-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GegdqL+yRdI10VZE2HtvObQ8Yj3E6BzCQ+VWUOYJZt8uViRkssFyRGMoy1l43lTF YhBcblmlw9ZmJnoDAwPQkg== 0000927356-99-001556.txt : 19991018 0000927356-99-001556.hdr.sgml : 19991018 ACCESSION NUMBER: 0000927356-99-001556 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 19991005 FILER: COMPANY DATA: COMPANY CONFORMED NAME: D E FREY GROUP INC CENTRAL INDEX KEY: 0000864038 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 841122880 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-88499 FILM NUMBER: 99723445 BUSINESS ADDRESS: STREET 1: 1700 LINCOLN STREET SUITE 2200 CITY: DENVER STATE: CO ZIP: 80203 BUSINESS PHONE: 3038634040 MAIL ADDRESS: STREET 1: 1700 LINCOLN ST SUITE 2200 CITY: DENVER STATE: CO ZIP: 80203 S-1 1 D.E. FREY GROUP, INC. - FORM S-1 As filed with the Securities and Exchange Commission on October 5, 1999 Registration No. 333-__________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________________________ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 D.E. FREY GROUP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 6211 84-1122880 - ---------------------------- -------------------------- ---------------- (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Clarification Identification organization) Code Number) Number) 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 (303) 863-4040 ------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of principal executive offices) Dale E. Frey Chairman and Chief Executive Officer D.E. Frey Group, Inc. 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 (303) 863-4040 --------------------------------------------------------- (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Samuel E. Wing, Esq. John G. Herbert, Esq. Jones & Keller, P.C. John G. Herbert, P.C. 1625 Broadway, Suite 1600 1675 Larimer, Suite 310 Denver, Colorado 80202 Denver, Colorado 80202 Telephone: (303) 573-1600 Telephone: (303) 534-0522 _______________________________ Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] CALCULATION OF REGISTRATION FEE
======================================================================================================== Proposed Maximum Proposed Maximum Amount of Title of Each Class of Securities Amount to be Offering Price Aggregate Offering Registration to be Registered Registered Per Security/(1)/ Price Fee - ------------------------------------------------------------------------------------------------------ Common Stock 2,000,000 $7.00 $14,000,000 $3,892 - ------------------------------------------------------------------------------------------------------ Common Stock/(2)/ 300,000 7.00 2,100,000 584 - ------------------------------------------------------------------------------------------------------ Warrants to Purchase Common Stock/(3)/ 200,000 Nil --- - ------------------------------------------------------------------------------------------------------ Common Stock/(3)/ 200,000 8.40 1,680,000 467 - ------------------------------------------------------------------------------------------------------ Totals $17,780,000 $4,943 - ------------------------------------------------------------------------------------------------------
________________ (1) Estimated solely for purposes of calculating the registration fee. (2) Represents shares of common stock subject to the underwriters' over- allotment option. (3) Represents warrants granted to the representative of the underwriters to purchase common stock and the shares underlying the warrants. ___________________________ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON THE DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ SUBJECT TO COMPLETION, DATED OCTOBER ___, 1999 Prospectus 2,000,000 Shares D.E. FREY GROUP, INC. Common Stock We are a full service retail securities brokerage firm. Because this is our initial public offering, there is no public market for our common stock. We intend to apply to have the shares listed on the American Stock Exchange. We anticipate that the public offering price will be between $5 and $7 per share. See "Risk Factors" beginning on page 6 to read about risks you should consider before buying shares of our common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ___________________________ Per Share Total ----- ----- Public offering price...................... $ $ Underwriting discount...................... Proceeds to us (before expenses)........... The underwriters have a 45-day option to purchase up to an additional 300,000 shares to cover any over-allotments. NEIDIGER TUCKER BRUNER, INC. D.E. FREY & COMPANY, INC. - -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities any state where the offer or sale is not permitted. - -------------------------------------------------------------------------------- The date of this prospectus is ______________, 1999 inside front cover map showing branch locations SUMMARY Because this is a summary, it may not contain all the information you consider important. You should read the entire prospectus carefully to understand this offering, especially the Risk Factors section beginning on page 6 and the financial statements beginning on page 71. Because we are a holding company, when we describe our business or refer to ourselves, we generally mean the business we conduct through our broker-dealer subsidiary, D.E. Frey & Company, Inc. We often refer to ourselves as the "parent" or "parent company" and to our broker-dealer subsidiary as our "subsidiary" or the "broker." Overview of our Company We are a full service retail securities brokerage firm, formed in 1989, operating through 93 independent investment professionals in 37 offices in 18 states. Each of these offices except our home office in Denver, Colorado is a branch office which generally has between one and three independent investment professionals. In addition to our ongoing retail brokerage activities, we have since June 1996 participated as a selling group member in more than 80 underwritten public offerings of securities. We offer customers brokerage services relating to corporate equity and debt securities, U.S. government securities, municipal securities, mutual funds, variable annuity and variable life insurance products, general insurance, portfolio planning and management, cash management services, market information and portfolio tracking and records management. We recruit experienced, highly productive investment professionals by offering them a high commission payout and the independence of owning and operating their own branch office. Generally, each branch office pays substantially all costs associated with establishing and operating the branch in return for a relatively high portion of gross commission revenue, which averages approximately 90% of commission revenue. We provide regulatory, compliance and other support services to our investment professionals. This program allows expansion of our brokerage operations with relatively minimal capital outlay by our firm. Continuing to add experienced highly productive brokers is an integral part of our growth strategy. We have experienced significant revenue growth over the past five years. Total revenues have increased from $17.4 million in 1994 to $37.0 million in 1998, a compounded growth rate of 21%. Our revenue growth is due to growth in customer assets, number of customer accounts and increases in the number and productivity of investment professionals. As of June 30, 1999 we have approximately 33,000 active customer accounts with account balances aggregating $3 billion. 1 Presently, we provide real-time decision support and empower our investment professionals with relevant and timely information to better serve their clients. In addition, recently, we began focusing on other rapidly growing sectors of the securities industry that are related to or dependent on Internet and electronic commerce technology. Among other plans, which are discussed in this prospectus, we intend to utilize an on-line brokerage service being developed by our clearing broker through which individual clients will be able to trade Nasdaq and exchange listed securities and mutual funds. Our Goals and Growth Strategy Our goal is to enhance our position as a full service retail brokerage firm and grow by capitalizing on changes occurring in the financial services industry by: . continuing our strategy of recruiting and retaining investment professionals who are highly experienced and who have an established client base . continuing to emphasize and provide a favorable environment for cultivating and maintaining the long term relationships between our investment professionals and their clients, which we believe is essential to our growth and the success of our overall plans . developing on-line Internet securities trading capabilities for our customers, thereby adding new customers and meeting the expectations of our existing customers . continuing to emphasize client relationships even with respect to Internet trading accounts by associating a specific investment professional with each account, thereby merging the convenience of Internet based securities trading with the personal relationships provided by our full service investment professionals . in connection with the Internet trading capabilities, developing a web site on which we can provide additional financial information, services and products to our clients . entering into relationships with financial service and other companies which can be accessed by our customers from our web site, thereby providing additional sources of revenues from such companies . in connection with changes in our business and shifts in the securities industry, negotiating new and more advantageous arrangements with the financial services companies with whom we do business, thereby increasing revenues and decreasing expenses 2 . continuing to empower our investment professionals and their clients with a complete selection of tools and services necessary to meet their needs, including a full array of market data, trading services, electronic communications and non-proprietary financial products, as well as the ability to conduct business in any mode desired, supported with real time data, from traditional brokerage operations to electronic and Internet transactions The Offering Common stock offered by us.............. 2,000,000 Common stock to be outstanding after the offering/(1)/................. 6,855,536 Use of proceeds......................... We estimate that the net proceeds to us from selling our common stock in the offering, at $5 to $7 per share, will be approximately $8.4 to $11.9 million. We expect to use the net proceeds for regulatory capital, repayment of debt, expansion of Internet and e-commerce capabilities, technology development, marketing, recruitment of investment professionals and for general corporate purposes including overhead. See "Use of Proceeds." Proposed Trading Symbol................. DEF _________________ (1) Based on the number of shares outstanding at August 31, 1999, including 283,922 shares to be issued upon conversion of $1,448,000 of debt, assuming a price per share of $5.10 (85% of an assumed public offering price of $6.00 per share) simultaneously with this offering (see "Exchange of Debt"). The number of shares does not take into account: . shares issuable upon exercise of 941,500 outstanding options and warrants which have a weighted average exercise price of $2.21 per share . the underwriters' 45 day over-allotment option to purchase up to 300,000 additional shares We are a holding company, D.E. Frey Group, Inc., operating through our wholly owned subsidiary, D.E. Frey & Company, Inc. We were incorporated under Delaware law in 1989. Our executive offices are located at 1700 Lincoln Street, Suite 2200, Denver, Colorado 80203, and our telephone number is (303) 863-4040. 3 Summary Consolidated Financial and Other Data You should read the information presented below along with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our unaudited pro forma consolidated financial statements and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Statements of Operations Data:
Six months ended Year ended December 31, June 30, 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- -------- -------- (unaudited) (in thousands, except per share and other data) Revenues: Brokerage.......................... $ 15,816 $ 19,851 $ 27,097 $ 31,136 $ 33,045 $ 16,711 $ 20,663 Interest and account fees.......... 1,218 1,535 2,005 2,203 2,880 1,399 1,671 Other.............................. 325 475 942 1,350 1,113 766 563 -------- -------- -------- -------- -------- -------- -------- Total revenues................... 17,359 21,861 30,044 34,689 37,038 18,876 22,897 -------- -------- -------- -------- -------- -------- -------- Expenses: Commissions and investment advisory, clearing and execution fees............................... 13,448 17,177 23,566 27,513 29,470 14,852 18,648 Other expenses..................... 4,158 6,752 7,887 7,329 7,957 3,984 4,327 -------- -------- -------- -------- -------- -------- -------- Total expenses................... 17,606 23,929 31,453 34,842 37,427 18,836 22,975 -------- -------- -------- -------- -------- -------- -------- Net income (loss)................... $ (247) $ (2,068) $ (1,409) $ (153) $ (389) $ 40 $ (78) ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common share, basic and diluted............ $ (0.12) $ (0.86) $ (0.46) $ (0.04) $ (0.09) $ 0.01 $ (0.02) ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding Basic.............................. 2,094 2,400 3,052 3,744 4,338 4,178 4,547 ======== ======== ======== ======== ======== ======== ======== Diluted............................ 2,094 2,400 3,052 3,744 4,338 4,275 4,547 ======== ======== ======== ======== ======== ======== ======== Pro Forma Data:/(1)/ Pro forma net income (loss)........ $ ( 234) $ 0.00 ======== ======== Pro forma net income (loss) per share, basic and diluted........... $ ( 0.05) $ 0.00 ======== ======== Shares used in computing pro forma loss per share: Basic............................... 4,622 4,831 ======== ======== Diluted............................. 4,622 5,357 ======== ========
4
At December 31, At June 30, 1999 1998 Actual Pro Forma/(1)/ --------------- -------- -------------- (unaudited) Cash and cash equivalents............ $ 733 $ 1,086 $ 11,219 Working capital...................... 582 971 11,141 Total assets......................... 4,945 6,119 16,181 Notes payable........................ 5,470 6,070 4,622 Total liabilities.................... 8,516 9,416 7,931 Shareholders' equity (deficit)....... (3,571) (3,296) 8,250
At December 31, At Other Data 1994 1995 1996 1997 1998 June 30, 1999 --------------------------------------------------- ------------- Number of branches................... 28 23 32 33 36 37 Number of investment professionals...................... 67 99 99 100 92 93 Recruited during year................ 29 39 18 19 13 10 Terminated or resigned during year........................ 0 7 18 16 21 9
Year Ended December 31, Six Months Ended 1994 1995 1996 1997 1998 June 30, 1999 --------------------------------------------------- ---------------- Average revenue per investment professional which includes commissions, advisory fees and investments........................ $236,060 $200,515 $273,707 $311,362 $359,185 $222,180
- ------------------ (1) Pro forma amounts are calculated after giving effect to: . the unaudited pro forma adjustments to reflect the issuance of 2,000,000 shares of common stock (without exercise of the underwriters' over-allotment option) at an assumed price of $6.00 per share, the midpoint of the range of initial public offering prices, after deducting our estimated offering expenses and underwriting discounts . the concurrent issuance of 283,922 shares of common stock, at a price of $5.10 per share (85% of the above, assumed public offering price) upon conversion of $1,448,000 of debt; see "Exchange of Debt" Pro forma per share amounts are computed by using the weighted average number of shares of common stock outstanding in the relevant period as adjusted to give effect to the issuances of stock in the debt exchange, as if such issuances occurred at the beginning of the periods indicated. 5 RISK FACTORS You should carefully consider the risks described below in considering whether to invest in our common stock. The risks and uncertainties described below may not be the only ones we will face. Additional risks and uncertainties not presently known to us or that we currently deem not material may also impair our operations. If any of the following risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that case, the trading price of our common stock would likely decline and you could lose all or part of your investment in our company. This prospectus contains forward-looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements are found in the material set forth under "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in the prospectus generally. When used in this prospectus, the words "anticipate," "believe," "expect," "estimate," "intend" and similar expressions are generally intended to identify forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described in "Risk Factors" and elsewhere in this prospectus. We have no operating history using our planned business strategies, including electronic commerce, upon which you may evaluate us. We have no operating history using our planned business strategies, including electronic commerce, upon which to evaluate the merits of investing in our common stock. Our prospects are subject to the risks, expenses, and uncertainties encountered by many companies today, including traditional operational risks, financial risks and strategic or business-model risks. These business-model risks include the failure . to properly recognize and act on patterns of strategic change in our industry . to best respond to customer priorities, including expectations as to price and quality . to be resource-efficient and obtain profitability . to maintain and increase our electronic commerce capabilities and usage While these risks can affect any business, they are particularly relevant to companies, like ours, whose future depends on the success of our strategic business model. We may not be successful in addressing these risks, and our business and financial condition could suffer. We have incurred accumulated losses since our inception and we have a shareholders' deficit. As of June 30, 1999, we had cumulative losses of $7.7 million and a shareholders' deficit of $3.3 million. Although our revenue has grown since our inception, there can be no 6 assurance that our revenues will continue at their current level or increase in the future. We have never had a profit for a full fiscal year since our inception in 1989. We expect to increase our operating expenses through our recruiting, sales and marketing, automation of internal functions, compliance and supervision and development of our electronic commerce technology. As a result, it is uncertain when or if we will become profitable on an ongoing basis. If such expenses are not followed by increased revenues, our business, results of operations and financial condition would be negatively impacted. Our lack of an operating history in conjunction with our business strategies (including attracting additional, high producing investment professionals and expansion into Internet trading) and the uncertain nature of the securities markets make it difficult or impossible to predict future results of operations. Therefore, our revenue growth should not be taken as an indicator of the rate of revenue growth or the profitability, if any, we can expect in the future. There are significant costs associated with our proposed network infrastructure expansion and such expansion could cause potential disruptions in service. We will need to expand our network infrastructure and client support capabilities in anticipation of an expanded client base and an increase in client services. Such expansion will require us to make significant expenditures to develop our interactive website capabilities for Intranet and Internet features and to hire and train additional service personnel. Such expansion must be completed without system disruptions, slower response times or degradation in speed of order fulfillment and levels of client service. System disruptions, or degradation in the level of client service during this process could harm our business. We face adversity if we are insolvent. After this offering and conversion of some of our debt, we will have outstanding subordinated notes and senior debt in the aggregate principal amount of approximately $4.6 million, which contain customary default provisions. Also the subordinated notes which will amount to approximately $3.0 million after conversion, contain provisions allowing acceleration of maturity at the option of the holders in the event we become insolvent and admit our insolvency in writing. In the event it should ever be determined that we are insolvent, then the holders of the subordinated notes may have the right to accelerate the indebtedness and demand immediate payment. If at that time, or at the time of any other default under our debt agreements, we do not have significant cash reserves or other sources of immediate capital, acceleration of our indebtedness would have a material adverse effect on us. The securities business is highly volatile. The securities business is, by its nature, subject to significant risks, particularly in volatile or illiquid markets. These risks include the risks of: . trading losses . customer fraud . counterparty failure to meet . employee fraud commitments . failures in connection with the . errors and misconduct processing of securities transactions . litigation 7 Our principal business activities are retail securities brokerage, asset management, and related financial services. These businesses are highly competitive and subject to various risks, volatile trading markets, and fluctuations in the volume of market activity. The securities business is directly affected by many broad factors, including: . economic and political . broad trends in business and conditions finance . legislation and regulation . currency values affecting the business and . market conditions financial communities . interest rate levels and volatility . inflation . technological changes . the availability and cost of . changes in customer's buying trends short-term or long-term funding and capital These and other factors can contribute to lower price levels for securities and illiquid markets. Lower price levels of securities may result in: . reduced securities transactions volumes, with a correlative reduction in commission revenues . reduced management fees calculated as a percentage of assets managed . losses from declines in the market value of securities held for trading and investment In low volume periods, profitability levels are further adversely affected because certain of our expenses remain relatively fixed. Sudden sharp declines in securities' market values and the failure of persons and counterparties to perform their obligations can result in illiquid markets. This in turn can make it difficult for us to sell securities. As a result of the varied risks associated with the securities business, which are beyond our control, our commissions and other revenues could be diminished. Revenue reductions and losses resulting from securities ownership could hurt our business. In addition, our revenues and operating results may fluctuate from quarter to quarter and from year to year because of these risks. We may not be able to keep up with changing trends in the securities business. Several current trends are affecting the securities industry, including: . increasing consolidation . increasing use of technology . increasing use of discount and on-line electronic brokerage services . greater self reliance by individual investors seeking to eliminate the middleman . greater investment in mutual funds, variable annuities and variable life insurance products . downward pressure on commission levels . a current movement to expand the hours of operations of Nasdaq and national securities exchanges 8 These trends could result in our facing increased competition from larger broker-dealers, a need for increased investment in technology, or potential loss of customers and reductions in commission income. Risks associated with our sales structure. All of our investment professionals are required by law to be licensed with our subsidiary, a licensed securities broker-dealer. Pursuant to these requirements, the investment professionals are subject to our supervision in the area of compliance with federal and applicable state securities laws, rules and regulations, as well as the rules and regulations of self-regulatory organization such as the NASD and National Futures Association. The violation of any regulatory requirements could jeopardize our securities broker-dealer or other licenses or could subject us to liability. There is fierce competition in the brokerage industry. All aspects of our business are highly competitive. We compete directly with national and regional full service broker-dealers and with discount brokers, on-line brokers, mutual funds, banks, insurance companies, dealers, investment banking firms and investment advisors and others. The financial services industry has become considerably more concentrated as numerous securities firms have either ceased operations or have been acquired by or merged into other firms. These mergers and acquisitions have increased competition from these firms, many of which have significantly greater equity capital and financial and other resources than we do. With respect to retail brokerage activities, some regional firms with which we compete have operated in various markets longer than we have and have established long-standing client relationships. In addition, we expect competition from commercial banks to increase because of recent legislative and regulatory initiatives in the United States to remove or relieve restrictions on commercial banks' securities activities. We also compete with others in the financial services industry in recruiting new employees and retaining current employees. We expect to face increasing competition from companies offering electronic brokerage services, which is a rapidly developing segment of our industry. These competitors may have lower costs or provide fewer services, and may offer certain customers more attractive pricing or other terms, than we offer. It is imperative that we keep our costs down. However, we may not be able to do so in comparison to firms more technologically adept. In addition, issuers may bypass stockbrokers and other investment professionals and sell their securities directly to purchasers, including sales using electronic media such as the Internet. To the extent that issuers and purchasers of securities succeed in transacting business without the assistance of financial intermediaries like us, our business could be harmed. We may not be able to keep up in a cost-effective way with rapid technological change. The brokerage business and particularly the on-line financial services industry are characterized by rapid technological change, changes in customer requirements, frequent new service and product introductions and enhancements and evolving industry standards. Our 9 future success will depend, in part, on our ability to develop technologies and enhance our existing services and products. We must also develop new services and products that address the increasingly sophisticated and varied needs of our customers and prospective customers. We must respond to this changing environment on a timely and cost-effective basis. The development and enhancement of services and products entails significant technical and financial risks. We may not be able to: . effectively use new technologies . adapt services and products to evolving industry standards . develop, introduce and market new services and products or enhance new services and products In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services and products, and our new service and product enhancements may not achieve market acceptance. If we encounter these problems, our business, financial condition and operating results will be negatively affected. Operational risks may disrupt our business or limit our growth. Our business is highly dependent on information processing and telecommunications systems. We face operational risks arising from mistakes made in the confirmation or settlement of transactions or from transactions not being properly booked, evaluated or accounted for. Our business is highly dependent on our ability, the ability of our clearing firm and other firms which execute trades for us, to process, on a daily basis, a large and growing number of transactions across numerous and diverse markets. Consequently, both we and our clearing firm rely heavily on our respective financial, accounting, telecommunications and other data processing systems. If any of these systems do not operate properly or are unavailable due to problems with our physical infrastructure, we could suffer financial loss, a disruption of our business, liability to clients, regulatory intervention or reputational damage. In addition, the rapidly increasing level of telephone and e-mail activity has at times strained the capacity of our telecommunications system and our customer service staff. An inability of the systems we use to accommodate an increasing volume of transactions and customer activity could also constrain our ability to expand our businesses. We are currently upgrading and expanding the capabilities of our data and telecommunications systems and other operating technology. We expect that in the future we will need to continue to automate, upgrade and expand our systems infrastructure. See "Business - Our Information Technology and Systems." We are subject to net capital constraints. The SEC and the NASD, and various other regulatory bodies in the United States have rules with respect to net capital requirements that affect us. These rules require that at least a substantial portion of a broker-dealer's assets be kept in cash or highly liquid investments. Our broker-dealer subsidiary must comply with the net capital requirements, which limit operations that require intensive use of capital, such as in underwriting or trading activities. See "Business - Effect of Net Capital Requirements." These rules could also restrict our ability to withdraw capital from our broker-dealer subsidiary, even in circumstances where this subsidiary has 10 more than the minimum amount of required capital. This, in turn, could limit our ability to pay dividends, implement our strategies and pay interest on and repay the principal of our debt. A change in these rules, or the imposition of new rules, affecting the scope, coverage, calculation, or amount of the net capital requirements, could have similar adverse effects. Significant operating losses or any unusually large charge against net capital could also have a negative impact on our business. The failure of our brokerage customers to meet their margin requirements may cause us to incur significant liabilities. Our brokerage business, by its nature, is subject to risks related to defaults by our customers in paying for securities they have agreed to purchase and deliver securities they have agreed to sell. Correspondent Services Corporation (CSC), a division of a major brokerage firm, provides clearing services to our brokerage business, including the confirmation, receipt, execution, settlement and delivery functions involved in securities transactions, as well as the safekeeping of customers' securities and assets and certain customer record keeping, data processing and reporting functions. CSC makes margin loans to our customers to purchase securities with funds they borrow from CSC. We must indemnify CSC for, among other things, any loss or expense incurred due to defaults by our customers in failing to repay margin loans or to maintain adequate collateral for those loans. We are subject to risks inherent in extending credit, especially during periods of rapidly declining markets. We are dependent on the continued availability of our Chairman and other key employees. Our success is highly dependent on the services of our founder and Chairman, Dale E. Frey, who is 69 years old. We have a $1 million key man life insurance on him, but this does not obviate the risk of the loss of his services. Most aspects of our business are also dependent on skilled individuals. We devote considerable resources to recruiting, training and compensating these individuals. Competition for key personnel is intense. From time to time, our investment professionals and employees leave to pursue other opportunities. We cannot assure that losses of key personnel due to such competition, or for other reasons, will not occur in the future. Our growth strategy depends on our ability to attract and retain high producing investment professionals. A principal component of our strategy is to increase market penetration by recruiting experienced investment professionals. We cannot assure that these recruiting efforts will be successful or, if successful, that they will enhance our business, results of operations, or financial condition. Investment professionals leave us periodically for various reasons. If a small number of our larger-producing investment professionals were to leave, our business could be critically damaged. We cannot assure that such losses of investment professionals will not occur. 11 We may be required to take charges to earnings in connection with stock options and warrants issued to investment professionals. We have granted options and warrants to certain investment professionals in the past as incentive compensation. In addition, in connection with our future efforts to attract and retain investment professionals, we may wish to offer incentive compensation to them in the form of stock options and warrants. Under currently proposed accounting pronouncements it is likely that our investment professionals may not be considered the functional equivalent of employees. Therefore, if these proposed rules are adopted we may be required prospectively to recognize charges to earnings in connection with such stock options and warrants. Such charges, if they materialize could result in a material negative effect on the reported results of our operations. Employee or investment professional misconduct could harm us and is difficult to detect and deter. There have been a number of highly publicized cases involving fraud or other misconduct by employees or investment professionals in the financial services industry in recent years, and we run the risk that employee or investment professional misconduct could occur. Misconduct by employees or investment professionals could include binding us to transactions that exceed authorized limits or present unacceptable risks, or hiding from us unauthorized or unsuccessful activities. In either case, this type of conduct could result in unknown and unmanaged risks or losses. Employee or investment professional misconduct could also involve the improper use of confidential information, which could subject us to regulatory sanctions and cause us serious reputational harm. It is not always possible to deter employee or investment professional misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. See "Legal Matters Affecting Us." Despite our efforts, our systems as well as those of others may prove not to be Year 2000 compliant, which would significantly disrupt our business. We may realize exposure and risk if the systems on which we are dependent to conduct our operations including those of our clearing firm are not Year 2000 compliant. Any significant disruption of our computer infrastructure caused by the Year 2000 problem could significantly interfere with our business operations. Our potential areas of exposure include products purchased from third parties, computers, software, telephone systems and other equipment used internally and those used by our vendors. We will be negatively impacted if our present efforts to address Year 2000 compliance issues are not successful, or if vendors with whom we conduct business do not successfully address such issues. Our long-term success may depend in part on the development of the Internet and electronic commerce as a commercial marketplace for securities transactions, which is uncertain. The markets for investment banking and brokerage services through the Internet and electric commerce are at an early stage of development and are rapidly evolving. Because the markets for our on-line services are new and evolving, it is difficult to predict the future growth 12 (if any) and the future size of these markets. We cannot assure that we will be able to successfully participate in those markets. A number of factors could prevent widespread acceptance of Internet and electric commerce, including the following: . electronic commerce is at an early stage and buyers may be unwilling to shift their purchasing from traditional vendors to on-line vendors or share their purchasing with traditional vendors . the necessary network infrastructure for substantial growth in usage of the Internet may not be adequately developed . increased government regulation or taxation may adversely affect the viability of electronic commerce . insufficient availability of telecommunication services or changes in telecommunication services could result in slower response times or increased costs . adverse publicity and consumer concern about the security of electronic commerce transactions could discourage its acceptance and growth . government and self regulatory organization (SRO) regulation may adversely affect or otherwise restrict electronic securities transactions We rely heavily on CSC and termination of our agreement with CSC could harm our business. Our clearing agreement with CSC may be terminated by either party subject to certain conditions. Termination of this agreement could harm our business. Moreover, we are heavily relying on CSC to develop on-line, Internet trading capabilities, which it has indicated will be available in the fourth quarter of 1999. Although we are prepared to seek Internet trading capabilities through other sources, if necessary, the failure of CSC to develop such capabilities would delay our entry into this segment of the securities industry. The ability to offer Internet securities trading to our customers is a significant portion of our growth strategy. Pursuant to our clearing agreement, CSC on a fee basis, processes most of the securities transactions for our account and the accounts of our clients. Services of CSC include billing and credit extension, control and receipt, custody and delivery of securities, for which we pay a transaction charge. We are dependent on the operational capacity and the ability of CSC for the orderly processing of transactions. In addition, by engaging the processing services of a clearing firm, we are exempt from certain capital reserve requirements and other complex regulatory requirements imposed by federal and state securities laws. Moreover, we have agreed to indemnify and hold CSC harmless from certain liabilities or claims, including claims arising from the transactions of our clients. Our business is subject to stringent regulation. Our business and the securities industry are subject to extensive regulation in the United States at both the federal and state levels, as well as by self-regulatory organizations such as the NASD and National Futures Association. In addition, the SEC, NASD and various other regulatory agencies have stringent rules with respect to the protection of customers and 13 maintenance of specified levels of net capital by broker-dealers. A significant operating loss or any unusually large charge against net capital could curtail our ability to expand or even continue our existing level of business. The regulatory environment in which we operate is subject to change. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. governmental regulators or SROs, including legislation or regulations regarding securities transactions via the Internet and electronic commerce. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by the SEC, other federal and state governmental authorities and SROs. We are subject to periodic examination by the SEC, SROs and various state authorities. Our sales practice operations, trading operations, record-keeping, supervisory procedures and financial position may be reviewed during such examinations to determine if they comply with the rules and regulations designed to protect customers and protect the solvency of broker-dealers. Examinations may result in issuance of a letter to us noting perceived deficiencies and requesting us to take corrective action. Deficiencies could lead to further investigation and the possible institution of administrative proceedings, which may result in the issuance of an order imposing sanctions upon us and/or our personnel, including our investment professionals. Sanctions against us may include a censure, cease and desist order, monetary penalties or an order suspending us for a period of time from conducting certain or all of our securities operations. Sanctions against individuals may include a censure, cease and desist order, monetary penalties or an order restricting the individual's activities or suspending the individual from association with us. In egregious cases, either we or our personnel or both could be expelled from an SRO or barred from the securities industry. In recent NASD and SEC examinations, the examiners have indicated that we may not have fully complied with certain regulatory requirements in our securities placement activities and with respect to our supervisory responsibilities. See "Legal Matters Affecting Us." We are in a highly litigious business. Many aspects of our business involve substantial risks of liability. There has been an increase in litigation and arbitration within the securities industry in recent years, including class action suits seeking substantial damages. Broker-dealers such as us are subject to claims by dissatisfied customers, including claims alleging they were damaged by: . improper sales practices such as unauthorized trading . churning . sale of unsuitable securities . use of false or misleading statements in the sale of securities . mismanagement . breach of fiduciary duty 14 In the normal course of business, we are defendants in various civil actions and arbitrations arising out of our broker-dealer and sales activities, in our role as an employer, and as a result of other business activities, and we are presently a defendant in a number of lawsuits and arbitrations. We may be liable for the unauthorized acts of our retail brokers and independent contractors if we fail to adequately supervise their conduct. We have incurred significant legal fees and settlement expenses to resolve disputed claims in the past. We cannot assure that we will not make significant payments to resolve disputed claims in the future, and it may be necessary to use some of the proceeds of this offering to make such payments. See "Legal Matters Affecting Us" for a discussion of legal and administrative actions to which we are a party. See also "Use of Proceeds." As is common in the securities industry, we carry insurance that covers some payments for liabilities but it may not be sufficient to cover particular liabilities or the full amount of particular liabilities. From time to time, in connection with hiring retail brokers, we could be subject to litigation by a broker's former employer. In addition, our charter documents provide for indemnification of our officers and directors. The adverse resolution of any legal proceedings involving us or these persons could have a material adverse effect on our business, financial condition, results of operations or cash flows. There are frequent claims against persons engaged in the sale of securities. Plaintiffs' attorneys in securities class action lawsuits frequently name the persons involved in the distribution and sale of securities as defendants. We have been named as a defendant in three lawsuits related to the distribution and sale of the same security. See "Legal Matters Affecting Us." Securities class action lawsuits naming us as a defendant may be filed in the future, particularly if we increase our activity as an underwriter or selling group member of securities distributions. In addition to financial costs and risks, defending litigation, to a certain extent, diverts the efforts and attention of our management and staff. Our management and other employees may have to devote substantial time defending litigation, which might materially divert their attention from other responsibilities. Securities class action litigation in particular is highly complex and can extend for a protracted period of time, consuming substantial management time and effort and substantially increasing the cost of such litigation. We may not be able to secure financing if we need it in the future. We may require additional financing beyond the proceeds of this offering to support more rapid expansion, develop new or enhanced services and products, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements. We can give you no assurance that additional financing, if needed, will be available to us on favorable terms or at all. 15 There are risks associated with our prior activities. In the three years preceding the date of this prospectus, we have issued securities in transactions believed by management to have been exempt from the securities registration requirements under federal and state securities laws. These exemptions are complex and it is often difficult to determine if their terms have been fully complied with. If for any reason the claimed exemptions were not available for the transactions, we could be subject to civil liabilities, the amount of which could severely damage our business. Also, in the last three years we have been a selling group member in about 80 offerings underwritten by other firms. As a seller in these offerings we could incur liability if any of them were legally defective. See also "Legal Matters Affecting Us." Future sales by existing shareholders may depress the market price of our common stock. Immediately prior to this offering, we will have about 4.6 million shares of common stock outstanding, in addition to which approximately 284,000 shares will be issued simultaneously with the public offering pursuant to our exchange with debt holders. Shares issued to debt holders will be restricted from resale for 180 days after the date of this prospectus. See "Exchange of Debt." After the offering and the concurrent issuance of common stock for debt, approximately 6.9 million shares of our common stock will be outstanding if the underwriters do not exercise their over-allotment option. The sale of, and the potential for sale of, our outstanding shares in the market could have a depressive effect on the price of our shares. See "Shares Eligible for Resale." We have a conflict of interest in this offering. Our broker-dealer subsidiary acts as co-managing underwriter of this offering. Accordingly, we will benefit not only from the proceeds from this offering, but from underwriting discounts and commissions. This presents conflicts of interest when our subsidiary and its investment professionals recommend or solicit their customers to buy our securities. This could have a negative impact on our proposed offering and its potential success and it could expose us to legal claims, even if the conflict of interest is made clear to investors. We will have broad discretion to spend a large portion of the net proceeds from this offering. We estimate that the net proceeds from the sale of the 2,000,000 shares of common stock offered by us, at a price of $5 to $7 per share, will be approximately $8.4 to $11.9 million, after deducting underwriting discounts and estimated offering expenses. We intend to use a substantial portion of the net proceeds: . to fund growth in our operations, including marketing and expansion in the number of our investment professionals . to add to our regulatory capital 16 . for technology development, including our Internet and e-commerce brokerage business and capital expenditures for our Internet and telecommunications facilities . for other general corporate purposes . to repay debt These are general categories and expenditures within each category may vary depending on future events. There is also a possibility that we may find it necessary to use some of the proceeds to satisfy legal claims asserted against us in lawsuits and arbitrations in which we are involved if several or all of the existing cases are lost and the claimants or plaintiffs are awarded the full amount of their alleged losses. See "Legal Matters Affecting Us." Consequently, our board of directors and management may apply much of the net proceeds of this offering to uses you may not consider desirable. The failure of management to apply these funds effectively could have a material adverse effect on our business, financial condition and operating results. For more information on how we intend to use proceeds from this offering, see "Use of Proceeds." An active trading market may not develop or continue. Before the offering, no public market has existed for our common stock and an active trading market may not develop or continue. We intend to apply for listing of our common stock on the American Stock Exchange. However, we cannot assure that our application for listing will be accepted or that we will be able to maintain the listing in the future. Even if our stock is listed, that does not guarantee that an active trading market for our common stock will develop and continue after the offering. Our common stock may trade at prices below the initial public offering price. Together with the underwriters, we will determine the initial public offering price. The price at which our common stock will trade after this offering is likely to be volatile and may fluctuate substantially due to factors such as: . our historical and anticipated quarterly and annual operating results . variations between our actual results and the expectations of investors and analysts . announcements by us or others and developments affecting our business . investor perceptions of our company and comparable public business companies . conditions and trends in the brokerage business In particular, the stock market has from time to time experienced significant price and volume fluctuations affecting the common stock of retail brokerage companies, like us. These fluctuations may result in a material decline in the market price of our common stock. We do not expect to pay dividends. We have not declared or paid, and for the foreseeable future we do not anticipate declaring or paying, dividends on our common stock. 17 An economic downturn may have an adverse effect on our company. If the general economic health of the United States declines from recent historically high levels or if investors fear such a decline is imminent, they may reduce the level of their activity in the stock market. Any decline or concern about an imminent decline in the economy could delay decisions among companies to purchase products and services or could delay decisions by companies to make capital expenditures. Fears of inflation or increased interest rates could also adversely affect our business. These factors would have a material adverse effect on the stock market and our business, prospects, financial condition and results of operations and on the price of our common stock. Investors will incur immediate and substantial dilution. The estimated initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our outstanding common stock immediately after the offering. If you purchase common stock in this offering, you will incur immediate and substantial dilution. At September 30, 1999 we have outstanding 941,500 options and warrants to purchase our common stock at an average price of $2.21 per share. To the extent outstanding warrants and options to purchase our common stock are exercised or additional equity securities are issued at a price below the price of a share in this offering, you may experience further dilution. See "Dilution." Provisions of Delaware law and our certificate of incorporation and bylaws may delay or prevent a takeover of our firm. We are organized under the laws of the State of Delaware. Some provisions of Delaware law may delay or prevent a transaction which would cause a change in our control. In addition, our certificate of incorporation contains some provisions which may delay or prevent this type of transaction, even if our shareholders consider the transaction to be in their best interests. Our certificate of incorporation authorizes our board to determine the number of shares and the terms of any unissued series of our preferred stock without any vote or action by our shareholders. As a result, our board can authorize and issue shares of preferred stock with voting or conversion rights which may adversely affect the voting or other rights of holders of our common stock. In addition, the rights given to the holders of a series of preferred stock may prohibit a merger, reorganization, sale of all or substantially all of our assets, liquidation or other extraordinary corporate transaction. Our certificate of incorporation divides our board into three classes of directors, so only approximately one-third of the directors will be subject to reelection each year. Also, we have adopted advance notice provisions in our bylaws which require our shareholders to present their nominations for directors or other business proposals within a specified time frame. These provisions make the removal of incumbent directors and the election of new directors more time-consuming and difficult, which may discourage third parties from attempting to obtain control of our firm, even if the change in control would be in the best interests of our shareholders. See "Description of our Equity Securities." 18 USE OF PROCEEDS We expect to receive net proceeds from the sale of the 2,000,000 shares of common stock offered by us, based on an offering price of $5 to $7 per share, of approximately $8.4 to $11.9 million, and up to $13.8 million if the over- allotment option granted to the underwriters is exercised in full, after deducting underwriting discounts and estimated offering expenses payable by us. The general purposes of this offering are: . to increase our equity capital . to facilitate future access by us to public equity markets . to provide increased visibility and credibility in the marketplace . to enhance our ability to use common stock as consideration as a means of attracting and retaining key employees and investment professionals We currently intend to use approximately $2.5 million of the net proceeds of this offering to increase the regulatory capital of our broker dealer and $1.25 million to repay the "Bridge Loan" and to pay debt service costs for 24 months on our Senior Debt and Subordinated Debt. We currently intend to use the balance of the net proceeds of this offering for the following: . enhancement and expansion of our network infrastructure . construction of an interactive website to facilitate a virtual operating environment . development of electronic commerce business opportunities, including Internet trading capabilities for our customers . automation of operational practices, such as transferring new customers to us, commissions, accounting and supervision to realize economies of scale . expansion of our sales and marketing efforts, including recruiting additional investment professionals, and the hiring of additional personnel engaged in marketing activities . building transitional support teams for newly recruited investment professionals . working capital and general corporate purposes We have not yet determined the actual expected expenditures and therefore cannot estimate the amounts to be used for each purpose set forth above with a substantial degree of accuracy. However, we estimate that the technology upgrades (network infrastructure, interactive website construction, electronic commerce development and automation of operational practices) will require a minimum of $2.5 million, assuming we can substantially depend on CSC, our clearing broker, to develop Internet trading capabilities for the use of our customers. We also believe we can productively use a significant portion of the remaining proceeds for increased marketing efforts and the transitional support teams for newly recruited investment professionals. This amount will increase to the extent we achieve greater success in such marketing efforts. There is also a possibility that we may find it necessary to use some of the proceeds from this offering to satisfy legal claims asserted against us in lawsuits and 19 arbitrations in which we are involved if several or all of the existing cases are lost and the claimants or plaintiffs are awarded the full amount of their alleged losses. See "Legal Matters Affecting Us" for a discussion of the proceedings in which we are involved. The amounts and the timing of the above expenditures will vary significantly depending upon a number of factors, including, but not limited to, the success and timing of our recruiting efforts, the development and implementation of the technology-based measures, negotiations with third parties and corresponding increases in revenues. If any of these factors change, we may find it necessary to reallocate a portion of the proceeds within the above- described categories or use portions of the proceeds for other purposes. Our estimates may prove to be inaccurate, new programs or activities may be undertaken which will require considerable additional expenditures or unforeseen expenses may occur. Pending the uses of proceeds as described above, we will invest the net proceeds in short term government, government guaranteed and investment grade securities. 20 DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock and do not expect to do so in the foreseeable future. We currently intend to retain any earnings to finance the expansion and development of our business. Any future payment of dividends will be made at the discretion of our board of directors based upon conditions then existing, including our earnings, financial condition and capital requirements as well as such economic and other factors as our board of directors may deem relevant. DILUTION The net tangible book value (deficit) of our common stock as of June 30, 1999, was $(3.8) million, or $(0.83) per share of common stock. After giving effect to: . the sale of 2,000,000 shares of common stock offered through this prospectus at an assumed initial public offering price of $6.00 per share (the mid-point of the pricing range) and deducting underwriting discounts and estimated offering expenses payable by us . the conversion of $1.4 million of a debt into 283,922 shares of common stock at the rate of $5.10 per share (a 15% discount from the foregoing assumed public offering price) Our net tangible book value as adjusted, as of June 30, 1999, would have been $7.9 million, or $1.15 per share of common stock. This represents an immediate increase of $1.98 per share to existing stockholders, turning the net tangible book deficit to a net tangible book value as adjusted. This also represents an immediate dilution in net tangible book value as adjusted of $4.85 per share to new investors purchasing shares of common stock in this offering. Dilution is determined by subtracting pro forma net tangible book value per share after this offering from the amount of cash paid by a new investor for a share of common stock. The following table illustrates the dilution per share as described above:
Assumed initial public offering price................... $ 6.00 Net tangible book deficit as of June 30, 1999........... $(0.83) Decrease in net tangible book deficit and increase in net tangible book value attributable to new investors and conversion of debt holders......................... 1.98 ------- Pro forma net tangible book value after this offering and conversion of debt to common stock........................................... 1.15 ------ Dilution to new investors............................... $ 4.85 ======
21 As of June 30, 1999, there were outstanding options and warrants to purchase an aggregate of 941,500 shares of common stock, all of which were then exercisable at an average exercise price of $2.21. We had also reserved up to an additional 400,000 shares of common stock for issuance upon the exercise of options which had not yet been granted under our stock option plan and 215,000 shares for issuance under the stock purchase plan. To the extent options or warrants are exercised, there will be further dilution to new investors. 22 CAPITALIZATION The following table shows our consolidated capitalization on June 30, 1999, on a historical basis and on a pro forma basis. The pro forma information gives effect to: . the sale of 2,000,000 shares of common stock (without exercise of the underwriters' over-allotment option) at an assumed price of $6.00 per share, the midpoint of the range of initial public offering price, after deducting our estimated offering expenses and underwriting discounts, resulting in estimated net proceeds of $10.2 million . the concurrent issuance of 283,922 shares of common stock, at a price of $5.10 per share (85% of the above, assumed public offering price) upon conversion of $1,448,000 of debt; see "Exchange of Debt" You should read this table together with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our unaudited pro forma consolidated financial statements and our consolidated financial statements and their notes included in this prospectus.
June 30, 1999 --------------------------------------- (Amounts in thousands) Actual Pro Forma ------ --------- Debt: Senior debt............................ $ 1,350 $ 1,350 Subordinated debt...................... 4,470 3,022 Bridge loan............................ 250 250 ------- ------- Total debt............................ $ 6,070 $ 4,622 ======= ======= Shareholders' equity: Common stock, par value $.10 per share; 10,000,000 shares authorized; 4,571,614 shares issued and outstanding (actual); and 6,855,536 shares issued and outstanding (pro forma)............... $ 457 $ 686 Additional paid-in capital............. 3,954 15,320 Accumulated deficit.................... (7,707) (7,756) ------- ------- Total shareholders' equity (deficit)/(a)/.................. $(3,296) $ 8,250 ======= ======= Total capitalization.................... $ 2,774 $12,872 ======= =======
(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. 23 SELECTED FINANCIAL DATA We have derived the selected historical consolidated income statement information for the years ended December 31, 1996, 1997 and 1998 from our audited consolidated financial statements and their notes. Those audited financial statements are included in this prospectus. We have derived the selected historical consolidated income statement information for the years ended December 31, 1994 and 1995 from our audited consolidated financial statements and their notes. Those financial statements are not included in this prospectus. We have derived the selected historical consolidated income statement information for the six months ended June 30, 1998 and 1999 and the consolidated balance sheet information as of June 30, 1999 from our unaudited interim consolidated financial statements included in this prospectus, and in our management's opinion, those financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation. Our operating results for the six months ended June 30, 1999 do not necessarily indicate results that we expect for the year ended December 31, 1999. We have derived the unaudited pro forma information for the year ended December 31, 1998 and as of and for the six months ended June 30, 1999 from our unaudited pro forma consolidated financial statements included in this prospectus. The unaudited pro forma information does not represent our results of operations for any future date or period. You should read the selected consolidated financial information together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our unaudited pro forma consolidated financial statements and our consolidated financial statements and their notes included in this prospectus. 24 Consolidated Statements of Operations Data:
Six months ended Year ended December 31, June 30, 1994 1995 1996 1997 1998 1998 1999 --------------------------------------------------------- ------- --------- (unaudited) (In thousands, except per share amounts) Revenues: Brokerage $15,816 $19,851 $27,097 $31,136 $33,045 $16,711 $20,663 Interest and account fees 1,218 1,535 2,005 2,203 2,880 1,399 1,671 Other 325 475 942 1,350 1,113 766 563 ------- ------- ------- ------- ------- ------- ------- Total 17,359 21,861 30,044 34,689 37,038 18,876 22,897 ------- ------- ------- ------- ------- ------- ------- Expenses: Commissions and investment advisory fees 11,897 15,419 21,512 25,194 26,933 13,592 17,093 Clearing and execution fees 1,551 1,758 2,054 2,319 2,537 1,260 1,555 Employee compensation 1,936 2,076 2,641 2,610 2,907 1,467 1,695 Interest 428 475 699 571 698 323 317 Other 1,794 4,201 4,547 4,148 4,352 2,194 2,315 ------- ------- ------- ------- ------- ------- ------- Total 17,606 23,929 31,453 34,842 37,427 18,836 22,975 ------- ------- ------- ------- ------- ------- ------- Net income (loss) $ (247) $(2,068) $(1,409) $ (153) $ (389) $ 40 $ (78) ======= ======= ======= ======= ======= ======= ======= Net income (loss) per common share, basic and diluted $ (0.12) $ (0.86) $ (0.46) $ (0.04) $ (0.09) $ 0.01 $ (0.02) ======= ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding Basic 2,094 2,400 3,052 3,744 4,338 4,178 4,547 ======= ======= ======= ======= ======= ======= ======= Diluted 2,094 2,400 3,052 3,744 4,338 4,275 4,547 ======= ======= ======= ======= ======= ======= ======= Pro forma data (unaudited):/(1)/ Pro forma net income (loss) (234) $ 0.00 ======= ======= Pro forma net income (loss) per share, basic and diluted $ (0.05) $ 0.00 ======= ======= Shares used in computing pro forma loss per share: Basic 4,622 4,831 ======= ======= Diluted 4,622 5,357 ======= =======
25 Consolidated Balance Sheet Data:
Year ended December 31, At 1994 1995 1996 1997 1998 June 30, 1999 -------------------------------------------------- -------------------------- (in thousands, except per share data) Actual Pro Forma/(1)/ -------- --------------- (unaudited) Cash and cash equivalents.................. $ 220 $ 1,572 $ 307 $ 1,446 $ 733 $ 1,086 $11,219 Working capital............................ 1,322 519 (408) 968 582 971 11,141 Total assets............................... 4,951 5,508 4,969 6,624 4,945 6,119 16,181 Notes payable.............................. 4,906 4,853 4,770 5,570 5,470 6,070 4,622 Total liabilities.......................... 6,886 8,516 8,768 10,102 8,516 9,416 7,931 Shareholders' equity (deficit)............. (1,936) (3,008) (3,008) (3,478) (3,571) (3,296) 8,250
- ------------------ (1) Calculated after giving effect to: . the unaudited pro forma adjustments to reflect the issuance of 2,000,000 shares of common stock (without exercise of the underwriters' over-allotment option) at an assumed price of $6.00 per share, the midpoint of the range of initial public offering price, after deducting our estimated offering expenses and underwriting discounts . the concurrent issuance of 283,922 shares of common stock, at a price of $5.10 per share (85% of the above, assumed public offering price) upon conversion of $1,448,000 of debt; see "Exchange of Debt" Pro forma per share amounts are computed by using the weighted average number of shares of common stock outstanding in the relevant period as adjusted to give effect to the issuances of stock in the debt exchange, as if such issuances occurred at the beginning of the periods indicated. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read this discussion together with our financial statements and the related notes and other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under Risk Factors and in other portions of this prospectus. Overview We have been in the full service retail brokerage business for approximately 10 years. During this time, we have incurred operating losses and have never had a profit for a full fiscal year. Rather than seeking short-term profitability, our management has emphasized growing our revenue base, customer base and asset base and recruiting highly productive, experienced investment professionals. It was, and continues to be, our objective to increase our commission revenues to the necessary critical mass and to obtain credability in the independent retail brokerage business, thus achieving profitability. Following is a brief discussion of certain factors which have contributed to our accumulated losses, as well as trends and steps which management has taken or intends to take to improve operating results. See also "Business--Our Business Development and Operating Strategy." One of the factors impacting our operating results was that after commencing our business, we committed substantial resources to developing the infrastructure to support our investment professionals. As a result, we had excess service capacity until approximately 1995, which contributed to our operating losses. Debt has also been a significant factor negatively affecting our earnings. In order to continue our business, including our growth strategy, we incurred substantial additional debt, in the form of our Subordinated Debt, in 1994 and we have incurred additional debt since then, thus substantially increasing our financing costs. In addition, during 1995 and the next three years, we were named as a party to numerous NASD arbitrations and lawsuits. Most of these were related to private placement security offerings and direct participation investments sold by our investment professionals. Our current management and outside legal counsel have expended numerous hours to resolve the matters and reduce the number of pending claims, and the total number of proceedings which are presently pending has been substantially reduced from the numbers over the past several years. See "Legal Matters Affecting Us." As a result, legal fees during this time period substantially exceeded the budgeted amounts, and in addition it was necessary to pay the associated claims, in part or in whole, in various instances. 27 In order to decrease the risks of our being involved in additional litigation proceedings, along with the risk of the financial exposure which we have incurred in the past, our current management has implemented new recruiting, compliance, supervision, product and operational policies and procedures. See "Business--Regulation of Our Business." Also, our current general policy is to prohibit our investment professionals from selling direct participation investments and securities in private placement offerings. The legal fees and settlement costs have decreased in the last fiscal year, and our management anticipates that these costs should continue to decrease. Finally, technology developments over the last few years have substantially impacted the retail brokerage business. We have not made sufficient investments in technology to improve our operational efficiency and decrease our operational costs in line with where we feel they should be. See "Business--Our Information Technology and Systems." Our management believes that investing in technology, including automation, should decrease future operating expenses. Operations Revenues and Expenses. We derive our revenues primarily from commissions, investment advisory services, principal transactions, interest income and broker charges. Commission revenues are generated on agency transactions in listed exchange securities and securities traded on Nasdaq. In addition we earn commissions on mutual fund, variable annuity, variable life and general insurance product sales. Revenues of investment advisory services are fees based on the dollar value of assets under management. Principal transactions revenues include net revenues from trading debt securities, primarily for the benefit of customers. When we execute transactions as a principal, we charge markups or markdowns. Broker charges are fees charged to our investment professionals for providing the infrastructure to serve their clients, including access to real-time data, execution services, market-maker activities and regulatory oversight supervision. Interest income is derived principally from interest sharing agreements with our clearing organization on money lent to customers on margin from customer accounts and from excess funds in our proprietary accounts. Account fees are received from the clearing organization and are based on the volume of transactions cleared. Since our investment professionals are independent contractors, we collect the commissions from customers and then remit them to our investment professionals, net of a fee retained by us. Our share is calculated on a sliding scale based on the volume generated by each registered representative, and typically averages 10% of the gross commissions. Commissions expense represents the net funds remitted to our investment professional's share of the commissions and is variable in direct relation to commissions revenues. Clearing and execution fees include the costs of clearing securities, floor brokerage and exchange fees. Employee compensation and benefits are salaries paid to employees that support the investment professionals, including bond and equity trading desks, cashiering, customer account maintenance, supervisory and compliance, computer systems, marketing and general 28 corporation functions. Interest expense reflects finance charges on bank loans, subordinated debt and proprietary margin accounts used to finance securities inventory in the proprietary trading accounts. Results of Operations Comparing the Six Months Ended June 30, 1999 and June 30, 1998. We recorded a loss of $77,500 in the six months ended June 30, 1999 compared to income of $39,900 in the corresponding 1998 period. Total revenues increased 21% to $22.9 million in the 1999 period, while expenses increased 22% to $23.0 million in 1999. Net income in the six months ended June 30, 1998 includes a benefit from the reversal of a $0.1 million customer complaint reserve established in 1997. The following table breaks down brokerage revenues by major category: For the Six Months Ended June 30, ------------------ 1999 1998 ------ ------ (in thousands, unaudited) Commissions $13,557 $10,687 Principal transactions 4,566 3,839 Investment advisory services 2,540 2,185 ------- ------- Total $20,663 $16,711 ======= ======= Commissions revenues increased in 1999 by $2.9 million or 27% over the comparable period of the prior year. The increase is attributable to an increase in revenues from insurance and annuity products of $1.6 million or 94%, while commissions from equity securities and mutual funds increased $0.8 million and $0.5 million, respectively. The market acceptance of variable life products and continued strength in the equity markets are primary reasons for the increase. Principal transactions revenues were $4.6 million in 1999, representing an increase of $0.7 million or 19%. The portion of the revenues to the investment professionals from principal transactions were $1.0 million higher in 1999, while the portion of the revenues to the firm were slightly lower than in the comparable 1998 period. Investment advisory services increased 16% in 1999, continuing the trend of investment professionals expanding customer assets under management. Interest and account fees were $1.7 million and $1.4 million for the six months ended June 30, 1999 and 1998, respectively, representing an increase in 1999 of 19%. The increase was due to an increase in securities transactions and increased interest received on higher margin and money market balances. 29 Other income was $0.6 million and $0.8 million for the six months ended June 30, 1999 and 1998, respectively. The decrease in 1999 is due to the 1998 period benefitting from the reversal of a $0.1 million customer complaint reserve established in 1997. Commissions expense was $17.1 million and $13.6 million for the six months ended June 30, 1999 and 1998, respectively, representing an increase in 1999 of $3.5 million or 26%, which is consistent with the increase in brokerage revenues. Clearing and execution fees were $1.6 million and $1.3 million for the six months ended June 30, 1999 and 1998, respectively, representing an increase in 1999 of $0.3 million or 23%, which is the result of an increase in the volume of securities transactions. Employee compensation and benefits expenses increased by $0.2 million, or 16%, to $1.7 for the six months ended June 30, 1999 as compared to the same period in 1998. The increase was due to increased staffing to support our expanding investment professional base, salary increases and bonuses during 1999. Other expenses were $2.3 million and $2.2 million for the six months ended June 30, 1999 and 1998, respectively. The increase includes a decline in customer complaints and legal charges offset by higher computer and wide area network operating costs to support the expanding level of services and automation. Results of Operations Comparing the Years Ended December 31, 1998 and 1997. The following table breaks down brokerage revenues by major category: 1998 1997 ------- ------- (in thousands) Commissions $22,174 $20,580 Principal transactions 6,514 7,058 Investment advisory services 4,357 3,498 ------- ------- $33,045 $31,136 ======= ======= Commissions revenues increased by $1.6 million or 8% in 1998. The increase in commission revenues resulted from growth in sales of mutual funds and other equity securities. Although the number of investment professionals decreased from 100 in 1997 to 92 in 1998, commission revenue was not negatively impacted as we recruit higher producing investment professionals as opposed to lower producing investment professionals who left us during the year. These increases were partially offset by decreases in sales of insurance and annuity products primarily due to the adverse market publicity regarding variable annuity products. Principal transactions revenues decreased in the year ended 1998 by $0.6 million or 8%. Revenues in 1998 were down, primarily due to declines in trading volumes on debt securities caused by continuing weakness in the market for debt securities. 30 Investment advisory services increased $0.9 million or 25% as several investment professionals recruited in 1998 had a large percentage of their business in investment advisory fees. Interest and account fees were $2.9 million and $2.2 million in 1998 and 1997, respectively, representing an increase of 31%. The increase resulted from the continued growth in the number of securities transactions and higher average proprietary and customer account balances generating increased margin and money market interest income. Other income was $1.1 million in 1998 compared to $1.3 million in 1997, representing a decrease for the year ended 1998 of 18% as the prior year included higher product and investment banking fees. Commissions expenses were $26.9 million and $25.2 million for 1998 and 1997, respectively, representing an increase in 1998 of $1.7 million or 7%, consistent with the increase in brokerage revenues. Clearing and execution fees were $2.5 million and $2.3 million in 1998 and 1997, respectively, representing an increase in 1998 of 9%, which is the result of an increase in the volume of equity securities transactions. Employee compensation and benefits expenses increased by $0.3 million, or 11%, to $2.9 in 1998 as compared to 1997. The Company continues to increase staff to support revenue growth and its enhanced level of real time data provided to investment professionals. The change is also attributable to annual salary increases. Other expenses were $4.4 million and $4.1 million in 1998 and 1997, respectively, representing an increase of 5%. The overall increase is a result of the continued development of a corporate infrastructure to support an expanding number of investment professionals, offset slightly by a $0.2 million decrease in legal expenditures to $0.6 million in 1998. Results of Operations Comparing the Years Ended December 31, 1997 and 1996. The following table breaks down brokerage revenues by major category: 1997 1996 ------- ------- (in thousands) Commissions $20,580 $16,039 Principal transactions 7,058 7,912 Investment advisory services 3,498 3,146 ------- ------- Total $31,136 $27,097 ======= ======= Commissions revenues increased in the year ended 1997 by $4.6 million or 28% over the comparable 1996 period. Commissions from insurance and annuity products increased $1.8 million, or 53% to $5.3 million and general securities increased $1.6 million or 22%. The addition of several new high producing investment professionals late in 1996 and early 1997 31 and increased trading volume for existing investment professionals fueled by strong equity markets contributed to the increases. Principal transactions revenues decreased in the year ended 1997 by $0.8 million or 11%. A decline in commissions principal transactions due to a weakening fixed income market, was partially offset by an increase on the transactions completed. Investment advisory fees of $3.5 million in 1997 were $0.4 million or 11% higher than in 1996 as customer assets under management increased. Interest and account fees were $2.2 million and $2.0 million in 1997 and 1996, respectively, representing an increase of 10%. The increase is comparable to the overall revenue growth. Other income increased 43% to $1.3 million in 1997. The increase was primarily due to an increase in fees related to enhanced computer and wide area network services provided to our investment professionals. Commissions expenses were $25.2 million and $21.5 million in 1997 and 1996, respectively, representing an increase in 1997 of $3.7 million or 17%, which is consistent with the increase in brokerage revenues. Clearing and execution fees were $2.3 million and $2.1 million in 1997 and 1996, respectively. The increase of $0.2 million corresponds with the increased volume of brokerage transactions. Employee compensation and benefits expenses were $2.6 million in 1997 and 1996 as employee numbers remained consistent. Interest expense was $0.6 million and $0.7 million in 1997 and 1996, respectively. The slight decrease is because of lower margin balances on our proprietary trading accounts. Other expenses were $4.1 million and $4.6 million in 1997 and 1996, respectively, representing a decrease in 1997 of 9%. This decrease was primarily due to a reduction in equity in losses of affiliates, as the Company terminated its interest in an investment banking entity and a decrease in recruiting expense resulting from a decline in the revenue sharing percentage paid to certain investment professionals for recruiting new brokers. This was partially offset by increased legal expenditures for the resolution of several legal matters. Liquidity and Capital Resources Since our inception, we have primarily financed our operations through the private sale of debt and equity securities. As of June 30, 1999, we had cash and cash equivalents of $1.1 million, an increase of $0.4 million from December 31, 1998. The increase in cash and cash equivalents is primarily attributable to proceeds of $0.6 million from two new debt facilities. 32 In May 1999 we entered into a $250,000, one year promissory note, bearing interest at 13.5% and amended our senior bank debt arrangement adding an additional $1 million capacity to our revolving line of credit while decreasing the effective interest rate on the entire $2 million line to 11%. We used $350,000 of this facility during the second quarter of 1999, bringing the total borrowings on this facility to $1.35 million. The proceeds of these borrowings were used in part to meet debt service requirements on the subordinated debt, to provide financial assistance in the form of loans to investment professionals in connection with our recruiting activities, acquisition of certain assets and costs associated with the debt exchange offer and the proposed initial public offering. Cash Flow Information For the six months ended June 30, 1999 and 1998, net cash (used in) or provided by operations was approximately $(451,000) and $1,135,000, respectively. The 1999 period included $600,000 of cash used for the purchase of inventory positions, while the 1998 period included approximately $1.1 million of proceeds from the sale of inventory positions. Net cash used in investing during the six months ended June 30, 1999 and 1998 was approximately $100,000 in each period and consisted primarily of expenditures for furniture and equipment. During the six months ended June 30, 1999 and 1998, cash provided by (or used in) financing activities was approximately $890,000 and $(1,800,000), respectively. In 1999 new borrowings of $600,000 were drawn under two new debt agreements and $300,000 was borrowed from the clearing organization primarily for financing inventory positions, while the 1998 period included a $2 million repayment to the clearing organization partially for funds used to finance inventory positions and for working capital. For the years ended December 31, 1998, 1997 and 1996, net cash provided by (or used) in operations was approximately $2.0, $(1.2) and $(2.9) million, respectively. 1998 included $2.3 million in proceeds from the sale of inventory positions, while 1997 and 1996 included cash used for the purchase of inventory of approximately $0.8 million and $1.1 million, respectively. In addition, 1997 included $0.7 million in cash used to decrease accounts payable and accrued expenses. For 1998 and 1997, net cash used in investing activities was $1.0 million and $0.2 million, while 1996 provided cash from investing of $0.4 million. Cash used for the purchase of furniture and equipment was $341,000, $266,000 and $139,000 in 1998, 1997 and 1996, respectively. The net purchase of investments used cash of approximately $0.6 million in 1998, and the net sale of investments generated cash proceeds of $0.2 million and $0.7 million in 1997 and 1996, respectively. During 1998, 1997 and 1996, cash from financing activities included proceeds from the issuance of common stock of $296,000, $400,000 and $550,000, respectively. In 1997 the Company borrowed $1.0 million under a senior debt facility, and in 1998, 1997 and 1996, net (repayments) or borrowings from the clearing organization for the financing of inventory positions and working capital was $(1.9) million, $1.3 million and $0.6 million, respectively. We currently anticipate that we will continue to experience significant growth in our operating expenses for the foreseeable future as we 33 . develop on-line trading capabilities for our investment professionals and customers . expand services provided to our investment professionals . increase sales and marketing activities . improve and automate our operational and financial systems . expand services provided to our investment professionals Such operating expenses will consume a material amount of our cash resources, including a portion of the net proceeds from this public offering. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next two years. Impact of Year 2000 Issue The Year 2000 issue involves the potential for system and processing failures of date-related data resulting from computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that contain time-sensitive software may recognize a date using two digits of "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of our operations, including, among other things, a temporary inability to process transactions in connection with our brokerage activities. Because we are dependent, to a very substantial degree, upon the proper functioning of computer systems, the failure of any computer system to be Year 2000 compliant could materially adversely affect us. Failure of this kind could, for example, cause settlement of trades to fail, lead to incomplete or inaccurate accounting, recording or processing of trades in securities, result in generation of erroneous results or give rise to uncertainty about our exposure to trading risks and our need for liquidity. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions, reputational harm and legal liability. We have completed our internal information technology and non-information technology assessment, and we believe that our internal software and hardware systems will function properly with respect to dates in the year 2000 and thereafter. There can be no assurance that our year 2000 remediation program will detect and correct all potential points of failure by December 31, 1999. In addition, we depend upon the proper functioning of third-party computer and non-information technology systems. These parties include depositories, clearing agencies and firms, clearing houses, commercial banks and other vendors. We have contacted our vendors with whom we have important financial or operational relationships to determine the extent to which they are vulnerable to the Year 2000 issues. These parties have informed us that they have undertaken programs for preparing and testing their computer systems for potential Year 2000 problems. As of this date no major vendors have indicated that their systems will not be 34 Year 2000 compliant. Contingency plans are being developed for all critical vendors and third-party systems we use. However, if some of all our vendors prove not to be Year 2000 compliant and if we experience difficulties in finding replacement services, then our business could be materially adversely affected. Disruption or suspension of activity in the world's financial markets is also possible. In addition, uncertainty about the success of remediation efforts generally may cause many market participants to reduce the level of their market activities temporarily as they assess the effectiveness of these efforts during a "phase-in" period beginning in late 1999 and early 2000. This in turn could result in a general reduction in trading and other market activities (and lost revenues) as well as reduced funding availability in late 1999 and early 2000. We cannot predict the impact that such reduction would have on our business. Recent Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivatives to be recognized in the statement of financial condition at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and should be applied prospectively. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This statement revises the disclosure requirements for pensions and other postretirement plans and is effective for our December 31, 1999 financial statements. The adoption of these statements are not expected to have a material adverse effect on our financial statements. 35 BUSINESS We are a full service retail securities brokerage firm, formed in 1989, operating through 93 independent investment professionals in 37 offices in 18 states. Each of these offices except our home office is a branch office which has generally between one and three independent investment professionals. In addition to our ongoing retail brokerage activities, we have since June 1996 participated as a member of the selling group in more than 80 underwritten public offerings of securities. Our approach to the retail securities brokerage business is to attract and retain highly productive, experienced brokers. Our retail brokerage business has developed by establishing and maintaining relationships with high net worth individuals. Our full service brokerage firm offers customers brokerage services relating to corporate equity and debt securities, U.S. government securities, municipal securities, mutual funds, variable annuity and variable life insurance products, general insurance, portfolio planning and management, cash management services, market information and portfolio tracking and record management. Commissions are charged on agency transactions in exchange listed securities and securities traded on Nasdaq. We also earn commissions on mutual fund, variable annuity, variable life, and general insurance product sales. In addition to retaining commissions, we realize fees from asset-based investment advisory services. When we execute transactions as a principal, we charge markups or markdowns. We recruit experienced, highly productive investment professionals by offering them a high commission payout and the independence of owning and operating their own branch office. Generally, each branch office pays substantially all costs associated with establishing and operating the branch in return for a relatively high portion of gross commission revenue, which averages approximately 90% of commission revenues and is on a sliding scale as commission revenues increase. Generally brokers retain 100% after monthly commission revenues reach $250,000 per broker. We provide regulatory, compliance and other support services to our investment professionals. This program allows expansion of our brokerage operations with relatively minimal capital outlay. Continuing to add experienced, highly productive brokers is an integral part of our growth strategy. We have experienced significant revenue growth over the past five years. Total revenues have increased from $17.4 million in 1994 to $37.0 million in 1998, a compounded growth rate of 20.85%. Our revenue growth is due in part to growth in customer assets, number of customer accounts and increases in the number and productivity of investment professionals. As of June 30, 1999, we have approximately 33,000 active customer accounts with account balances aggregating $3 billion. We believe that our growth has been primarily attributable to our ability to attract and retain highly productive, experienced investment professionals. As of June 30, 1999, we had 93 investment professionals. Our investment professionals generated average commissions of approximately $274,000, $311,000 and $359,000 in fiscal 1996, 1997 and 1998. Revenues from our retail brokerage business, excluding interest and account fees, grew from $15.8 million 36 in 1994 to $33.0 million in 1998, a compounded growth rate of 20.2%. Retail brokerage fees represented approximately 90% of our total revenues for the same periods. With the high commission payout, the key to our profitability is to continue to attract high productivity investment professionals and maintain and control costs at the lowest level possible without sacrificing customer service. We believe that the opportunity exists to achieve substantial improvements on efficiency and productivity by automating more functions. Our investment professionals are independent contractors compensated solely on a commission basis without any fringe benefits. In addition, we do not clear securities transactions for customers but have entered into a clearing agreement with a subsidiary of a major brokerage firm. This allows us to avoid substantial fixed costs for back office operations, and maintain our net capital requirements at the lowest regulatory levels. Finally, we do not maintain a research department. Acquiring research from outside sources provides greater flexibility in product selection, results in lower fixed costs to us and better serves the customers' needs. Our investment professionals are not limited regarding the products they sell to their customers and they are encouraged to seek a variety of products from many different sources, almost none of which are originated by or through us. Recently, we began focusing on other rapidly growing sectors of the securities industry that are related to or dependent on Internet and electronic commerce technology. We are developing an on-line brokerage service through which individual clients will be able to trade Nasdaq, exchange listed securities and mutual funds. We provide real-time decision support and empower our investment professionals with relevant and timely information to better serve their clients. Our strategy is to join the convenience of Internet based securities trading while continuing the personal relationships provided by full service investment professionals. We intend to accomplish this by assigning an investment professional to each on-line customer. Competitive Strengths . Supportive Infrastructure for Large Producers. We have developed an infrastructure and a culture which supports the relationship between our investment professionals and their clients. We understand that customers who are building and maintaining wealth seek trustful long term relationships with investment professionals based on timely service, care, knowledge, information and objective advice. We believe that we are one of the few independent retail brokerage firms that understands and can provide the services and supportive culture required for large producers with national retail brokerage experience. While the infrastructure and culture in themselves may not provide any sustainable competitive advantage in our business over the long run, our infrastructure and culture are in place at the present time. We believe this constitutes a substantial advantage in that we have the ability to conduct activities today, through our infrastructure, which would require others months or years to develop. 37 . Trading Operations. We believe we are unique among independent retail brokerage firms, because we offer to our investment professionals direct access to our trading desks and the traders do not compete with our stockbrokers over customer orders. We believe this operating practice promotes better selection, price, choice and timely service to our investment professionals and their clients. . Experienced and Established Investment Professionals. Our investment professionals have established their clientele by focusing on the upper level of the market where customers are building and maintaining wealth through long term relationships and are less price sensitive. Our investment professionals have prior experience with national and regional retail brokerage firms. We believe that our investment professionals have some of the highest average commission revenues and service more client assets per investment professional than most other independent retail brokerage firms. . Experienced and Innovative Management. Our firm is led by our chief executive officer and president, Dale E. Frey, who was previously an executive vice-president and divisional manager for E.F. Hutton & Company, Inc. Our senior vice president of operations, Scott T. Gillespie, has numerous years of experience with other broker-dealers. Paul L. Hocevar, our chief financial officer and senior vice president, is an entrepreneur with many years of experience with other business ventures. Larry Hayden, our senior vice president of administration, has over 30 years of experience in the financial services industry, including regulatory and compliance matters. . Low Customer Acquisition Cost. We have experienced growth in our customer base with limited marketing expenditures by retaining experienced and established investment professionals who were affiliated with national or regional retail brokerage firms and who have already established a long term relationship with their clients. We have been able to attract such investment professionals not only through our direct efforts, but also through referrals from our existing sales force. Hence, we have not found it necessary to conduct "end customer" marketing to grow and develop our business. Our Goals Our goal is to be a highly respected full service retail brokerage firm by capitalizing on the changes occurring in the financial services industry. We intend to achieve our goal by: . cultivating long term relationships and placing the relationship between the client and our investment professionals first. We believe this special relationship is the essence of the business. We intend to maintain this relationship even with respect to Internet securities trading accounts by associating a specific investment professional with each such account 38 . 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. 39 A barrier to our growth is the fact that many investment professionals won't make a decision because of the fear of the unknown in connection with setting up and operating their own independently operated branch offices. Most of the investment professionals have not established an office before or negotiated with telecommunication service providers or purchased computer equipment with the specifications necessary to properly function with our wide area network. Consequently, we plan to offer a "turn key" solution to newly- recruited investment professionals to remove as many of these obstacles as possible. On behalf of the new investment professional, we plan to secure office space, purchase and install the computer equipment, negotiate a contract with a telecommunications service provider and procure other items related to a complete office. We would use a portion of the proceeds of this offering to finance the up front costs of setting up these offices, and the investment professionals would repay us over a reasonable period of time. Historically, we have not conducted "end customer" marketing to grow and develop our business. Rather, we market by recruiting experienced and established investment professionals who already have established a substantial book of business based on long-term relationships with their clients. We focus on the upper level of the market where our investment professionals' clients are less price sensitive. This is because their clients are building and maintaining wealth through long-term relationships based on quality service, objective advice, care, knowledge and information. We believe that it is imperative to add the convenience of Internet based securities trading to the personal relationships provided by our full service investment professionals. We anticipate new retail clients because of the new on-line trading services. As opposed to the practices of most other broker- dealers that offer on-line trading services, each new on-line retail client will be assigned to a specific independent investment professional. We believe this will be an effective recruiting tool for us. Our Trading Activities Our trading departments generally do not trade for their own account. The primary purpose of the trading department is to service our investment professionals' orders. Most of our listed orders are routed to execution sources providing superior service, while at the same time being sensitive to execution costs. Our OTC orders are executed through a network of unaffiliated Nasdaq market makers with no single market maker executing all trades. This allows us to fill client orders quickly and efficiently by choosing the market maker we deem best in each particular stock. Additionally, we offer execution services through the "Brass" electronic order flow management system, which has been licensed to us. This system routes orders to market markers and electronic communication networks. Our fixed income trading division assists our investment professionals in buying, selling or shopping for competitive yields and terms of fixed income securities, including municipal bonds, corporate bonds, U.S. Treasuries, mortgage-backed securities, government sponsored enterprises, unit investment trusts and certificates of deposit. If our investment professionals use our department traders for debt securities, generally we execute the transaction as a principal and charge markups and markdowns. Our investment professionals have the choice 40 of buying and selling securities from the clearing firm or its affiliates' inventory or utilizing our traders to shop the street for better product and prices. Department traders shop for price improvement and superior securities in the inter-dealer and wholesale markets on behalf of our investment professionals and negotiate prices and terms. The department traders negotiate prices and terms with the objective of best possible execution for our investment professionals' clients. Product and Services We Offer We offer our investment professionals a broad array of products and services designed to assist them with their client's investment needs and allow them the convenience of maintaining a single brokerage relationship for simplicity and security. Our investment professionals are able to consolidate their client's holdings in a single report through our report writing software package. A unique benefit for our investment professionals over their counterparts at national brokerage firms is selection and choice. Our investment professionals are free to select the products and services that best meet the needs of their clients. We have selling agreements with over 66 mutual fund families representing over 5,000 mutual funds. In the variable insurance product area we have selling agreements with over 46 insurance companies representing 82 variable annuity products and 38 variable life products. Additionally, we have agreements with 34 insurance carriers, representing 169 general insurance products. General insurance includes fixed annuities, universal life, term, long-term care, whole life, immediate annuities, straight life and health insurance. We participate in eight fee based asset management programs which provide access to approximately 80 money managers, six mutual fund asset management programs, including the Charles Schwab One Source program with 200 mutual fund families and approximately 1,500 mutual funds. We do not have proprietary products that we induce our investment professionals to sell to their clients. Thus, the clients' investment decision for products is not influenced by our need to sell proprietary products. We place the relationships between our investment professionals and their clients first. Our Portfolio Management Services We have arranged for our investment professionals to offer their clients portfolio planning and management. We use a consultative approach to portfolio planning and management for our investment professionals' clients. Generally, sponsors of asset management programs arrange for a number of well-known investment advisors to offer their services to clients who have a minimum of $100,000 to invest. The sponsors will select the investment managers eligible to participate in the various programs and will perform other services in connection with the program. This is our comprehensive approach to the total portfolio planning and management process that allows our investment professionals to play a key consultative role in the investment decisions of their clients. 41 The strategic alliance with the sponsors of the programs allows us to offer professional portfolio planning and management through industry leaders and without the fixed overhead costs. Our independent investment professionals can offer asset management services to their clients through third party sponsors, such as CSC Choice, B.C. Ziegler, Portfolio Management Consultants, Lockwood Financial, Brinker Capital and Charles Schwab. The programs are wrap fee arrangements where the investment professional's clients are charged generally a quarterly program fee. The program fee is a fixed fee in which the investment professional earns a percentage of the program fee. How We Provide Research We do not conduct any research activities which can lead to conflicts of interest. Instead, we procure research and make it available to our investment professionals. They then have relevant, timely information so they may provide quality service and advice to their clients. We provide research to the investment professionals from several sources, including PaineWebber, Standard & Poor's Reports and Wall Street by Fax. Currently, PaineWebber offers research on 805 different companies. Standard & Poor's Reports On-Demand offers independent investment professional current opinion on the stocks it has recommended to its clients. Standard & Poor's Wall Street Consensus gives the latest buy/hold/sell recommendation and earnings estimates of key analysts. It includes 3,500 companies and is updated every 5 days. Standard & Poor's Reports On-Demand offers Wall Street's current opinion on the stock recommendations to customers. Reports also include Standard & Poor's widely followed STARS (Stock Appreciation Ranking System) to guide in making investment choices. Standard & Poor's also has an Alert Service available that continuously monitors corporate movement and faxes reports on the companies as soon as they are released. Wall Street by Fax offers 500,000 reports. The PaineWebber research is sent to the investment professionals free of charge, whereas the investment professionals must request the other research services and are charged by report for the Standard & Poor's Reports and Wall Street by Fax research services. Our Customer Service Department We maintain an experienced customer service department that assists our investment professionals in familiarizing themselves with our vast array tools, services, policies and procedures. The department also assists in document management and compliance with regulatory requirements. The department has developed an excellent working relationship with our clearing firm and provides valuable assistance to our investment professionals. Similar to trading, the operations department exists to service the needs of our investment professionals. As of June 30, 1999, there were approximately 20 employees in the customer service department. The employees have daily contact with CSC regarding margin calls, wire transfers, new customer accounts and other operational matters. Our Clearing and Settlement Procedures We are an "introducing broker" and do not clear our own transactions. We have developed a strategic alliance with Correspondent Services Corporation (CSC), a subsidiary of 42 a major national brokerage firm, as our clearing agent. CSC effects clearance and settlement of our securities transactions in a cost effective manner. We act or interface between our independent investment professionals' customers and the clearing firm. We believe the strategic alliance with CSC has been beneficial in our recruiting efforts because of the industry name recognition of its parent corporation. The utilization of the clearing firm also reduces the fixed overhead costs associated with conducting clearing operations for our investment professionals. The clearing arrangement enhances our retail brokerage operations by permitting expanded services, such as customer margin accounts, and a broader inventory of securities for customer purchases on credit, and a high level of transaction execution and electronic information services. Our Information Technology and Systems Our operations rely heavily on our information and communications systems to provide the broad array of market data and financial products to our investment professionals. We have developed and managed a wide area network to provide market data and financial product information to them. Service contracts have been negotiated with several information service providers, such as the New York Stock Exchange, Dow Jones News, Quotron, Bloomberg, the American Stock Exchange, and Reuters. These services are provided over our network. Our investment professionals can access customer account information, obtain securities prices, financial news, financial products information and other financial information either via our network or the Internet. Clients of the investment professionals can also access their account information via the Internet. Our computers are linked to all major markets and our primary custodians. Most functions are fulfilled over the network, but the opportunity exists to achieve substantial improvements in efficiency and productivity by automating more functions through the network. To enhance the reliability of the system and integrity of data, we maintain and carefully monitor backup and recovery functions. These include duplication and storage of all critical data from the clearing agent and data service firms on our server in Denver. The wide area network also provides access to the Internet, individual web sites, and product information. We download daily the transactional information from CSC for brokerage account information and DST Systems, Inc., an independent data bank and reporting service for transactional information from dozens of mutual fund and annuity companies. Our investment professionals can produce various reports via this information network for their clients. We are committed to providing real-time decision support to our investment professionals through state of the art technology at affordable costs. 43 In addition, in the near future, we will create our interactive website that will have the following capabilities: . Intranet for internal use (e.g., training, education, communications, compliance notifications, outsourcing information, etc.) . Internet for broker recruiting, which would include our brand message and recruiting story . Internet for customers to review reports, research via links to third party providers and other financial information . Internet for on-line trading The financial services industry has been dramatically effected by the Internet and the discount brokerage sector of the securities industry, characterized by dramatic increases in the volume of on-line trading. We are committed to empowering our investment professionals and their clients with the support mechanism to conduct business in any mode they desire. We believe joining the convenience of Internet based securities trading with the relationship provided by our experienced full service investment professionals will provide the ultimate in quality service and advice to clients. We believe offering on-line trading should be a natural extension to the current services we provide. We are in the process of determining the scope of the services and products that will be offered to our investment professionals and their clients by electronic commerce. The technology platform of the clearing firm is an integral part of our overall platform and will determine the technology that we must develop or acquire from other vendors. CSC has represented to us that it will have on-line trading capabilities by the fourth quarter of 1999 and will provide other services by electronic commerce in the future. We are currently evaluating CSC's technology architecture for its proposed electronic commerce services. We are also evaluating other clearing firms which have the technology necessary to offer the overall scope of services and products which we desire, including on-line trading capabilities. Assuming CSC is able to provide on-line trading capabilities as and when it has represented, we hope to begin offering a secure Internet on-line trading system for our investment professionals' customers by the fourth quarter of 1999. Our current plans are to charge customers $29.95 per Internet trade. We anticipate that our investment professionals' customers will be able to obtain account information, quotes and a wide variety of news and research services, as well as enter orders to buy and sell securities. We will be somewhat unique to the Internet on-line trading broker dealers, because we will assign an experienced investment professional to each new client's account. Existing clients will retain the same investment professionals for their Internet trades. System enhancements planned for the future include providing our investment professionals with on-line order entry and trade data, processing and approval; commission and other accounting data; regulatory compliance controls for our operations; built in 44 trading parameters for clients accounts and the independent investment professionals; and broker registration information. The Competition We Face The financial services industry is highly competitive and we expect competition to intensify. We encounter direct competition primarily from established brokerage firms. We compete with some of these firms on a national basis and with others on a regional basis. Our competitors include large and well established national and regional retail brokerage firms as well as relatively new securities firms, a growing number of which are rapidly developing firms that are using technology to win business away from the more traditional firms. General financial success with the securities industry and the increasing popularity of the Internet will together attract additional competitors for us, such as banks, software development companies, insurance companies and providers of on-line financial and information services. In recent years there has been a significant consolidation in the financial services industry. Commercial banks and other financial institutions have acquired or established broker-dealer affiliates and begun offering financial services to individuals traditionally offered by securities firms. These firms have the ability to offer a wide range of products, including lending, deposit taking, insurance, brokerage, investment management and investment banking services. This may enhance their competitive position by attracting and retaining customers through the convenience of one-stop shopping. They also have the ability to support investment banking and securities products with commercial banking, insurance and other financial service revenue to gain market share. Many of our competitors have significantly greater financial, technical, marketing and other resources than we do. Some of our competitors also offer a wider range of products and services than we do and have greater name recognition, more established reputations and more extensive client and customer bases. Because of these resources, our competitors may be able to respond more quickly to new or changing opportunities, technologies and customer requirements due to superior systems capabilities. They may also be better able to undertake more extensive promotional activities, offer more attractive terms to customers, clients, investment professionals, and employees and adopt more aggressive pricing policies compared to our firm. In the on-line brokerage business we will be competing with discount brokerage firms which generally execute transactions for customers without offering other services such as research, portfolio valuation and investment recommendations. We will compete directly with the numerous discount brokerage firms already operating on the Internet. Our principal competitors will include Charles Schwab, Fidelity Brokerage Services, E*Trade, Waterhouse Investor Services and Datek On-line. Many of these firms execute transactions for their customers through the Internet. The number of on-line discount brokerage brokers will likely increase rapidly if this form of trading continues to gain market acceptance. The principal competitive factors in on-line discount brokerage include price, customer service, system reliability, quality of trade execution, delivery platform capabilities, ease of use, graphical user interface, range of products and services, innovation, branding and reputation. In our 45 brokerage business we also encounter competition from established full- commission brokerage firms such as Morgan Stanley Dean Witter, PaineWebber, Donaldson, Lufkin & Jenerette, Merrill Lynch, and Raymond James. Many of these brokerage firms have also begun conducting business on-line. Our Investment Professionals Our brokers are independent contractors who offer such services as securities brokerage and asset management, as well as life insurance to individual, corporate, government and institutional clients. Under our structure, the investment professionals are independent contractors rather than employees and are financially responsible for their direct operating expenses including: . office facilities . furniture and equipment . support personnel . errors and omissions insurance . clearing and execution services via our network and other transaction related services However, the "payout" percentages of revenues to the investment professionals, primarily commissions, are, in general, substantially higher in comparison to other national retail brokerage firms which utilize the employer/employee structure. Accordingly, under our structure, the investment professional's income potential, particularly for higher producing individuals, is generally considerably higher in comparison to income potential under the prevailing employer/employee structure in the industry, even though our professionals assume responsibility for their direct operating expenses. For regulatory purposes, all customer transactions and revenues produced by our investment professionals are recorded on our books and records and we are responsible for regulatory compliance supervision of our investment professionals. We supervise them to the extent necessary to meet the regulatory requirements of the SEC and NASD. Failure to meet these requirements can result in censures, fines, civil liability and even suspension or loss of our license as a registered securities broker-dealer. All branch office managers are required by us to be qualified as general securities principals and general securities representatives and, if required by the nature of the business, as registered options principals and municipal securities principals. They must pass appropriate qualifying examinations in those categories. In addition, we charge our investment professionals for clearing, execution, services offered via our network and other transaction related services necessary to conduct securities brokerage activities. We are responsible for providing back office support for our investment professionals, including trading, due diligence on products and sponsoring investment banking services, regulatory and compliance matters, and other related services. For federal and state income tax purposes, our investment professionals are treated as independent contractors and not employees. In 1989, we received a determination letter from 46 the Denver District of the Internal Revenue Service stating that our brokers would be treated as independent contractors for federal income tax purposes. We have consistently relied on the determination letter and the representations therein when conducting our operations. In 1995, the IRS examined our employment tax returns for 1993 and 1994. In 1998, the IRS accepted our position that our investment professionals were independent contractors for federal employment tax purposes. Regulation Of Our Business The securities industry in the United States is subject to extensive regulation under both federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. We are a broker- dealer registered with the SEC and a member of the NASD, National Futures Association and the Commodities Futures Trading Commission. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD. These self-regulatory organizations adopt rules, subject to approval by the SEC, governing in the industry and conduct periodic examinations of broker-dealers. Securities firms are also subject to regulation by state securities authorities in the states in which they do business. We are registered as a broker-dealer and as an investment advisor in 50 states and the District of Columbia. The principal purpose of regulating broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and shareholders of broker-dealers. The regulations to which broker-dealers are subject cover all aspects of the securities business, including: . training of personnel . sales methods . trading practices among broker-dealers . uses and safekeeping of customers' funds and securities . capital structure of securities firms . record keeping . fee arrangements . disclosure to clients . the conduct of directors, officers and employees SEC and self-regulatory actions can result in censure, fine, cease and desist orders or suspension or expulsion of a broker-dealer or an investment advisor, its officers or its employees. We have undergone SEC and NASD examinations within the last few years and the regulatory authorities have alleged non-compliance violations. See "Legal Matters Affecting Us." In addition to conducting supervision of our investment professionals as required by regulatory authorities, the professional qualifications, including the regulatory records maintained by the NASD and state securities commissions, of all candidates under consideration to become affiliated with us are subjected to review by a committee comprised of 47 our management personnel and outside legal counsel. These additional procedures were established to mitigate the risks associated with retaining new investment professionals. Effect of Net Capital Requirements As a registered broker-dealer, we are subject to regulatory net capital rules administered by the SEC. The rule specifies minimum net capital requirements for all registered broker-dealers and is designed to measure financial integrity and liquidity. Our broker is required to maintain net capital of 6.67% of aggregate indebtedness or $250,000. As of June 30, 1999, our net capital of $727,077 was 387% of aggregate indebtedness and our net capital in excess of the minimum requirement was $477,077. Failure to maintain the required regulatory net capital may subject a firm to suspension or expulsion by the NASD, certain punitive actions by the SEC and other regulatory bodies and, ultimately, may require a firm's liquidation. Properties Our executive offices are located in Denver where we lease 24,000 square feet. The terms of the leases expire in 2003 and 2009. Our aggregate monthly lease payments are about $23,000. Employees We believe that one of our strengths is the quality and dedication of our people and the shared sense of being part of a team that provides timely quality, service to our clients. We strive to maintain a work environment that fosters professionalism, excellence, diversity and cooperation among our employees. We also believe that our employees should have an equity stake in the firm. Our employees as a group own roughly 25% of our equity on a fully diluted basis. As of June 30, 1999, we had 52 employees, none of whom is represented by a labor union. 48 LEGAL MATTERS AFFECTING US We are a party to the following legal proceedings. U.S. Lending Litigation Certain individuals who purchased debentures and/or preferred stock issued by U.S. Lending Corporation ("USL") have brought three lawsuits in state courts in Colorado, Florida and Texas against us and approximately 30 other broker- dealers, numerous individual salesmen and former officers and directors of USL. The three cases assert essentially the same claims under the securities laws of each state, and common law principles of negligent misrepresentation and negligent failure to supervise. The individual plaintiffs hope to be designated class representatives and obtain recission of the purchase of USL securities on behalf of all of the purchasers from January 1993 to March 1995. The cases are at various stages of pre-trial proceedings, including limited written discovery and depositions. In Florida, the Court dismissed claims against all non-Florida resident defendants who did not sell securities to at least one of the proposed class representatives in the State of Florida. The plaintiffs have appealed this ruling to the Florida Court of Appeals. As a result of this ruling, all of our officers, directors and investment professionals in that case, except one, have been dismissed. The Court has denied the plaintiffs' request to certify them as class representatives but permitted them to renew their request in the future. In Colorado and Texas, the plaintiffs' request to be certified as class representatives is pending, but the Courts have deferred ruling on class certification until after resolution of our motions for summary judgment. We have moved for summary judgment seeking dismissal of the cases because there is a substantial question as to the plaintiffs' ability to bring their claims in light of a plan of reorganization approved by the court in the USL bankruptcy. In Colorado, the Court ordered the plaintiffs to seek clarification of the bankruptcy judge's rulings, and our motion was granted to stay the case pending a final ruling on our motion for summary judgment. In Texas, our motion is awaiting oral argument before the judge. We have answered the three complaints and denied liability. At present, it is difficult to estimate how much is at stake in this litigation. The currently named plaintiffs invested less than $125,000 through our broker-dealer. We sold approximately $5,000,000 of the total $28,000,000 raised by USL. The balance was sold by the other broker-dealers. If the class is ultimately certified against us, they will likely seek recission of the amount invested through us plus interest, attorneys' fees and costs. The investors received a substantial, but presently unknown, amount of interest and/or return of capital. In addition, we have settled claims with other plaintiffs or claimants representing approximately $500,000 of USL securities purchases. These amounts would offset any liability to the class. 49 At present, our litigation counsel cannot evaluate the likelihood of an unfavorable outcome as to these cases. If any or all of the suits are certified as class actions and if we were to lose at the trials of the cases, the damages could be material and exceed our current ability to pay without using some of the proceeds from this offering. Individual Arbitrations and Litigation As of September 30, 1999 we are also a defendant or co-defendant in six separate NASD arbitration actions and one lawsuit brought by certain individuals alleging various claims against us and/or our investment professionals. We believe that in each of these pending matters, we have meritorious defense or offsets that will enable us to settle the cases without a material adverse effect on us. Our counsel in each of these cases, however, cannot give us an evaluation of the likelihood of an unfavorable outcome. Although we do not believe that the loss of any one of the cases would have a material adverse effect on us, if several or all of the cases were lost and the claimants or plaintiffs were awarded the full amount of their alleged losses, we might not be able to pay the full amount of the damages awarded without using some of the proceeds from this offering, which amount could be material. NASD and SEC Investigations We have been the subject of an NASD investigation and an SEC investigation of various aspects of our business. We settled the NASD investigation by agreeing to a consent order, which the NASD has not yet signed, in June 1999. Without admitting or denying the NASD's allegations, we consented to a fine of $50,000, and our Chief Executive Officer consented to a 30-day suspension from association in all principal capacities with our broker/dealer. It is customary that a principal of the firm is sanctioned at the same time. The alleged violations are for failing to promptly deposit money into an escrow account in connection with two securities offerings in 1994 and 1995, failure to establish a qualifying account to receive, hold and distribute investor funds with respect to two 1994 securities offerings by Nevada Gold & Casinos, Inc. ("Nevada Gold"), failure to return investor funds when the minimum sales contingency was not met, permitting persons to function in a principal capacity before such persons passed the appropriate examinations, failure to supervise a person formerly associated with us and failure to establish, maintain and enforce adequate written supervisory procedures. The SEC investigation partially overlapped the NASD investigation regarding the two securities offerings of Nevada Gold in which we acted as the selling agent. The SEC staff was authorized to investigate whether there were misrepresentations or omissions with respect to the Nevada Gold securities offerings, whether the Nevada Gold offerings were exempt from registration under Regulation D, whether certain individuals or entities were acting as unregistered brokers or dealers in connection with the sale of Nevada Gold securities and, if so, whether they failed to maintain net capital as required by the Exchange Act and applicable regulations, whether funds received in connection with the Nevada Gold offerings were promptly transmitted to an appropriate escrow account and whether certain individuals may have failed to supervise persons subject to their supervision who engaged in the alleged violations described above. 50 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. 51 MANAGEMENT Our Directors and Officers The following table sets forth certain information concerning our directors and executive officers:
Beginning Term Name Age Positions Held of Service ---- --- -------------- --------------- Dale E. Frey 69 Chairman of the Board, September 1989 President, Chief Executive Officer and Director/(1)(2)/ Cornelia F. Eldridge 57 Director/(1)/ September 1989 Michael R. McClurg 59 Director/(1)/ September 1989 Jerome C. Eppler 74 Director/(1)/ January 1991 William R. Tennison, Jr. 57 Director/(1)/ June 1997 Scott T. Gillespie 43 Senior Vice President of March 1995 Operations/(2)/ Paul L. Hocevar 52 Senior Vice President and April 1996 Chief Financial Officer/(2)/ Larry Hayden 63 Senior Vice President of April 1999 Administration/(2)/
__________________ /(1)/ Director or officer of the parent company. /(2)/ Officer of the broker subsidiary. No arrangements exist between directors, officers, or other persons which resulted in the selection or election of any of the above-named persons. All directors hold office until the next annual meeting of shareholders or until their successors are duly elected and qualified. Officers serve at the pleasure of the board of directors. The principal occupations of the persons named above for at least the past five years are as follows: 52 Dale E. Frey has been the Chief Executive Officer, President and a Director of the parent and the broker since inception. From January 1967 until December 1987 he was an Executive Vice-President and Regional Manager of E.F. Hutton & Company, Inc. and served on its board of directors. From January 1988 until September 1988, he was an Executive Vice President of Shearson Lehman Hutton, Inc. While with Hutton, Mr. Frey managed over 1,200 employees who generated revenues of $150 million per year. His eleven-state region captured 25% of the total market share (based on gross commission revenues) of the securities business within that region based upon the McGlagan Report which was a survey prepared for the securities industry. Mr. Frey graduated from the University of Colorado in 1958 with a degree in aeronautical engineering. Cornelia F. Eldridge has been a Director of the parent since September 1989. Since 1987, Ms. Eldridge has been self-employed through Eldridge Associates, New York, New York, engaged in the business of management consulting. From August 1984 until December 1986 she was a Partner in Ditri Associates, New York, New York, engaged in the business of management consulting. Ms. Eldridge graduated from Ohio Wesleyan University in 1963 with a Bachelor of Arts degree in Art and French and from the University of Massachusetts in 1968 with an MBA. Michael R. McClurg has been a Director of the parent since September 1989. Since May 1993, Mr. McClurg has served as President, Chief Executive Officer and Director of DDx & Co., engaged in the business of detecting estrus in cows to maximize the efficiencies of artificial insemination programs on dairy farms and beef ranches. Mr. McClurg has 37 years of business management, finance, and investment experience. From 1962 to 1980 Mr. McClurg was an investment banker on Wall Street with three different firms. His last and most notable position while on Wall Street was as Senior Vice President of Dillion, Reed & Co. Inc. From 1980 to 1983 he formed and managed several specially designed oil and gas limited partnerships for institutional investors. In 1983 he moved to Denver, Colorado where he served as President, Chief Executive Officer and Director of High Plains Oil Corporation, a Nasdaq listed oil and gas exploration and production company that was sold to a New York Stock Exchange listed company in 1987. Since June 1987, Mr. McClurg has served as President, Chief Executive Officer and a Director of M.R. McClurg & Co., Inc., which provides financial consulting services to a variety of companies and provides assistance in arranging financing and mergers and acquisitions. Mr. McClurg graduated in 1962 with a Bachelor of Science degree in finance/marketing from Indiana University. Jerome C. Eppler has been a Director of the parent since January 1991. From 1953 to 1961, he was a General Partner of Cyrus J. Lawrence & Sons, a registered securities broker-dealer which was a member of the New York Stock Exchange. In 1961 he formed Eppler & Company, a private investment banking firm of which he is the sole owner. From 1967 to 1978, he served as Chairman and Chief Executive Officer of ISI Corp., which was the founder of Life Insurance Group of California. In 1978, that company was sold to E.F. Hutton Group ISI Corp., through a separate subsidiary, managed mutual funds having assets over $1 billion. Mr. Eppler has been associated with companies in various capacities as a director and otherwise, including Allegheny Airlines (now U.S. Air) from 1961 to 1975; Esmark, Inc. from 1965 to 1984; Gifford-Hill & Co. from 1978 to 1986; and Telecredit, Inc. from 1976 to 1990. He was a Limited Partner 53 of Alex Brown & Sons, a registered securities broker-dealer from 1982 until 1986. At present, Mr. Eppler is a principal of Olympic Capital Partners, an investment banking firm; a director of Tessco Inc., a national distributor of telecommunication devices and equipment; Vision TEK, a software development company; and Advanced Research Systems, Inc., a medical software development company. Mr. Eppler received degrees from Texas A&M University in 1947 and the Wharton Graduate School of Business in 1949. William Tennison, Jr. has been a Director of the parent since June 1997. Since 1991, Mr. Tennison has been a registered representative affiliated with the broker as an independent contractor and has served on the broker's board of directors since the summer of 1997. He specializes in retirement and estate planning. He began his professional career in 1971 at E.F. Hutton & Company advancing to First Vice President and served on the Directors Advisory Council. In addition to his primary function as an Account Executive, he held numerous managerial positions at branch, regional and national levels. He developed and published a highly respected training program, The Bill Tennison Master Class, utilized throughout the securities industry. He is a frequent speaker at securities industry sales conferences and other professional conventions. Mr. Tennison graduated from Arizona State University in 1963 with a Bachelor of Science degree in industrial management and the University of Arizona in 1965 with an MBA. Scott T. Gillespie has been employed by the broker since January 1995 and became an officer in March 1995. From March 1992 through December 1994, he was employed by Resources Trust Company and was Managing Director of its Investment Manager Services Division. From June 1990 through March 1992, he was a business consultant and principal of the Business Planning Group, specializing in turnaround management. From March 1985 through October 1989, Mr. Gillespie was President of Drake Capital securities, Inc. From June 1983 through February 1985, Mr. Gillespie was the Chief Financial Officer of First Wilshire Securities Management, Inc. From September 1978 through June 1983, Mr. Gillespie was a CPA and audit manager with Deloitte & Touche (formerly Touche Ross & Co.), an international accounting firm. Mr. Gillespie received a Bachelor of Science and MBA degrees in finance from the University of Southern California in 1977 and 1978, respectively. Paul L. Hocevar has been employed by the broker since September 1995 and has served as a director of the broker and Chief Financial Officer since February 1996 and August 1996, respectively. From March 1991 to September 1995, he was President and Director of COMgroup International and affiliates, privately owned international telecommunication companies, with cellular, paging, e-mail and Internet access projects in Yugoslavia, Malta, Kuwait, and other international locations. From January 1983 to February 1991, he was a Partner with Arthur Andersen & Company, an international accounting firm as a tax specialist. From September 1973 to April 1982, he was employed by Peat, Marwick, Mitchell & Co., an international accounting firm. He was promoted to partner in June 1979, and was a member of the firm's oil and gas tax practice team from 1973 through 1982. He has been an author, a lecturer, a speaker and an expert witness on numerous occasions during his professional career. He graduated from the University of Denver in 1969 with a degree in accounting and the University of Denver College of Law in 1973 with a Juris Doctorate degree. 54 Larry Hayden has been employed by the broker since April 1999. From February 1998 to April 1999, he served as Vice President of Compliance for Fiserv Correspondent Services, Inc. Since 1991, through his consulting firm, L.D. Hayden & Associates, he has provided independent compliance audits for brokerage and investment advisory firms as well as management reviews focusing on strategic planning, employment practices and structured hiring practices. From 1986 to 1991, he served as President of CFP Board of Standards (formerly The International Board of Standards and Practices for Certified Financial Planners). Mr. Hayden was Executive Vice President and a Director of Hanifen, Imhoff Inc., a regional NYSE member firm from 1977 to 1984. From 1973 to 1977, he served as Vice President, Treasurer and Director for Westamerican Financial Corporation, a national distributor of mutual funds. From 1968 through 1973, Mr. Hayden was employed by the National Association of Securities Dealers as Assistant District Director in the Denver District office. He was also a member of the Board of Governors of the NASD. He is an Arbitrator for the NASD and frequently serves on Nasdaq listing qualification hearing panels. Mr. Hayden graduated in 1961 from Western State College with a Bachelor degree in Business Administration and received a Masters degree in organizational management from the University of Phoenix in 1996. He received his Certified Financial Planner designation in 1982 and is a member of the Institute of Certified Financial Planners. Term and Compensation of Directors Our five person board of directors is divided into three separate classes (Class I, Class II and Class III), with one class of directors elected at each annual meeting to serve a three year term. Each director elected serves in such capacity until the next annual meeting of our shareholders where that class is re-elected or until their successors are duly elected and qualified. Directors that are not employees or investment professionals each receive $2,000 for each meeting of the board of directors that they attend and $500 for attending a meeting of a committee of the board of directors. Each of our directors is reimbursed for any expenses incurred by such director in connection with such director's attendance at a meeting of the board of directors, or committee thereof. Directors who are employed by us receive no compensation from us for serving on the board of directors. Term of Executive Officers The board of directors names each of our executive officers at the first board meeting following our annual meeting of shareholders. Each officer serves at the behest of the board of directors and until their successors are elected and appointed or until the earlier of their death, resignation or removal. Committees of the Board of Directors We have appointed certain members of our board to serve on various committees of the board of directors. The board of directors has established three standing committees: (a) the compensation committee; (b) the audit committee; and (c) the planning committee. 55 Compensation Committee. The compensation committee is responsible for reviewing the performance of our chief executive officer; reviewing and recommending the compensation of our executive officers, including the chief executive officer; recommending and approving stock option grants and restricted stock awards to management; reviewing and recommending non-cash compensation programs including stock option grants, 401(k) contributions and annual bonuses; reviewing and recommending director compensation; and advising the chief executive officer on miscellaneous compensation issues. The members of the compensation committee are Mr. McClurg, Mr. Eppler and Ms. Eldridge. Audit Committee. The audit committee reports to the board of directors in discharging its responsibilities relating to our accounting, reporting and financial control practices. The audit committee has general responsibility for oversight of financial controls, as well as our accounting, regulatory, and audit activities, and annually reviews the qualifications of the independent auditors. The audit committee is composed entirely of outside directors. The members of the audit committee are Mr. McClurg, Mr. Eppler and Ms. Eldridge. We have not designated a nominating committee. The entire board of directors acts to nominate persons for election as directors. Compensation Committee Interlocks and Insider Participation The compensation committee of the board of directors consists of Mr. McClurg, Mr. Eppler and Ms. Eldridge, none of whom has been or is an officer or employee. No interlocking relationship exists between any member of the compensation committee and any member or any other company's board of directors or compensation committee. Indemnification of Officers and Directors Our amended and restated certificate of incorporation limits, to the maximum extent permitted under Delaware law, the personal liability of directors and officers for monetary damages for breach of their fiduciary duties as directors and officers, except in certain circumstances involving certain wrongful acts, such as breach of a director's duty of loyalty or acts of omission which involve intentional misconduct or a knowing violation of law. Section 145 of the Delaware General Corporation Law permits us to indemnify officers, directors or employees against expenses (including attorney's fees), judgements, fines and amounts paid in settlement in connection with legal proceedings if the officer, director or employee acted in good faith and in a manner he reasonably believed to be in or not opposed to our best interests, and with respect to any criminal act or proceeding, he had no reasonable cause to believe his conduct was unlawful. Indemnification is not permitted as to any matter as to which the person is adjudged to be liable unless, and only to the extent that, the court in which such action or suit was brought upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Individuals who successfully defend such an action are entitled to indemnification against expense reasonably incurred in connection therewith. 56 COMPENSATION The following table sets forth information as to compensation paid by us, to the named persons. SUMMARY COMPENSATION TABLE
Long Term Compensation ---------------------------------- Annual Compensation Awards Payouts ---------------------- ------------------ ------------- Other Other All Annual restricted Other Name and Fiscal Compens- stock Options/ LTP compen- principal position year Salary Bonus sation/(1)/ award(s) SARs Payouts sation - ------------------ ------- ------- ----- ------------ ----------- --------- ------- -------- Dale E. Frey 1998 $600,000 -- -- -- -- 1997 600,000 $ 37,500 -- 350,000 -- -- 1996 600,000 -- -- 100,000 -- -- Scott T. Gillespie 1998 $133,185 $ 9,000 -- 107,500 -- -- 1997 133,110 6,250 -- 25,000 -- -- 1996 133,110 -- -- -- -- Paul L. Hocevar 1998 $180,100 -- -- -- -- 1997 155,000 $ 12,500 -- 150,000 -- -- 1996 130,000 -- -- 50,000 -- --
__________________ (1) Warrants issued and exercised at less than the fair value of the stock. We have an existing employment agreement with Mr. Frey which has a term of three years and provides for an annual salary of $600,000 and customary benefits. We anticipate that the annual salary rate during 1999 for Messrs. Gillespie, Hocevar and Hayden will be $150,000, $180,000 and $110,000, respectively. Mr. Hayden was not employed by us until April 1999, and thus he will not receive his full annual salary for 1999. We also have Noncompetition and Nonsolicitation Agreements with Messrs. Gillespie, Hocevar and Hayden, which are contingent upon completion of our public offering. These agreements are for a term of 30 months commencing on the date of closing of the public offering, and, if the employment of any of these individuals were to terminate before the end of the term, they would be restricted from competing with us or soliciting our clients or investment professionals for the remainder of the term. If we were to terminate the employment of any of these individuals other than for cause before the end of the terms, they would be entitled under these agreements to an additional three months salary and the salary that would be payable to them if they were to continue to be employed to the end of the term of the agreements. The executive officers of the broker participate in an incentive compensation plan. The incentive compensation is determined annually based on annual consolidated net income before taxes. On the first $600,000 of incentive compensation for our executive officers the consolidated net income before taxes must equal or exceed two times the sum of the aggregate 57 base salary plus incentive compensation payable to all executive officers. The factor increases as the consolidated net income before taxes increases for succeeding increments of incentive compensation. The following table illustrates the application of the foregoing formula and shows the aggregate annual incentive compensation for the first several income ranges, for which the factors are 2, 2.25 and 2.5, respectively: Consolidated Net Income Amount of Before Taxes Incentive Compensation ------------------------ ---------------------- From To From To ---- -- ---- -- $2,400,000 $ 4,200,000 $ 0 $ 600,000 4,650,001 6,600,000 600,001 1,200,000 7,200,001 11,400,000 1,200,001 2,400,00 Stock Options We Have Granted The following table sets forth certain information with respect to the options granted during 1998 to each of our executive officers listed in the Summary Compensation Table above:
Potential Realized Value at Assumed Percent of Annual Rates of Total Options Stock Price Granted to Exercise or Appreciation Options Employees in Base Price Expiration for Option Term/(1)/ ------------------------ Name Granted # Fiscal Year $/Sh Date 5%($) 10%($) - ---- --------- ------------ ----------- ------------ ------ ------- Scott T. Gillespie 107,500 97.7% $2.00 03/02/03 $59,340 $131,365
__________________ /(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.
Value of Unexercised Shares Number of Unexercised In-the-Money Options/(2)/ Acquired Value Options at December 31, 1998 at December 31, 1998 ------------------------------------ ----------------------------------- Name on Exercise Realized/(1)/ Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ----------- ------------ ------------ -------------- ------------- Dale E. Frey 2,000 $ 6,000 350,000 -- $980,000 -- Scott T. Gillespie 12,000 45,000 107,500 -- 322,500 -- Paul L. Hocevar -- -- 100,000 -- 300,000 --
____________________________ /(1)/ The value realized is based on an arbitrary value of $5.00 per share. /(2)/ The value of unexercised options is based on an arbitrary value of $5.00 per share. 58 Our Stock Option Plan To attract and retain qualified personnel, we adopted the 1992 stock option plan. The plan initially covered approximately 300,000 shares. In February 1994, the number of shares available pursuant to the plan was increased to 600,000 shares and was later increased to 1,000,000 shares in May 1999 subject to shareholder ratification. The plan allows issuance of both qualified (or incentive) options and non-qualified options and has a term of ten years. Options have been and may be granted to employees, independent contractors, officers, directors and consultants at the discretion of the board of directors. Subject to the limitations of the Internal Revenue Code, incentive options will be granted to employees, including officers, at an exercise price not less than the fair market value of the underlying shares on the date of grant. The committee may elect varying vesting schedules, although it is anticipated that most option grants will require deferred vesting. To obtain favorable tax treatment, the holder of shares acquired through exercise of an incentive option may not dispose of those shares for two years from the date the option is granted and for one year from the date of transfer of any shares to the exercising option holder. Non-qualified options have been and may be granted under the plan by the committee to officers, directors, employees consultants and others having a business relationship with the Company. The option exercise price, option exercise period, option vesting and other matters will be at the discretion of the committee. As of June 30, 1999, options for the purchase of 602,500 shares are outstanding under the plan at an average exercise price of approximately $2.29 per share. Such options expire at various times between 2000 and 2004. Our Employee Stock Purchase Plan In April 1995, our board of directors approved the 1995 Stock Purchase Plan whereby employees, independent contractors, advisors and consultants of the parent company or the broker, at their election, may purchase shares and pay for such shares out of their compensation. The plan will terminate on March 31, 2005, or earlier upon not less than ten days' prior written notice. A maximum of 250,000 shares has been reserved for issuance pursuant to the plan. As of June 30, 1999, 34,527 shares have been issued pursuant to the 1995 plan for an aggregate of $69,054, or an average of $2 per share. On a quarterly basis, our board of directors determines the purchase price for shares issued pursuant to the plan. During 1998 and 1999 there was no material activity in the plan. In June 1999, the board of directors determined the purchase price for shares issued pursuant to the plan was $5.00 per share. Each participant in the plan will receive, within 60 days after the last day of each fiscal year, a non-transferable option for the purchase of that number of shares as equals 20% of the total number of shares purchased by the participant pursuant to the plan during the preceding year. The options will be exercisable for a period of three years after the issuance date at an exercise price equal to the then value as established by our board of directors, but only so long as the holder of the option is employed by us or the broker as an independent contractor, consultant or advisor associated with us. However, if a public market exists for our shares, the 59 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. 60 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.
Shares Beneficially/(2)/ Owned Prior To Shares Beneficially Offering Owned After Offering/(18)/ ------------------------ ---------------------------- Name and Address/(1)/ Number Percent Number Percent - ---------------- ------ ------- ------ --------- Dale E. Frey/(3)(4)(5)(6)(7)(8)(9)/ 861,601 17.5 861,601 12.0 William R. Tennison, Jr./(5)(6)(10)/ 293,153 6.4 326,859 4.8 174 Grand Avenue Paonia, CO 81428 Robert Tointon/(11)/ 300,000 6.6 300,000 4.4 Post Office Box 1518 Greeley, CO 80632 Scott T. Gillespie/(3)(4)(6)(12)/ 144,500 3.1 144,500 2.1 Paul L. Hocevar/(3)(4)(6)(13)/ 201,292 4.3 201,292 2.9 Larry Hayden/(4)(14)/ 15,000 * 15,000 -- Cornelia Eldridge/(5)(15)/ 15,850 * 17,880 -- 2455 E. Sunrise Blvd. Suite 313 Ft. Lauderdale, FL 33304 Jerome Eppler/(5)(16)/ 82,500 1.8 82,500 1.2 1004 A Hummingbird Dr. Castle Rock, CO 80104
61 Mike McClurg/(5)(17)/ 162,383 3.5 196,744 2.9 2516 Tournament Dr. Castle Rock, CO 80104 Executive Officers & Directors as a group (8 persons) 1,776,279 37.3 2,146,376 30.3
______________________ /(1)/ The address of each of the persons listed above is 1700 Lincoln Street, Denver, Colorado 80203, unless indicated otherwise. /(2)/ Beneficial ownership is determined in accordance with the rules of the SEC. In general, a person who has voting power and/or investment power with respect to securities is treated as a beneficial owner of those securities. Shares of common stock subject to options, warrants or rights currently exercisable or exercisable within 60 days of the date of this prospectus are considered as beneficially owned by the person holding such options, warrants or rights. Unless indicated otherwise, we believe that the persons named in this table have sole voting and investment power with respect to the shares of common stock outstanding as of June 30, 1999. /(3)/ Executive officer of parent. /(4)/ Executive officer of subsidiary. /(5)/ Director of parent. /(6)/ Director of subsidiary. /(7)/ Includes options to purchase 350,000 shares of common stock. /(8)/ Includes 60,500 shares of common stock owned by Mr. Frey's minor son. /(9)/ Includes shares against which Mr. Frey's spouse may have a legal claim. /(10)/ Includes 46,361 and 15,815 shares of common stock owned by Tennison Revocable Trust and William R. Tennison IRA. Includes shares of common stock issued in the conversion to Tennison & Associates of which Mr. Tennison is an officer and director and warrants to purchase 14,500 shares of common stock. /(11)/ Includes 150,000 shares of common stock owed by Phelps-Tointon, Inc. of which Mr. Tointon is a director. /(12)/ Includes 33,000 shares of common stock owned by Mr. Gillespie's individual retirement account and options to purchase 107,500 shares of common stock. /(13)/ Includes 50,000 shares of common stock owned by Paul L. Hocevar Keogh, and options to purchase 100,000 shares of common stock. /(14)/ Includes options to purchase 15,000 shares of common stock. /(15)/ Includes warrants to purchase 12,500 shares of common stock. /(16)/ Includes 60,000 and 10,000 shares of common stock owned by the Jerome Eppler Keogh and Jerome Eppler Trust, respectively. Also, includes 12,500 warrants to purchase common stock. /(17)/ Includes 70,984 shares of common stock owned by MR McClurg & Co. of which Mr. McClurg is an officer and director, 10,000 shares of common stock owned by Emma McClurg, wife, and warrants to purchase 12,500 shares of common stock. /(18)/ Takes into account 283,922 shares issued in conversion of debt as described under "Exchange of Debt." * Less than 1.0%. 62 CERTAIN TRANSACTIONS During 1997 and 1998, we advanced to a newly formed limited liability company approximately $518,000 in debt and equity contributions to repurchase direct participating interests and other securities from claimants of our broker-dealer subsidiary. We are the manager of the limited liability company, which was formed by us to hold certain investments that are in the process of liquidity. The aggregate amount owed by the limited liability company to us has been reduced to approximately $423,000, as of June 30, 1999. We believe that we will be able to recover the full amount from the limited liability company as the investments are liquidated. However, we have recorded a reserve of $215,000 against this investment as of June 30, 1999. Contingent upon completion of this offering, Messrs. McClurg and Tennison and Ms. Eldridge have agreed to convert $175,242, $171,900 and $10,355, respectively, of subordinated debt in our debt exchange for 34,397, 33,706 and 2,030 shares of our common stock, respectively, at an assumed price of $5.10 (85% of our assumed offering price of $6 per share). We will not enter into transactions or agreements with directors, officers, principal security holders or other affiliated parties unless the terms thereof are no less favorable to us than could be obtained from unaffiliated third parties. In any event, we will not enter into any transaction with directors, officers or principal security holders without the affirmative vote of a majority of disinterested directors. 63 DESCRIPTION OF OUR EQUITY SECURITIES Common Stock We are authorized to issue 10,000,000 shares of common stock, $.10 par value, of which 4,571,614 shares are currently issued and outstanding. Holders of shares are entitled to dividends as and when declared by our board of directors from funds legally available therefor, and upon our liquidation, dissolution or winding up, to share ratably in all assets remaining after payment of liabilities. We have not paid any dividends to date nor do we anticipate paying any dividends on our shares in the foreseeable future. It is our present policy to retain earnings, if any, for use in the development and expansion of our business. The holders of shares are entitled to one vote for each share held of record by them, and do not have the right to cumulate their votes for election of directors. The holders of shares do not have preemptive rights. Preferred Stock We intend to amend our certificate of incorporation to authorize 1,000,000 shares of preferred stock, $.001 par value. Our preferred stock may be issued from time to time by our board of directors as in one or more series. The description of shares of each series of preferred stock will be as set forth in resolutions adopted by the board of directors and a certificate of designation to be filed as required by Delaware law prior to the issuance of any shares of the series. The certificate of designation will set the number of shares to be included in each series of preferred stock and set the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms and conditions of redemption relating to the shares of each series. However, the board of directors is not authorized to change the right of the common stock to vote one vote per share on all matters submitted for shareholder action. The authority of the board of directors with respect to each series of preferred stock includes, but is not limited to, setting or changing the following: . the designation of the series and the number of shares constituting the series, provided that the aggregate number of shares constituting all series of preferred stock may not exceed 1,000,000 . the annual distribution rate on shares of the series, whether distributions will be cumulative and, if so, from which date or dates . whether the shares of the series will be redeemable and, if so, the terms and conditions of redemption, including the date or dates upon and after which the shares will be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates . our obligation, if any, to redeem or repurchase shares of the series pursuant to a sinking fund 64 . whether shares of the series will be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any . whether the shares of the series will have voting rights, in addition to the voting rights provided by law, and, if so, the terms of the voting rights . the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up . any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to the series which may be authorized or permitted under Delaware law The shares of preferred stock of any one series will be identical with each other in all respects except as to the dates from and after which dividends thereon will cumulate, if cumulative. Outstanding Options and Warrants From time to time we have issued options and warrants to purchase our common stock. As of June 30, 1999, we had outstanding options permitting the holders to purchase 602,500 shares of our common stock at an average exercise price of $2.29 per share. See "Compensation - Our Stock Option Plan." We also had outstanding warrants permitting the holders to purchase 340,000 shares of our common stock at an average exercise price of $2.20 per share. 65 EXCHANGE OF DEBT In August 1999, we asked our debt holders to convert their debt into our common stock at a rate per common share of 85% of the public offering price, contingent on the closing of this offering. Holders of $1,448,000 of our debt elected to do so, and based on a public offering price of $5 to $7 per share, will receive between 341,000 and 243,000 shares upon closing. These shares are restricted from sale for 180 days following this offering. 66 SHARES ELIGIBLE FOR RESALE Prior to this offering, there has been no public market for our common stock. We cannot provide any assurances that a significant public market for the common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for our common stock or our future ability to raise capital through an offering of equity securities. After this offering and the exchange of $1,448,000 of debt for common stock (see "Exchange of Debt"), we will have outstanding 6,855,536 shares of common stock. Of these shares, the 2,000,000 shares to be sold in this offering, or 2,300,000 shares if the underwriters' over-allotment option is exercised in full, will be freely tradable in the public market without restriction under the Securities Act, unless such shares are held by any of our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 4,855,536 shares outstanding upon completion of this offering will be "restricted securities" as that term is defined under Rule 144. We issued and sold the restricted shares in private transactions in reliance on exemptions from registration under the Securities Act. Restricted shares may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 under the Securities Act, as summarized below. Pursuant to the "lock-up" agreements between our officers, directors and the holders of 5% or more of our outstanding shares of common stock and either ourself or the underwriters, have agreed not to offer, sell, pledge or otherwise dispose of, directly or indirectly, or announce their intention to do the same, any of our common stock or securities convertible into, or exchangeable or exerciseable for any of our securities for a period of 12 months from the date of this offering. In addition, "lock-up" agreements between converting debt holders and either ourself or the underwriters, and holders of ________ of the restricted shares have agreed not to do the same for a period of 180 days from the date of this offering. The underwriter agrees to release all shareholders from the lock-up provisions if our common stock trades at a 50% premium above the public offering price for 20 trading days. However, if the holder of the restricted shares is an individual, he or she may transfer any such securities either during his or her lifetime or on death by will or intestacy to his or her immediate family or to a trust the beneficiaries of which are exclusively the holder of the securities and/or a member of his or her immediate family. We also have entered into an agreement with the underwriters that we will not offer, sell or otherwise dispose of common stock for a period of 180 days from the date of this offering. On the date of the expiration of the lock-up agreements, all of the restricted shares will be eligible for immediate sale, although shares held by affiliates will be subject to some volume, manner of sale and other limitations under Rule 144. Shares issued upon exercise of options and warrants we granted prior to the date of this offering will also be available for sale in the public market under Rule 144. In general, under Rule 144 as in effect at the closing of this offering, beginning 90 days after the date of this prospectus, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, including the holding period of any prior owner who is not an affiliate, would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 67 . 1% of the then-outstanding shares of common stock or . the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to the sale Sales under Rule 144 are also subject to some manner of sale and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an affiliate, is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. 68 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below, for whom Neidiger Tucker Bruner, Inc. and D.E. Frey & Company, Inc. are acting as representatives, have severally agreed to purchase from us, and we have agreed to sell to them, the respective number of shares of common stock set forth opposite each underwriter's name below. Number Underwriters of Shares ------------ --------- Neidiger Tucker Bruner, Inc...................... D.E. Frey & Company, Inc......................... --------- Total....................................... 2,000,000 ========= The Underwriting Agreement provides that the obligations of the several underwriters thereunder are subject to approval of certain legal matters by their counsel and to various other conditions. The nature of the underwriters' obligation is such that they are committed to purchase and pay for all shares of common stock, other than those covered by the over-allotment option discussed below, if any are purchased. The underwriters propose to offer the shares of our common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus, and to other securities dealers, who may include the underwriters, at such price, less a concession not in excess of $________ per share of common stock. The underwriters may allow, and such selected dealers may reallow, a concession not in excess of $________ per share of common stock to other brokers and dealers. After this offering, the price to the public, concession, allowance and reallowance may be changed by the representatives. The representatives have informed us that they do not intend to confirm sales to any account over which they exercise discretionary authority. We have granted the underwriters an option to purchase up to 300,000 additional shares of common stock at the same price per share as we will receive for the 2,000,000 shares that the underwriters have agreed to purchase. This option is exercisable during the 45-day period after the date of this prospectus, solely to cover over-allotments, if any. To the extent that the underwriters exercise this option, each of the underwriters will be committed, subject to certain conditions, to purchase such additional shares of common stock in approximately the same proportions as set forth in the above table. If purchased, the underwriters will sell the additional shares on the same terms as the 2,000,000 shares are being sold. If the underwriters exercise the over- allotment in full, the total public offering price will be $___________, total underwriting discounts will be $__________, and total proceeds to us will be $__________. We have also granted the underwriters warrants to purchase additional shares of common stock equal to ten percent of the common stock purchased by the underwriters in the initial public offering, exclusive of the over-allotment option. The warrants will be exercisable at a price equal to 120% of the initial public offering price for a period of four years, commencing one year from the effective date of this Registration Statement. Any holder of the warrants shall be permitted to exchange, in a cashless transaction, all or part of the warrants for our common stock. The cashless exchange shall be permitted commencing one year after the issue date of the warrants and only if our common stock is listed or approved for trading on an exchange, inter-dealer communication system, or national quotation bureau. The underwriter shall have a right of first refusal to act as our investment banker with respect to future public offerings and/or private offerings involving our securities or securities of our subsidiaries. The right of first refusal is valid for one year from the effective date of this Registration Statement. We have also entered into a consulting agreement with the underwriter as a financial consultant at $2,000 per month for a 24 month period. The consulting agreement will terminate if the offering does not close or either party elects to terminate the underwriting letter of intent. 69 The offering of the common stock is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject any order for the purchase of common stock. Subject to certain exceptions, we have agreed not to issue, and each of our officers and directors (and some of our shareholders) have agreed not to offer, sell or otherwise dispose of any of our shares of common stock or our other equity securities for a period of 180 days after the date of this prospectus without the prior written consent of the representatives. We have agreed to indemnify the underwriters against certain liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect thereof. Prior to this offering, there has been no public market for our common stock. Consequently, we negotiated the initial public offering price with the underwriters. Among the factors considered in such negotiations were: . prevailing market conditions . an assessment of our management . our results of operations in recent periods . the present stage of our development . the market capitalizations of other companies which we and the representatives believe to be comparable to us . estimates of our business potential There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to this offering at or above the initial public offering price. The initial public offering price should not be considered an indication of the actual value of our common stock. Such price is subject to change as a result of market conditions and other factors. We cannot assure you that our common stock can be resold at or above the initial public offering price. In order to facilitate this offering, certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock during and after the offering, such as the following: . the underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than we have been sold to them 70 . the underwriters may elect to cover any such short position by purchasing shares of common stock in the open market or by exercising the over-allotment option . the underwriters may stabilize or maintain the price of our common stock by bidding for or purchasing shares of common stock in the open market . the underwriter may engage in passive market making transactions . the underwriters may impose penalty bids, under which selling concessions allowed to syndicate members of other broker-dealers participating in this offering are reclaimed if shares of common stock previously distributed in the offering are repurchased in connection with stabilization transactions or otherwise The effect of these transactions may be to stabilize or maintain the market price at a level about that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of our common stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the American Stock Exchange or otherwise and, if commenced, may be discontinued at any time. Because of the relationship between us and our wholly owned subsidiary D.E. Frey & Company, Inc., the offering is being conducted in accordance with Rule 2720 of the National Association of Securities Dealers. That rule requires that the initial public offering price can be no higher than that recommended by a "qualified independent underwriter," as defined by the NASD. Neidiger Tucker Bruner, Inc. has served in that capacity and performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part. Neidiger Tucker Bruner, Inc. has received $20,000 to date from us as compensation for such role. 71 LEGAL MATTERS The validity of the shares of common stock being offered will be passed on for us by Jones & Keller, P.C. Certain legal matters will be passed on for the underwriters by John G. Herbert, P.C. EXPERTS The financial statements of D.E. Frey Group, Inc. as of December 31, 1998 and 1997 and the years ended December 31, 1998, 1997 and 1996 have been included herein in reliance on the report of Hein + Associates LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. With respect to the unaudited interim financial information for the six months ended June 30, 1999 and 1998, the independent accountants have not reviewed or audited such financial information and have not expressed an opinion or any other form of assurance with respect to such financial information. AVAILABLE INFORMATION We have filed with the U.S. Securities and Exchange commission a registration statement on Form S-1 under the Securities Act with respect to the offer of our common stock. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us, please refer to the registration statement, including the exhibits and schedules thereto, which may be inspected without charge and copied at prescribed rates at the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and the Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New York, 10048, and Northwestern Atrium Center 500 West Madison Street, Suite 140, Chicago, Illinois 60661. The Commission maintains a website that contains reports, proxy and information statements and other information filed electronically with the Commission at http://www.sec.gov. - ------------------ 72 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Pro Forma Condensed Financial Information (Unaudited) - ---------------------------------------------------- Introduction .................................................................................................... F-2 Pro Forma Condensed Statement of Financial Condition - June 30, 1999 ............................................ F-3 Pro Forma Condensed Statement of Operations - For the Six Months Ended June 30, 1999............................. F-4 Pro Forma Condensed Statement of Operations - For the Year Ended December 31, 1998 .............................. F-5 Notes to Pro Forma Condensed Financial Information .............................................................. F-6 D.E. Frey Group, Inc. - --------------------- Independent Auditor's Report..................................................................................... F-7 Consolidated Statements of Financial Condition - December 31, 1997 and 1998 and June 30, 1999 (Unaudited)............................................................................... F-8 Consolidated Statements of Operations - For the Years Ended December 31, 1996, 1997, and 1998, and For the Six Months Ended June 30, 1998 and 1999 (Unaudited)......................................... F-9 Consolidated Statements of Shareholders' Deficit - For the Years Ended December 31, 1996, 1997, and 1998, and For the Six Months Ended June 30, 1999 (Unaudited)........................................ F-10 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996, 1997, and 1998, and For the Six Months Ended June 30, 1998 and 1999 (Unaudited)......................................... F-11 Notes to Consolidated Financial Statements....................................................................... F-13 Schedule II - Valuation and Qualifying Accounts.................................................................. F-25
F-1 INTRODUCTION D.E. Frey Group, Inc. and Subsidiary The accompanying unaudited pro forma condensed balance sheet Actual column reflects the Company's financial condition as of June 30, 1999. The pro forma debt exchange column reflects the exchange of shares of common stock for certain subordinated notes. The exchange is subject only to the completion of an initial public offering and the conversion price of the debt is 85% of the price at which shares are sold to the public, which has been assumed to be $6.00 per share. The total debt exchanged was $1,448,000 for 283,922 shares of common stock. In addition, $49,208 in deferred financing costs has been charged to equity and $36,200 in interest payable on debt that has been paid. The pro forma offering adjustment column reflects the sale of 2,000,000 shares of common stock in this offering (at an assumed offering price of $6.00) after deducting underwriting discounts and commissions and estimated offering expenses totaling approximately $1.8 million. The accompanying unaudited pro forma condensed statements of operations Actual column reflects operations for the year ended December 31, 1998 and six months ended June 30, 1999. The adjustments column reflects the exchange of shares of common stock for certain subordinated notes assuming the conversion occurred at the beginning of the periods presented. The adjustments include the elimination of interest expense and amortization of deferred financing charges related to the debt that will be exchanged. These statements are not necessarily indicative of future operations or the actual results that would have occurred had the exchange been consummated at the beginning of the periods indicated. The unaudited pro forma condensed financial statements should be read in conjunction with the historical financial statements and notes thereto, included elsewhere in this prospectus. F-2 D.E. FREY GROUP, INC. AND SUBSIDIARY PRO FORMA CONDENSED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
Actual Pro Forma Pro Forma Pro Forma June 30, Debt Exchange Before Offering 1999 Adjustments Offering Adjustments Pro Forma ------------ --------------- ------------ --------------- ------------ ASSETS ------ Cash and cash equivalents $ 1,085,683 $ (36,200)/A/ $ 1,049,483 $ 10,170,000 /B/ $11,219,483 Securities owned 1,452,441 - 1,452,441 - 1,452,441 Receivables 2,234,389 - 2,234,389 - 2,234,389 Property and Equipment, at cost, less accumulated depreciation of $871,189 626,966 - 626,966 - 626,966 Deferred Financing Costs and Other 719,824 (49,208)/C/ 670,616 (22,491)/D/ 648,125 ----------- ----------- ----------- ------------ ----------- Total Assets $ 6,119,303 $ (85,408) $ 6,033,895 $ 10,147,509 $16,181,404 =========== =========== =========== ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Commissions and compensation payable $ 1,988,966 $ - $ 1,988,966 $ - $ 1,988,966 Accounts payable, accrued expenses and other 1,356,615 (36,200)/A/ 1,320,415 - 1,320,415 Notes payable to related parties 357,500 (357,500)/E/ - - - Other notes payable 5,712,517 (1,090,500)/E/ 4,622,017 - 4,622,017 ----------- ----------- ----------- ------------ ----------- 9,415,598 (1,484,200) 7,931,398 - 7,931,398 Shareholders' Equity: Common stock 457,161 28,392 /E/ 485,553 200,000 /B/ 685,553 Other (3,753,456) 1,370,400 /E/ (2,383,056) 9,947,509 /B,D/ 7,564,453 ----------- ----------- ----------- ------------ ----------- Total shareholders' equity (3,296,295) 1,398,792 (1,897,503) 10,147,509 8,250,006 ----------- ----------- ----------- ------------ ----------- Total Liabilities and Shareholders' Equity $ 6,119,303 $ (85,408) $ 6,033,895 $ 10,147,509 $16,181,404 =========== =========== =========== ============ ===========
See accompanying notes to these financial statements. F-3 D.E. FREY GROUP, INC. AND SUBSIDIARY PRO FORMA CONDENSED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
Actual Adjustments Pro Forma ------------- ------------ --------------- Revenues $ 22,896,672 $ - $ 22,896,672 Expenses: Commissions, clearing and execution fees 18,647,861 - 18,647,861 Employee compensation 1,694,881 - 1,694,881 Interest 316,626 (72,400)/F/ 244,226 Other 2,314,804 (5,180)/G/ 2,309,624 ------------- ------------ --------------- Total expenses 22,974,172 (77,580) 22,896,592 ------------- ------------ --------------- Net Income (Loss) $ (77,500) $ 77,580 $ 80 ============= ============ =============== Net Income (Loss) Per Share, Basic and Diluted $ (0.02) $ (0.00) ============= =============== Weighted Average Shares Outstanding: Basic 4,547,237 4,831,159/H/ ============= =============== Diluted $ 4,547,237 $ 5,357,259/H/ ============= ===============
See accompanying notes to these financial statements F-4 D.E. FREY GROUP, INC. AND SUBSIDIARY PRO FORMA CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
Actual Adjustments Pro Forma ------------- ------------- ------------- Revenues $ 37,037,360 $ - $ 37,037,360 Expenses: Commissions, clearing and execution fees 29,469,728 - 29,469,728 Employee compensation 2,906,628 - 2,906,628 Interest 697,981 (144,800)/F/ 553,181 Other 4,351,985 (10,359)/G/ 4,341,626 ------------- ------------- ------------- Total expenses 37,426,322 (155,159) 37,271,163 ------------- ------------- ------------- Net Income $ (388,962) $ 155,159 $ (233,803) ============= ============= ============= Net Income Per Share, Basic and Diluted $ (0.09) $ (0.05) ============= ============= Basic and Diluted Weighted Average Shares Outstanding 4,338,473 4,622,395/H/ ============= =============
See accompanying notes to these financial statements F-5 Notes to Pro Forma Condensed Financial Information A. Payment of accrued interest on the subordinated debentures converted to equity. B. To reflect the sale of 2,000,000 shares of common stock at $6.00 per share, net of offering costs of approximately $1.8 million, as contemplated in the proposed public offering. C. To write off the deferred financing costs associated with the debt to be exchanged. D. To net offering costs incurred and capitalized as of June 30, 1999 against proceeds from the initial public offering. E. To reflect the exchange of $1,448,000 in subordinated debentures for 283,922 shares of common stock. The debt will be exchanged at 85% of the public offering price and is contingent on closing of this public offering. The pro forma adjustment assumes a public offering price of $6 per share. F. To eliminate interest expense related to debt to be exchanged for shares of common stock. G. To eliminate the amortization of deferred financing costs associated with the debt to be exchanged for shares of common stock. H. Increase in shares of common stock resulting from the exchange offer, assuming an initial public offering price of $6 per share and the dilutive effect of stock options and warrants. F-6 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 D.E. FREY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30, ------------------------- 1997 1998 1999 ----------- ----------- ----------- (Unaudited) ASSETS ------ Cash and Cash Equivalents $ 1,446,215 $ 732,900 $ 1,085,683 Securities Owned: Marketable 2,485,756 660,493 1,226,685 Not readily marketable, at estimated fair value 76,839 176,259 225,756 ----------- ----------- ----------- Total securities owned 2,562,595 836,752 1,452,441 Receivables: Clearing organization 947,114 1,467,840 1,250,352 Product sponsors and other 281,656 346,533 486,474 Registered representatives, net of allowance for uncollectible accounts of $44,193, $149,515, and $105,513 (unaudited) 262,856 214,464 281,594 Related party - 204,493 206,235 Other accounts receivable, net of allowance for uncollectible accounts of $48,675, $82,387, and $82,387 (unaudited) 200,879 29,169 9,734 ----------- ----------- ----------- Total receivables 1,692,505 2,262,499 2,234,389 Furniture and Equipment, at cost, net of accumulated depreciation of $557,515, $757,650, and $871,189, (unaudited), respectively 537,569 658,598 626,966 Deferred Financing Costs, net 241,229 167,895 455,569 Other Assets 144,116 285,940 264,255 ----------- ----------- ----------- Total Assets $ 6,624,229 $ 4,944,584 $ 6,119,303 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIT ------------------------------------- Liabilities: Commissions and compensation payable $ 1,494,289 $ 1,873,662 $ 1,988,966 Accounts payable and accrued expenses 722,972 742,957 861,506 Payable to clearing organization 1,976,626 92,362 367,931 Interest payable 338,290 336,782 127,178 Notes payable related parties 357,500 357,500 357,500 Other notes payable 5,212,517 5,112,517 5,712,517 ----------- ----------- ----------- Total liabilities 10,102,194 8,515,780 9,415,598 ----------- ----------- ----------- Commitments and Contingencies (Note 6) Shareholders' Deficit: Common stock, $.10 par value; 10,000,000 shares 408,924 452,661 457,161 authorized; 4,089,249, 4,526,614, and 4,571,614 (unaudited) shares issued and outstanding Additional paid-in capital 3,353,785 3,605,779 3,953,680 Accumulated deficit (7,240,674) (7,629,636) (7,707,136) ----------- ----------- ----------- Total shareholders' deficit (3,477,965) (3,571,196) (3,296,295) ----------- ----------- ----------- Total Liabilities and Shareholders' Deficit $ 6,624,229 $ 4,944,584 $ 6,119,303 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-8 D.E. FREY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended Years Ended December 31, June 30, ------------------------------------------ -------------------------- 1996 1997 1998 1998 1999 ------------ ------------ ------------ ------------ ------------ (Unaudited) Revenues: Commissions $ 16,039,039 $ 20,580,558 $ 22,174,313 $ 10,686,806 $ 13,556,570 Principal transactions 7,912,000 7,058,092 6,513,967 3,839,344 4,566,144 Asset management and advisory 3,145,480 3,498,210 4,356,570 2,184,508 2,539,915 Interest and account fees 2,005,269 2,203,335 2,880,312 1,398,709 1,671,469 Other 941,968 1,348,566 1,112,198 766,219 562,574 ------------ ------------ ------------ ------------ ------------ Total revenues 30,043,756 34,688,761 37,037,360 18,875,586 22,896,672 ------------ ------------ ------------ ------------ ------------ Expenses: Commissions 21,511,903 25,193,763 26,932,743 13,591,850 17,092,918 Clearing and execution fees 2,053,678 2,319,390 2,536,985 1,260,477 1,554,943 Employee compensation 2,640,630 2,610,336 2,906,628 1,466,594 1,694,881 Interest 699,389 571,206 697,981 322,674 316,626 Other 4,547,453 4,147,158 4,351,985 2,194,094 2,314,804 ------------ ------------ ------------ ------------ ------------ Total expenses 31,453,053 34,841,853 37,426,322 18,835,689 22,974,172 ------------ ------------ ------------ ------------ ------------ Net Income (Loss) $ (1,409,297) $ (153,092) $ (388,962) $ 39,897 $ (77,500) ============ ============ ============ ============ ============ Net Income (Loss) Per Share, Basic and Diluted $ (0.46) $ (0.04) $ (0.09) $ 0.01 $ (0.02) ============ ============ ============ ============ ============ Basic Weighted Average Shares Outstanding 3,052,022 3,743,546 4,338,473 4,177,749 4,547,031 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-9 D.E. FREY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Additional Common Stock Paid-In Accumulated -------------------------- Shares Amount Capital Deficit Total ------------ ------------ ------------ ------------- ------------- Balances, January 1, 1996 2,656,100 $ 265,610 $ 2,404,848 $ (5,678,285) $ (3,007,827) Issuance of common stock for cash and services 712,207 71,221 546,430 - 617,651 Purchase and retirement of common stock (346) (35) (483) - (518) Net loss - - - (1,409,297) (1,409,297) ------------ ------------ ------------ ------------- ------------- Balances, December 31, 1996 3,367,961 336,796 2,950,795 (7,087,582) (3,799,991) Issuance of common stock for cash and services 721,288 72,128 402,990 - 475,118 Net loss - - - (153,092) (153,092) ------------ ------------ ------------ ------------- ------------- Balances, December 31, 1997 4,089,249 408,924 3,353,785 (7,240,674) (3,477,965) Issuance of common stock for cash 437,365 43,737 251,994 - 295,731 Net loss - - - (388,962) (388,962) ------------ ------------ ------------ ------------- ------------- Balances, December 31, 1998 4,526,614 452,661 3,605,779 (7,629,636) (3,571,196) Issuance of common stock for cash and services 45,000 4,500 81,754 - 86,254 (unaudited) Issuance of warrants for services (unaudited) - - 266,147 - 266,147 Net loss (unaudited) - - - (77,500) (77,500) ------------ ------------ ------------ ------------- ------------- Balances, June 30, 1999 (Unaudited) 4,571,614 $ 457,161 $ 3,953,680 $ (7,707,136) $ (3,296,295) ============ ============ ============ ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-10 D.E. FREY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended Years Ended December 31, June 30, ----------------------------------------- -------------------------- 1996 1997 1998 1998 1999 ------------ ------------ ------------ ------------ ------------ (Unaudited) Cash Flows From Operating Activities: Net income (loss) $ (1,409,297) $ (153,092) $ (388,962) $ 39,987 $ (77,500) Adjustments to reconcile to net cash from operating activities: Amortization of deferred financing costs 87,945 39,878 73,334 47,681 50,973 Depreciation and amortization 209,161 208,668 227,570 104,167 124,735 Equity in losses 185,446 - - - - Forgiveness of debt (83,333) - - - - Compensatory stock options 70,000 75,000 - - - (Increase) decrease in operating assets: Securities owned, net (1,123,044) (779,197) 2,330,183 1,073,382 (566,192) Receivables (312,933) 30,369 (365,500) (312,782) (42,490) Other assets (122,926) 224,973 (224,512) (199,006) 58,979 Increase (decrease) in operating liabilities: Commissions and compensation payable 108,816 (73,292) 379,373 358,521 115,304 Accounts payable, accrued expenses and other (459,898) (783,831) (54,712) 22,623 (114,559) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (2,850,063) (1,210,524) 1,976,774 1,134,573 (450,750) ------------ ------------ ------------ ------------ ------------ Cash Flows From Investing Activities: Purchase of furniture and equipment (138,691) (265,888) (340,980) (125,044) (81,907) Proceeds from not readily marketable securities - - - - 44,165 Purchase of not readily marketable securities - - (99,420) - (44,500) Proceeds from investments 681,620 666,114 - - - Purchase of investments - (498,702) (504,920) - - Loan to related party - - (162,500) - - Repayment of loan to related party - - 106,266 - - Investment in equity method investee (136,830) - - - - Other - (95,416) - 2,896 - ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities 406,099 (193,892) (1,001,554) (122,148) (82,242) ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-11 D.E. FREY GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six Months Ended Years Ended December 31, June 30, ---------------------------------------------- ------------------------------ 1996 1997 1998 1998 1999 -------------- -------------- -------------- -------------- -------------- (Unaudited) Cash Flows From Financing Activities: Proceeds from issuance of common stock 546,651 400,119 295,731 225,009 86,254 Proceeds from (payable to) clearing organization 633,525 1,343,100 (1,884,266) (1,976,626) 275,569 Proceeds from notes payable - 1,000,000 - - 600,000 Payment of notes payable - (200,000) (100,000) (85,000) - Direct financing costs - - - - (72,500) Other (518) - - - (3,548) -------------- -------------- -------------- -------------- -------------- Net cash provided by (used in) financing activities 1,179,658 2,543,219 (1,688,535) (1,836,617) 885,775 -------------- -------------- -------------- -------------- -------------- Increase (Decrease) In Cash And Cash Equivalents (1,264,306) 1,138,803 (713,315) (824,192) 352,783 Cash And Cash Equivalents, beginning of year 1,571,718 307,412 1,446,215 1,446,215 732,900 -------------- -------------- -------------- -------------- -------------- Cash And Cash Equivalents, end of year $ 307,412 $ 1,446,215 $ 732,900 $ 622,023 $ 1,085,683 ============== ============== ============== ============== ============== Supplemental Disclosures Of Cash Flow Information: Cash paid for interest $ 599,203 $ 517,500 $ 699,488 $ 481,763 $ 526,230 ============== ============== ============== ============== ============== Cash paid for income taxes $ - $ - $ - $ - $ - ============== ============== ============== ============== ============== Noncash Investing And Financing Activities - Deferred financing costs in the form of warrants issued $ - $ - $ - $ - $ 266,147 ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-12 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------ Organization and Nature of Presentation - The consolidated financial --------------------------------------- statements include the accounts of D.E. Frey Group, Inc. (DEFG) and its wholly-owned subsidiary, D.E. Frey & Company, Inc. (DEF) (together referred to as the "Company"). DEF is a broker-dealer registered with the Securities and Exchange Commission (SEC) and is a member of the National Association of Securities Dealers, Inc. (NASD), National Futures Association and the Commodities Futures Trading Commission. DEF acts as an "introducing broker" and utilizes an unaffiliated brokerage firm ("clearing broker") to provide security clearance services and customer account maintenance. Pursuant to its agreement with its clearing broker, DEF is liable for amounts uncollected from customers introduced by DEF. DEF is a Delaware corporation that is a wholly-owned subsidiary of DEFG (Parent). DEF is engaged in a single line of business as a retail securities broker-dealer, which comprises several classes of services, including principal transactions, agency transactions, investment banking, and investment advisory businesses. DEF is licensed as an investment securities broker-dealer, registered investment advisory and as an insurance broker. Unaudited Interim Results - The accompanying interim financial statements ------------------------- as of June 30, 1999, and for the six months ended June 30, 1998 and 1999 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position as of June 30, 1999 and results of operations and cash flows for the six months ended June 30, 1998 and 1999. The financial data and other information disclosed in these notes to financial statements related to these periods are unaudited. The results for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. Liquidity - DEF's business strategy since inception has been to generate --------- revenue growth on a sustained basis and, through economies of scale inherent in its primarily fixed operating expense structure, to achieve and maintain growth in profitability. The Company has incurred cumulative operating losses since inception. Revenue growth over the three-year period ended December 31, 1998, has been approximately 70% and management believes that the Company will increase revenues in the future as a result of expected increases in the Company's registered representatives and expanded services. The profitability of the Company in the future will be affected by the Company's expenditures necessary to grow the Company. Since inception, the Company has raised debt and equity capital on several occasions, including $1.4 million and $295,731 in 1997 and 1998, respectively, to sustain operations. During 1999, the Company entered into a $250,000, one-year promissory note and amended our senior bank debt by adding an additional $1 million revolving line of credit, and extending the maturity date of the initial $1 million note. Management anticipates that future operations will result in positive cash flow on a cumulative basis. However, to support anticipated growth in operations and to provide additional services to its brokers and funding that may be necessary because of certain loss contingencies incurred in the ordinary course of business (see Note 6), the Company plans to raise additional debt and/or equity capital between $10.0 million and $15.0 million in 1999. F-13 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) Although management cannot assure that future operating results will be cash positive nor that the Company will raise additional debt and/or equity capital that may be required, based upon the revenue growth and operating results achieved and the demonstrated ability to raise sufficient capital to sustain operations, management believes that the Company's capital resources will be adequate to maintain and fully realize its business strategy. Principles of Consolidation - The consolidated financial statements of the --------------------------- Company include the accounts of DEFG and DEF. All significant intercompany transactions have been eliminated in consolidation. Securities Transactions - Commission revenue, principal transaction ----------------------- revenue and expenses related to securities transactions are recorded on settlement date, generally the third business day following the transaction date. Differences between trade date and settlement date are immaterial to the accompanying financial statements. Investment banking management fees are recorded on offering date, sales concessions on settlement date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable. Investment advisory fees are recognized on a pro rata basis over the term of the contract. Cash and Cash Equivalents - Cash equivalents consist of interest-earning ------------------------- investments with maturities of less than 90 days. Cash of approximately $1.5 million and $0.9 million was uninsured as of December 31, 1997 and 1998, respectively. Securities Owned - Marketable securities owned consist of investments held ---------------- for trading purposes; these are stated at market value and unrealized gains and losses are included in revenue. Securities not readily marketable are valued at fair value as determined by management of the Company. The trading departments were established to promote selection and choice to the brokers and the Company, as of December 31, 1998, made a market in six equity securities. The Company does not generally purchase securities to hold for speculative purposes. Furniture and Equipment - Furniture and equipment are stated at cost. ----------------------- Depreciation of furniture and equipment is calculated using the straight-line method over the estimated useful lives (ranging from 3 to 7 years) of the respective assets. The cost of normal maintenance and repairs is charged to operating expenses as incurred. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any gains or losses are reflected in current operations. Deferred Financing - Costs incurred with respect to the Company's debt ------------------ financing have been capitalized and are amortized over the respective lives of associated debt using the straight-line method, which approximates the interest rate method. Receivable From and Payable to Clearing Organization - Amounts receivable ---------------------------------------------------- from the clearing organization at December 31, 1997 and 1998 includes the net of commissions and clearing fees recorded on a settlement date basis, which does not differ materially from a trade date basis. The amount payable to the clearing organization relates to securities purchased by DEF and is collateralized by the securities owned by DEF. F-14 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) Investments - Investments in companies in which the Company's ownership is ----------- 20% to 50% and which the Company does not control, are accounted for by the equity method. Income Taxes - The Company accounts for income taxes under the provisions ------------ of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The Parent and its subsidiaries are included in the consolidated federal income tax return filed by the Parent. The amount of current and deferred taxes payable or refundable is recognized as of the date of the financial statements, utilizing currently enacted tax laws and rates. Deferred tax expenses or benefits are recognized in the financial statements for the changes in deferred tax liabilities or assets between years. Comprehensive Income (Loss) - In June 1997, the Financial Accounting -------------------------- Standards Board issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130, which is effective for fiscal years beginning after December 15, 1997, defines comprehensive income as all changes in stockholders' equity exclusive of transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries, and certain changes in minimum pension liabilities. For all periods presented, there were no differences between comprehensive and net income (loss). Net Income (Loss) Per Share - Basic net income (loss) per share and ---------------------------- diluted net income (loss) per share are presented in conformity with SFAS No. 128, Earnings Per Share, for all periods presented. In accordance with SFAS No. 128, for periods of net loss the basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period as outstanding stock options and warrants are excluded from diluted net loss per share calculation as they are antidilutive. The effect of outstanding stock options and warrants have been included in the diluted earnings per share calculation for periods with net income. Basic and diluted earnings per share were the same for all periods presented. During the six months ended June 30, 1998, included in diluted earnings per share are common equivalent shares outstanding of 97,500, determined using the treasury stock method, consisting of options and warrants to purchase Company shares. Recently Issued Accounting Pronouncements - SFAS No. 133, Accounting For ----------------------------------------- Derivative Instruments and Hedging Activities, is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a significant effect on the Company's results of operations or its financial position. SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, was issued in February 1998. This statement revises the disclosure requirements for pensions and other postretirement benefits. This statement is effective for the Company's financial statements for the year ended December 31, 1999, and the adoption of this standard is not expected to have a material effect on the Company's financial statements. F-15 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) Use of Estimates - The consolidated financial statements are prepared in ---------------- conformity with generally accepted accounting principles and industry practices which require management to make estimates and assumptions that affect certain amounts in the financial statements and accompanying notes. The Company makes significant estimates concerning the ultimate liabilities associated with asserted claims (see Note 6). Due to the uncertainties inherent in the estimation process and the significance of these costs, it is at least reasonably possible that the Company's estimates in connection with these items could be further materially revised within the next year. Reclassification - Amounts in prior years are reclassified as necessary to ---------------- conform with the current period's presentation. Such reclassifications had no effect on the net loss. 2. MARKETABLE SECURITIES OWNED: --------------------------- Marketable securities owned consist of:
December 31, June 30, --------------------------------- ---------- 1997 1998 1999 --------------- ---------------- ---------- United States Treasury Bill $ - $ 508,342 $ 518,279 Municipal Bond 2,355,552 81,659 442,991 Collateralized mortgage obligations - - 234,994 Equity securities 130,204 61,492 22,902 Corporate bonds - 9,000 7,519 ---------- ---------- ---------- Total $2,485,756 $ 660,493 $1,226,685 ========== ========== ==========
3. RELATED PARTY TRANSACTIONS: -------------------------- During 1997 and 1998, DEFG and DEF advanced funds to a newly formed limited liability company (LLC) to repurchase securities from claimants of DEF. The LLC was formed by DEFG and DEFG is the manager of the LLC. Under the terms of the LLC, after allowable expenses have been paid, earnings will be paid 100% to the members until they have achieved a 14% non-compounded capital return, then to DEFG until a 14% non-compounded capital return has been met and then earnings will be allocated 50% to the limited partners and 50% to DEFG. No equity in earnings will be recognized by DEFG until the limited partners have achieved a 14% capital return and all receivables have been repaid. DEFG has made capital contributions of approximately $215,000, which have been fully reserved. DEF has advanced $206,000 that is recorded as a receivable from affiliate. Based on the value of the assets contributed to the LLC, DEFG's ownership interest is approximately 36%. F-16 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) Following is summarized (unaudited) financial information for the LLC:
Six Months Ended Year Ended December 31, June 30, ---------------------------- -------------- 1997 1998 1999 ----------- ----------- -------------- Revenues $ - $ 111,238 $ 63,388 Net income - 60,394 23,774 Dividends received - - -
December 31, June 30, -------------------------- --------------- 1997 1998 1999 ----------- ----------- --------------- Current assets $ 100 $ 112,548 $ 68,260 Investments in partnership units - 1,366,324 1,213,739 Other assets - 140,400 140,699 Current liabilities - 206,235 226,861 Long term debt - 300,000 200,000 Member's equity 100 1,113,037 995,837
4. Income Taxes: The Company's actual effective tax rate differs from the U.S. Federal corporate income tax rate of 34% as follows:
1996 1997 1998 -------- --------- --------- 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% ======== ======= =======
F-17 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) The components of the Company's net deferred tax asset are as follows:
As of December 31, -------------------------------------------------- 1996 1997 1998 ----------- ------------- ------------ 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) ------------ ----------- ----------- $ - $ - $ - ============ =========== ===========
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:
December 31, June 30, ----------------------------- ---------- 1997 1998 1999 ----------- ----------- ---------- Senior subordinated debentures, interest payable annually, due in 2004 $ 4,470,017 $ 4,470,017 $ 4,470,017 Senior bank debt, interest payable monthly, due in 1998 subject to renewal options 1,000,000 1,000,000 1,350,000 Unsecured bridge loan, interest payable quarterly, due in 2000 - - 250,000 Promissory notes, paid in 1998 100,000 - - ----------- --------- ---------- TOTAL $ 5,570,017 $ 5,470,017 $ 6,070,017 =========== =========== ===========
Subordinated Debentures - Unsecured debentures in the amount of $4.47 ----------------------- million were issued in 1994, maturing in 10 years and bearing interest at 10%. Participating additional interest of up to 5% is payable from 10% of the Company's annual consolidated pre-tax income. Using prevailing interest rates on similar instruments, the fair value of the debentures was $3.9 million and $4.0 million at December 31, 1997 and F-18 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) December 31, 1998, respectively. Board of Directors hold $357,500 of these notes. In August 1999, the Company asked the debtholders to convert their debt into our common stock at a rate per common share of 85% of the public offering price, contingent on the completion of the Company's proposed initial public offering. Holders of $1,448,000 of the subordinated debt elected to convert their debt to common shares of which $357,500 relate to directors. Senior Bank Debt - In August 1997, the Company entered into a $1 million ---------------- debt facility with a bank, collateralized by a $1 million certificate of deposit pledged by a third party investor, which matures in August 2000 and is subject to one year renewal options. Including the interest paid to the bank and pledge fee paid to the third party, the effective interest rate was 13.5%. In May 1999 a $1 million line of credit was entered into with the same bank and the same third party pledged a certificate of deposit in the amount of $2 million to collateralize both debt facilities, $350,000 has been drawn on this new line of credit as of June 30, 1999. Pursuant to the new pledge agreement the combined effective interest rate for both facilities is 11%. The new line of credit matures in May 2000 and is subject to four one-year renewal options. In connection with the new pledge agreement, 50,000 warrants and cash with a combined value of approximately $200,000 were issued to a registered representative for services related to obtaining the pledge agreement (see Note 8). These costs have been reflected in deferred financing costs and will be amortized over the term of the pledge agreement. The fair value of the senior debt at December 31, 1997 and 1998 approximates the carrying value. Bridge Loan - In May 1999, the Company entered into a $250,000 loan, which ----------- matures in one year and bears interest at 13.5%, payable quarterly. The note includes a prepayment penalty of 3% on the outstanding principal balance. 50,000 warrants, valued at approximately $120,000 were issued to the debtholder and 8,000 warrants and cash with a combined value of approximately $22,000 were issued to a registered representative for services related to obtaining the bridge loan (see Note 8). These costs have been reflected in deferred financing costs and will be amortized over the one-year term of the note. 6. Commitments And Contingencies: ----------------------------- Leases - DEF leases office space and equipment under leases which are ------ classified as operating leases and expire in various years through 2009. Certain leases have escalation clauses and renewal options. Future minimum lease payments under non-cancelable leases as of December 31, 1998, are as follows: 1999 $ 268,243 2000 272,312 2001 301,657 2002 307,180 2003 291,905 Thereafter 1,390,947 ----------- Total $ 2,832,244 =========== F-19 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) DEF subleases a portion of its office space to the Denver retail branch for approximately $3,400 per month. The lease payments in the schedule above have not been reduced by the sublease payments. Rental expense, net of sublease income, was approximately $292,000, $278,000, and $305,000 for the years ended December 31, 1996, 1997, and 1998, respectively. DEF is a guarantor of rental obligations pursuant to office space leases of certain independent contractor registered representatives. Future minimum payments of those leases are as follows at December 31, 1998: 1999 $ 175,014 2000 175,014 2001 149,365 ----------- Total $ 499,393 =========== Customer Litigation - DEF is a defendant or co-defendant in three purported ------------------- class action lawsuits in which the class representatives seek rescission for the purchase of securities from DEF in connection with a private placement underwriting. The Courts have not certified the classes. DEF is unable to estimate the magnitude of its exposure at this time. At present, DEF's litigation counsel can not evaluate the likelihood of an unfavorable outcome as to the these cases. If any or all of the suits are certified as class actions and if DEF were to lose at the trials of the cases, the damages could exceed DEF's current ability to pay without further capital or financing arrangements. DEF is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Some of the actions seek substantial damages and the Company is unable to estimate the magnitude of its exposure at this time. Management believes, based upon discussion with counsel, that the outcome of these matters will not have a material effect on the Company's financial position; however, there can be no assurance in this regard. Subsequent to June 30 , 1999, the Company settled seven claims totaling $237,000. NASD and SEC Examinations - DEF has been the subject of an NASD ------------------------- investigation and an SEC investigation of various aspects of its business. DEF settled the NASD investigation by agreeing to a consent order, which the NASD has not yet signed. Without admitting or denying the NASD's allegations, DEF consented to a fine and principal of DEF consented to a 30-day suspension from association in all principal capacities with DEF. The SEC investigation partially overlapped the NASD investigation regarding the two securities offerings in which DEF acted as the selling agent. The SEC staff was authorized to investigate alleged violations of the securities laws regarding two securities offerings and whether or not certain DEF principals failed to supervise persons subject to their supervision who engaged in the alleged violations. The SEC staff has informed the Company that it has concluded its investigation. Management of DEF is unable to describe the allegations that may be made against DEF or the financial penalties or other sanctions that be sought against DEF, its officer, directors and F-20 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) employees. No provision for liability with respect to this matter has been made in the accompanying financial statements and management believes the ultimate outcome of such examination will not have a material adverse effect on its financial condition or results of operations. Year 2000 - The Company is currently using computer hardware and software --------- that is not in compliance with the year 2000 dating issues. The Company has incurred approximately $150,000 of costs to replace non-compliant computer hardware and software. Management has estimated that it will incur up to $90,000 of additional costs to be year 2000 compliant. 7. FINANCIAL INSTRUMENTS: --------------------- Off-Balance Sheet Risk and Concentration of Credit Risk - DEF records ------------------------------------------------------- customer transactions on a settlement date basis, generally three business days after trade date. The risk of loss on unsettled transactions is identical to settled transactions and relates to customers' and other counterparties' inability to fulfill their contracted obligations. In the normal course of business, DEF also executes customer transactions involving the sale of securities not yet purchased and the writing of option contracts on securities. In the event customers or other counterparties, such as broker/dealers or clearing organizations, fail to satisfy their obligations, DEF may be required to purchase or sell financial instruments underlying the contract loss. Customer securities may be pledged as collateral to satisfy margin deposits, settlement and other financing activities at various clearing organizations. To the extent these counterparties are unable to fulfill their contracted obligations to return securities pledged, DEF is exposed to the risk of obtaining securities at prevailing market prices to meet its customer obligations. Securities sold but not yet purchased represent obligations of DEF and its clearing agents to deliver specified securities at contracted prices. Settlement of such obligations may be at amounts greater than those recorded in customer accounts and in the balance sheet. 8. STOCK PURCHASE PLAN AND STOCK OPTION PLAN: ----------------------------------------- Stock Purchase Plan - In April 1995, the Company's Board of Directors ------------------- approved the 1995 Stock Purchase Plan (the "1995 Plan") whereby employees and independent contractors, advisors and consultants of the Company, at their election, could purchase shares of the Company's common stock, par value $.10 per share, and pay for such shares out of their compensation by means of a withholding therefrom. The shares have not been registered under federal or applicable state securities laws and will be, when issued, "restricted securities" subject to substantial restrictions on transfer. The Plan is not subject to the Employee Retirement Income Security Act of 1974 and is not qualified under Sections 401(a) or 423 of the Internal Revenue Code. F-21 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) Additionally, within 60 days after each fiscal year end, each 1995 Plan participant will be issued a non-transferable three-year option for the purchase of twenty percent of the number of shares purchased by such participant pursuant to the 1995 Plan during the preceding year. The Company's Board of Directors has reserved a maximum of up to 250,000 shares of common stock for issuance pursuant to the 1995 Plan. During 1996, 1997 and 1998 $29,798, $20,547 and $8, respectively, had been contributed under the 1995 Plan in exchange for 14,899, 10,274 and 4 shares, respectively. A total of 34,527 shares have been issued pursuant to the 1995 Plan. Stock Option Plan - The Company has a Stock Option Plan ("Plan") which ----------------- provides for the grant of options to purchase up to 600,000 shares of the Company's common stock to officers, employees, directors and registered representatives of the Company. As of December 31, 1998, options to purchase 572,500 shares have been granted under this plan. In June 1999 shares under this plan were increased to 1,000,000, subject to ratification of the shareholders. The Plan provides for immediate vesting with a maximum exercise period of five years and expire on termination of employment. It is intended that certain options issued to employees and officers may constitute incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 and that other options issued pursuant to the Plan shall constitute non-qualified options. The Board of Directors shall determine which options are to be incentive stock options and which are to be non-qualified options. During the six months ended June 30, 1999, options to purchase 35,000 shares were issued to officers and employees of the Company with an exercise price of $5 per share, which options expire in 2004. In November 1997, the Company granted incentive stock options to employees for the purchase of 350,000 shares of common stock at a weighted average exercise price of $2.15 per share, which options expire in 2002. In January and March 1998, the Company granted incentive stock options to an employee and an officer for the purchase of 110,000 shares of common stock at a weighted average exercise price of $2.00 per share, which options expire in 2003. Warrants to Officers, Employees, Directors, and Registered Representatives- -------------------------------------------------------------------------- In February 1996, the Company granted warrants to purchase 95,500 shares at an exercise price of $2.00 per share to officers and employees of the Company. In May 1996, the Company issued warrants to purchase 200,000 shares at an exercise price of $.25 to three officers of the Company. In August 1996, the officers exercised 130,000 of the warrants. In September 1996, 70,000 warrants were extended and, as a result, the Company recognized $70,000 in compensation expense. These warrants were exercised in 1997. In December 1996, the Company issued warrants to purchase 4,000 shares at an exercise price of $2.00 per share to two registered representatives for recruiting services performed in 1995. During 1996, the Company caused 95,000 warrants to be assigned from a terminated employee of the Company to registered representatives of DEF. The Company paid $80,000 to this individual. During 1997, 315,000 warrants were granted to officers, employees and directors, of which 297,000 were exercised and 18,000 expired without being exercised. The weighted average market price of the Company's common stock on grant date exceeded the weighted average exercise price of $.25 by $.25. In 1999, 60,500 warrants were granted to registered representative which expire in 2004. Warrants for the purchase of 10,500 shares of common stock are exercisable at $5.00 per share. Warrants for 50,000 shares F-22 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) of common stock are exercisable at $2.25 per share or $1.75 less than the Company's initial public offering price, if completed. Additionally, warrants for the exercise of 40,000 shares of common stock were exercised. For all options granted during the calendar years 1996, 1997 and 1998, the weighted average market price of the Company's common stock on the grant date was equal to or less than the weighted average exercise price. Due to the limited activity of the Company's common stock because the shares are not publicly traded, for the purpose of pricing the grants, the fair market value of DEFG's common stock is determined by the Company's management and the compensation committee and approved by DEFG's Board of Directors. The following table sets forth the option activity under the 1995 Plan and the Plan and warrants issued to officers, employees, directors, and registered representatives:
Years Ended December 31, ---------------------------------------------------------------------------------------------- 1996 1997 1998 ---------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price -------------- -------------- -------------- -------------- -------------- -------------- 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 ============== ============== ==============
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:
Weighted Average Number of Shares Exercise Price -------------------------------------- 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
F-23 D.E. FREY GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information Subsequent to December 31, 1998 is Unaudited) Warrants to Non-related Parties - In addition to the above amounts, there ------------------------------- are outstanding at December 31, 1997, 1998, and June 30, 1999, warrants for the purchase of 400,000, 100,000 and 150,000 shares, respectively, at a weighted average price of $.325, $1.00 and $1.83 per share, respectively. During 1998, 300,000 of these warrants were exercised for an average price of $.10 per share. In 1999, 50,000 warrants were granted to a debtholder related to the arrangement of new financing for the Company. These warrants are exercisable at $3.50 per share and expire in May 2004. Pro Forma Stock-Based Compensation Disclosures - The Company applies APB ---------------------------------------------- Opinion 25 and related interpretations in accounting for its stock options and warrants which are granted to employees, directors and registered representatives. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123 (Black Scholes American formula), the Company's net loss would have been increased to the pro forma amounts indicated below:
Years Ended December 31, ----------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Net loss applicable to common shareholders: As reported $ (1,409,297) $ (153,092) $ (388,962) Pro forma $ (1,465,188) $ (153,092) $ (441,856)
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:
December 31, ----------------------------------------- 1996 1997 1998 ----------- ----------- ----------- 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
9. REGULATORY CAPITAL REQUIREMENTS: ------------------------------- DEF is subject to regulatory net capital rules administered by the SEC's Uniform Net Capital Rule (Rule 15c3-1). Under such rules, DEF is required to maintain minimum net capital of 6% of aggregate indebtedness as defined or $250,000. As of December 31, 1998, DEF=s net capital of $448,373 was 506% of aggregate indebtedness and its net capital in excess of the minimum requirement was $198,373. F-24 Schedule II D.E. Frey Group, Inc. And Subsidiaries Valuation And Qualifying Accounts
Additions Balance at Charged to Balance at Year Ended December 31, Beginning of Year Costs and Expenses Other End of Year ---------------------- ----------------- ------------------ ------------ ----------- 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 _______________________________________________
F-25 ================================================================================ No dealer, salesperson or other person is authorized to give any information or to repre sent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. _______________ TABLE OF CONTENTS
Page ---- Summary.................................................................... 1 Risk Factors............................................................... 6 Use of Proceeds............................................................ 19 Dividend Policy............................................................ 21 Dilution................................................................... 21 Capitalization............................................................. 23 Selected Financial Data.................................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 27 Business................................................................... 36 Legal Matters Affecting Us................................................. 49 Management................................................................. 52 Compensation............................................................... 57 Principal Shareholders..................................................... 61 Certain Transactions....................................................... 63 Description of our Equity Securities....................................... 64 Exchange of Debt........................................................... 66 Shares Eligible for Resale................................................. 67 Underwriting............................................................... 69 Legal Matters.............................................................. 72 Experts.................................................................... 72 Available Information...................................................... 72 Financial Statements.......................................................F-1
Through and including _____________, 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. ================================================================================ 2,000,000 Shares D.E. FREY GROUP, INC. Common Stock NEIDIGER TUCKER BRUNER, INC. D.E. FREY & COMPANY, INC. Co-managers PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission registration fee.............. $ 4,943 NASD fee......................................................... 2,278 American Stock Exchange Listing fee.............................. 20,000 Legal fees and expenses.......................................... 100,000 Accounting fees and expenses..................................... 50,000 Printing expenses................................................ 75,000 Transfer agent fees.............................................. 5,000 Blue sky filing fees and legal expenses.......................... 30,000 Miscellaneous expenses........................................... 162,779 -------- Total....................................................... $450,000 ========
All of the above items except the registration fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The registrant's Certificate of Incorporation exculpates directors from personal liability to the fullest extent permitted by Section 102(b)(7) of the Delaware General Corporation Law. This provision provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the directors derived an improper personal benefit. The registrant's Bylaws and Certificate of Incorporation provide that the registrant shall indemnify, to the fullest extent authorized by the Delaware General Corporation Law, each person who is involved in any litigation or other proceeding because he or she is or was a director or officer of the registrant against all expense, loss or liability in connection therewith. Section 145 of the Delaware General Corporation Law permits a corporation to indemnify any director or officer of the corporation against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation, if such person acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, if he or she had no reason to believe his conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of an action or suit, if such II-1 person has acted in good faith and in a manner that he or she reasonably incurred by any director or officer in connection with the defense or settlement of an action in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant is reasonably entitled to indemnity for such expenses despite such adjudication of liability. The right to indemnification includes the right to be paid expenses incurred in defending any proceeding in advance of its final disposition upon the delivery to the corporation of an undertaking, by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director or officer is not entitled to indemnification. The registrant will obtain directors' and officers' liability insurance. The Underwriting Agreement, filed as Exhibit 1, provides that the Underwriter named therein will indemnify us and hold us harmless and each of our directors, officers or controlling persons from and against certain liabilities, including liabilities under the Securities Act. The Underwriting Agreement also provides that such Underwriter will contribute to certain liabilities of such persons under the Securities Act. Section 7 of the proposed Underwriting Agreement filed herewith as Exhibit 1.1 contains customary cross indemnification provisions as between the Underwriters and the registrant. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) In January through December of 1996, the registrant issued 712,207 shares of its common stock to 37 persons in consideration of $546,651 cash and services valued at $71,000. (b) In January through December of 1997 the registrant issued 721,288 shares of its common stock to 58 persons in consideration of $400,119 cash and services valued at $75,000. (c) In May through December 1998, the registrant issued 437,365 shares of its common stock to 11 persons for $295,731 cash. (d) In January through May 1999, the registrant issued 45,000 shares of its common stock to three persons for $86,254. II-2 (e) Also included above but under its employee's stock purchase plan, the registrant issued the following shares of its common stock:
Number of Shares Amount Year Employee/Purchasers Purchased Paid ---- ------------------- --------- ------- 1996 4 14,370 $28,740 1997 2 12,642 25,284 1998 1 4 8 1999 -- -- --
(f) The registrant has issued warrants and options under its incentive stock option plan during the last three years; any exercises have been included in (a) through (d) above. (g) In September 1999, the registrant offered to exchange shares of its common stock for conversion of debt, contingent on the consummation of an initial public offering by the registrant. A total of 43 persons holding $1,448,000 of subordinated notes accepted the contingent offer. No underwriters or broker-dealers were involved in the offers or sales described above. The issuances in (a) through (f) were made in transactions exempt from the registration requirements of Section 5 of the Securities Act, pursuant to Section 4(2) and in reliance in some cases under Regulation D adopted thereunder. With regard to the registrant's reliance upon such exemption, it made certain inquiries to establish that such sales qualified for the exemption. In particular, the registrant received written representations from each person, among other things, that he was an experienced and sophisticated investor not in need of the protection afforded investors by the Securities Act and that he had made available all information necessary in order to make an informed investment decision to purchase the securities. The registrant further obtained a representation from each person of his intent to acquire the securities for purposes of investment only and not with a view toward any distribution or public resale, and each of the certificates representing the securities has been embossed with a restrictive legend restricting transfer of the securities. With respect to the exchange offering in (g), the registrant relied on Sections 3(a)(9) and 4(2) of the Securities Act and Rule 506 adopted under Section 4(2). No additional consideration was paid in connection with the exchange. ITEM 16. EXHIBITS (a) Exhibits filed herewith unless otherwise noted are: Exhibit No. Description ----------- ----------- 1.1 Form of Underwriting Agreement. 1.2 Co-Manager Agreement.* II-3 1.3 Agreement Among Underwriters. 1.4 Selling Dealers Agreement.* 1.5 Underwriter's Warrant Agreement. 3.1 Restated and Amended Certificate of Incorporation of the registrant. 4.1 Specimen common stock certificate.* 4.2 Form of Subordinated Promissory Note. 5 Form of opinion of Jones & Keller, P.C.* 10.1 Officer's Incentive Compensation Agreement. 10.2 Employment Agreement, as Amended and Restated and Proposed Addendum--D.E. Frey. 10.3 Proposed Form of Noncompetition and Nonsolicitation Agreement-- --Paul L. Hocevar, Scott T. Gillespie and Larry Hayden. 10.4 1992 Stock Option Plan. 10.5 1995 Stock Purchase Plan. 10.6 Recruiting Agreement. 10.7 Form of Investment Professional's Independent Contractor Agreement. 10.8 Form of Branch Office Agreement. 10.9 DEF Fund LLC Operating Agreement. 10.10 CSC Clearing Agreement. 10.11 Senior Debt Agreement, May 1999. 10.12 Senior Debt Agreement, August 1999. 10.13 Senior Debt Pledge Agreement. 10.14 Bridge Loan Agreement. 21 Subsidiaries of registrant. 23.1 Consent of Hein + Associates LLP. 23.2 Consent of Jones & Keller, P.C. (included in Exhibit 5)*. II-4 24 Power of attorney (included on the signature page). 27 Financial Data Schedule (per Appendix D). ______________ * To be filed by amendment. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement; and (iii) to include any additional or changed material information with respect to the plan of distribution. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To provide to the Underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-5 (5) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (6) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act as part of this Registration Statement as of the time it was declared effective. (7) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities at that time as the initial bona fide offering of those securities. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on this 4th day of October, 1999. D.E. FREY GROUP, INC. By: /s/ D. E. Frey ----------------------------- D. E. Frey, President POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints D.E. Frey and Paul L. Hocevar and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and to sign any registration statement and amendments thereto for the same offering filed pursuant to Rule 462(b), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting upon said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/ D. E. Frey Director, Chairman and Chief October 4, 1999 - -------------------------- D.E. Frey Executive Officer (Principal Executive Officer) /s/ Paul L. Hocevar Chief Financial Officer; October 4, 1999 - -------------------------- Paul L. Hocevar Principal Accounting Officer /s/ Cornelia F. Eldridge Director October 4, 1999 - -------------------------- Cornelia F. Eldridge /s/ Michael R. McClurg Director October 4, 1999 - -------------------------- Michael R. McClurg /s/ Jerome C. Eppler Director October 4, 1999 - -------------------------- Jerome C. Eppler /s/ William R. Tennison Director October 4, 1999 - -------------------------- William R. Tennison II-7 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 2,000,000 Shares D.E. FREY GROUP, INC. Common Stock UNDERWRITING AGREEMENT NEIDIGER, TUCKER, BRUNER, INC. with FREY & COMPANY, INC., as co-manager as Representative of the several Underwriters named in Schedule I attached hereto c/o Neidiger, Tucker, Bruner, Inc. 300 Plaza Level 1675 Larimer Street Denver, Colorado 80202 __________________, 1999 Gentlemen: D.E. Frey Group, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters"), on whose behalf Neidiger, Tucker, Bruner, Inc. ("NTB") is acting as representative (the "Representative"), an aggregate of 2,000,000 shares (the "Firm Shares") of its common stock, par value $.10 per share (the "Common Stock"). The Underwriters will have the option to purchase from the Company up to an additional 300,000 shares of Common Stock (the "Additional Shares") solely to cover over-allotments in the sale of the Firm Shares. The Firm Shares and any Additional Shares to be purchased by the Underwriters are referred to collectively herein as the "Shares". The Shares are more fully described in the Registration Statement, as defined below. The Company also proposes to sell to NTB individually, and not in its capacity as Representative, five-year warrants (the "Representative's Warrants") to purchase for 120% of the public offering price of the Firm Shares, an aggregate of 200,000 shares of Common Stock as provided in Section 2 hereof. The Representative's Warrants and the shares of Common Stock issuable upon exercise of the Representative's Warrants are referred to collectively herein as the Representative's Securities". D.E. Frey and Company, Inc., a wholly-owned subsidiary of the Company, will be a co-manager of the offering subject to the Representative. The Representative has advised the Company that it is authorized to enter into this Agreement on behalf of the several Underwriters and that the several Underwriters are willing, severally and not jointly, to purchase the number of Firm Shares set forth opposite their respective names on Schedule I. The term "Underwriters" refers to any individual member of the underwriting syndicate and includes any party or parties substituted for an Underwriter pursuant to Section 10 hereof. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333- _____), and an amendment or amendments thereto, for the registration of the Shares under the Securities Act of 1933, as amended (the "Act"). Such registration statement, including the prospectus, financial statements and schedules, exhibits and all other documents filed as a part thereof, as amended at the time of effectiveness of the registration statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A of the Rules and Regulations of the Commission under the Act (the "Regulations"), is herein called the "Registration Statement"; and the prospectus, in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required, is herein called the "Prospectus". The term "preliminary prospectus" as used herein means a preliminary prospectus as described in Rule 430 of the Regulations. (b) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b)) of the Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission and at the Closing Date and the Additional Closing Date, if any (as hereinafter respectively defined), the Registration Statement and the Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Act and the Regulations and did not or will not contain an untrue statement of a material fact and did not or will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (i) in the case of the Registration Statement, not misleading and (iii) in the case of the Prospectus, in light of the circumstances under which they were made, not misleading. When the preliminary prospectus dated _________________, 1999 relating to the Shares was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Act and the Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related preliminary prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representative expressly for use in connection with the preparation thereof. (c) Hein & Associates LLP, who have certified the financial statements and supporting schedules included in the Registration Statement, are independent public accountants with respect to the Company as required by the Act and the Regulations. (d) The Company has no subsidiaries other than D.E. Frey & Company, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Subsidiary"). Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as disclosed in the Registration Statement and the Prospectus, there has been no material adverse change or any development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and the Subsidiary taken as a whole, whether or not arising from transactions in the ordinary course of business (a 2 "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 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 (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 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 tax returns, including franchise tax returns, which are required to be filed or have duly obtained extensions of time for the filing thereof and have paid all taxes shown on such returns and all assessments received by them to the extent that the same have become due; and the provisions for income taxes payable, if any, shown on the consolidated financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid foreign and domestic taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Neither the Company nor the Subsidiary has executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company or the Subsidiary. (aa) The Subsidiary is not currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on the Subsidiary's capital stock, from repaying to the Company any loans or advances to the Subsidiary from the Company or from transferring any of the Subsidiary's property or assets to the Company, except as described in or contemplated by the Prospectus. (bb) Each of the Company and the Subsidiary has fulfilled its obligations, if any, under the minimum funding standards of Section 302 of the Employee Income Security Act of 1974, as amended ("ERISA") and the regulations thereunder with respect to each "plan" (as defined in Section 3(3) of ERISA and such regulations) in which employees of the Company and the Subsidiary are eligible to participate and each such plan is in compliance in all material respects with the presently applicable provisions of ERISA and such regulations. The Company and its Subsidiary have not incurred any unpaid liability to the Pension Benefit Guaranty Corporation (other than for the payment of premiums in the ordinary course) or to any such plan under Title IV of ERISA. (cc) Neither the Company nor any of its affiliates has incurred any liability or obligation for any finder's fees or similar arrangements in connection with the transactions herein contemplated. (dd) There are no agreements, claims, payments, arrangements or understandings, whether oral or written, with respect to the sale of the Shares by, between or otherwise with respect to the Company or the Subsidiary or any officer, director, shareholder, partner, employee or affiliate of the Company or the Subsidiary that may affect the Underwriters' compensation in connection with the sale and distribution of the Shares as determined by the National Association of Securities Dealer's, Inc. ("NASD") or for which the Company or any Underwriter may be responsible. (ee) The minute books and stock record books of the Company and the Subsidiary are complete and correct and accurately reflect all material corporate actions authorized or approved by their respective shareholders and Board of Directors and all committees thereof, including the audit committee and compensation committee of the Board of Directors, and all issuances and transfer of shares of the capital stock of the Company and the Subsidiary. (ff) Except as disclosed in the Registration Statement and the Prospectus, the Company has not issued, sold or offered for sale within the last three years any shares of its Common Stock, any right to acquire any shares of its Common Stock or any securities or instrument exercisable for or convertible into any shares of its Common Stock. (gg) Neither the Company nor to best of the Company's knowledge any officer, director or employee of or agent acting on behalf of the Company or the Subsidiary has at any time (i) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any 7 contributions to any candidate for political office in accordance with any applicable statute, rule, regulation or ordinance requiring such disclosure, (ii) made any payment to any governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law, (iii) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which the Company sells or from which the Company buys products for the purpose of influencing such agent or person to buy products from or sell products to the Company, or (iv) engaged in any transaction on behalf of the Company, maintained any bank account for the Company, or used any corporate funds of the Company, except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company. (hh) The Company is not, and upon completion of the transactions contemplated hereby will not be, required to register as an investment company under the Investment Company Act of 1940, as amended. (ii) The Company has obtained from each shareholder of the Company an enforceable written agreement that for the agreed upon terms, such shareholder will not, without the Representative's prior written consent, offer, pledge, sell, contract to sell, grant any option for the sale of, or other dispose of, directly or indirectly, any shares of Common Stock or any security or other instrument which by its terms is convertible into, exercisable for or exchangeable for shares of Common Stock. (jj) The Company has (i) entered into an employment agreement with each of _______________, ______________, and ______________ the forms filed as Exhibits _____, _____ and _____, respectively, to the Registration Statement, and (ii) purchased term key-person insurance on the lives of __________________ and ________________ each in the amount of $1,000,000, which policies name the Company as the beneficiary thereof. 2. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters and the Underwriters, severally and not jointly, agree to purchase from the Company, at a purchase price per share of $.____, the number of Firm Shares set forth opposite the respective names of the Underwriters on Schedule I hereto subject to adjustments in accordance with Section 10 hereof. (b) Payment of the purchase price for, and delivery of certificates for, the Shares shall be made at the offices of the Representative, 300 Plaza Level, 1675 Larimer Street, Denver, Colorado 80202, or at such other place as shall be agreed upon by the Representative and the Company, at _______ a.m. on the third or fourth full business day (unless postponed in accordance with the provisions of Section 10 hereof) following the date of the effectiveness of the Registration Statement, or such other time not later than 10 business days after such date as shall be agreed upon by the Representative and the Company (such time and date of payment and delivery being herein called the "Closing Date"). Payment shall be made to the Company by wire transfer of immediately available funds to an account designated by the Company, against delivery to the Representative for the respective accounts of the Underwriters of certificates for the Firm Shares to be purchased by them. Certificates for the Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two full business days prior to the Closing Date. The Company will permit the Representatives to examine and package such certificates for delivery at least one full business day prior to the Closing Date. If the Representative so elects, delivery of the Firm Shares purchased from the Company may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representative. 8 (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 (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 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 (which agreement shall provide that such provisions may not be amended, nor may the performance of any obligations under such provisions be waived, without the prior written consent of the Representative), and the certificates evidencing such Supplemental Shares bear a legend that sets forth such restrictions on transfer or disposition. (i) The Company shall cause (i) each officer and director of the Company and each holder of 5% or more of the Company's Common Stock (or securities convertible into shares Common Stock) to furnish to the Representative, prior to the date of this Agreement, in form and substance satisfactory to Representative's counsel, whereby each such person shall agree not to offer for sale, contract to sell, sell, distribute, grant any option or other right to purchase or otherwise dispose of or contract to dispose of any of their shares of the Company's Common Stock (or any security convertible into shares of the Company's Common Stock) without the Representative's prior written consent during the 12 month period following the effective date of the Registration Statement; and (ii) at least 75% of the other holders of the Company's Common Stock (or other security convertible into Common Stock) to furnish to the Representative, prior to the date of this Agreement, a written agreement, in form and substance satisfactory to Representative's counsel whereby each such person shall agree not to offer for sale, contract to sell, sell, distribute, grant any option or other right to purchase or otherwise dispose of or contract to dispose of any of their shares of the Company's Common Stock (or any security convertible into shares of the Company's Common Stock) for a period of 180 days from the effective date of the Registration Statement without the Representative's prior written consent. Except as the Representative may consent, in its sole discretion, the foregoing agreements shall also provide that any sale of shares of the Company's Common Stock by any such person during the 18 month period from the effective date of the Registration Statement, and which sale is made pursuant to Rule 144 under the Act (or comparable provision under the Act) shall be made only in a transaction or transactions by or directly with the Representative or D.E. Frey and Company, Inc., provided the compensation charged by the Representative or D.E. Frey and Company, Inc., as the case may be, is competitive with other broker-dealers. (j) During a period of three years from the effective date of the Registration Statement, the Company will furnish to the Representative copies of (i) all reports to the Company's shareholders; (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange; and such additional information concerning the business and financial condition of the Company as the Representative may reasonably request and which can be prepared or obtained by the Company without unreasonable effort or expense. (k) The Company will apply the proceeds from the sale of the Shares as set forth under "Use of Proceeds" in the Prospectus. (l) The Company will use its best efforts to maintain the inclusion of the Common Stock for listing on the American Stock Exchange. (m) The Company shall take all necessary action, on an expedited basis, to be included in Standard and Poor's Corporate Records, Stock Quotes and Stock Guide published by Standard and Poor's Corporation and to continue such inclusion for a period of not less than seven years from the Closing Date. (n) Until that date which is 90 days after the Closing Date, the Company shall not, without the prior approval of the Representative issue or permit any press release or other communication or hold any press conference with respect to the Company or its activities or the offering of the Shares, other than trade releases issued in the ordinary course of the Company's business and approved by the Company's counsel. 12 (o) During a period of 12 months from the Closing Date, the Company will not authorize or otherwise effect any change in the compensation to any officer and/or director of the Company without 30 days' prior written notice to the Representativ e. (p) On the Closing Date, the Company shall enter into a consulting agreement, retaining the Representative as a financial consultant to the Company for a period of 24 months at a fee of $48,000 payable in full on the Closing Date. Such consulting agreement shall also provide for compensation to the Representative as follows: 5% of the first $3 million, 2.5% of any consideration between $3 million and $5 million; 2% of any consideration between $5 million and $10 million; and 1% of any consideration greater than $10 million paid or received by the Company (or its shareholders) in any transaction (including mergers, asset sales and acquisitions) accepted by the Company (or its shareholders) within 36 months from the Closing Date, provided Neidiger, Tucker, Bruner, Inc. introduced the other party to the Company. (q) For a period of three years from the Closing Date, the Company shall notify Neidiger, Tucker, Bruner, Inc. in writing at least 30 days before a proposed public offering or private offering involving securities of the Company or any subsidiary (other than bank debt or similar financing, securities offered solely to Company employees or securities issuable in transactions enumerated in Rule 145(a) under the Act) so that Neidiger, Tucker, Bruner, Inc., individually and not in its capacity as Representative or, at Neidiger, Tucker, Bruner, Inc.'s option, with a group of investment bankers associated with Neidiger, Tucker, Bruner, Inc., shall have the right of first refusal to effect the offering on terms at least as favorable to the Company as those set forth in such notice (which notice will specify the price to the underwriter or other method of determining the underwriting discount or fee). Neidiger, Tucker, Bruner, Inc. will notify the Company if Neidiger, Tucker, Bruner, Inc. intends to exercise its right of first refusal within 15 days of receipt by Neidiger, Tucker, Bruner, Inc. of such notice from the Company. If Neidiger, Tucker, Bruner, Inc. fails to exercise the right of first refusal within the 15 day period and the terms of the proposed subsequent financing thereafter are altered in any material respect, the Company shall again offer to Neidiger, Tucker, Bruner, Inc., individually and not in its capacity as Representative, the right of first refusal to effect the financing transaction upon such altered terms and Neidiger, Tucker, Bruner, Inc. shall have 15 days from the date of receipt of such notice to notify the Company of its acceptance. The foregoing preferential rights provided to Neidiger, Tucker, Bruner, Inc. shall continue in effect during the entire three year period despite any exercise or failure to exercise the preferential right granted herein during the stated term. 5. Payment of Costs and Expenses. (a) Whether or not the transactions contemplated in this Agreement are consummated, the Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: (i) all expenses (including stock transfer taxes, if any) incurred in connection with the delivery of the Firm Shares and Additional Shares to the Underwriters, (ii) all fees and expenses (including, without limitation, fees and expenses of the Company's accountants and counsel, but excluding fees and expenses of counsel for the Underwriters, except as provided in (iii) below) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), each preliminary prospectus and the Prospectus as amended or supplemented, and the printing, delivery and shipping of this Agreement and other underwriting documents, including Underwriters' Questionnaires, Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreement Among Underwriters and Selected Dealer Agreements and any letters transmitting the offering material to selling group members (including costs of shipment and delivery), (iii) all filing fees and fees and disbursements of Underwriters' counsel incurred in connection with the qualification of the Securities under state securities laws as provided in Section 4(e) hereof, (iv) the filing fees of the Commission and 13 NASD, (v) the fees and expenses of inclusion of the Common Stock on the NASDAQ SmallCap Market as well as and any other securities exchange, (vi) the cost of printing certificates representing the Common Stock, (vii) the cost and charges of the transfer agent or registrar, (viii) the costs of "tombstone" advertisements in such publications as the Representative shall reasonably request, as well as the costs of any other advertising undertaken at the Company's request, (ix) the costs of preparing, printing and distributing two bound volumes for the Representative and Underwriter's counsel, (x) all fees and costs for due diligence information, examinations, (xi) the costs and expenses associated with the production of materials related to and travel expenses incurred by the Company's management and the Representative in connection with, the various meetings to be held between the Company's management and prospective investors; and (xii) all other costs and expenses incident to the performance of the obligations of the Company hereunder which are not otherwise provided for in this section. In addition, the Company shall also pay the Representative, at the applicable Closing Date, a non-accountable expense allowance equal to 2 1/2% of the initial public offering price of the Shares purchased on such Closing Date (including Additional Shares purchased pursuant to the option granted pursuant to Section 2 hereof). If the sale of the Shares provided for herein is not consummated by reason of any termination of this Agreement pursuant to Section 12 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or because any condition of the Underwriters' obligations set forth in Section 6 herein is not fulfilled, the Company shall reimburse Neidiger, Tucker, Bruner, Inc. for all of Neidiger, Tucker, Bruner, Inc.'s accountable out-of-pocket expenses (including fees and disbursements of its counsel) actually incurred by Neidiger, Tucker, Bruner, Inc. in connection with the investigation, preparing to market and marketing of the Shares or in contemplation of performing its obligations hereunder, such reimbursement not to exceed in the aggregate $75,000. Neidiger, Tucker, Bruner, Inc. acknowledges that $45,000 has been paid to it pursuant to the Company's prior agreement that this amount is to be applied against the expense allowance and toward the reimbursement of Neidiger, Tucker, Bruner, Inc. Neidiger, Tucker, Bruner, Inc. agrees that any portion of such $45,000 that is not necessary to reimburse it for its out-of-pocket expenses actually incurred if the sale of the Shares, as contemplated by this Agreement, is not consummated for any reason shall be repaid to the Company. 6. Conditions of Underwriters' Obligations. The obligations of the Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of each of the representations and warranties on the part of the Company contained herein as of the date of this Agreement and as of the Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement thereto shall have become effective not later than 5:30 p.m., Washington, D.C. time, on the date of this Agreement or such later date and time as shall have been consented to in writing by the Representative; the Prospectus shall have been filed with the Commission in accordance with Section 4(a) hereof; and at or prior to the Closing Date no stop order suspending the effectiveness of the Registration Statement or any post-amendment thereof shall have been issued and no proceedings therefore shall have been initiated or threatened by the Commission. (b) The Representative shall not have advised the Company that the Prospectus contains an untrue statement of fact which, in Representative's reasonable opinion, is material, or omits to state a fact which, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made not misleading. (c) All proceedings in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be satisfactory in form and substance to the Representative and to John G. Herbert, P.C. ("Underwriters' Counsel"), and the Underwriters shall have received from Underwriters' 14 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 (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 (k) On the Closing Date, the Company shall have executed and delivered to Neidiger, Tucker, Bruner, Inc. the Representative's Warrants in such denominations and in the names of such permitted designees as shall have been instructed by Neidiger, Tucker, Bruner, Inc. in writing. (l) At the time this Agreement is executed, the Common Stock shall have been duly approved for listing on the American Stock Exchange subject to official notice of issuance. (m) Since the effective date of the Registration Statement, neither the Company nor the Subsidiary shall have sustained any loss by fire, flood, accident or other calamity, nor shall either of them have become a party to or the subject of any litigation, individually or in the aggregate, which is materially adverse to the Company or the Subsidiary nor shall there have been a material adverse change in the general affairs, business, key personnel, capitalization, financial position or net worth of the Company or the Subsidiary, whether or not arising in the ordinary course of business, which loss, litigation or change, in the reasonable judgment of the Representative, shall render it inadvisable to proceed with the delivery of the Shares. (n) Subsequent to the date of this Agreement or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in Section (i) or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Company the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Representative, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Shares as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). (o) At or prior to the Closing Date, Neidiger, Tucker, Bruner, Inc. shall have received the written agreements and performance of the matters specified in Section 4 and ___ hereof. (p) Prior to the Closing Date, the Company shall have furnished to the Representatives such further information, certificates and documents confirming the representations and warranties of the Company and compliance with the conditions contained herein as the Representative may reasonably have requested. If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement or if any of the certificates, opinions, written statements or letters furnished to the Representative or to Underwriters' Counsel pursuant to this Section 6 shall not be in all material respects reasonably satisfactory in form and substance to the Representative and to Underwriters' Counsel, all obligations of the Underwriters hereunder may be canceled by the Representative at or at any time prior to the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be canceled by the Representative at or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company by telephone or facsimile, confirmed in writing. 7. Indemnification. (a) The Company will indemnify and hold harmless each Underwriter, its officers, directors and each person, if any, who controls any Underwriter (including each person who may be substituted for an Underwriter as provided in Section 10 hereof) within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any losses, claims, damages, expenses, liabilities or 17 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 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 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 (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 (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 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 If the foregoing correctly sets forth the understanding between the Representative and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and each of the several Underwriters. Very truly yours, D.E. FREY GROUP, INC. By:_____________________________________ Name: Title: Accepted as of the date first above written: NEIDIGER, TUCKER, BRUNER, INC. D.E. Frey and Company, Inc., as e-Manager Thomas Weisel Partners LLC On behalf of themselves and the other Underwriters named in Schedule I hereto BY: NEIDIGER, TUCKER, BRUNER, INC. By:_____________________________________ Name: Title: 24 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 EX-1.3 3 AGREEMENT AMONG UNDERWRITERS Exhibit 1.3 2,000,000 Shares of Common Stock D.E. FREY GROUP, INC. ---------------------------------- AGREEMENT AMONG UNDERWRITERS ---------------------------------- _____________________, 1999 Neidiger, Tucker, Bruner, Inc. As Representative of the Several Underwriters 300 Plaza Level 1675 Larimer Street Denver, Colorado 80202 To the Underwriters named in Schedule I to the attached Underwriting Agreement Ladies and Gentlemen: 1. Underwriting Agreement. We understand that D.E. Frey Group, Inc., a Delaware corporation (the "Company"), proposes to enter into an underwriting agreement (the "Underwriter Agreement") in substantially the form attached to this Agreement Among Underwriters (the "Agreement') with you and other prospective underwriters (including us) (collectively, the "Underwriters") providing for the several, and not joint, purchase by the Underwriters from the Company of 2,000,000 shares of its Common Stock, $.10 par value, upon the terms stated in the Underwriting Agreement (such 2,000,000 shares of Common Stock are herein referred to as the "Firm Shares"), in which we will agree in accordance with the terms thereof to purchase the number of Firm Shares set forth opposite our name in Schedule I thereto. In addition, the Company proposes to grant to the Underwriters, upon the terms stated in the Underwriting Agreement, the right to purchase up to an additional 300,000 shares of Common Stock (the "Additional Shares") for the sole purpose of covering over-allotments in the sale of the Firm Shares. We will agree in accordance with the terms of the Underwriting Agreement to purchase our proportionate share of the Option Shares which you determine to be purchased. The Firm Shares and the Additional Shares are collectively referred to herein as the "Shares." 2. Registration Statement and Prospectus. The Shares are more particularly described in a registration statement on Form S-1 (Registration No. 333-______) filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933 (the "Act"). Amendments to such registration statement have been or are being filed, or a form of prospectus is being filed pursuant to Rule 424(b) and Rule 430A under the Act, or a Term Sheet or Abbreviated Term Sheet is being filed pursuant to Rule 424(b)(7) under the Act, in which, with our consent hereby confirmed, we have been named as one of the Underwriters of the Shares. A copy of the registration statement as filed and a copy of each amendment as filed (excluding exhibits) have heretofore been delivered to us. We confirm that we have examined the registration statement, including amendments thereto, relating to the Shares, as filed with the Commission, that we are willing to accept the responsibilities of an Underwriter under the Act in respect of the registration statement, and we are willing to proceed with a public offering of the Shares in the manner contemplated therein. The registration statement and the related prospectus may be further amended, but no such amendment or change shall release or affect our obligations hereunder or under the Underwriting Agreement. As used herein, the terms "Registration Statement," "Prospectus," "preliminary prospectus," "Term Sheet" and "Abbreviated Term Sheet" shall have the same meanings as specified in the Underwriting Agreement. 3. Authority of Neidiger, Tucker, Bruner, Inc. We hereby authorize Neidiger, Tucker, Bruner, Inc., acting on our behalf, as our representative (a) to complete, execute. and deliver the Underwriting Agreement, to determine the public offering price of the Shares, concessions and any reallowances to Selected Dealers (as hereinafter defined) and the underwriting' discount with respect thereto and to make such variations, if any, as in your judgment are appropriate and are not material, provided that the respective amount of Shares set forth opposite our name in Schedule I thereto shall not be increased without our consent, except as provided herein or in the Underwriting Agreement, (b) to waive performance or satisfaction by the Company of obligations; or conditions included in the Underwriting Agreement if in your judgment such waiver will not have a material adverse effect upon the interests of the Underwriters, and (c) to take such action as in your discretion may be necessary or advisable to carry out the Underwriting Agreement, this Agreement and the transactions for the accounts of the several Underwriters contemplated thereby and hereby. We also authorize you to determine all matters relating to the public advertisement of the Shares 4. Public Offering. We authorize you, with respect to any Shares which we so agree to purchase, to reserve for sale, and on our behalf sell, to dealers selected by you (including you or any of the other Underwriters, such dealers so selected being hereinafter called "Selected Dealers") and to others all or part of our Shares as you may determine. Reservations for sales to persons other than Selected Dealers shall be as nearly as practicable in proportion to the respective underwriting obligations of the Underwriters, unless you agree to a smaller proportion at the request of an Underwriter. Reservations for sales to Selected Dealers need not be in such proportion. All sales of reserved Shares shall be as nearly as practicable in proportion to the respective reservations as calculated from day to day. In your discretion, from time to time, you may add to the reserved Shares any Shares retained by us remaining unsold, and you may upon our request release to us any of our Shares reserved but not sold. Any Shares so released shall not thereafter be deemed to have been reserved. Upon termination of this Agreement, or prior thereto at your discretion, you shall deliver to our account any of our Shares reserved but not sold and delivered, except that if the aggregate of all reserved but unsold and undelivered Shares is less than 300,000 Shares, you are authorized to sell such Shares for the accounts of the several Underwriters at such price as you may determine. Sales of reserved Shares shall be made to Selected Dealers at the public offering price less the Selected Dealers' Concession (herein so called) pursuant to the Selected Dealer Agreement in substantially the form attached hereto, and to others at the public offering price. Underwriters and Selected Dealers may reallow a concession to other dealers as set forth in the Selected Dealer Agreement. After advice from you that the Shares are released for sale to the public, we will offer to the public in conformity with the terms of the offering set forth in the Prospectus such of our Shares as you advise us are not reserved. We authorize you after the Shares are released for sale to the public, in your discretion, to change the public offering price of the Shares and the Concession, and to buy Shares for our account from Selected Dealers at the public offering price less such amount not in excess of the Selected Dealers' Concession as you may determine. 2 Sales of Shares between Underwriters may be made with your prior consent, or as you deem advisable for blue sky purposes. We agree that we will not sell to any accounts over which we exercise discretionary authority any Shares which we have agreed to purchase under the Underwriting Agreement. 5. Additional Provisions Regarding Sales. You may, in your discretion, charge our account with an amount equal to the Selected Dealers' Concession in respect of each Share purchased under the Underwriting Agreement by you and not sold by you for our account (and each Share which you believe has been substituted therefor) which may be delivered against a purchase contract made by you for our account prior to the later of (a) the termination of all of the provisions referred to in Section 10 hereof or (b) the covering by you of any short position created by you for our account, or in lieu of such charge, require us to repurchase on demand at the total cost thereof (including commissions), plus transfer taxes, any such Share so delivered. 6. Payment and Delivery. At or before 8:00 a.m., Denver, Colorado time, on the Closing Date (as defined in the Underwriting Agreement) and on each Additional Closing Date (as defined in the Underwriting Agreement), we will deliver to you at your office at 300 Plaza Level, 1675 Larimer Street, Denver, Colorado 80202, by wire transfer or a certified or bank cashiers' check payable to your order, in clearing house funds, in the amount equal to the initial offering price set forth in the Prospectus less the Selected Dealers' Concession in respect of the number of Firm Shares or Additional Shares, as the case may be, to be purchased by us pursuant to the Underwriting Agreement. We authorize you for our account to make payment of the purchase price for the Shares to be purchased by us against delivery to you of such Shares, and the difference between such price and the amount of our check delivered to you therefor shall be credited to our account. Unless we notify you at least two full business days prior to such Closing Date (or, if applicable, such Additional Closing Date) to make other arrangements, you may, in your discretion, advise the Company to prepare our certificates in our name. If you have not received our funds as requested, you may in your discretion make such payment on our behalf, in which event we will reimburse you promptly. Any such payment by you shall not relieve us from any of our obligations hereunder or under the Underwriting Agreement. We authorize you for our account to accept delivery of our Shares from the Company and to hold such of our Shares as you have reserved for sale to Selected Dealers and others and to deliver such Shares against such sales. You will deliver to us our unreserved Shares as promptly as practicable. Notwithstanding the foregoing provisions of this Section 6, if you so notify us, payment for and delivery of our Shares may be made through the facilities of The Depository Trust Company, if we are a member, unless we have otherwise notified you prior to a date to be specified by you, or, if we are not a member, settlement may be made through a correspondent who is a member pursuant to instructions we may send to you prior to such specified date. As promptly as practicable after you receive payment for reserved Shares sold for our account, you will remit to us the purchase price paid by us for such Shares and credit or debit our account with the difference between the sale price and such purchase price. 7. Authority to Borrow. In connection with the transactions contemplated in the Underwriting Agreement or this Agreement, we authorize you, in your discretion, to advance your own funds for our account, charging current interest rates, to arrange loans for our account and in connection therewith to execute and deliver any notes or other instruments and hold or pledge as security any of our Shares or any 3 Common Stock of the Company purchased for our account. Any lender may rely upon your instructions in all matters relating to any such loan. Any of our Shares and any Common Stock of the Company purchased for our account held by you may from time to time be delivered to us for carrying purposes, and any such securities will be delivered to you upon demand. 8. Stabilization and Other Matters. We authorize you in your discretion to make purchases and sales of the Common Stock of the Company for our account in the open market or otherwise, for long or short account, on such terms as you deem advisable and in arranging sales to over-allot. If you have purchased Common Stock for stabilizing purposes prior to the execution of this Agreement, such purchases shall be treated as having been made pursuant to the foregoing authorization. We also authorize you, either before or after the termination of the offering provisions of this Agreement, to cover any short position incurred pursuant to this Section on such terms as you deem advisable. All such purchases and sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective underwriting obligations. Our net commitment under this Section (excluding any commitment incurred under the Underwriting Agreement upon exercise of the right to purchase Option Shares) shall not, at the end of any business day, exceed 10% of our maximum underwriting obligation. We will on your demand take up and pay for at cost any Common Stock so purchased or sold or over-allotted for our account, and, if any other Underwriter defaults in its corresponding obligation, we will assume our proportionate share of such obligation without relieving the defaulting Underwriter from liability. We will be obligated in respect of purchases and sales made for our account hereunder whether or not any proposed purchase of the Shares from the Company is consummated. The existence of this provision is no assurance that the price of the Shares will be stabilized or that, if stabilizing is commenced, it may not be discontinued at any time. We agree to advise you, from time to time upon your request, during the term of this Agreement, of the number of Shares retained by us remaining unsold, and will, upon your request, sell to you for the accounts of one or more of the several Underwriters such number of such Shares as you may designate at such prices, not less than the net price to Selected Dealers nor more than the public offering price, as you may determine. If you effect any stabilizing purchase pursuant to this Section 8, you will notify us promptly of the date and time when the first stabilizing purchase was effected and the date and time when stabilizing was terminated. You will retain such information as is required to be retained by you as "Manager" pursuant to Rule 17a-2 under the Securities Exchange Act (the "Exchange Act"). We agree that we will not effect any stabilizing purchases without your express authorization, and, if any purchases are effected, we agree to furnish to you not later than three business days following the date upon which stabilization was commenced such information as is required under Rule 17a-2(d). With respect to the Underwriting Agreement, you are also authorized in your discretion (a) to exercise the option therein as to all or any part of the Option Shares, and to terminate such option in whole or in part prior to its expiration, (b) to postpone the (Closing Date and any Additional Option Closing Date referred to in the Underwriting Agreement, and any other time or date specified therein, (c) to exercise any right of cancellation or termination, (d) to arrange for the purchase by other persons (including yourselves or any other Underwriter) of any Shares not taken up by any defaulting Underwriter, and (e) to consent to such other changes in the Underwriting Agreement as in your judgment do not materially adversely affect the substance of' our rights and obligations thereunder. 4 We further agree that (a) prior to the termination of this Agreement we will not, directly or indirectly, bid for or purchase any Shares for our own account, except as provided in this Agreement and in the Underwriting Agreement, and (b) prior to the completion (as defined in Regulation M promulgated under the Exchange Act) of our participation in this distribution, we will otherwise comply with Regulation M promulgated under the Exchange Act. 9. Allocation of Expenses and Settlement. We authorize you to charge our account with (a) all transfer taxes on Shares purchased by us pursuant to the Underwriting Agreement and sold by you for our account, (b) Selected Dealers' Concessions in connection with the purchase, marketing and sale of the Shares for our account, and (c) our proportionate share (based upon our underwriting obligation) of all other expenses incurred by you under this Agreement and in connection with the purchase, carrying, sale and distribution of the Shares. Your determination of the amount and allocation of such expenses shall be conclusive. In the event of the default of any Underwriter in carrying out its obligations hereunder, the expenses chargeable to such Underwriter pursuant to this Agreement and not paid by it, as well as any additional losses or expenses arising from such default, may be proportionately charged by you against the other Underwriters not so defaulting (including such other persons who purchase Shares upon a default by an Underwriter pursuant to Section 11 hereof), without, however, relieving such defaulting Underwriter from its liability therefor. As soon as practicable after termination of this Agreement, the accounts hereunder will be settled, but you may reserve from distribution such amount as you deem necessary to cover possible additional expenses. You may at any time make partial distributions of credit balances or call for payment of debit balances. Any of our funds in your hands may be held with your general funds without accountability for interest. Notwithstanding the termination of this Agreement or any settlement, we will pay (a) our proportionate share (based on our underwriting obligation) of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters, including any liability based on the claim that the Underwriters constitute an association, unincorporated business or other separate entity, and of any expenses incurred by you or any other Underwriter with your approval in contesting any such claim or liability, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account. 10. Termination. The offering provisions of this Agreement shall terminate 45 days from the date hereof unless extended by you. You may extend said provisions for a period or periods not exceeding an additional 30 days in the aggregate, provided that the Selected Dealer Agreements, if any, are similarly extended. Whether extended or not, said provisions may be terminated in whole or in part by notice from you. 11. Default by Underwriters. Default by one or more Underwriters in respect of their obligations hereunder or under the Underwriting Agreement shall not release us from any of our obligations or in any way affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from such default. In case of such default by one or more Underwriters, you are authorized to increase, pro rata with other non-defaulting Underwriters, the number of Shares which we shall be obligated to purchase pursuant to the Underwriting Agreement, provided that the aggregate amount of all such increases for our account shall not exceed 10% of our total commitment to purchase the Firm Shares set forth opposite our names on Schedule I of the Underwriting Agreement; and you are further authorized to arrange, but shall not be obligated to arrange, for the purchase by other persons, who may include yourselves or other Underwriters, of all or a portion of any aggregate amount not taken up. In the event any such arrangements are made, the respective numbers of Shares to be purchased by the non-defaulting Underwriters and by any such other persons shall be taken as the basis for the underwriting obligations under this Agreement. 5 12. Position of Neidiger, Tucker, Bruner, Inc. Except as otherwise specifically provided in this Agreement, you shall have full authority to take such action as you may deem advisable in respect of all matters pertaining to the Underwriting Agreement and this Agreement and in connection with the purchase, carrying, sale, and distribution of the Shares (including authority to terminate the Underwriting Agreement as provided therein). You shall be under no liability to us for or in respect of the value of the Shares or the validity or the form thereof, the Registration Statement, any preliminary prospectus, the Prospectus, the Underwriting Agreement, or other instruments executed by the Company or others; or for or in respect of the issuance, transfer, or delivery of the Shares; or for the performance by the Company or others of any agreement on its or their part; nor shall you be liable under any of the provisions hereof or for any matters connected herewith, except for your own want of good faith, for obligations expressly assumed by you in this Agreement and for any liabilities imposed upon you by the Act. No obligations on your part shall be implied or inferred herefrom. Authority with respect to matters to be determined by you, or by you and the Company, pursuant to the Underwriting Agreement, shall survive the termination of this Agreement. In taking all actions hereunder, except in the performance of your own obligations hereunder and under the Underwriting Agreement, you shall act only as the representative of each of the Underwriters. The commitments and liabilities of each of the several Underwriters are several in accordance with their respective purchase obligations and are not joint or joint and several. Nothing contained herein shall constitute the Underwriters partners or render any of them liable to make payments otherwise than as herein provided. If for federal income tax purposes the Underwriters should be deemed to constitute a partnership, then each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended, and agrees not to take any position inconsistent with such election. Each Underwriter authorizes Neidiger, Tucker, Bruner, Inc., in its discretion on behalf of such Underwriter, to execute such evidence of such election as may be required by the Internal Revenue Service. 13. Compensation to Neidiger, Tucker, Bruner, Inc. As compensation for your services in connection with the purchase of the Shares and the management of the public offering of the Shares, we agree to pay you and authorize you to charge our account with an amount equal to $_______ per share of the Shares which we have agreed to purchase pursuant to the Underwriting Agreement. 14. Indemnification and Future Claims. Each underwriter, including you, agrees to indemnify, hold harmless and reimburse each other Underwriter and each person, if any, who controls any other Underwriter within the meaning of Section 15 of the Act, and any successor of any other Underwriter, to the extent that, and upon the terms upon which, each Underwriter will be obligated pursuant to the Underwriting Agreement to indemnify, hold harmless and reimburse the Company, its directors, officers, and controlling persons therein specified. In the event that at any time any person other than an Underwriter asserts a claim against one or more of the Underwriters or against you as representatives of the Underwriters arising out of an alleged untrue statement or omission in the Registration Statement (or any amendment thereto) or in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or relating to any transaction contemplated by this Agreement, we authorize you to make such investigation, to retain such counsel for the Underwriters and to take such action in the defense of such claim as you may deem necessary or advisable. You may settle such claim with the approval of a majority in interest (based upon underwriting obligations) of the Underwriters. We will pay our proportionate share (based upon our underwriting obligation) of all expenses incurred by you (including the fees and expenses of counsel for the Underwriters) in investigating and defending against such claim and our proportionate share of the aggregate liability incurred by all Underwriters in respect of such claim (after deducting any contribution or indemnification obtained pursuant to the Underwriting Agreement, or otherwise, from persons other than Underwriters), whether such liability 6 is the result of a judgment against one or more of the Underwriters or the result of any such settlement. There shall be credited against any amount paid or payable by us pursuant to this paragraph any loss, damage, liability, or expense which is incurred by us as a result of any such claim asserted against us, and if such loss, claim, damage, liability, or expense is incurred by us as a result of any such claim against us, and if such loss, claim, damage, liability, or expense is incurred by us subsequent to any payment by us pursuant to this Section, appropriate provision shall be made to effect such credit, by refund or otherwise. Any Underwriter may retain separate counsel at its own expense. A claim against or liability incurred by a person who controls an Underwriter shall be deemed to have been made against or incurred by such Underwriter. In the event of default by any Underwriter in respect of its obligations under this Section, the non-defaulting Underwriters shall be obligated to pay the full amount thereof in the proportions that their respective underwriting obligations bear to the underwriting obligations of all non-defaulting Underwriters, without relieving such defaulting Underwriter of its liability hereunder. Our agreements contained in this Section will remain in full force and effect regardless of any investigation made by or on behalf of such other Underwriter or controlling person and will survive the delivery of and payment for the Shares and the termination of this Agreement and the similar agreements entered into with the other Underwriters. 15. Blue Sky and Other Matters. You will not have any responsibility with respect to the right of any Underwriter or other person to sell the Shares in any jurisdiction notwithstanding any information you may furnish in that connection. We authorize you to file a New York Further State Notice, if required, and to make and carry out on our behalf any agreements which you may deem necessary in order to procure registration or qualification of any of the Shares in any jurisdiction, and we will at your request make such payments, and furnish to you such information, as you may deem required by reason of any such agreements. We authorize you to file on behalf of the several Underwriters with the National Association of Securities Dealers, Inc, (the "NASD") such documents and information, if any, which are available or have been furnished to you for filing pursuant to the applicable rules, statements, and interpretations of the NASD. 16. Title to Shares. The Shares purchased by the respective Underwriters shall remain the property of such Underwriters until sold and no title to any such Shares shall in any event pass to you by virtue of any of the provisions of this Agreement. 17. Capital Requirements. We confirm that the incurrence by us of our obligations under this Agreement and under the Underwriting Agreement will not place us in violation of Rule l5c3-l under the Exchange Act or of any applicable rules relating to capital requirements of any securities exchange or association to which we are subject. 18. Liability for Future Claims. Neither any statement by you of any credit or debit balance in our account nor any reservation from distribution to cover possible additional expenses relating to the Shares will constitute any representation by you as to the existence or nonexistence of possible unforeseen expenses or liabilities of or charges against the several Underwriters. Notwithstanding the distribution of any net credit balance to us, we will be and remain liable for, and will pay on demand, (a) our proportionate share (based upon our underwriting obligation) of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters, including any liability which may be incurred by the Underwriters or any of them based on the claim that the Underwriters constitute an association, unincorporated business, partnership, or any separate entity, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account. 19. Acknowledgment of Registration Statement, Etc. We hereby confirm that we have examined the Registration Statement (including any amendments or supplements thereto) and Prospectus 7 relating to the Shares filed with the Commission, that we are willing to accept the responsibilities of an underwriter thereunder and that we are willing to proceed as therein contemplated. We confirm that we have authorized you to advise the Company on our behalf (a) as to the statements to be included in any preliminary prospectus and in the Prospectus (including any supplement thereto) relating to the Shares, insofar as they relate to us, and (b) that there is no information about us required to be stated in said Registration Statement or said preliminary prospectus or the Prospectus (including any supplement thereto) other than as set forth in the Underwriters' Questionnaire previously delivered by us to you and the Company. We understand that the aforementioned documents are subject to further change and that we will be supplied with copies of any amendment or amendments to the Registration Statement and of any amended Prospectus promptly, if and when received by you, but the making of such changes and amendments will not release us or affect our obligations hereunder or under the Underwriting Agreement. 20. Notices and Governing Law. Any notice from you to us shall be mailed, telephoned, or telegraphed to us at our address as set forth in the Underwriters' Questionnaire. Any notice from us to you shall be deemed to have been duly given if mailed, telephoned or facsimile to you at 300 Plaza Level, 1675 Larimer Street, Denver, Colorado 80202, Attention: Corporate Finance. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 21. Other Provisions. We represent that we are actually engaged in the investment banking or securities business and that we are a member in good standing of the NASD or, if we are not such a member, that we are a foreign dealer not eligible for membership in the NASD and that we will not offer or sell any Shares in, or to persons who are nationals or residents of the United States of America. In making sales of Shares, if we are such a member, we agree to comply with all applicable rules of the NASD, including, without limitation, the Interpretation of Rule 2110 of the NASD's Rules of Conduct with respect to Free-Riding and Withholding (IM-2110-1) and Rule 2740 of such rules, or if we are a foreign dealer, we agree to comply with such Interpretation and Rules 2730, 2740 and 2750 of such Rules as though we were such a member, and with Rule 2420 as that Rule applies to a non-member broker or dealer in a foreign country. We confirm that you have heretofore delivered to us such number of copies of the Prospectus as have been reasonably requested by us, and we further confirm that we have complied and will comply with Rule 15c2-8 under the Exchange Act concerning delivery of each preliminary prospectus and the Prospectus, and that we will furnish to persons who receive a confirmation of sale (i) a copy of the Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under the Act or (ii) if a Term Sheet or Abbreviated Term Sheet is used, a copy of the Term Sheet or Abbreviated Term Sheet and the last preliminary prospectus filed with the Commission prior to the time the Registration Statement became effective. We are aware of our statutory responsibilities under the Act, and you are authorized on our behalf to so advise the Commission. 22. Counterparts. This Agreement may be signed in any number of counterparts which, taken together, shall constitute one and the same instrument, and you may confirm the execution of such counterparts by facsimile signature. [Signature page follows] 8 Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart. -------------------------------------------- As Attorney-in-Fact for each of the several Underwriters named in Schedule I to the Underwriting Agreement Confirmed as of the date first above written: Neidiger, Tucker, Bruner, Inc. As Representative of the Several Underwriters By: ----------------------------- Name: --------------------------- Title: -------------------------- 9 EX-1.5 4 UNDERWRITER'S WARRANT AGREEMENT Ex 1.5 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, OR AN OPINION OF COUNSEL SATISFACTION TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. D.E. FREY GROUP, INC. Common Stock Purchase Warrant D.E. FREY GROUP, INC., a Delaware corporation (the "Company"), hereby certifies that, for value received, Neidiger, Tucker, Bruner, Inc. or its registered assigns (the "Holder"), is entitled, on the terms and subject to the conditions set forth herein, to purchase from the Company at any time commencing __________, 2000 and before 5:00 p.m., Denver, Colorado time, on ________, 2004, 200,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined) at a Purchase Price of $____ per share. The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant. As used herein the following terms, unless the context otherwise requires, have the indicated meanings: "Company" means D.E. Frey Group, Inc. and any person (corporate or otherwise) that shall succeed to or assume the obligations of D.E. Frey Group, Inc. hereunder in accordance with the terms hereof. "Common Stock" means the Company's Common Stock, $.10 par value per share, as authorized on the date hereof, and any other securities into which or for which the Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expiration Date" means ________, 2004. "Holder" or "Holders" means the holder or holders of the Registerable Securities, including the holder or holders of Warrants to purchase Registerable Securities not then issued. "Issue Date" means the ________, 1999 date of the original issuance of this Warrant. "Majority Holders" means the holder or holders of Warrants and Registerable Securities theretofore issued upon exercise or conversion of Warrants, who own or have the right to acquire upon exercise or conversion of Warrants not less than 51% of the Registerable Securities that would be outstanding if all of the outstanding Warrants were exercised in full on the date as of which the determination is being made. "Other Securities" means any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holder at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities as a result of the provisions of Section 4. "Prospectus" means the prospectus included in the Registration Statement as of the date it becomes effective under the Securities Act ("SEC Effective Date"), including financial statements and all documents incorporated by reference therein. In the case of references to the Prospectus as of a date subsequent to the SEC Effective Date, Prospectus means as supplemented as of such subsequent date. "Purchase Price" means $_____ per share which is equal to 120% of the public offering price per share of the Company's Common Stock covered by the Company's Registration Statement Form S-1 (SEC File No. 333-_________) "Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or statements in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement by the United States Securities and Exchange Commission (the "SEC"). "Registerable Securities" means the shares of Common Stock issued or issuable upon exercise or conversion of the Warrant and Other Securities issued or issuable as a result of the provisions of Sections 4 or 5 hereof. References herein to amounts or percentages of Registerable Securities as of or on any particular date shall be deemed to refer to amounts or percentages after giving effect to any applicable events contemplated by the preceding sentence. As to any particular Registerable Securities, such securities shall cease to be Registerable Securities when they have been sold pursuant to an effective registration statement or in compliance with Rule 144 or are eligible to be sold pursuant to subsection (k) of Rule 144. "Registration Period" means the period from the Issue Date to the earliest of (i) the date which is three years after the SEC Effective Date, (ii) the date on which the Holder may sell all of Holder's Registerable Securities without registration under the Securities Act pursuant to subsection (k) of Rule 144, without restriction on the manner of sale or the volume of securities which may be sold in any period and without the requirement for the giving of any notice to, or the mailing of any filing with the SEC and (iii) the date on which the Holder no longer owns any Registerable Securities. "Registration Statement" means a registration statement of the Company under the Securities Act on such form for which the Company then qualifies and which permits the secondary resale thereunder of Registerable Securities required by, the provisions hereof to be included therein. The term "Registration Statement" shall also include any amendment thereto and all exhibits and financial statements and schedules and documents incorporated by reference in such Registration Statement as of the SEC Effective Date. In the case of references to the Registration Statement as of a date subsequent to the SEC Effective Date, Registration Statement means as amended or supplemented as of such subsequent date. "Rule 144" means Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit a holder of securities of the Company to sell such Company securities to the public without registration under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "SEC" means the United States Securities and Exchange Commission. "SEC Effective Date" means the date the Registration Statement is declared effective by the SEC. 2 "SEC Filing Date" means the date the Registration Statement is first filed with the SEC pursuant to the provisions of Section 20. "Trading Day" means a day on which the principal securities market for the Common Stock is open for general trading of securities. "Warrants" means this Warrant and any other warrants derived from this Warrant originally issued by the Company to Neidiger, Tucker, Bruner, Inc. on the Issue Date. 1. Exercise of Warrant. 1.1 Exercise. This Warrant may be exercised by the Holder, in -------- full or in part, at any time, or from time to time, commencing 12 months from the Issue Date to and including the Expiration Date by surrender of this Warrant and the subscription form annexed hereto (completed and signed by the Holder) to the principal office of the Company or the Company's transfer agent and registrar for the Common Stock, and by making payment by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription form by (b) the Purchase Price then in effect. The Holder shall provide a copy of the subscription form to the Company at the time of exercise and the Company will confirm the exercise instructions given therein by notice to the Company's transfer agent within one Trading Day after receiving such subscription form. On any partial exercise the Company will promptly issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the purchase of the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.2 Cashless Exercise. Notwithstanding anything to the contrary ----------------- contained in Section 1.1, the Holder may elect to exercise this Warrant in whole or in part by receiving shares of Common Stock equal to the net issuance value (as determined below) of this Warrant, or any part hereof upon surrender of this Warrant to the principal office of the Company or the Company's transfer agent and registrar for the Common Stock together with the subscription form annexed hereto (completed and signed by the Holder), in which event the Company shall issue to the Holder a number of shares of Common Stock equal to X in the following formula: X = Y (A-B) ------- A Where: Y = the number of shares of Common Stock as to which this Warrant is to be exercised. A = the current fair market value of one share of Common Stock calculated as of the last Trading Day immediately preceding the exercise of this Warrant. B = the Purchase Price. As used herein, current fair market value of Common Stock as of a specified date shall mean with respect to each share of Common Stock the closing sale price of the Common Stock on the principal securities market on which the Common Stock may at the time be listed or, if there have been no sales on any such exchange on such day, the average of the reported closing bid and asked prices on the principal securities market at the end of such day, or, if on such day the Common Stock is not so listed, the average 3 of the representative bid and asked prices quoted in the Nasdaq System as of 2:00 p.m., Denver, Colorado time, or, if on such day the Common Stock is not quoted in the Nasdaq System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of five consecutive Trading Days consisting of the day as of which the current fair market value of a share of Common Stock is being determined (or if such day is not a Trading Day, the Trading Day next preceding such day) and the four consecutive Trading Days prior to such day. If on the date for which current fair market value is to be determined the Common Stock is not listed on any securities exchange or quoted in the Nasdaq System or the over-the-counter market, the current fair market value of Common Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless prior to such date the Company has become subject to a merger, acquisition or other consolidation transaction pursuant to which the Company is not the surviving party, in which case the current fair market value of the Common Stock shall be deemed to be the value received or agreed to be paid by the holders of the Company's Common Stock for each share thereof pursuant to such transaction. 2. Delivery upon Exercise. As soon as practicable after the exercise of this Warrant, and in any event within three (3) Trading Days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which the Holder shall be entitled on such exercise, in such denominations as may be requested by the Holder plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current fair market value (as determined in accordance with subsection 1.2) of one full share, together with any other stock or other securities and property (including cash where applicable) to which the Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon exercise of this Warrant as provided herein, the Company's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the Holder, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other person of any obligation to the Company, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with such exercise. If the Company fails to issue and deliver the certificates for the Common Stock to the Holder pursuant to the first sentence of this paragraph as and when required to do so, in addition to any other liabilities the Company may have hereunder and under applicable law, the Company shall pay or reimburse the Holder on demand for all out-of-pocket expenses including, without limitation, reasonable fees and expenses of legal counsel incurred by the Holder as a result of such failure. 3. Adjustment for Dividends in Other Stock, Property etc.; Reclassification etc. In case at any time, or from time to time, after the Issue Date, all the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor: 3.1 other or additional stock or other securities or property (other than cash) by way of dividend, or 3.2 any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or 4 3.3 other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in Section 5), then and in each such case the Holder, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subsections 3.2 and 3.3 of this Section 3) which the Holder would hold on the date of such exercise if on the date thereof the Holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the case referred to in subsections 3.2 and 3.3 of this Section 3) receivable by the Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Section 4. Notwithstanding anything in this Section 3 to the contrary, no adjustments pursuant to this Section 3 shall actually be made until the cumulative effect of the adjustments called for by this Section 3 since the date of the last adjustment actually made would change the amount of stock or other securities and property which the Holder would hold by more than 1%. 4. Exercise upon Reorganization, Consolidation, Merger etc. In case at any time or from time to time after the Issue Date, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition of such reorganization, consolidation, merger, sale or conveyance the Company shall cause lawful and adequate provisions to be made whereby the Holder hereof shall thereafter have the right to receive upon exercise of this Warrant, in addition to or in lieu of (as the case may be) the shares of Common Stock of the Company immediately issuable upon such exercise, such securities or other property receivable upon such reorganization, consolidation, merger, sale or conveyance as though the Holder had exercised the Warrant and was the owner of the shares of Common Stock issuable hereunder immediately prior to any such events at a price equal to the product of (x) the number of shares issuable upon exercise of the Warrant and (y) the Purchase Price applicable immediately prior to the record date for such reorganization, consolidation, merger, sale or conveyance as though Holder had exercised the Warrant. The provisions of this Section shall apply to successive reorganizations, consolidations, mergers, sales or conveyances. 5. Adjustment for Extraordinary Events. In the event that after the Issue Date the Company shall (i) issue additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the Purchase Price in effect immediately prior to such event by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described in this Section 5. The Holder shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would be issuable on such exercise immediately prior to such issuance by a fraction of which (i) the numerator is the Purchase Price in effect immediately prior to such issuance and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 6. Adjustment for Certain Stock Issuances. 5 6.1 In case at any time the Company shall issue shares of its Common Stock or debt or equity securities convertible into or exercisable or exchangeable for shares of Common Stock (collectively, the "Newly Issued Shares") after the Issue Date other than (i) an issuance pro rata to all holders of its outstanding Common Stock, (ii) issuances pursuant to options, warrants and convertible securities outstanding on the Issue Date and (iii) issuances pursuant to employee stock option plans (other than in connection with any corporate financing or acquisition transaction), at a price below the Purchase Price in effect at the time of such issuance, then, following such issuance of Newly Issued Shares, the number of shares of Common Stock which the Holder shall be entitled to receive upon exercise of this Warrant shall be increased and the Purchase Price shall be decreased to the respective amounts determined pursuant to this Section 6. The number of shares of Common Stock purchasable upon the exercise of this Warrant following any such adjustment shall be determined by multiplying the number of shares purchasable upon exercise of this Warrant immediately prior to such adjustment by a fraction, the numerator of which shall be the sum of (a) the number of shares of Common Stock outstanding or authorized to be outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the exercise or conversion of all options, warrants, purchase rights or convertible securities which are exercisable at the time of the issuance of the Newly Issued Shares), plus (b) the number of Newly Issued Shares, and the denominator of which shall be the sum of (a) the number of shares of Common Stock outstanding immediately prior to the issuance of the Newly Issued Shares (calculated on a fully-diluted basis assuming the conversion of all options, warrants, purchase rights or convertible securities which are exercisable at the time of the issuance of the Newly Issued Shares), plus (b) the number of shares of Common Stock which the aggregate consideration, if any, received by the Company for the number of Newly Issued Shares would purchase at a price equal to the Purchase Price in effect at the time of such issuance. Upon any adjustment under this Section 6, the number of shares of Common Stock purchasable upon exercise of this Warrant in full immediately after such adjustment shall be rounded to the nearest one-one- hundredth of a share of Common Stock subject, however, to Section 2 of this Warrant relating to fractional shares of Common Stock. Such adjustment of the number of shares purchasable provided for in this Section 6 may be expressed in the following formula: X = W x [O+N] ---------- [O+(C/P)] Where: C = aggregate consideration received by the Company for the Newly Issued Shares. N = number of Newly Issued Shares. O = number of shares of Common Stock outstanding or authorized to be outstanding (on a fully diluted basis, as described above) immediately prior to the issuance of the Newly Issued Shares. P = Purchase Price in effect immediately prior to the time of the issuance of the Newly Issued Shares. W = number of shares of Common Stock issuable upon exercise of this Warrant prior to the issuance of the Newly Issued Shares. X = number of shares of Common Stock issuable upon exercise of this Warrant after the issuance of the Newly Issued Shares. Upon the issuance of such Newly Issued Shares, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the Purchase Price in effect immediately prior to such event by a 6 fraction, the numerator of which shall be the number of shares of Common Stock issuable upon exercise of this Warrant prior to the issuance of the Newly Issued Shares and the denominator of which shall be the number of shares of Common Stock issuable upon the exercise of this Warrant after the issuance of the Newly Issued Shares as provided in this Section 6, and the product so obtained shall thereafter be the Purchase Price then in effect. The number of shares of Common Stock issuable upon exercise of this Warrant and the Purchase Price, as each is so adjusted, shall be readjusted in the same manner upon the happening of any successive issuances of Newly Issued Shares described in this Section 6. 7. Further Assurances. The Company will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise of all or any portion of this Warrant from time to time outstanding. 8. Notices of Record Date, etc. In the event of: 8.1 any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend on, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or 8.2 any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to or consolidation or merger of the Company with or into any other person (other than a wholly-owned subsidiary of the Company), or 8.3 any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder, at least ten days prior to such record date, a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act, or a favorable vote of stockholders if either is required. Such notice shall be mailed at least ten days prior to the date specified in such notice on which any such action is to be taken or the record date, whichever is earlier. 9. Reservation of Stock Issuable on Exercise. The Company will at all times reserve and keep available out of its authorized but unissued shares of capital stock solely for issuance and delivery on the exercise of this Warrant, a sufficient number of shares of Common Stock (or Other Securities) to effect the full exercise of this Warrant and the exercise, conversion or exchange of any other warrant or security of the Company exercisable for, convertible into, exchangeable for or otherwise entitling the holder to acquire shares of Common Stock (or Other Securities), and if at any time the number of authorized but unissued shares of Common Stock (or Other Securities) shall not be sufficient to effect such exercise, conversion or exchange, the Company shall take such action as may be necessary to increase its authorized but unissued shares of Common Stock (or Other Securities) to such number as shall be sufficient for such purposes. 7 10. Transfer Restrictions. This Warrant and/or the underlying securities may not be sold, transferred, assigned, pledged or hypothecated during the first 12 months from the Issue Date except to one or more persons, each of whom on the date of sale, transfer, assignment or hypothecation is an officer of Neidiger, Tucker, Bruner, Inc., an officer or partner of an underwriter or an officer or partner of a dealer who participates in the offering of the securities of D.E. Frey Group, Inc. covered by its Registration Statement on Form S-1 (SEC File No. 333-_______); a person or persons who receive the Warrant and/or the underlying securities pursuant to operation of law; or except by reason of reorganization of the Company. Thereafter, the Warrant and/or the underlying securities may be transferred upon compliance with applicable federal and state securities laws and subject to the terms and conditions of this Agreement. This Warrant shall inure to the benefit of the successors to and assigns of the Holder. This Warrant and all rights hereunder, in whole or in part, are registerable at the principal office of the Company or the office of the Company's transfer agent and registrar by the Holder hereof in person or by his duly authorized attorney, upon surrender of this Warrant properly endorsed. 11. Register of Warrants. The Company shall maintain, at the principal office of the Company (or such other office or agency as it may designate by notice to the Holder hereof), a register in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each successor and prior owner of such Warrant. The Company shall be entitled to treat the person in whose name this Warrant is so registered as the sole and absolute owner of this Warrant for all purposes. 12. Exchange of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the principal office of the Company or the office of the Company's transfer agent and registrar, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said Holder hereof at the time of such surrender. 13. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 14. Warrant Agent. American Securities Transfer & Trust. Inc., 1825 Lawrence Street, Suite 444, Denver, Colorado 80202, has been appointed the Company's Transfer Agent and Registrar and the Company's exercise agent for purposes of issuing shares of Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1. The Company may, by notice to the Holder, appoint an agent having an office in the United States of America for the purpose of exchanging this Warrant pursuant to Section 12 and replacing this Warrant pursuant to Section 13, or either of the foregoing, and thereafter any such exchange or replacement, as the case may be, shall be made at such office by such agent. 15. Remedies. The Company stipulates that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 16. No Rights or Liabilities as a Stockholder. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the 8 absence of affirmative action by the Holder hereof to purchase Common Stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of the Holder for the Purchase Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 17. Notices. etc. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to be sufficiently given when delivered personally (by hand, by courier or by facsimile, with answer back confirmation) and shall be effective upon receipt, addressed: (i) if to the Company, at 1700 Lincoln Street, Suite 2200, Denver, Colorado 80202, Attn: President, facsimile number (303) 863-4-56 and (ii) if to the Holder, at 300 Plaza Level, 1675 Larimer Street, Denver, Colorado 80202, Attn: President, facsimile number (303) 623-9310, or at such other address or facsimile number as a party shall have provided to the other party by written notice given in accordance with these provisions. 18. Securities Law Restrictions. By acceptance of this Warrant, the Holder represents to the Company that this Warrant is being acquired for the Holder's own account and for the purpose of investment and not with a view to, or for sale in connection with, the distribution thereof, nor with any present intention of distributing or selling this Warrant or the Common Stock issuable upon exercise of this Warrant. Neither this Warrant nor the shares of Common Stock issuable upon the exercise or conversion of this Warrant have been registered under the Securities Act or under the securities laws of any state. Neither this Warrant, nor the shares of Common Stock issuable upon the exercise or conversion of this Warrant, may be sold, transferred, hypothecated, assigned, offered for sale or otherwise disposed of unless registered pursuant to the Securities Act and applicable state securities laws or unless in the opinion of counsel who is reasonably satisfactory to the Company an exemption from such registration is available. Certificates representing securities issued upon exercise or conversion of this Warrant shall bear a legend as provided in Section 19 hereof. 19. Legend. Unless theretofore registered for resale under the Securities Act, each certificate for shares issued upon exercise of this Warrant shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). The securities have been acquired for investment and may not be resold, transferred or assigned in the absence of an effective registration statement for the securities under the Act, or an opinion of counsel satisfactory to the issuer that registration is not required under the Act. 20. Registration Rights. Nothing contained herein shall be construed as requiring the exercise of this Warrant prior to the initial filing of any registration statement provided herein or the effectiveness thereof. 20.1 Demand Registration. At any time commencing ________________, 2000 (one year after the Issue Date) and on or before _______________, 2004 (five years after the Issue Date), a Majority of the Holders shall have the right to request registration under the Securities Act for all or any portion of the Registerable Securities upon the terms and conditions set forth in this subsection 20.1. Promptly after receipt of a request for registration pursuant to this subsection 20.1 the Company shall notify all other Holders in writing of such request for registration. Upon receipt of such notice from the Company (the "Company Notice"), each such holder may give the Company a written request to register all or some of such holder's Registerable Securities in the Registration Statement described in the Company Notice, provided that such written request is given within 10 days after the date on which the Company Notice is given (with such request stating (i) the amount of Registerable Securities to be included and (ii) any other information reasonably requested by the Company to properly effect the registration of such Registerable 9 Securities). The Company shall as soon as practicable after the date on which the Company Notice is given, file with the SEC and use its best efforts to cause to become effective a Registration Statement which shall cover the Registerable Securities specified in the Demand Notice and in any written request from any other holder received by the Company within 10 days of the date on which the Company Notice is given. No right to registration of Registerable Securities under this subsection 20.1 shall be construed to limit any registration required under subsection 20.2 hereof. The obligations of the Company under this subsection 20.1 shall expire after the Company has afforded the Holder the opportunity to exercise registration rights under this subsection 20.1 for one registration. 20.2 Piggy-back Registration. If at any time commencing ______________, 2000 (one year after the Issue Date) and on or before ________________, 2006 (seven years after the Issue Date), the Company shall determine to prepare and file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the Securities Act of any securities of the Company, other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with employee benefit plans, the Company shall send to the Holder and each other holder who is entitled to registration rights under this subsection 20.2 written notice of such determination and if, within 10 days after receipt of such notice, Holder shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registerable Securities the Holder requests to be registered, except that if, in connection with any underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock (or Other Securities) which may be included in the Registration Statement because, in such underwriter(s)' judgement, such limitation is necessary to effect an orderly public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registerable Securities with respect to which Holder has requested inclusion. Any exclusion of Registerable Securities shall be made pro rata among all holders who have requested that Registerable Securities be included, in proportion to the number of Registerable Securities specified in their respective requests; provided, however, that the Company shall not exclude any Registerable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such Registration Statement; and provided further, however, that, after giving effect to the immediately preceding proviso, any exclusion of Registerable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement, based on the number of securities for which registration is requested except to the extent such pro rata exclusion of such other securities is prohibited under any written agreement entered into by the Company with the holder of such other securities prior to the Issue Date of this Certificate, in which case such other securities shall be excluded, if at all, in accordance with the terms of such agreement. No right to registration of Registerable Securities under this subsection 20.2 shall be construed to limit any registration required under subsection 20.1 hereof. The obligations of the Company under this subsection 20.2 may be waived by a Majority of the Holders and such obligations of the Company shall expire after the Company has afforded the opportunity to the holders to exercise registration rights under this subsection 20.2 for two registrations; provided, however, that any Holder who shall have had any Registerable Securities excluded from any Registration Statement in accordance with this subsection 20.2 shall be entitled to include in an additional Registration Statement filed by the Company the Registerable Securities so excluded. 20.3 Obligations of the Company. In connection with the registration of the Registerable Securities, the Company shall: 20.3.1 prepare promptly and file with the SEC the Registration Statement provided in Section 20.1 with respect to the Registerable Securities and thereafter to use its best efforts to cause such Registration Statement relating to the Registerable Securities to become effective as soon as possible after such filing, and keep the Registration Statement effective at all times during the Registration 10 Period; submit to the SEC, within three Business Days after the Company learns that no review of the Registration Statement will be made by the staff of the SEC or the staff of the SEC has no further comments on the Registration Statement, as the case may be, a request for acceleration of the effectiveness of the Registration Statement to a time and date not later then 48 hours after the submission of such request; notify the Holder of the effectiveness of the Registration Statement on the date the Registration Statement is declared effective; and, the Company represents and warrants to, and covenants and agrees with the Holder that the Registration Statement (including any amendments or supplements thereto and prospectuses contained therein, at the time it is first filed with the SEC, at the time it is ordered effective by the SEC and at all times during which it is required to be effective hereunder) and each such amendment and supplement at the time it is filed with the SEC and all times during which it is available for use in connection with the offer and sale of Registerable Securities shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; 20.3.2 prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and during the Registration Period, comply with the provisions of the Securities Act with respect to the disposition of all Registerable Securities of the Company covered by the Registration Statement until such time as all of such Registerable Securities have been disposed of in accordance with the intended methods of disposition by the Holder or Holders thereof as set forth in the Registration Statement; 20.3.3 furnish to each Holder whose Registerable Securities are included in the Registration Statement and its legal counsel, (i) promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, one copy of the Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, each letter written by or on behalf of the Company to the SEC or the staff of the SEC and each item of correspondence from the SEC or the staff of the SEC relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment) and (ii) such number of copies of a prospectus, including a preliminary prospectus and all amendments and supplements thereto and such other documents, as such Holder reasonably may request in order to facilitate the disposition of the Registerable Securities owned by such Holder; 20.3.4 use reasonable efforts to (i) register and qualify the Registerable Securities covered by the Registration Statement under such securities or blue sky laws of such jurisdictions as the Holders who hold a majority of the Registerable Securities being offered reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post- effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times until the end of the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period and (iv) take all other actions reasonably necessary or advisable to qualify the Registerable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto (I) to qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection 20.3.3, (II) to subject itself to general taxation in any such jurisdiction, (III) to file a general consent to service of process in any such jurisdiction, or (IV) to make any change in its Articles of Incorporation or Bylaws which the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders; 20.3.5 in the event that the Registerable Securities are being offered in an underwritten offering, enter into and perform its obligations under an underwriting agreement in usual and 11 customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering; 20.3.6 as promptly as practicable after becoming aware of such event or circumstance, notify each Holder of any event or circumstance of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, file such supplement or amendment with the SEC at such time as shall permit the Holder to sell Registerable Securities pursuant to the Registration Statement as promptly as practicable, and deliver a number of copies of such supplement or amendment to each Holder as such Holder may reasonably request; 20.3.7 as promptly as practicable after becoming aware of such event, notify each Holder who holds Registerable Securities being sold (or, in the event of an underwritten offering the managing underwriters) of the issuance by the SEC of any stop order or other suspension of effectiveness of the Registration Statement at the earliest possible time; 20.3.8 permit one legal counsel designated as selling stockholders' counsel by the Holder(s) holding a majority of the Registerable Securities being sold to review and comment on the Registration Statement and all amendments and supplements thereto a reasonable period of time prior to their filing with the SEC; 20.3.9 make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement; 20.3.10 at the request of the Holder(s) who hold a majority of the Registerable Securities being sold, furnish on the date that Registerable Securities are delivered to an underwriter, if any, for sale in connection with the Registration Statement (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters; and (ii) an opinion, dated such date, from counsel representing the Company for purposes of such Registration Statement, in form and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Holders; 20.3.11 make available for inspection by Holder, any underwriter participating in any distribution or disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by Holder or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable Holder to exercise Holder's due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to a Holder) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction or (iii) the information in such Records has 12 been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto; 20.3.12 use its best efforts (i) to cause all the Registerable Securities covered by the Registration Statement to be listed on the American Stock Exchange or such other principal securities market on which securities of the same class or series issued by the Company are then listed or traded or (ii) if securities of the same class or series as the Registerable Securities are not then listed on the American Stock Exchange or any such other securities market, to cause all of the Registerable Securities covered by the Registration Statement to be listed on the NASDAQ, New York Stock Exchange or the American Stock Exchange; 20.3.13 provide a transfer agent and registrar, which may be a single entity, for the Registerable Securities not later than the effective date of the Registration Statement; 20.3.14 cooperate with the Holder and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registerable Securities to be offered pursuant to the Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or the Holder may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Holder may request; 20.3.15 during the period the Company is required to maintain effectiveness of the Registration Statement pursuant to subsection 20.3.1, the Company shall not bid for or purchase any Common Stock or Other Securities or any right to purchase Common Stock or Other Securities or attempt to induce any person to purchase any such security or right if such bid, purchase or attempt would in any way limit the right of the Holder to sell Registerable Securities by reason of the limitations set forth in Regulation M under the Exchange Act; and 20.3.16 take all other reasonable actions necessary to expedite and facilitate disposition by the Holder of the Registerable Securities pursuant to the Registration Statement. 20.3.17 With a view to making available to the Holders the benefits of Rule 144, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (iii) furnish to each Holder so long as such Holder owns Registerable Securities, promptly upon request, (I) a written statement by the Company that it has complied with the reporting requirements of Rule 144 and the Exchange Act, (II) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (III) such other information as may be reasonably requested to permit the Holders to sell such securities pursuant to Rule 144 without registration. 20.4 Obligations of the Holder. In connection with the registration of the Registerable Securities, the Holder shall have the following obligations: 20.4.1 it shall be a condition precedent to the obligations of the Company to complete the registration pursuant hereto with respect to the Holder's Registerable Securities that the Holder shall furnish to the Company such information regarding Holder, the Registerable Securities held by Holder and the intended method of disposition of the Registerable Securities held by Holder as shall be reasonably required to effect the registration of such Registerable Securities and shall execute such documents in 13 connection with such registration as the Company may reasonably request. At least five days prior to the first anticipated filing date of the Registration Statement, the Company shall notify the Holder of the information the Company requires from the Holder (the "Requested Information") if any of Holder's Registerable Securities are eligible for inclusion in the Registration Statement. If at least two Business Days prior to the filing date the Company has not received the Requested Information from the Holder (at such time Holder becoming a "Non-Responsive Holder"), then the Company may file the Registration Statement without including Registerable Securities of Non-Responsive Holder but shall not be relieved of its obligation to file a Registration Statement with the SEC relating to the Registerable Securities of Non-Responsive Holder promptly after Non-Responsive Holder provides the Requested Information; 20.4.2 by Holder's acceptance of the Registerable Securities, Holder agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless Holder has notified the Company in writing of such Holder's election to exclude all of Holder's Registerable Securities from the Registration Statement; 20.4.3 in the event Holder(s) holding a majority of the Registerable Securities being registered determine to engage the services of an underwriter, each Holder agrees to enter into and perform such Holder's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registerable Securities, unless such Holder has notified the Company in writing of such Holder's election to exclude all of such Holder's Registerable Securities from the Registration Statement; 20.4.4 Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in subsections 20.3.6 or 20.3.7, Holder will immediately discontinue disposition of Registerable Securities pursuant to the Registration Statement covering such Registerable Securities until Holder's receipt of the copies of the supplemented or amended prospectus contemplated by subsections 20.3.6 or 20.3.7 and, if so directed by the Company, Holder shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Holder's possession of the prospectus covering such Registerable Securities current at the time of receipt of such notice; 20.4.5 Holder may not participate in any underwritten registration hereunder unless Holder (i) agrees to sell Holder's Registerable Securities on the basis provided in any underwriting arrangements approved by the Holders entitled hereunder to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and other fees and expenses of investment bankers and any manager or managers of such underwriting and legal expenses to the underwriters applicable with respect to its Registerable Securities, in each case to the extent not payable by the Company pursuant to the terms of this Agreement; and 20.4.6 Holder agrees to take all reasonable actions necessary to comply with the prospectus delivery requirements of the Securities Act applicable to its sales of Registerable Securities. 20.5 Expenses of Registration. All costs and expenses, other than underwriting or brokerage discounts, commissions and other fees related to the distribution of the Registerable Securities, incurred in connection with registrations, filings or qualifications pursuant to subsections 20.1 and 20.2, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees and the fees and disbursements of counsel for the Company shall be borne by the Company, provided, however, 14 that the Holder(s) shall bear the fees and out-of-pocket expenses of the one legal counsel selected by the Holder(s) pursuant to subsection 20.3.8 hereof. 20.6 Indemnification. In the event any Registerable Securities are included in a Registration Statement under this Agreement: 20.6.1 To the extent permitted by law, the Company will indemnify and hold harmless each Holder who holds such Registerable Securities, the directors, if any, of such Holder, the officers, if any, of such Holder, each person, if any, who controls any Holder within the meaning of the Securities Act or the Exchange Act, any underwriter (as defined in the Securities Act) for the Holders, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each person, if any, who controls any such underwriter within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in subsection 20.6.4 with respect to the number of legal counsel, the Company shall reimburse the Holders and the other Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this subsection 20.6.1: (I) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement, the prospectus or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to subsection 20.3.3 hereof; (II) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Person if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to subsection 20.3.3 hereof; and (III) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registerable Securities by a Holder pursuant to Section 10. 20.6.2 In connection with any Registration Statement in which a Holder is participating, each such Holder agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in subsection 20.6.1, the Company, each of its directors, each of its officers who signs the Registration Statement, each person on, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, any underwriter and any other stockholder selling securities pursuant 15 to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the Securities Act or the Exchange Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in connection with such Registration Statement; and such Holder will reimburse any legal or other expenses reasonably incurred by any Indemnified Party, promptly as such expenses are incurred and are due and payable, in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this subsection 20.6.2 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Holder, which consent shall not be unreasonably withheld; provided, further, however, that the Holder shall be liable under this subsection 20.6.2 for only that amount of a Claim as does not exceed the amount by which the net proceeds to such Holder from the sale of Registerable Securities pursuant to such Registration Statement exceeds the cost of such Registerable Securities to such Holder. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registerable Securities by the Holders pursuant to Section 10. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this subsection 20.6.2 with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. 20.6.3 The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in any distribution, to the same extent as provided above, with respect to information so furnished in writing by such persons expressly for inclusion in the Registration Statement. 20.6.4 Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 20.6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under Section 20.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel selected by the indemnifying party but reasonably acceptable to the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. In such event, the Company shall pay for only one separate legal counsel for the Holders; such legal counsel shall be selected by the Holders holding a majority in interest of the Registerable Securities included in the Registration Statement to which the Claim relates. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 20.6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by Section 20.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 20.7 The agreements, representations and warranties of the Company and the Holder set forth or provided in this Section 20 shall survive any exercise of this Warrant and the delivery of and 16 payment for the Registerable Securities hereunder and shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company and the Holder. 21 Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of Colorado. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. Dated: ______________, 1999 D.E. FREY GROUP, INC. __________________________________ _______________________, President FORM OF SUBSCRIPTION D.E. FREY GROUP, INC. (To be signed only on exercise of Warrant) TO: D.E. Frey Group, Inc. 1700 Lincoln Street, Suite 2200 Denver, Colorado 80202 Attn: President 1. The undersigned Holder of the attached original, executed Warrant hereby elects to exercise its purchase right under such Warrant with respect to _______________ shares of Common Stock, as defined in the Warrant, of D.E. Frey Group, Inc., a Delaware corporation (the "Company"). 2. The undersigned Holder (check one): [_] (a) elects to pay the aggregate purchase price for such shares of Common Stock (the "Exercise Shares") (i) by lawful money of the United States or the enclosed certified or official bank check payable in United States dollars to the order of the Company in the amount of $____________, or (ii) by wire transfer of United States funds to the account of the Company in the amount of $_____________, which transfer has been made before or simultaneously with the delivery of this Form of Subscription pursuant to the instructions of the Company; or [_] (b) elects to receive shares of Common Stock having a value equal to the value of the Warrant calculated in accordance with Section 1.2 of the Warrant. 3. Please issue a stock certificate or certificates representing the appropriate number of shares of Common Stock in the name of the undersigned or in such other name as is specified below: 17 Name: ------------------------------------------------ Address: --------------------------------------------- --------------------------------------------- Dated:_________________ _________________________________________ (Signature must conform to name of Holder as specified on the face of the Warrant) ----------------------------------------- ----------------------------------------- (Address) 18 EX-3.1 5 AMEND/RESTATE CERT OF INC CERTIFICATE OF INCORPORATION OF D.E. FREY GROUP, INC. A STOCK CORPORATION FIRST: The name of this Corporation is D.E. FREY GROUP, INC. SECOND: Its Registered office in the State of Delaware is to be located at 229 South State Street, in the City of Dover, County of Kent, zip code 19901. The Registered Agent in charge thereof is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. FOURTH: The amount of total authorized capital stock of this Corporation is One Hundred Fifty Thousand Dollars ($150,000) divided into 1,500,000 shares of common stock, $.10 par value. FIFTH: The name and mailing, address of the incorporator are as follows: Name: Cathryn B. Mayers Mailing Address: 2222 One United Bank Center 1700 Lincoln Street Denver, Colorado 80203 SIXTH: The powers of the incorporator are to terminate upon filing of the Certificate of Incorporation. The name and address of the person who is to serve as the sole director until the first annual meeting of shareholders, or until his successor is elected and qualified, is as follows: Dale E. Frey 29 Castle Pines Drive North Castle Rock, CO 80104 SEVENTH: No person who is or was a director of the corporation shall be personally liable to the Corporation or to the shareholders for monetary damages for breach of fiduciary duty as a director. A person who is or was a director of the Corporation shall be personally liable to the Corporation or to the shareholders for monetary damages for any breach of such director's duty of loyalty to the Corporation or to the shareholders, any act or omission not in good faith or which involves intentional misconduct or a knowing violation of the law, any act specified in Section 174 of the Delaware General Corporation Law, or, any transaction from which such director derived an improper personal benefit. EIGHTH: The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he -2- is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorney fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Determination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon plea of nolo contendere or its equivalent, shall not, of itself, create a ---- ---------- presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or he is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise -3- against expenses (including attorney fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation only and to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorney fees) actually and reasonably incurred by him in connection therewith. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Such expenses incurred by other employees and -4- agents shall be paid upon such terms and conditions, if any, as the board of directors deems appropriate. NINTH: In the event that the Corporation's board of directors is divided into classes in the manner set forth in Section 141 of the Delaware General Corporation Law, then the holders of a majority of the shares then entitled to vote at an election of directors may effect the removal of any director or the entire board of directors, with or without cause. TENTH: Special meetings of the shareholders may be called by the president of the Corporation, the board of directors, or by the record holder or holders of at least 33% of all shares entitled to vote at such meeting. ELEVENTH: The power to adopt, amend, or repeal the bylaws of the Corporation is conferred upon the board of directors. I, the undersigned, for the purpose of forming a corporation under the laws of the State of Delaware, do make, file and record this Certificate, and do certify that the facts herein stated are true, and I have accordingly hereunto set my hand this 14th day of August, 1989. /s/ Cathryn B. Mayers ----------------------------------------- Cathryn B. Mayers, Incorporator -5- Breza & Winters One United Bank Center 1700 Lincoln Street - Suite 2222 Denver, Colorado 80203 attn: Roberta J. Feezor envelope in Box STATE OF DELAWARE INDEXED KENT COUNTY RECORDED In the Office for the Recording of the Deeds, Etc. at Dover, In and for the said County of Kent, In Corp. Record X Vol. 135 Page 337 Etc. ----- ----- ----- the 29th day of July A.D. 19 91 -------- -------- ---- WITNESS my Hand and the Seal of said office. /s/ Michael T. Scure, Recorder -------------------- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF D.E. FREY GROUP, INC. D.E. Frey Group, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the state of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of said corporation, by the written unanimous consent of its members, filed with the minutes of the board, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation: RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc. be amended by changing the Fourth Article thereof so that, as amended said Article shall be and read as follows: "The amount of total authorized capital stock of this Corporation is Four Hundred Sixty Eight Thousand Seven Hundred Fifty Dollars ($468,750), divided into 1,500,000 shares of common stock, $.10 par value, and 318,750 shares of preferred stock, $1.00 par value, which preferred shares have the following rights and preferences: 1. Designation. This resolution shall provide for a single series of ------------- preferred stock, the designation of which shall be "Series 1989-A Preferred Stock" (hereinafter the "Preferred Shares") and the number of authorized shares constituting the Preferred Shares is 318,750. The number of authorized Preferred Shares may be reduced by a further resolution duly adopted by the Board of the Company and by the filing of a certificate pursuant to the provisions of the Delaware General Corporation Law stating that such reduction has been so authorized. 2. Voting. Except as otherwise expressly provided herein or as required by ------ law, the holders of Preferred Shares shall have no voting rights. In the event the holders of Preferred Shares are entitled to vote, each Preferred Share shall be entitled to one vote, either in person or by proxy, and the holders of Preferred Shares and common stock shall vote together and not as separate classes unless otherwise expressly provided herein or required by law. 3. Dividends. --------- 3.1 The holders of then outstanding Preferred Shares shall be entitled to receive, when and as declared by the Board out of any funds legally available therefor, cumulative dividends at the annual rate of $.9667 per share payable in cash annually on each October 1, commencing October 1, 1990. Such dividends shall accrue on each share from and after the date of issuance and shall accrue from day-to-day whether or not earned or declared. Such dividends shall be cumulative so that, except as provided in Section 3.2 below, if such dividends in respect of any previous or -2- current annual dividend period at the annual rate specified above shall not have been paid or declared and a sum sufficient for the payment thereof set apart, the deficiency shall first be fully paid before any dividend or other distribution shall be paid on or declared and set apart for the common stock, par value $.10 per share, of the Company ("Common Stock"). Any accumulation of dividends on the Preferred Shares shall not bear interest. 3.2 Unless full dividends on the Preferred Shares for all past dividend periods and the then current dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart: (i) no dividend whatsoever (other than dividend payable solely in Common Stock) shall be paid or declared and no distribution shall be made on any Common Stock; and (ii) no shares of Common Stock shall be purchased, redeemed or acquired by the Company and no funds shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock held by employees, officers directors, consultants, or other persons performing services for the Company or any subsidiary of the Company ("Subsidiary," defined herein as any corporation at least 50% of whose outstanding voting stock shall at the time be owned directly or indirectly by the Company or by one of more of its Subsidiaries) that are subject to agreements under which the -3- Company has the option to repurchase such shares at cost upon the occurrence of certain events such as the termination of employment. After cumulative dividends on the Preferred Shares for all past dividend periods and the then current dividend period shall have been declared and paid or set apart, if the Board shall elect to declare additional dividends out of funds legally available therefor, not less than fifty percent (50%) of such additional dividends shall be declared in equal amounts per share on all Preferred Shares and the balance, if any, may be distributed to holders of the Common Stock. 3.3 Each holder of Preferred Shares shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the Delaware General Corporation Law to distributions made by the company in connection with the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any Subsidiary upon termination of their employment or services pursuant to agreements providing for the right of repurchase, provided that such repurchases are not prohibited as provided herein. 4. Mandatory Redemption. On October 1, 1994, the Company will redeem all of -------------------- the Preferred Shares at the time issued and outstanding for an amount in cash equal to $1.00 per share plus any accrued and unpaid dividends thereon, whether or not earned or -4- declared, to and including that date. Written notice of redemption stating the date and place of redemption and the amount of the redemption price shall be mailed by the Company not less than 30 days nor more than 60 days prior to the redemption date to the record holders of the shares to be redeemed directed to their last known address as shown by the Company records. If notice of redemption is given as provided above and if on the redemption date the Company has set apart in trust for that purpose sufficient funds for such redemption, then from and after the redemption date, notwithstanding that any certificate for such shares has not been surrendered for cancellation, the Preferred Shares called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive the redemption price without interest upon surrender of certificates representing the shares called for redemption. Any monies remaining in trust after one year from the redemption date shall be returned to the Company and thereafter holders of certificates for such shares shall look only to the Company for the redemption price thereof. 5. Rights on Liquidation. In the event of the liquidation, dissolution or --------------------- winding up of the Company, whether voluntary or involuntary, resulting in any distribution of its assets to its shareholders, the holders of the Preferred Shares then issued and -5- outstanding shall be entitled to receive an amount equal to $1.00 per Preferred Share plus accrued and unpaid dividends thereon, and no more, before any payment or distribution of the assets of the Company is made to or set apart for the holders of Common Stock. If the assets of the Company distributable to the holders of Preferred Shares are insufficient for the payment to them of the full preferential amount described above, such assets shall be distributed ratably among the holders of the Preferred Shares. The holders of the Common Stock shall be entitled to the exclusion of the holders of the Preferred Shares to share in all remaining assets of the Company in accordance with their respective interests. For purposes of this paragraph, a consolidation or merger of the Company with any other corporation or corporations shall not be deemed to be a liquidation, dissolution or winding up of the Company. 6. Restrictions and Limitations. ---------------------------- 6.1 So long as any Preferred Shares remain outstanding, the Company shall not, and shall not permit any of its Subsidiaries to, without the vote or written consent by the holders of at least seventy percent (70%) of the then outstanding Preferred Shares: -6- 6.1.1 Redeem, purchase or otherwise acquire for value any Preferred Share or Shares other than by redemption in accordance with Section 4 hereof other than as may be required by law; 6.1.2 Purchase, redeem or otherwise acquire (or pay into or set aside for a sinking fund for such purpose), any of the Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants, or other persons performing services for the Company or any subsidiary of the Company pursuant to agreements under which the Company has the option to repurchase such shares at cost upon the occurrence of certain events such as the termination of employment; 6.1.3 Authorize or issue or obligate itself to issue any other equity security (including any security convertible into or exercisable for any equity security) senior to or on a parity with the Preferred Shares as to dividend or redemption rights and liquidation preferences; -7- 6.1.4 Alter or change the rights, preferences or privileges of the Preferred Shares, whether by amendment to its articles of incorporation or otherwise; 6.1.5 Effect any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Company or any Subsidiary other than in the ordinary course of business, or any consolidation or merger involving the Company or any Subsidiary, or any reclassification or other change of any stock or any recapitalization of the Company; 6.1.6 Permit any Subsidiary to issue or sell, or obligate itself to issue or sell, except to the Company or any wholly-owned Subsidiary, any stock of such subsidiary; or 6.1.7 Increase the total number of authorized Preferred Shares. 7. Notice. Any notice required to be given to the holders of Preferred -------- Shares shall be deemed to have been given upon the earlier of personal delivery or three business days after deposit in the United States mails by registered or certified mail, return receipt requested, with postage fully prepaid, and addressed to each holder of record at his address as it appears on the stock -8- transfer records of the Company. Any notice to the Company shall be in writing and shall be deemed to have been given only upon actual receipt thereof." SECOND: That in lieu of a meeting and vote of stockholders, the sole stockholder has given unanimous written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said D.E. Frey Group, Inc. has caused this Certificate to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla, its Assistant Secretary, this 11th day of September, 1989. ---- --------- D.E. FREY GROUP, INC. By: /s/ Dale E. Frey, President -------------------------------- Dale E. Frey, President ATTEST /s/ Jose A. Padilla - -------------------- Jose A. Padilla, Assistant Secretary -9- STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 04/30/1990 901215189 - 2205026 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF D.E. FREY GROUP, INC. D.E. Frey Group, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the state of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of said corporation, by the written unanimous consent of its members, filed with the minutes of the board, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation: RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc. be amended by changing paragraph 3.1 of the Fourth Article thereof so that, as amended said Article shall be and read as follows: 3. Dividends. ---------- 3.1 The holders of then outstanding Preferred Shares shall be entitled to receive, when and as declared by the Board out of any funds legally available therefor, cumulative dividends at the annual rate of 53.3% per share payable in cash annually on each October 1, commencing October 1, 1990. Such dividends shall accrue on each share from and after the date of issuance and shall accrue from day-to-day whether or not earned or declared. Such dividends shall be cumulative so that, except as provided in Section 3.2 below, if such dividends in respect of any previous or current annual dividend period at the annual rate specified above shall not have been paid or declared and a sum sufficient for the payment thereof set apart, the deficiency shall first be fully paid before any dividend or other distribution shall be paid on or declared and set apart for the common stock, par value $.10 per share, of the Company ("Common Stock"). Any accumulation of dividends on the Preferred Shares shall not bear interest. SECOND: That in lieu of a meeting and vote of stockholders, the sole stockholder has given unanimous written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WFEREOF, said D.E. Frey Group, Inc. has caused this Certificate to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla, its Assistant Secretary, this 23 day of April, 1990. -- ----- D.E. FREY GROUP, INC. BY: /s/ Dale E. Frey --------------------- Dale E. Frey, President ATTEST: /s/ Jose A. Padilla - -------------------- Jose A. Padilla, Assistant Secretary STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 11/14/1990 903205317 - 2205026 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF D.E. FREY GROUP, INC. D.E. Frey Group, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the state of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of said corporation, by the written unanimous consent of its members, filed with the minutes of the board, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation: RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc. be amended by changing the Fourth Article thereof so that, as amended said Article shall be and read as follows: "The total authorized capital stock of this Corporation consists of 1,500,000 shares of common stock, $.10 par value; 318,750 shares of Series 1989- A Preferred Stock, $1.00 par value ("1989 Preferred Shares"), and 1,100,000 shares of Series 1990-A Preferred Stock, $1.00 par value ("1990 Preferred Shares"), which preferred shares have the following rights and preferences: 1. Designation. This Fourth Article provides for a series of preferred ----------- stock, the designation of which shall be "Series 1989-A Preferred Stock" (hereinafter the "1989 Preferred Shares") and the number of authorized shares constituting the 1989 Preferred Shares is 318,750. This Fourth Article also provides for a series of preferred stock, the designation of which shall be "Series 1990-A Preferred Stock" (hereinafter the "1990 Preferred Shares") and the numbcr of authorized shares constituting the 1990 Preferred Shares is 1,100,000. The 1989 Preferred Shares and 1990 Preferred Shares may be collectively referred to herein as "Preferred Shares." The number of authorized Preferred Shares may be reduced by a further resolution duly adopted by the Board of the Company and by the filing of a certificate pursuant to the provisions of the Delaware General Corporation Law stating that such reduction has been so authorized. 2. Voting. Except as otherwise expressly provided herein or as required ------ by law, the holders of Preferred Shares shall have no voting rights. In the event the holders of Preferred Shares are entitled to vote, each Preferred Share shall be entitled to one vote, either in person or by proxy, and the holders of Preferred Shares and common stock shall vote together and not as separate classes or series unless otherwise expressly provided herein or required by law. 3. Dividends --------- 3.1 The holders of then outstanding 1989 Preferred Shares shall be entitled to receive, when and as declared by the Board out of any funds legally available therefor, cumulative dividends at the annual rate of 53.3% per share payable in cash annually on each October 1, commencing October 1, 1990. The holders of then outstanding 1990 Preferred Shares shall be entitled to receive, when and as declared by the Board out of any funds legally available therefor, cumulative dividends at the annual rate of 10% per share payable in cash annually on each January 1, commencing January 1, 1992. Dividends shall accrue on 1989 Preferred Shares and 1990 Preferred Shares from and after their respective dates of issuance and shall accrue from day-to-day whether or not earned or declared. Such dividends shall be cumulative so that, except as provided in Section 3.2 below, if such dividends in respect of any previous or current annual dividend periods at the annual rates specified above shall not have been paid or declared and a sum sufficient for the payment thereof set apart, the deficiency or deficiencies shall first be fully paid before any dividend or other distribution shall be paid on or declared and set apart for the common stock, par value $.10 per share, of the Company ("Common Stock"). Any accumulation of dividends on the Preferred Shares shall not bear interest. 3.2 Unless full dividends on the 1989 Preferred Shares and 1990 Preferred Shares for all their respective past dividend periods and their respective then current dividends period shall have been paid or declared and a sum sufficient for the payment thereof set apart: (i) no dividend whatsoever (other than dividend payable, solely in Common Stock) shall be paid or declared and no distribution shall be made on any common stock; and (ii) no shares of common stock shall be purchased, redeemed or acquired by the Company and no funds shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock held by employees, officers, directors, consultants, or other persons performing services for the Company or any subsidiary of the Company ("Subsidiary," defined herein as any corporation at least 50% of whose outstanding voting stock shall at the time be owned directly or indirectly by the Company or by one of -2- more of its Subsidiaries) that are subject to agreements under which the Company has the option or obligation to repurchase such shares at cost upon the occurrence of certain events such as the termination of employment. Cumulative dividends on the 1989 Preferred Shares and 1990 Preferred Shares must be paid concurrently by the Company to the holders thereof unless one of the series of Preferred Shares has been previously redeemed. The Company shall calculate the total amount of dividends payable to the holders of Preferred Shares based upon (i) the amount of accrued and unpaid dividends on the 1989 Preferred Shares, and (ii) the amount of accrued and unpaid dividends on the 1990 Preferred Shares, on the record date. If the aggregate dollar amount allocated by the Board of Directors to be paid as dividends to the holders of Preferred Shares is insufficient for the payment of the full amount calculated in (i) and (ii) in the preceding sentence, such dividend shall be distributed pro rata between the holders of the 1989 Preferred Shares and the 1990 Preferred Shares. Within each series of Preferred Shares, the dividend shall be distributed ratably among the holders of the shares in accordance with their respective interests. After cumulative dividends on the Preferred Shares for all past dividend periods and the then current dividend period shall have been declared and paid or set apart, if the Board shall elect to declare additional dividends out of funds legally available therefor, not less than fifty percent (50%) of such additional dividends shall be declared in equal amounts per share on all Preferred Shares and the balance, if any, may be distributed to holders of the Common Stock. 3.3 Each holder of Preferred Shares shall be deemed to have consented to distributions made by the Company in connection with the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any Subsidiary upon termination of their employment or services pursuant to agreements providing for the right or obligation of repurchase, provided that such repurchases are not prohibited as provided herein. 4. Mandatory Redemption. The Company will redeem all then issued and -------------------- outstanding shares of 1989 Preferred Shares and 1990 Preferred Shares on October 1, 1994, and January 1, 1996, respectively. The redemption price for both the 1989 Preferred Shares and 1990 Preferred Shares shall be an amount in cash equal to $1.00 per share plus any accrued and unpaid dividends thereon, whether or not earned or declared, to and including the date of redemption. Written notice of redemption of either the 1989 Preferred Shares or 1990 -3- Preferred Shares stating the date and place of redemption and the amount of the redemption price shall be mailed by the Company not less than 30 days nor more than 60 days prior to the redemption date to the record holders of the shares to be redeemed directed to their last known address as shown by the Company records. If notice of redemption is given as provided above and if on the redemption date the Company has set apart in trust for that purpose sufficient funds for such redemption, then from and after the redemption date, notwithstanding that any certificate for such shares has not been surrendered for cancellation, the 1989 Preferred Shares or 1990 Preferred Shares called for redemption, as the case may be, shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive the redemption price without interest upon surrender of certificates representing the shares called for redemption. Any monies remaining in trust after one year from the redemption dates of either the 1989 Preferred Shares or 1990 Preferred Shares shall be returned to the Company and thereafter holders of certificates for such shares shall look only to the Company for the redemption price thereof. 5. Rights on Liquidation. In the event of the liquidation, dissolution or --------------------- winding up of the Company, whether voluntary or involuntary, resulting in any distribution of its assets to its shareholders, (i) the holders of the 1989 Preferred Shares then issued and outstanding shall be entitled to receive an amount equal to $1.00 per 1989 Preferred Share plus accrued and unpaid dividends thereon; and (ii) the holders of the 1990 Preferred Shares then issued and outstanding shall be entitled to receive an amount equal to $1.00 per 1990 Preferred Share plus accrued and unpaid dividends thereon. If the assets of the Company to be distributed to the holders of Preferred Shares are insufficient for the payment to them of the full preferential amount described in (i) and (ii) in the preceding sentence, such assets shall be distributed pro rata between the holders of 1989 Preferred Shares and 1990 Preferred Shares based upon the total amounts due each series as calculated in (i) and (ii). Within each series of Preferred Shares, these assets of the Company shall be distributed ratably among the holders of the shares in accordance with their respective interests. Distributions to holders of the Preferred Shares shall be made before any payment or distribution of the assets of the Company is made to or set apart for the holders of Common Stock. The holders of the Common Stock shall be entitled, to the exclusion of the holders of the Preferred Shares, to share in all remaining assets of the Company in accordance with their -4- respective interests. For purposes of this paragraph, a consolidation or merger of the Company with any other corporation or corporations shall not be deemed to be a liquidation, dissolution or winding up of the Company. 6. Restriction and Limitations. --------------------------- 6.1 So long as any Preferred Shares remain outsranding, the Company shall not, and shall not permit any of its Subsidiaries to, without the vote or written consent by the holders of at least seventy percent (70%) of the then outstanding 1989 Preferred Shares and 1990 Preferred Shares: 6.1.1 Redeem, purchase or otherwise acquire for value any Preferred Share or Shares other than by redemption in accordance with Section 4 hereof or other than as may be required by law. 6.1.2 Purchase, redeem or otherwise acquire (or pay into or set aside a sinking fund for such purpose), any of the Common Stock: provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants, or other persons performing services for the Company or any subsidiary of the Company pursuant, to agreements under which the Company has the option or obligation to repurchase such shares at cost upon the occurrence of certain events such as the termination of employment: 6.1.3 Authorize or issue or obligate itself to issue any other equity security (including any security convertible into or exercisable for any equity security) senior to or on a parity with the Preferred Shares as to dividend or redemption rights and liquidation preferences; 6.1.4 Alter or change the rights, preferences or privileges of the Preferred Shares, whether by amendment to its articles of incorporadon or otherwise; 6.1.5 Effect any sale, lease, assignment transfer or other conveyance of all or substantially all of the assets of the Company or any Subsidiary other than in the ordinary course of business or any consolidation or merger involving the Company or any Subsidiary, or any reclassification or other change of any stock or any recapitalization of the Company; 6.1.6 Permit any Subsidiary to issue or sell, or obligate itself to issue or sell, except to the Company or any wholly-owned Subsidiary, any stock of such subsidiary; or 6.1.7 Increase the total number of authorized Preferred Shares. -5- 7. Notice. Any notice required to be given to the holders of Preferred ------ Shares shall be deemed to have been given upon the earlier of personal delivery or three business days after deposit in the United States mails by registered or certified mail, return receipt requested, with postage fully prepaid, and addressed to each holder of record at his address as it appears on the stock transfer records of the Company. Any notice to the Company shall be in writing and shall be deemed to have been given only upon actual receipt thereof." SECOND: That in lieu of a meeting and vote of stockholders, the holders of not less than 70% of the outstanding shares of Common Stock and 1989 Preferred Shares have given their written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware, such percentage constituting the minimurn number of votes that would be necessary to authorize such amendment at a meeting of shareholders. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said D.E. Frey Group, Inc. has caused this Certificate to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla, its Assistant Secretary, this 13th day of November, 1990. D.E. FREY GROUP, INC. By: /s/ Dale E. Frey ------------------------- Dale E. Frey, President ATTEST: /s/ Jose A. Padilla - ---------------------------------------- Jose A. Padillia, Assistant Secretary -6- STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 07/11/1991 911925035 - 2205026 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF D.E. FREY GROUP, INC. D.E. Frey Group, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the state of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of said corporation, by a unanimous vote of its members at the annual meeting on May 20, 1991, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation: RESOLVED, that the Certificate of Incorporation of D.E. Frey Group, Inc. be amended by changing the first paragraph of the Fourth Article thereof so that, as amended said paragraph shall be and read as follows: "The total authorized capital stock of this Corporation consists of 10,000,000 shares of common stock, $.10 par value and 318,750 shares of Series 1989-A Preferred Stock, $1.00 par value ("1989 Preferred Shares") which preferred shares have the following rights and preferences:" All references to the Series 1990-A Preferred Stock, and any and all rights and preferences appurtenant thereto, are deleted in their entirety. SECOND: At the annual meeting of shareholders held on May 20, 1991, the holders of more than 70% of the outstanding shares of Common Stock and 1989 Preferred Shares approved said amendment in accordance with the provisions of Section 222 of the General Corporation Law of the State of Delaware, such percentage constituting the minimum number of votes required to approve such amendment. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said D.E. Frey Group, Inc. has caused this Certificate to be signed by Dale E. Frey, its President, and attested by Jose A. Padilla, its Assistant Secretary, this 29th day of June, 1991. D.E. FREY GROUP, INC. By: /s/ Dale E. Frey ------------------------- Dale E. Frey, President ATTEST: /s/ Jose A. Padilla - -------------------------------------- Jose A. Padilla, Assistant Secretary -2- EX-4.2 6 10% SENIOR SUB PROMISSORY NOTE EXHIBIT 4.2 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") AND IS A "RESTRICTED SECURITY" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE NOTE MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. D.E. FREY GROUP, INC. 10% SENIOR SUBORDINATED PARTICIPATING PROMISSORY NOTE ----------------------------------------------------- $15,000 July 02 1999 D.E. FREY GROUP, INC. (herein sometimes called the "Company" or "Borrower"), a corporation duly organized and validly existing under the laws of the State of Delaware, for value received, hereby, absolutely and unconditionally promises to pay to the order of (herein sometimes called "Lender" or "Holder" or "Owner"), the principal sum of FIFTEEN THOUSAND DOLLARS AND NO/100 ($15,000), and to pay interest on said principal sum, at the rate of ten percent (10%) per annum, with interest only payable annually, commencing March 31, 2000, and on the 31st day of each March thereafter until paid in full (the "Interest Payment Date"). All principal and accrued and unpaid interest shall be due and payable in full on March 31 2004. Both the principal of and the interest on this Note shall be payable in lawful money of the United States of America at the principal office of the Holder hereof, or such other place as the Holder hereof may, from time to time, designate. This Note is one of a series of identical notes (except as to principal amount) aggregating a minimum of $2,500,000 and a maximum of $5,000,000 in principal amount (collectively, the "Notes"). Additional provisions are set forth below and incorporated herein by this reference. IN WITNESS WHEREOF, this Note has been duly executed and delivered as of the day and year first above written. D.E. FREY GROUP, INC. ___________________________________ By: Dale E. Frey, President ATTEST: _______________________ 1 Paul Hocevar, Secretary ADDITIONAL PROVISIONS OF 10% SENIOR SUBORDINATED PARTICIPATING PROMISSORY NOTES 1. Additional Interest. In addition to the stated rate of interest, the -------------------- Company shall pay to the Holder of this Note on the Interest Payment Date additional interest in an amount equal to 10% of the Company's consolidated pre- tax net profit, if any, for the preceding fiscal year, not to exceed an aggregate return, including interest at the stated rate, to holders on the Notes of 15% for any year (prorated from the date of issuance of the Notes for 1994) ("Additional Interest"). Pre-tax net profit shall be determined in accordance with generally accepted accounting principles consistently applied as stated in the Company's annual audited consolidated financial statements. However, if the annual audited financial statements are not available on the Interest Payment Date, then the Additional Interest shall be based upon the Company's unaudited consolidated financial statements subject to adjustment when the audited financial statements are available. Any overpayment of Additional Interest will be applied against interest due on the next Interest Payment Date. Any other payment of Additional Interest will be due and payable in full within ten days after receipt by the Company of the annual audited consolidated financial statements. 2. Redemption. ----------- (a) Optional Redemption. The Notes are redeemable, in whole or in part, at any time and from time to time after the date of issuance and prior to maturity at the option of the Company at the following redemption prices (expressed as percentages of the principal amount redeemed), if redeemed at any time during the indicated year, but prior to the stated maturity date.
If Redeemed But no later than Premium ----------- ----------------- ------- 0 years after issuance 2 years after issuance 105% 2 years after issuance 4 years after issuance 104% 4 years after issuance 6 years after issuance 103% 6 years after issuance 8 years after issuance 102% 8 years after issuance 10 years after issuance 101%
together with accrued interest to the Redemption Date (the "Redemption Price"). Notice of redemption shall be given to all Holders at their address of record not more than 60 nor less than 30 days prior to the Redemption Date. (b) Extraordinary Redemption. In the event (i) the Company voluntarily or 2 involuntarily sells, assigns, transfers or conveys all of the capital stock or all or substantially all of the assets of its wholly-owned subsidiary, to D.E. Frey & Company, Inc. (the "Broker"), a Delaware corporation and a securities broker-dealer registered with the Securities and Exchange Commission ("SEC") and a member of the National Association of Securities Dealers, Inc. ("NASD"), or (ii) the registration of the Broker with the SEC or the membership of the Broker with the NASD shall terminate or shall be suspended for more than 30 days, then the Company shall redeem all of the Notes at a Redemption Price equal to the principal amount redeemed together with accrued and unpaid interest to the Redemption Date. Notice of redemption shall be given to all Holders at their address of record not less than 30 days after the date of any such transaction or occurrence and the Redemption Date shall not be less than 60 days after the date of any such transaction or occurrence. (c) Form of Notice. The notice of redemption shall state the Redemption Date, the Redemption Price; an identification of the Note or Notes to be redeemed and the principal amount to be redeemed if less than the entire principal amount; that interest will cease to accrue on the principal amount to be redeemed on and after the Redemption Date; and the place where the Notes are to be surrendered for payment of the Redemption Price. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof will be issued in the name of the Holder upon cancellation hereof. (d) Deposit of the Redemption Price. At least one business date prior to the Redemption Date the Company shall deposit with a paying agent (which shall be a bank or trust company having trust powers conferred under federal or state law) or, if the Company is acting as its own paying agent, segregate and hold in trust an amount of money sufficient to pay the Redemption Price, together with an officer's certificate to the effect that such redemption is not prohibited by the terms of any outstanding Senior Indebtedness. The Notes to be redeemed shall become due and payable on the Redemption Date and shall cease to bear interest as of such date; provided, however, if the Notes to be redeemed are not paid upon surrender, they shall continue to bear interest at the interest rate provided herein until paid. (e) Partial Redemption. If the Notes are to be redeemed in part and not in whole, then the Notes to be redeemed shall be determined by lot or by another fair and equitable manner by an independent third party selected by the Company. 3. Subordination. Anything in this Note to the contrary notwithstanding, -------------- the indebtedness evidenced by this Note shall be subordinate and junior in right of payment, to the extent and in the manner hereinafter set forth, to all indebtedness of the Company constituting Senior Indebtedness after the date of this Note: (a) Occurrences Precluding Payment on Notes. No payment on account of principal, premium, if any, or interest on this Note shall be made unless full payment of amounts then due for principal, premium, if any, and interest on all Senior Indebtedness has been made or duly provided for in money or money's worth. No payment on account of principal, premium, if any, 3 or interest on this Note shall be made if, at the time of such payment or immediately after giving effect thereto, there shall have occurred an event of default with respect to any Senior Indebtedness, as defined in any instrument evidencing such Senior Indebtedness or in the instrument under which the same is outstanding, permitting any holder thereof to accelerate the maturity thereof and such event of default shall not have been cured or waived and shall not have ceased to exist. (b) Prior Payment of Senior Indebtedness. Upon (i) any acceleration of the principal amount due on this Note or (ii) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership, or other proceedings, or upon any assignment for the benefit of creditors of the Company or any other marshalling of the assets and liabilities of the Company, all principal, premium, if any, and interest due or to become due upon the Senior Indebtedness shall be first paid in full or payment thereof provided for in money or money's worth before any payment is made on account of the principal of or interest on the indebtedness evidenced by this Note; and upon any such dissolution or winding up, or liquidation or reorganization, or any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan or reorganization or readjustment, the payment of which is subordinate to the payment of all Senior Indebtedness at the time outstanding), to which the Holder of this Note would be entitled except for the provisions hereof, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holder of this Note, if received by him, directly to the holders of Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of Senior Indebtedness held by such holders) or their representatives, to the extent necessary to pay all Senior Indebtedness in full in money or money's worth after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness before any payment or distribution is made to the Holders of the indebtedness evidenced by this Note. (c) Subrogation. Subject to the payment in full of all Senior Indebtedness, the Holder of this note shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company made on the Senior Indebtedness until the principal of and premium, if any, and interest on this Note shall be paid in full; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holder of this Note would be entitled except for the provisions hereof and no payment over pursuant to the provisions hereof to the holders of Senior Indebtedness by the Holder of this Note shall, as between the Company, its creditors, other than the holders of Senior Indebtedness, and the Holder of this Note be deemed to be a payment by the Company to or on account of Senior Indebtedness, it being understood that the foregoing provisions hereof are and are intended solely for the purpose of defining the relative rights of the Holder of this Note, on the one hand, and the holders of Senior Indebtedness, on the 4 other hand. (d) No Impairment of Obligation to Pay Notes. Nothing herein contained is intended to or shall impair, as between the Company, its creditors, other than the holders of Senior Indebtedness, and the Holder of this Note, the obligation of the Company which is absolute and unconditional to pay to the Holder of this Note the principal of and premium, if any, and interest on this Note as and when the same shall become due and payable strictly in accordance with its terms or to affect the relative rights of the Holder of this Note and creditors of the Company, other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Holder of this Note from exercising all remedies otherwise permitted by applicable law upon default under this note, subject to the rights, if any, under this section of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. (e) Definition. As used herein, "Senior Indebtedness" shall mean all indebtedness of the Company, whether outstanding on the date of issuance of this Note or hereafter created, for (i) short-term and long-term borrowings (including interest and collection costs) from financial institutions, including banks, savings and loan associations, insurance companies and the like, incurred in connection with the acquisition of any asset by the Company (other than this or any other Note) or by the Broker or to provide capital to the Broker; and (ii) purchase money indebtedness (including interest and collection costs), incurred in connection with the acquisition of any asset by the Company (other than this or any other Note) or by the Broker and any deferrals, renewals or extensions of any such Senior Indebtedness. 4. Seniority. Anything in this Note to the contrary notwithstanding, the ---------- indebtedness evidenced by this Note shall be senior and prior in right of payment, to the extent and in the manner hereinafter set forth, to all indebtedness of the Company (which, for purposes of this Section 4 shall include any subsidiary of the Company) for money borrowed constituting Subordinated Debt after the date of this Note: (a) Occurrences Precluding Payment on Subordinated Debt. No payment on account of principal, premium, if any, or interest on Subordinated Debt shall be made unless full payment of amount then due for principal, premium, if any, and interest on all Notes has been made or duly provided for in money or money's worth. No payment on account of principal, premium, if any, or interest on Subordinated Debt shall be made if, at the time of such payment or immediately after giving effect thereto, there shall have occurred an event of default with respect to the Notes or if interest on this Note shall not have been paid for a period of one year or more. (b) Priority in Payment of Notes. Upon (i) any acceleration of the principal amount due on this Note or (ii) any payment or distribution of assets of the Company of any kind or 5 character, whether in cash, property or securities, to creditors upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership, or other proceedings, or upon any assignment for the benefit of creditors of the Company or any other marshalling of the assets and liabilities of the Company, all principal, premium, if any, and interest due or to become due upon this Note shall be first be paid in full or payment thereof provided for in money or money's worth before any payment is made on account of the principal of or interest on the indebtedness evidenced by any Subordinated Debt; and upon any such dissolution or winding up, or liquidation or reorganization, or any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinate to the payment of all Notes at the time outstanding), to which the holders of Subordinated Debt would be entitled except for the provisions hereof, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the holders of Subordinated Debt, if received by them, directly to the Holders of the Notes (pro rata to each such Holder on the basis of respective amounts of Notes held by such Holders) or their representatives, to the extent necessary to pay all Notes in full in money or money's worth after giving effect to any concurrent payment or distribution to or for the holders of the Notes before any payment or distribution is made to the holders of the Subordinated Debt. (c) Subrogation. Subject to the payment in full of all Notes, the holder of Subordinated Debt shall be subrogated to the rights of the Holders of the Notes to receive payments or distributions of assets of the Company made on the Notes until the principal of and premium, if any, and interest on the Subordinated Debt shall be paid in full; and for the purposes of such subrogation, no payments or distributions to the holders of the Notes of any cash, property or securities to which the holder of the Subordinated Debt would be entitled except for the provisions hereof and no payment over pursuant to the provisions hereof to the Holder of this Note by the holders of the Subordinated Debt shall, as between the Company, its creditors, other than the holders of Subordinated Debt, and the Holder of this Note be deemed to be a payment by the Company to or on account of this Note, it being understood that the foregoing provisions hereof are and are intended solely for the purpose of defining the relative rights of the Holder of this Note, on the one hand, and the holders of Subordinated Debt, on the other hand. (d) No Impairment. Nothing herein contained is intended to or shall impair, as between the Company, its creditors, other than the holders of Subordinated Debt, and the Holder of this Note, the obligation of the Company which is absolute and unconditional to pay to the holder of the Subordinated Debt the principal of and premium, if any, and interest on the Subordinated Debt as and when the same shall become due and payable strictly in accordance with its terms or to affect the relative rights of the holders of the Subordinated Debt and creditors of the Company, other than the Holder of this Note, nor shall anything herein or therein prevent the holders of the Subordinated Debt from exercising all remedies otherwise permitted by applicable law upon default under the Subordinated Debt, subject to the rights, if any, under this 6 section of the Holder of this Note in respect of cash, property or securities of the Company received upon the exercise of any such remedy. (e) Definition. As used herein, "Subordinated Debt"shall mean short-term and long-term borrowings (including interest and collection costs) from any person whatsoever, excluding (i) Senior Indebtedness; (ii) accounts payable arising in the ordinary course of business; (iii) wage and other compensation claims of employees and registered representatives who are associated with the Company as independent contractors; and (iv) any indebtedness which has a priority in payment as a matter of law. (f) Acknowledgment of Subordination. To the extent practicable, any promissory note or other evidence of indebtedness representing Subordinated Debt shall contain provisions substantially similar to the foregoing and effectuating the intention of this Section 4 that the Subordinated Debt be subordinated in payment to this Note as provided herein. 5. Covenants of the Company. --------- -- --- -------- (a) Mergers and Sales of Assets by the Company. If the Company is recapitalized, consolidated with or merged into any other corporation, or sells or conveys to any other corporation all or substantially all of its property as an entity, then the obligation to pay the principal of (and premium, if any) and interest on the Notes and the performance of the other covenants of the Company under the Notes shall remain in full force and effect. (b) Stock of Broker. The Company agrees not to sell, transfer, convey, distribute, pledge, hypothecate or otherwise dispose of all or any portion of the capital stock of the Broker owned by the Company or any interest therein, nor to cause or allow the Broker to issue, sell, transfer, convey, pledge, hypothecate or otherwise dispose of any of its capital stock or any interest therein to any person other than the Company. Notwithstanding the foregoing but subject to Section 2(b) herein, the Company may dispose of all of the Broker's capital stock owned by the Company in a single transaction. (c) Assets of Broker. Subject to Section 2(b) herein, the Company agrees not to cause or allow the Broker to sell, transfer, convey, distribute, pledge, hypothecate or otherwise dispose of all or substantially all of its assets. Notwithstanding the foregoing and subject to Section 2(b) herein, the Company may cause or allow the Broker's to dispose of all or substantially all of its assets in a single transaction for such consideration as the board of directors of the Broker shall determine, in good faith, to be fair and reasonable. 6. Tender upon Warrant Exercise. Notwithstanding anything herein ------ ---- ------- --------- contained to the contrary, the Holder may apply all or a portion of the principal amount of this Note in payment of all or a portion of the exercise price of those certain Stock Purchase Warrants of even date herewith for the purchase of shares of the Company's common stock, par value $.10 per 7 share, at an exercise price of $1.50 per share, subject to adjustment as provided therein. Accrued and unpaid interest on the principal amount of this Note so applied shall be paid to the Holder within 30 days following the date of tender of this Note to the Company for that purpose. 7. Demand Registration Rights. ------ ------------ ------- (a) Company Registration. If at any time after December 31, 1994, to and including December 31, 1995, the Company shall receive from the Holders of not less than a majority in principal amount of the Notes then outstanding a notice requesting registration of their Notes under the Act for public sale, the Company shall promptly give each other Holder written notice of such request. The Company shall, one time only, use its best efforts to cause to be registered under the Act all of the Notes that the Holders have requested to be registered, including Holders who made written request therefor within twenty (2) days after mailing of such notice to them by the Company. (b) Obligations of the Company. Whenever required to use its best efforts to effect the registration of the Notes, the Company shall, as expeditiously as reasonably possible: (i) Prepare and file with the Securities and Exchange Commission ("SEC") a registration statement with respect to such Notes and use its best efforts to cause such registration statement to become and remain effective; provided, however, that in connection with any proposed registration intended to permit an offering of any securities from time to time (i.e., a so-called "shelf registration"), the Company shall in no event be obligated to cause any such registration to remain effective for more than 180 days. (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Notes owned by them. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably appropriate for the distribution of the securities covered by the registration statement, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, and further provide that (anything in this Section 7(b)(iv) to the contrary notwithstanding with respect to the bearing of expenses) if any jurisdiction in which the securities shall be qualified shall require that expenses incurred in connection with the 8 qualification of the securities in that jurisdiction be borne by selling shareholders pro rata, to the extent required by such jurisdiction. (c) Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action that the Holders shall furnish to the Company such information regarding them, the Notes held by them, and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the action to be taken by the Company. (d) Company Registration Expenses. The Company shall bear all registration and qualification fees and expenses (excluding underwriters' discounts, commissions and expenses), and any additional costs and disbursements of counsel for the Company in connection with such registration; provided, however, that if any such cost or expense is attributable solely to one selling Holder and does not constitute a normal cost or expense of such a registration, such cost or expense shall be paid by that selling Holder. In addition, each selling Holder shall bear the fees and costs of its own counsel. (e) Delay of Registration. No Holder shall have any right to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 7. (f) Indemnification. (i) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for it, and each such person, if any, who controls such Holder or underwriter within the meaning of the Act, against any losses, claims, damages, or liabilities, joint or several, to which they may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based on any untrue or alleged untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; and will reimburse each such Holder, such underwriter, or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 7(f) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld) nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon an untrue statement or 9 alleged untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter, or controlling person. (ii) To the extent permitted by law, each Holder requesting or joining in a registration will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, and each agent and any underwriter for the Company (within the meaning of the Act) against any losses, claims, damages, or liabilities to which the Company or any such director, officer, controlling person, agent, or underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, preliminary or final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, agent, or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(f) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (iii) Promptly after receipt by an indemnified party under this Section 7(f) of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this paragraph, notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties. The failure to notify an indemnifying party promptly of the commencement of any such action, if prejudicial to his ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this paragraph, but the omission to so notify the indemnifying party will not relieve him of any liability that he may have to any indemnified party otherwise than under this paragraph. (g) Termination of the Company's Obligations. The Company shall have no obligations pursuant to this Section 7 after December 31, 1995. 10 (h) Lockup Agreement. In consideration for the Company agreeing to its obligations under this Section 7, each Holder agrees in connection with any registration of the Company's securities, upon the request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Notes (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days from the effective date of such registration) as the Company or the underwriters may specify. 8. Default Interest. In the event of an uncured event of default under ------- --------- this Note, the interest on the principal amount of this Note shall be computed at the default rate of 15% per annum, and no Additional Interest shall accrue thereafter as long as the default rate of interest remains effective. 9. Default Provisions. All principal and accrued and unpaid interest on ------- ----------- this Note shall become and be due and payable immediately upon demand of the Holder if any one or more of the following "events of default" shall occur: (a) Payment Default. Default in the payment of any principal or interest on this Note when and as the same becomes due and payable and the continuance thereof for sixty (60) days after receipt of written notice by the Borrower from the Holder hereof; (b) Other Default. Default in the due observance or performance of any of the other agreements, covenants, warranties, representations, terms or conditions contained in this Note and the continuance thereof for sixty (60) days after written notice from the Holder hereof; provided, however, that the cure period shall be extended for a reasonable period (but in no event for a period longer than 180 days from the date of the initial default notice) if: (i) such event of default cannot be cured within the applicable cure period despite the Company's diligent and good faith effort; (ii) the Company commences all actions necessary to cure such default immediately upon receipt of Holder's written notice and provides Holder with its written plan to cure; and (iii) so long as the Company diligently pursues such cure to its completion; (c) Dissolution or Insolvency. The dissolution, liquidation, termination of existence, or admission in writing of insolvency (defined as the Company generally not paying its debts as they become due, excluding its 45% subordinated notes due October 1, 19--, and its 1989-A Series Preferred Stock, par value $1.00 per share, redeemable on October 1, 19--) of, or the making of an assignment for the benefit of creditors, by the Company or the Broker; (d) Voluntary Bankruptcy. The institution of bankruptcy proceedings or proceedings for a reorganization, liquidation, composition, receivership or other similar debtor relief under any other law or regulation, federal or state, by the Company or the Broker; or 11 (e) Involuntary Bankruptcy. The institution of bankruptcy proceedings or proceedings for a reorganization, liquidation, composition, receivership or other similar debtor relief under any other law or regulation, federal or state, instituted against the Company or the Broker and such proceeding shall continue unstayed and in effect for any period of sixty (60) consecutive days; or (f) Default on Senior Indebtedness. There shall have occurred an event of default under any instrument evidencing Senior Indebtedness or in the instrument under which the same is outstanding permitting any holder thereof to accelerate the maturity thereof until such time as such event of default shall have been cured or waived and shall have ceased to exist, provided that the 1989 Preferred Stock shall not be deemed to be Senior Indebtedness. The Company shall, within 90 days after the occurrence of any Event of Default known to it, give to the Holder of this Note notice of such default. 10. Transfer. Subject to the appropriate provisions of the Act, and the --------- provisions of applicable state blue-sky laws, this Note or any portion of the principal amount hereof equal to $1,000 or integral multiples thereof is transferable on the records of the Company upon presentation of this Note, properly endorsed, at its principal executive offices. Upon such presentation and transfer a new Note or Notes will be issued. For the purposes of payment and all other purposes, the Company shall deem and treat the person in whose name this Note is registered as the absolute owner hereof and the Company shall not be affected by any notice to the contrary. 11. No Waiver. Except as provided in Section 12 below, no failure to -- ------- exercise, and no delay in exercising any right, power or remedy hereunder shall impair any right, power or remedy which the Holder may have, nor shall any such delay be construed to be a waiver of any of such rights, powers or remedies, or an acquiescence in any breach or default under this Note, nor shall any waiver, which, except as provided in Section 12 below, must be in writing signed by the Holder, of any breach or default hereunder be deemed a waiver of any default or breach subsequently occurring. The rights and remedies herein specified are cumulative and not exclusive of any rights or remedies which the Holder would otherwise have. 12. Amendments and Waivers. ---------- --- -------- (a) Amendment by the Company. The Company may amend or supplement the Notes without notice to or the consent of the holders of the Notes (i) to cure any ambiguity, omission, defect or inconsistency and (ii) to make any other change that does not adversely affect the rights of the holders of the Notes. The Company may similarly waive compliance with any provision of the Notes which waiver does not adversely affect the rights of the Note holders. (b) Amendments to Comply with the Trust Indenture Act of 1940. In connection with registration of the Notes for public sale or if it should ever be determined that the Notes were or 12 are subject to provisions of the Trust Indenture Act of 1940, the Company may find it necessary or desirable to cause the Notes to be covered by a trust indenture administered by an independent trustee. Accordingly, the Holders agree that the Company shall have the right and power to enter into a trust indenture meeting the applicable requirements of the Trust Indenture Act of 1940, to appoint an independent trustee thereunder and, subject to Section 12(c) herein, to make such modifications and amendments to the Notes as the Board of Directors of the Company, in the exercise of its discretion, shall deem necessary or desirable without any requirement for approval by the holders of the Notes. (c) Amendments Requiring Holder Approval. The Company may otherwise amend the Notes only with the written consent of the holders of at least a majority of the principal amount of the Notes then outstanding; provided, however, that without the consent of the holder of each Note affected, however, no such amendment may (i) reduce the rate or extend the time for payment of interest on the Notes, (ii) reduce the principal of or extend the maturity of the Notes, (iii) decrease the redemption premium to be paid by the Company or (iv) reduce the required percentage for waiver or modification of the Notes. (d) Waivers. Except as otherwise provided in Section 12(c) above, the observance of any term or provision of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) and any default or event of default may be waived with the written consent of the Borrower and the Holders of at least a majority in principal amount of Notes then outstanding. (e) Amendments and Waivers Binding on all Holders. Except as otherwise provided in Section 12(c) above, any amendment or waiver effected in accordance with this Section 12 shall be binding upon each Holder of any Notes at the time outstanding, each future holder of all such Notes and the Company. Each Holder acknowledges and agrees that by operation of this Section, the Holders of a majority in principal amount of Notes then outstanding will have the right and power to diminish or eliminate certain material rights of the Holder hereunder. 13. Notices. All notices, requests, consents and demands hereunder shall -------- be effective upon the earlier of personal delivery (including telex, telecopier, telegram, overnight courier or other acknowledged receipt) or three business days after deposit in the United States mails, registered or certified mail, postage fully prepaid, return receipt requested, addressed to the Holder or the Company at the address set forth below: Company: D.E. Frey Group, Inc. 1700 Lincoln Street Suite 2200 Denver, Colorado 80203 Attention: President 13 Holder: Any address may be changed by notice, in writing, given in accordance with this Section. 14. Severability of Provisions. In case any one or more of the provisions ------------ -- ----------- contained in this Note should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 15. Successors and Assigns. This Note shall be binding upon, enforceable ---------- --- -------- by and against, and inure to the benefit of the Holder and the Company, and their respective heirs, personal representatives, successors and assigns. 16. Choice of Law. This Agreement shall be governed by and construed in ------ -- ---- accordance with the laws of the State of Colorado. 17. Amendment and Priority. No provision of this Note may be amended, --------- --- --------- except with the written consent of the Holder or as provided in Section 12 above. No such amendment shall extend to or affect any obligation, covenant, agreement, event of default or any provision of this Note not expressly amended nor impair any right consequent thereon. 18. Collection Costs. In the event this Note is placed in the hands of an ---------- ------ attorney for collection following the occurrence of an event of default, the Company agrees to pay all costs of collection incurred by the Holder including reasonable attorneys' fees. 14 EX-10.1 7 OFFICER'S INCENTIVE COMPENSATION AGREEMENT Exhibit 10.1 - -------------------------------------------------------------------------------- D.E. Frey & Company, Inc. DEFrey One Norwest Center 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 MEMORANDUM TO FILE (303) 863-4040 - -------------------------------------------------------------------------------- To: D.E. Frey & Company, Inc. ("Company") Files Member NASD/ SIPC From: Paul L. Hocevar Date: November 18, 1996 Subject: Employment Agreements On November 15, 1996 the undersigned met with Mr. Mike McClurg, member of the Company's Compensation Committee, to discuss the suggested revisions to the employment agreements. It was agreed that the following amendments to the THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT shall be made, effective January 1, 1996: 1) The base compensation pool for all executives would be $100,000 per month regardless of the profitability of Company or consolidated group and the individual executive's base compensation would be a percentage of the base compensation pool. The base compensation pool of $100,000 will be reduced to X amount, if consolidated gross revenue for a six month period is less than the aggregate employee percentages times $100,000 times 10 times 6. For example, Dale's percentage of the compensation pool is 50% and the aggregate percentages for all executive's is 75% at this time. If the consolidated group revenue for a six month period was less than $4,500,000 (.75 x $100,000 x 10 x 6) the base compensation pool for the month would be the average consolidated gross revenue for the six month period times 10%. This provision is intended to provide some downside protection to the Company. The term consolidated gross revenue has the same meaning as the term is defined in the THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT between the Company and Dale E. Frey. 2) The incentive compensation pool for the executives would be determined annually based on annual consolidated net income before taxes. Each executive's share of the incentive compensation pool would be his/her percentage, as determined above, of the pool. The attached table reflects the incentive compensation pool. For example, the consolidated net income must equal or exceed two times the aggregate base and incentive compensation payable to all Executive Officers for the incentive compensation pool up to $600,000. Therefore, consolidated net income before taxes must exceed 2 times the base compensation before the Company executives are entitled to incentive compensation. The factor increases as consolidated net income increases. 3) All other provisions of the agreement would remain the same. D.E. FREY & COMPANY, INC. ------------------------- INCENTIVE COMPENSATION ----------------------
Consolidated Net Income Aggregate Base Compensation (1) Incentive Compensation Factor Before Taxes Incentive Compensation - -------------------- ---------------------- ------ ------------ ---------------------- Lower Upper Lower Upper Range Range Range Range ----- ----- ----- ----- $1,200,000 $0 $600,000 2 $2,400,000 $3,600,000 $600,000 $1,200,000 $600,001 $1,200,000 2.25 $4,050,000 $5,400,000 $1,200,000 $1,200,000 $1,200,001 $2,400,000 2.5 $6,000,000 $9,000,000 $2,400,000 $1,200,000 $2,400,001 $3,600,000 3 $10,800,000 $14,400,000 $3,600,000 $1,200,000 $3,600,001 $4,800,000 4 $19,200,000 $24,000,000 $4,800,000 $1,200,000 $4,800,001 $8,400,000 5 $30,000,000 $48,000,000 $8,400,000 $1,200,000 $8,400,001 $22,800,000 5 $48,000,000 $120,000,000 $22,000,000
The maximum aggregate monthly base compensation payable to Management Executive Officers excluding the General Counsel is $100,000 per month, regardless of the profitability of Group and Company. Incentive compensation above the aggregate of Management Executive officers monthly compensation shall not be deemed to have been earned and shall not be payable unless Group's consolidated net income before taxes computed for the fiscal year (but after the deduction for the incentive compensation) equals or exceeds 2; 2.25; 2.5; 3.0; 4.0; and 5.0 times the aggregate base compensation and incentive compensation payable to Management Executive officers excluding the General Counsel (Management Compensation), if Management compensation is $1,200,000 to $1,800,000; $1,800,001 to $2,400,000; $2,400,001 to $3,600,000; $3,600,001 to $4,800,000; $4,800,001 to $6,000,000; $6,000,001 to $9,600,000; $9,600,001 to $24,000,000 and Management compensation in excess of $24,000,000 respectively. (1) Assumes base compensation of $100,000 per month EX-10.2 8 EMPLOYMENT AGREEMENT, AS A&R-DE FREY EXHIBIT 10.2 THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------------- THIS THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Amended Agreement") between D.E. FREY & COMPANY, INC., ("Employer"), a Delaware corporation, and DALE E. FREY ("Employee") is dated this ______ day of _________________, 1994. WITNESSETH: ---------- WHEREAS, Employee is operating and managing the securities brokerage business of Employer, and performs services for D.E. Frey Group, Inc. ("Group"); and WHEREAS, Employer desires to have Employee continue to operate and manage the business of Employer; and WHEREAS, Employee desires to continue his services as Chairman of the Board and Chief Executive Officer of Employer, with such services to be rendered in the various corporate areas that are generally handled by the aforesaid designated positions and Employee desires to accept such employment, and in furtherance thereof Employer and Employee entered into a Second Amended and Restated Employment Agreement dated February 12, 1994; WHEREAS, Employer and Employee desire to amend and modify the Second Amended and Restated Employment Agreement, as set forth in this Third Amended and Restated Employment Agreement; and WHEREAS, Employee understands that, in his service for Employer, he is forever surrendering and waiving any rights to utilize, directly or indirectly, the name D.E. Frey & Company, except as otherwise provided herein, or any other name so similar thereto as to create confusion in the public's mind, in the acquisition or ownership or the opening and operation of any business whose principal feature is conducting business dealings within or with the financial services industry; and WHEREAS, Employer understands that Employee does not wish, without its permission, to perform any services for any person or entity other than Employer during the term of this Amended Agreement as it may be extended or modified; and WHEREAS, Employee further understands that the term "Employer" shall include any corporation with which Employer may be merged or consolidated, any corporation which may acquire all or a substantial portion of the assets or goodwill of such corporation, or any corporation which may result from any corporate reorganization or other corporate restructuring; and WHEREAS, Employee recognizes the significance of not disclosing to any other person or entity, during or after the term of his employment with Employer, any confidential business information or trade secrets of Employer obtained or learned by Employee during his employment. NOW, THEREFORE, in consideration of the premises as hereinabove set forth, the parties do agree as follows: 1. TERM. Employer hereby employs Employee for a period of five (5) years ---- commencing on July 16, 1993 through July 15, 1998, unless earlier terminated in the manner specified in this Amended Agreement. 2. COMPENSATION. ------------ (a) Salary. Subject to paragraph 10(f) herein, that as and for a ------ monthly salary for Employee's services to be rendered under this Amended Agreement, Employee shall receive (I) base compensation equal to 5.0% of Group's consolidated gross revenue up to $1,000,000 per month payable regardless of the profitability of Employer or Group plus (II) incentive compensation equal to 5.0% of Group's consolidated gross revenue over $6,000,000 for a six month period; provided, however, that incentive compensation shall not be deemed to have been earned and shall not be payable unless Group's consolidated net income computed biannually before taxes and after deduction of the aggregate base and incentive compensation payable to all Executive Officers of Employer and of Group, including Employee, (the "Management Pool") equals or exceeds the amounts determined as follows: Consolidated Gross Group Consolidated Revenue for a Six Month Period Net Income - ------------------------------ ------------------ Over $6,000,000 up to $9,000,000 2.00X the Management Pool Over $9,000,000 up to $12,000,000 2.25X the Management Pool Over $12,000,000 up to $18,000,000 2.50X the Management Pool Over $18,000,000 up to $24,000,000 3.00X the Management Pool Over $24,000,000 up to $30,000,000 4.00X the Management Pool Over $30,000,000 5.00X the Management Pool The term "consolidated gross revenues" shall mean the sum of (I) gross commissions earned by Employer's brokerage offices located in Denver, Colorado, Colorado Springs, Colorado, Houston, Texas and Tallahassee, Florida; (II) net receipts from flagship offices. Flagship offices pay Employer a percentage of their gross commission revenues from all transactions that have settled and not cancelled or otherwise been adjusted; (III) net profits from securities trading which shall be defined as the difference between the purchase or sale price of securities transactions and the price offered to Employer's brokers or other dealers and shall exclude the costs of generating those revenues such as interest, clearing costs, and similar costs; (IV) corporate finance fees; (V) other income and (VI) all other gross revenues earned by any and all other subsidiaries of Group. -2- (b) Method of Payment. Employee shall be paid his monthly salary on ----------------- the 15th of each month. Incentive compensation under paragraph 2(a)(II) shall be calculated based on a six month period commencing January 1, 1994 through June 30, 1994, and continuing thereafter. The incentive compensation shall be paid on the 15th day of the month following the end of a six month period. Such salary shall be subject to the usual and required employee payroll deductions and withholding. Employee's compensation shall be paid in the following form: (I) the first $1,500,000 of annual compensation shall be payable in cash; (II) all amounts over $1,500,000 up to $2,000,000 shall be paid 80% in cash and 20% in the Common Stock of Group; (III) over $2,000,000 and up to $3,000,000 shall be paid 50% in cash and 50% in the Common Stock of Group; (IV) over $3,000,000 and up to $5,000,000 shall be paid 25% in cash and 75% in the Common Stock of Group; and (V) all amounts over $5,000,000 shall be paid in the Common Stock of Group. The Common Stock of Group shall be valued at its fair value determined as follows: (i) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange, the current value shall be the last reported sale price of the Common Stock on the composite tape of such exchange on the last trading day prior to the compensation payment date or if no such sale is made on such day, the average closing bid and asked prices for such day on the composite tape of such exchange; or (ii) If the Common Stock is not so listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Association of Securities Dealers Quotation System (or, if not so quoted on NASDAQ, by the National Quotation Bureau, Inc. or on the OTC Bulletin Board) on the last trading day prior to the compensation payment date, or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount, not less than book value, determined in such reasonable manner as may be prescribed by the board of directors of Group, such determination to be final and binding on Employee. Notwithstanding the foregoing, in the event a majority of the disinterested members of the board of directors of Group shall determine that issuance of the Common Stock would result in value dilution to existing shareholders, then such members may cause Employer to pay all or any portion of the Common Stock portion of Employee's compensation in cash rather than in Common Stock. (c) Warrants. In addition, Employee shall receive as compensation, -------- ten (10) percent of any warrants and/or other equity -3- participation earned by Employer through its underwriting and syndicate activities. (d) Payment of Loan. On April 14, 1989, the effective date of its --------------- registration with the NASD as a broker/dealer, Employer loaned to Employee the sum of Two Hundred Fifty Thousand Dollars ($250,000.00), the unpaid balance of which, as of the date of this Agreement, is $194,373. The loan is evidenced by a non-interest bearing promissory note, the entire amount of which is to be forgiven upon the death of Employee. The parties agree that the promissory note shall be modified to incorporate the following payment terms: In each month in which Employee's net salary (gross salary less the usual and required employee payroll deductions and withholding taxes) exceeds $30,000, Employer shall withhold from Employee's salary for that month and apply against the loan an amount equal to 50% of such excess. In any event, the loan shall be due and payable in full no later than April 14, 1998. 3. OTHER POSITIONS. During the term of this Amended Agreement, Employer --------------- agrees to nominate Employee for election to the board of directors of Employer and to use its best efforts to cause such election. In addition, Group agrees to employ Employee as Chairman and Chief Executive Officer of Group having similar duties and responsibilities as under this Amended Agreement in consideration of the acquisition of Common Stock granted in paragraph 2 herein. During the term of this Agreement, Group also agrees to nominate Employee for election to the board of directors of Group and to use its best efforts to cause such election. Upon termination of this Amended Agreement for any reason, the employment of Employee as Chairman and Chief Executive Officer of Group and Employer shall terminate. Employee shall also be deemed to simultaneously resign his position on the board of directors of Employer and Group. 4. VACATION. Employee shall be entitled to such vacation with pay during -------- each year of this Amended Agreement as may be determined by the board of directors of Employer, and at such times as Employee and Employer may mutually agree upon, but in no event less than four (4) weeks during each calendar year. 5. EMPLOYMENT. Employee agrees to perform the services requested of him ---------- by the board of directors of Employer. Employee will open, operate and manage the securities brokerage business of Employer, commencing his services hereunder as Chairman of the Board and Chief Executive Officer, and that all such services so -4- rendered to Employer shall be consistent with the services that are customarily rendered in the different corporate areas, which are usually handled by the positions designated aforesaid. It is further understood, that the term "Employer" shall include any corporation with which Employer may be merged or consolidated, any corporation which may acquire all or a substantial portion of the assets or goodwill of Employer, or any corporation which may result from any corporate reorganization or other corporate restructuring. 6. THE NAME "FREY." Employee understands and agrees that the name "Frey," --------------- either alone or in combination with any other words including the name of Employer and its parent company (the "Name"), is the sole and exclusive property of Employer in connection with the direct or indirect ownership and/or operation of any business in the financial services industry. In the event Employer or any person using the Name with the consent of Employer should cease to be in the financial services industry, then such person shall cease using the Name and, if no person is eligible to use the Name, then ownership of the Name shall automatically revert to Employee or his heirs. In addition, should any person using the Name be determined by final order of a court of competent jurisdiction to have committed, conspired to commit or aided and abetted the commission of any fraud or to have violated any criminal law (other than misdemeanor violations) under circumstances which would cause embarrassment or humiliation to Employee or his heirs, then Employer and any person affiliated or associated with Employer shall cease using the Name forthwith upon the giving of written notice by Employee or by any of his heirs to Employer and ownership of the Name shall forthwith revert to Employee or his heirs upon the giving of such notice. The parties further agree that the use of the Name by Employer or any other person after such notice has been given, would invariably and inevitably cause irreparable injury to Employee or his heirs, and Employer and any other person using the Name consents to the District Court in and for the City and County of Denver as having jurisdiction to enter any temporary and/or permanent injunction against Employer and/or any such person prohibiting use of the Name, but only after notice to Employer or any such person and the opportunity to be heard. Employer agrees that it will cause the forgoing provisions regarding use and termination of use of the Name to be incorporated into all agreements whereby Employer authorizes or allows the Name to be used by any other person. The provisions of this Section 6 and of Section 11 shall survive termination of this Agreement. 7. BUSINESS EXPENSES. Employer shall reimburse Employee for any ----------------- reasonable and necessary business expenses incurred by Employee in connection with his services hereunder in accordance with its then prevailing policy, provided that Employee shall submit to -5- Employer a written itemization as provided by the policies and procedures for such expense reimbursement by Employer. 8. AUTOMOBILE. Employer shall furnish Employee an automobile or allowance ---------- for automobile expense to the extent permitted by the Internal Revenue Code and regulations promulgated thereunder. Employer shall also reimburse Employee for the costs of automobile maintenance, insurance, and license plates. 9. BENEFITS. During the term hereof and as long as Employee is not in -------- default hereunder, he shall be entitled to participate in any plans and benefits (or to the equivalent thereof) generally available to senior corporate officers of Employer, subject to the terms and conditions of such plans. 10. TERMINATION. ----------- (a) Events of Termination. Employer may terminate Employee's services --------------------- for "Cause" upon 10 days written notice of termination ("Notice of Termination") setting forth the reason(s) for and date of termination ("Date of Termination"). Examples of termination for "Cause" include, but are not limited to, the following: (I) an act or acts of dishonesty, a breach of fiduciary duty to Employer, or acts contrary to the best interest of Employer; or (II) the commission of a felony. Employee's services shall also be deemed terminated upon his death or disability. Employee may also voluntarily terminate his employment upon thirty (30) days written Notice of Termination delivered to Employer. (b) Compensation upon Termination Voluntarily by Employee or for ------------------------------------------------------------ Cause. If Employee's employment shall be terminated voluntarily by Employee or - ----- if Employee's employment is terminated for Cause, then Employer shall pay Employee's salary in accordance with subparagraph 2(a) above during the pay period through the Date of Termination, together with any accrued benefits pursuant to all other non-cash benefit plans through the Date of Termination, but in accordance with the provisions of such benefit plans regarding distribution in the event of termination and Employer shall have no further obligation to Employee under this Amended Agreement. (c) Compensation upon Termination for Disability, for Death, or ----------------------------------------------------------- Involuntarily for Other than Cause. If Employee's employment shall be - ---------------------------------- terminated by disability, for death, or involuntarily for other than Cause, then Employee shall be entitled to: (i) Severance pay in a lump sum on or before the thirtieth (30th) day following the Date of Termination in an amount equal to the amount earned as salary by Employee for the preceding twelve months. -6- (ii) Any stock of Employer earned by or awarded to Employee, as of the Date of Termination, under any stock bonus plan, in accordance with and pursuant to the provisions of such stock plan, it being understood and agreed, however, that any and all options for the purchase of the stock of Employer that Employee might be entitled to can only be exercised by Employee while Employee is still employed by the Employer or in accordance with the terms of the option agreement, whichever is longer. (iii) Have Employer maintain in full force and effect, for the continued benefit of Employee for ninety (90) days after the Date of Termination at respective contribution levels of Employer and of employees in comparable positions, and for ninety (90) consecutive and additional days at Employee's sole expense, all medical insurance and all non-cash benefit plans and programs or arrangements in which Employee was entitled to participate immediately prior to the Date of Termination, other than life insurance benefit plans; provided, however, that if Employee becomes eligible to participate in a benefit plan, program or arrangement of another employer which confers substantially similar benefits upon Employee, Employee shall cease to receive benefits under this subparagraph in respect of such plan, program or arrangement; provided, further, that Employee's participation in life insurance benefit plans allows Employee to convert his group participation therein to one or more individual, non- group life insurance policies, in which event Employer shall maintain for ninety (90) consecutive days immediately following the Date of Termination, such life insurance benefits at the respective contribution levels of Employer and Employee which were applicable immediately prior to the Date of Termination. (d) Mitigation. Employee shall not be required to mitigate the amount ---------- of any payment or benefits provided for in this Amended Agreement by seeking, after the Date of Termination, other employment or otherwise, nor except as may be otherwise provided herein, shall the amount of any payment or benefit provided for in subparagraph 10(c) be reduced by any compensation earned by Employee as the result of employment by another employer after the Date of Termination, or otherwise. (e) Cash Option. Notwithstanding anything to the contrary herein, ----------- with respect to any non-cash compensation benefits payable under Paragraph 9 herein, Employer shall have the right, but not the obligation, to pay to Employee the cash equivalent of such compensation and benefits. (f) Definition. For purposes of this Amended Agreement, the term ---------- "disability" shall mean such medically determinable degree of physical or mental impairment as renders the Employee unable to perform his regular or normal duties as an officer, director or -7- employee of Employer or as shall be otherwise defined in any policy or policies of disability insurance now or hereafter obtained by the Employer with respect to Employee. Except as otherwise provided in any such policy or policies of disability insurance, for the purposes of this Amended Agreement the event of disability shall not, however, be deemed to have taken place until such condition as described above has persisted for a cumulative period of six months. The compensation payable to Employee pursuant to paragraph 2 above shall be reduced to the extent of payments made to Employee under any such disability policy or policies or otherwise relating to any disability of Employee. 11. NON-DISCLOSURE. Employee agrees that neither during nor after the -------------- term of his employment with Employer herein will he use or disclose to any other person any confidential business information or trade secrets of Employer, or affiliated companies, obtained or learned by him during his employment. 12. COSTS OF ENFORCEMENT. If any dispute or controversy arises concerning -------------------- this Amended Agreement, the parties shall be subject to binding arbitration in accordance with industry rules. In the event arbitration proceedings are commenced by either party against the other party to enforce the rights and obligations set forth in this Amended Agreement, the costs of such litigation or other proceedings, including reasonable attorneys' fees, shall be ultimately borne by the non prevailing party as adjudged by the arbitration panel. 13. APPLICABLE LAW. All matters pertaining to this Amended Agreement -------------- (including its interpretation, applications, validity, performance and breach) in whatever jurisdiction action may be brought, shall be governed by the laws of the State of Colorado applicable to contracts made and to be wholly performed in Colorado. Nothing in this Amended Agreement shall be construed to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Amended Agreement and any material present or future statute, law, governmental regulation, or ordinance contrary to which the parties have no legal right to contract or perform, the latter shall prevail, but in such event the provision(s) of this Amended Agreement affected shall be curtailed and limited only to the extent necessary to bring it or them within the legal requirements. If any term or provision of this Amended Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Amended Agreement or the application of such term or provision to the persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Amended Agreement shall be valid and enforced to the fullest extent permitted by law. -8- 14. ENTIRE AGREEMENT. This Amended Agreement embodies the entire ---------------- understanding of the parties, and there are no agreements, representations, or warranties concerning the subject matter of this Amended Agreement, other than those contained herein. 15. PRIOR AGREEMENTS. This Amended Agreement supersedes and replaces any ---------------- and all prior understandings or employment agreements with Employer. 16. SUCCESSORS; BINDING AGREEMENT. This Amended Agreement shall inure to ----------------------------- the benefit of and be binding upon Employer and its successors and by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If Employee should die while amounts would still be payable to Employee hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Amended Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. This Amended Agreement shall remain in full force and effect, except as the terms of this Amended Agreement may otherwise provide, in the event of any sale of all or a substantial portion of Employer's assets or goodwill, or merger or consolidation involving Employer or divisive or other reorganization or change in control of the board of directors of Employer. 17. NOTICE. Notices and all other communications provided for in this ------ Amended Agreement shall be in writing and shall be deemed to have been duly given when delivered or three (3) days following being mailed by United States mail, registered mail, return receipt requested, postage prepaid, and addressed to the respective addresses as set forth on the last page of this Amended Agreement; provided that all notices to Employer shall be directed to the attention of the Secretary of Employer or to such other address as each party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 18. RIGHTS TO RESULT AND PROCEEDS OF SERVICES. Employer shall own all ----------------------------------------- rights of every kind in and to all results and proceeds of Employee's services hereunder. 19. MODIFICATION, WAIVER. No provision of this Amended Agreement may be -------------------- modified, waived, or discharged unless such modification, waiver or discharge is agreed to in writing signed by Employee and a written resolution by the board of directors of Employer. No waiver by any party hereto at any time of any breach by any other party hereof of, or failure to comply with any condition or provision of this Amended Agreement to be performed by such other party, shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. -9- 20. LEGAL REPRESENTATION. Employee acknowledges that legal counsel for -------------------- Employer prepared this Amended Agreement; that such counsel does not and will not represent Employee; and the Employee has been advised and encouraged to obtain the services of his own legal counsel with respect to this Amended Agreement. IN WITNESS WHEREOF, Employee and Employer have executed this Amended Agreement this _____ day of ____________________, 1994. EMPLOYER: D.E. FREY & COMPANY, INC. ATTEST: ______________________________ By: /s/ Kevin L. Spencer _______________, _____________ ___________________________ Kevin L. Spencer, President Employer's Address: 1700 Lincoln Street, Suite 2220 Denver, Colorado 80203 EMPLOYEE: /s/ Dale E. Frey ______________________________ Dale E. Frey Employee's Address: 1700 Lincoln Street, Suite 2220 One Norwest Center Denver, Colorado 80203 -10- The undersigned agrees to issue its Common Stock in accordance with the provisions of Paragraph 2 and to employ Employee and to initiate the director nomination covenant contained in Paragraph 3 of the above Amended Agreement. D.E. FREY GROUP, INC. ATTEST ______________________________ By: /s/ Kevin L. Spencer __________________, __________ ___________________________ Kevin L. Spencer, President Address: 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 -11- ADDENDUM TO THIRD AMENDED AND RESTATED -------------------------------------- EMPLOYMENT AGREEMENT -------------------- THIS ADDENDUM TO THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Addendum") between D.E. Frey & Company, Inc. ("Employer"), a Delaware corporation, D.E. Frey Group, Inc. ("Group"), a Delaware corporation, and Dale E. Frey ("Employee"), is dated this _________ day of September, 1999. WITNESSETH: ---------- WHEREAS, Employer and Employee entered into a Third Amended And Restated Employment Agreement dated October 27, 1994 ("Amended Agreement") whereby Employer employed Employee for a period of five years commencing on July 16, 1993, and continuing, unless otherwise terminated, until July 15, 1998; WHEREAS, in a separate document Group agreed to abide by certain provisions in the Amended Agreement; WHEREAS, Employer and Employee and Group continued to operate in accordance with the terms of the Amended Agreement from July 16, 1998, until the date of this Addendum notwithstanding the absence of any writing extending the term of the Amended Agreement; WHEREAS, pursuant to the provisions of the Amended Agreement and during the term of the Amended Agreement, Employee and, until the date of this Addendum, Employee operated and managed the securities brokerage business of Employer and also performed services for Group; WHEREAS, Employer and Employee desire to extend the term of the Amended Agreement to include the period of Employee's employment from the end of the term of the Amended Agreement to the date of this Addendum and for a period of five years commencing with the date of this Addendum; WHEREAS, Employer and Employee desire to continue their employment relationship under the same terms and conditions as provided in the Amended Agreement except as expressly modified herein; and WHEREAS, Employee and Group desire to continue their employment relationship as described by the Amended Agreement. -12- NOW, THEREFORE, consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employer and Employee and Group agree as follows: 1. Acceptance of the Amended Agreement. Employer and Employee hereby ----------------------------------- accept each of the terms and conditions of the Amended Agreement as binding on both parties, except as any of the terms or conditions of the Amended Agreement is expressly modified by this Addendum. A copy of the Amended Agreement is attached hereto as Exhibit A. 2. Agreement of the Group. Group agrees (a) to issue its Common Stock in ---------------------- accordance with the provisions of paragraph 2 of the Amended Agreement; (b) to employ Employee as Chairman and Chief Executive Officer of Group as described in paragraph 3 of the Amended Agreement; (c) to nominate Employee for election to the board of directors of Group and use its best efforts to cause such election; (d) to take any other action which it is required to take by the Amended Agreement; and (e) to be bound to the agreement contained in this paragraph during the term of the Amended Agreement as extended by this Addendum. 3. Term. Paragraph 1 of the Amended Agreement is hereby modified to read ---- the "Employer hereby employs Employee for the period from July 16, 1998 through the date of the Addendum to this Amended Agreement and further, for the period from the date of the Addendum through September 15, 2002, unless earlier terminated in the manner specified in this Amended Agreement." 4. Payment of Loan. Paragraph 2(d) of the Amended Agreement is hereby --------------- struck from the Amended Agreement in that the loan described in the paragraph is fully paid. 5. Legal Representation. Employee acknowledges that legal counsel for -------------------- Employer and Group prepared this Addendum; that such counsel does not and will not represent Employee; and the Employee has been advised and encouraged to obtain the services of his own legal counsel with respect to this Addendum. -13- IN WITNESS WHEREOF, Employee and Employer and Group have executed this Addendum this _______ day of _______________, 1999. EMPLOYER: D.E. FREY & COMPANY, INC. ATTEST: By: __________________________________ ___________________________ Its: __________________________________ Employer's Address: 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 EMPLOYEE: __________________________________ Dale E. Frey Employee's Address: 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 D.E. FREY GROUP, INC. ATTEST: By: __________________________________ ___________________________ Its: __________________________________ Group's Address: 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 -14- EX-10.3 9 FORM OF NONCOMPETITION/SOLICITATION EXHIBIT 10.3 NONCOMPETITION AND NONSOLICITATION AGREEMENT -------------------------------------------- THIS NONCOMPETITION AND NONSOLICITATION AGREEMENT (the "Agreement") between D.E. Frey & Company, Inc. ("Frey"), a Delaware corporation, and Paul L. Hocevar ("Employee"), is dated this _________ day of September, 1999. WITNESSETH: WHEREAS, Employee has been and is presently employed by Frey; and WHEREAS, Frey proposes to effect a recapitalization of its business, in light of which both Frey and Employee have an interest in entering into an agreement reflecting their respective obligations to one another in the event of termination of their employment relationship during the Term (defined below), and the other matters set forth below. NOW, THEREFORE, for and in consideration of the foregoing premises and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Frey and Employee hereby agree as follows: 1. Term; Condition Precedent. ------------------------- 1.1 The Term. The term of this Agreement shall be the thirty-month -------- period that commences on the date of closing of a firm commitment underwritten public offering of shares of common stock of Frey in which the aggregate gross proceeds to Frey from such offering shall be approximately $10,000,000 to $14,000,000 (the "Term"), and which shall have occurred on or before (an "IPO Closing"). 1.2 The Condition Precedent. The obligations of Frey and Employee ----------------------- under this Agreement shall be subject to an IPO Closing. In the event that an IPO Closing does not occur on or before, this Agreement shall be null and void, and shall have no further force or effect. 2. Definition of "Frey". -------------------- For purposes of subsection 4.2, subsection 4.3 and subsection 4.4 hereof, "Frey" shall include any subsidiaries of Frey (whether existing currently or in the future), any parent corporation of Frey and any business ventures in which Frey, its subsidiaries or its parent corporation may participate (whether existing currently or in the future) (Frey, any direct or indirect subsidiary thereof and any parent corporation thereof, may hereinafter be referred to as a "Frey Group Entity"). 3. Termination of Employment Relationship; Effect of Termination of ---------------------------------------------------------------- Employment Relationship; Notice of Termination; Termination Payments; --------------------------------------------------------------------- Cause. ----- 3.1 Termination of Employment Relationship. Pursuant to this -------------------------------------- Agreement, the employment relationship between Frey and Employee may be terminated by either party. 3.1.1 Termination by Frey. With or without Cause (as defined ------------------- below), Frey may terminate the employment of Employee at any time during the Term upon giving Notice of Termination (as defined below). 3.1.2 Termination by Employee. Employee may Employee's ----------------------- employment at any time, for any reason, upon giving Notice of Termination. 3.1.3 Automatic Termination. This Agreement and Employee's --------------------- employment hereunder shall terminate automatically upon the death or total disability of Employee. The term "total disability" as used herein shall mean Employee's inability to perform the duties normally performed in Employee's employment with Frey for a period or periods aggregating 90 calendar days in any 12-month period as a result of physical or mental illness, loss of legal capacity or any other cause beyond Employee's control, unless Employee is granted a leave of absence by the Board of Directors of Frey. Termination hereunder shall be deemed to be effective (a) at the end of the calendar month in which Employee's death occurs or (b) immediately upon a determination by the Board of Directors of Frey of Employee's total disability, as defined above. 3.2 Effect of Termination of Employment Relationship. The provisions ------------------------------------------------ of Section 3 hereof shall survive the termination of Employee's employment for any and all of the period from Employee's employment termination date until the end of the Term, except that (a) the provisions of subsections 4.2 and 4.3 shall not survive Frey's termination of Employee's employment without Cause, as defined below, and (b) the provisions of subsection 4.5 shall survive the termination of Employee's employment and the end of the Term. The provisions of Section 8 hereof shall survive the termination of Employee's employment and the end of the Term. -2- 3.3 Notice of Termination. The term "Notice of Termination" shall --------------------- mean at least 14 days' written notice of termination of Employee's employment, during which period Employee's employment and performance of services will continue; provided, however, that Frey may, upon notice to Employee and without reducing Employee's compensation during such period, excuse Employee from any or all of Employee's duties during such period. The effective date of the termination of Employee's employment hereunder shall be the date on which such 14 day period expires. 3.4 Termination Payments. In the event of termination of the -------------------- employment of Employee, all compensation and benefits set forth in this Agreement shall terminate except as specifically provided in this Subsection 3.4. 3.4.1 Termination by Frey. If Frey terminates Employee's ------------------- employment without Cause during the Term, Employee shall be entitled to receive (a) termination payments equal to the lesser of (i) three months' annual base salary, or (ii) the annual base salary Employee would have received if Employee's employment hereunder had continued until the end of the term, and (b) any unpaid annual base salary which has accrued for services already performed as of the date termination of Employee' employment becomes effective. If Employee is terminated by Frey for Cause, Employee shall not be entitled to receive any of the foregoing benefits, other than those set forth in clause (b) above. 3.4.2 Termination by Employee. In the case of the termination of ----------------------- Employee's employment by Employee, Employee shall not be entitled to any payments hereunder, other than those set forth in clause (b) of subsection 3.4.1. 3.4.3 Termination after the End of the Term. In the case of a ------------------------------------- termination of Employee's employment after the end of the Term, Employee shall not be entitled to receive any payments hereunder, other than those set forth in clause (b) of subsection 3.4.1. 3.4.4 Payment Schedule. All payments under this subsection 3.4 ---------------- shall be made to Employee at the same intervals as payments of salary were made to Employee immediately prior to termination. 3.5 Cause. Wherever reference is made in this Agreement to ----- termination being with or without Cause, "Cause" shall include, without limitation, the occurrence of one or more of the following events: -3- (a) Failure or refusal to carry out the lawful duties normally performed in Employee's position with Frey or any lawful directions of the Board of Directors of Frey; (b) Except by reason of death or disability, failure by Employee in any material respect to devote Employee's full business attention and time to the business and affairs of Frey or to use Employee's reasonable best efforts to perform his or her professional or job responsibilities in a professional manner; (c) The rendering of any business, commercial or professional services to any other firm or business without the prior written consent of Frey; (d) Temporary loss (for a period of at least 90 days) or permanent loss of Employee's license or other such qualification or authorization to do business, or Employee's causing Frey or any other Frey Group Entity (as defined in Section 2) to so lose (or to be declined in an application or notice to acquire) a license or such other qualification or authorization to do business that is material to Frey or any other Frey Group Entity, provided that whether a license or other qualification or authorization to do business is material to Frey shall be determined by the Board of Directors of Frey and such determination shall be binding on the parties hereto; (e) Conviction of or entry of a plea of nolo contendere by Employee in a proceeding alleging violation by Employee of a state or federal criminal law involving the commission of a crime against Frey or any other Frey Group Entity, or a felony; (f) Current use by Employee of illegal substances; deception, fraud, misrepresentation or dishonesty by Employee; any incident materially compromising Employee's reputation or ability to represent Frey with the public; any act or omission by Employee which substantially impairs the business, good will or reputation of Frey or any other Frey Group Entity; or any other misconduct; or (g) Any other material violation of any provision of this Agreement. -4- 4. Applicability and Scope of Noncompetition, Nonsolicitation, ----------------------------------------------------------- Nondisparagement, and Nondisclosure and Return of Materials ----------------------------------------------------------- Provisions; Equitable Relief; Effect of Violation. ------------------------------------------------- 4.1. Applicability. If Employee's employment with Frey terminates ------------- for any reason during the Term, Employee's obligations under this Section 4 shall continue in full force and effect until the end of the Term, except that in the event of Frey's termination of Employee's employment without Cause, as defined above, the Employee's obligations under subsections 4.2 and 4.3 shall terminate. 4.2. Scope of Noncompetition. Employee agrees that Employee will ----------------------- not, directly or indirectly, during Employee's employment and, if Employee's employment terminates before the end of the Term, the remaining period of time until the end of the Term, be employed by, consult with or otherwise perform services for, own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected with, in any manner, any organization which, by reason of its activities as a broker, dealer, investment advisor, investment company, underwriter or related business, is subject to regulation by the Securities and Exchange Commission and which conducts business in any state or province in which Frey conducts business (a "Competitor"). Employee shall be deemed to be related to or connected with a Competitor if such Competitor is (a) a partnership in which Employee is a general or limited partner, member or employee, (b) a corporation, limited liability company or association of which Employee s a shareholder, member, officer, manager, employee or director, or (c) a partnership, corporation, limited liability company or association of which Employee is a consultant or agent; provided, however, that nothing herein shall prevent the purchase or ownership by Employee of shares which constitute less than five percent of the outstanding equity securities of a publicly or privately held corporation, if Employee has no other relationship with such corporation. 4.3 Scope of Nonsolicitation. Employee shall not directly or ------------------------ indirectly solicit, influence or entice, or attempt to solicit, influence or entice, any employee or consultant of Frey to cease his or her relationship with Frey or solicit, influence, entice or in any way divert any client, customer, distributor, partner, joint venturer, supplier or service provider of Frey to do business or in any way become associated with any Competitor. This subsection 4.3 shall apply during the time period and geographical area described in subsection 4.2 hereof. 4.4. Nondisparagement. Employee agrees that Employee will not at any ---------------- time before the end of the Term make any statements that disparage Frey, its directors, officers, -5- employees and representatives or that damage the reputation or goodwill of Frey. 4.5. Nondisclosure and Return of Materials. During the term of ------------------------------------- Employee's employment by Frey and following termination of such employment, Employee will not disclose (except as required by Employee's duties to Frey), any concept, design, process, technology, trade secret, customer list, plan, embodiment, or invention, any other intellectual property or any other confidential information, whether patentable or not, of any Frey Group Entity of which Employee becomes informed or aware during Employee's employment, whether or not developed by Employee. In the event of the termination of Employee's employment with Frey, Employee will return all documents, data and other materials of whatever nature, including, without limitation, drawings, specifications, research, reports, embodiments, software and manuals to Frey which pertain to Employee's employment with Frey or to any intellectual property and shall not retain or cause or allow any third party to retain photocopies or other reproductions of the foregoing. 4.6. Equitable Relief. Employee acknowledges that the provisions of ---------------- this Section 4 are essential to Frey, that Frey would not enter into this Agreement if it did not include this Section 4 and that damages sustained by Frey as a result of a breach of this Section 4 cannot be adequately remedied by damages, and Employee agrees that Frey, notwithstanding any other provision of this Agreement, including, without limitation, Section 8 hereof, and in addition to any other remedy it may have under this Agreement or at law, shall be entitled to injunctive and other equitable relief to prevent or curtail any breach of any provision of this Agreement, including, without limitation, this Section 4. 4.7. Effect of Violation. Employee and Frey acknowledge and agree ------------------- that additional consideration has been given for Employee entering into this Section 4, such additional consideration including, without limitation, certain provisions for termination payments pursuant to Section 3 of this Agreement. Violation by Employee of this Section 4 shall relieve Frey of any obligation it may have to make such termination payments, but shall not relieve Employee of Employee's obligations under this Section 4. 5. Form of Notice. -------------- All notices given hereunder shall be given in writing, shall specifically refer to this Agreement and shall be personally delivered or sent by telecopy or other electronic facsimile transmission or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof: -6- If to Employee: Paul L. Hocevar If to Frey: D.E. Frey & Company, Inc. Attn: General Counsel 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 If notice is mailed, such notice shall be effective upon mailing, or if notice is personally delivered or sent by telecopy or other electronic facsimile transmission, it shall be effective upon receipt. 6. Assignment. ----------- This Agreement is personal to Employee and shall not be assignable by Employee. Frey may assign its rights hereunder to (a) any corporation resulting from any merger, consolidation or other reorganization to which Frey is a party, (b) any parent corporation of Frey whether existing currently or in the future, or (c) any corporation, partnership, association or other person to which Frey may transfer all or substantially all of the assets and business of Frey existing at such time. All of the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. 7. Waivers. ------- No delay or failure by any party hereto in exercising, protecting or enforcing any of his, her or its rights, titles, interests or remedies hereunder, and no course of dealing or performance with respect thereto, shall constitute a waiver thereof. The express waiver by a party hereto of any right, title, interest or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any other rights or remedies. 8. Arbitration. ----------- Subject to the provisions of subsection 4.6 hereof, any controversies or claims arising out of or relating to this Agreement shall be fully and finally settled by final and binding arbitration in accordance with the rules, constitutions, or bylaws of the National Association -7- of Securities Dealers, Inc., as may be amended from time to time. The prevailing party shall be entitled to costs, expenses and reasonable attorneys' fees. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The provisions of this Section 8 continue in effect for any and all covered controversies or claims, whether before or after the end of the Term. 9. Amendments in Writing. --------------------- No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by Frey and Employee, and each such amendment, modification, waiver, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by Frey and Employee. 10. Applicable Law. --------------- This Agreement shall in all respects, including all matters of construction, validity and performance, be governed by, and construed and enforced in accordance with, the laws of the State of Colorado, without regard to any rules governing conflicts of laws. 11. Severability. ------------ If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, including, without limitation, the duration of such provision, its geographical scope or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intent of the parties hereto as nearly as may be possible, (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision hereof, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. -8- 12. Headings. -------- All headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement. 13. Counterparts. ------------ This Agreement, and any amendment or modification entered into pursuant to Section 8 hereof, may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same instrument. 14. Integration. ----------- Except as set forth in the following sentence, this Agreement on and as of the date of the commencement of the Term shall constitute the entire agreement between Frey and Employee with respect to the subject matter hereof and all oral or written communications, understandings or agreements between Frey and Employee prior or contemporaneous to the commencement of the Term with respect to such subject matter shall be hereby, as of the commencement of the Term, superseded and nullified in their entireties. Notwithstanding the foregoing sentence, this Agreement supplements and does not supersede any previously executed, written employment agreement between Frey and Employee that may be currently in effect; to the extent of any inconsistency or conflict between the terms of this Agreement and the terms of any such previously executed employment agreement, the terms of this Agreement shall, as of the commencement of the Term, control and govern. IN WITNESS WHEREOF, the parties have executed and entered into this Agreement on the date set forth above. EMPLOYEE: _________________________________________ Paul L. Hocevar -9- D.E. FREY & COMPANY, INC. By: _________________________________________ Its: _________________________________________ -10- EX-10.4 10 1992 STOCK OPTION PLAN Exhibit 10.4 D.E. FREY GROUP, INC. 1992 STOCK OPTION PLAN ARTICLE I ESTABLISHMENT AND PURPOSE ------------------------- 1.1 Establishment. D.E. Frey Group, Inc., a Delaware corporation ------------- ("Company"), hereby establishes a stock option plan for key directors, employees, independent contractors and consultants providing material services to the Company and its wholly-owned subsidiary, D.E. Frey and Company, Inc., a Delaware corporation, as described herein, which shall be known as the "1992 STOCK OPTION PLAN" (the "Plan"). It is intended that certain of the options issued to employees pursuant to the Plan may constitute incentive stock options within the meaning of Section 422 of the Internal Revenue Code and that other options issued pursuant to the Plan shall constitute non-qualified options. The Board of Directors shall determine which options are to be incentive stock options and which are to be non-qualified options and shall enter into option agreements with recipients accordingly. 1.2 Purpose. The purpose of this Plan is to enhance shareholder ------- investment by attracting, retaining and motivating key employees, directors and consultants of the Company, and to encourage stock ownership by such persons by providing them with a means to acquire a proprietary interest in the Company's success. ARTICLE II DEFINITIONS ----------- 2.1 Definitions. Whenever used herein, the following terms shall ----------- have the respective meanings set forth below, unless the context clearly requires otherwise, and when said meaning is intended, the term shall be capitalized. (a) "Board" means the Board of Directors of the Company. ----- (b) "Code" means the Internal Revenue Code of 1986, as amended. ---- (c) "Committee" shall mean the Committee provided by Article IV --------- hereof, which may be created at the discretion of the Board. (d) "Company" means D.E. Frey Group, Inc., a Delaware corporation. ------- (e) "Consultant" means any person or entity, including a Parent ---------- Corporation or a Subsidiary Corporation, who provides services (other than as an Employee) to the Company, a Parent Corporation or a Subsidiary Corporation, and shall include independent contractors, Non-Employee Officers and Non-Employee Directors, as defined subsequently. (f) "Date of Exercise" means the date the Company receives notice, ---------------- by an Optionee, of the exercise of an Option pursuant to Section 8.1 of this Plan. Such notice shall indicate the number of shares of Stock the Optionee intends to exercise. (g) "Employee" means any person, including an officer or director -------- of the Company or a Subsidiary Corporation, who is employed by the Company or a Subsidiary Corporation. (h) "Fair Market Value" means the fair market value of Stock upon ----------------- which an option is granted under this Plan, determined as follows: (i) If the Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange, the Fair Market Value shall be the last reported sale price of the Stock on the composite tape of such exchange on the last trading day prior to the date of issuance of this option, or if no such sale is made on such day, the average closing bid and asked prices for such day on the composite tape of such exchange; or (ii) If the Stock is not so listed or admitted to unlisted trading privileges, the Fair Market Value shall be the mean of the last reported bid and asked prices reported by the National Association of Securities Dealers Quotation System (or, if not so quoted on NASDAQ, by the National Quotation Bureau, Inc.) on the last trading day prior to the date of issuance of the option; or (iii) If the Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the Fair Market Value shall be an amount, not less than book value, determined by the Board of Directors of the Company, such determination to be final and binding on the Holder. (i) "Incentive Stock Option" means an Option granted under this Plan ---------------------- which is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code. (j) "Non-Employee Director" means a member of the Board who is not an --------------------- employee of the Company at the time an Option is granted hereunder. (k) Non-Employee Officer" means an officer of the Company who is not -------------------- an employee of the Company at the time an Option is granted hereunder. (l) "Non-qualified Option" means an Option granted under this Plan -------------------- which is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. Non-qualified Options may be granted at such times and subject to such restrictions as the Board shall determine without conforming to the statutory rules of Section 422 of the Code applicable to incentive stock options. (m) "Option" means the right, granted under this Plan, to purchase ------ Stock of the Company at the option price for a specified period of time. For purposes of this Plan, an Option may be either an Incentive Stock Option or a Non-qualified Option. (n) "Optionee" means an Employee or Consultant holding an Option under -------- the Plan. (o) "Parent Corporation" shall have the meaning set forth in Section ------------------ 424(e) of the Code with the Company being treated as the employer corporation for purposes of this definition. (p) "Subsidiary Corporation" shall have the meaning set forth in ---------------------- Section 424(f) of the Code with the Company being treated as the employer corporation for purposes of this definition. (q) "Significant Shareholder" means an individual who, within the ----------------------- meaning of Section 422(b)(6) of the Code, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation of the Company. In determining whether an individual is a Significant Shareholder, an individual shall be treated as owning stock owned by certain relatives of the individual and certain -2- stock owned by corporations in which the individual is a shareholder, partnerships in which the individual is a partner, and estates or trusts of which the individual is a beneficiary, all as provided in Section 424(d) of the Code. (r) "Stock" means the $.10 par value common stock of the Company. ----- 2.2 Gender and Number. Except when otherwise indicated by the ----------------- context, any masculine terminology when used in this Plan also shall include the feminine gender, and the definition of any term herein in the singular also shall include the plural. ARTICLE III ELIGIBILITY AND PARTICIPATION ----------------------------- 3.1 Eligibility and Participation. All Employees are eligible to ----------------------------- participate in this Plan and receive either or both Incentive Stock Options and Non-qualified Options under the Plan. All Consultants are eligible to participate in this Plan and receive Non-qualified Options hereunder. Optionees in the Plan shall be selected by the Board, in its sole discretion, from among those Employees and Consultants who, in the opinion of the Board, are in a position to contribute materially to the Company's continued growth and development and to its long-term financial success. ARTICLE IV ADMINISTRATION -------------- 4.1 Administration. The Board shall be responsible for administering -------------- the Plan. (a) The Board is authorized to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to the Plan; to provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company; and to make all other determinations necessary or advisable for the administration of the Plan. Determinations, interpretations, or other actions made or taken by the Board, pursuant to the provisions of this Plan, shall be final and binding and conclusive for all purposes and upon all persons. (b) At the discretion of the Board this Plan may be administered by a Committee which shall be an executive committee of the Board, consisting of not less than three members of the Board. The members of such Committee may be directors who are eligible to receive Options under this Plan, but Options may be granted to such persons only by action of the full Board and not by action of the Committee. Such Committee shall have full power and authority, subject to the limitations of the Plan and any limitations imposed by the Board, to construe, interpret and administer this Plan and to make determinations which shall be final, conclusive and binding upon all persons, including, without limitation, the Company, the shareholders, the directors and any persons having any interests in any Options which may be granted under this Plan, and, by resolution or resolution providing for the creation and issuance of any such Option, to fix the terms upon which, the time or times at or within which, the price or prices at which any such shares may be purchased from the Company upon the exercise of such Option. Such terms, time or times and price or prices shall, in every case, be set forth or incorporated by reference in the instrument or instruments evidencing such Option, and shall be consistent with the provisions of this Plan. (c) If the Committee has been appointed, the Board may from time to time remove members from, or add members to, the Committee. The Board may terminate the Committee at any time. Vacancies on the Committee, howsoever caused, shall be filled by the Board. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as the Chairman may determine. A majority of the Committee at which a quorum is present, or acts -3- reduced to or approved in writing by all of the members of the Committee, shall be the valid acts of the Committee. A quorum shall consist of two-thirds (2/3) of the members of the Committee. (d) Where the Committee has been created by the Board, references in this Plan to actions to be taken by the Board shall be deemed to refer to the Committee as well, except where limited by this Plan or by the Board. (e) The Board shall have all of the enumerated powers of the Committee, but shall not be limited to such powers. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. ARTICLE V STOCK SUBJECT TO THE PLAN ------------------------- 5.1 Number. The total number of shares of Stock hereby made ------ available and reserved for issuance under the Plan upon exercise of Incentive Stock Options shall be 300,000, less the number of shares issued and reserved for issuance upon exercise of outstanding Non-qualified Options. The aggregate number of shares of Stock available under this Plan shall be subject to adjustment as provided in Section 5.3. The total number of shares of Stock may be authorized but unissued shares of Stock, or Shares acquired by purchase as directed by the Board from time to time in its discretion, to be used for issuance upon exercise of Options granted hereunder. 5.2 Unused Stock. If an Option shall expire or terminate for any ------------ reason without having been exercised in full, the unpurchased shares of Stock subject thereto shall (unless the Plan shall have terminated) become available for other Options under the Plan. 5.3 Adjustment in Capitalization. In the event of any change in the ---------------------------- outstanding shares of Stock by reason of a stock dividend or split, recapitalization, reclassification, or other similar corporate change, the aggregate number of shares of Stock set forth in Section 5.1 shall be appropriately adjusted by the Board, whose determination shall be conclusive; provided however, that fractional shares shall be rounded to the nearest whole share. In any such case, the number and kind of shares that are subject to any Option (including any Option outstanding after termination of employment) and the Option price per share shall be proportionately and appropriately adjusted without any change in the aggregate Option price to be paid therefor upon exercise of the Option. ARTICLE VI DURATION OF THE PLAN -------------------- 6.1 Duration of the Plan. Subject to approval of shareholders, the -------------------- Plan shall be in effect for ten years from the date of its adoption by the Board. Any Options outstanding at the end of said period shall remain in effect in accordance with their terms. The Plan shall terminate before the end of said period if all Stock subject to it has been purchased pursuant to the exercise of Options granted under the Plan. ARTICLE VII TERMS OF STOCK OPTIONS ---------------------- 7.1 Grant of Options. Subject to Section 5.1, Options may be granted ---------------- to Employees or Consultants at any time and from time to time as determined by the Board; provided, however, that Consultants may receive only Non-qualified Options and may not receive Incentive Stock Options. The Board shall have complete discretion in determining the terms and conditions and number of Options granted to each Optionee. In making such determinations, the Board may take into account the nature of services rendered by such Employees or Consultants, their present and potential contributions to the Company and its -4- Subsidiary Corporations, and such other factors as the Board in its discretion shall deem relevant. The Board also shall determine whether an Option is to be an Incentive Stock Option or a Non-qualified Option. (a) In the case of Incentive Stock Options, the total Fair Market Value (determined at the date of grant) of shares of Stock with respect to which incentive stock options granted after December 31, 1986 are exercisable for the first time by the Optionee during any calendar year under all plans of the Company under which incentive stock options may be granted (and all such plans of any Parent Corporations and any Subsidiary Corporations of the Company) shall not exceed $100,000. Hereinafter, this requirement is sometimes referred to as the "$100,000 Limitation". (b) Nothing in this Article VII of the Plan shall be deemed to prevent the grant of Options permitting exercise in excess of the maximums established by the preceding paragraph where such excess amount is treated as a Non-qualified Option. (c) The Board is expressly given the authority to issue amended or replacement Options with respect to shares of Stock subject to an Option previously granted hereunder. An amended Option amends the terms of an Option previously granted and thereby supersedes the previous Option. A replacement Option is similar to a new Option granted hereunder except that it provides that it shall be forfeited to the extent that a previously granted Option is exercised, or except that its issuance is conditioned upon the termination of a previously granted Option. 7.2 No Tandem Options. Where an Option granted under this Plan is ----------------- intended to be an Incentive Stock Option, the Option shall not contain terms pursuant to which the exercise of the Option would affect the Optionee's right to exercise another Option, or vice versa, such that the Option intended to be an Incentive Stock Option would be deemed a tandem stock option within the meaning of the regulations under Section 422 of the Code. 7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise ---------------------------------------------------------------- Specified. As determined by the Board on the date of grant, each Option shall - --------- be evidenced by an Option agreement (the "Option Agreement") that includes the non-transferability provisions required by Section 10.2 hereof and specifies: whether the Option is an Incentive Stock Option or a Non-qualified Option; the Option price; the duration of the Option; the number of shares of Stock to which the Option applies; any vesting or exercisability restrictions which the Board may impose; in the case of an Incentive Stock Option, a provision implementing the $100,000 Limitation; and any other terms or conditions which the Board may impose. All such terms and conditions shall be determined by the Board at the time of grant of the Option. (a) If not otherwise specified by the Board, the following terms and conditions shall apply to Options granted under the Plan: (i) Term. The duration of the Option shall be five years ---- from the date of grant. (ii) Exercise of Option. Unless an Option is terminated as ------------------ provided hereunder, an Optionee may exercise his Option for up to, but not in excess of, the amounts of shares subject to the Option specified hereafter, based on the Optionee's number of years of continuous service with the Company or a Subsidiary Corporation from the date on which the Option is granted. In the case of an Optionee who is an Employee, continuous service shall mean continuous employment; in the case of an Optionee who is a Consultant, continuous service shall mean the continuous provision of consulting services. In applying said limitations, the amount of shares, if any, previously purchased by the Optionee under the Option shall be counted in determining the amount of shares the Optionee can purchase at any time. The Optionee may exercise his Option in the following amounts: -5- (A) After one year of such continuous services, up to but not in excess of twenty percent of the shares originally subject to the Option; (B) After two years of such continuous services, up to but not in excess of forty percent of the shares originally subject to the Option; (C) After three years of such continuous services, up to but not in excess of sixty percent of the shares originally subject to the Option; (D) After four years of such continuous services, up to but not in excess of eighty percent of the shares originally subject to the Option; and (E) At the expiration of the fifth year of such continuous services, the Option may be exercised, in whole or in part, and at any time and from time to time within its term but it shall not be exercisable after the expiration of five years from the date on which it was granted. (b) The Board shall be free to specify terms and conditions other than those set forth above, in its discretion. (c) All Option Agreements shall incorporate the provisions of this Plan by reference, with certain provisions to apply depending upon whether the Option Agreement applies to an Incentive Stock Option or to a Non-qualified Option. 7.4 Option Price. No Option granted pursuant to this Plan shall have ------------ an Option price that is less than the Fair Market Value of Stock on the date the Option is granted. Incentive Stock Options granted to Significant Shareholders shall have an Option price of not less than 110% of the Fair Market Value of Stock on the date of grant. The Option exercise price shall be subject to adjustment as provided in Section 5.3 above. 7.5 Term of Options. Each Option shall expire at such time as the --------------- Board shall determine when it is granted, provided however that under no circumstances shall a Non-qualified Option be exercisable later than the tenth anniversary date of its grant, nor by its terms, shall an Incentive Stock Option granted to a Significant Shareholder be exercisable later than the fifth year from the anniversary date of its grant. 7.6 Exercise of Options. Options granted under the Plan shall be ------------------- exercisable at such times and be subject to such restrictions and conditions as the Board shall in each instance approve, which need not be the same for all Optionees. 7.7 Payment. Payment for all shares of Stock shall be made at the ------- time that an Option, or any part thereof, is exercised, and no shares shall be issued until full payment therefor has been made. Payment shall be made (i) in cash, or (ii) if acceptable to the Board, in Stock or in some other form; provided, however, in the case of an Incentive Stock Option, that said other form of payment does not prevent the Option from qualifying for treatment as an "incentive stock option" within the meaning of the Code. ARTICLE VIII WRITTEN NOTICE, ISSUANCE OF STOCK --------------------------------- CERTIFICATES, SHAREHOLDER PRIVILEGES ------------------------------------ 8.1 Written Notice. An Optionee wishing to exercise an Option shall -------------- give written notice to the Company, in the form and manner prescribed by the Board. Full payment for the shares exercised pursuant to the Option must accompany the written notice. -6- 8.2 Issuance of Stock Certificates. As soon as practicable after the ------------------------------ receipt of written notice and payment, the Company shall deliver to the Optionee or to a permitted nominee of the Optionee a certificate or certificates for the requisite number of shares of Stock. 8.3 Privileges of a Shareholder. An Optionee or any other person --------------------------- entitled to exercise an Option under this Plan shall not have stockholder privileges with respect to any Stock covered by the Option until the date of issuance of a stock certificate for such stock. ARTICLE IX TERMINATION OF EMPLOYMENT OR SERVICES ------------------------------------- 9.1 Death. If an Optionee's employment in the case of an Employee, ----- or provision of services as a Consultant in the case of a Consultant, terminates by reason of death, the Option may thereafter be exercised at any time prior to the expiration date of the Option or within 12 months after the date of such death, whichever period is the shorter, by the person or persons entitled to do so under the Optionee's will or, if the Optionee shall fail to make a testamentary disposition of an Option or shall die intestate, the Optionee's legal representative or representatives. The Option shall be exercisable only to the extent that such Option was exercisable as of the date of death. 9.2 Termination other than for Cause or Due to Death. In the event ------------------------------------------------ of an Optionee's termination of employment in the case of an Employee, or termination of the provision of services as a Consultant in the case of a Consultant, other than by reason of death, the Optionee may exercise such portion of his Option as was exercisable by him at the date of such termination (the "Termination Date") at any time within three months of the Termination Date; provided, however, that where the Optionee is an Employee, and is terminated due to disability within the meaning of Code ? 422, he may exercise such portion of his Option as was exercisable by him on his Termination Date within one year of his Termination Date. In any event, the Option cannot be exercised after the expiration of the term of the Option. Options not exercised within the applicable period specified above shall terminate. (a) In the case of an Employee, a change of duties or position within the Company or an assignment of employment in a Subsidiary Corporation or Parent Corporation of the Company, if any, or from such a Corporation to the Company, shall not be considered a termination of employment for purposes of this Plan. (b) The Option Agreements may contain such provisions as the Board shall approve with reference to the effect of approved leaves of absence upon termination of employment. 9.3 Termination for Cause. In the event of an Optionee's termination --------------------- of employment in the case of an Employee, or termination of the provision of services as a Consultant in the case of a Consultant, which termination is by the Company or a Subsidiary Corporation for cause, any Option or Options held by him under the Plan, to the extent not exercised before such termination, shall terminate upon notice of termination for cause. 9.4 Call Option of the Company. In the event the employee, -------------------------- independent contractor, advisor, consultant or similar relationship between the Company or a Subsidiary Corporation and any Optionee should terminate for any reason at any time the Company shall have the option, exercisable within 90 days after the termination date (or within 90 days after the exercise date, whichever is later), to purchase all shares of the Company's common stock owned by the Participant, including all Stock acquired by the Optionee pursuant to this Plan for an amount equal to the Fair Market Value thereof on the termination date. The Company shall have no obligation to exercise this option. Each stock certificate evidencing the shares will bear a legend referring to the Company's option to purchase the shares. -7- ARTICLE X RIGHTS OF OPTIONEES ------------------- 10.1 Service. Nothing in this Plan shall interfere with or limit in ------- any way the right of the Company or a Subsidiary Corporation to terminate any Employee's employment, or any Consultant's services, at any time, nor confer upon any Employee any right to continue in the employ of the Company or a Subsidiary Corporation, or upon any Consultant any right to continue to provide services to the Company or a Subsidiary Corporation. 10.2 Non-transferability. All Options granted under this Plan shall ------------------- be nontransferable by the Optionee, other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee. ARTICLE XI OPTIONEE-EMPLOYEE'S TRANSFER ---------------------------- OR LEAVE OF ABSENCE ------------------- 11.1 Optionee-Employee's Transfer or Leave of Absence. For purposes ------------------------------------------------ of this Plan: (a) A transfer of an Optionee who is an Employee from the Company to a Subsidiary Corporation or Parent Corporation, or from one such Corporation to another, or (b) A leave of absence for such an Optionee (i) which is duly authorized in writing by the Company or a Subsidiary Corporation, and (ii) if the Optionee holds an Incentive Stock Option, which qualifies under the applicable regulations under the Code which apply in the case of incentive stock options, shall not be deemed a termination of employment. However, under no circumstances may an Optionee exercise an Option during any leave of absence, unless authorized by the Board. ARTICLE XII AMENDMENT, MODIFICATION, AND ---------------------------- TERMINATION OF THE PLAN ----------------------- 12.1 Amendment, Modification, and Termination of the Plan. ---------------------------------------------------- (a) The Board may at any time terminate, and from time to time may amend or modify the Plan, provided, however, that no such action of the Board, without approval of the shareholders, may: (i) increase the total amount of Stock which may be purchased through Options granted under the Plan, except as provided in Article V; (ii) change the class of Employees or Consultants eligible to receive Options; (b) No amendment, modification, or termination of the Plan shall in any manner adversely affect any outstanding Option under the Plan without the consent of the Optionee holding the Option. ARTICLE XIII ACQUISITION, MERGER OR LIQUIDATION ---------------------------------- 13.1 Acquisition. ----------- -8- (a) In the event that an Acquisition occurs with respect to the Company, the Company shall have the option, but not the obligation, to cancel Options outstanding as of the effective date of Acquisition, whether or not such Options are then exercisable, in return for payment to the Optionees of an amount equal to a reasonable estimate of an amount (hereinafter the "Spread") equal to the difference between the net amount per share payable in the Acquisition or as a result of the Acquisition, less the exercise price of the Option. In estimating the Spread, appropriate adjustments to give effect to the existence of the Options shall be made, such as deeming the Options to have been exercised, with the Company receiving the exercise price payable thereunder, and treating the shares receivable upon exercise of the Options as being outstanding in determining the net amount per share. (b) For purposes of this section, an "Acquisition" shall mean any transaction in which substantially all of the Company's assets are acquired or in which a controlling amount of the Company's outstanding shares are acquired, in each case by a single person or entity or an affiliated group of persons and entities. For purposes of this section, a controlling amount shall mean more than 50% of the issued and outstanding shares of stock of the Company. The Company shall have such an option regardless of how the Acquisition is effectuated, whether by direct purchase, through a merger or similar corporate transaction, or otherwise. In cases where the acquisition consists of the acquisition of assets of the Company, the net amount per share shall be calculated on the basis of the net amount receivable with respect to shares upon a distribution and liquidation by the Company after giving effect to expenses and charges, including but not limited to taxes, payable by the Company before the liquidation can be completed. (c) Where the Company does not exercise its option under this Section 13.1 the remaining provisions of this Article XIII shall apply, to the extent applicable. 13.2 Merger or Consolidation. Subject to any required action by the ----------------------- shareholders, if the Company shall be the surviving corporation in any merger or consolidation, any Option granted hereunder shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled in such merger or consolidation. 13.3 Other Transactions. A dissolution or a liquidation of the ------------------ Company or a merger and consolidation in which the Company is not the surviving corporation shall cause every Option outstanding hereunder to terminate as of the effective date of such dissolution, liquidation, merger or consolidation. However, the Optionee either (i) shall be offered a firm commitment whereby the resulting or surviving corporation in a merger or consolidation will tender to the Optionee an option (the "Substitute Option") to purchase its shares on terms and conditions both as to number of shares and otherwise, which will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder granted by the Company, or (ii) shall have the right immediately prior to such dissolution, liquidation, merger, or consolidation to exercise any unexercised Options whether or not then exercisable, subject to the provisions of this Plan. The Board shall have absolute and uncontrolled discretion to determine whether the Optionee has been offered a firm commitment and whether the tendered Substitute Option will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder. In any event, any Substitute Option for an Incentive Stock Option shall comply with the requirements of Code Section 424(a). ARTICLE XIV SECURITIES REGISTRATION ----------------------- 14.1 Securities Registration. In the event that the Company shall ----------------------- deem it necessary or desirable to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any Stock with respect to which an Option may be or shall have been granted or exercised, or to qualify any such -9- Options or Stock under the Securities Act of 1933, as amended, or any other statute, then the Optionee shall cooperate with the Company and take such action as is necessary to permit registration or qualification of such Options or Stock. 14.2 Representations. Unless the Company has determined that the --------------- following representation is unnecessary, each person exercising an Option under the Plan may be required by the Company, as a condition to the issuance of the shares pursuant to exercise of the Option, to make a representation in writing (i) that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof, (ii) that before any transfer in connection with the resale of such shares, he will obtain the written opinion of counsel for the Company, or other counsel acceptable to the Company, that such shares may be transferred. The Company may also require that the certificates representing such shares contain legends reflecting the foregoing. ARTICLE XV TAX WITHHOLDING --------------- 15.1 Tax Withholding. Whenever shares of Stock are to be issued in --------------- satisfaction of Options exercised under this Plan, the Company shall have the power to require the recipient of the Stock to remit to the Company an amount sufficient to satisfy federal, state, and local withholding tax requirements. ARTICLE XVI INDEMNIFICATION --------------- 16.1 Indemnification. To the extent permitted by law, each person --------------- who is or shall have been a member of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of judgment in any such action, suit, or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's articles of incorporation or bylaws, as a matter of law, or otherwise, or any power that the Company or any Subsidiary Corporation may have to indemnify them or hold them harmless. ARTICLE XVII REQUIREMENTS OF LAW ------------------- 17.1 Requirements of Law. The granting of Options and the issuance ------------------- of shares of Stock upon the exercise of an Option shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.2 Governing Law. The Plan, and all agreements hereunder, shall be ------------- construed in accordance with and governed by the laws of the State of Colorado. ARTICLE XVIII EFFECTIVE DATE OF PLAN ---------------------- 18.1 Effective Date. The Plan shall be effective on March 3, 1992. -------------- -10- ARTICLE XIX COMPLIANCE WITH CODE -------------------- 19.1 Compliance with Code. Incentive Stock Options granted hereunder -------------------- are intended to qualify as "incentive stock options" under Code ? 422. If any provision of this Plan is susceptible to more than one interpretation, such interpretation shall be given thereto as is consistent with Incentive Stock Options granted under this Plan being treated as incentive stock options under the Code. ARTICLE XX NO OBLIGATION TO EXERCISE OPTION -------------------------------- 20.1 No Obligation to Exercise. The granting of an Option shall ------------------------- impose no obligation upon the holder thereof to exercise such Option. ARTICLE XXI STOCKHOLDER APPROVAL -------------------- 21.1 Stockholder Approval. This Plan shall be submitted for approval -------------------- and ratification by a vote of the holders of a majority of the shares of Common Stock of the Company no later than March 3, 1993; provided, however, that failure to timely obtain such shareholder approval shall result in all Options granted hereunder being deemed to be Non-qualified Options and shall not affect the validity of any Option issued under this Plan. THIS 1992 STOCK OPTION PLAN was adopted by the Board of Directors of D.E. Frey Group, Inc. on March 3, 1992, to be effective as of March 3, 1992. D.E. FREY GROUP, INC. /s/ Dale E. Frey By: Dale E. Frey, President -11- EX-10.5 11 1995 STOCK PURCHASE PLAN EXHIBIT 10.5 D.E. FREY GROUP, INC. 1995 STOCK PURCHASE PLAN --------------------- 250,000 Shares Common Stock, $.10 Par Value ---------------------
TABLE OF CONTENTS Page ---- PLAN INFORMATION....................................................... 1 SECURITIES TO BE OFFERED AND PERSONS WHO MAY PARTICIPATE IN THE PLAN... 1 PURCHASE OF AND PAYMENT FOR SECURITIES PURSUANT TO THE PLAN............ 2 FEDERAL INCOME TAX CONSEQUENCES........................................ 3 RESALES OF SHARES...................................................... 3 CALL OPTION OF THE COMPANY............................................. 4 CONFIDENTIALITY AGREEMENT.............................................. 4 ADMINISTRATION OF THE PLAN............................................. 4 ADDITIONAL INFORMATION................................................. 4
---------------------- THIS PLAN IS REQUIRED TO BE ACCOMPANIED BY AND IS A PART OF A PRIVATE PLACEMENT MEMORANDUM OR OTHER DISCLOSURE DOCUMENT PREPARED BY THE COMPANY. PARTICIPANTS ARE URGED TO CAREFULLY REVIEW THE DISCLOSURE DOCUMENT. NO OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IS MADE IN ANY STATE OR JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. The date of this Plan is April 1995 D.E. FREY GROUP, INC. PLAN INFORMATION The principal executive offices of D.E. Frey Group, Inc., a Delaware corporation (the "Company"), are located at One Norwest Center, Suite 2200, 1700 Lincoln Street, Denver, Colorado 80203. The telephone number of the Company is (303) 863-4040. Management believes it is very important to allow employees, independent contractors and other advisors and consultants to the Company the opportunity to participate in the growth of the Company. Accordingly, in April 1995, the Board of Directors of the Company approved the 1995 Stock Purchase Plan (the "Plan") whereby employees ("Employees") and independent contractors, advisors and consultants (collectively, "Consultants") of the Company and its subsidiaries, at their election, may purchase shares of the Company's Common Stock, par value $.10 per share (the "Shares"), and pay for such Shares out of their compensation by means of a withholding therefrom. Employees and Consultants who elect to participate in the Plan may be collectively referred to herein as the "Participants." Within 60 days after the end of each fiscal year of the Company, it will issue to each Participant a non-transferable three-year option ("Option") for the purchase of that number of shares of the Company's Common Stock ("Option Stock") as equals 20% of the total number of Shares purchased by that Participant pursuant to the Plan during the preceding year. The exercise price will be the then value as established by the Board of Directors or the current market price if a market exists for the Common Stock. The Options may be exercised only so long as the holder is employed by or an independent contractor, consultant or advisor associated with the Company or any of its subsidiaries. The Shares, Options and Option Stock (collectively referred to as the "Securities") have not been registered under federal or applicable state securities laws and will be, when issued, "restricted securities" subject to substantial restrictions on transfer. The Plan will terminate on March 31, 2005, or earlier upon not less than ten days' prior written notice given to all Participants. A participation election is effective until terminated. Either the Company or a Participant can terminate the participation of that Participant on not less than 30 days written notice given prior to the last day of any fiscal quarter of the Company, effective as of the first day of the following fiscal quarter. The Company may suspend the Plan if, in the opinion of management, a material event requires that a new stock value be established by the Board of Directors. Any new value will be effective as of the date of occurrence of any such material event unless determined otherwise by the Board of Directors. The Plan is not subject to the Employee Retirement Income Security Act of 1974 and is not qualified under Section 401(a) of the Internal Revenue Code (the "Code"). SECURITIES TO BE OFFERED AND PERSONS WHO MAY PARTICIPATE IN THE PLAN The Board of Directors of the Company has reserved a maximum of up to 250,000 Shares of its Common Stock for issuance pursuant to the Plan. No Participant may commit more than ten percent of his or her gross income (before taxes and other withholdings required by law but after deduction of expenses and other amounts payable to the Company or any subsidiary of the Company) for the purchase of Shares pursuant to the Plan. The Plan does not limit the number of Shares which may be purchased by any one Participant. All Employees to and Consultants of the Company are eligible to participate in the Plan. Each Consultant will be required to certify to the Company that the fees to be used to purchase the Shares by that Consultant pursuant to the Plan will have been earned for bona fide services rendered to the Company by the Consultant otherwise than in connection with offer or sale of securities in a capital-raising transaction. Shares may be sold only to Participants who reside in states where such securities have been qualified for sale or are exempt from such qualification. Employees and Consultants who desire to participate in the Plan should contact the Plan administrator to determine if the securities have been qualified for sale in their state of residence. No offer to sell or solicitation of an offer to buy securities is made in any state or jurisdiction where the offer would be unlawful. Attached to this Plan is the Company's Private Placement Memorandum (the "Memorandum") dated April 1995. Persons eligible to participate in the Plan are urged to thoroughly read the Memorandum and to ask of management any questions they may have regarding the Company and its management, operations and financial condition. The Company will provide, upon request, to any person eligible to participate in the Plan copies of all documents referred to in the Memorandum. PURCHASE OF AND PAYMENT FOR SECURITIES PURSUANT TO THE PLAN Employees and Consultants may elect to participate in the Plan by entering into written agreements with the Company (the "Participation Agreement") pursuant to which a specified percentage (whole numbers only) of compensation then or thereafter owed to the Participant by the Company or by any subsidiary of the Company shall be deducted from such compensation and applied for the purchase of Shares. Such election will continue indefinitely until terminated by either the Company or the Participant upon not less than 30 days written notice given prior to the last day of any fiscal quarter of the Company, effective as of the first day of the following fiscal quarter. The Shares shall be issuable as of the date of the deduction from the Participant's compensation (the "Issuance Date"). The purchase price shall be the value per share as determined by the Company's Board of Directors, which determination shall be conclusive. The value will be determined not less frequently than quarterly in advance and, in any event, as soon as practicable after the occurrence of a material event. On the occurrence of an event deemed by management to be material, the Company may suspend the Plan until the Board of Directors has had the opportunity to establish a revised value. Any such revised value will be retroactive to the date such event occurred unless otherwise determined by the Board of Directors. The Company will advise all participants of the value as soon as practicable after established by the Board of Directors and, in any event, will advise them of the value established for each fiscal quarter on or before the first day of that quarter. For the quarter ending June 30, 1995, the board has determined the value to be $2.00 per Share. Stock certificates evidencing the Shares will not be issued except upon written request by the Participant, but not more frequently than quarterly. Fractional shares will not be issued. Any fractional shares will be paid in cash. Each Participant will be advised by the Company promptly after the end of each fiscal year of the price per Share and the number of Shares purchased by that Participant during that year, and the total number of Shares credited to the Participant's account. Fractional shares will be credited to the Participant's account calculated to two decimal places. Even though certificates evidencing such Shares may not have 2 been delivered, the Participants shall have all rights of shareholders under Delaware law, including voting of the Shares and the right to receive dividends or other distributions thereon. Each Participant in the Plan will receive, within 60 days after the last day of each fiscal year of the Company, a non-transferable option ("Option") for the purchase of that number of whole shares of the Company's Common Stock (rounded down to the nearest whole share) as equals 20% of the total number of Shares purchased by the Participant pursuant to the Plan during the preceding year. The Options will be exercisable for a period of three years after the issuance date at an exercise price equal to the then value as established by the Board of Directors, but only so long as the holder of the Option is employed by or an independent contractor, consultant or advisor associated with the Company or any of its subsidiaries. However, should a public market then exist for the Common Stock, the exercise price will be the closing price on the last business day preceding the date of issuance of the Option. The Common Stock received upon exercise of the Options will be subject to substantial restrictions on transfer. No commissions or other fees will be charged to a Participant in connection with such purchases. FEDERAL INCOME TAX CONSEQUENCES There is no tax benefit associated with the Plan. Any gain or loss upon sale of the Shares will be capital gain or loss under the Internal Revenue Code. RESALES OF SHARES The Securities will be issued pursuant to the exemptions from securities registration provided by Rule 701 under the Securities Act of 1933 (the "1933 Act") and/or Regulation D promulgated thereunder and under applicable state laws. The Securities will be "restricted securities" as defined in Rule 144 under the 1933 Act, and subject to substantial restrictions on transfer. In the Participation Agreement, each Participant will be required to warrant and represent to the Company that, among other things, he or she has received all information about the Company and its subsidiaries deemed necessary by the Participant to the making of an informed investment decision; the Participant is acquiring the Securities for investment and not for distribution or resale; the Participant understands that the Securities are subject to substantial restrictions on transfer; and the Participant is willing and able to assume all the risks of the investment, including loss of all of his or her invested capital. Each stock certificate evidencing ownership of any Securities will bear a restrictive legend regarding these restrictions on transfer. The Options will never be transferable and the Shares and Option Stock will not be transferable so long as the Company has the purchase option described below under "CALL OPTION OF THE COMPANY." The Company reserves the right to alter, amend or terminate the Plan or to restrict the participation of any person in the Plan for any reason including legal requirements under federal and applicable state securities laws, rules and regulations. This may include limiting the number of Participants who are not "accredited investors" (as defined in the Participation Agreement) to 35 or fewer on a first-come, first-served basis. 3 CALL OPTION OF THE COMPANY In the event the employee, advisor or consultant relationship between the Company and any Participant should terminate for any reason at any time the Company shall have the option, exercisable within 90 days after the termination date, to purchase all shares of the Company's common stock owned by the Participant, including all Shares and Option Stock acquired by that Participant pursuant to the Plan, for an amount equal to the value thereof on the termination date determined by the Board of Directors of the Company as set forth above. The Company shall have no obligation to exercise the option. Each stock certificate evidencing the Shares and Option Stock will bear a legend referring to the Company's option to purchase the Securities. CONFIDENTIALITY AGREEMENT The Participation Agreement contains a covenant of confidentiality whereby each Participant agrees that any information provided to him or her regarding the Company, its business, operations, management, financial condition or otherwise, will be kept strictly confidential by the Participant during and at all times after his or her participation in the Plan. In the event of violation of this confidentiality agreement, the Company may exercise all remedies available to it including temporary restraining orders and injunctive relief, recovery of damages and otherwise. In the event of litigation under or arising out of the confidentiality covenant, the prevailing party is entitled to recover its costs, including reasonable legal fees, from the other party. ADMINISTRATION OF THE PLAN The Plan will be administered and managed by Paul Hocevar. The address of the administrator of the Plan is One Norwest Center, Suite 2200, 1700 Lincoln Street, Denver, Colorado 80203, telephone number (303) 863-4040. The administrator is designated by the Company's President and may be removed at any time by the President. ADDITIONAL INFORMATION The Company will provide without charge to each Participant a copy of the following documents: 1. Within 90 days after the end of each fiscal year, the Company's audited consolidated financial statements for such fiscal year and the fiscal year prior thereto; 2. Upon written request made no earlier than 30 days after the end of each fiscal quarter, the Company's unaudited consolidated financial statements for the quarter then ended and the comparable period for the preceding fiscal year, together with a year-to-date consolidated statement of operations. 4 EX-10.6 12 RECRUITING AGREEMENT EXHIBIT 10.6 TO: McAst Inc. FROM: Dale E. Frey RE: Recruiting Agreement DATE: May 1, 1995 D.E. Frey & Company, Inc. would like to enter into an agreement with McAst, Inc. to recruit registered representatives into the firm. For the service we offer the following: A) Either 5% of the registered representative's gross commission revenues received by D.E. Frey & Company, Inc. after affiliation and NASD approval in months 4 through 15, or 50% of the amount D.E. Frey & Company, Inc. receives on such gross commission revenues over this same period of time, whichever is less. B) Either 3% of the registered representative's gross commission revenues received by D.E. Frey & Company, Inc. in months 16 through 27, or 30% of the amount D.E. Frey & Company, Inc. receives on such gross commission revenues over this same period of time, whichever is less. C) Either 1% of the registered representative's gross commission revenues received by D.E. Frey & Company, Inc. in months 28 through 39, or 10% of the amount D.E. Frey & Company, Inc. receives on such gross commission revenues over this same period time, whichever is less. D) Either 1/2 of 1% of the registered representative's gross commission revenues received by D.E. Frey & Company, Inc. in months 40 as long as registered representative is affiliated with D.E. Frey & Company, Inc., or 5% of the amount D.E. Frey & Company, Inc. receives on such gross commission revenues over the same period of time, whichever is less. E) D.E. Frey & Company, Inc. is not responsible for any of McAst, Inc. operating expenses (I.E. travel, entertainment, meals, lodging, etc.). F) McAst, Inc. will be paid each month their share of the gross commission revenues. If the above is acceptable please sign and return to D.E. Frey & Company, Inc. to the attention of Dale E. Frey. /s/ Dale E. Frey /s/ Bill Tennison ____________________________ _____________________________ Dale E. Frey Bill Tennison Chairman McAst, Inc. Chief Executive Officer /s/ James Sarkauskas _____________________________ James Sarkauskas McAst, Inc. /s/ Dick McAllaster ____________________________ Dick McAllaster /s/ Mike Robertson McAst, Inc. _____________________________ Mike Robertson McAst, Inc. EX-10.7 13 FORM OF INVEST PROF AGR EXHIBIT 10.7 D.E. FREY & COMPANY, INC. 1700 Lincoln Street, Suite 2200 Reg. Rep. ____Office Denver, CO 80203 INDEPENDENT CONTRACTOR AGREEMENT ___________________________________________ Date of Agreement__________________ Name of Independent Contractor Number:____________________________ ___________________________________________ Street Address ___________________________________________ City State Zip This Agreement is made by and between D.E. Frey & Company, Inc., a corporation organized and existing under the laws of Delaware (Company), and the person whose name appears above (Contractor). Background Circumstances: The Company is engaged in business as a securities broker-dealer licensed and qualified to transact business pursuant to laws, statutes, rules, regulations and interpretations (collectively called Rules) promulgated by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. (NASD), and various other state, local and federal government agencies (Regulators). Contractor wishes to become affiliated with the Company as an independent contractor in order to effect securities transactions through the facilities of the Company and its clearing broker-dealer, or either of them. In consideration of the background circumstances and the following agreements, the undersigned parties agree as follows: 1. Authority. (a) During the term hereof, the Company authorizes the Contractor, as an independent contractor, to represent it in securities transactions. Such representation shall be subject to all of the terms, conditions, and covenants contained in this Agreement, and is specifically limited to include only those activities that are approved and authorized by the Company as set forth on Exhibit A attached hereto and incorporated herein by this reference and those securities that the Contractor is qualified to deal in under applicable Rules. (b) The Contractor shall not solicit any securities until duly registered under applicable state and federal laws unless exempt from registration, and until any license or permit required by law has been obtained and is then in effect. (c) The Contractor shall not represent any other broker/dealer or issuer doing securities business unless agreed to in writing by the Company. (d) The Contractor shall have no power or authority to incur any indebtedness or liability of any kind in the name of the Company, nor have the power to bind the Company in any manner not specified in this contract. 2. Independent Contractor. (a) THE CONTRACTOR RECOGNIZES, UNDERSTANDS AND AGREES THAT: (1) AS AN ------------------------------------------------------------------ INDEPENDENT CONTRACTOR, CONTRACTOR IS NOT ENTITLED TO UNEMPLOYMENT ------------------------------------------------------------------ INSURANCE BENEFITS UNLESS UNEMPLOYMENT COMPENSATION COVERAGE IS --------------------------------------------------------------- PROVIDED BY THE CONTRACTOR OR SOME OTHER ENTITY; (2) CONTRACTOR IS NOT ---------------------------------------------------------------------- ENTITLED TO WORKERS' COMPENSATION BENEFITS; AND (3) CONTRACTOR IS ----------------------------------------------------------------- OBLIGATED TO PAY FEDERAL AND STATE INCOME TAX ON ANY MONEYS PAID ---------------------------------------------------------------- PURSUANT TO THE CONTRACT RELATIONSHIP. ------------------------------------- (b) Nothing herein shall be construed to create the relationship of employer and employee between the Company and the Contractor. (c) The Contractor, as an independent contractor, shall be free to determine, within the scope of this Agreement, the persons from whom to solicit business and the method, time, place and manner of the Contractor's performance, subject to compliance with all applicable Rules adopted by the SEC, NASD and Regulators, all as from time to time amended, and standard rules of procedures from time to time adopted by the Company. (d) In the course of the Contractor's business conduct, the Contractor shall in no manner represent to the public that any relationship, other than that of independent contractor, exists between the Company and the Contractor. (e) The Company enters into this Agreement for the sole purpose of retaining Contractor to engage in securities transactions. The Company has no right to control or direct the Contractor in the sales of securities, or as to the result to be accomplished by the work, or as to the details and means by which the result is accomplished, excepting that the Company shall have the responsibility and right to perform such supervisory overview as required by the Regulators and the Rules. The Company's compliance manual is intended solely to provide procedures reasonably designed to prevent violations of the Rules and is not intended to otherwise control or supervise the activities of Contractor. The Company shall also be permitted to issue such instructions as may be necessary to explain, clarify and, as required by Regulators, to ensure compliance with directives promulgated by the Regulators. Except for such provisions, the Contractor shall be completely free from the will and control of the Company. 3. Procedures. (a) All customer account applications are subject to acceptance by the Company, and no transactions shall be deemed to be made until approved and executed by the Company or its clearing firm. The Company reserves the right in its sole discretion at any time to reject any and all applications transmitted to it by the Contractor and to refund to customers any payments made by them. If the Contractor has received commissions on such refunded payments, the Contractor agrees to repay such commissions to the Company, and the -2- Company is hereby authorized to deduct the amount thereof from commissions due or to become due the Contractor. (b) The Contractor will forward immediately to the Company all buy and sell orders for approved securities transactions solicited by the Contractor for the Company, together with any payment received by the contractor from the customer, without any deduction whatsoever and without commingling with the Contractor's own funds. In the event of the Contractor's failure to do so, all rights under this Agreement, including accrued and accruing commissions, shall immediately terminate at the Company's election. (c) The Contractor shall cause all checks or other orders for the payment of money received in connection with applications or orders to be made payable to such custodian bank, underwriter, issuer or broker-dealer as directed by the Company. The contractor shall not collect cash from the customer in payment of purchases or sales. (d) The Contractor shall not forward the Contractor's own funds to the Company for or on behalf of any customer or otherwise directly or indirectly furnish funds for any customer in connection with any purchase. The Contractor shall not directly or indirectly arrange for, or assist in arranging for, the extension or maintenance of credit to, for, or on behalf of any person in connection with the purchase of securities, other than in a margin account carried by the Company or one of its correspondents in compliance with Regulation T of the Federal Reserve Board. 4. Commissions. (a) Compensation payable to Contractor shall be determined solely on the basis of a written agreement entered into between the Branch Office manager and me. Such compensation shall be paid from Office Income, as hereinafter defined. All income derived from Branch Office operations, including brokerage commissions, investment advisory compensation, and all other income relating to the securities business (the "Office Income") shall be routed through the Company and shall not be under the direct or indirect control of the Branch Office or manager of the Branch Office. (b) Notwithstanding section 4(a), the Company shall retain certain amounts from Contractor's personal production, for purposes of covering the costs of due diligence, compliance and legal counsel in connection with operation of the Branch Office in which Contractor conducts his activities; provided, however, that such monthly fee shall be phased in as set forth on Exhibit B attached hereto and incorporated herein by reference. (c) The Company retains a certain percentage from the production generated by Contractor. The percentage retained shall fluctuate per increment of monthly production for contractor as set forth on Exhibit C attached hereto and incorporated herein by this reference. (d) Contractor is required to carry errors and omissions insurance and premiums for such insurance shall be deducted from contractor's production as set forth on Exhibit D attached hereto and incorporated herein by this reference. (e) Unless otherwise agreed in writing, any payment made to or for the account of the Contractor in excess of commissions actually earned shall be repayable on demand or -3- immediately upon termination of this Agreement and shall be a first lien upon any funds which, for any reason, then or thereafter become due to the contractor by the Company. The Contractor shall have no right to assign or otherwise encumber the Contractor's right to receive commissions without the express written consent of the Company. (f) Except as subsequently provided in this Agreement, the Contractor shall have no right to receive commissions after ceasing to be a sales representative of the Company except as to cash sales or open account sales made before that time, but when and only to the extent that payment has been received by the Company. (g) The Company will, from time to time, furnish to the Contractor a statement of the Contractor's account showing earnings and payments made, the balance due from the Company or the amount of any balance due from the Contractor to the Company. The Contractor agrees to notify the company in writing within 30 days of any disagreement with such statement in any respect. (h) The Contractor agrees to repay the Company for any losses incurred by it as a result of losses incurred in the Contractor's customer accounts. 5. Sales Practices. (a) The Contractor, in making solicitations, shall not take or recommend any action which the Contractor may have reason to believe is not in the best interests of the client or customer. The Contractor will not make any untrue statement or misrepresentation, or omit any material facts concerning the securities involved, and will comply in all respects with the Company's compliance procedures, applicable rules of the NASD, and with applicable Rules adopted by the SEC, NASD and Regulators and modifications and supplements thereto, with respect to securities transactions. (b) The Contractor shall make no written or oral representations concerning the approved products offered for sale by the Company except those contained in the current prospectuses and supplementary sales literature authorized by the Company. The Contractor shall not solicit business through mailings or advertisements or other media unless the contents thereof have previously been examined and approved by the Company. (c) The Contractor shall prepare and maintain such records as will comply with applicable securities laws and Company policies and procedures and shall open such records to inspection and review by the Company as it shall deem advisable from time to time. (d) The Company's compliance manual contains the operational rules and regulations required by the rules and Regulators. The Contractor acknowledges receipt of the manual and agrees to follow the procedures and requirements contained therein, as amended from time to time. Failure to comply with the provisions of the manual constitutes a material breach of this Agreement. The Company manual, as published, and as modified and amended from time to time, is incorporated into this contract by reference as though fully set out. (e) Full and complete disclosure of Contractor's other business interests is set forth on Exhibit E attached hereto and incorporated into this contract by reference as though fully set out. -4- 6. General Provisions. (a) Nothing in this Agreement shall be interpreted as relieving either party from its obligations to comply with all applicable securities laws of the United States, the laws of the states in which either or both parties are or may be registered or licensed or that may be applicable to any particular transaction, or the Rules of the SEC, NASD or any other Regulator with which the parties are, or may be required to be, registered. (b) The terms, conditions and covenants contained in this Agreement comprise the entirety of the agreement between the parties to this instrument. All understandings, either oral or in writing, that have previously existed or been reached prior to or simultaneously with the acceptance by the Company of this Agreement, are expressly abrogated and superseded by the terms, conditions, and covenants herein contained. This Agreement may not be modified except in writing jointly executed by the parties. (c) The parties agree that any dispute or claim arising out of the terms of this Agreement shall be submitted to binding arbitration and settled in accordance with the Code of Arbitration Procedure of the NASD. Any arbitration, legal suit or other proceeding arising out of or relating in any way to this Agreement shall be instituted and held in Denver, Colorado. The construction and interpretation of this Agreement shall be determined in accordance with the laws of the State of Colorado, including the arbitration law of the State of Colorado, and its provisions prohibiting the award of punitive damages in arbitration. The prevailing party may be awarded attorneys' fees and costs. Contractor waives any objection that Contractor now has or might subsequently make to such laying of venue. (d) This Agreement shall take effect on the date of the execution thereof and shall not be deemed accepted by the Company until and unless subscribed with the signature of a duly authorized officer thereof. In the event that any provisions of this Agreement are held to be in contravention of any laws or rulings presently in force or hereinafter existing, such provisions may be deemed to be void. In such event, however, no other provision of this Agreement shall be deemed affected by such holding. (e) The Contractor shall not, either during the period of this Agreement or subsequent to discharge of the Contractor, directly or indirectly, communicate or divulge to or use for the benefit of the Contractor or any other person, firm or corporation, the names of customers of the Company or any other confidential information or data that may have been communicated to or acquired by the Contractor by virtue of this Agreement, or use any information acquired by the Contractor during the period of this Agreement or subsequent to termination. The Contractor will not induce any person to terminate an agreement with the Company, and will not make, or solicit, or recommend the making of unwarranted claims against the Company. The Contractor further agrees that following termination from the Company, or in contemplation thereof, the Contractor will not solicit or recommend the sale, surrender, or redemption of securities that are underwritten, distributed, or managed by affiliates of the Company, and that the Contractor will not cause or attempt to cause the owner or holder of such securities to cease performance of any investment programs related to them. (f) The Company shall not be responsible for the Contractor's expenses of any type, including, but not limited to, dues and registration fees, bonding, transportation, office, secretarial, -5- postage, advertising, telephone charges, and other expenses incidental to the Contractor's solicitation of business. (g) Contractor shall reimburse the Company for all losses and charges incurred due to the actions of Contractor's customers, including, but not limited to, sell-outs, buy-ins, reneges, late charges and extensions. Contractor specifically authorizes the Company to withhold from commissions amounts reasonably estimated by the Company to be sufficient or necessary to indemnify the Company hereunder or to secure any indebtedness of the Contractor to the Company. Contractor also grants a security interest to the Company in any brokerage or other account held by the Company in the name of, the joint name of, or for the benefit of Contractor, to secure any indebtedness of the Contractor to the Company. (h) This Agreement is not assignable or transferable by the Contractor, and no rights, interests or benefits accruing to Contractor shall be subject to assignment or transfer without the written consent of the Company. (i) The Contractor shall indemnify and save the Company and its agents, affiliates, successors and assigns harmless from any and all expenses, costs, causes of action and damages resulting from or growing out of unauthorized acts or transactions by the Contractor. 7. Termination. (a) This Agreement may be terminated at any time by either party upon written notice to the other given 10 business days in advance, and may be terminated immediately by the Company for cause. Notice of any such termination shall be deemed to be given on the day mailed or delivered. If mailed to the Company, it shall be addressed to the principal office of the Company, 1700 Lincoln Street, Suite 2200, Denver, CO 80203, and if mailed to the Contractor, shall be addressed to the Contractor's last known address as shown on the records of the Company. (b) Upon termination of this Agreement as previously provided, the account of the Contractor with the Company shall be settled within 45 days. The Company shall furnish the Contractor by ordinary mail a statement of the Contractor's account as of the effective date of the termination, showing the balance due the Contractor from the Company, or the amount of the Contractor's indebtedness to the Company, as the case may be. The Contractor agrees, within 15 days thereafter, to notify the Company in writing of any objection or exception that the Contractor may have to the statement, setting forth the specific grounds of the Contractor's objection and the particular items involved. If the Contractor fails to give the required notice within 15 days, the Contractor shall be deemed to have waived all rights to any claim based upon such objection or exception. If a balance is due the Contractor from the Company, the Company shall remit the amount of said balance to the Contractor. If the Contractor is indebted to the Company, the Company has the right to offset such indebtedness against amounts otherwise payable to the Contractor by the Company. If any amounts payable to Contractor are insufficient to cover Contractor's outstanding indebtedness to the Company, the Contractor shall forthwith remit the amount of such indebtedness to the Company, and if the indebtedness is not paid within 30 days, interest shall accrue at the rate of 6% per annum, or at such rate provided for in any instrument evidencing such indebtedness, and the Contractor agrees to pay the Company's reasonable attorneys' fees and costs incurred in collection of the account. -6- (c) Upon notice of termination of this Agreement by the Contractor or the Company, all supplies and equipment furnished by the Company and all original records, holding pages, customer and client lists, accounts, holding pages and similar records, files and manuals furnished by the Company shall be surrendered to the Company and remain the property of the Company as valuable, special and unique assets that constitute trade secrets owned exclusively by the Company. Notwithstanding anything to the contrary, Contractor may retain a duplicate copy of such client lists, books, records, documents and other information for Contractor's personal use and client development. IN WITNESS WHEREOF, the parties hereto have executed the foregoing Agreement. _________________________________________________ Date:_______________________ Independent Contractor D.E. FREY & COMPANY, INC. By:______________________________________________ Date:_______________________ -7- EX-10.8 14 FORM OF BRANCH OFFICE AGR Exhibit 10-8 D.E. FREY & COMPANY, INC. 1700 Lincoln Street, Suite 2200 Denver, CO 80203 BRANCH OFFICE AGREEMENT __________________________________________ Date of Agreement:________________ Name of Branch Manager __________________________________________ Number: __________________________ Street Address __________________________________________ City State Zip This Agreement is made and entered into this ____________ day of ________________, 19 ____ between D.E. Frey & Company, Inc., a corporation organized and existing under the laws of Delaware (Company), and _______________________________, (Manager). Background Circumstances: A. The Company is engaged in business as a securities broker-dealer licensed and qualified to transact business pursuant to laws, statutes, rules, regulations and interpretations (collectively called Rules) promulgated by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. (NASD), and various other state, local and federal government agencies (Regulators). B. Manager is knowledgeable and experienced in all aspects of the securities business, including sales, administration and compliance. C. Company desires to open a branch office in or about ______________, (the Branch Office), and Manager desire to manage the Branch Office. Now, therefore, in consideration of the background circumstances and the following agreements, the parties agree as follows: 1. Engagement of Manager. Subject to all terms, conditions and provisions hereof, the Company hereby engages Manager as resident agent manager of the Branch Office, and Manager hereby accepts and agrees to such engagement. 2. Term. The term of this Agreement shall be for a period of one year from the date given above. Thereafter, this Agreement shall be automatically renewed for consecutive one-year terms unless either party, by notice duly given to the other party not less than 30 days prior to expiration of the then one-year term, elects to terminate this Agreement effective upon such expiration. However, in the even of breach of any term, provisions or condition of this Agreement, the non-breaching party may give the breaching party notice identifying the breach in reasonable detail and the opportunity to cure the breach within ten days of the notice. If the breach is not timely cured, the non-breaching party shall have the right, for a period of 30 days thereafter and upon not less than ten days' notice given to the breaching party, to terminate this Agreement. 3. Payment of Costs. All costs associated with establishing, operating and terminating the Branch Office shall be paid by the Manger. The Manger is not authorized to, and shall not, create or allow the creation of any debt, liability or obligation of any nature whatsoever on the part of the Company relating to or arising from the Branch Office of its operation. All obligations relating to the Branch Office shall be in the name of and shall be paid by the Manager or the Manager's nominee, and the Company shall not have any liability therefor. Such obligations shall include, but not by way of limitation, purchase or lease of office space, furnishings and equipment; employment arrangements or agreements with all personnel; workers' compensation, unemployment or similar insurance; health, life and disability insurance; property damage and liability insurance; utilities and supplies; telephone; advertising; licenses and dues; and all other capital and operating expenses of any nature. 4. Name and Signage. Manager may elect to form a partnership, corporation or other entity for the sole purpose of owning the assets located at the Branch Office and incurring the debts, liabilities and obligations relating to the establishment, operation and termination of the Branch Office. Such entity shall not engage in any other business or activity without the prior written consent of the Company. The name of such entity likewise shall be subject to the prior written consent of the Company, which shall not be unreasonably withheld, but which, in any event, shall not state or imply that such entity is engaged in the investment, securities or commodities business. Manager shall be required to use the name of the Company in connection with the Branch Office as required by the Rules of NASD and the Regulators. 5. Office of Supervisory Jurisdiction. For a period of 90 days from the date of this Agreement, the Branch Office shall not be designated as an office of supervisory jurisdiction. During such 90 days period, Manager agrees to use his or her best efforts to bring the Branch Office into compliance with the standards for operation established by the company from time to time in order to comply with various federal, state, and regulatory guidelines. If, in the sole discretion of the Company, the Manager has attained the necessary standards for operation at the end of the 90 day period, the Branch Office may be designated as an Office of Supervisory Jurisdiction. Manager agrees to be directly responsible for implementation of procedures and the review and supervision of the activities of the registered representatives and other persons associated with the Branch Office as specified in the written procedures from time to time promulgated by the Company. The Branch Office shall be subject to the supervision by a principal designated by the Company. The Manager acknowledges receipt of the written procedures and agrees to keep them in the Branch Office. 6. Independent Contractor. The Manager and each registered representative at or associated with the Branch Office shall enter into an independent contractor agreement with the Company in the form specified by it from time to time. Compensation payable to registered representatives shall be determined solely between the Manager and each registered representative and shall be in writing signed by the Manager and each registered representative. Such compensation shall be paid by the Company from Office Income (as hereinafter defined). The parties acknowledge and agree that while the Company may make suggestions from time to time, the Manager shall assume and make all decisions regarding operation of the Branch Office, including hours of operation, dress code, furnishings and equipment. The parties acknowledge and agree that the Manager is an independent contractor, and not an employee, agent or partner of the Company, and has no power or authority to bind the Company to any extent whatsoever. 7. Covenants of Manager. 2 7.1 Manager will cause the Branch Office to be operated at all times in full compliance with all federal and applicable state laws, rules and regulations and agrees to assume primary responsibility for such compliance. Without limiting the generality of the foregoing, Manager will strictly comply with the written procedures specified by the Company from time to time; will institute and continue training programs for all Branch Office personnel regarding compliance with Rules of the NASD, SEC and the Regulators; and will institute procedures designed to monitor and assure compliance by such persons. 7.2 Manager will not, at any time during the term of this Agreement or at any time thereafter, disparage or defame the Company of any of its personnel or take or allow to be taken any action which could have that effect. 7.3 Manager will allow the Company full and complete access to any and all books, records and personnel at or relating to the Branch Office at any time. 7.4 All contractual obligations relating to the Branch Office shall include the following language: Neither D.E. Frey & Company, Inc., a Delaware corporation (the Company), nor any of its officers, directors, employees, shareholders, associates or affiliates shall have any duty, liability or obligation of any nature whatsoever under this Agreement. In the event of any default or breach by __________________ under this Agreement, then __________________ agrees to give the Company written notice specifying such default in reasonable detail and the opportunity for a period of 10 days after receipt of such notice within which to cure the same. Notice shall be delivered to the Company at 1700 Lincoln Street, Suite 2200, Denver, Colorado 80203, Attention: President. 7.5 Manager shall not enter into any contractual obligations or agree to do so for or on behalf of the Branch Office that will or may create any liability for the Company without the express written consent of the Company, which consent shall not be unreasonable withheld unless the Company determines that such contractual obligations will not be in the best interests of the Company. 7.6 The facilities occupied by the Branch Office shall not be used for any purpose or business other than operation of a securities broker-dealer subject, in any event, to policies from time to time established by the Company. 7.7 Office income, as hereafter defined, for any period of three consecutive months during the term of this Agreement shall not be less than $__________ gross. 8. Representation and Warranties of Manager. 8.1 The Manager is, and at all time during the term of this Agreement shall be, licensed as a general securities principal and, if required by the nature of the business conducted, either is also licensed as a registered options principal or will engage individuals so registered at all times during the term of this Agreement. 8.2 The Manger has no history of violations reported or required to be reported on the Manager's Form U-4. 3 8.3 The Manager has adequate financial resources required to perform the duties and obligations of the Manager under this Agreement, and will provide adequate proof thereof to the Company at any time upon its request. 9. Duties of the Company. The Company shall pay from Office Income all costs incurred by the Branch Office in connection with clearing, confirmations, account statements, and other costs directly related to providing transactional and other services to customers of the Branch Office and all compensation payable to persons employed by or otherwise associated with the Branch Office, including non-registered persons and the registered representatives. In addition, the Company shall pay the cost of registration of the Company as a securities broker-dealer under the laws of the state in which the Branch Office is located and under the laws of such other states as the Manager and the Company shall mutually agree. The Company shall also pay the cost of registration of the Company as an investment advisor under the laws of such states as Manager and the Company shall mutually agree. The Company shall provide such additional services to the Branch Office and to the Manager at such cost as the Company and the Manager shall from time to time agree. 10. Manager Compensation. All brokerage commissions and investment advisory compensation from Branch Office operations (Office Income) shall be routed through the Company and shall not be under the direct or indirect control of the Branch Office or the Manger. The Company shall retain such percentages of Office Income as may be negotiated from time to time between the parties, and after payment of the Branch Office costs pursuant to paragraph 9, shall pay the balance remaining to the Manager, as compensation for the Manger's services, at such times as the parties may mutually agree; provided, however, that the Company is authorized to retain and expend such portions of the balance as it deem necessary or advisable in order to pay any costs and expenses associated with the Branch Office that arise or may rise as a result of any breach or default by Manager under this Agreement. 11. Indemnification. Manager agrees to indemnify and hold harmless the Company and its officers, directors, shareholders, employees, independent contractors, consultants, agents, associates, affiliates, successors and assigns, past, present and future, from and against any and all claims, demands, judgments, liabilities, costs and expenses of any nature whatsoever, including, without limitation, costs of investigation and reasonable attorneys' fees incurred by any of the indemnified persons as a result of the breach by the Manager of any term provision or condition contained in this Agreement. 12. Arbitration. In the event of any differences, claims or disputes between the parties hereto arising out of this Agreement or related to it, the parties agree to submit such matters to arbitration by the NASD or its successor in Denver, Colorado. The arbitrators shall be governed by the duly promulgated rules and regulations of the NASD or its successor, and the pertinent provisions of the laws of the State of Colorado, relating to arbitration, including provisions of the arbitration law of the State of Colorado that prohibit the award of punitive damages. The decision of the arbitrators may be entered in a judgment in any court of the State of Colorado or elsewhere and such decision shall be final and absolute. 13. Miscellaneous. (i)This Agreement sets forth the understanding of the parties and supersedes all prior written or oral understandings and agreements and may be modified only by a writing signed by all parties; (ii) Neither party shall have the right to assign all or any portion of that person's interest in this Agreement to any other person. Subject to the foregoing, all terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the personal representatives, successors, and assigns of the parties thereto; (iii) This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado; (iv) The failure of any party to insist in any one or more instances upon performance of any terms or conditions of this Agreement shall not be construed as a waiver of future performance of such or any 4 other term, covenant or condition; (v) In the event any party takes legal action against any other party to enforce the terms of this Agreement, the party in whose favor a final judgment or order is rendered shall be entitled to recover reasonable attorneys' fees and costs from the other party in amounts to be fixed by the occur or arbiter that renders the judgment or order. Such fees and costs shall include those incurred in connection with any appeal or appeals; (vi) Should any term or condition of this Agreement be determined by a court of competent jurisdiction to be void or unenforceable, all other provisions of this Agreement shall remain in full force and effect; (vii) All notices required hereunder shall be deemed to have been given when in writing upon the earlier of personal delivery or three days following deposit in the United States mail by certified or registered mail, postage prepaid, to the party at the address set forth herein. Each party hereto, by notice duly given, may change their address for the giving of notice. Executed as of the date first set forth above. COMPANY: MANAGER: D.E. FREY & COMPANY, INC., a ____________________________________ Delaware corporation By: _________________________________ By: ________________________________ Title:_______________________________ Title:______________________________ 1700 Lincoln Street, Suite 2200 Denver, Colorado 80203 5 EX-10.9 15 DEF FUND OPERATING AGR EXHIBIT 10.9 DEF SPECIAL FUND, LLC LIMITED LIABILITY COMPANY OPERATING AGREEMENT THIS OPERATING AGREEMENT ("Agreement" or "Operating Agreement") of DEF Special Fund, LLC (the "Fund") is made the 16th day of October, 1997, by D.E. Frey & Group, Inc. ("Frey" or "Manager"), a Colorado corporation and the Members on Exhibit A hereto (referred to individually as a "Member" and collectively as the "Members"). 1. Name, Principal Place of Business and Agent for Service of Process ------------------------------------------------------------------ 1.1 The Fund is hereby formed as a limited liability company under the Colorado Limited Liability Company Act (the "Colorado Act") concurrently with the filing of the Fund's Articles of Organization with the Colorado Secretary of State as provided in the Colorado Act, which Articles are hereby adopted and approved by the Members. The Members hereby enter into this Agreement to provide for the governance of the Fund and the conduct of its business, and to specify the Members' respective rights and obligations. 1.2 The name of the limited liability company formed hereby DEF SPECIAL FUND, LLC and its principal place of business 1700 Lincoln, Suite 2200, Denver, Colorado 80203, or such other place or places as the Manager may hereafter determine. 1.3 The agent for service of process on the Fund shall be Dale Frey, 1700 Lincoln, Suite 2200, Denver, Colorado 80203 or such other eligible person as the Manager shall designate. 2. Definition of Terms ------------------- 2.1 Unless otherwise expressly provided herein or unless the context otherwise requires, the terms with initial capital letters in this Operating Agreement shall be defined as follows: "Accredited Investor" shall mean any investor accepted into the Fund as a Member who is both an "accredited investor" as that term is defined in Rule 501(a) under Regulation D promulgated under the Securities Act of 1933, as amended. "Additional Members" shall mean any persons to whom the Fund sells and issues Units, other than the Original Members; "Additional Member" shall mean any one of the Additional Members. "Adjusted Asset Value" shall mean the Gross Proceeds multiplied by the ratio of number of Interests owned by the Fund at the beginning of each given year divided by the number of all Interests in which the Fund has invested during its term. The Adjusted Asset Value shall be calculated yearly. A-1 "Adjusted Capital Account" shall mean, with respect to each Member, the balance of their original capital account reduced by any return of capital distributions made on a quarterly basis. "Adjusted Capital Account Deficit" shall mean, with respect to each Member, the deficit balance in his Capital Account as of the end of the relevant fiscal period of the Fund, after giving effect to the following adjustments: (a) Increasing such Capital Account by any amount such Member is obligated to restore under the standards set by Section 1.704- 1(b)(2)(ii)(c) of the Regulations (or is deemed obligated to restore under Section 1.704-2(g)(l) and (i)(5) of the Regulations); and (b) Decreasing such Capital Account by the items described in Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Regulations. "Administration Fee" shall mean the fee payable to the Manager pursuant to Paragraph 9.3 of the Operating Agreement. "Affiliate" or "Affiliates" of any person shall mean: (i) any other person directly controlling, controlled by or under common control with such person, (ii) any other person owning or controlling 10% or more of the outstanding voting securities of such person, (iii) any executive officer, director or general partner of such person, and (iv) if such person is an executive officer, director or general partner, any company for which such person acts in such capacity. "Agreement" shall mean this operating agreement for DEF Special Fund, LLC. "Assignee" shall mean a person who has acquired a beneficial interest in one or more Units but who is not a substituted Member. "Capital Account" shall mean the account established and maintained for each Member pursuant to Paragraph 12.1. "Colorado Regulations" shall mean the regulations promulgated by the State of Colorado under the Colorado Securities Act. "Colorado Securities Act" shall mean the Colorado Corporate Securities Law of 1968, as amended. "Cash From Operations" shall mean the excess of Gross Cash From Operations over: (i) operational cash disbursements of the Fund (excluding cash disbursements of Net Proceeds and any return to Members of Uninvested Net Capital), and (ii) a reasonable allowance for reserves, contingencies and anticipated obligations, as determined by the Manager. "Closing Date" shall mean the date one year from the date of the Memorandum or such earlier date as may be designated as the Closing Date by the Manager; provided that such date may be extended by the Manager on one or more occasions to a date no later than two years from the date of the Memorandum. "Code" shall mean the Internal Revenue Code of 1986, as amended to date, or corresponding A-2 provisions of subsequent, superseding revenue laws. "Distributions" shall mean cash or other property, from any source, distributed by the Fund to the Unit Holders, but shall not include any payments to the Manager made under the provisions of Paragraph 9 or Paragraph 10. "Economic Risk of Loss" shall mean the extent to which a Member or Related Person bears the economic risk of loss for a Fund liability as determined under Treasury Regulation Section 1.752-2. "Fund" shall mean DEF Special Fund, LLC, the limited liability company governed by this Agreement. "Fund Minimum Gain" shall mean the amount determined in accordance with the principles of Treasury Regulation Section 1.704-2(d). "Future Funds" shall mean such other investment entities as may be formed in the future as to which the Manager and/or its Affiliates may act directly or indirectly as sponsors and/or investment advisors. "Gross Cash From Operations" shall mean the sum of the cash received by the Fund from (i) its operations and the operations of the issuers of Interests in which the Fund invests, (ii) the net cash distributed to the Fund by the issuer of an Interest from the sale, refinancing or other disposition of property owned by the issuer of the Interest (whether upon liquidation or otherwise), and (iii) interest income received by the Fund and any portion of Working Capital Reserves which the Manager determines no longer to maintain pursuant to Paragraph 16.1.14. "Gross Proceeds" shall mean the aggregate dollar amount of the consideration paid to the Fund by the Members for Units, without reduction for any Selling Commissions or for any waiver of Selling Commissions otherwise payable with respect to such Units pursuant to Paragraph 9.2. "Group Selling Agreement" shall mean the Agreement between the Manager and the Selling Broker-Dealers. "Income" or "Loss" shall mean, for each fiscal year or other relevant period, an amount equal to the Fund's taxable income or loss for such year or period determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (i) any income of the Fund that is exempt from federal income tax and not otherwise taken into account in computing Income or Loss pursuant to this definition shall be added to such taxable income or loss; (ii) any expenditures of the Fund described in Section 705(a)(2)(B) of the Code or treated as such pursuant to Treasury Regulation Section 1.704- 1(b)(2)(iv)(i), and not otherwise taken into account in computing Income or Loss pursuant to this definition, shall be subtracted from such taxable income or loss; (iii) any adjustment pursuant to Section 743(b) of the Code shall be allocated solely to the Member to which such adjustment relates and shall not be taken into account in computing Income or Loss; (iv) any gain or loss which would have been realized by the Fund on the sale of assets distributed in kind to Members, determined with reference to the fair market value and the adjusted tax basis of such property for federal income tax purposes immediately prior to such distribution, shall be A-3 added to or subtracted from such taxable income or loss; and (v) notwithstanding any other provision of this definition, any items that are specially allocated pursuant to Paragraph 11.7 hereof shall not be taken into account in computing Income or Loss. "Interests" shall mean those limited partnership units, trust interests and other similar debt or equity interests issued by unaffiliated real estate limited partnerships, other real estate-based investment entities or other non-real estate-based entities, which have been acquired by the Fund. "Investor" shall mean a Member of the Fund other than the Original Members. "Majority Vote" shall mean the vote of Members who own more than 50% of the Total Outstanding Units held by Members. "Manager" shall mean Frey, or any other person or entity which succeeds Frey in its capacity as manager of the Fund. "Member Nonrecourse Debt" shall have the meaning given it in Treasury Regulation Section 1.704-2(b)(4). "Member Nonrecourse Debt Minimum Gain" shall mean the amount determined in accordance with the principles of Treasury Regulation Section 1.704- 2(i)(3). "Members" shall mean the Original Members and all persons admitted to the Fund as Additional Members or as substituted Members; "Member" shall mean any one of the Members. "Memorandum" shall mean the private placement memorandum, as amended or supplemented, which is delivered to prospective Investors for their review prior to a purchase of the Fund's Units. "MPI" shall mean MacKenzie Patterson, Inc., the Administrator. "Net Proceeds" shall mean the Gross Proceeds less Selling Commissions and all Organizational Expenses payable by the Fund. "Net Proceeds Available For Investment" shall mean the sum of the Net Proceeds, less (i) the Selling Commissions, allowances, fees and other Organizational Expenses paid to the Manager, Affiliates and others pursuant to Paragraphs 9.2, 9.3, 9.4 and 10.1 herein, and (ii) amounts set aside by the Manager for Working Capital Reserves, operational expenses and payment of fees to the Manager, Affiliates and others pursuant to Paragraph 10.1.2 herein. "Nonrecourse Deductions" shall have the meaning given it in Treasury Regulation Section 1.704-2(b)(1). "Offering" shall mean the offering of Units in the Fund. "Operational Expenses" shall mean all operating expenses of the Fund, except those deemed to be Organizational Expenses as defined herein, and shall include, without limitation, the items set forth in Paragraph 10.1.2. A-4 "Organizational Expenses," which shall not include Operational Expenses as defined herein, shall mean those expenses incurred directly or indirectly in connection with the formation of the Fund and in qualifying and marketing Units under applicable federal and state law, and any other expenses actually incurred and directly related to the offering and sale of Units, including such expenses as: (i) filing and recording fees and taxes, (ii) the costs of distributing the Memorandum, (iii) the costs of obtaining any permits which may be necessary or desirable in connection with the issuance of Units, and (iv) accounting fees incurred in connection therewith. "Original Invested Capital" shall mean the amount in cash contributed to the capital of the Fund by each Member for his Units, which amounts contributed for Units shall be attributed to such Units in the hands of a successor Unit Holder. "1940 Act" shall mean the Investment Company Act of 1940, as amended. "Purchaser Representative" shall mean, collectively, a "purchaser representative" under Regulation D or a "professional advisor" under the Colorado Securities Act. "Qualified Plans" shall mean, collectively, qualified pension, profit- sharing, stock bonus, Keogh and similar retirement plans. "Regulation D" shall mean the rules governing the limited offer and sale of securities without registration under the Securities Act of 1933, and set forth at 17 CFR (S) 230.501, et seq. "Related Person" shall mean a Person having a relationship with a Partner that is described in Treasury Regulation Section 1.752-4(b). "SEC" shall mean the Securities and Exchange Commission. "Selling Broker-Dealer" shall mean any NASD-registered broker-dealer entering into the Group Selling Agreement with the Manager to sell Units in the Fund. "Selling Commissions" shall mean the commissions payable to the Selling Broker-Dealer pursuant to Paragraph 9.2 herein. "Subscription Agreement" or "Subscription Documents" shall mean the Subscription Agreement, the form of which is attached as Exhibit B to the Memorandum, which is to be completed and delivered by each prospective Investor. "Syndication Expenses" shall mean all expenditures classified as syndication expenses pursuant to Treasury Regulation Section 1.709-2(b). Syndication Expenses shall be taken into account herein at the time they would be taken into account under the Fund's method of accounting if they were deductible expenses. "Total Outstanding Units" shall mean all Units of the Fund which are issued and outstanding from time to time. "Treasury Regulations" or "Regulations" shall mean the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). A-5 "UBTI" shall mean unrelated business taxable income as that term is defined in Sections 511-514 of the Code. "Unit" shall mean that ownership interest in the Fund acquired by a capital contribution of $500 to the Fund (computed without reduction for any waiver of the Selling Commission otherwise payable with respect to such Unit pursuant to Paragraph 9.2) and shall entitle the holder thereof to an interest in the Income, Loss and Distributions of the Fund attributable to the number of Units held, without regard to Capital Accounts. "Unit Holders" shall mean owners of Units who are either Members or Assignees; "Unit Holder" shall mean any one of the Unit Holders. Each of the Original Members shall be considered to be a Unit Holder with respect to its respective Units. The Manager shall be considered to be a Unit Holder only to the extent it owns Units. "Working Capital Reserves" shall mean any working capital reserves established pursuant to the provisions of Paragraph 16.1.14. 3. Business and Purpose -------------------- The Fund intends to primarily acquire Interests from the Manager as specified in the Offering Memorandum as Attachment A. The Fund expects to receive cash distributions from the Interests in which it invests, including distributions arising out of the operations sale and refinancing of real property held by the issuers of the Interests and/or the liquidation of the Interests. The Fund may also be entitled to other allocations and/or distributions allocable to holders of such Interests. As of the date hereof, the Fund does not expect to engage in the active trading of Interests. The Manager may cause the Fund to reimburse the Manager for out- of-pocket expenses paid or incurred in connection with the acquisition of Interests, including interest charges and transfer fees incurred by the Manager. Such fees and commissions will be paid in addition to the other fees authorized by Paragraph 9 herein. In addition, the Fund may do any and all acts and things which may be necessary, incidental or convenient to carry on the Fund's purpose and business as specified in this Operating Agreement and as permitted under the Colorado Act; provided, however, that the distributions generated from operations of the issuers of Interests and received by the Fund shall not be reinvested in other Interests. It is the intention of the Fund to be taxed as a "partnership" under the provisions of the Code, and the Manager is authorized and directed to file such notices and take such other actions as may be required to achieve the Fund's desired characterization for federal income tax purposes. 4. Term ---- The term of the Fund shall commence as of the date of filing of the articles of organization and shall continue until December 31, 2027, unless sooner terminated in accordance with the provisions of this Operating Agreement. Pursuant to Paragraph 18.2.7 of this Agreement, five years A-6 from the Closing Date the Members will vote upon whether to liquidate, wind-up and dissolve the Fund. 5. Manager ------- 5.1 The Manager and its Affiliates shall have the right to purchase and hold Units on the same terms and basis as other Members; provided, however, that such parties may purchase Units at a price reduced by the amount of the Selling Commission otherwise payable with respect to such subscription. Except to the extent that it purchases Units, the Manager shall make no contribution to the capital of the Fund. 5.2 The Manager shall have fiduciary responsibility for the safe- keeping and use of all assets of the Fund, whether or not in its immediate possession or control, and shall not employ such assets in any manner except for the exclusive benefit of the Fund. 6. Members ------- 6.1 Subject to the other terms and conditions of this Operating Agreement, the Fund intends to sell and issue Units to, and to admit as Additional Members, such persons who contribute cash to the capital of the Fund for such Units. The Fund shall not admit as Additional Members more than 35 persons excluding Accredited Investors, nor more than 99 persons including Accredited Investors (as computed in accordance with Regulation D (as amended) promulgated under the Securities Act of 1933, as amended, the Colorado Corporate Securities Law of 1968, as amended, other applicable state securities and "blue sky" laws and the 1940 Act. No more than 2,400 Units will be issued. 6.2 The purchase price for each Unit shall be $500 payable in cash, reduced to the extent that fee-only planners, investment advisors and/or Selling Broker-Dealers waive part or all of the Selling Commissions otherwise payable to them with respect to such Unit pursuant to Paragraph 9.2. The minimum investment shall be 10 Units ($5,000) although the Manager, in its discretion may accept a subscription for fewer than 10 Units. 6.3 A person seeking admittance to the Fund as a Member will not be sold any Units until such time as (i) he has offered to purchase at least 10 Units (subject to the right of the Manager in its discretion to allow a purchase of fewer than 10 Units), (ii) he has tendered $500 in cash to the Fund for each Unit that he has offered to purchase (reduced to the extent that the Manager, pursuant to request by a Selling Broker-Dealer or investment advisor, waives the Selling Commissions or any portion thereof otherwise payable with respect to such Unit pursuant to Paragraph 9.2), which amount shall be returned to him without interest in the event and at such time as the Manager elects not to sell him any Units, (iii) he has executed and filed with the Fund a written instrument which sets forth his intention to become a Member, requests admission to the Fund in that capacity and verifies that he meets the requirements of the limited and non-public offering exemptions under applicable federal and state securities laws, together with such other instruments and documents as the Manager may deem necessary or desirable to effect such admission, including a special and limited power of attorney, the form, style and content of which are more fully described herein, and a written acceptance and adoption by him of the provisions of this Operating Agreement, and (iv) the Manager has accepted and approved, in its absolute discretion, the sale of Units to him. 6.4 No person shall be accepted and admitted to the Fund until such time as the Manager has accepted and approved the sale of 2,400 Units. Upon acceptance of subscriptions for 2,400 Units, the Fund shall commence business. A-7 6.5 The Manager has the right, in its absolute discretion, to approve or disapprove any person's admittance to the Fund as a Member for any reason whatsoever. 7. Status of Members ----------------- Except as otherwise required by law, Members shall not be bound by, or be personally liable for, the expenses, liabilities or obligations of the Fund. 8. Status of Units and Redemption ------------------------------ 8.1 Except as otherwise required by law, each Unit, when issued, shall be fully paid and non-assessable. No Member shall be required or permitted to make any contribution to the capital of the Fund except through the purchase of Units. 8.2 Beginning two years after the close of the Fund's offering, during each subsequent calendar quarter, the Fund may, at the discretion of the Manager, redeem up to two and one-half percent (2.5%) of the outstanding Units in the Fund. Any redemption will be subject to the laws and regulations of any state or federal regulatory agency having jurisdiction. To redeem Units, a Member (the "Redeeming Member") shall submit to the Manager a written redemption request on or before 60 days prior to the end of the calendar quarter. 8.3 The Manager, in its sole discretion, may accept or refuse a request for redemption of Units and shall provide written notice within 60 days of receipt of the request. 8.4 The redemption price for Units to be redeemed by the Fund shall be the estimated asset value of the Fund represented by the Units, as determined by the Manager using then-current dealer bids for each Interest held by the Fund. In the absence of dealer bids for some or all interests, the Manager, in its sole discretion, shall establish a fair redemption price for the Units. Any and all Manager compensation which would be due on a liquidation of a pro rata portion of the assets represented by the redeemed Units will be calculated, and the Redeeming Member will be paid the redemption price less any compensation which would have been due the Manager or Affiliates under such circumstances and less a surrender charge of two and one-half percent (2.5%) of the original subscription price for the Units. 8.5 Upon the Manager's acceptance of the redemption request, the Redeeming Member shall tender the Units to be redeemed and the Fund shall pay the redemption price for the redeemed Units within 90 days of the end of the calendar quarter in which the request was received. A Redeeming Member may cancel the redemption request by giving written notification to the Manager within 30 days of the Manager's mailing of its notice of acceptance of the redemption request. 8.6 Following the Fund's redemption of Units, each tendered Unit shall be cancelled and shall cease to represent an equity ownership interest in the Fund. 9. Compensation to the Manager and Affiliates ------------------------------------------ 9.1 The Manager and its Affiliates will receive compensation from the Fund only as specified by this Operating Agreement. The Manager and its Affiliates shall have the right to assign all or any portion of any of the fees or compensation to which any of them is entitled pursuant to this A-8 Paragraph 9 to any person or entity. The amount and/or kind of Manager's compensation may be required to be restructured in the event that an unfavorable ruling is received from the Internal Revenue Service or Department of Labor. If the ruling is unfavorable, the Manager will be required to restructure the compensation sections of the Operating Agreement. If restructuring is necessary and the change in compensation results in an overall decrease in compensation expense to the Fund, the restructuring would be implemented unilaterally by the Manager pursuant to its authority contained in Paragraph 16 of the Operating Agreement. Alternatively, if restructuring is necessary and the change in compensation results in an overall increase in compensation expense to the Fund, the restructuring would be implemented only upon majority approval by the Members other than the Manager and its Affiliates. 9.2.1 A Selling Commission in an amount equal to 5% of the gross subscription price of each Unit sold shall be payable to the Selected Dealers, for services performed in connection with the sale of Units; provided, however, that the Selling Commission may be reduced as to certain sales of Units when payment is waived by the Selling Broker-Dealer. 9.3 During the term of this Operating Agreement, the Manager shall receive monthly an Administration Fee equal to one sixth of one percent (0.1666%) of the Adjusted Asset Value as of the end of the most recent year for administrative services rendered in handling the day-to-day operations of the Fund. The Manager intends to hire MacKenzie Patterson, Inc. to administer to the Fund and will accordingly re-allow the Administration Fee to MPI. 9.4 Interest at the legal rate may be paid by the Fund on any loans made to it by the Manager or Affiliate, subject to the provisions of Paragraph 16.2.3. 10. Fund Expenses ------------- 10.1 All Fund expenses are incorporated into this document and no additional expenses will be charged. 11. Distributions of Cash From Operations, Capital Transactions and --------------------------------------------------------------- Allocations of Income and Loss ------------------------------ 11.1 Distributions and Allocations Among Unit Holders. Income, Loss and Distributions of the Fund shall be apportioned among the Unit Holders based on the number of Units owned by each and on the number of months within the fiscal year of the Fund that they were Unit Holders beginning with the day they are first deemed to be Unit Holders, without regard to Capital Accounts; provided, however, that Income attributable to the sale of Interests shall first be allocated among the Unit Holders so as to take into account the varying Distributions and allocations of Income and Loss among the Unit Holders prior to the Closing Date. For purposes of this apportionment, a person who is admitted to the Fund as an Additional Member shall be deemed to have become a Unit Holder as of the date of his admission to the Fund pursuant to Paragraph 6.5, and an Assignee shall be deemed to have become a Unit Holder on the effective date of the assignment to him, as determined pursuant to Paragraph 13.3. Distributions from Operations will be allocated first 100% to the Members until a 14% non- compounded return on Adjusted Capital, the next 100% to the Manager until a 14% non-compounded return on its Adjusted Capital, thereafter 50% to the Members and 50% to the Manager. Distributions from Capital will be allocated first 100% to the Members until a complete return of original capital, the next 100% to the Manager until it receives a complete return of their capital, thereafter, 50% to the Members and 50% to the Manager. A-9 11.2 Character of Income and Loss. Except as otherwise required by Code Section 704,1245 or 1250 (or any successor provisions thereto) or Treasury Regulation promulgated thereunder, the character of Income and Loss (as ordinary income or capital gains) shall be allocated among the Members in the same proportion as recognized by the Fund. 11.3 Timing of Distributions. The Fund intends to make quarterly cash Distributions, beginning with the first full fiscal quarter after the close of escrow, to the Unit Holders of substantially all of the Cash from Operations under this Paragraph 11; provided, however, that the final decision with respect to the timing and amount of Distributions, if any, shall be subject to the results of Fund operations and in the sole discretion of the Manager. 11.4 Expenses and Reserves. All Distributions are subject to the payment of Organizational Expenses and Operational Expenses and to the establishment of Working Capital Reserves and the establishment and maintenance of such other reserves as the Manager may determine in its sole discretion. 11.5 Return of Certain Distributions. Notwithstanding any other provision of this Operating Agreement, a Member shall be obligated to return a Distribution from the Fund to the extent that, immediately after giving effect to the Distribution, all liabilities of the Fund, other than liabilities to Members on account of their interests in the Fund and liabilities as to which recourse of creditors is limited to specified property of the Fund, exceed the fair value of the Fund assets, provided that the fair value of any property that is subject to a liability as to which recourse of creditors is so limited shall be included in the Fund assets only to the extent that the fair value of the property exceeds this liability. 11.6 Special Allocations ------------------- 11.6.1 In the event any Unit Holders unexpectedly receive any adjustments, allocations, or distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4)-(ii)(d)(6), items of Fund income and gain (consisting of a pro rata portion of each item of the Fund's income, including gross income, and gain for such year) shall be specially allocated to such Unit Holders in an amount and manner sufficient to eliminate the negative Capital Account balances (or any increase in the amount thereof) created by such adjustments, allocations, or distributions as quickly as possible. 11.6.2 The Capital Account of each Unit Holder shall be reduced by a charge equal to the amount of the Selling Commission paid by the Fund that is properly allocable to the Units held by such Unit Holder. All other Syndication Expenses for any fiscal year or other period shall be specially allocated to the Members in proportion to their Units, provided that if Unit Holders are admitted to the Fund on different dates, all of such other Syndication Expenses shall be divided among the Unit Holders who own Units from time to time so that, to the extent possible, the cumulative amount of such other Syndication Expenses allocated with respect to each Unit at any time is the same amount. In the event the Manager shall determine that such result is not likely to be achieved through future allocations of such other Syndication Expenses, the Manager may allocate a portion of Income and Losses so as to achieve the same effect on the Capital Accounts of the Unit Holders. 11.6.3 Except as otherwise provided in Treasury Regulation Section 1.704-2(f), if there is a net decrease in Fund Minimum Gain during a fiscal year of the Fund, each Member shall be allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in proportion to, and to the extent of, an amount equal to the portion of such Member's share of the net decrease in Fund Minimum Gain during such year. A-10 11.6.4 Except as otherwise provided in Treasury Regulation Section 1.704-2(h), if there is a net decrease in Member Nonrecourse Debt Minimum Gain during a fiscal year of the Fund determined in accordance with the principles of Section 1.704-2(i) of the Regulations, each Member who had a share of Member Nonrecourse Debt Minimum Gain at the beginning of such year shall be allocated items of Fund income and gain for such year (and, if necessary, subsequent years) in proportion to, and to the extent of, an amount equal to the portion of such Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain during such year that is allocable (in accordance with the principles set forth in Treasury Regulation Section 1.704-2(i)) to the disposition of Fund property subject to the related Member Nonrecourse Debt. 11.6.5 The allocations set forth in Paragraph 11.6 herein, other than this Paragraph 11.6.5 (the "Regulatory Allocations"), are intended to comply with certain requirements of Treasury Regulations. It is the intent of the Fund that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Fund income, gain, loss or deduction pursuant to this Paragraph 11.6.5. Therefore, notwithstanding any other provision of Paragraph 11 (other than the Regulatory Allocations), the Manager shall make such offsetting special allocations of Fund income, gain, loss or deductions in whatever amount it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Fund would have had if the Regulatory Allocations were not part of this Agreement and all Fund items were allocated pursuant to the provisions of Paragraph 11 other than the Regulatory Allocations. In exercising its discretion under this Paragraph 11.6.5, the Manager shall take into account future Regulatory Allocations that, although not yet made, are likely to offset other Regulatory Allocations previously made. 11.6.6 Notwithstanding the proceeding, any deduction attributable to Member Nonrecourse Debt shall be allocated to the Members that bear the Economic Risk of Loss for the Member Nonrecourse Debt. 11.7 Withholding. All amounts withheld pursuant to the Code or any provisions of any state or local tax law with respect to any distribution to, or allocable share of, the Members shall be treated as amounts distributed to the Members pursuant to Paragraph 11 for all purposes under this Agreement. The Manager may allocate any such amounts among the Members in any manner that is in accordance with applicable law. 12. Capital Accounts ---------------- 12.1 A Capital Account shall be established and maintained for each Member in accordance with the principles described in Treasury Regulation Section 1.704-1(b). The Capital Account of each Member (a) shall be credited with (i) the amount of cash and the agreed upon fair market value of property contributed by such Member to the Fund, if any (net of liabilities secured by such contributed property that the Fund is considered to assume or take subject to under Code Section 752), and (ii) such Member's distributive share of Fund Income; and (b) shall be debited with (i) the amount of cash and the fair market value of property distributed to such Member (net of liabilities secured by such distributed property that such Member is considered to assume or take subject to under Code Section 752), and (ii) such Member's distributive share of Fund Loss. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with the applicable Treasury Regulations, including Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such regulations. The allocation of A-11 income, loss, and credits will be apportioned between Members and Manager consistent with the allocation of the Distributions From Operations. 12.2 The Assignee of all or a portion of a Member's interest shall succeed to that portion of the Member's Capital Account which is allocable to the portion of the interest transferred. 13. Assignment and Transfer of Units -------------------------------- 13.1 Unit Holders shall not have the right or power, except by will or by the laws of descent and distribution, to assign any Units unless they have met the following terms and conditions: 13.1.1 The assignment shall be by a duly executed written instrument of assignment filed with the Fund, the terms of which are not in contravention of any of the provisions of this Operating Agreement, and shall specify the number of Units being assigned. 13.1.2 The assignment shall be made pursuant to a validly filed and effective registration statement under the Securities Act of 1933, as amended, or an exemption therefrom, and any other applicable sections of the Securities Act of 1933, as amended, and regulations promulgated pursuant thereto and the provisions of any applicable California or other state securities laws or regulations, and shall not jeopardize the availability of the limited and non- public offering exemptions to the Fund in connection with any issuance of Units. 13.1.3 The assignment does not violate, and will not cause the Fund to violate, any federal or state securities laws, and the Unit Holder shall have provided assurances, which may include, in the discretion of the Manager, an opinion of counsel acceptable to the Fund, that the assignment will not cause a termination of the Fund under Code Section 708, will not cause the Fund to be treated as publicly traded under Code Section 7704 and will not cause the Fund to be beneficially owned by more than 99 persons, as calculated under the 1940 Act. 13.1.4 The Unit Holder, if he assigns fewer than all his Units, and his Assignee shall each own at least ten Units subsequent to the assignment. No assignment of any fractional Units shall be permitted. 13.1.5 The Unit Holder shall have notified the Manager of the transfer of a beneficial interest in any Units which occurs without a transfer of record ownership. 13.1.6 The Unit Holder shall have paid to the Fund a transfer fee, determined and collected by the Manager, to cover all reasonable expenses of the Fund connected with the transfer. 13.2 The Manager may, in its sole discretion: 13.2.1 Waive in whole or in part any or all of the requirements set forth in this Operating Agreement with respect to any proposed assignment by a Unit Holder; and, in particular, 13.2.2 Waive the requirement set forth in Paragraph 13.1.4 with respect to any proposed assignment by a Unit Holder to any of the members of his immediate family or any trust established for the benefit of such persons or by way of gift to any person. No such waiver shall constitute a waiver as to any future proposed assignment. A-12 13.3 An Assignee of whom the Fund has actual written notice shall be entitled to receive Distributions of cash or other property from the Fund attributable to the Units acquired by reason of the assignment from and after the effective date of the assignment of such Units to him; provided, however, that the Fund and the Manager shall be entitled to treat the assignor of such Units as the absolute owner thereof in all respects, and shall incur no liability for allocations or Distributions which are made in good faith to such assignor until such time as all of the requirements of Paragraph 13.1 have been satisfied or waived and the written instrument of the assignment has been received by the Fund and the effective date of assignment has passed. The effective date of an assignment of Units which complies with the provisions of Paragraph 13 of this Operating Agreement shall be the first day of the calendar quarter immediately following the calendar quarter set forth on the written instrument of assignment or the quarter during which a transfer by operation of law occurs. 13.4 Under the 1940 Act, the Fund may not, without registering thereunder, have more than 99 beneficial owners. At any time following the Closing Date, should the Manager determine that more than 99 persons own the securities of the Fund, the Manager may, in its sole discretion, cause the Fund to repurchase the Units of each Member who was admitted or acquired such beneficial ownership after the 99th person became a beneficial owner of the Fund's securities. Each such Member hereby agrees to sell its Units to the Fund upon receipt of written notice from the Manager that its Units are being repurchased pursuant to this Paragraph. The price for any such repurchase shall be an amount which after taking into account the period of ownership and the cumulative amount of all Distributions previously received by such selling Member will result in such selling Member receiving a cash return on its investment in the Fund equaling its Original Invested Capital and an 14% per annum non-compounded return on remaining Original Invested Capital. 14. Substituted Members ------------------- 14.1 No Assignee shall have the right to become a substituted Member in place of his assignor unless all of the following conditions are first satisfied: 14.1.1 His assignor was a Member; 14.1.2 A duly executed and acknowledged written instrument of assignment shall have been filed with the Fund, which instrument shall set forth the intention of the assignor that the Assignee succeed to the assignor's interest as a substituted Member in his place; 14.1.3 The assignor and Assignee shall have executed and acknowledged such other instruments as the Manager may deem necessary or desirable to effect such substitution, including the written acceptance and adoption by the Assignee of the provisions of this Operating Agreement and his execution and delivery to the Manager of a special and limited power of attorney, the form and content of which shall be prescribed by the Manager; 14.1.4 The written consent of the Manager to such substitution shall have been obtained; and 14.1.5 A transfer fee shall have been paid to the Fund which is sufficient to cover all reasonable expenses connected with such substitution. 14.2 By executing or adopting this Operating Agreement, each Member hereby consents to the admission of additional or substituted Members by the Manager and to any Assignee of A-13 Units who holds at least ten Units becoming a substituted Member. 15. Books, Records, Accounting and Reports -------------------------------------- 15.1 The Manager shall keep, or cause to be kept, at the principal place of business of the Fund as set forth in Paragraph 1.1, all of the following: (a) A current list of the full name and last known business or residence address of each Member set forth in alphabetical order together with the contribution and the share in profits and losses of each Member; (b) A copy of the articles of organization and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any certificate has been executed; (c) Copies of the Fund's federal, state and local income tax or information returns and reports, if any, for the six most recent taxable years; (d) Copies of the original Operating Agreement and all amendments thereto; (e) Financial statements of the Fund for the six most recent fiscal years; and (f) The Fund's books and records for at least the current and four most recent fiscal years. 15.2 Upon the request of a Member, for any purpose reasonably related to the interest of that person as a Member of the Fund, the Manager shall promptly deliver to the requesting Member a copy of the information required to be maintained by subdivisions (a), (b) or (d) of Paragraph 15.1. Each Member has the right upon reasonable request for such a purpose, and upon reasonable advance notice, to inspect and copy during normal business hours any of the Fund records required to be maintained by Paragraph 15.1. The Manager shall promptly furnish to a Member a copy of any amendments to this Operating Agreement executed by the Manager pursuant to the power of attorney from the Member contained in Paragraph 22. 15.3 The Manager shall cause to be compiled, at Fund expense, and shall attempt to distribute to the Members within 90 days after the end of each fiscal year, all financial information regarding the Fund that is necessary for the preparation of the Members' federal and state income tax or information returns, and shall also attempt to distribute to the Members within said 90-day period copies of the Fund's federal, state and local income tax or information returns for the year; provided, however, that in the event the Manager is unable to provide such information to the Members within such 90-day period it shall provide such information as soon thereafter as is reasonably practicable. 15.4 The Manager shall cause to be prepared, at Fund expense, and shall distribute to the Members within 120 days after the end of each fiscal year, an annual report containing financial statements of the Fund (balance sheet, statement of income or loss, and statement of Members' equity) prepared on an appropriate accounting basis selected by the Manager. 15.5 The Manager, at the Fund's expense, shall cause to be prepared income tax returns for the Fund and shall further cause such returns to be timely filed with the appropriate A-14 authorities. 16. Rights, Authority, Powers, Responsibilities and Duties of the Manager --------------------------------------------------------------------- 16.1 Subject only to the provisions of Paragraph 16.4, the Manager shall have all authority, rights and powers conferred by law and those required or appropriate to the management of the Fund business which, by way of illustration but not by way of limitation, shall include the rights, authority and powers: 16.1.1 To cause the Fund to acquire and enter into any contract of insurance which the Manager deems necessary or appropriate for the protection of the Fund and the Manager, or either of them, for the conservation of Interests, or for any purpose convenient or beneficial to the Fund; 16.1.2 To cause the Fund to, and itself to, employ persons in the operation and management of the business of the Fund on such terms and for such compensation as the Manager shall determine; 16.1.3 To prepare or cause to be prepared reports, statements and other relevant information for distribution to Members; 16.1.4 To open accounts and deposits and maintain accounts in the name of the Fund in any bank or savings and loan association, provided however, that the Fund's monies shall not be commingled with the monies of any other person or entity; 16.1.5 To cause the Fund to make or revoke any of the elections referred to in Section 754 of the Code or any similar provisions enacted in lieu thereof; 16.1.6 To select the Fund's accounting year; 16.1.7 To determine the appropriate accounting method or methods to be used by the Fund for the purposes of preparing financial statements and tax returns (the Manager currently intends to utilize the accrual method of accounting in maintaining the Fund's books and records); 16.1.8 To require in any or all Fund contracts that the Manager shall not have any personal liability thereon but that the person or entity contracting with the Fund is to look solely to the Fund and its assets for satisfaction; 16.1.9 To purchase or cause any of its Affiliates to purchase for investment for their own accounts Units upon the terms described in Paragraph 5.1; 16.1.10 Notwithstanding anything herein to the contrary, subject to Paragraph 16.4.11, to amend this Operating Agreement without the consent or vote of any of the Members: (i) to reflect the addition or substitution of Members, the repurchase of Units of Members pursuant to Paragraph 13.4 or 16.3 or the reduction of the Capital Accounts upon the return of Uninvested Net Capital to Members, (ii) to add to the representations, duties or obligations of the Manager or surrender any right or power granted to the Manager herein, for the benefit of the Members, (iii) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to add any other provisions with respect to matters or questions arising under this Operating Agreement which will not be inconsistent with the provisions of this Operating Agreement, (iv) to delete or add any provision A-15 from or to this Operating Agreement requested to be so deleted or added by a federal or state securities commissioner or other regulatory agency, the deletion or addition of which provision is deemed by such regulatory agency to be for the benefit or protection of the Members, and (v) to delete or add any provision from or to the Operating Agreement, including restructuring the kind and amount of compensation pursuant to Paragraph 9.1 of this Agreement, if deemed necessary by the Manager to comply with applicable laws and regulations provided that such deletion or addition does not have a material adverse effect on the Members; 16.1.11 To execute, acknowledge and deliver any and all instruments to effectuate the foregoing, and to take all such action in connection therewith as the Manager shall deem necessary or appropriate; 16.1.12 To prepare, file and publish any and all instruments or documents necessary or appropriate to enable the Fund to transact business or otherwise to exist; 16.1.13 To establish a Working Capital Reserve in an amount as the Manager in its sole judgment shall determine advisable; 16.1.14 To make short-term (for periods of one year or less), unsecured, interest-bearing loans to the Fund, either before or after the admission of Members pursuant to Paragraph 6, for the purposes deemed appropriate by the Manager, which loans, together with accrued interest thereon, may be repaid from amounts contributed to the Fund by the Additional Members; provided, however, that the amount of any interest charged for any such loans shall be subject to Paragraph 16.4.3; 16.1.15 To act on behalf of the Fund in all dealings with the Internal Revenue Service, as designated tax matters "partner" as that term is used in the Code; 16.2 Neither the Manager nor any of its Affiliates shall have the authority: 16.2.1 Except as contemplated by this Operating Agreement, to cause the Fund to enter into contracts with, sell or lease property to or buy or lease property from, the Manager or any of its Affiliates without obtaining the approval by Majority Vote of the Members; 16.2.2 To alter the primary purpose of the Fund as set forth in Paragraph 3; 16.2.3 To make long-term loans to the Fund or short-term secured loans to the Fund or, on short-term unsecured loans made to the Fund, receive interest or other financing charges or fees in excess of those amounts which would be charged by third party financing institutions on comparable loans for the same purpose in the same geographic area; 16.2.4 Except as provided in Article 8 and Paragraph 13.4, to cause the Fund to redeem or repurchase Units; 16.2.5 To do any act in contravention of the articles of organization or this Operating Agreement or which would make it impossible to carry on the ordinary business of the Fund; 16.2.6 To cause the Fund to confess a judgment against the Fund in connection with any threatened or pending legal action; A-16 16.2.7 To possess or use the Interests or assign the rights of the Fund in the Interests for other than an appropriate Fund purpose; 16.2.8 To admit new Members after the Closing Date (except for substituted Members admitted in accordance with Paragraph 14) or cause the Fund to offer or issue other securities, except with the consent of the Members as provided in this Operating Agreement; 16.2.9 To cause the Fund to, or to itself, employ the assets of the Fund in any manner except for the exclusive benefit of the Fund; 16.2.10 To cause the Fund to, or to itself, commingle the monies of the Fund with those of any other person or entity, provided that, a joint venture or investment complying with Paragraph 16.1.22 shall not be deemed commingling of funds; 16.2.11 To amend the Operating Agreement without the consent of each Member who would be adversely affected thereby, to: (i) eliminate or decrease the limited liability of a Member, or (ii) affect the status of the Fund as a partnership for federal income tax purposes; 16.2.12 To borrow money from the Fund; or 16.2.13 To cause the Fund to invest in general partnerships, joint ventures or other entities which do not purport generally to afford limited liability to investors such as the Fund. 16.3 The Manager and its Affiliates shall not receive any rebates or give-ups in connection with the sale of Interests in the Fund nor shall they engage in any reciprocal business arrangements which would circumvent the restrictions contained herein against dealing with the Manager or any of its Affiliates. Neither the Manager nor any of its Affiliates shall directly or indirectly pay or award any finder's fees, commissions or other compensation to any person engaged by a potential investor in the Fund for investment advice as an inducement to such advisor to advise the purchase of Units in the Fund; provided, however, that this clause shall not prohibit the payment of Selling Commissions to a registered broker-dealer or other properly licensed person for selling Units or the assignment by the Manager of a portion of its fees from or interest in the Fund to any registered broker-dealer participating in the offering of Units. 16.4 If the Members vote to remove the Manager, the Manager shall within 90 days from the date of such vote prepare financial statements of the Fund, at Fund expense, and shall cause such statements to be mailed to the Members as soon as reasonably possible. 16.5 The Manager shall be authorized and have the duty and responsibility for providing continuing administrative support, advice, consultation, analysis and supervision with respect to the functions of the Fund as an owner of the Interests in such a manner as the Manager deems appropriate, including authorization and responsibility for making all decisions with respect thereto and voting the same when permissible and deemed appropriate, and complying with federal, state and local regulatory requirements and procedures. A-17 16.6 The Manager and its Affiliates shall not be bound to devote all of their business time to affairs of the Fund, it being understood that the Manager and Affiliates are and will continue to be engaged in other activities and in other employment, some of which are or may be in connection with business investments and other enterprises which are or may be in competition with the Fund. 17. Return of Uninvested Net Capital to Members ------------------------------------------- There will be no Return of Univested Net Capital to Members as the portfolio is a specified offering and all of the Interests in Attachment A will be purchased upon full capital raising. 18. Rights, Powers and Voting Rights of the Members ----------------------------------------------- 18.1 Members other than the Manager shall take no part in the control, conduct or operation of the Fund and shall have no right or authority to act for or bind the Fund. Without limiting the generality of the foregoing, the Members other than the Manager acknowledge and agree that they do not have the right to bring any cause of action in the name of the Fund or on behalf of the Members as a group against any of the issuers of Interests in which the Fund invests or the management of such Interests. 18.2 Members shall have the right, by Majority Vote, to vote only upon the following matters affecting the basic structure of the Fund: 18.2.1 Removal of the Manager as manager of the Fund; 18.2.2 Election of a successor manager, subject to the provisions of Paragraph 19; 18.2.3 Dissolution and termination of the Fund; 18.2.4 Sale of all or substantially all of the Interests at any one time provided that no such vote shall be required if the purchase price of the Interests as of the date of such sale is less than 20% of the Net Proceeds; 18.2.5 Amendment of the Operating Agreement, except for the matters set forth in Paragraph 16.1.11, as to which the Manager alone may adopt amendments, and except for the matters set forth in Paragraph 16.2.11 hereof, as to which the approval of all Members who would be adversely affected is required for amendment; and 18.2.6 The extension of the term of the Fund. 18.2.7 Five years after the Closing Date, the Manager shall submit for vote of the Members a proposal to liquidate, wind-up and dissolve the Fund. As part of the proposal the Manager shall calculate the amount of estimated net proceeds which the Fund could receive from a sale of all remaining Interests. The liquidation proposal approved by a Majority Vote of the Members and liquidating distributions will be subject to the actual proceeds realized by the Fund in liquidating all or a portion of the remaining Interests. If the liquidation proposal is not approved, the Manager shall resubmit a liquidation proposal to the Members every two years thereafter. 18.3 The Manager may at any time call a meeting of the Members, or call for a vote of the Members without a meeting, on matters on which they are entitled to vote, and shall call for such A-18 meeting or vote following receipt of written request therefor by Members holding 10% or more of the Units held by all Members as of the date of receipt of such written request (the "Notice Date"). Within 10 days of the Notice Date, the Manager shall notify all Members of record as of the Notice Date regarding the time and place of the Fund meeting, if called, and the general nature of the business to be transacted thereat, or, if no such meeting has been called, the Manager shall notify all Members of the matter or matters to be voted upon and the date upon which the votes will be counted. Any Fund meeting or the date upon which such votes, without a meeting, will be counted shall be no less than 15 nor more than 60 days following mailing of the notice thereof by the Manager. All expenses of the voting and such notification shall be borne by the Fund. 18.4 A Member shall be entitled to cast one vote for each Unit which he owns in the following manner: (i) at a meeting, in person, by written proxy or by a signed writing directing the manner in which he desires that his vote be cast, which writing must be received by the Manager prior to such meeting, or (ii) without a meeting, by a signed writing directing the manner in which he desires that his vote be cast, which writing must be received by the Manager prior to the date upon which the votes of Members are to be counted. Only the votes of Members of record on the Notice Date, whether at a meeting or otherwise, shall be counted. The laws, rules and regulations of the State of Colorado pertaining to the validity and use of corporate proxies shall govern the validity and use of proxies given by Members. 18.5 No Member shall have the right or power to: (i) withdraw or reduce his contribution to the capital of the Fund except as a result of the dissolution of the Fund or as otherwise provided by law, (ii) bring an action for partition against the Fund, (iii) cause the termination and dissolution of the Fund other than by the right specified in Paragraph 18.2, or (iv) demand or receive property other than cash in return for his contribution. No Member in his capacity as such shall have priority over any other Member either as to the return of contributions of capital or as to Income, Loss or Distributions. Other than upon the dissolution and termination of the Fund as provided by this Operating Agreement, there has been no time agreed upon when the contribution of each Member is to be returned. 18.6 Nothing contained in this Paragraph 18 shall be deemed to limit a broker/dealer's authority under the Group Selling Agreement. 19. Removal of Manager ------------------ 19.1 As provided in Paragraph 18.2.1, the Manager may be removed as manager of the Fund, which removal shall not otherwise affect the Manager's status or rights as a Member. 19.2 Written notice of the removal of the Manager shall be served upon the Manager either by certified or by registered mail, return receipt requested, or by personal service. Such notice shall set forth the date upon which the removal is to become effective. 19.3 Upon the removal of the Manager, the interest of the Manager in the Income, and Loss and Distributions of the Fund shall be purchased by the Fund for a purchase price equal to the fair market value thereof determined according to the provisions of Paragraph 19.4. Unless otherwise agreed, 50% of the purchase price of such interest shall be paid by the Fund to the Manager in cash if available and the balance by a promissory note of the Fund, payable to the Manager or its order in a face amount equal to said market value and containing provisions as would be usual and customary in a commercial promissory note, with principal and accrued interest payable from time to time from Cash From Operations. Interest on said promissory note shall accrue at the rate of 2% above the rate announced A-19 from time to time by The Bank of America as its prime or base rate or the maximum rate permitted by law, whichever is less. Any remaining unpaid principal and accrued interest on such promissory note shall be due and payable on the earlier of the date of liquidation of the Fund or a date three years from the date of the Manager's removal. 19.4 The fair market value of the Manager's interest purchased by the Fund according to the provisions of Paragraph 19.3 above shall be determined by agreement between such Manager and the Fund (which agreement shall require approval by a Majority Vote). If said parties cannot agree upon the fair market value of such interest within 30 days after the occurrence of the event upon which such interest of the Manager is to be purchased by the Fund, the fair market value thereof shall be determined in the manner provided by the laws of the State of California for the determination of controversies by arbitration, the Manager to choose one arbitrator, the Fund to choose one arbitrator and the two arbitrators so chosen to choose a third arbitrator. The decision of a majority of said arbitrators as to the fair market value of the Manager's interest shall be final and binding and may be enforced by legal proceedings. The Fund and the Manager shall each compensate the arbitrator appointed by it and the compensation of the third arbitrator shall be borne equally by such parties. 20. Certain Transactions -------------------- The Manager, any Member, and any Affiliate, shareholder, officer, director or employee thereof, may engage in or possess an interest in any other business or venture of every nature and description, independently or with others, regardless of whether or not competitive with the business of the Fund. 21. Dissolution and Termination of the Fund --------------------------------------- 21.1 The Fund shall be dissolved and terminated upon the earliest to occur of the following: 21.1.1 The retirement (provided there has been 90 days' prior written notice to the Members) or removal of the Manager, unless a new Manager elected in place thereof within 120 days of the date of such event by Majority Vote of the Members elects to continue the business of the Fund. Expenses incurred in the reformation, or attempted reformation, of the Fund shall be deemed expenses of the Fund; 21.1.2 A Majority Vote in favor of dissolution and termination of the Fund; 21.1.3 The expiration of the term of the Fund; or 21.1.4 The sale or other disposition of all of the Interests (or liquidation of all of the Interests in which the Fund invests). 21.2 Upon any dissolution and termination of the Fund, the Manager shall (i) take full account of the Fund assets and liabilities, (ii) liquidate the assets, if possible, as promptly as is consistent with obtaining the fair value thereof (but the Fund, or a successor liquidating trust or liquidation agent, may hold Interests until liquidation of the Interests, if deemed advisable), and (iii) apply and distribute the proceeds therefrom in the following order: 21.2.1 To the payment of creditors of the Fund, but excluding secured creditors whose A-20 obligations will be assumed or otherwise transferred on the liquidation of Fund assets; 21.2.2 To the repayment of any outstanding loans made by the Manager to the Fund; 21.2.3 To the Unit Holders in proportion to, and to the extent of, the positive balances in their respective Capital Accounts. 22. Special and Limited Power of Attorney ------------------------------------- 22.1 The Manager shall at all times during the existence of the Fund have a special and limited power of attorney as the attorney-in-fact for each Member, with power and authority to act in the name and on the behalf of each Member, to make, execute, acknowledge and file the following documents and any other documents deemed by the Manager to be necessary or appropriate for the business of the Fund: 22.1.1 The Operating Agreement, as well as any amendments to the foregoing, which, under the laws of the State of California or the laws of any other state, are required to be filed or which the Manager deems it advisable to file; 22.1.2 Any other instrument or document which may be required to be filed by the Fund under the laws of any state or by any governmental agency, or which the Manager deems it advisable to file; and 22.1.3 Any instrument or document which may be required to effect the continuation of the Fund, the admission of an Additional Member or substituted Member or the dissolution and termination of the Fund (provided such continuation, admission or dissolution and termination are in accordance with the terms of this Operating Agreement). 22.2 The special and limited power of attorney granted to the Manager hereby: 22.2.1 Is a special and limited power of attorney coupled with an interest, is irrevocable, shall survive the death or dissolution and liquidation of the granting Member and is limited to those matters herein set forth; 22.2.2 May be exercised by the Manager for each Member by a facsimile signature or by listing all of the Members and executing any instrument with a single signature of the Manager, acting as attorney-in-fact for all of them; and 22.2.3 Shall survive an assignment by a Member of all or any portion of his Units except that, where the Assignee of any Units owned by a Member has been approved by the Manager for admission to the Fund as a substituted Member, the special and limited power of attorney shall survive such assignment for the purpose of enabling the Manager to execute, acknowledge and file any instrument or document necessary to effect such substitution, as well as for the purposes set forth in Paragraph 22.1. 23. Indemnification and Exculpation ------------------------------- 23.1. The Manager and its "Affiliates" (as defined for purposes of this Paragraph in Paragraph 23.5 below) shall have no liability to the Fund or to any Member for any loss suffered by the A-21 Fund which arises out of any action or inaction of the Manager and its Affiliates, if the Manager and its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Fund, and such course of conduct did not constitute negligence or misconduct of the Manager and its Affiliates. To the extent permitted by law, the Manager and its Affiliates shall be indemnified by the Fund against any losses, judgments, liabilities, expenses (including legal fees and costs), and amounts paid in settlement of any claims sustained by them in connection with the Fund; provided that the same were not the result of breach of fiduciary duty where the Manager and its Affiliates personally benefited. 23.2. Notwithstanding the foregoing Paragraph 23.1, the Manager and its Affiliates, and any person acting as a Broker-Dealer, shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee, or (2) such claims have been dismissed with prejudice as to the particular indemnitee or (3) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee. 23.3. In any claim for indemnification for federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission with respect to the issue of indemnification for securities law violations. 23.4 The Fund shall not incur the cost of that portion of any insurance, other than public liability insurance, which insures any party against any liability the indemnification of which is herein prohibited. 23.5. For purposes of this Paragraph, the term "Affiliates" shall mean any person performing services on behalf of the Fund who (1) directly or indirectly controls, is controlled by, or is under common control with the Manager; or (2) owns or controls 10% or more of the outstanding voting securities of the Manager; or (3) is an officer, director, partner or trustee of the Manager; or (4) any company for which the Manager is a partner or shareholder. 24. Miscellaneous ------------- 24.1 This Operating Agreement may be executed in several counterparts, and all so executed shall constitute one Operating Agreement, binding on all of the parties hereto, notwithstanding that all of the parties are not signatory to the original or to the same counterpart. 24.2 Subject to the restrictions on transfer contained herein, the terms and provisions of this Operating Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the respective Members, and shall be construed in accordance with, and governed by, the laws of the State of Colorado. 24.3 In the event that any provision of this Operating Agreement or the application thereof to any person or in any circumstances shall be determined to be invalid, unlawful or unenforceable to any extent, the remainder of this Operating Agreement, and the application of such provision to persons or circumstances other than those as to which it is determined to be invalid, unlawful or unenforceable, shall not be affected thereby, and each remaining provision of this Operating Agreement shall continue to be valid and may be enforced to the fullest extent permitted by law. 24.4 All notices under this Operating Agreement shall be in writing and shall be given A-22 to the Members entitled thereto, by personal service or by mail, posted to the address maintained by the Fund for such person or at such other address as he may specify in writing. 24.5 Paragraph titles or captions contained in this Operating Agreement are inserted only as a matter of convenience and for reference. Such titles and captions in no way define, limit, extend or describe the scope of this Operating Agreement nor the intent of any provision of this Operating Agreement. 24.6 Whenever required by the context of this Operating Agreement, the singular shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders, and vice versa; and the word "person" shall include a corporation, partnership, firm or other form of association. 24.7 The names, addresses and capital contributions of the Members are or will be set forth on Exhibit 1 attached hereto, as it may be amended from --------- time to time, which exhibit shall be maintained at the principal place of business of the Fund. 24.8 Notwithstanding the place where this Operating Agreement may be executed by any of the parties hereto, the parties expressly agree that all the terms and provisions hereof shall be construed under the laws of the State of Colorado and that the Colorado Act shall govern this Operating Agreement. 25. Power to Bind the Fund ---------------------- The Manager acting alone shall have the authority, right and power to negotiate and execute any and all contracts and other documents on behalf of the Fund, subject to the limitations set forth in Paragraph 16.2. 26. Arbitration. The Members and Manager agree that any dispute, claim or ----------- controversy arising out of a purchase of Units or the Operating Agreement shall be resolved by submission to binding arbitration in Denver, Colorado before a retired judge or justice. If the parties are unable to agree on a retired judge or justice each party shall name one retired judge or justice and the two persons so-named shall select a neutral judge or justice who will act as the sole arbitrator. The arbitrator selected shall agree to follow Colorado law. The parties shall be entitled to take discovery in accordance with the provisions of the Colorado Code of Civil Procedure, but either party may request that the arbitrator limit the amount and scope of such discovery and in determining whether to do so, the arbitrator shall balance the need for this discovery against the parties' mutual desire to resolve all disputes expeditiously and inexpensively. The arbitrator shall follow California law and shall render his decision in writing, explaining the legal and factual basis for decision as to each of the principal controverted issues. The arbitrator's decision shall be final and binding upon the parties. A judgment upon any award may be entered in a court of competent jurisdiction. Each party shall be responsible for all of its own costs, including all attorneys fees, of arbitration. SIGNATURES OF MEMBERS: MANAGER: D.E. Frey & Group, Inc. A-23 By: --------------------------- Dale E. Frey Its: PRESIDENT A-24 EX-10.10 16 CSC CLEARING AGR Exhibit 10.10 CLEARING AGREEMENT This agreement, made this _____17_____ day of ______June________, 1994 (the "Agreement") between Correspondent Services Corporation (hereinafter referred to as "CSC"), and D.E. Frey & Company, Inc. (hereinafter referred to as the "Correspondent"). WITNESSETH THAT: WHEREAS, the Correspondent is desirous of availing itself of clearing, execution and other services related to the securities business as more fully set forth herein; and Whereas, CSC desires to extend the foregoing types of services to the Correspondent. Now Therefore, in consideration of the mutual covenants hereinafter set forth and other good and valuable consideration the receipt of which is hereby acknowledged, the parties hereto hereby covenant and agree as follows: I. Services -------- A. Services to be Performed by CSC ------------------------------- (i) CSC will execute orders for the Correspondent's proprietary accounts and for the Correspondent's customers whose cash or margin accounts have been accepted by CSC ("Introduced Accounts"), but only insofar as such orders are transmitted by the Correspondent to CSC. (ii) CSC will generate, prepare and, to the extent mutually agreed upon by the parties hereto, mail confirmations respecting each of the Introduced Accounts. (iii) CSC will prepare and mail the summary monthly statements (or quarterly statements if no activity in any Introduced Account occurs during any quarter covered by such statement) to every Introduced Account. (iv) CSC will settle contracts and transactions in securities (including options to buy or sell securities) (i) between the Correspondent and other brokers and dealers, (ii) between the Correspondent and the Introduced Accounts, and (iii) between the Correspondent and persons other than the Introduced Accounts or other brokers and dealers. (v) CSC will engage in all cashiering functions for the Introduced Accounts, including the receipt, delivery and transfer of securities purchased, sold, borrowed and loaned, receiving and distributing payment therefore, holding in custody and safekeeping all securities and payments so received, the handling of margin accounts, including paying and charging of interest, the receipt and distribution of dividends and other distributions, and the processing of exchange offers, rights offerings, warrants, tender offers and redemptions. For purposes of the Securities Investor Protection Act of 1970, as amended, and the financial responsibility rules of the Securities and Exchange Commission, the Correspondent's customers will be the customers of CSC. Upon mutual agreement of the parties hereto, the cashiering functions with respect to the receipt of securities and the making and receiving payments therefor may be relinquished to the Correspondent. (vi) CSC will construct and maintain books and records of all transactions executed or cleared through it and not specifically charged to the Correspondent pursuant to the terms of this Agreement, including a daily record of required margin and other information required by Rule 432(a) of the rules of the Board of Directors of the New York Stock Exchange, Inc. (the "Rules"), or by the constitution, articles of incorporation, by-laws (or comparable instruments) or rules, regulations or other instruments corresponding to the foregoing, and the stated policies or practices of any other securities exchange (the "Standards"), including but not otherwise limited to any national securities exchanges registered under the Securities Exchange Act of 1934, as amended ("National Securities Exchange"). B. Services Which Shall Not be Performed by CSC -------------------------------------------- Unless otherwise agreed to in a writing executed by the parties hereto, CSC shall not engage in any of the following services on behalf of the Correspondent: (i) Accounting, bookkeeping or recordkeeping, cashiering, or any other services with respect to commodity transactions, and/or any transaction other than securities transactions. (ii) Preparation of the Correspondent's payroll records, financial statements or any analysis or review thereof or any recommendations relating thereto. 2 (iii) Preparation or issuance of checks in payment of the Correspondent's expenses, other than expenses incurred by CSC on behalf of the Correspondent pursuant to this Agreement. (iv) Payment of commissions, salaries or other remuneration to the Correspondent's salespersons or any other employees of the Correspondent. (v) Preparation and filing of reports (the "Reports") with the Securities and Exchange Commission, any state securities commission, any National Securities Exchange, or other securities exchange or securities association or any other regulatory or self-regulatory body or agency with which the Correspondent is associated and/or by which it is regulated. Furthermore, CSC will, at the request of the Correspondent, furnish the Correspondent with any necessary information and data contained in books and records kept by CSC and not otherwise reasonably available to the Correspondent if such information is required in connection with the preparation and fling of Reports by the Correspondent. (vi) Making and maintaining reports and records required to be kept by the Correspondent by the Currency and Foreign Transactions Reporting Act of 1970 and the regulations promulgated pursuant thereto, or any similar laws or regulations enacted or adopted hereafter. (vii) Verification of the address changes of any Introduced Account. (viii) Obtaining and verifying new account information, and insuring that such information meets the requirements of Rule 405 { 1 } of the Rules and any other Rules or applicable standards. (ix) Maintaining a record of all personal and financial information concerning any Introduced Account and all orders received therefrom, and maintaining all documents and agreements executed by any Introduced Account. (x) Holding for safekeeping of the securities of any Introduced Account registered in the name of the Introduced Account. (xi) Accepting deposits from the Correspondent in the form of coin or currency of the United States or any other country. II. Clearing Charges ---------------- 3 See Schedule "A" attached hereto and incorporated herein by reference. Correspondent shall have sole discretion to determine the amount of commission/mark up charged to its Introduced Accounts cleared by CSC. CSC agrees to pay Correspondent certain commissions and/or sales credits received by CSC less any amounts due to CSC under this Agreement or otherwise and any expenses or other sums to third parties paid on the Correspondent's behalf by CSC. In no event shall the fees charged in this Article II for the above services be in contravention of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, as amended, and the Employee Retirement Income Security Act of 1974, as amended, or any rules or regulations thereunder, or any other law, rule or regulation, Federal, State or Local, or any constitution, by-law, rule, regulation or instrument correspondent to the foregoing, or stated policy or practice of any national securities exchange or other securities exchange or association or other regulatory or self-regulatory body or agency ("Laws and Regulations"). In the event that such fees are deemed by CSC or the Correspondent to be in contravention of the Laws and Regulations, they shall be replaced with fees mutually agreed upon by CSC and the Correspondent. III. Notation on Statements, Confirmation and Other Written Material --------------------------------------------------------------- CSC shall carry all Introduced Accounts in the names of the Correspondent's customer, with a notation on its books and records that such Introduced Accounts were introduced by the Correspondent, and all monthly or quarterly statements, confirmations relating to such Introduced Accounts shall also indicate that the Introduced Accounts were introduced by the Correspondent. In addition, account statements will indicate that customer funds and securities received by CSC will be held at CSC and will contain the telephone number of a contact area at CSC. Inadvertent omission of such notations shall not be deemed to constitute a breach of this Agreement. Copies of the forms covering the foregoing shall be furnished by CSC to the Correspondent. IV. Opening of Accounts ------------------- (i) At the time of the opening of each Introduced Account, Correspondent shall furnish CSC with all financial and personal information concerning such Introduced Accounts as CSC may reasonably require. At the time of the opening of Introduced Accounts which are margin accounts, the Correspondent shall furnish CSC with executed customers' agreements, hypothecation agreements and consents to loans of securities (collectively, the 4 "margin agreement"). CSC shall supply the Correspondent with margin agreement forms regarding margin accounts in sufficient quantities, such forms to be submitted to CSC upon their completion by the Correspondent. If any Introduced Account may have been opened without CSC having previously received a properly executed margin agreement, failure of CSC to receive such margin agreements shall not be deemed to be a waiver of the information requirements set forth herein. Upon the written or oral request of CSC, the Correspondent shall furnish CSC with any other documents and agreements executed by the Introduced Account on forms which shall be supplied by CSC in sufficient quantities and which may reasonably be required by CSC in connection with the opening, operating or maintaining of Introduced Accounts. CSC may, at its option, mail margin agreements or "new account" forms directly to the Introduced Accounts upon notification by the Correspondent, and/or require completion of its own margin agreement or "new account" forms and, if required, option account agreements for the Introduced Accounts. The Correspondent shall promptly provide CSC with basic data and copies of documents relating to each of the Introduced Accounts, including, but not otherwise limited to, copies of records of any receipts of the Introduced Accounts' funds and/or securities received directly by the Correspondent, as shall be necessary for CSC to discharge its service obligations hereunder. (ii) All transactions in any Introduced Account are to be considered cash transactions until such time as CSC has received margin agreements, duly and validly executed in respect of such Introduced Account. Nevertheless, it is intended that Correspondent will obtain executed margin agreements within the time periods set forth in procedural manuals provided by CSC or any entity affiliated with CSC. In the event credit is inadvertently extended with respect to such Introduced Accounts, Correspondent shall indemnify and hold CSC harmless from and against all loss, liability, damage, cost and expense (including but not otherwise limited to fees and expenses of legal counsel) arising therefrom. (iii) At the time of the opening of any Introduced Account, the Correspondent shall furnish CSC with the name of any principal other than the account name for whom the Correspondent is acting as agent, and written evidence of such authority. (iv) The Correspondent shall have the sole and exclusive responsibility for compliance with Rule 405(3) of the Rules and shall specifically approve the opening of any new account before forwarding such 5 account to CSC as a potential Introduced Account. CSC, in its reasonable business judgement, reserves the right to reject any account which the Correspondent may forward to CSC as a potential Introduced Account. CSC also reserves the right to terminate any account previously accepted by it as an Introduced Account. (v) Pursuant to written notification received by the Correspondent and forwarded to CSC, any account of the Correspondent may choose to reject the services to be performed by CSC pursuant to this Agreement and thus choose not to be serviced as an Introduced Account pursuant hereto. Upon notice from another member organization that an Introduced Account intends to transfer his account thereto, CSC shall expedite such transfer and shall have the sole and exclusive responsibility for compliance with Rule 412 of the Rules. (vi) It shall be the sole and exclusive responsibility of the Correspondent to make every reasonable effort to ascertain the essential facts relative to any Introduced Account and any order therefore, in compliance with Rule 405(1) of the Rules, including but not otherwise limited to ascertaining the authority of all orders for Introduced Accounts, and the genuineness of certificates, papers and signatures provided by each Introduced Account. Any investment advice furnished to an Introduced Account by the Correspondent shall be the sole and exclusive responsibility of the Correspondent. (vii) The Correspondent shall be solely and exclusively responsible for the handling and supervisory review of any Introduced Accounts over which the Correspondent's partners, officers or employees have discretionary authority, as required by Rule 408 of the Rules and any other applicable Laws and Regulations. The Correspondent shall furnish CSC with such documentation with respect thereto as may be requested by CSC. The Correspondent hereby agrees to indemnify and hold CSC harmless against any loss, liability, damage, cost or expense (including but not otherwise limited to fees and expenses of legal counsel) suffered or incurred by CSC directly or indirectly as a result of any liabilities or claims arising from the exercise by the Correspondent, its partners, officers or employees of discretionary authority over Introduced Accounts. The Correspondent hereby warrants that with regard to any orders or instructions given by the Correspondent with respect to such discretionary accounts, its partners, officers or employees shall have been fully and properly authorized relative thereto and that the 6 execution of such orders shall not be in violation of the Laws and Regulations. Furthermore, the Correspondent hereby agrees to indemnify and hold CSC harmless against any loss, liability, damage, cost or expense (including but not otherwise limited to fees and expenses to legal counsel) suffered or incurred by CSC directly or indirectly as a result of any breach of the Correspondent's said warranty. (viii) The Correspondent shall have the sole and exclusive responsibility for the handling and supervisory review of any Introduced Account for an employee or officer of any member organization, self-regulatory organization, bank, trust company, insurance company or other organization engaged in the securities business, and for compliance with Rule 407 of the Rules relating thereto. The Correspondent shall furnish CSC with such documentation with respect thereto as may be requested by CSC. (ix) The Correspondent shall have the sole and exclusive responsibility to insure that those of its customers who become Introduced Accounts hereunder shall not be minors or subject to those prohibitions existing under the Laws and Regulations generally relating to the incapacity of any Introduced Account or any conflict of interest relating to such Introduced Account (x) The Correspondent shall be solely and exclusively responsible for any loss, liability, damage, cost or expense (including but not otherwise limited to fees and expenses of legal counsel) sustained or incurred by either the Correspondent or CSC, arising out of or resulting from any orders the Correspondent has taken from Introduced Account residing or being domiciled in jurisdictions in which the Correspondent has not been or is no longer authorized to do business. (xi) It shall be the sole and exclusive responsibility of the Correspondent to comply with the Laws and Regulations relating to each Introduced Account which effect listed option transactions including, but not limited to, approval by the Correspondent's Registered Options Principal or Senior Registered Options Principal (as applicable), delivery of required Options Disclosure Documents (and Supplements where applicable) and option documentation. V. Transactions and Margin ----------------------- (i) It is understood that with respect to Introduced Accounts which are margin accounts, CSC is responsible for compliance with Regulation T, 12 C.F.R. Part 220, the Federal margin regulation promulgated by the Board of Governors of the Federal Reserve System (the "Board"), and any 7 interpretative ruling issued by the Board, and letter rulings of the Federal Reserve Bank of New York, Rules and Interpretations of the New York Stock Exchange, Inc. and any other applicable margin and margin maintenance requirements of the Laws and Regulations. The Correspondent is responsible to CSC for the collection of the margin required to support each transaction for, and to maintain margin in, each Introduced Account and such margin, in conformity with the above margin and margin maintenance requirements. After such initial margin on each transaction has been received, maintenance margin calls shall be generated by CSC and made by CSC or by the Correspondent at the instructions of CSC. CSC shall have the right to modify, in its sole discretion, the margin requirements of any Introduced Account from time to time so that CSC may call for additional margin. Therefore, CSC shall be the sole judge as to the amount of margin to be required of and maintained by Introduced Accounts. CSC may impose such margin by individual security within an account or by a specified Introduced Account and such margin need not be of general application to all accounts. CSC shall impose no fees on the Correspondent, other than any fees or charges imposed directly or by any regulatory body with regard to margin extensions obtained by CSC pursuant to written requests from a principal of the Correspondent. (ii) On all transactions, the Correspondent shall be solely and exclusively responsible to CSC for any loss, liability, damage, cost or expense (including but not otherwise limited to fees and expenses of legal counsel) incurred or sustained by the Correspondent or CSC as result of the failure of any Introduced Account to make timely payment for the securities purchased by it or timely and good delivery of securities sold for it, or timely compliance by it with margin or margin maintenance calls (provided that CSC has timely issued such call and/or given notice thereof to the Correspondent or if conditions creating such call should be reasonably known by Correspondent), whether or not any margin extensions have been granted by CSC pursuant to the request of the Correspondent, except that no interest will be charged by CSC for cash shorts in Introduced Accounts. The Correspondent agrees to be solely and exclusively responsible for the payment and delivery of all "when issued" or "when distributed" transactions which CSC may accept, forward or execute for Introduced Accounts. (iii) On all over-the-counter transactions for Introduced Accounts, the Correspondent shall furnish CSC with the names of the respective purchasing and selling broker-dealers (except as otherwise provided in paragraph (iv) of this Section, as set forth below), the names of the purchasing and selling customers, and the wholesale and retail purchase and sale prices. 8 (iv) Should the Correspondent entrust the execution of an order in an over-the-counter security to CSC or any entity affiliated with CSC and the counter party is left at CSC's discretion. CSC will assume the responsibility of paying the Correspondent that which the counter party has failed to pay pursuant to the over-the-counter order transaction (counter party risk). In the case the Correspondent executes its own over-the-counter order or designates the counter party, it shall be understood that in the event the over-the-counter dealer with whom the Correspondent dealt or whom it designated fails to live up to its part of the transaction, the Correspondent will assume the counter party risk and reimburse CSC for any loss sustained thereby. (v) The Correspondent shall be solely and exclusively responsible for approving all orders for the Introduced Accounts and for establishing procedures to insure that such approved orders are transmitted properly to CSC for execution. CSC, in its reasonable business judgement, reserves the right to reject any order which the Correspondent may transmit to CSC for execution. (vi) The Correspondent shall be solely and exclusively responsible for the supervisory review of all orders for the Introduced Accounts and shall insure that any orders and instructions given by it or any of its employees to CSC pursuant to the terms of this Agreement shall have been properly authorized in advance. (vii) The Correspondent shall be solely and exclusively responsible for sales and purchases for the Introduced Accounts that may create or result in violation of any of the Laws and Regulations. (viii) All transactions pursuant to the terms of this Agreement shall be subject to the constitution, rules, by-laws, regulations, stated practices, and customs and any modifications thereof of any national securities exchange or other securities exchange or market and its clearing house, if any, where executed, and the Laws and Regulations. It is understood that the Correspondent assumes sole and exclusive responsibility for compliance with the Laws and Regulations in the same manner and to the same degree as if the Correspondent were performing the services for the Introduced Accounts that have been assumed by CSC pursuant to this Agreement, except insofar as CSC may pursuant to paragraph (iv) of this Section, as set forth above, select the counter party to a particular transaction. (ix) All transactions heretofore had between the Correspondent and CSC with respect to orders given by or for the Introduced Accounts and cleared through CSC shall be subject to the Provisions of this Agreement. VI. Supervisory Responsibility -------------------------- 9 (i) Correspondent shall have the sole and exclusive responsibility for the review of all Introduced Accounts and for compliance with any supervisory responsibilities under Rule 405(2) of the Rules, including but not otherwise limited to matters involving the investment objectives of the Introduced Accounts, the reasonable basis for recommendations made to Introduced Accounts, and the frequency of trading in the Introduced Accounts, whether or not such transactions are instituted by the Correspondent, its partners, officers, employees or any registered investment advisor. (ii) The Correspondent and CSC shall each be responsible for compliance with any supervisory procedures under Rule 342 of the Rules and, to the extent applicable, any other provisions of the Laws and Regulations, including but not otherwise limited to supervising the activities and training of their respective registered representatives, as well as all of their other respective employees in the performance of functions specifically allocated to them pursuant to the terms of this Agreement. VII. Information to be provided by the Correspondent ----------------------------------------------- (i) The Correspondent shall provide CSC with copies of all financial information and reports filed by the Correspondent with the New York Stock Exchange, Inc. (if a member), the National Association of Securities Dealers, Inc., the Securities and Exchange Commission, and any other National Securities Exchange (where a member) (including but not otherwise limited to monthly and quarterly Financial and Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports) simultaneous with the filing therewith. (ii) The Correspondent shall submit to CSC on an annual basis the audited financial statements of the Correspondent, its parent organization (if applicable) and, when requested by CSC, its affiliated entities. In addition, the Correspondent shall submit to CSC upon request, information and reports relating to the financial integrity of Correspondent, its parent organization (if applicable) and its affiliated entities, including but not otherwise limited to information regarding the Correspondent's aggregate indebtedness ratio and net capital. (iii) The Correspondent shall provide CSC with all appropriate data in its possession pertinent to the performance and supervision of any 10 function or responsibility specifically allocated to CSC pursuant to the terms of this Agreement. (iv) The Correspondent shall provide CSC with any amendment or supplement to the Form BD of the Correspondent. VIII. Information to be provided by CSC --------------------------------- CSC shall provide the Correspondent with all appropriate data in its possession pertinent to the proper performance and supervision of any function specifically allocated to the Correspondent pursuant to the terms of this Agreement. The Correspondent shall be responsible for and shall promptly reimburse CSC for all costs incurred by CSC in connection with the preparation and mailing of such information. IX. Customer Notification and Correspondence ---------------------------------------- (i) The Correspondent shall be solely and exclusively responsible for informing its customers in a written correspondence, the form and substance of which will be mutually agreed upon, prior to the effective date of this Agreement, as to the general nature of the services to be provided by CSC pursuant to this agreement and the right of such customers to reject the services provided herein. Any new customers of the Correspondent shall also be informed as provided herein, verbally prior to such customers becoming Introduced Accounts and in writing, once the new accounts have been opened and accepted. The Correspondent shall be solely and exclusively responsible for the payment of all costs incurred in connection with the preparation and mailing of such customer correspondence. (ii) The Correspondent shall inform its customers pursuant to such written correspondence that all inquiries and correspondence should be directed to the Correspondent. All customer correspondence shall be reviewed and responded to by the party responsible for the specific area to which the inquiry or complaint relates pursuant to the terms of this Agreement. In the event such correspondence is not directed to such party originally, the Correspondent or CSC shall expeditiously forward such correspondence to the appropriate party. X. Errors Controversies and Indemnification ---------------------------------------- 11 (i) Errors, misunderstandings or controversies, except those specifically otherwise covered in this Agreement, between the Introduced Accounts and the Correspondent or any of its employees, which shall arise out of acts or omissions or the Correspondent or any of its employees (including, without limiting the foregoing, the failure of the Correspondent to deliver promptly to CSC any instructions received by the Correspondent from an Introduced Account with respect to the voting, tender or exchange of shares held in such Introduced Account), shall be the sole and exclusive responsibility and liability of the Correspondent. In the event, however, that by reason of such error, misunderstanding or controversy, the Correspondent in its discretion deems it advisable to commence an action or proceeding against an Introduced Account, the Correspondent shall indemnify and hold CSC harmless from any loss, liability, damage, cost or expense (including but not otherwise limited to fees and expenses of legal counsel) which CSC may incur or sustain in connection therewith or under any settlement thereto. If such error, misunderstanding or controversy shall result in the bringing of an action or proceeding against CSC, the Correspondent shall indemnify and hold CSC harmless from any loss, liability, damage, cost or expense (including but not otherwise limited to reasonable fees and expenses of legal counsel) which CSC may incur or sustain in connection therewith or under any settlement thereof. (ii) Errors, misunderstandings or controversies, except those specifically otherwise covered in this Agreement, between the Introduced Accounts and the Correspondent or any of its employees, which shall arise out of acts or omissions of CSC or any of its employees, shall be the sole and exclusive responsibility and liability of CSC. In the event, however, that by reason of such error, misunderstanding or controversy, CSC in its discretion deems it advisable to commence an action or proceeding against an Introduced Account, CSC shall indemnify and hold the Correspondent harmless from any loss, liability, damage, cost or expense (including but not otherwise limited to reasonable fees and expenses of legal counsel) which the Correspondent may incur or sustain in connection therewith or under any settlement thereof. If such error, misunderstanding or controversy shall result in the bringing of an action or proceeding against the Correspondent, CSC shall indemnify and hold the Correspondent harmless from any loss, liability, damage, cost or expense (including but not otherwise limited to reasonable fees and expenses of legal counsel) which the 12 Correspondent may incur or sustain in connection therewith or under any settlement thereof. (iii) CSC and the Correspondent both agree to indemnify the other and hold the other harmless from and against any loss, liability, damage, cost or expense (including but not otherwise limited to reasonable fees and expenses of legal counsel) arising out of or resulting from any failure by the indemnifying party or any of its employees to carry out fully the duties and responsibilities assigned to the indemnifying party herein or any breach of any representation or warranty herein by the indemnifying party under this Agreement. The Correspondent hereby agrees to indemnify and hold CSC harmless from and against any loss, liability, damage, cost or expense (including but not otherwise limited to reasonable fees and expenses of legal counsel) sustained or incurred in connection herewith in the event any Introduced Account fails to meet any initial margin call or subsequent maintenance calls, in conformity with Section V hereof. (iv) The indemnification provisions in this Agreement, shall remain operative and in full force and effect, regardless of the termination of this Agreement, and shall survive any such termination. (v) Correspondent agrees to maintain, and to provide evidence thereof to CSC, at least $250,000 blanket bond indemnity bond insurance covering any and all acts of its employees, agents and partners, with an insurance company reasonably acceptable to CSC, listing CSC as an insured party and permitting CSC to assume the policy in the event of the Correspondent ceasing operations. XI. Representations and Warranties ------------------------------ (a) The Correspondent represents and warrants as follows: (i) The Correspondent will maintain at all times while this Agreement is in full force and effect stated net capital of not less than $100,000 unless CSC has otherwise agreed in writing. The Correspondent will not carry customer, broker or dealer accounts and will not receive or hold funds under Rule 15c3- 1 of the Securities Exchange Act of 1934, as amended, for those persons. The Correspondent will immediately notify CSC when [i] its Aggregate Indebtedness Ratio reaches or exceeds 10 to 1, [ii] if the Correspondent has elected to operate under paragraph [f] or Rule 15c3- 1 of the Securities Exchange Act of 1934, as amended, when its net capital is less than 5% of aggregate debit items computed in accordance with Rule 15c3- 13 3, [iii] when the aggregate amount of any withdrawals of equity capital and/or unsecured advances or loans exceed 20% of excess net capital in any 30 day period or 30% of excess net capital in any 90 day period or [iv] its stated net capital is less than the minimum amount required under this Agreement. (ii) The Correspondent is a member of good standing of the National Association of Securities Dealers, Inc. The Correspondent will promptly notify CSC of any additional exchange memberships or affiliations. The Correspondent shall also comply with whatever non- member access rules have been promulgated by any National Securities Exchange or any other securities exchange of which it is not a member. (iii) The Correspondent is and during the term of this Agreement will remain duly registered or licensed and in good standing as a broker/dealer under all applicable Laws and Regulations. (iv) The Correspondent has all the requisite authority in conformity with all applicable Laws and Regulations to enter into this Agreement and to retain the services of CSC in accordance with the term thereof. (v) The Correspondent is in compliance, and during the term of this Agreement will remain in compliance with [i] the capital and financial reporting requirements of every National Securities Exchange or other securities exchange and/or securities association of which the Correspondent is a member, [ii] the capital requirements of the Securities and Exchange Commission, and [iii] the capital requirements of every state in which the Correspondent is licensed as a broker/dealer. (vi) The Correspondent shall not generate and/or prepare any statements, billings or confirmations respecting any Introduced Account unless expressly so instructed in writing by CSC. (vii) The Correspondent shall keep confidential any information it may acquire as a result of this Agreement regarding the business and affairs of CSC, which requirement shall survive the life of this Agreement. (b) CSC represents and warrants as follows: (i) CSC is a member in good standing of the National Association of Securities Dealers, Inc., and the New York Stock Exchange, Inc. 14 (ii) CSC is and during the term of this Agreement will remain duly licensed and in good standing as a broker/dealer under all applicable Laws and Regulations. (iii) CSC has all the requisite authority, in conformity with all applicable Laws and Regulations, to enter into and perform this Agreement. (iv) CSC is in compliance, and during the term of this Agreement, will remain to compliance, with [i] the capital and financial reporting requirements of every National Securities Exchange and/or other securities exchange or association of which it is a member, [ii] the capital requirements of the Securities and Exchange Commission, and [iii] the capital requirements of every state in which it is licensed as a broker/dealer. (v) CSC represents and warrants that the names and addresses of the Correspondent's customers which have or which may come to its attention in connection with the clearing and related functions it has assumed under this Agreement are confidential and shall not be utilized by CSC except in connection with the functions performed by CSC pursuant to this Agreement. CSC shall send no written information to such customers other than statements, bills or notices of transactions in connection with its role as clearing agent. Notwithstanding the foregoing, should an Introduced Account request, on an unsolicited basis, that CSC or any entity affiliated with CSC become its broker, acceptance or such Introduced Account by CSC or any entity affiliated with CSC shall in no way violate this representation and warranty, nor result in a breach of this Agreement. (vi) CSC shall keep confidential any information it may acquire as a result of this Agreement regarding the business and affairs of the Correspondent, which requirement shall survive the life of this Agreement. XII. Termination - Event of Default ------------------------------ Notwithstanding any provision in this Agreement, the following events or occurrences shall constitute an Event of Default under this Agreement: (i) Either CSC or the Correspondent shall fail to perform or observe any term, covenant or condition to be performed or observed by it hereunder and such failure shall continue to be unremedied for a 15 period of 30 days after written notice from the non-defaulting party to the defaulting party specifying the failure and demanding that the same be remedied; or (ii) Any representation or warranty made by either CSC or the Correspondent herein shall prove to be incorrect at any time in any material respect; or (iii) A receiver, liquidator or trustee of either CSC or the Correspondent, or of its property, held by either party, is appointed by court order and such order remains in effect for more than 30 days; or either CSC or the Correspondent is adjudicated bankrupt or insolvent; or any of its property is sequestered by court order and such order remains in effect for more than 30 days; or a petition is filed against CSC or the Correspondent under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within 30 days after such filing; or (iv) Either CSC or the Correspondent files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization. arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereinafter in effect, or consents to filing of any petition against it under any such law; or (v) Either CSC or the Correspondent makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of either CSC or the Correspondent, or of any property held by either party; or (vi) Either party hereto knowingly and willfully solicits or causes to solicit for employment the employees of either party or their affiliates, subsidiaries, successors or assignees without prior consent of the other party; or (vii) If research is provided by CSC or any entity affiliated with CSC to the Correspondent and the Correspondent knowingly and willfully reproduces or reprints in any fashion same or represents to customers or to an unrelated third party that the research supplied by CSC or such affiliated entity is that of the Correspondent. 16 Upon the occurrence of any such Event of Default, the non-defaulting party may, at its option, by notice to the defaulting party declare that this Agreement shall be thereby terminated and such termination shall be effective as of the date such notice has been sent or communicated to the defaulting party. XIII. Remedies Cumulative ------------------- The enumeration herein of specific remedies shall not be exclusive of any other remedies. Any delay or failure by any party of this Agreement to exercise any right, power, remedy or privilege herein contained, or now or hereafter existing under any applicable statute or law, shall not be construed to be a waiver of such right, power, remedy or privilege or to limit the exercise of such right, power, remedy or privilege. No single, partial or other exercise of any such right, power, remedy or privilege shall preclude the further exercise thereof or the exercise of any other right, power, remedy or privilege. XIV. Miscellaneous ------------- (i) As of the effective date of this Agreement CSC will not convert or allow to be converted to its records as Introduced Accounts customer accounts of the Correspondent that are partially or totally unsecured, securities in the name of the Correspondent's customers, or legal transfer securities (securities in the name of estates, trust, joint ownership, foreign ownership and such), unless previously approved in writing by CSC. If in error such accounts are converted to CSC books or records, CSC reserves the right to convert back to the Correspondent or its clearing agent said customer accounts and the positions. (ii) CSC shall have the power to place open orders as instructed by the Correspondent as of the effective date of this Agreement, and appropriate adjustments shall be made by CSC to reflect that CSC has acted as broker on the open orders with specialists on any national securities exchange or other securities exchange. (iii) CSC shall have the power to effect appropriate adjustments with respect to pending dividends and other distributions from the effective date of this Agreement through the last payable date of such pending dividends. (iv) The Correspondent shall be responsible for providing annual dividend and distribution information as contained in IRS Form l087 (to include individual l099 filings) and any other information required to be reported by Federal, state or local tax laws, rules or 17 regulations, to its customers until the effective date of this Agreement, whereupon CSC shall assume this function as to Introduced Accounts. (v) CSC shall have the power to allocate and make appropriate adjustments for fails, reorganization accounts, other work in process accounts, and overages relating to accounts of the customers of the Correspondent that have become Introduced Accounts pursuant to the terms of this Agreement. (vi) The Correspondent shall assume all liabilities in connection with the bad debts of all Introduced Accounts. Unsecured debits in the Introduced Accounts shall be paid within 30 days of their origin date, and it shall be the responsibility of the Correspondent to collect such payments from its customers and transmit them to CSC within such 30-day period. If any unsecured debit balances remain outstanding beyond such 30-day period, CSC is authorized to apply as payment of such debit balances commission fees owed to the Correspondent in connection with transactions pursuant to this Agreement. (vii) Transfers of securities relating to introduced accounts shall tee frozen ten business days prior to the effective date of this Agreement. (viii) CSC shall limit its services pursuant to the terms of this Agreement to that of clearing functions and the related services expressly set forth herein and the Correspondent shall not hold itself out as an agent of CSC or any of the subsidiaries or companies controlled directly or indirectly by or affiliated with CSC or its parent. (ix) This Agreement supersedes any previous agreement and may be modified only by a writing signed by both parties to this Agreement. Such modification shall not be deemed as a cancellation of this Agreement. (x) This Agreement shall be submitted to and/or approved by any national securities exchange, or other regulatory and self-regulatory bodies vested with the authority to review and/or approve this Agreement or any amendment or modifications hereto. In the event of any such disapproval, the parties hereto agree to bargain in good faith to achieve the requisite approval. CSC will file a fully executed copy of this agreement with the New York Stock Exchange. 18 (xi) This Agreement may be canceled by either of the parties hereto upon one hundred eighty (180) days' written notice; provided, however, that this Agreement may be canceled by either party upon thirty (30) days' written notice if (i) the net capital ratio of the other party exceeds 10 to 1, (ii) if the other party has elected to operate under paragraph [f] of Rule 15c3- 1 of the Securities Exchange Act of 1934, as amended, when its net capital is less than 5% of aggregate debit items computed in accordance with Rule 15c3-3, (iii) when the aggregate amount of any withdrawals of equity capital and/or unsecured advances or loans exceed 20% of excess net capital in any 30 day period or 30% of excess net capital in any 90 day period or (iv) its stated net capital is less than the minimum amount required under this Agreement; and provided, further, that this Agreement may be canceled by CSC at any time between the date on which this Agreement is executed and the effective date of this Agreement, if there is a material change in the control or management of the Correspondent. (xii) Any dispute or controversy between the Correspondent and CSC relating to or arising out of this Agreement shall be settled by arbitration before and under the rules of the Arbitration Committee of the New York Stock Exchange, Inc., unless the transaction which gave rise to such dispute or controversy was effected in another exchange or market which provides arbitration facilities, in which case it shall be settled by arbitration under such facilities. (xiii) CSC will not be bound to make any investigation into the facts surrounding any transaction that it may have with the Correspondent on a principal or agency basis or that the Correspondent may have with its customers or other persons, nor will CSC be under any responsibility for compliance by the Correspondent with any Laws and Regulations which may be applicable to the Correspondent. It is understood that CSC will assist the Correspondent in any investigation conducted by the Correspondent. (xiv) To facilitate the keeping of records by CSC the Correspondent will turn over promptly to CSC any and all cash remittances and securities which the Correspondent receives from its customer. Concurrently with the delivery of such funds or securities to the Correspondent, it shall furnish CSC with such information as may be relevant or necessary to enable CSC to record promptly and properly such cash remittances and securities in the respective Introduced Accounts. 19 (xv) This Agreement shall be binding upon all successors, assigns or transferees of both parties hereto, irrespective of any change with regard to the name of or the personnel of the Correspondent or CSC. Any assignments of this Agreement shall be subject to the requisite review and/or approval of any regulatory or self-regulatory agency or body whose review and/or approval must be obtained prior to the effectiveness and validity of such assignment. Except as indicated below, no assignment of this Agreement by either party shall be valid unless consented to in writing by the other party. Any assignment by CSC to any subsidiary or to a company affiliated with or controlled directly or indirectly by CSC will be deemed valid and enforceable in the absence of any consent from Correspondent. Neither this Agreement nor any operation hereunder is intended to be, shall not be deemed to be, and shall not be treated as a general or limited partnership, association or joint venture or agency relationship between the Correspondent and CSC. (xvi) Should the Correspondent in any way attempt to hold itself out as, advertise or in any way represent that it is the agent of CSC, CSC shall have the power, at is option, to terminate the Agreement and the Correspondent shall be liable for any loss, liability, damage, cost or expense (including but not otherwise limited to reasonable fees and expenses of legal counsel) sustained or incurred by CSC as a result of such representation of agency or apparent authority to act as an agent of CSC or agency by estoppel. (xvii) The Correspondent shall not, without having obtained the prior written approval of CSC, agree to place or place any advertisement in any newspaper, publication, periodical or any other media if such advertisement in any manner makes reference to CSC, to any person or entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with CSC and to the clearing arrangements and/or any of the services embodied in this Agreement. (xviii) The Laws and Regulations require that CSC must have proper documentation to support any account opened on its books, including Introduced Accounts. If, after reasonable requests therefor, the necessary documents so as to enable CSC to comply with such account documentation requirements of the Laws and Regulations have not been received by CSC, the Correspondent shall receive notification that no further orders will be accepted for the Introduced Accounts involved. Should it happen that inadvertent orders are placed for such accounts after this notice is received, no 20 commission credit will be granted from such order. On receipt of the necessary documents, this restriction will be lifted on future commissions, but any commissions withheld will be credited or paid. This Agreement is not in any way intended to limit the responsibility of CSC under the Laws and Regulations with respect to Introduced Accounts. (xix) The construction and effect of every provision of this Agreement, the rights of the parties hereunder and any questions arising out of this Agreement, shall be subject to the statutory and common law of the State of New York. (xx) The headings preceding the text, articles and sections hereof have been inserted for convenience and reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. (xxi) This Agreement shall cover only the type of services set forth herein and is in no way intended nor shall be construed to bestow upon the Correspondent any special treatment regarding any other arrangements, agreements or understandings which presently exist between Correspondent and CSC or which may hereinafter exist. The Correspondent shall be under no obligation whatsoever to deal with CSC or any of its subsidiaries or any companies controlled directly or indirectly by or affiliated with CSC or its parent, in any capacity other than as set forth in this Agreement. Likewise, CSC shall be under no obligation whatsoever to deal with the Correspondent or any of its affiliates in any capacity other than as set forth in this Agreement. (xxii) If any provision or condition of this Agreement shall be held to be invalid or unenforceable by any court, or regulatory or self- regulatory agency or body, such invalidity or unenforceability shall attach only to such provision or condition. The validity of the remaining provisions and conditions shall not be affected thereby and this Agreement shall be carried out as if any such invalid or unenforceable provision or condition were not contained herein. (xxiii) In the event that CSC assumes any contractual obligation on behalf of the Correspondent relative to communication equipment, the Correspondent hereby agrees to immediately absorb the remaining portion of said contract if Correspondent terminates the relationship with CSC. The Correspondent further agrees to absorb any and all costs associated with the removal or relocation of any 21 communication equipment installed by or at the direction of CSC, if this agreement is terminated by the Correspondent. (xxiv) Any unsecured debit residing in a customer account as a result of the failure to perform on behalf of the customer and/or the Correspondent will be the responsibility of the Correspondent. Thirty (30) calendar days will be allowed for collection. If funds are not received, CSC reserves the right to debit the Correspondent; bad debit, collateral and/or commission refund account the amount of the unsecured balance plus interest at the rate of l/2% above the prevailing broker call loan rate. (xxv) The interest and handling expense (to include day charges) for any DVP transaction that does not settle on a normal or regular way basis or is rejected by the agent for any reason other than CSC negligence is the responsibility of the Correspondent. (xxvi) For the purposes of any and all notices, consents, directions, approvals, restrictions, requests or other communications required or permitted to be delivered hereunder, CSC's address shall be 120 Broadway, 27th Floor, New York, New York, 10271 and the Correspondent's address shall be 1700 Lincoln Street, Suite 2200. -------------------------------- Denver, CO 80203, and either party may change its address for ---------------- notice purposes by giving written notice pursuant to registered mail of the new address to the other party. (xxvii) This Agreement shall become effective on or about_6/1/94____ or such date mutually agreed upon by the parties hereto. Made and executed at _____Denver__________ on the date hereinabove set forth. Accepted and Agreed to: CORRESPONDENT SERVICES CORPORATION (CSC) By: /s/ Robert Basso Title: President Date: 7/11/94 Accepted and Agreed to: 22 D.E. FREY & COMPANY, INC. By: /s/ Kevin L. Spencer Title: President Date 6/17/94 23 EX-10.11 17 SENIOR DEBT AGR-5/99 EXHIBIT 10.11 PROMISSORY NOTE
- ------------------------------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $1,000,000 05-20-1999 05-20-2000 1741-38185 53 6B 1741-38185 JEB - ------------------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------------------------------------------
Borrower: D.E. FREY GROUP, INC. Lender: COLORADO STATE BANK AND TRUST 1700 LINCOLN STREET, SUITE 2200 1600 BROADWAY DENVER, CO 80203-4522 DENVER, CO 80202-4999 Principal Amount: $1,000,000.00 Interest Rate: 5.400% Date of Note: May 20, 1999
PROMISE TO PAY. D.E.FREY GROUP, INC. ("Borrower") promises to pay to COLORADO STATE BANK and TRUST ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00) or so much as may be outstanding, together with interest at the rate of 5.400% per annum on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on May 20, 2000. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning June 20, 1999, and all subsequent interest payments are due on the same day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $25.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $15.00, whichever is greater. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonable practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on the Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the interest rate on this Note to 18.000% per annum. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This note has been delivered to Lender and accepted by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Denver County, the State of Colorado. This Note shall be governed by and construed in accordance with the laws of the State of Colorado. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $17.00 if Borrower makes a payment on Borrower's loan and the check or pre authorized charge with which the Borrower pays is later dishonored. COLLATERAL. This Note is secured by CSB CERTIFICATE OF DEPOSIT #70-19150. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: DALE E. FREY, PRESIDENT and PAUL L. HOCEVAR. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing or this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length or time) this loan, or release any party or guarantor or collateral: or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: D.E. FREY GROUP, INC. By: /s/ Dale E. Frey ________________________ DALE E. FREY, PRESIDENT EX-10.12 18 SENIOR DEBT AGR-8/99 EXHIBIT 10.12 PROMISSORY NOTE
- ------------------------------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $1,000,000 08-07-1999 08-14-2000 1741-37818 53 6B 1741-37818 JEB - ------------------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------------------------------------------
Borrower: D.E. FREY GROUP, INC. Lender: COLORADO STATE BANK AND TRUST 1700 LINCOLN STREET, SUITE 2200 1600 BROADWAY DENVER, CO 80203-4522 DENVER, CO 80202-4999 Principal Amount: $1,000,000.00 Interest Rate: 5.260% Date of Note: August 7, 1999
PROMISE TO PAY. D.E.FREY GROUP, INC. ("Borrower") promises to pay to COLORADO STATE BANK and TRUST ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00) or so much as may be outstanding, together with interest at the rate of 5.260% per annum on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on August 14, 2000. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning September 14, 1999, and all subsequent interest payments are due on the same day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $25.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $15.00, whichever is greater. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on the Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the interest rate on this Note to 18.000% per annum. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This note has been delivered to Lender and accepted by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Denver County, the State of Colorado. This Note shall be governed by and construed in accordance with the laws of the State of Colorado. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $17.00 if Borrower makes a payment on Borrower's loan and the check or pre authorized charge with which the Borrower pays is later dishonored. COLLATERAL. This Note is secured by CSB CERTIFICATE OF DEPOSIT #70-17518. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: DALE E. FREY, PRESIDENT. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing or this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. SPECIAL COVENANT. IN THE EVENT THE LOAN BALANCE IS LESS THAN $1,000,000, THE BORROWER AGREES TO PAY THE BANK INTEREST ON THE DIFFERENCE AT 1.0% THE BANK WILL INVOICE THE BORROWER ON A MONTHLY BASIS IN THIS EVENT. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length or time) this loan, or release any party or guarantor or collateral: or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: D.E. FREY GROUP, INC. By: /s/ Dale E. Frey ________________________ DALE E. FREY, PRESIDENT EX-10.13 19 SENIOR DEBT PLEDGE AGR EXHIBIT 10.13 AGREEMENT This Agreement is made and entered into as of this 9th day of March, 1999, by and between LOUISE H. ROGERS, ("Pledgor") and D.E. FREY GROUP, INC., a Delaware corporation (the "Company"), having its principal place of business at 1700 Lincoln Street, Suite 2200, Denver, Colorado 80203. RECITALS: A. The Company owns all of the outstanding capital stock of D.E. Frey & Company, Inc., a Delaware corporation (the "Broker"), which is a securities broker-dealer registered with the Securities and Exchange Commission, licensed under the laws of all 50 states and a member of the National Association of Securities Dealers, Inc. ("NASD"). B. The Pledgor and the Company executed an agreement dated August 7, 1997 for Pledgor to provide $1,000,000 in capital to the Company, which was amended by an agreement dated August 7, 1998 (collectively,"Original Agreement"). Pursuant to the Original Agreement, the Company obtained a revolving loan from Colorado State Bank, Denver, Colorado (the "Bank") in the principal amount of $1,000,000 bearing interest at 1% over the annual rate paid by the Bank on one- year certificates of deposit issued by the Bank ("Original Loan"). The Company has drawn down $1,000,000 of the Original Loan from the Bank. The Company has made to Broker a $500,000 subordinated loan as defined in 17 CFR (S) 240. 15c3- 1d. As required by the Original Agreement, the Broker filed the documents required under 17 CFR 240.15c3-1d with the NASD and obtained the NASD's approval. C. The Pledgor assisted the Company in obtaining the Original Loan by pledging, as collateral securing repayment of the Original Loan, a certificate of deposit issued by the Bank in the amount of $1,000,000 ("the Original CD"). The Company has paid the Pledgor, concurrently with Company's payments of interest on the Original Loan to the Bank, an amount equal to the difference between 10% per annum and the interest rate payable to the Pledgor on the Original CD on the amount of the outstanding balance due on the Loan to the Bank ("pledge fees"). D. The Company and the Broker wish to obtain additional capital in the conduct of their respective securities brokerage and related businesses. Pledgor is willing to assist the Company in acquiring such additional capital on an arrangement similar to that for the Original Loan. E. The Company wishes to consolidate the Original Loan and the new loan for additional capital, and Pledgor is willing to pledge an additional certificate of deposit to secure the consolidated loan on the terms and conditions of this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Consolidation. The Company and the Pledgor agree that Original Agreement shall be superseded in its entirety by this Agreement effective as of the closing of the transaction contemplated hereby. 2. The New Loan. The Company will make application for a revolving loan from Colorado State Bank, Denver, Colorado for a new loan, which includes and is consolidated with the Original Loan, in the principal amount of $2,000,000 bearing interest at 1% over the annual rate paid by the Bank on one-year certificates of deposit issued by the Bank, with interest only payable monthly and with principal and accrued and unpaid interest due and payable in full one year from the date of making of the loan (the "Loan"), subject to renewals for four years. If the Loan is approved by the Bank, the Company will have drawn $1,000,000 from the Bank, as of the closing of the transaction contemplated hereby, by virtue of the Original Loan. Any future borrowings on the Loan from the Bank must be approved by the Pledgor. Any net proceeds from the Loan used to provide capital to the Broker shall be in the form of a subordinated loan agreement as defined in 17 CFR 240. 15c3-1d. The Broker shall file the documents required under 17 CFR 240.15c3-1d with NASD for approval. The proposed agreement shall not be a satisfactory subordination agreement until the NASD has found the agreement acceptable and such agreement has become effective in the form found acceptable. 3. Use of New Loan Proceeds. The Company may use the proceeds of the Loan to provide financial assistance to registered representatives that the Broker recruits and that become affiliated with the Broker. The Company agrees not to provide financial assistance to the registered representative until the registered representative has resigned from his existing broker dealer and upon registration with the NASD, the Securities and Exchange Commission, all necessary Securities Exchanges, and all necessary State Securities Commissions. The Company's financial assistance will be in the form of a personal recourse loan recoverable from the gross commissions of the registered representative. Loans shall not exceed 50% of a registered representative's trailing commissions for the last twelve month period. The term of a loan shall not exceed five years. Pursuant to the terms of a loan the Company shall have the right to declare the principal balance of the loan immediately due and payable without notice or demand if (i) the registered representative's affiliation or association with the Broker shall terminate for any reason whatsoever prior to the due date of the loan; (ii) if the registered representative has not retained all licenses and registrations issued by the NASD, Securities and Exchange Commission, all necessary Securities Exchanges, and all necessary State Securities Commissions; or (iii) if the registered representative shall be in breach or default under any agreement with the Company or Broker. The registered representative shall agree to assign to the Company the right to apply his gross commissions as recorded on the Broker's books and records against the outstanding principal balance, and that the Company shall have a security interest in all his gross commissions, if he is in default of the loan. The Company agrees to require the registered representative to execute a promissory note with these provisions and to file an appropriate financing statement to preserve a first lien security interest in favor of the Company against the gross commissions of the registered representative. -2- 4. Pledge of CD. Pledgor agrees to assist the Company in obtaining the Loan by pledging, as collateral securing repayment of the Loan, a certificate of deposit issued by the Bank in the amount of $2,000,000 (the "CD"). Pledgor agrees that the CD shall remain on deposit with the Bank at all times during the term of the Loan and until the Loan are paid in full. Pledgor agrees to deposit an additional $1,000,000 in an interest bearing Escrow Account at Colorado State Bank until closing of the loan and issuance of the CD. The cash deposit with interest will be returned if the transaction does not close. By written notice to the Company at its principal office, no sooner than six months after the effective date of this Agreement, the Pledgor may accelerate the withdrawal of the CD as collateral for the Loan upon occurrence of an Event of Acceleration as defined in this paragraph. The Pledgor may accelerate such withdrawal of the CD as collateral to the last business day of a calendar month not less than six months after the receipt of such notice by the Company. Events of Acceleration which may be included shall be limited to: (a) Failure to pay the pledge fees provided in this Agreement as scheduled; (b) Failure to pay when due other money obligations of a specified material amount; (c) Discovery that any material, specified representation or warranty of the Company which is included in this Agreement and on which this Agreement was based or continued was inaccurate in a material respect at the time made; (d) The following specified and clearly measurable event(s), which the Pledgor and the Company agree (i) is a significant indication that the financial position of Company and/or the Broker has changed materially and adversely from agreed upon specified norms; or (ii) could materially and adversely affect the ability of the Broker to conduct its business as conducted on the effective date of this Agreement; (iii) is a significant change in the senior management or in the general business conducted by the Broker from date this Agreement became effective; or (iv) constitute continued failure to perform agreed-upon covenants included in this Agreement relating to the maintenance and reporting by the Company of its financial position or relating to the conduct of its business. The events of Acceleration as discussed in paragraphs 4 (a) through (d) are enumerated below: (i) The filing of an application by the Securities Investor Protection Corporation for a decree adjudicating that customers of the Broker are in need of protection under the Securities Investor Protection Act of 1970 and the failure of the Broker to obtain the dismissal of such application within 30 days; -3- (ii) The aggregate indebtedness of the Broker exceeding 1500 percent of its net capital or, in the case the Broker has elected to operate under Section 17 CFR (S) 240.15c3- 1(a)(2)(vi), its net capital computed in accordance therewith is less than 2 percent of its aggregate debit items computed in accordance with 17 CFR (S) 240.15c3-3a, if greater, throughout a period of 15 consecutive business days, commencing on the day the Broker first determines and notifies the Company and the Pledgor of such fact. (iii) Revocation by the Commission of the registration of the Broker; (iv) Suspension by the NASD (without reinstatement within 30 days) or revocation of the Broker's status as a member thereof; and (v) Receivership, insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to bankruptcy laws, or any other marshaling of assets and liabilities of the Broker. 5. Fees to Pledgor. The Company agrees to pay all pledge fees due under the Original Agreement to the Pledgor on or before closing of the transaction contemplated hereby. Pledgor requires a return of 10% per annum on the $2,000,000 principal amount of the CD. Therefore, the Company agrees to pay the Pledgor, concurrently with the Company's payments of interest on the Loan to the Bank, an amount equal to the difference between 10% per annum and the interest rate payable to the Pledgor on the CD on the amount of the outstanding balance due on the Loan to the Bank ("pledge fees"). 6. Closing. Closing of the transactions contemplated hereby shall occur as soon as possible but not later than May 31, 1999. Closing shall take place at such other time or place as the parties shall mutually agree. Each party shall promptly cooperate with the Bank and the other party with a view toward expediting the closing. The obligations of the Company and the Pledgor at closing shall be subject to the conditions that all representations and warranties of the other party shall be true as if then given and the other party shall have performed or observed all terms, conditions and obligations hereunder to be performed or observed by it on or prior to closing. 7. Representations, Warranties and Obligations of the Company. The Company represents and warrants to Pledgor, which representations and warranties shall survive the closing, as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted, and is duly qualified as a -4- foreign corporation and in good standing in all other jurisdictions in which such qualification is required. The Company owns all of the issued and outstanding capital stock of the Broker. (b) All corporate action on the part of the Company and its officers, directors and shareholders necessary for the authorization, execution, delivery and performance of all obligations of the Company under this Agreement has been taken. This Agreement, when executed and delivered, shall constitute a valid and legally binding obligation of the Company. (c) All consents, approvals, orders or authorizations of or registrations, qualifications, designations, declarations or filings with any federal or state governmental authority on the part of the Company required in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained prior to, and be effective as of, the closing. (d) The Company will furnish monthly consolidated financial statements prepared under general accepted accounting principles and a quarterly update on all customer complaints and/or litigation. 8. Representations and Warranties of Pledgor. Pledgor represents and warrants to the Company as follows: (a) Pledgor is domiciled in and is a bona fide resident of the State of Texas. (b) Pledgor acknowledges that the pledge fees ("the Securities") will be acquired as an investment for Pledgor's own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and Pledgor has no present intention of selling, granting participation in, or otherwise distributing the same; that the Securities are restricted securities within the meaning of Rule 144 promulgated pursuant to the Securities Act of 1933 (the "Securities Act") and are subject to substantial restrictions on transfer; and that any and all certificates representing the Securities and any and all securities issued in replacement thereof or in exchange therefor shall bear the following legend, or one substantially similar thereto, which the Pledgor has read and understands: The Securities represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act") and are "restricted securities" as that term is defined in Rule 144 under the Act. The Securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company. -5- (c) The Pledgor further agrees that the Company shall have the right to give stop transfer instructions in its records against any transfer of the pledge fees, and acknowledges that the Company has informed Pledgor of its intention to issue such instructions. (d) The Pledgor has been furnished with the Company's Confidential Business Plan dated December 12, 1997, audited financial statements for D.E. Frey Group, Inc. as of December 31, 1997 and unaudited monthly financial statements for D.E. Frey Group, Inc. and subsidiaries since August 1997. Pledgor acknowledges that the Company will, upon written request made by Pledgor, provide without charge copies of all documents identified in the Confidential Business Plan. (e) Pledgor has had an opportunity to ask questions of and receive satisfactory answers from duly designated representatives of the Company and has been afforded an opportunity to examine such documents and other information which she has requested for the purpose of verifying the information set forth in the referred to above and for the purpose of answering any question she may have concerning the business, affairs and financial condition of the Company. Pledgor understands that the Confidential Business Plan does not, and does not purport to, contain all information material to the making of an informed investment decision. (f) Pledgor understands that the Securities are unregistered and must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. Pledgor further acknowledges that she is fully aware of the applicable limitations on the resale of the Securities. The Rule permits sales of "restricted securities" held for not less than two years and upon compliance with the requirements of such Rule. If the Rule is available to Pledgor, Pledgor may make only routine sales of the Securities in limited amounts in accordance with the terms and conditions of that Rule. The Company is the only person which may register its Securities under the Act and it currently is not contemplating registering any of its Securities. The Company has not made any representations, warranties or covenants to Pledgor regarding the registration of the Securities or compliance with Regulation A or some other exemption under the Act. (g) Pledgor is an investor who directly or with the assistance of her representatives has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Company based upon the information furnished to her; her personal knowledge of the business and affairs of the Company; the records, files and plans of the Company to all of which she has had full access; such additional information as she may have requested and has received from the Company; and the independent inquiries and investigations undertaken by it. (h) Pledgor is an "accredited investor" as that term is defined in Rule 501 under the Securities Act of 1933; can bear the economic risk of loss of her entire investment; she has adequate means for providing for her current needs and personal contingencies; and she has no need for liquidity with respect to her investment in the Securities. -6- (i) All information, representations and warranties contained herein or otherwise given or made to the Company by Pledgor are correct and complete as of the date of this Agreement, and if there should be any material change in such information prior to closing of the offering of the Securities, she will immediately furnish such revised or corrected information to the Company. (j) No person has given any information or made any representation not contained in the Disclosure Document referred to above or otherwise provided to Pledgor in writing by a person authorized by Company or Broker. Pledgor understands and agrees that any information or representation not contained therein must not, and will not, be relied upon and that nothing contained therein should be construed as legal or tax advice to Pledgor. (k) No person has made any direct or indirect representation or warranty of any kind to Pledgor with respect to the economic return which may accrue as a result of the transaction. Pledgor has consulted with its own tax counsel and other advisors with respect to an investment in the Company. (l) Notwithstanding anything contained herein to the contrary, the parties acknowledge and agree that the pledge of the CD as collateral securing payment of the Loan does not involve the offer or sale of a security under federal or state law and, in any event, neither this Agreement nor any other written or oral statement or representation made in connection with this Agreement shall be deemed to be an admission by the Company that the transactions contemplated hereby involve, in whole or in part, the offer or sale of a security. 9. Arbitration. In the event of any differences, claims or disputed matters between the parties hereto arising out of this Agreement or connected herewith, the parties agree to submit such matters to arbitration by the American Arbitration Association or its successor in Denver, Colorado. Either party can invoke arbitration upon ten days' notice to the other party. The determination of the arbitrator shall be final and absolute. The arbitrator shall be governed by the duly promulgated rules and regulations of the American Arbitration Association or its successor, and the pertinent provisions of the laws of the State of Colorado, relating to arbitration. The decision of the arbitrator may be entered in a judgment in any court of the State of Colorado or elsewhere. The arbitrator shall have no power to award exemplary or punitive damages. 10. Indemnification. The parties understand and acknowledge the meaning and legal consequences of the representations and warranties contained herein and in any other document delivered in connection herewith. The Company and the Pledgor each shall indemnify the other, their respective officers, directors, partners, affiliates, controlling persons, shareholders, employees, and agents and the heirs, personal representatives, successors and assigns of the foregoing (all of whom are hereinafter referred to as the "Indemnified Persons") and shall hold the Indemnified Persons harmless from and against any and all loss, damage, liability, cost or expense of any nature whatsoever (including attorneys' fees and disbursements) due to or arising out of a breach of any such representation, warranty, acknowledgment or agreement made by the indemnifying party. -7- 11. Miscellaneous. This Agreement sets forth the understanding of the parties and supersedes all prior written or oral understandings and agreements and may be modified only by a writing signed by all parties. No party shall have the right to assign all or any portion of its rights, duties or obligations under this Agreement to any other person. Subject to the foregoing, all terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors, assigns, legal representatives, heirs and estates of the parties hereto. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. The failure of any party to insist in any one or more instances upon performance of any terms or conditions of this Agreement shall not be construed as a waiver of future performance of such or any other term, covenant or condition. In the event any party invokes arbitration against the other party in order to enforce the terms of this Agreement, the party in whose favor a final award is rendered shall be entitled to recover from the other party its reasonable attorneys' fees and costs to be fixed by the arbiters which render such award. Such fees and costs shall include those incurred in connection with any appeal or appeals. Any reference to he or his shall also include she or her. Should any term or condition of this Agreement be determined by a court of competent jurisdiction to be void or unenforceable, all other provisions of this Agreement shall remain in full force and effect. 12. Notices. All notices required hereunder shall be deemed to have been given when in writing upon the earlier of personal delivery or three days following deposit in the United States mails by certified or registered mail, postage prepaid, to the other party at the addresses set forth below, or such other addresses as may subsequently be provided: To Pledgor: To Company: - ---------- ---------- Louise H. Rogers Dale E. Frey D. E. Frey Group, Inc. 1700 Lincoln, Suite 2222 Denver, Colorado 80203 IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. /s/ Louise H. Rogers ------------------------------------------ Louise H. Rogers D.E. FREY GROUP, INC., a Delaware corporation By:/s/ Dale E. Frey Dale E. Frey, President ---------------- -8- EX-10.14 20 BRIDGE LOAN AGR EXHIBIT 10.14 This Promissory Note has not been registered under the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws (the "State Acts"), and shall not be sold, pledged, hypothecated, donated or otherwise transferred (whether or not for consideration) by the holder except upon the issuance to Maker of a favorable opinion of the holder's counsel or submission to Maker of such other evidence as may be satisfactory to counsel to Maker, to the effect that any such transfer shall not be in violation of the Act and the State Acts. PROMISSORY NOTE $250,000.00 Denver, Colorado May 11, 1999 D.E. Frey Group, Inc., a Delaware corporation ("Maker"), hereby promises to pay to the order of Frank H. and Marilyn Richardson, individuals ("Lender") the principal sum of $250,000, together with interest thereon in lawful money of the United States as herein provided. 1. Interest. The unpaid principal balance of this Note shall bear -------- interest commencing on the date all proceeds of the loan are received by Maker, such interest to be at the rate of 13.5% per annum, payable in arrears in calendar quarterly installments. Each such quarterly interest payment shall be due and payable within 10 days of the end of each calendar quarter. Interest shall be calculated based on the actual number of days the principal balance remains outstanding in a year of 365 days. 2. Maturity. The unpaid principal balance of this Note, together with -------- accrued and unpaid interest, shall be due and payable at the earlier of one year from the date on which all proceeds of the loan have been received by Maker. 3. Prepayment. The unpaid principal balance of the Note, together with ---------- accrued and unpaid interest, may be paid in whole or in part, at any time in the sole discretion of Maker. The Maker agrees to pay 103% of the principal balance of the Note as full satisfaction of the principal if the Maker elects to prepay. Any prepayment in part by Maker shall be first allocated to any accrued and unpaid interest, with any remaining amount being allocated to the unpaid principal. 4. Default. If any of the following events occurs, all indebtedness ------- owing by Maker hereunder shall become forthwith due and payable to Lender, upon delivery by Lender to Maker of a written notice of default and demand for payment, and the expiration of the following periods from the delivery of such notice, during which periods Maker shall have the ability to cure such default: (i) in the case of (a) below, ten days and (ii) in the case of (b), (c), (d), or (e) below, 30 days. The unpaid principal balance of this Note shall bear interest commencing after the cure period has expired at the rate of 16.0% per annum until the Note is paid in full, if the Maker is in default and has not cured such default. (a) Any default by Maker in the payment, when due, of any part of the principal of or interest on this Note and the payment of any other sums payable by Maker pursuant to the terms of this Note. (b) The insolvency or bankruptcy of Maker or any of its direct or indirect subsidiaries, the execution by Maker or any of its direct or indirect subsidiaries of an assignment for the benefit of creditors of substantially all of the assets of Maker or any such direct or indirect subsidiary, or Maker's or any of its direct or indirect subsidiary's consent to the appointment of a trustee or a receiver or other officer of a court or other tribunal. (c) The appointment of a trustee or receiver or other officer of a court for Maker or any of its direct or indirect subsidiaries, or for a substantial part of their properties, without the consent of Maker or of such direct or indirect subsidiary, where no discharge is effected within 30 days. (d) The institution of bankruptcy, reorganization, insolvency, or liquidation proceedings by or against Maker or any of its direct or indirect subsidiaries, and if against Maker or such a direct or indirect subsidiary, where such proceeding is consented to by Maker or such subsidiary or remains undismissed for 30 days. (e) Any breach or failure of Maker to perform any term or condition of this Note. 5. Collection. Maker and all guarantors and endorsers of this Note shall ---------- pay all costs and expenses of collection and enforcement of this Note, including reasonable attorneys' fees. 6. Waiver. Demand, presentment for payment, notice of dishonor, protest ------ and notice of protest are hereby waived. 7. Proceeds. The proceeds from this Note, to be given on and as of the -------- date of this Note, shall consist of $250,000 in cash, to be used for the payment of interest on outstanding subordinated debt and costs associated with the proposed initial public offering of Maker. 8. Assignment. This Note may not be assigned by Lender or Maker without ---------- the express written consent of the other party; provided, however, that Lender may assign this Note to any of its affiliates without such consent. Such an affiliate, for purposes of this Section 9, is any person of which Lender owns directly or indirectly more than 50% of the voting equity interests, or such person as owns directly or indirectly more than 50% of the voting equity interests of Lender, or which the Lender controls as general partner. 9. Governing Law. This Note is made and is being executed in the State of ------------- Texas, and the provisions hereof will be construed in accordance with the laws of the State of Texas. Furthermore, Lender and Maker (and their lawful assignees, successors and endorsers) further agree that in the event of default this Note may be enforced in any court of competent jurisdiction in the State of Texas, and they do hereby submit to such jurisdiction in the State of Texas. 10. Severability. Invalidation of any of the provisions of this Note ------------ shall not affect the remainder of this Note. 11. Amendment. This Note may not be amended or modified except by an --------- instrument in writing signed by both parties. 12. Warrants. The Lender will issue warrants to purchase 50,000 shares of -------- D.E. Frey Group, Inc. common stock at an exercise price of $3.50 per share and the warrants will expire on April 30, 2004. D.E. FREY GROUP, INC. By: /s/ Dale E. Frey ______________________________ Dale E. Frey, President EX-21 21 SUBSIDIARIES OF REGISTRANT Exhibit 21 Subsidiaries of Registrant Subsidiary State of incorporation - ---------- ---------------------- D.E. Frey & Company, Inc Delaware DEF Special Fund, LLC Colorado EX-23.1 22 CONSENT OF HEIN & ASSOC EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the use in the Registration Statement on Form S-1 and related Prospectus of D.E. Frey Group, Inc. of our report dated February 5, 1999, accompanying the financial statements of D.E. Frey Group, Inc. contained in such Registration Statement, and to the use of our name and the statements with respect to us, as appearing under the heading "Experts" in the Prospecus. HEIN + ASSOCIATES LLP Denver, Colorado September 30, 1999 EX-27 23 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR D.E. FREY GROUP'S JUNE 30, 1999 FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,086 2,234 1,227 0 226 627 6,119 0 3,345 0 0 0 6,070 0 0 457 (3,753) 6,119 4,566 1,671 13,557 0 2,540 317 17,093 (78) (78) 0 0 (78) (0.02) (0.02)
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