed
investment decision.
(f) Pledgor understands that the Securities are unregistered and must be
held indefinitely unless they are subsequently registered under the Act or an
exemption from such registration is available. Pledgor further acknowledges
that she is fully aware of the applicable limitations on the resale of the
Securities. The Rule permits sales of "restricted securities" held for not less
than two years and upon compliance with the requirements of such Rule. If the
Rule is available to Pledgor, Pledgor may make only routine sales of the
Securities in limited amounts in accordance with the terms and conditions of
that Rule. The Company is the only person which may register its Securities
under the Act and it currently is not contemplating registering any of its
Securities. The Company has not made any representations, warranties or
covenants to Pledgor regarding the registration of the Securities or compliance
with Regulation A or some other exemption under the Act.
(g) Pledgor is an investor who directly or with the assistance of her
representatives has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of an investment in
the Company based upon the information furnished to her; her personal knowledge
of the business and affairs of the Company; the records, files and plans of the
Company to all of which she has had full access; such additional information as
she may have requested and has received from the Company; and the independent
inquiries and investigations undertaken by it.
(h) Pledgor is an "accredited investor" as that term is defined in Rule
501 under the Securities Act of 1933; can bear the economic risk of loss of her
entire investment; she has adequate means for providing for her current needs
and personal contingencies; and she has no need for liquidity with respect to
her investment in the Securities.
-6-
<PAGE>
(i) All information, representations and warranties contained herein or
otherwise given or made to the Company by Pledgor are correct and complete as of
the date of this Agreement, and if there should be any material change in such
information prior to closing of the offering of the Securities, she will
immediately furnish such revised or corrected information to the Company.
(j) No person has given any information or made any representation not
contained in the Disclosure Document referred to above or otherwise provided to
Pledgor in writing by a person authorized by Company or Broker. Pledgor
understands and agrees that any information or representation not contained
therein must not, and will not, be relied upon and that nothing contained
therein should be construed as legal or tax advice to Pledgor.
(k) No person has made any direct or indirect representation or warranty
of any kind to Pledgor with respect to the economic return which may accrue as a
result of the transaction. Pledgor has consulted with its own tax counsel and
other advisors with respect to an investment in the Company.
(l) Notwithstanding anything contained herein to the contrary, the parties
acknowledge and agree that the pledge of the CD as collateral securing payment
of the Loan does not involve the offer or sale of a security under federal or
state law and, in any event, neither this Agreement nor any other written or
oral statement or representation made in connection with this Agreement shall be
deemed to be an admission by the Company that the transactions contemplated
hereby involve, in whole or in part, the offer or sale of a security.
9. Arbitration. In the event of any differences, claims or disputed
matters between the parties hereto arising out of this Agreement or connected
herewith, the parties agree to submit such matters to arbitration by the
American Arbitration Association or its successor in Denver, Colorado. Either
party can invoke arbitration upon ten days' notice to the other party. The
determination of the arbitrator shall be final and absolute. The arbitrator
shall be governed by the duly promulgated rules and regulations of the American
Arbitration Association or its successor, and the pertinent provisions of the
laws of the State of Colorado, relating to arbitration. The decision of the
arbitrator may be entered in a judgment in any court of the State of Colorado or
elsewhere. The arbitrator shall have no power to award exemplary or punitive
damages.
10. Indemnification. The parties understand and acknowledge the meaning
and legal consequences of the representations and warranties contained herein
and in any other document delivered in connection herewith. The Company and the
Pledgor each shall indemnify the other, their respective officers, directors,
partners, affiliates, controlling persons, shareholders, employees, and agents
and the heirs, personal representatives, successors and assigns of the foregoing
(all of whom are hereinafter referred to as the "Indemnified Persons") and shall
hold the Indemnified Persons harmless from and against any and all loss, damage,
liability, cost or expense of any nature whatsoever (including attorneys' fees
and disbursements) due to or arising out of a breach of any such representation,
warranty, acknowledgment or agreement made by the indemnifying party.
-7-
<PAGE>
11. Miscellaneous. This Agreement sets forth the understanding of the
parties and supersedes all prior written or oral understandings and agreements
and may be modified only by a writing signed by all parties. No party shall
have the right to assign all or any portion of its rights, duties or obligations
under this Agreement to any other person. Subject to the foregoing, all terms
and provisions of this Agreement shall be binding upon and inure to the benefit
of and be enforceable by the successors, assigns, legal representatives, heirs
and estates of the parties hereto. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado. The failure of
any party to insist in any one or more instances upon performance of any terms
or conditions of this Agreement shall not be construed as a waiver of future
performance of such or any other term, covenant or condition. In the event any
party invokes arbitration against the other party in order to enforce the terms
of this Agreement, the party in whose favor a final award is rendered shall be
entitled to recover from the other party its reasonable attorneys' fees and
costs to be fixed by the arbiters which render such award. Such fees and costs
shall include those incurred in connection with any appeal or appeals. Any
reference to he or his shall also include she or her. Should any term or
condition of this Agreement be determined by a court of competent jurisdiction
to be void or unenforceable, all other provisions of this Agreement shall remain
in full force and effect.
12. Notices. All notices required hereunder shall be deemed to have been
given when in writing upon the earlier of personal delivery or three days
following deposit in the United States mails by certified or registered mail,
postage prepaid, to the other party at the addresses set forth below, or such
other addresses as may subsequently be provided:
To Pledgor: To Company:
- ---------- ----------
Louise H. Rogers Dale E. Frey
D. E. Frey Group, Inc.
1700 Lincoln, Suite 2222
Denver, Colorado 80203
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
/s/ Louise H. Rogers
------------------------------------------
Louise H. Rogers
D.E. FREY GROUP, INC., a Delaware
corporation
By:/s/ Dale E. Frey Dale E. Frey, President
----------------
-8-
<PAGE>
EXHIBIT 10.14
This Promissory Note has not been registered under the Securities Act of 1933,
as amended (the "Act"), or applicable state securities laws (the "State Acts"),
and shall not be sold, pledged, hypothecated, donated or otherwise transferred
(whether or not for consideration) by the holder except upon the issuance to
Maker of a favorable opinion of the holder's counsel or submission to Maker of
such other evidence as may be satisfactory to counsel to Maker, to the effect
that any such transfer shall not be in violation of the Act and the State Acts.
PROMISSORY NOTE
$250,000.00 Denver,
Colorado
May 11,
1999
D.E. Frey Group, Inc., a Delaware corporation ("Maker"), hereby promises to
pay to the order of Frank H. and Marilyn Richardson, individuals ("Lender") the
principal sum of $250,000, together with interest thereon in lawful money of the
United States as herein provided.
1. Interest. The unpaid principal balance of this Note shall bear
--------
interest commencing on the date all proceeds of the loan are received by Maker,
such interest to be at the rate of 13.5% per annum, payable in arrears in
calendar quarterly installments. Each such quarterly interest payment shall be
due and payable within 10 days of the end of each calendar quarter. Interest
shall be calculated based on the actual number of days the principal balance
remains outstanding in a year of 365 days.
2. Maturity. The unpaid principal balance of this Note, together with
--------
accrued and unpaid interest, shall be due and payable at the earlier of one year
from the date on which all proceeds of the loan have been received by Maker.
3. Prepayment. The unpaid principal balance of the Note, together with
----------
accrued and unpaid interest, may be paid in whole or in part, at any time in the
sole discretion of Maker. The Maker agrees to pay 103% of the principal balance
of the Note as full satisfaction of the principal if the Maker elects to prepay.
Any prepayment in part by Maker shall be first allocated to any accrued and
unpaid interest, with any remaining amount being allocated to the unpaid
principal.
4. Default. If any of the following events occurs, all indebtedness
-------
owing by Maker hereunder shall become forthwith due and payable to Lender, upon
delivery by Lender to Maker of a written notice of default and demand for
payment, and the expiration of the following periods from the delivery of such
notice, during which periods Maker shall have the ability to cure such default:
(i) in the case of (a) below, ten days and (ii) in the case of (b), (c), (d), or
(e) below, 30 days. The unpaid principal balance of this Note shall bear
interest commencing after
<PAGE>
the cure period has expired at the rate of 16.0% per annum until the Note is
paid in full, if the Maker is in default and has not cured such default.
(a) Any default by Maker in the payment, when due, of any part of the
principal of or interest on this Note and the payment of any other sums payable
by Maker pursuant to the terms of this Note.
(b) The insolvency or bankruptcy of Maker or any of its direct or
indirect subsidiaries, the execution by Maker or any of its direct or indirect
subsidiaries of an assignment for the benefit of creditors of substantially all
of the assets of Maker or any such direct or indirect subsidiary, or Maker's or
any of its direct or indirect subsidiary's consent to the appointment of a
trustee or a receiver or other officer of a court or other tribunal.
(c) The appointment of a trustee or receiver or other officer of a
court for Maker or any of its direct or indirect subsidiaries, or for a
substantial part of their properties, without the consent of Maker or of such
direct or indirect subsidiary, where no discharge is effected within 30 days.
(d) The institution of bankruptcy, reorganization, insolvency, or
liquidation proceedings by or against Maker or any of its direct or indirect
subsidiaries, and if against Maker or such a direct or indirect subsidiary,
where such proceeding is consented to by Maker or such subsidiary or remains
undismissed for 30 days.
(e) Any breach or failure of Maker to perform any term or condition of
this Note.
5. Collection. Maker and all guarantors and endorsers of this Note shall
----------
pay all costs and expenses of collection and enforcement of this Note, including
reasonable attorneys' fees.
6. Waiver. Demand, presentment for payment, notice of dishonor, protest
------
and notice of protest are hereby waived.
7. Proceeds. The proceeds from this Note, to be given on and as of the
--------
date of this Note, shall consist of $250,000 in cash, to be used for the payment
of interest on outstanding subordinated debt and costs associated with the
proposed initial public offering of Maker.
8. Assignment. This Note may not be assigned by Lender or Maker without
----------
the express written consent of the other party; provided, however, that Lender
may assign this Note to any of its affiliates without such consent. Such an
affiliate, for purposes of this Section 9, is any person of which Lender owns
directly or indirectly more than 50% of the voting equity interests, or such
person as owns directly or indirectly more than 50% of the voting equity
interests of Lender, or which the Lender controls as general partner.
9. Governing Law. This Note is made and is being executed in the State of
-------------
Texas, and the provisions hereof will be construed in accordance with the laws
of the State of Texas. Furthermore, Lender and Maker (and their lawful
assignees, successors and endorsers) further agree that in the event of default
this Note may be enforced in any court of competent
<PAGE>
jurisdiction in the State of Texas, and they do hereby submit to such
jurisdiction in the State of Texas.
10. Severability. Invalidation of any of the provisions of this Note
------------
shall not affect the remainder of this Note.
11. Amendment. This Note may not be amended or modified except by an
---------
instrument in writing signed by both parties.
12. Warrants. The Lender will issue warrants to purchase 50,000 shares of
--------
D.E. Frey Group, Inc. common stock at an exercise price of $3.50 per share and
the warrants will expire on April 30, 2004.
D.E. FREY GROUP, INC.
By: /s/ Dale E. Frey
______________________________
Dale E. Frey, President
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Subsidiary State of incorporation
- ---------- ----------------------
D.E. Frey & Company, Inc Delaware
DEF Special Fund, LLC Colorado
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Registration Statement on Form S-1 and related
Prospectus of D.E. Frey Group, Inc. of our report dated February 5, 1999,
accompanying the financial statements of D.E. Frey Group, Inc. contained in such
Registration Statement, and to the use of our name and the statements with
respect to us, as appearing under the heading "Experts" in the Prospecus.
HEIN + ASSOCIATES LLP
Denver, Colorado
September 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR D.E. FREY GROUP'S
JUNE 30, 1999 FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,086
<RECEIVABLES> 2,234
<SECURITIES-RESALE> 1,227
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 226
<PP&E> 627
<TOTAL-ASSETS> 6,119
<SHORT-TERM> 0
<PAYABLES> 3,345
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 6,070
0
0
<COMMON> 457
<OTHER-SE> (3,753)
<TOTAL-LIABILITY-AND-EQUITY> 6,119
<TRADING-REVENUE> 4,566
<INTEREST-DIVIDENDS> 1,671
<COMMISSIONS> 13,557
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 2,540
<INTEREST-EXPENSE> 317
<COMPENSATION> 17,093
<INCOME-PRETAX> (78)
<INCOME-PRE-EXTRAORDINARY> (78)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
