<PAGE>
As filed with the Securities and Exchange Commission on November 29, 1999
Registration No. 333-88499
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
PRE-EFFECTIVE AMENDMENT NO. 1
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)
--------------
<TABLE>
<S> <C> <C>
Delaware 6211 84-1122880
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Clarification Code Number) Identification Number)
</TABLE>
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:
<TABLE>
<S> <C>
SAMUEL E. WING, ESQ. JOHN G. HERBERT, ESQ.
Jones & Keller, P.C. John G. Herbert, P.C.
1625 Broadway, Suite 1600 5740 East Powers Ave.
Denver, Colorado 80202 Greenwood Village, Colorado 80111
Telephone: (303) 573-1600 Telephone: (303) 378-9596
</TABLE>
--------------
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. [_]
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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered per security(1) offering 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
- -----------------------------------------------------------------------------------------------------------
Totals....................................... 2,300,000 $16,100,000 $4,476*
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Represents shares of common stock subject to the underwriters' over-
allotment option.
* Previously paid.
--------------
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 NOVEMBER 29, 1999
Prospectus
[LOGO OF D.E. FREY GROUP, INC. APPEARS HERE]
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.
----------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discount....................................
Proceeds to us, before expenses..........................
</TABLE>
The underwriters have a 45-day option to purchase up to an additional
300,000 shares to cover any over-allotments. The representative of the
underwriters has an option to acquire up to 200,000 shares of our common stock
at $ per share at anytime during a four year period commencing one year
from the date of this prospectus.
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 is not soliciting an offer to
buy these securities in any state where the offer or sale is not
permitted.
The date of this prospectus is , 1999
<PAGE>
[inside front cover]
[PHOTO APPEARS HERE]
OUR VISION
MERGE convenience of Internet trading with professional services
provided by our Investment Professionals
PROVIDE support mechanisms to Investment Professionals and their clients
EMPOWER Investment Professionals with complete array of tools and services
RECRUIT Investment Professionals who are; Entrepreneurial; Experience;
Established Client base
CULTIVATE trustful long-term relationships by valuing the Investment
Professional and Client relationship
<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 F-1.
Overview of our Company
We are a full service retail securities brokerage firm, formed in 1989,
operating through 94 independent investment professionals in 38 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 that
generate annual gross commissions in excess of $500,000 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 annual growth rate of 21%. Our revenue growth is due to
growth in customer assets, number of customer accounts and increases in the
number of investment professionals and the commissions they generate. As of
September 30, 1999 we had approximately 33,000 active customer accounts with
account balances aggregating $3 billion.
Presently, we provide support to our investment professionals to meet their
client's needs and we 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
1
<PAGE>
. 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
. 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 financial products sponsored by third
parties, as well as the ability to conduct business in any mode desired,
supported with current data, from traditional brokerage operations to
electronic and Internet transactions
2
<PAGE>
The Offering
<TABLE>
<C> <S>
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
</TABLE>
- --------
(1) Based on the number of shares outstanding at September 30, 1999, including
283,922 shares to be issued upon conversion of $1,448,000 of debt,
assuming a price per share of $5.10, which is 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
. up to 200,000 shares which may be issued upon exercise of warrants
granted to the representative of the underwriters in this offering; the
warrants are exercisable at $ per share at any time during a
four year period commencing one year from the date of this prospectus
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.
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 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>
Statements of Operations
Data:
Revenues:
Brokerage............. $15,816 $19,851 $27,097 $31,136 $33,045 $ 24,818 $ 29,283
Interest and account
fees................. 1,218 1,535 2,005 2,203 2,880 2,076 2,398
Other................. 325 475 942 1,350 1,113 924 802
------- ------- ------- ------- ------- -------- --------
Total revenues........ 17,359 21,861 30,044 34,689 37,038 27,818 32,483
------- ------- ------- ------- ------- -------- --------
Expenses:
Commissions and
investment advisory,
clearing and
execution fees....... 13,448 17,177 23,566 27,513 29,470 22,129 26,347
Other expenses........ 4,158 6,752 7,887 7,329 7,957 5,761 6,894
------- ------- ------- ------- ------- -------- --------
Total expenses........ 17,606 23,929 31,453 34,842 37,427 27,890 33,241
------- ------- ------- ------- ------- -------- --------
Net loss................ $ (247) $(2,068) $(1,409) $ (153) $ (389) $ (72) $ (758)
======= ======= ======= ======= ======= ======== ========
Net loss per common
share, basic and
diluted................ $ (0.12) $ (0.86) $ (0.46) $ (0.04) $ (0.09) $ (0.02) $ (0.17)
======= ======= ======= ======= ======= ======== ========
Weighted average common
shares outstanding
Basic................. 2,094 2,400 3,052 3,744 4,338 4,298 4,555
======= ======= ======= ======= ======= ======== ========
Diluted............... 2,094 2,400 3,052 3,744 4,338 4,298 4,555
======= ======= ======= ======= ======= ======== ========
Pro Forma Data:(1)
Pro forma net loss.... $ (234) $ (642)
======= ========
Pro forma net loss per
share, basic and
diluted.............. $ (0.05) $ (0.13)
======= ========
Shares used in
computing pro forma
loss per share, basic
and diluted.......... 4,622 4,839
======= ========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
1999
At December 31, ---------------------
1998 Actual Pro Forma(1)
--------------- ------- ------------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................. $ 733 $ 953 $11,178
Working capital........................... 582 510 10,762
Total assets.............................. 4,945 5,509 15,560
Notes payable............................. 5,470 6,420 4,972
Total liabilities......................... 8,516 9,486 7,966
Shareholders' equity (deficit)............ (3,571) (3,977) 7,594
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
At December 31, At
------------------------ September 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Other Data
Number of branches...................... 28 23 32 33 36 38
Number of investment professionals...... 67 99 99 100 92 94
Recruited during year................... 29 39 18 19 13 14
Terminated or resigned during year...... 0 7 18 16 21 12
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
-------------------------------------------- September 30,
1994 1995 1996 1997 1998 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 $311,521
</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, which excludes 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, which is 85% of the 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.
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 of operations and our financial condition could
differ materially from those anticipated in the forward-looking statements as a
result of various factors, including the risks described in "Risk Factors" and
elsewhere in this prospectus.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below in considering
whether to invest in our common stock. 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.
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 September 30, 1999, we had cumulative losses of $8.4 million and a
shareholders' deficit of $4.0 million. Although our revenue has grown since
our inception, there can be no 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. Moreover, we expect to increase
our operating expenses further 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.
6
<PAGE>
The loss of our Chairman or other key employees could severely harm our
business.
Our business is highly dependent on the services of our founder and
Chairman, Dale E. Frey, who is 70 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 in the securities
business 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 present management team may not be capable of fully implementing our
business plan.
On November 19, 1999, our Senior Vice President of Operations resigned to
pursue another business opportunity. He had been designated to play a critical
role in implementing our business plan, particularly including overseeing the
. upgrading of our technology and the automation of our operations
. introduction and evaluation of our on-line trading and e-commerce
activities
In addition, we will need a full time technology officer to enhance and
continually upgrade our technological capabilities.
We hope to replace our operations officer as soon as possible and we hope to
hire our technology officer shortly after conclusion of this offering. Any
delays in replacing our operations officer quickly could cause dislocations and
problems in our current operations and force us to delay the implementation of
many of our business plans.
We must be able to attract and retain high producing investment professionals
if we are to grow and become profitable.
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.
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 $5.0 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.
We face many potential problems in the securities business, especially when the
markets are 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
7
<PAGE>
. counterparty failure to meet commitments
. errors and misconduct
. litigation
. customer fraud
. employee fraud
. failures in connection with the processing of securities transactions
. failure of our customers or our investment professionals to meet their
commitments
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 conditions
. legislation and regulation affecting the business and financial
communities
. inflation
. the availability and cost of short-term or long-term funding and capital
. broad trends in business and finance
. currency values
. market conditions
. interest rate levels and volatility
. technological changes
. changes in customer's buying trends
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 transaction 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
8
<PAGE>
. 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
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.
We are confronted with problems if our investment professionals fail to comply
with regulatory requirements.
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 by us or our investment professionals could
jeopardize our broker-dealer license or other licenses and could subject us to
liability to customers.
We must be able to contend with the fierce competition that exists 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 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
9
<PAGE>
. 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 problems 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."
Regulatory net capital requirements significantly affect and often constrain
our business.
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 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, a subsidiary of Paine Webber Group, Inc., 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.
10
<PAGE>
Our business structure utilizing independent contractors has caused regulatory
and legal problems.
Our branch offices are owned and operated by independent contractors which
is a departure from the usual practice of other firms which own their branches
and employ their brokers. This has been a source of contention with regulators
as to our duties of branch and broker supervision. We are reliant on our
independent professionals to adhere to just and equitable principles of the
securities business and we supervise them to that end. However, this unique
relationship could continue to be a matter of concern to regulators.
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 some of our 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.
Although our investment professionals are independent contractors for tax
purposes, under current accounting pronouncements regarding options and
warrants, our investment professionals are considered the functional equivalent
of employees. As a result, under the current accounting pronouncements, no
charges to earnings have been recorded in our financial statements. However,
there are currently proposed accounting pronouncements under which it is likely
that our investment professionals may no longer 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 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
11
<PAGE>
. 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 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.
Termination of this agreement could harm our business. Moreover, we are heavily
relying on CSC to develop on-line, Internet trading capabilities for equity
securities, which we are currently testing under a pilot program. 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.
If we fail to adhere to stringent regulations governing our business, we could
be severely sanctioned or barred from doing business altogether.
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 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 self regulatory organizations, 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 self regulatory organizations.
We are subject to periodic examination by the SEC, self regulatory
organizations 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
12
<PAGE>
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 a self regulatory organization 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 subject to lawsuits by our customers, investment professionals,
employees and other broker/dealers.
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
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.
We face additional litigation risks when we participate in securities
distributions.
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
13
<PAGE>
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 have been involved in numerous securities arbitrations and lawsuits.
During the last few years, including the three years and nine months covered
by our financial statements included in this prospectus, we have been
respondents or defendants in many legal actions, some of which are described
under "Legal Matters Affecting Us." Not only have many of the matters resulted
in legal liability to us, they have detracted management's focus on our
business and have resulted in substantial legal fees. We can give you no
assurance that existing matters will be resolved on terms acceptable to us or
which we can afford, or that additional legal matters will not arise in the
future.
We may incur liability from our previous private placement activities.
In the last three years, we have issued securities in transactions believed
by management to be exempt from 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 rescission rights or other civil liabilities, as we have been in the
past, the amount of which could severely damage our business. See also "Legal
Matters Affecting Us."
We may incur liability from our past participations in public offerings.
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 lawsuits are filed against any issuers or underwriters and
the plaintiffs are successful in proving their cases.
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.
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." In
addition, our officers, directors and five percent shareholders have agreed to
a 12 month lockup. See "Principal Shareholders." 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."
Because we are both an issuer and an underwriter of our securities, and because
of our commission structure, 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. Furthermore, our
investment professionals derive their income from high payout commissions
received from us rather than as a result of building our stockholders' equity.
These facts present conflicts of interest when our subsidiary and
14
<PAGE>
its investment professionals recommend or solicit their customers to buy our
securities and become stockholders. This could have a negative impact on our
proposed offering and its potential success and it could expose us to legal
claims.
Your investment may suffer if the proceeds of this offering are not be spent
effectively.
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
. 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 a substantial portion 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 for our common stock may not develop or continue after
this offering.
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.
15
<PAGE>
We have not paid and 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.
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.
The book value of your shares immediately after the offering will be
substantially less than the amount you invested.
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 a weighted 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."
You might be denied the benefits of a takeover of our Company by a third party
because of certain provisions in the Delaware General Corporation law and also
because we have adopted protective provisions in our certificate of
incorporation and bylaws.
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
. prevent an acquirer from paying a control premium to investors
. entrench current management despite the potential of a more effective
management team
See "Description of our Equity Securities."
16
<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 a bridge loan and to pay debt service costs as they become due
over the next 24 months on our senior debt and subordinated debt. The bridge
loan of $250,000 is due in May 2000 and bears interest at 13.5% per annum. See
Note 5 to the Financial Statements.
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
. financing up front costs of setting up offices 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, such as 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 a
substantial portion of the proceeds from this offering to pay litigation costs
and 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" 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
17
<PAGE>
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.
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 September
30, 1999, was $(4.5) million, or $(0.99) per share of common stock. After
giving effect to:
. the sale of 2,000,000 shares of common stock offered through this
prospectus at the mid-point of the initial public offering price range
of $6.00 per share 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, which is a 15% discount from the
foregoing assumed public offering price
Giving effect to the above, our net tangible book value as adjusted, as of
September 30, 1999, would have been $7.2 million, or $1.06 per share of common
stock. This represents an immediate increase of $2.05 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 $4.94 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>
<S> <C> <C>
Assumed initial public offering price......................... $6.00
Net tangible book deficit as of September 30, 1999............ $(0.99)
Decrease in net tangible book deficit and increase in net
tangible book value attributable to new investors and
conversion of debt holders................................... 2.05
------
Pro forma net tangible book value after this offering and
conversion of debt to common stock........................... 1.06
-----
Dilution to new investors..................................... $4.94
=====
</TABLE>
As of September 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 a weighted 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. In addition, the
representative of the underwriters will receive warrants to purchase up to
200,000 shares of our common stock. To the extent options or warrants are
exercised, there will be further dilution to new investors.
18
<PAGE>
CAPITALIZATION
The following table shows our consolidated capitalization on September 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, which is 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>
September 30, 1999
---------------------
Actual Pro Forma
--------- ----------
(Amounts in
thousands)
<S> <C> <C>
Debt:
Senior debt........................................ $ 1,700 $ 1,700
Subordinated debt.................................. 4,470 3,022
Bridge loan........................................ 250 250
--------- ---------
Total debt....................................... $ 6,420 $ 4,972
========= =========
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 15,343
Accumulated deficit................................ (8,388) (8,435)
--------- ---------
Total shareholders' equity (deficit)(a).......... $ (3,977) $ 7,594
========= =========
Total capitalization............................. $ 2,443 $ 12,566
========= =========
</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.
19
<PAGE>
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 nine months ended September 30, 1998 and 1999 and the
consolidated balance sheet information as of September 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 nine months ended September 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 nine months ended September 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.
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- -------- --------
(unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Brokerage............. $15,816 $19,851 $27,097 $31,136 $33,045 $ 24,818 $ 29,283
Interest and account
fees................. 1,218 1,535 2,005 2,203 2,880 2,076 2,398
Other................. 325 475 942 1,350 1,113 924 802
------- ------- ------- ------- ------- -------- --------
Total................ 17,359 21,861 30,044 34,689 37,038 27,818 32,483
------- ------- ------- ------- ------- -------- --------
Expenses:
Commissions and
investment advisory
fees................. 11,897 15,419 21,512 25,194 26,933 20,225 24,169
Clearing and execution
fees................. 1,551 1,758 2,054 2,319 2,537 1,904 2,178
Employee
compensation......... 1,936 2,076 2,641 2,610 2,907 2,199 2,626
Interest.............. 428 475 699 571 698 497 499
Other................. 1,794 4,201 4,547 4,148 4,352 3,064 3,770
------- ------- ------- ------- ------- -------- --------
Total................ 17,606 23,929 31,453 34,842 37,427 27,890 33,241
------- ------- ------- ------- ------- -------- --------
Net loss................ $ (247) $(2,068) $(1,409) $ (153) $ (389) $ (72) $ (758)
======= ======= ======= ======= ======= ======== ========
Net loss per common
share, basic and
diluted................ $ (0.12) $ (0.86) $ (0.46) $ (0.04) $ (0.09) $ (0.02) $ (0.17)
======= ======= ======= ======= ======= ======== ========
Weighted average common
shares outstanding
Basic................. 2,094 2,400 3,052 3,744 4,338 4,298 4,555
======= ======= ======= ======= ======= ======== ========
Diluted............... 2,094 2,400 3,052 3,744 4,338 4,298 4,555
======= ======= ======= ======= ======= ======== ========
Pro forma data
(unaudited):(1)
Pro forma net loss.... $ (234) $ (642)
======= ========
Pro forma net loss per
share, basic and
diluted.............. $ (0.05) $ (0.13)
======= ========
Shares used in
computing pro forma
net loss per share,
basic and diluted:... 4,622 4,839
======= ========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, At September 30, 1999
------------------------------------------- -------------------------
1994 1995 1996 1997 1998 Actual Pro Forma(1)
------- ------- ------- ------- ------- ---------- -------------
(unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 220 $ 1,572 $ 307 $ 1,446 $ 733 $ 953 $ 11,178
Working capital......... 1,322 519 (408) 968 582 510 10,762
Total assets............ 4,951 5,508 4,969 6,624 4,945 5,509 15,560
Notes payable........... 4,906 4,853 4,770 5,570 5,470 6,420 4,972
Total liabilities....... 6,886 8,516 8,768 10,102 8,516 9,486 7,966
Shareholders' equity
(deficit).............. (1,936) (3,008) (3,008) (3,478) (3,571) (3,977) 7,594
</TABLE>
- --------
(1) Calculated after giving effect to:
. the unaudited pro forma adjustments to reflect the issuance of 2,000,000
shares of common stock, which excludes the 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, which is 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.
21
<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
11 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 creditability
in the independent retail brokerage business, thus achieving profitability.
Following is a brief discussion of material 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. Also, in 1995 a former officer of ours
received a substantial NASD arbitration award against us for termination of his
employment. 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.
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 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.
22
<PAGE>
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 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 Nine Months Ended September 30, 1999
and September 30, 1998.
We recorded a loss of $758,000 in the nine months ended September 30, 1999
compared to a loss of $72,000 in the corresponding 1998 period. Total revenues
increased 17% to $32.5 million in the 1999 period, while expenses increased
19% to $33.2 million in 1999. Increases in other expenses and employee
compensation accounted for the increase in net loss.
The following table breaks down brokerage revenues by major category:
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
---------------
1999 1998
------- -------
(in thousands,
unaudited)
<S> <C> <C>
Commissions............................................ $19,305 $16,372
Principal transactions................................. 6,037 5,165
Investment advisory services........................... 3,941 3,281
------- -------
Total.................................................. $29,283 $24,818
======= =======
</TABLE>
Commissions revenues increased in 1999 by $2.9 million or 18% over the
comparable period of the prior year. The increase is attributable to an
increase in revenues from insurance and annuity products of $1.8 million or
59%, while commissions from equity securities increased $0.7 million and
deferred commission income from various products increased $0.4 million. The
market acceptance of variable life products and higher
23
<PAGE>
customer trading volumes are primary reasons for the increase. During the third
quarter of 1999, commissions revenue was consistent with the comparable 1998
period, even though the general trend in the retail brokerage industry was
lower retail volume and greater than expected seasonality.
Principal transactions revenues were $6.0 million in 1999, representing an
increase of $0.9 million or 17%. The portion of the revenues to the investment
professionals from principal transactions were $0.9 million higher in 1999,
while the portion of the revenues to the firm was comparable to the 1998
period.
Investment advisory services increased 20% in 1999, continuing the trend of
investment professionals expanding customer assets under management.
Interest and account fees were $2.4 million and $2.1 million for the nine
months ended September 30, 1999 and 1998, respectively, representing an
increase in 1999 of 16%. The increase was due to an increase in securities
transactions and increased interest received on higher margin and money market
balances.
Other income was $0.8 million and $0.9 million for the nine months ended
September 30, 1999 and 1998, respectively. The decrease in 1999 is due to the
1998 period benefiting from the reversal of a $0.1 million customer complaint
reserve established in 1997.
Commissions expense was $24.2 million and $20.2 million for the nine months
ended September 30, 1999 and 1998, respectively, representing an increase in
1999 of $4.0 million or 19%, which is consistent with the increase in brokerage
revenues.
Clearing and execution fees were $2.2 million and $1.9 million for the nine
months ended September 30, 1999 and 1998, respectively, representing an
increase in 1999 of $0.3 million or 14%, which is the result of an increase in
the volume of securities transactions.
Employee compensation and benefits expenses increased by $0.4 million, or
19%, to $2.6 million for the nine months ended September 30, 1999 as compared
to the same period in 1998. Increased staffing in the compliance and
supervision departments, increased staffing in connection with the initial
public offering and general salary increases resulted in higher costs in 1999.
Other expenses were $3.8 million and $3.1 million for the nine months ended
September 30, 1999 and 1998, respectively. The increase includes the
amortization of primarily non-cash deferred financing costs associated with new
debt commitments, legal charges resulting in settlement of several litigations,
higher computer and wide area network operating costs to support the expanding
level of services, automation and an increase in other broker related costs.
Results of Operations Comparing the Years Ended December 31, 1998 and 1997.
The following table breaks down brokerage revenues by major category:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Commissions............................................... $22,174 $20,580
Principal transactions.................................... 6,514 7,058
Investment advisory services.............................. 4,357 3,498
------- -------
$33,045 $31,136
======= =======
</TABLE>
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.
24
<PAGE>
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.
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 million 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:
<TABLE>
<CAPTION>
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Commissions............................................... $20,580 $16,039
Principal transactions.................................... 7,058 7,912
Investment advisory services.............................. 3,498 3,146
------- -------
Total..................................................... $31,136 $27,097
======= =======
</TABLE>
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 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.
25
<PAGE>
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 September 30, 1999, we had
cash and cash equivalents of $1.0 million, an increase of $0.2 million from
December 31, 1998. The increase in cash and cash equivalents is primarily
attributable to proceeds of $1.0 million from two new debt facilities partially
offset by cash used in operating activities and for the purchase of property
plant and equipment.
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 $0.7
million of this facility during the first nine months of 1999, bringing the
total borrowings on this facility to $1.7 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 nine months ended September 30, 1999 and 1998, net cash (used in) or
provided by operations was approximately $(0.6) million and $2.1 million,
respectively. The 1999 period included $0.4 million of cash used in operating
activities before working capital charges and $0.2 million for the purchase of
inventory positions, while the 1998 period included approximately $2.2 million
of proceeds from the sale of inventory positions. Net cash used in investing
during the nine months ended September 30, 1999 and 1998 was approximately $0.1
million and $0.9 million, respectively. Investments in furniture and fixtures
consisted primarily of expenditures for computer equipment to upgrade the wide
area network, and in 1998, $0.5 million
26
<PAGE>
was invested in a U.S. Treasury bill and a $0.1 million advance to DEF Special
Fund. During the nine months ended September 30, 1999 and 1998, cash provided
by (or used in) financing activities was approximately $0.9 million and $(1.8)
million, respectively. In 1999, new borrowings of $1.0 million, drawn under two
new debt agreements, and $0.1 million borrowed from the clearing organization,
primarily for financing inventory positions, were offset by $0.1 million in
expenditures to secure the new debt and $0.1 million in direct costs for
preparation of our registration statement. 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 $0.8 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
.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
27
<PAGE>
liability. We have completed our internal information technology and non-
information technology assessment, and we believe that upon completion of our
year 2000 program our internal software and hardware systems will function
properly with respect to dates in the year 2000 and thereafter. Expected
expenditures for our year 2000 project are estimated to be $0.3 million, of
which $0.2 million has been spent as of September 30, 1999. 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 Year 2000 compliant.
Contingency plans have been developed for all critical vendor and third-
party systems, including backup telephone service communications, access lines,
electrical power, exchange data services, order execution, records, accounting
and commissions. Implementation is in progress and should be completed by mid
December. However, if some or 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.
28
<PAGE>
BUSINESS
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. We are a full service retail securities brokerage firm,
operating through 94 independent investment professionals in 38 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 annual 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 September 30,
1999, we had 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 September 30, 1999, we had 94 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 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 attaining 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 Paine Webber Group, Inc. 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
29
<PAGE>
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.
. 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. Larry Hayden, our senior vice president of administration,
has over 30 years of experience in the financial services industry,
including regulatory and compliance matters. Paul L. Hocevar, our chief
financial officer and senior vice president, is an entrepreneur with many
years of experience with other business ventures.
. 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.
30
<PAGE>
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
. 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.
We believe that we must invest in technology to automate our operational
functions, including on-line order entry, the process for transferring new
customer accounts to us, commission processing, accounting, supervision and
electronic storage of documents and data. Under our business model it is
imperative that we automate all possible functions to increase our operational
efficiencies and, in particular, to control our labor costs.
31
<PAGE>
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 that we acquire the latest technology in
order to successfully recruit experienced and established investment
professionals. We believe that we must invest in the following to successfully
recruit new investment professionals:
. 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 on-
line order entry for our investment professionals and their customers
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.
See "Risk Factors--Our present management team may not be capable of fully
implementing our business plan," which describes problems we may face with the
recent departure of our Senior Vice President of Operations.
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 over-the-counter 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
32
<PAGE>
have the choice 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.
Products 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.
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.
33
<PAGE>
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
customer service department exists to service the needs of our investment
professionals. As of September 30, 1999, there were approximately 20 employees
in the operations 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, a
subsidiary of Paine Webber Group, Inc., 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.
34
<PAGE>
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.
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 is developing on-line Internet
trading capabilities for equity securities, and we are currently testing the
system under a pilot program. CSC may 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 the pilot program is successful, we hope to begin offering a secure
Internet on-line trading system for our investment professionals' customers by
the first quarter of 2000. 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 trading parameters for clients accounts and the
independent investment professionals; and broker registration information.
See "Risk Factors--Our present management team may not be capable of fully
implementing our business plan," which describes problems we may face with the
recent departure of our Senior Vice President of Operations.
35
<PAGE>
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, among
others, 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 has been increasing rapidly as 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 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
36
<PAGE>
. 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 net income potential, particularly for higher producing
individuals, is generally considerably higher in comparison to net income
potential under the prevailing employer/employee structure in the industry,
even though our professionals assume responsibility for their direct operating
expenses. Generally, the higher commission payout from our firm more than
offsets these 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 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
37
<PAGE>
. 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." We have
employed a seasoned individual with a number of years of industry experience to
manage our compliance and supervision departments.
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 our management personnel and
outside legal counsel. Since 1995, we have required all investment
professionals to have errors and omissions insurance. 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 not less than $250,000 and shall not permit its aggregate indebtedness
to exceed 1,500 percent of its net capital. As of September 30, 1999, our net
capital was $357,096 and aggregate indebtedness was 676% of our net capital.
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 September 30, 1999, we had 52 employees, none of whom is
represented by a labor union.
38
<PAGE>
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 $60,000 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.
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
39
<PAGE>
not be able to pay the full amount of the damages awarded without using a
substantial portion 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. 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.
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.
As an outgrowth of the SEC investigation, the SEC staff has referred the
activities of an investment professional in one of our branch offices to the
Colorado Attorney General's office. We have been notified by the Colorado
Attorney General's office that it and a statewide grand jury are investigating
the activities of the investment professional for financial misconduct and that
they have expanded the investigation to include us and our principals and
employees. The investigation is in the early stages and we have reviewed the
matter and do not believe there is any wrongdoing on our part or on the part of
our principals or employees.
We settled the NASD investigation by agreeing to a consent order, 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.
In November 1999, the consent order was approved by the NASD. We have been
informed that our chief executive officer will be suspended from all principal
capacities with our broker/dealer from December 20, 1999 through January 19,
2000. During the suspension, Mr. Hayden will serve as the executive
representative for our broker/dealer.
40
<PAGE>
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
---- --- -------------- --------------
<C> <C> <S> <C>
Dale E. Frey............... 70 Chairman of the Board, September 1989
President, Chief Executive
Officer and Director
Cornelia F. Eldridge....... 57 Director September 1989
Michael R. McClurg......... 59 Director September 1989
William R. Tennison, Jr. .. 57 Director June 1997
Paul L. Hocevar............ 52 Senior Vice President and April 1996
Chief Financial Officer
Larry Hayden............... 63 Senior Vice President of April 1999
Administration(1)
</TABLE>
- --------
(1) As discussed in "Legal Matters Affecting Us--NASD and SEC Investigations,"
Mr. Hayden will be our acting Chief Executive Officer and general
securities principal from December 20, 1999 to January 19, 2000.
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:
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
41
<PAGE>
firms. His last and most notable position while on Wall Street was as Senior
Vice President of Dillon, 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.
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.
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 of the parent
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.
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 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
42
<PAGE>
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 present four-member 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.
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 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 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
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),
judgments, 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
43
<PAGE>
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.
44
<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 principal Fiscal Compens- stock LTP compen-
position year Salary Bonus sation(1) award(s) Options/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(2)... 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.
(2) Mr. Gillespie resigned as an officer on November 19, 1999.
We have an employment agreement with Mr. Frey which expires in September
2002 and provides for an annual salary of $600,000 and customary benefits. We
anticipate that the annual salary rate during 1999 for Messrs. Hocevar and
Hayden will be $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.
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 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:
<TABLE>
<CAPTION>
Consolidated Net Income Amount of
Before Taxes Incentive Compensation
------------------------------------- ------------------------------------
From To From To
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
$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 2,400,000
</TABLE>
45
<PAGE>
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
Annual Rates of
Stock Price
Percent of Appreciation
Total Options for Option
Granted to Exercise or Term(1)
Options Employees in Base Price Expiration ----------------
Name Granted# Fiscal Year $/Sh Date 10%($)
---- --------- ------------- ----------- ---------- 5%($) --------
<S> <C> <C> <C> <C> <C> <C>
Scott T. Gillespie(3)... 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
Number of Unexercised In-the-Money Options(2)
Options at December 31, 1998 at December 31, 1998
---------------------------- -------------------------
Shares
Acquired Value
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(3)... 12,000 45,000 107,500 -- 322,500 --
Paul L. Hocevar......... -- -- 100,000 -- 300,000 --
</TABLE>
- --------
(1) The value realized is based on the minimum anticipated offering price of
$5.00 per share.
(2) The value of unexercised options is based on the minimum anticipated
offering price of $5.00 per share.
(3) Mr. Gillespie resigned as an officer on November 19, 1999.
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 September 30, 1999, options for the purchase of 602,500 shares are
outstanding under the plan at a weighted average exercise price of
approximately $2.29 per share. Such options expire at various times between
2000 and 2004.
46
<PAGE>
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
September 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. In determining the price, the board considers gross
commission income for the preceding twelve months, the status and general
outlook of the securities market and market valuations of publicly traded
national and regional retail brokerage firms. 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 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.
47
<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(16)
----------------- ------------------------
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
Paul L. Hocevar(3)(4)(6)(12)...... 201,292 4.3 201,292 2.9
Larry Hayden(4)(13)............... 15,000 * 15,000 --
Cornelia Eldridge(5)(14).......... 15,850 * 17,880 --
2455 E. Sunrise Blvd.
Suite 313
Ft. Lauderdale, FL 33304
Mike McClurg(5)(15)............... 162,383 3.5 196,744 2.9
2516 Tournament Dr.
Castle Rock, CO 80104
Executive Officers & Directors as
a group (6 persons).............. 1,549,279 32.4 1,619,376 22.6
</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 September 30,
1999.
(3) Executive officer of parent.
(4) Executive officer of subsidiary.
(5) Director of parent.
(6) Director of subsidiary.
48
<PAGE>
(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 50,000 shares of common stock owned by Paul L. Hocevar Keogh, and
options to purchase 100,000 shares of common stock.
(13) Includes options to purchase 15,000 shares of common stock.
(14) Includes warrants to purchase 12,500 shares of common stock.
(15) 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.
(16) Takes into account 283,922 shares issued in conversion of debt as
described under "Exchange of Debt."
*Less than 1.0%.
49
<PAGE>
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
liquidating. The aggregate amount owed by the limited liability company to us
has been reduced to approximately $475,000, as of September 30, 1999. During
1997 we recorded a reserve of $215,000 against our investment to address
collectibility concerns. Net of this reserve, our September 30, 1999 debt and
equity contributions are valued at $259,000.
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,
which is 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.
50
<PAGE>
DESCRIPTION OF OUR EQUITY SECURITIES
Common Stock
We are authorized to issue 25,000,000 shares of common stock, $.001 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 are authorized to issue 1,000,000 shares of preferred stock, $.001 par
value, of which no shares are currently issued. 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
. 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.
51
<PAGE>
Outstanding Options and Warrants
From time to time we have issued options and warrants to purchase our common
stock. As of September 30, 1999, we had outstanding options permitting the
holders to purchase 602,500 shares of our common stock at a weighted 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 a weighted average exercise price of $2.20 per
share.
Anti-Takeover Provisions
General. Provisions of the Delaware General Corporation Law and our amended
and restated certificate of incorporation may delay, discourage or prevent a
change in control of us unless such takeover or change in control is approved
by our board of directors. Such provisions also may render the removal of
directors and management more difficult. Such provisions may discourage bids
for common stock at a premium over the market price and may adversely affect
the market price and voting and other rights of the holders of common stock.
Amended and Restated Certificate of Incorporation. Our amended and restated
certificate of incorporation provides that the board of directors is divided
into three classes of directors, serving staggered three-year terms. Under the
staggered board provisions, the shareholders may remove a director from office
for cause only upon the affirmative vote of a majority of the outstanding
voting stock, and without cause only upon the affirmative vote of 70% of the
outstanding voting stock. Also, vacancies on the board of directors may be
filled only upon the affirmative vote of two-thirds of the directors remaining
in office. These provisions concerning the board of directors can be amended
only upon the affirmative vote of 70% of the shares of voting stock
outstanding.
With a classified board of directors, at least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in
the majority of the board of directors. As a result, a classified board of
directors, as well as the increased difficulty involved in removing directors
and filling vacancies on the board, may discourage proxy contests for the
election of directors or purchases of a substantial block of the common stock
because such provision could operate to prevent obtaining control of us in a
relatively short period of time. This classification provision also could have
the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of us. We believe that a classified
board of directors will help to assure the continuity and stability of the
board of directors and our business strategies and policies as determined by
the board of directors, since a majority of the directors at any given time
will have had prior experience as our directors. We believe that this, in turn,
will permit the board of directors to more effectively represent the interests
of shareholders.
The amended and restated certificate of incorporation requires that 70% of
the our outstanding voting stock be affirmatively voted in favor of any
provision which would provide for a merger or consolidation of us with or into
any other corporation, the sale, lease, exchange or other disposition of all or
substantially all of our assets or our dissolution.
Other provisions in our amended and restated certificate of incorporation
permit stockholders to act only at an annual or special meeting of
shareholders, and they may not act by written consent. The amended and restated
certificate of incorporation provides that special meetings of stockholders may
be called only by a majority of the entire board of directors, the chairman of
the board, the chief executive officer or the president. In addition, under the
amended and restated certificate of incorporation, a majority of the entire
board of directors can make, alter or repeal the bylaws, while the affirmative
vote of 70% of our outstanding voting stock is required to make, alter or
repeal the bylaws.
These provisions reduce our vulnerability to an unsolicited acquisition
proposal and discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for shares of common stock and, as a consequence, they
also may inhibit fluctuations in the market price of our common stock that
could result from actual or rumored takeover attempts. These provisions also
may have the effect of preventing changes in our management.
52
<PAGE>
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless (with certain exceptions) the
"business combination" or the transaction in which the person became an
"interested stockholder" is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale or other
transaction resulting in a financial benefit to the "interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's outstanding voting stock, or
was the owner of 15% or more of a corporation's outstanding voting stock at any
time within the prior three years, other than "interested stockholders" prior
to the time our common stock is quoted on the American Stock Exchange. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging takeover attempts that might result in a premium over
the market price for the shares of common stock held by stockholders.
EXCHANGE OF DEBT
In September 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. The shares are not being registered
as part of this offering and we have no plans or commitments to register these
shares in the future. 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 pursuant to an agreement with us and the
underwriters. The underwriters have agreed that they will release the shares
from the lock up if our common stock trades at a 50% premium above the public
offering price for 20 consecutive trading days.
53
<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 with either ourself or the
underwriters, our officers, directors and the holders of 5% or more of our
outstanding shares of common stock 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 exercisable for any of our securities for a period of 12 months
from the date of this offering. In addition, under "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 consecutive 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
. 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.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below, for whom Neidiger, Tucker, Bruner, Inc. is acting as
representative, 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.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Neidiger, Tucker, Bruner, Inc. ....................................
D.E. Frey & Company, Inc. .........................................
---------
Total............................................................ 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
underwriters thereunder are subject to delivery of legal opinions by counsel
and to the accuracy of our representations and warranties and compliance with
our covenants as set forth in the Underwriting Agreement. 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 to them not in excess of
$ per share, or 9% of the public offering price. 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
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 to the representative, or its assigns, on completion of
the offering, warrants to purchase up to 200,000 shares of common stock. 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 Neidiger, Tucker,
Bruner, Inc. as a financial consultant at $2,000 per month for a 24 month
period. Neidiger, Tucker, Bruner, Inc. will provide advice as to our trading
market, will attempt to interest other broker dealers in our stock and will
provide an ongoing
55
<PAGE>
critique as we pursue our business strategy and plans. The consulting agreement
will terminate if the offering does not close or either party elects to
terminate the underwriting letter of intent.
The offering of the common stock is being made by the several underwriters
subject to prior sale and to withdrawal, cancellation or modification of the
offering without notice. The underwriters reserve the right to withdraw, cancel
or modify such offer and to reject any order for the purchase of common stock
in whole or in part.
Except with respect to our stock compensation plans, and with respect to
outstanding options and warrants, 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. This consent may be
given in the representative's sole discretion and must be given if our common
stock trades at a 50% premium over the initial offering price for a period of
20 consecutive trading days.
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
. 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
56
<PAGE>
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 $34,000 to date from us as compensation for such
role.
57
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock being offered will be passed on
for us by Jones & Keller, P.C. Legal matters in connection with the offering
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
nine months ended September 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.
58
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
D.E. FREY GROUP, INC. AND SUBSIDIARY
Introduction.............................................................. F-2
Pro Forma Condensed Statement of Financial Condition--September 30, 1999
(Unaudited).............................................................. F-3
Pro Forma Condensed Statement of Operations--For the Nine Months Ended
September 30, 1999 (Unaudited)........................................... F-4
Pro Forma Condensed Statement of Operations--For the Year Ended December
31, 1998 (Unaudited)..................................................... F-5
Notes to Pro Forma Condensed Financial Information (Unaudited)............ F-6
Independent Auditor's Report.............................................. F-7
Consolidated Statements of Financial Condition--December 31, 1997 and 1998
and September 30, 1999 (Unaudited)....................................... F-8
Consolidated Statements of Operations--For the Years Ended December 31,
1996, 1997, and 1998, and For the Nine Months Ended September 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 Nine Months Ended
September 30, 1999 (Unaudited)........................................... F-10
Consolidated Statements of Cash Flows--For the Years Ended December 31,
1996, 1997, and 1998, and For the Nine Months Ended September 30, 1998
and 1999 (Unaudited)..................................................... F-11
Notes to Consolidated Financial Statements................................ F-12
Schedule II--Valuation and Qualifying Accounts............................ F-23
</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 September 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 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 nine
months ended September 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
September 30, Debt Exchange Before Offering
1999 Adjustments Offering Adjustments Pro Forma
------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash and Cash
Equivalents............ $ 952,634 $ (72,400)A $ 880,234 $10,297,966 B $11,178,200
Securities Owned........ 1,103,309 -- 1,103,309 -- 1,103,309
Receivables............. 2,028,740 -- 2,028,740 -- 2,028,740
Property and Equipment,
at cost, less
accumulated
depreciation of
$928,462............... 604,173 -- 604,173 -- 604,173
Deferred Financing
Costs.................. 401,247 (46,618)C 354,629 -- 354,629
Other................... 418,703 -- 418,703 (127,966)D 290,737
----------- ----------- ----------- ----------- -----------
Total Assets........ $ 5,508,806 $ (119,018) $ 5,389,788 $10,170,000 $15,559,788
=========== =========== =========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Commissions and
compensation payable... $ 1,829,640 $ -- $ 1,829,640 $ -- $ 1,829,640
Accounts payable,
accrued expenses and
other.................. 1,236,089 (72,400) A 1,163,689 -- 1,163,689
Notes payable to related
parties................ 357,500 (357,500) E -- -- --
Other notes payable..... 6,062,517 (1,090,500) E 4,972,017 -- 4,972,017
----------- ----------- ----------- ----------- -----------
9,485,746 (1,520,400) 7,965,346 -- 7,965,346
----------- ----------- ----------- ----------- -----------
Shareholders' Equity:
Common stock.......... 457,161 28,392 E 485,553 200,000 B 685,553
Other................. (4,434,101) 1,372,990 C,E (3,061,111) 9,970,000 B,D 6,908,889
----------- ----------- ----------- ----------- -----------
Total shareholders'
equity............. (3,976,940) 1,401,382 (2,575,558) 10,170,000 7,594,442
----------- ----------- ----------- ----------- -----------
Total Liabilities
and Shareholders'
Equity............. $ 5,508,806 $ (119,018) $ 5,389,788 $10,170,000 $15,559,788
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................. $32,483,437 $ -- $32,483,437
Expenses:
Commissions, clearing and execution
fees............................... 26,346,532 -- 26,346,532
Employee compensation............... 2,625,791 -- 2,625,791
Interest............................ 499,157 (108,600)F 390,557
Other............................... 3,770,102 (7,770)G 3,762,332
----------- -------- -----------
Total expenses.................... 33,241,582 (116,370) 33,125,212
----------- -------- -----------
Net Income (Loss)..................... $ (758,145) $116,370 $ (641,775)
=========== ======== ===========
Net Loss Per Share, Basic and
Diluted.............................. $ (0.17) $ (0.13)
=========== ===========
Basic and Diluted Weighted Average
Shares Outstanding................... 4,554,764 4,838,686 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
FOR THE 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 (Loss)..................... $ (388,962) $ 155,159 $ (233,803)
=========== ========= ===========
Net Loss 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 September 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.
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,
------------------------ September 30,
1997 1998 1999
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
Cash and Cash Equivalents.............. $ 1,446,215 $ 732,900 $ 952,634
Securities Owned:
Marketable........................... 2,485,756 660,493 908,988
Not readily marketable, at estimated
fair value.......................... 76,839 176,259 194,321
----------- ----------- -----------
Total securities owned............. 2,562,595 836,752 1,103,309
Receivables:
Clearing organization................ 947,114 1,467,840 999,152
Product sponsors and other........... 281,656 346,533 352,842
Registered representatives, net of
allowance for uncollectible accounts
of $44,193, $149,515, and $86,904
(unaudited)......................... 262,856 214,464 295,345
Related party........................ -- 204,493 259,301
Other accounts receivable, net of
allowance for uncollectible accounts
of $48,675, $82,387, and $88,177
(unaudited)......................... 200,879 29,169 122,100
----------- ----------- -----------
Total receivables.................. 1,692,505 2,262,499 2,028,740
Furniture and Equipment, at cost, net
of accumulated depreciation of
$557,515, $757,650, and $928,462,
(unaudited), respectively............. 537,569 658,598 604,173
Deferred Financing Costs, net.......... 241,229 167,895 401,247
Other Assets........................... 144,116 285,940 418,703
----------- ----------- -----------
Total Assets....................... $ 6,624,229 $ 4,944,584 $ 5,508,806
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Liabilities:
Commissions and compensation
payable............................. $ 1,494,289 $ 1,873,662 $ 1,829,640
Accounts payable and accrued
expenses............................ 722,972 563,281 789,226
Payable to clearing organization..... 1,976,626 272,038 201,534
Interest payable..................... 338,290 336,782 245,329
Notes payable related parties........ 357,500 357,500 357,500
Other notes payable.................. 5,212,517 5,112,517 6,062,517
----------- ----------- -----------
Total liabilities.................. 10,102,194 8,515,780 9,485,746
----------- ----------- -----------
Commitments and Contingencies (Note 6)
Shareholders' Deficit:
Common stock, $.10 par value;
10,000,000 shares authorized;
4,089,249, 4,526,614, and 4,571,614
(unaudited) shares issued and
outstanding......................... 408,924 452,661 457,161
Additional paid-in capital........... 3,353,785 3,605,779 3,953,680
Accumulated deficit.................. (7,240,674) (7,629,636) (8,387,781)
----------- ----------- -----------
Total shareholders' deficit........ (3,477,965) (3,571,196) (3,976,940)
----------- ----------- -----------
Total Liabilities and Shareholders'
Deficit........................... $ 6,624,229 $ 4,944,584 $ 5,508,806
=========== =========== ===========
</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>
For the Nine Months
For the Years Ended December 31, Ended September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions........... $16,039,039 $20,580,558 $22,174,313 $16,372,219 $19,304,881
Principal
transactions......... 7,912,000 7,058,092 6,513,967 5,165,421 6,037,849
Asset management and
advisory............. 3,145,480 3,498,210 4,356,570 3,280,526 3,940,960
Interest and account
fees................. 2,005,269 2,203,335 2,880,312 2,075,609 2,397,938
Other................. 941,968 1,348,566 1,112,198 923,819 801,809
----------- ----------- ----------- ----------- -----------
Total revenues...... 30,043,756 34,688,761 37,037,360 27,817,594 32,483,437
----------- ----------- ----------- ----------- -----------
Expenses:
Commissions........... 21,511,903 25,193,763 26,932,743 20,225,159 24,168,654
Clearing and execution
fees................. 2,053,678 2,319,390 2,536,985 1,904,124 2,177,878
Employee
compensation......... 2,640,630 2,610,336 2,906,628 2,199,100 2,625,791
Interest.............. 699,389 571,206 697,981 497,255 499,157
Other................. 4,547,453 4,147,158 4,351,985 3,063,983 3,770,102
----------- ----------- ----------- ----------- -----------
Total expenses...... 31,453,053 34,841,853 37,426,322 27,889,621 33,241,582
----------- ----------- ----------- ----------- -----------
Net Loss ............... $(1,409,297) $ (153,092) $ (388,962) $ (72,027) $ (758,145)
=========== =========== =========== =========== ===========
Net Loss Per Share,
Basic and Diluted...... $ (0.46) $ (0.04) $ (0.09) $ (0.02) $ (0.17)
=========== =========== =========== =========== ===========
Basic Weighted Average
Shares Outstanding..... 3,052,022 3,743,546 4,338,473 4,298,282 4,554,764
=========== =========== =========== =========== ===========
</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>
Common Stock Additional
------------------ 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 (unaudited).. 45,000 4,500 81,754 -- 86,254
Issuance of warrants
for services
(unaudited)........... -- -- 266,147 -- 266,147
Net loss (unaudited)... -- -- -- (758,145) (758,145)
--------- -------- ---------- ----------- -----------
Balances, September 30,
1999 (Unaudited)....... 4,571,614 $457,161 $3,953,680 $(8,387,781) $(3,976,940)
========= ======== ========== =========== ===========
</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>
For the Nine Months
For the Years Ended December 31, Ended September 30,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................ $(1,409,297) $ (153,092) $ (388,962) $ (72,027) $(758,145)
Adjustments to
reconcile to net cash
from operating
activities:
Amortization of
deferred financing
costs................ 87,945 39,878 73,334 65,339 185,741
Depreciation and
amortization......... 209,161 208,668 227,570 162,029 105,295
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 2,152,948 (248,495)
Receivables........... (312,933) 30,369 (365,500) (196,192) 265,349
Other assets.......... (122,926) 224,973 (224,512) (298,239) 25,274
Increase (decrease) in
operating liabilities:
Commissions and
compensation
payable.............. 108,816 (73,292) 379,373 337,614 (44,021)
Accounts payable,
accrued expenses and
other................ 459,898 783,831 (54,712) (40,006) (146,290)
----------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) operating
activities......... (2,850,063) (1,210,524) 1,976,774 2,111,466 (615,292)
----------- ----------- ----------- ----------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of furniture
and equipment.......... (138,691) (265,888) (340,980) (163,303) (116,387)
Proceeds from not
readily marketable
securities............. -- -- -- -- 50,957
Purchase of not readily
marketable
securities............. -- -- (99,420) (91,140) (44,500)
Proceeds from
investments............ 681,620 666,114 -- -- --
Purchase of
investments............ -- (498,702) (504,920) (504,920) --
Loan to related party... -- -- (162,500) (100,000) --
Repayment of loan to
related party.......... -- -- 106,266 -- --
Investment in equity
method investee........ (136,830) -- -- -- --
Other................... -- (95,416) -- -- --
----------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) investing
activities......... 406,099 (193,892) (1,001,554) (859,363) (109,930)
----------- ----------- ----------- ----------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance
of common stock........ 546,651 400,119 295,731 245,009 86,254
Proceeds from (payable
to) clearing
organization........... 633,525 1,343,100 (1,884,266) (1,976,626) 109,172
Proceeds from notes
payable................ -- 1,000,000 -- -- 950,000
Payment of notes
payable................ -- (200,000) (100,000) (100,000) --
Direct financing
costs.................. -- -- -- -- (72,500)
Deferred offering costs
and other.............. (518) -- -- -- (127,970)
----------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) financing
activities......... 1,179,658 2,543,219 (1,688,535) (1,831,617) 944,956
----------- ----------- ----------- ----------- ---------
Increase (Decrease) in
Cash and Cash
Equivalents............. (1,264,306) 1,138,803 (713,315) (579,514) 219,734
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 $ 866,701 $ 952,634
=========== =========== =========== =========== =========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid for
interest............... $ 599,203 $ 517,500 $ 699,488 $ 549,722 $ 590,610
=========== =========== =========== =========== =========
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-11
<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 September 30, 1999, and for the nine months ended September 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 September 30, 1999 and results of operations and cash flows for
the nine months ended September 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 nine months ended September 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
arising 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.
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 its business strategy.
F-12
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
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 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.
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
F-13
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
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 are 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.
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.
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.
F-14
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
2. Marketable Securities Owned:
Marketable securities owned consist of:
<TABLE>
<CAPTION>
December 31, September 30,
------------------- -------------
1997 1998 1999
---------- -------- -------------
<S> <C> <C> <C>
United States Treasury bill............... $ -- $508,342 $517,748
Municipal bonds........................... 2,355,552 81,659 142,025
Collateralized mortgage obligations....... -- -- 118,249
Certificates of deposit................... -- -- 76,799
Unit investment trusts.................... -- -- 44,675
Equity securities......................... 130,204 61,492 2,742
Corporate bonds........................... -- 9,000 6,750
---------- -------- --------
Total................................... $2,485,756 $660,493 $908,988
========== ======== ========
</TABLE>
3. Related Party Transactions:
DEFG and DEF have advanced funds to a limited liability company (LLC) to
repurchase securities from claimants of DEF. The LLC was formed in 1997 by DEFG
and DEFG is the manager of the LLC. In addition, 2,400 limited partnership
units, valued at $500 per unit, were sold to approximately 70 unrelated
investors. 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
$259,000 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 40%.
Following is summarized (unaudited) financial information for the LLC:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
---------------- -------------
1997 1998 1999
----- ---------- -------------
<S> <C> <C> <C>
Revenues...................................... $ -- $ 111,238 $ 76,977
Net income.................................... -- 60,394 26,849
Dividends received............................ -- -- --
<CAPTION>
December 31, September 30,
---------------- -------------
1997 1998 1999
----- ---------- -------------
<S> <C> <C> <C>
Current assets................................ $ 100 $ 112,548 $ 37,469
Investments in partnership units.............. -- 1,366,324 1,183,397
Other assets.................................. -- 140,400 140,699
Current liabilities........................... -- 206,235 206,235
Long term debt................................ -- 300,000 200,000
Member's equity............................... 100 1,113,037 955,330
</TABLE>
F-15
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
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>
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, September 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 1,700,000
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 $6,420,017
========== ========== ==========
</TABLE>
F-16
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
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 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 is held by 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 certificates of deposit in the amount of $2
million to collateralize both debt facilities, $700,000 has been drawn on this
new line-of-credit as of September 30, 1999. Pursuant to the new pledge
agreement the combined effective interest rate for both facilities is 11% with
the pledge fee equal to the difference between 10% and the certificate of
deposit interest rate. 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). The warrants were valued using a
method consistent with the method of SFAS No. 123. 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.
Additionally, 50,000 warrants, valued at approximately $120,000 using the
method of SFAS No. 123 , 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:
<TABLE>
<S> <C>
1999.............................................................. $ 268,243
2000.............................................................. 272,312
2001.............................................................. 301,657
2002.............................................................. 307,180
2003.............................................................. 291,905
Thereafter........................................................ 1,390,947
----------
Total........................................................... $2,832,244
==========
</TABLE>
F-17
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 registered representatives. Future minimum payments of those leases are
as follows at December 31, 1998:
<TABLE>
<S> <C>
1999................................................................ $175,014
2000................................................................ 175,014
2001................................................................ 149,365
--------
Total............................................................. $499,393
========
</TABLE>
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.
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. 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 it has concluded its
investigation and will seek to obtain authority from the SEC for the filing of
an administrative complaint against the Company and one or more officers,
directors, and employees. 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 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 has completed an internal technology assessment and
management believes that upon completion of its year 2000 program, all systems
will function properly with respect to dates in the year 2000 and thereafter.
However, there can be no assurance that the year 2000 program will detect and
correct all potential points of failure. Contingency plans have been developed
for all critical vendor and
F-18
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
third party systems. The Company has incurred approximately $200,000 of costs
to replace non-compliant computer hardware and software. Management has
estimated that it will incur up to $100,000 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, Stock Option Plan and Warrants:
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.
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 three months subsequent to termination of
employment. It is intended that certain options
F-19
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
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 nine months ended
September 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. No
warrants were granted or exercised in 1998.
In 1999, 60,500 warrants were granted to registered representatives 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 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.
F-20
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
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
Average Number Average Number Average
Number of Exercise of Exercise of Exercise
Shares Price Shares Price Shares 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>
Warrants to Non-related Parties - In addition to the above amounts, there
are outstanding at December 31, 1997, 1998, and September 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.
F-21
<PAGE>
D.E. FREY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information Subsequent to December 31, 1998 is Unaudited)
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. As of September 30, 1999, DEF's net capital of $357,096 was 676%
of aggregate indebtedness and its net capital in excess of the minimum
requirement was $107,096.
F-22
<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 Deduction 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-23
<PAGE>
[MAP OF D.E. FREY BRANCH LOCATIONS AND CORPORATE HEADQUARTERS APPEARS HERE]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent 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.......................................................... 17
Dividend Policy.......................................................... 18
Dilution................................................................. 18
Capitalization........................................................... 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 29
Legal Matters Affecting Us............................................... 39
Management............................................................... 41
Compensation............................................................. 45
Principal Shareholders................................................... 48
Certain Transactions..................................................... 50
Description of our Equity Securities..................................... 51
Exchange of Debt......................................................... 53
Shares Eligible for Resale............................................... 54
Underwriting............................................................. 55
Legal Matters............................................................ 58
Experts.................................................................. 58
Available Information.................................................... 58
Financial Statements..................................................... F-1
</TABLE>
Through and including , 2000 (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
[LOGO OF D.E. FREY GROUP, INC. APPEARS HERE]
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................... $ 4,476
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..................................................... 100,000
Transfer agent fees................................................... 5,000
Blue sky filing fees and legal expenses............................... 30,000
Miscellaneous expenses................................................ 138,146
--------
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 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.
II-1
<PAGE>
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.
(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.
II-2
<PAGE>
Item 16. Exhibits
(a) Exhibits filed herewith unless otherwise noted are:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement, as revised.
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.*
3.1A Form of 1999 Amended and Restated 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 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).
24 Power of attorney (included on the signature page).
27 Financial Data Schedule (per Appendix D).
</TABLE>
- --------
* Previously filed.
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
II-3
<PAGE>
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.
(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-4
<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 day of November, 1999.
D.E. FREY GROUP, INC.
/s/ D.E. Frey
By: _________________________________
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ D.E. Frey Director, Chairman and Chief November , 1999
___________________________________ Executive Officer (Principal
D.E. Frey Executive Officer)
/s/ Paul L. Hocevar Chief Financial Officer; November , 1999
___________________________________ Principal Accounting Officer
Paul L. Hocevar
/s/ Cornelia F. Eldridge Director November , 1999
___________________________________
Cornelia F. Eldridge
/s/ Michael R. McClurg Director November , 1999
___________________________________
Michael R. McClurg
/s/ William R. Tennison Director November , 1999
___________________________________
William R. Tennison
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement, as revised.
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.*
3.1A Form of 1999 Amended and Restated 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 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).
24 Power of attorney (included on the signature page).
27 Financial Data Schedule (per Appendix D).
</TABLE>
- --------
* Previously filed.
<PAGE>
Exhibit 1.1
2,000,000 Shares
D.E. FREY GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
NEIDIGER, TUCKER, BRUNER, INC.,
with D.E. 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.
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-
88499), 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
2
<PAGE>
"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
3
<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.
4
<PAGE>
(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
<PAGE>
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) Subject to applicable regulatory requirements, 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
7
<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 Dale E. Frey and a non-compete and nonsolicitation agreement with each of
Paul L. Hocevar and Larry Hayden identical to the forms of such agreements filed
as Exhibits 10.4 and 10.5, respectively, to the Registration Statement, and (ii)
purchased term key-person insurance on the life of Dale E. Frey in the amount of
$1,000,000, which policy names 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.
8
<PAGE>
(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:
9
<PAGE>
(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
10
<PAGE>
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
11
<PAGE>
(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. The Representative agrees to
release all shareholders from the foregoing agreements if the Company's Common
Stock trades at at least a 50% premium above the public offering price for 20
consecutive trading days. 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.
12
<PAGE>
(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 Representative.
(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.
(q) For a period of one year 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
13
<PAGE>
NASD, (v) the fees and expenses of inclusion of the Common Stock on the American
Stock Exchange 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'
14
<PAGE>
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.
15
<PAGE>
(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.
16
<PAGE>
(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(p) and 4(i) 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
17
<PAGE>
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).
18
<PAGE>
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
19
<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.
21
<PAGE>
(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
22
<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.
23
<PAGE>
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 co-manager
On behalf of themselves and the other
Underwriters named in Schedule I hereto
BY: NEIDIGER, TUCKER, BRUNER, INC.
By:_____________________________________
Name:
Title:
24
<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
-----
25
<PAGE>
2,000,000 Shares of Common Stock
D.E. FREY GROUP, INC.
_________________________________
SELECTED DEALER AGREEMENT
_________________________________
__________________, 1999
Underwriters represented by us have severally agreed to purchase from D.E.
Grey Group, Inc. (the "Company") the 2,000,000 shares of Common Stock
("Shares"). The Shares are described in the enclosed Prospectus, the receipt of
which you hereby acknowledge.
1. Offering to Selected Dealers. The several Underwriters, acting
through us, are severally offering part of the Shares for sale to certain
dealers ("Selected Dealers"), as principals, subject to the terms and conditions
stated herein and in the Prospectus, at the public offering price per Share set
forth in the Prospectus, less the per Share concession set forth in the
Prospectus (such concession hereinafter referred to as the "Selected Dealers'
Concession"). Sales of Shares to you pursuant to such offering will be
evidenced by our written confirmation and will be on such terms and conditions
set forth therein and in the Prospectus. In purchasing Shares, you will rely
upon no statement whatsoever, written or oral, other than statements in the
Prospectus.
2. Reoffering by Selected Dealers. We are advising you by
telecommunication of the method and terms of the offering. Acceptances of any
reserved Shares received at the office of Neidiger, Tucker, Bruner, Inc., 300
Plaza Level, 1675 Larimer Street, Denver, Colorado 80202, after the time
specified therefor in our telecommunication and any order for additional Shares
will be subject to rejection in whole or in part. Subscription books may be
closed by us at any time in our discretion without notice and the right is
reserved to reject any subscription in whole or in part, but notification of
allotments against and rejections of subscriptions will be made as promptly as
practicable.
We are advising you in such telecommunication of the release by us of the
Shares being sold by the Underwriters for public offering and of the public
offering price of the Shares. Upon receipt of such advice, the Shares
thereafter purchased by you hereunder are to be offered by you to the public at
the public offering price, subject to the terms thereof. You agree that in
selling Shares purchased hereunder you will comply with the applicable
requirements of the Securities Act of 1933 and the Securities Exchange Act of
1934. Except as herein otherwise provided, Shares shall not be offered or sold
by you below the public offering price before the termination of this Agreement,
except that a concession from such public offering price of not in excess of the
per Share amount set forth in the Prospectus may be allowed to dealers who are
actually engaged in the investment banking or securities business, who execute
the written agreement prescribed by Rule 2740(c) of the Rules of Conduct of the
National Association of Securities Dealers, Inc. ("NASD") and who are members in
good standing of the NASD or foreign dealers, not eligible for membership in the
NASD, who represent to you that they will promptly reoffer the Shares at the
public offering price and will abide by the conditions with respect to foreign
brokers and dealers set forth in the first paragraph of Section 4 hereof.
<PAGE>
It is assumed that Shares sold by you will be effectively placed for
investment. If we contract for or purchase in the open market or otherwise for
the account of any Underwriter any Shares sold to you and not effectively placed
for investment, we may charge you the Selected Dealers' Concession originally
allowed you on the Shares so repurchased, and you agree to pay such amount to us
on demand. Shares so delivered to you against any such repurchase need not be
the identical Shares originally purchased by you.
You will advise us upon request of Shares purchased by you remaining
unsold, and we shall have the right to repurchase such unsold Shares on demand
at the public offering price less all or part of the Selected Dealers'
Concession.
3. Payment and Delivery. Payment for Shares purchased by you shall be
made by you on such dates and at such places as we advise you, by wire transfer
or certified or bank cashiers' check payable to the order of Neidiger, Tucker,
Bruner, Inc. in such clearing house funds as we advise, against delivery of such
Shares. Delivery instructions must be in our hands at the office of Neidiger,
Tucker, Bruner, Inc., 300 Plaza Level, 1675 Larimer Street, Denver, Colorado
80202, at such time as we request. Notwithstanding such provisions, if we so
notify you, payment for and delivery of Shares purchased by you hereunder may be
made through the facilities of The Depository Trust Company, if you are a
member, unless you have otherwise notified us prior to the date specified in our
telegram to you, or, if you are not a member, settlement may be made through a
correspondent who is a member pursuant to instructions which you will send to us
prior to such specified date.
The above payment shall be made at the public offering price or if we so
advise you, at a net price equal to the public offering price less the Selected
Dealers' Concession. If payment is made by you at the public offering price,
the Selected Dealers' Concession payable to you hereunder shall be paid promptly
after the termination of this Agreement (or on such earlier date as we may
determine), except that such Concession may be withheld and canceled, at our
discretion, as to Shares which we have repurchased as set forth in the third
paragraph of Section 2 hereof.
4. Position of Selected Dealers and Underwriters. You represent that
you are actually engaged in the investment banking or securities business and
that you are a member in good standing of the NASD or that you are a foreign
dealer, not eligible for membership in the NASD, which agrees not to 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 you are such a member, you
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 you are a foreign dealer, you agree to comply with such Interpretation
and Rules 2730, 2740 and 2750 of such Rules as though you were such a member,
and with Rule 2420 as that Rule applies to a non-member broker or dealer in a
foreign country. You also confirm that you have complied and will comply with
the prospectus delivery requirements of Rule 15c2-8 under the Securities
Exchange Act of 1934 in accordance with your prior undertaking to do so, and
that you will furnish to persons who receive a confirmation of sale a copy of
the Prospectus.
You are not authorized to give any information or make any representations
other than as contained in the Prospectus, or to act as agent for any
Underwriter or us. Nothing shall constitute the Selected Dealers an
association, unincorporated business or other separate entity or partners with
the several Underwriters, with us, or with each other, but you shall be liable
for your proportionate share of any tax, liability or expense based on any claim
to the contrary. Neither we nor any Underwriter shall be under any liability to
2
<PAGE>
you, except for obligations expressly assumed by us in this Agreement, and no
obligations on our part shall be impled or inferred herefrom.
5. Blue Sky Matters. We will not have any responsibility with respect
to the right of any dealer to sell the Shares in any jurisdiction,
notwithstanding any information we may furnish in that connection. We have
filed a New York Further State Notice, if required.
6. Notices. All communications from you to us shall be addressed to
Neidiger, Tucker, Bruner, Inc., 300 Plaza Level, 1675 Larimer Street, Denver,
Colorado 80202, Attention: Corporate Finance. Any notice from us to you shall
be delivered, mailed or telegraphed to you at the address to which this letter
is mailed.
7. Termination. This Agreement shall terminate 30 days after the date
hereof unless extended by us for a period or periods not exceeding an additional
30 days in the aggregate, and, whether extended or not, may be terminated by us
at any time. Such termination shall not affect your obligation to pay for any
Shares purchased by you or any of the provisions of Section 4 hereof.
Please confirm your agreement hereto by signing the duplicate copy of this
Agreement enclosed herewith and returning it to us at the address in Section 6
above.
NEIDIGER, TUCKER, BRUNER, INC.
By:___________________________
(Authorized Signatory)
Title:________________________
Confirmed as of the date first above written:
____________________________________________
(Please print or type name of firm)
By:_________________________________________
(Authorized Signatory)
Title:______________________________________
3
<PAGE>
OFFER TO PURCHASE
______________________, 1999
Neidiger, Tucker, Bruner, Inc.
as Representative of the Several Underwriters
300 Plaza Level
1675 Larimer Street
Denver, Colorado 80202
We hereby confirm our order for ______________ shares of Common Stock, of
D.E. Frey Group, Inc. (the "Shares") subject to the terms and conditions
contained in your written confirmation of our purchase and the foregoing
Selected Dealer Agreement.
We hereby confirm our agreement to all the terms and conditions stated in
the Selected Dealer Agreement. We acknowledge receipt of the Prospectus
relating to the Shares and we further state that in entering this order we have
relied upon the Prospectus and no other statement whatsoever, written or oral.
We confirm that we are actually engaged in the investment banking or securities
business and are a member in good standing of the NASD or that we are a foreign
dealer, not eligible for membership in the NASD, which agrees not to offer or
sell any Shares in, or to persons who are nationals or residents of; the United
States of America. We agree that in making sales of the Shares, if we are such
a member, we will 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 will 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 the Rule applies to a non-member broker or
dealer in a foreign country. Further, we confirm that we have complied and will
comply with the prospectus delivery requirements of Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended, and that we will furnish to persons
who receive a confirmation of sale a copy of the Prospectus.
_________________________________________
(Please print or type name of firm)
By:______________________________________
Name:____________________________________
Title:___________________________________
Dated:__________________ , 1999 _________________________________________
_________________________________________
_________________________________________
(address or facsimile number to which all
notices may be mailed or transmitted)
4
<PAGE>
EXHIBIT 3.1A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
D.E. FREY GROUP, INC.
D.E. Frey Group, Inc. (hereinafter referred to as the "Corporation") filed
its original Certificate of Incorporation with the Delaware Secretary of State
on August 15, 1989. Pursuant to the provisions of the Delaware General
Corporation Law, the Corporation hereby certifies to the Secretary of State of
Delaware that:
FIRST: The Corporation desires to amend and restate its Certificate of
Incorporation as currently in effect as hereinafter provided.
SECOND: The provisions set forth in this Restated and Amended Certificate
of Incorporation supersede the original Certificate of Incorporation and all
amendments thereto. The Amended and Restated Certificate of Incorporation
correctly sets forth the provisions of this Certificate of Incorporation, as
amended, of the Corporation.
THIRD: The Certificate of Incorporation of the Corporation is hereby
amended and restated by striking in its entirety all provisions, inclusive, and
by substituting in lieu thereof the following:
ARTICLE I
Name
----
The name of the Corporation is D.E. Frey Group, Inc.
ARTICLE II
Purpose
-------
The purpose for which the Corporation is organized is the transaction of
all lawful acts or activity for which corporations may be organized under the
Delaware General Corporation Law.
ARTICLE III
Registered Office and Agent
---------------------------
The street address of the Corporation's registered office in Delaware is:
1209 Orange Street
Wilmington, DE 19801
<PAGE>
The name of the Corporation's registered agent at the address of the
aforesaid registered office is:
CT Corporation System
ARTICLE IV
Shares
------
The total number of shares of all classes which the Corporation has
authority to issue is 26,000,000, of which 25,000,000 shares shall be Common
Stock, par value $.001 per share (the "Common Stock"), and 1,000,000 shares
shall be Preferred Stock, par value $.001 per share (the "Preferred Stock").
The designations and the preferences, conversion and other rights, voting
powers, restrictions, limitations as to distributions, qualifications, and terms
and conditions of redemption of the shares of each class of stock are as
follows:
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. The description of shares of each
series of Preferred Stock, including any preferences, conversion and other
rights, voting powers, restrictions, limitations as to distributions,
qualifications, and terms and conditions of redemption shall be as set forth in
resolutions adopted by the Board of Directors and in Articles of Amendment with
a statement of the designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, filed as required by law
from time to time prior to the issuance of any shares of such series.
The Board of Directors is expressly authorized, prior to issuance, by
adopting resolutions providing for the issuance of, or providing for a change in
the number of, shares of any particular series of Preferred Stock and, as
required by law, by filing Articles of Amendment with a statement of the
designations and the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, to set or change the number of shares to be
included in each series of Preferred Stock and to set or change in any one or
more respects 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 such series.
Notwithstanding the foregoing, the Board of Directors shall not be authorized to
change the right of the Common Stock of the Corporation to vote one vote per
share on all matters submitted for stockholder action. The authority of the
Board of Directors with respect to each series of Preferred Stock shall include,
but not be limited to, setting or changing the following:
(a) the distinctive serial designation of such series and the number
of shares constituting such series (provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed
1,000,000);
(b) the rate of dividend on shares of such series, whether
distributions shall be cumulative and, if so, from which date or dates;
-2-
<PAGE>
(c) whether the shares of such series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or dates
upon and after which such shares shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(d) the obligation, if any, of the Corporation to redeem or repurchase
shares of such series pursuant to a sinking fund;
(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if so,
the terms and conditions of such conversion or exchange, including the
price or prices or the rate or rates of conversion or exchange and the
terms of adjustment, if any;
(f) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of
such voting rights;
(g) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation;
(h) whether the shares of such series are to be preferred over shares
of Common Stock of the Corporation or of any other class or series as to
dividends, or upon the voluntary or involuntary dissolution, liquidation,
or winding up of the affairs of the Corporation, or otherwise; and
(i) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series which may be
authorized or permitted under the Delaware General Corporation Law.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative.
COMMON STOCK
Subject to all of the rights of the Preferred Stock as expressly provided
herein, by law or by the Board of Directors pursuant to this Article, the Common
Stock of the Corporation shall possess all such rights and privileges as are
afforded to capital stock by applicable law in the absence of any express grant
of rights or privileges in these Articles of Incorporation, including, but not
limited to, the following rights and privileges:
(a) distributions may be declared and paid or set apart for payment
upon the Common Stock out of any assets or funds of the Corporation legally
available for the payment of distributions;
-3-
<PAGE>
(b) the holders of Common Stock shall have the right to vote for the
election of directors and on all other matters requiring stockholder
action, each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock in accordance with
their respective rights and interests.
ARTICLE V
Directors
---------
The business and affairs of the Corporation shall be managed under the
direction of a Board of Directors consisting of not fewer than three nor more
than nine directors, the exact number to be fixed from time to time by
resolution adopted by the affirmative vote of a two-thirds majority of the
entire Board of Directors. Whenever used in this Certificate of Incorporation,
the phrase "entire Board of Directors" shall mean that number of directors fixed
by the most recent resolution adopted pursuant to the preceding sentence prior
to the date as of which a determination of the number of directors then
constituting the entire Board of Directors shall be relevant for any purpose
under this Certificate of Incorporation. The Directors shall be classified,
with respect to the term for which they severally hold office, into three
classes, each class to be as nearly equal in number as possible, the first class
to hold office initially for a term expiring at the annual meeting of the
stockholders to be held in 2000, the second class to hold office initially for a
term expiring at the annual meeting of stockholders to be held in 2001, and the
third class to hold office initially for a term expiring at the annual meeting
of stockholders to be held in 2002, with the members of each class to hold
office until their successors are elected and qualified. At each annual meeting
of stockholders of the Corporation, the successors to the class of directors
whose term expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election.
Any vacancy occurring in the Board of Directors and any newly created
directorship resulting from any increase in the number of directors shall be
filled solely by the affirmative vote of a two-thirds majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Any director may be removed from office with cause only by the affirmative
vote of the holders of a majority of the then issued and outstanding voting
stock of the Corporation and may be removed from office without cause only by
the affirmative vote of the holders of 70% of the then issued and outstanding
voting stock of the Corporation.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of preferred stock or of any other class or series of shares
issued by the Corporation shall have the right, voting separately by class or
series, to elect directors under specified circumstances, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Certificate of Incorporation applicable
-4-
<PAGE>
thereto, and such directors so elected shall not be classified pursuant to this
Article V unless expressly provided by such terms.
This Article V may be altered, amended or repealed, and any provision
inconsistent herewith may be adopted, only by the affirmative vote of the
holders of 70% of then issued and outstanding voting stock of the Corporation,
in addition to any other vote required by the Delaware General Corporation Law
or this Certificate of Incorporation.
ARTICLE VI
Bylaws
------
The Bylaws may be altered, amended or repealed, or new bylaws may be
adopted by the Board of Directors. The Bylaws may be altered, amended, repealed
or replaced by new bylaws by the stockholders only upon the affirmative vote of
the holders of at least 70% of the then issued and outstanding voting stock of
the Corporation.
ARTICLE VII
Special Meetings
----------------
Special meetings of the stockholders of the Corporation, for any purpose or
purposes, may only be called at any time by a majority of the entire Board of
Directors or by the Chairman of the Board, the Chief Executive Officer or the
President of the Corporation.
ARTICLE VIII
Elimination of Right to Act by Written Consent
----------------------------------------------
No action required to be taken or which may be taken at any annual or
special meeting of the stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a meeting,
to the taking of any action is specifically denied.
ARTICLE IX
Elimination of Personal Liability of a Director
-----------------------------------------------
To the fullest extent permitted by Delaware law, as the same exists or may
hereafter be amended, a director of the Corporation shall not be liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director.
ARTICLE X
Indemnification of Directors
----------------------------
The Corporation shall indemnify and advance expenses to a director of the
Corporation to the fullest extent permitted by Delaware law, as the same exists
or may hereafter be amended.
-5-
<PAGE>
ARTICLE XI
Voting Requirements for Extraordinary Corporate Actions
-------------------------------------------------------
The affirmative vote of the holders of not less than 70% of the then issued
and outstanding voting stock of the Corporation shall be required for approval
or authorization of any (i) merger or consolidation of the Corporation with or
into any other corporation; or (ii) the sale, lease, exchange or other
disposition of all or substantially all of the assets of the Corporation to any
other corporation, person or entity; or (iii) the dissolution of the
Corporation.
ARTICLE XII
Compromise or Arrangement of the Corporation
--------------------------------------------
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of the Delaware General Corporation Law or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of the Delaware General
Corporation Law, order a meeting of the creditors or class of creditors, and/or
of the Stockholders or class of stockholders of this Corporation, as the case
may be, to be summoned in such manner as the said court directs. If a majority
in number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall if sanctioned by the court to which the said application has been made, be
binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be
and also on this Corporation.
ARTICLE XIII
Amendment of Certificate of Incorporation
-----------------------------------------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
thereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
FOURTH: The foregoing Amended and Restated Certificate of Incorporation
was duly adopted pursuant to Section 245 of the Delaware General Corporation
Law.
(a) By unanimous written consent, the Board of Directors adopted a
resolution setting forth the foregoing Amended and Restated Certificate of
Incorporation, declaring its advisability and directing that it be
considered at the next Annual Meeting of the Stockholders.
-6-
<PAGE>
(b) At the Annual Meeting of the Stockholders on November ___, 1999,
the stockholders of the Corporation duly approved said Amended and Restated
Certificate of Incorporation The number of votes cast for the amendments
contained in this Amended and Restated Certificate of Incorporation by the
holders of the Corporation's common stock, which was the only voting group
entitled to vote thereon, was sufficient for approval.
IN WITNESS WHEREOF, D.E. Frey Group, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed in its name and on its behalf
by its President and attested to by its Secretary on this ___ day of November,
1999.
ATTEST: D.E. FREY GROUP, INC.
___________________________ ______________________________
______________, Secretary Dale E. Frey, President
-7-
<PAGE>
EXHIBITS 5 and 23.2
November 23, 1999
D.E. Frey Group, Inc.
1700 Lincoln Street
Suite 2200
Denver, Colorado 80203
Re: D.E. Frey Group, Inc.
Ladies and Gentlemen:
We have examined the Registration Statement (No. 333-88499) on Form S-1
(the "Registration Statement") originally filed on October 5, 1999 by D.E. Frey
Group, Inc., (the "Company") with the Securities and Exchange Commission (the
"Commission") in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of 2,200,000 shares of the Company's
Common Stock (the "Registered Shares"), of which all shares are to be sold by
the Company and of which 200,000 shares are subject to an over-allotment option
granted by the Company to the underwriters. All of the Registered Shares are to
be sold to several underwriters (the "Underwriters") of which Niedeger, Tucker,
Bruner, Inc. is the representative (the "Representative") pursuant to an
underwriting agreement (the "Underwriting Agreement") to be entered into between
the Company and the Representative on behalf of the Underwriters. We are
familiar with the proceedings taken and proposed to be taken by the Company in
connection with the proposed authorization, issuance and sale of the Registered
Shares.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records and other instruments as
we have deemed necessary for the purposes of this opinion, including the
following: (a) the Restated and Amended Certificate of Incorporation of the
Company; (b) the Amended Bylaws of the Company; and (c) resolutions by the Board
of Directors of the Company pertaining to the offering.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies, and the authenticity of the originals of
all documents submitted to us as copies. We have also assumed the genuineness
of the signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company, and the 4due authorization, execution
and delivery of all documents by the parties thereto other than the Company.
<PAGE>
D.E. Frey Group, Inc.
November 23, 1999
Page 2
Based upon the foregoing, we are of the opinion that: when, as and if (i)
the Registration Statement shall have become effective pursuant to the
provisions of the Securities Act, (ii) the Registered Shares are sold to the
Underwriters and paid for pursuant to the terms of the Underwriting Agreement,
(iii) the Registered Shares shall have been issued in the form and containing
the terms described in the Registration Statement, and (iv) any legally required
consents or any other regulatory authorities shall have been obtained, the
Registered Shares will be legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
Registration Statement.
Very truly yours,
JONES & KELLER, P.C.
By /s/ Samuel E. Wing
Samuel E. Wing
SEW/lkl
<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 Prospectus.
Hein + Associates LLP
Denver, Colorado
November 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR D.E. FREY GROUP'S
SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 953
<RECEIVABLES> 2,029
<SECURITIES-RESALE> 909
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 194
<PP&E> 604
<TOTAL-ASSETS> 5,509
<SHORT-TERM> 0
<PAYABLES> 3,066
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 6,420
0
0
<COMMON> 457
<OTHER-SE> (4,434)
<TOTAL-LIABILITY-AND-EQUITY> 5,509
<TRADING-REVENUE> 6,038
<INTEREST-DIVIDENDS> 2,398
<COMMISSIONS> 19,305
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 3,941
<INTEREST-EXPENSE> 499
<COMPENSATION> 24,169
<INCOME-PRETAX> (758)
<INCOME-PRE-EXTRAORDINARY> (758)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (758)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
