SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, For Use of the
[ ] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
Frontier Adjusters of America, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common stock, par value $0.01 per share
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2) Aggregate number of securities to which transaction applies:
16,840,000 shares
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3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
$3.50 per share (based upon the closing price of Registrant's common stock
on May 2, 2000 as quoted on the AMEX)
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4) Proposed maximum aggregate value of transaction:
$58,940,000
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5) Total fee paid:
$11,788
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[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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[Frontier Letterhead]
________________, 2000
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Frontier Adjusters of America, Inc. ("Frontier" or the
"Company") to be held at _____ a.m., on ___________, 2000 at Frontier's
executive offices, located at 45 East Monterey Way, Phoenix, Arizona 85012.
At the Special Meeting you will be asked to consider and vote upon the
following Proposals:
1. To approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement") between Frontier, United Financial Adjusting Company
("UFAC") and Netrex Holdings LLC ("Netrex"), and the transactions
contemplated by the Merger Agreement, pursuant to which Frontier will
merge with and acquire a 100% ownership interest in UFAC and its
subsidiaries, DBG Technologies, Inc. ("DBG") and JW Software, Inc.
("JW") in exchange for the net issuance of 11,581,487 shares of
Frontier's common stock;
2. To approve the Amended and First Restated Articles of Incorporation of
the Company (the "Amended and Restated Articles") to conform the
Company's Articles of Incorporation to certain changes under Arizona
law, to change the Company's name to "Netrex Business Services, Inc."
and to reflect certain other technical changes; and
3. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
After careful consideration, your Board of Directors has unanimously
approved the Merger Agreement and the Amended and Restated Articles and has
concluded that each is in the best interests of Frontier and its shareholders.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY RECOMMENDED THAT FRONTIER'S SHAREHOLDERS
APPROVE THE MERGER AGREEMENT AND APPROVE THE AMENDED AND RESTATED ARTICLES.
Approval of each of the Proposals requires the affirmative vote of a
majority of the votes present in person or represented by proxy at the Special
Meeting provided that there is a quorum present. A quorum consists of over 50%
of the shares of Common Stock issued and outstanding on the Record Date. UFAC,
together with shareholder directors, holds approximately 68.5% of the aggregate
number of votes that may be cast by the holders of Frontier common stock, which
votes are sufficient to approve the Merger Agreement and the Amended and
Restated Articles.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Shareholders, a Proxy Statement relating to the actions to be
taken by Frontier's shareholders at the Special Meeting, and a proxy. The Proxy
Statement more fully describes the terms of the proposed Merger Agreement and
includes information about UFAC, DBG and JW.
To ensure your representation at the Special Meeting, please complete,
sign, and date the enclosed proxy and return it in the envelope provided. If you
attend the Special Meeting, you may vote in person if you wish, even though you
have previously turned in your proxy.
Thank you for your continued support.
Sincerely,
Peter I. Cavallaro, Esq.
Secretary
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FRONTIER ADJUSTERS OF AMERICA, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
_________________, 2000
The Special Meeting of Shareholders of Frontier Adjusters of America, Inc.,
an Arizona corporation ("Frontier" or the "Company"), will be held on
______________, _____________, 2000, at _______ a.m. (Phoenix, Arizona time) at
Frontier's executive offices located at 45 East Monterey Way, Phoenix, Arizona
85012, for the following purposes:
1. To approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement") between Frontier, United Financial Adjusting Company
("UFAC") and Netrex Holdings LLC ("Netrex"), and the transactions
contemplated by the Merger Agreement, pursuant to which Frontier will
merge with and acquire a 100% ownership interest in UFAC and its
subsidiaries, DBG Technologies, Inc. ("DBG") and JW Software, Inc.
("JW") in exchange for the net issuance of 11,581,487 shares of
Frontier's common stock;
2. To approve the Amended and First Restated Articles of Incorporation of
the Company (the "Amended and Restated Articles") to conform the
Company's Articles of Incorporation to certain changes under Arizona
law, to change the Company's name to "Netrex Business Services, Inc."
and to reflect certain other technical changes; and
3. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only shareholders of record at the close of
business on ______________, 2000 are entitled to notice of and to vote at the
Special Meeting.
All shareholders are cordially invited to attend the Special Meeting in
person. To assure your representation at the Special Meeting, however, you are
urged to mark, sign, date, and return the enclosed proxy as promptly as possible
in the postage-prepaid envelope enclosed for that purpose. Any shareholder
attending the Special Meeting may vote in person even if he or she previously
has returned a proxy.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE SPECIAL MEETING ARE
REQUESTED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE
PROVIDED.
By Order of the Board of Directors,
Phoenix, Arizona Peter I. Cavallaro, Esq.
__________________, 2000 Secretary
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FRONTIER ADJUSTERS OF AMERICA, INC.
45 EAST MONTEREY WAY
PHOENIX, ARIZONA 85012
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PROXY STATEMENT
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Shareholders are urged to read this Proxy Statement in its entirety. As used
herein, "Frontier" or the "Company" means Frontier Adjusters of America, Inc.,
an Arizona corporation, and/or its subsidiaries. "UFAC" means United Financial
Adjusting Company, an Ohio corporation, which is a wholly-owned subsidiary of
Netrex Holdings LLC ("Netrex"). "JW" means JW Software, Inc., a Missouri
corporation, which is wholly owned by UFAC. "DBG" means DBG Technologies, Inc.,
an Ohio corporation, which is wholly owned by UFAC. Netrex is a Delaware limited
liability company. UFAC owns 5,258,513 shares of common stock of Frontier (or
approximately 59% of the outstanding capital stock of Frontier). Netrex is owned
by certain private investors, including John M. Davies, Frontier's Chairman of
the Board. Certain capitalized terms used in this Summary are defined elsewhere
in this Proxy Statement.
GENERAL
The enclosed proxy is solicited on behalf of Frontier by Frontier's board of
directors (the "Board" or "Board of Directors") for use at Frontier's Special
Meeting of Shareholders to be held on _________, ____________, 2000 at ____ a.m.
(Phoenix, Arizona time) (the "Special Meeting"), or at any adjournment thereof,
for the purposes set forth in this Proxy Statement and in the accompanying
Notice of Special Meeting of Shareholders.. The Special Meeting will be held at
Frontier's executive offices located at 45 East Monterey Way, Phoenix, Arizona
85012.
These proxy solicitation materials were first mailed on or about _____________,
2000 to all shareholders entitled to vote at the Special Meeting.
The mailing address of the Company's principal executive office is 45 East
Monterey Way, Phoenix, Arizona 85012.
RECORD DATE
The Board of Directors has fixed the close of business on _____________, 2000 as
the record date (the "Record Date") for the determination of shareholders
entitled to notice of and to vote at the Special Meeting or any adjournment
thereof.
REVOCABILITY OF PROXIES
Any person giving a proxy may revoke the proxy at any time before its use by
delivering to the Company written notice of revocation or a duly executed proxy
bearing a later date, or by attending the Special Meeting and voting in person.
VOTING SECURITIES AND VOTING RIGHTS
On the Record Date, the Company had outstanding 8,957,660 shares of common
stock, par value $.01 per share (the "Common Stock"). Each holder of Common
Stock voting at the Special Meeting, either in person or by proxy, may cast one
vote per share of Common Stock held on all matters to be voted upon at the
Special Meeting.
The presence, in person or by proxy, at the Special Meeting of shareholders
entitled to cast a majority of all votes entitled to be cast at such meeting,
shall constitute a quorum. Assuming that a quorum is present, the affirmative
vote of a majority of the shares of the Company present in person or represented
by proxy at the Special Meeting is required to approve the Merger Agreement and
the transactions contemplated thereby, to approve the Amended and Restated
Articles of Incorporation, and to transact such other business as may properly
come before the Special Meeting or any adjournment thereof.
Shareholders are not entitled under Arizona law to appraisal rights with respect
to the Transaction.
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Votes cast by proxy or in person at the Special Meeting will be tabulated by the
election inspectors appointed for the Special Meeting and will determine whether
a quorum is present. The election inspectors will treat abstentions as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum, but as unvoted for purposes of determining the approval of any
matter submitted to the shareholders for a vote. Thus, an abstention will have
the same effect as a vote against a Proposal. If a broker indicates on the proxy
that it does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to that matter.
VOTING OF PROXIES
When a proxy is properly executed and returned, the shares it represents will be
voted at the Special Meeting as directed. Unless otherwise instructed, shares
represented by proxy will be voted "for" each of the Proposals. If any other
matters should properly come before the Special Meeting, it is the intention of
the persons named in the enclosed proxy to vote each proxy in accordance with
their best judgment on such matter.
SOLICITATION
The cost of this solicitation will be borne by the Company. In addition, the
Company may reimburse brokerage firms and other persons representing beneficial
owners of shares for expenses incurred in forwarding solicitation materials to
such beneficial owners. Proxies also may be solicited by certain of the
Company's directors and officers, personally or by telephone or telegram,
without additional compensation.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Frontier (File No.
001-12902) are incorporated by reference in this Proxy Statement.
1. Frontier's Annual Report on Form 10-K for the fiscal year ended June 30,
1999.
2. Frontier's Quarterly Reports on Form 10-Q for the quarters ended September
30, 1999 and December 31, 1999.
3. Frontier's current report on Form 8-K dated December 2, 1999.
All documents and reports filed by Frontier pursuant to Sections 13(a), 13(c),
14, or 15(d) of the Exchange Act after the date of this Proxy Statement and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference in this Proxy Statement and to be a part hereof from the dates of
filing of such documents or reports. Any statement contained in a document or
report incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein, or in any other subsequently filed
document or report which also is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROXY STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST TO THE
COMPANY'S SECRETARY AT THE COMPANY'S EXECUTIVE OFFICE SET FORTH IN THIS PROXY
STATEMENT.
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PROPOSAL ONE
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On May 2, 2000, the Board of Directors approved a proposal to merge with
UFAC. UFAC offers products and services in the area of claims adjusting, third
party claims administration, and subrogation collections. UFAC has two
wholly-owned subsidiaries, JW and DBG. JW and DBG provide innovative software
products and programs for customers in the insurance, financial and automotive
industries. The Board believes that this merger will allow Frontier to enter
into businesses closely related to its insurance and risk management business,
to expand its technology base and operations and to expand into e-commerce
activities.
PARTIES TO THE TRANSACTION
FRONTIER
Frontier licenses and franchises independent insurance adjusters (the
independent insurance adjusters licensed or franchised by Frontier are
hereinafter referred to collectively as the "Adjusters") throughout the United
States and in Canada and provides support services to the Adjusters. The
Adjusters are engaged by insurance carriers and self-insured companies to adjust
claims made against them by claimants and by policyholders. In addition,
Frontier, and certain of the Adjusters, offer risk management services to their
clients. As of March 31, 2000, Frontier had entered into 505 license and
franchise agreements ("Agreements") with 683 advertised locations in 50 states,
the District of Columbia and Canada. In addition to licensing and franchising
Adjusters, Frontier owns and operates independent insurance adjusting and risk
management businesses in Arizona and Nevada.
As of March 31, 2000, Frontier employed 34 people, 33 full-time and one
part-time. Nine employees provided adjusting services full-time, one employee
provided adjusting services part-time, two were full-time officers of Frontier,
and 22 were full-time administrative staff. Management believes that its
relations with its employees are good.
GENERAL
For its fiscal years ended June 30, 1999, 1998 and 1997, Frontier's licensing
and franchising activities accounted for approximately 78%, 79% and 86%,
respectively, of gross revenue, and Frontier's adjusting and risk management
businesses accounted for approximately 22%, 21% and 14%, respectively, of gross
revenue. The revenue derived from Frontier's operations, as well as the gross
billings by Adjusters (upon which Frontier's revenue from licensing and
franchising activities are based), are set forth in the following table.
Fiscal Year Ended June 30,
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1999 1998 1997
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Gross billings by Adjusters $44,730,000 $42,050,000 $48,060,000
(approximate)
Revenue from licensing and
franchising activities 4,936,349 4,596,657 5,278,967
Revenue from Frontier-owned adjusting
and risk management businesses 1,405,235 1,228,691 885,636
Although Frontier generally considers its client base broad and well
diversified, collections received by Adjusters from one insurance company,
Scottsdale Insurance Company, represented revenue to Frontier of 1.6%, 9.2% and
18.8% of continuing licensing and franchising fees for the years ended June 30,
1999, 1998 and 1997, respectively. In June 1997 this client elected to purchase
the majority of its adjusting services from other vendors, and thereafter, the
revenue generated from this client substantially diminished.
For further disclosure regarding Frontier's accounting segments, see Note 8 to
the financial statements to Frontier's Annual Report for the fiscal year ended
June 30, 1999.
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CLAIMS ADJUSTING
A claims adjuster conducts the business of providing claims adjustment services
to insurance companies and to self-insured clients. The major elements of claims
adjusting consist of the following:
* Investigation - the development of information necessary to determine
the cause and origin of the loss.
* Evaluation - the determination of the extent and value of damage
incurred and the coverage, liability and compensability relating to
the parties involved.
* Disposition - the resolution of the claim, whether by payment,
negotiation and settlement, by denial or by other resolution.
* Management - the coordination of all parties involved in the claims
process and the supervision of the claims process including risk
management related services.
Insurance companies, which represent the major source of revenue to adjusters,
customarily manage their own claims management function and require defined
services from adjusters, such as field investigation and settlement services.
Self-insured clients typically require a range of risk management services
including claims adjustment, claims management, statistical reporting and loss
control, among other services. Insurance companies usually make claims adjusting
assignments on a claim by claim basis. Self-insured clients typically retain
adjusting firms like Frontier and the Adjusters to handle all of their claims,
such as workers' compensation, general liability claims and other claims.
Neither Frontier nor any of the Adjusters engages in public adjusting, which
consists of representing individual insureds with respect to their claims
against insurance companies.
Risk management related services consist primarily of providing services to
in-house risk managers of self-insureds whose internal resources do not include
expertise in claims adjusting or other aspects of claims management. Risk
management services, which also are often referred to in the industry as "third
party administration" include administering claims, working with self-insurers
to decide whether certain claims need external investigation, coordinating the
efforts of the field investigation with internal claims review activities,
generating necessary statistical reports and paying losses. The insurance
companies responsible for the excess coverage of self-insured clients often play
a significant role in the selection and retention of providers of risk
management or third party administration and related services.
LICENSING AND FRANCHISING
The major part of Frontier's revenue is derived under its Agreements with the
Adjusters. Pursuant to the terms of the Agreements, an Adjuster is authorized to
use, within a designated geographic area, Frontier's service mark in providing
adjusting and risk management-related services. In addition, an Adjuster is
provided with a computerized central collection and rebilling service and
national advertising and referrals by Frontier. Frontier receives a 10% or 15%
royalty fee on all of the Adjusters' collections. In fiscal 1999, Frontier
retained 10.7% of the Adjusters' collections as royalty fees under all of its
Agreements.
Frontier generally does not advertise for or solicit potential licensees or
franchisees. Frontier believes that through the financial flexibility it offers
and the established and dependable services it provides to Adjusters, Frontier
is generally capable of attracting qualified licensees and franchisees.
Frontier's philosophy is to enter into agreements with licensees and franchisees
who are highly qualified and capable of adjusting all types of claims. Frontier
estimates that the average length of time during which the Adjusters have been
providing insurance adjusting services, on a company-wide basis, is
approximately 20 years.
Before entering into an agreement with a prospective licensee or franchisee,
Frontier reviews the prospective licensee's or franchisee's background to
determine whether he or she is qualified and capable of rendering professional
insurance adjusting services. In evaluating a potential licensee or franchisee,
Frontier considers the length of time the potential licensee or franchisee has
been involved in insurance adjusting and such other factors as his or her (i)
experience and the types of claims that he or she is capable of adjusting; (ii)
ability to act independently without supervision by Frontier; (iii) prior and
current associations in the insurance adjusting business; and (iv) reputation in
the insurance adjusting business and in the community in which he or she will
provide insurance adjusting services.
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OPERATION OF INDEPENDENT ADJUSTERS
Each Adjuster is required to maintain an office within a designated geographic
area defined in his or her Agreement. The Agreements require, among other
things, that Adjusters devote at least 80% of their time during any 45-day
period to the conduct of the defined business. The Agreements are subject to
termination by Frontier upon an Adjuster's failure to meet minimum gross billing
volumes. The Adjusters retain the right to make independent decisions regarding
the management and operation of their businesses, subject to the terms of the
Agreements.
Frontier has a national advertising program in major trade journals. The
advertising is designed to promote Frontier's operations and to generate new
accounts for its Adjusters. Adjusters receive claims from both local referrals
developed by the Adjusters and from referrals by Frontier. The latter referrals
are generally obtained through advertising efforts and the general reputation of
Frontier. In addition, Adjusters are permitted, but not required, to advertise
within their designated geographic areas.
Upon providing services to a client, the Adjuster prepares a bill to the client
for the Adjuster's services. The form of invoice, which is supplied by Frontier,
indicates that remittance is to be made directly to Frontier's address. Upon
receipt of payment from the client, Frontier withholds the royalty fee together
with any reimbursements due to Frontier for liability and errors and omissions
insurance premiums Frontier may have paid on behalf of the Adjuster and
repayments for any credits, loans or advances Frontier may have made to the
Adjuster. Frontier rebills uncollected invoices on a 45-60 day cycle. Frontier's
arrangements with Adjusters located in Canada differ from the foregoing in that
clients of Canadian Adjusters send their remittances to Frontier's Canadian P.
O. Box or to Frontier's franchisee in Regina, Saskatchewan, Canada. Remittances
received by Frontier's franchisee are deposited by the franchisee directly into
Frontier's bank account.
If a particular geographic area produces claims volume greater than the Adjuster
in that area is capable of servicing, the Adjuster may, at Frontier's request,
or at the suggestion of the Adjuster, relinquish to a new prospective licensee
or franchisee a portion of the designated area covered by his or her Agreement.
As a result of these arrangements, Frontier redirects to the relinquishing
Adjuster 5% of collections derived from services provided by the new Adjuster.
To assist new Adjusters in meeting their business and personal expenses during
their initial period as Adjusters, Frontier may advance funds to them against
future billings. Typically such advances are made semi-monthly and average
approximately $2,500 per month. The number of Adjusters to whom semi-monthly
advances are made typically varies between 1 and 5. Frontier believes that these
arrangements provide new Adjusters assistance in making the transition from
being employees of insurance companies or other adjusting firms to becoming the
owners of their own businesses and, therefore, aid Frontier in attracting
qualified individuals as Adjusters.
In addition to advancing funds to new Adjusters, Frontier frequently lends money
to Adjusters. These loans may either be loans that are repaid on a weekly basis
out of their collections, or advances against accounts receivable. Frontier
generally requires that advances against receivables be repaid in full within 45
days.
Frontier does not charge interest on any loans or advances made to Adjusters.
During the past four fiscal years, Frontier has loaned or advanced an average
aggregate of approximately $342,000 per month and has received reimbursement of
an average of approximately $322,000 per month. At December 31, 1999, Frontier
had approximately $1,209,000 in outstanding loans or advances. During the past
four fiscal years, Frontier has written off an average of approximately $183,000
per year due to bad debts related to these arrangements.
COMPANY-OWNED INSURANCE ADJUSTING BUSINESS
In addition to its operations as a licensor and franchisor, Frontier conducts
independent insurance adjusting and risk management operations in Arizona and
Nevada.
OWNERSHIP OF FRONTIER COMMON STOCK BY UFAC
On April 29, 1999, at the annual shareholders' meeting, Frontier's shareholders
approved the November 20, 1998, agreement between Frontier and UFAC, whereby
UFAC purchased 5,258,513 shares of Common Stock of Frontier, representing
approximately 59% of Frontier's then outstanding Common Stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FRONTIER
For a discussion of management's analysis of financial condition and results of
operations, refer to Frontier's Form 10K for the fiscal year ended June 30,
1999, and Form 10-Q for the quarter ended December 31, 1999.
UFAC AND THE UFAC SUBSIDIARIES
UFAC, together with its subsidiary companies, DBG and JW, provides claims
adjusting services, third party claims administration, and claims administration
software to the automotive, insurance and financial services industries, with
particular emphasis on Internet applications. UFAC owns 100% of the issued and
outstanding capital stock of DBG and JW.
UFAC
UFAC offers a group of insurance claims products and services, including claims
adjusting, third party claims administration and subrogation collections, to a
broad range of insurance carriers and managers. UFAC's products and services are
directed primarily to the automotive industry and may be customized to meet the
needs of independent insurance carriers, risk managers of financial institutions
and self insured fleets, and commercial insurance brokers and their clients.
UFAC's products and services are designed to achieve lower claims costs for its
clients.
CLAIMS ADJUSTING
UFAC carefully selects and trains its claim representatives to provide third
party claims administration services for the commercial market. Claim
representatives average eight years of professional claims experience and
receive ongoing training. Each claim representative is evaluated under
proprietary performance standards for timeliness, accuracy and courtesy.
THIRD PARTY CLAIMS ADMINISTRATION
UFAC provides administration of complex, high limit claims for the auto
industry.. Claim specialists continuously evaluate claims to make
recommendations for settlement or defense. In addition, claim specialists are
encouraged to cross-sell services to existing clients and to other carriers when
appropriate. UFAC claim specialists are available to respond to customer needs
24 hours per day, seven days per week.
UFAC's extensive experience in third party claims administration has resulted in
development of a litigation database of approved defense counsel. The litigation
database helps UFAC to objectively review and evaluate the results, cost and
performance of each defense counsel. Also, UFAC has a dedicated special
investigation unit with a countrywide and international network of
investigators. Using UFAC's information systems and databases, together with the
National Insurance Crime Bureau and its experience and data, UFAC investigates
and assists, on behalf of its clients, in the prosecution of criminal claims
against perpetrators of insurance fraud.
SUBROGATION COLLECTIONS
UFAC's operations include a subrogation group that focuses on collection of
third party liability indemnification claims. UFAC's subrogation collectors are
skilled in litigation management and trained as casualty claims representatives.
COMPETITION
UFAC's main competitors are Hertz Claims Management, Crawford and Company, and
Empire Fire & Marine. UFAC believes that its extensive experience in the
commercial auto industry and its highly trained claims professionals, coupled
with an operating structure that allows efficient and effective handling of all
customer claims, permits UFAC to efficiently compete with its major competitors,
many of whom have greater financial resources than UFAC.
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MAJOR CUSTOMERS
Historically, UFAC has had four major customers: Enterprise-Rent-a-Car Company;
Rental Insurance Services Enterprise (USI Insurance Service Corp.); Frontier
Insurance Group, Inc., including its clients Dollar/Thrifty Auto Group,
Budget-Rent-A-Car and Ryder; and American Express Travel Related Services
Company, Inc. For the 12 months ended December 31, 1999 these customers
represent 17%, 9%, 44% and 28% of UFAC's revenue, respectively. In general,
UFAC's relationships with its customers tend to span several years because of
the complexities of the working relationship and the high cost of changing claim
management firms. However, Frontier Insurance Group, Inc., a recently acquired
customer, informed UFAC in April 2000 that it would cease using UFAC's services
for new claims. UFAC believes that it has replaced this lost revenue with
additional revenue from Enterprise-Rent-a-Car. Enterprise-Rent-a-Car represented
approximately four months of revenue in 1999 and has contracted with UFAC for
services for the entire year 2000. The loss of any of its major customers in the
future may have a material adverse affect on UFAC's results of operations.
PRICING AND EXPENSE MANAGEMENT
UFAC is paid a predetermined fee for managing and adjusting a claim to closure.
Fees vary by type of claim, for example, bodily injury claims are much more
complex than property damage claims and therefore the related fees are higher.
The variation is due to the complexity of the type of claim and the resources
needed to resolve the type of claim. Complex claims often last three years or
more. Fees are paid at the beginning of an engagement thereby generating a
strong initial cash flow.
Adjuster compensation accounts for approximately 65% of UFAC's total annual
expenses. Therefore, staff management and claim volume are the major factors
affecting profitability. UFAC monitors adjuster inventory levels and closure
rates on a daily basis. UFAC closely monitors loss adjustment expense per claim
to ensure that its fee structure is adequate and standard productivity levels
are being met. Because of the service nature of UFAC's business, UFAC's fixed
costs are low in comparison to its variable costs. In the 12 months ended
December 31, 1999 fixed costs represented approximately 30% of UFAC's total
costs.
UFAC's technology staff has spent the past 24 months developing a PC
server-based claim system to replace the current mainframe system. The main
features of the new system are enhanced user efficiencies and lower operating
costs. In accordance with generally accepted accounting principles ("GAAP"),
these costs have been capitalized and will be amortized over five years
beginning mid 2000. The net incremental annual expense will be approximately
$80,000.
EMPLOYEES
As of April 1, 2000, UFAC employed approximately 230 employees, of whom 20 were
administrative, 200 were claims service employees and ten were in sales and
marketing and other categories. UFAC has not experienced any work slow downs in
the past and believes that it has good relationships with its employees.
FACILITIES
UFAC's operations are located in four leased facilities located in Cleveland,
Ohio; Sacramento, California; Orlando, Florida; and Memphis, Tennessee.
Approximately 80% of UFAC employees are located in Cleveland, Ohio under a
short-term lease. UFAC has identified potential replacement space and
anticipates entering into a lease on the replacement space under similar terms
and conditions to its current lease.
JW AND DBG
JW and DBG provide innovative software products and programs for customers in
the insurance, automotive, and financial industries. JW's and DBG's products are
offered under license agreements to customers, which agreements also offer
customer training, installation assistance and ongoing data processing support
from their respective professional staffs.
7
<PAGE>
JW was formed by James T. Wieland in October 1989. In October 1998, UFAC
purchased 51% of JW from Mr. Wieland and in April 2000 purchased the remaining
49% of JW. DBG commenced operations in early 1999. JW and DBG provide supporting
services to each other.
PRODUCTS AND SERVICES
JW's and DBG's claims management software systems help to manage the process of
adjusting workers' compensation and property and casualty claims. These systems
utilize visual displays, including icons and pull down menus, and a "wizard"
feature that provides easy to access help menus to facilitate use of the
product. Assignment and workflow management applications help streamline field
workflow administration for the user. Service and assignment requests are
entered via the Internet. The software identifies the closest claims adjusters
to complete the assignment, then tracks the request, providing status reports
throughout the cycle. Field service results, including digital images, are used
to expedite the transfer of information from the field to the central office and
to customers.
Both JW and DBG believe software support is key to the success of information
systems. Therefore, JW and DBG operate a Help Desk 24 hours per day, seven days
per week. In addition, all software purchases include comprehensive training,
using the software tailored for the specific customer's application. JW and DBG
also offer consulting services in the areas of project management, custom
programming, data migration and business process evaluation.
JW's and DBG's software systems were developed in Power Builder 6.5 for
Microsoft Windows and use open database access methods to allow system
implementations with various commercial grade databases such as Oracle, MS, SQL
Server and Sybase SQL Anywhere. The systems adhere to Windows 3.x, Windows 98
and Windows NT standards. System interfaces are designed to be consistent and
intuitive, utilizing visual displays such as tool bars, icons, tabs, and
buttons. This provides a single-screen interface to all related features and
functionality.
JW and DBG anticipate that future sales volume will break down as follows:
application software sales 75%; maintenance and support services 15%; and
consulting work 10%. The companies intend to expand by acquiring small,
entrepreneurial software companies and by providing centralized marketing,
financial and technical support.
COMPETITION
JW and DBG's main competitors are CSC Computer Science Corp., Dorn Technologies,
Pyramid Systems, Envision Technology Group, The Freedom Group and The David
Corporation. JW and DBG believe that their competitive advantages include a more
comprehensive solution to claims management needs, coupled with alternative user
interface options. The companies also benefit from their affiliation with UFAC,
which provides end user expertise for the development of their claims management
software.
EMPLOYEES
As of April 1, 2000, JW and DBG, together, employed approximately 50 employees,
consisting of 34 application programmers, 4 web developers, and 12 operating
support personnel including database, hardware and network support. Because of
the service nature of JW and DBG operations, the companies operate with minimal
fixed costs. Programmer compensation (a variable cost) accounted for
approximately 80% of total annual expense during the 12 months ended December
31, 1999.
FACILITIES
JW and DBG operations are located in two leased locations in Cleveland, Ohio and
St. Louis, Missouri. Approximately 65% of their employees are located in
Cleveland, Ohio under a short-term lease. JW and DBG have identified potential
replacement space and anticipate entering into a lease on the replacement space
under similar terms and conditions to its current lease.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF UFAC
Prior to April 2000, UFAC owned 100% of DBG, 51% of JW, 100% of Vehicle
Inspection Services, Inc. (formerly Progressive Vehicle Services, Inc.) and
approximately 59% of Frontier. UFAC acquired the remaining 49% of JW in April
2000.
The following table sets forth the consolidated operating results of UFAC, DBG
and JW for the years ended December 31, 1999 and 1998 and reflects the minority
interest in JW held by a third party. The financial statements have been
prepared to reflect the financial position and results of operations of UFAC, JW
and DBG on a carve-out basis and not to reflect UFAC and all majority-owned
subsidiaries on a consolidated basis. Accordingly, UFAC's interest in Frontier
and Vehicle Inspection Services, Inc. have been excluded.
1999 1998
------------------- -------------------
Revenue $16,976,448 100.0% $ 9,361,239 100.0%
----------- ----- ----------- -----
Compensation and employee benefits 9,972,053 58.7 5,077,094 54.2
Office and overhead expenses 5,245,974 30.9 3,865,691 41.3
Other operating expenses 1,051,783 6.2 384,882 4.1
----------- ----- ----------- -----
Total operation expenses 16,269,810 95.8 9,327,667 99.6
----------- ----- ----------- -----
Income from operations 706,638 4.2 33,572 0.3
----------- ----- ----------- -----
Other income (expense) 1,161,179 6.8 178,962 1.9
Income taxes 879,862 5.2 97,737 1.0
Minority interest 99,673 0.6 63,549 0.7
----------- ----- ----------- -----
Net income $ 1,087,628 6.4% $ 178,346 1.9%
=========== ===== =========== =====
DISCUSSION
UFAC's consolidated revenue increased approximately 80% from $9,361,239 for the
12 months ended December 31, 1998 to $16,976,448 for the 12 months ended
December 31, 1999. This growth is due to two major factors. During the 12 months
ended December 31, 1999, UFAC began a claims adjusting program with Frontier
Insurance Group, Inc. and added Enterprise-Rent-A-Car to its customer base.
These two programs generated approximately $7,000,000 in revenue during the 12
months ended December 31, 1999. Frontier Insurance Group, Inc. has indicated to
UFAC that it will cease purchasing new services from UFAC commencing in April
2000. Revenue to UFAC from Frontier Insurance Group, Inc. represented
approximately $6,700,000 during the 12 months ended December 31, 1999. Also,
during 1999, JW licensed its claims management system to Budget-Rent-A-Car. This
generated approximately $700,000 in revenue during the year.
The increase in operating costs and expenses to $16,269,810 during the 12 months
ended December 31, 1999 from $9,327,667 for the 12 months ended December 31,
1998, an increase of approximately 75%, is directly correlated to the increase
in UFAC's revenue. Operating profit improved to $706,638 during the 12 months
ended December 31, 1999 from $33,572 in the 12 months ended December 31, 1998.
This increase was due to increased volume, operating efficiencies and increased
leveraging of fixed costs. Other income increased during 1999 from $178,962 in
the 12 months ended December 31, 1998 to $1,161,179 in the 12 months ended
December 31, 1999. This increase was due to the gain on sale of a rental
property during 1999.
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<PAGE>
LIQUIDITY
Net cash provided by operations increased to $11,078,428 during the year ended
December 31, 1999 from $1,379,794 during the year ended December 31, 1998. The
increase was primarily due to the increase in net income, deferred revenue and
agency deposits.
Net cash used in investing activities was $2,064,611 during the year ended
December 31, 1999 a decrease of $55,098 from $2,119,709 during the year ended
December 31, 1998. Cash used in 1999 was primarily used to purchase fixed assets
and for software development costs. Cash used in 1998 was primarily used to
purchase JW and for software development costs.
Net cash used in financing activities during the year ended December 31, 1999
was $8,789,025.. This was substantially the result of the settlement of
intercompany loans, principally with Progressive. Net cash provided by financing
activities of $745,847 during the year ended December 31, 1998 was the result of
intercompany loans received.
UFAC, DBG and JW believe that their current cash balances are sufficient to meet
anticipating operating requirements for the companies for the next 12 months.
There can be no assurance that additional capital beyond the amounts forecasted
will be required or that any such required additional capital will be available
on reasonable terms, if at all.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 established new accounting for reporting standards for derivative
financial instruments and for hedging activities. SFAS 133 requires a company to
measure all derivatives at fair value and to recognize them in the balance sheet
as an asset or liability, depending on that company's rights or obligations
under the applicable derivative contract. In June 1999, the FASB issued SFAS No.
137, which deferred the effective date of SFAS 133 for one year. UFAC, DBG and
JW will adopt SFAS 133 no later than the first quarter of fiscal year 2001. SFAS
133 is not expected to have a material impact on the consolidated results of
operations, financial position or cash flows of UFAC, DBG and JW.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
Future performance may be affected by a number of factors, which should be
considered in evaluating UFAC, DBG and JW. Revenue depends on, among other
things, continued customer satisfaction, successful new sales, timing of new
product introductions, price competition and decline and the continued
successful design of new products. Future operating results may vary
significantly from period to period as a result of these factors.
UFAC's revenue and margins are highly dependent upon a few large customers. The
loss of one or more of these customers would materially adversely affect UFAC's
operating results. For DBG and JW, frequent product introductions and rapid
product obsolescence characterize the technology market. Despite a strategy
designed to enable short time frame from product development to market, there is
no assurance that DBG and JW will be successful in execution or that successful
execution will assure high margins.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this Proxy Statement, including
statements made under "Proposal One-UFAC and the UFAC Subsidiaries - JW and DBG
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations of UFAC," concerning future, proposed and anticipated activities of
Frontier, UFAC, JW and/or DBG, certain trends with respect to their operating
results, capital resources and liquidity or with respect to the insurance
adjusting industry in general, and other statements contained in this Proxy
Statement regarding matters that are not historical facts are forward-looking
statements, and by their very nature, include risks and uncertainties.
Accordingly, actual results may differ, perhaps materially, from those expressed
in or implied by such forward-looking statements. Factors that could cause
actual results to differ materially include the foregoing and those discussed
elsewhere in this Proxy Statement and under "Special Considerations" in
Frontier's Form 10-K for the year ended June 30, 1999.
10
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning each of the directors and
executive officers of UFAC, JW and DBG.
Name Age Position
---- --- --------
UFAC:
John M. Davies 43 Sole Director
Troy M. Huth 39 President
Jeffrey R. Harcourt 39 Treasurer
Peter I. Cavallaro 38 Secretary
JW:
Troy M. Huth 39 Chairman of the Board and Director
James T. Wieland 38 President and Director
Jeffrey R. Harcourt 39 Treasurer
Peter I. Cavallaro 38 Secretary
William A. White 45 Director
DBG:
Troy M. Huth 39 President and Director
Jeffrey R. Harcourt 39 Treasurer and Director
Peter I. Cavallaro 38 Secretary
William A. White 45 Director
JOHN M. DAVIES was appointed sole director of UFAC in 1999. Mr. Davies has been
associated with Frontier as a director since 1999 and Chairman of the Board
since January 2000. Effective June 1, 1999, Mr. Davies became President of
Netrex LLC, a newly organized financial services and technology company. Mr.
Davies was employed by The Progressive Corporation from 1990 to 1999. His last
position with Progressive was managing Progressive's Diversified Business Group.
Prior to joining Progressive, he was employed at Coopers & Lybrand, an
international accounting and consulting firm. Mr. Davies has an MBA from the
University of Pittsburgh and has earned numerous professional designations,
including being a Certified Public Accountant, a Chartered Property and Casualty
Underwriter and a Chartered Life Underwriter.
TROY M. HUTH was appointed President of UFAC in 1999, Chairman of the Board and
President of JW in 1999 and President and director of DBG in 1999. Mr. Huth has
been associated with Frontier as its President and director since 1999. Prior to
the acquisition of UFAC by Netrex from Progressive in 1999, Mr. Huth had been
employed by The Progressive Corporation since 1986 in various technology and
management positions. Mr. Huth currently serves as the President of DBG and the
Chairman of JW. Prior to joining Progressive, he held several information
technology management positions in manufacturing and service businesses and has
been in the technology field since 1979. Mr. Huth has a BA from Baldwin Wallace
College.
JEFFREY R. HARCOURT was appointed Treasurer of UFAC, JW and DBG in 1999 and
director of DBG in 1999. Mr. Harcourt has been associated with Frontier as its
Chief Financial Officer and as a director since 1999. Mr. Harcourt was employed
by The Progressive Corporation from 1990 through 1999 and currently is the Chief
Financial Officer of Netrex.. Prior to joining Progressive, he was employed by
KPMG Peat Marwick, an international accounting and consulting firm. Mr. Harcourt
holds a BS degree from Miami University and has earned numerous designations,
including being a Certified Public Accountant, a Chartered Property and Casualty
Underwriter, a Certified Internal Auditor and a Certified Information Systems
Auditor.
PETER I. CAVALLARO joined UFAC as Secretary and General Counsel and JW and DBG
as Secretary in 1999. Mr. Cavallaro joined Netrex LLC, a newly organized
financial services and technology company, in November 1999. Mr. Cavallaro was
appointed the Company's Secretary in January of 2000. From 1990 to 1999, Mr.
Cavallaro held various positions with NationsBanc Auto Leasing, Inc. (formerly
11
<PAGE>
named Oxford Resources Corp.), including serving as Senior Vice President and
General Counsel from 1995 to 1999. From June 1999 to November 1999, Mr.
Cavallaro was a Partner at the New York law firm of Rivkin, Radler & Kremer LLP.
Mr. Cavallaro continues as Of Counsel to that law firm. Mr. Cavallaro holds a
J.D. degree from St. John's University School of Law, and a B.A. degree from St.
John's University in New York.
WILLIAM A. WHITE was appointed as a director of JW and DBG in 1999. Mr. White
has been associated with the Company as a director since 1999 and was appointed
Vice President in January 2000. Mr. White was employed by The Progressive
Corporation from 1985 to 1999 and managed Progressive's Diversified Claims
Business Group. Mr. White joined Netrex LLC, a newly organized financial
services and technology company, in November 1999. Prior to his employment with
Progressive, Mr. White served as a commissioned officer in the United States
Army. Mr. White holds a master's degree from the University of Southern
California and undergraduate degree in Business Administration from John Carroll
University in Cleveland, Ohio.
JAMES T. WIELAND is the President for JW Software, Inc. with 15 years experience
in the information technology industry. Mr. Wieland holds a B.S. degree from the
University of Missouri, St. Louis with an emphasis in Information Systems and
Financial Accounting. In 1989, he founded JW Software, Inc., a company
specializing in claims administration software.
LEGAL PROCEEDINGS
From time to time in the normal course of business, UFAC, JW and/or DBG are
named as defendants in lawsuits. The companies do not believe that they are
subject to any such lawsuits or litigation, or threatened lawsuits or litigation
that will have a material adverse affect on the companies or their businesses.
12
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical consolidated financial
information for Frontier for the five years ended June 30, 1999 and the six
month periods ended December 31, 1999 and December 31, 1998. The tables have
been derived from, and should be read in conjunction with, the historical
audited financial statements of Frontier, including the related notes thereto
incorporated by reference in this Proxy Statement. Frontier's financial
statements for the five years ended June, 30, 1999 were audited by McGladrey &
Pullen, LLP. See "Incorporation of Certain Documents by Reference." The
financial information for the six month periods ended December 31, 1999 and 1998
for Frontier is unaudited and reflects, in the opinion of the management of
Frontier, all adjustments necessary for a fair presentation of such information.
Results for these interim periods are not necessarily indicative of the results
that may be expected for the full year or any other interim period.
FRONTIER ADJUSTERS OF AMERICA, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(in dollars except for number of shares)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31 June 30
--------------------- ---------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
--------- --------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenue 3,243,056 3,157,482 6,341,584 5,825,348 6,164,603 5,641,984 5,240,825
Net income 566,400 435,415 546,452 612,475 979,198 1,134,519 1,026,848
Comprehensive income 570,030 435,575 517,505 578,854 1,069,110 1,113,186 1,023,483
Basic earnings per share 0.06 0.09 0.12 0.13 0.21 0.25 0.22
Diluted earnings per share 0.06 0.09 0.12 0.13 0.21 0.25 0.22
Weighted average number of
shares used in per share
data: Basic 8,957,560 4,605,358 4,569,049 4,605,358 4,607,709 4,620,101 4,662,679
Diluted 8,957,560 4,607,261 4,570,113 4,612,674 4,631,898 4,627,606 4,664,258
Cash dividends per share -- .0375 1.6375 0.15 0.15 0.14 0.115
BALANCE SHEET DATA
Working capital 2,671,986 3,544,440 2,073,511 3,214,489 3,261,953 3,196,562 2,946,748
Total assets 6,260,423 7,284,144 12,118,984 7,800,700 7,912,139 6,875,752 6,597,050
Long-term debt -- -- -- 4,953 33,462 59,983 84,655
Property and equipment, net 1,653,442 1,727,991 1,608,936 1,724,329 1,736,226 1,554,401 1,484,545
Stockholders' equity 5,623,663 6,715,115 5,053,633 6,452,241 6,564,193 6,230,799 5,838,651
Book value per share 0.63 1.46 0.56 1.40 1.43 1.35 1.26
Retained earnings 3,589,131 4,998,649 3,022,731 4,735,935 4,814,266 4,526,419 4,042,588
Total shares outstanding 8,957,560 4,605,358 8,957,560 4,605,358 4,605,358 4,619,658 4,640,898
</TABLE>
13
<PAGE>
The following tables set forth selected historical audited consolidated
financial information for UFAC and Subsidiaries (DBG and JW) for the two years
ended December 31, 1999. The financial statements have been prepared to reflect
the financial position and results of operations of UFAC, JW and DBG on a
carve-out basis and not to reflect UFAC and all majority-owned subsidiaries on a
consolidated basis. Accordingly, Frontier and Vehicle Inspection Services, Inc.
(formerly Progressive Vehicle Inspection Services, Inc.) have been excluded. The
tables have been derived from, and should be read in conjunction with, the
historical audited consolidated financial statements of UFAC, including the
related notes thereto included with this Proxy Statement. UFAC's financial
statements for the two years ended December 31, 1999 were audited by
PricewaterhouseCoopers, LLP.
UNITED FINANCIAL ADJUSTING COMPANY AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL INFORMATION
(in dollars)
Year Ended
December 31
---------------------------
1999 1998
---------- ----------
INCOME STATEMENT DATA
Operating revenue 16,976,448 9,361,239
Net income 1,087,628 178,346
BALANCE SHEET DATA
Working capital (deficit) 212,157 (9,270,101)
Total assets 21,733,675 11,591,747
Long-term debt -- --
Property and equipment, net 2,734,098 7,669,667
Stockholders' equity
(deficit) 5,639,359 (1,279,906)
Book value per share 5.64 (1.28)
Accumulated deficit (1,421,308) (2,508,936)
14
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Frontier's Common Stock is listed on the American Stock Exchange (AMEX) under
the symbol "FAJ." The following table sets forth the range of high and low
prices, and the trading volume, during each quarterly period within Frontier's
two most recent fiscal years and the current fiscal year.
Price
High Low Volume
------- ------- -------
Fiscal Year Ending June 30, 2000
First Quarter $ 3.250 $ 1.500 308,800
Second Quarter 2.125 1.000 370,900
Third Quarter 4.500 1.250 397,600
Fical Year Ended June 30, 1999
First Quarter $ 3.375 $ 2.375 260,900
Second Quarter 2.563 2.000 254,200
Third Quarter 2.750 2.375 240,800
Fourth Quarter 4.375 2.375 354,400
Fiscal Year Ended June 30, 1998
First Quarter $2.8125 $ 2.125 364,300
Second Quarter 3.5000 2.375 699,800
Third Quarter 3.3125 2.500 320,600
Fourth Quarter 3.2500 2.375 293,500
The following shows per share cash dividends declared for each quarter during
Frontier's two most recent fiscal years.
Cash Dividends Declared
-----------------------
Fiscal Year Ending June 30, 2000
First Quarter $ .0000
Second Quarter .0000
Third Quarter .0000
Fiscal Year Ended June 30, 1999
First Quarter $ .0375
Second Quarter .0000
Third Quarter .0000
Fourth Quarter 1.6000
Fiscal Year Ended June 30, 1998
First Quarter $ .0375
Second Quarter .0375
Third Quarter .0375
Fourth Quarter .0375
None of the securities of UFAC, DBG and JW are publicly traded and, therefore,
no market price information is available for these companies.
THE TRANSACTION
At the Special Meeting, and at any adjournments thereof, shareholders of the
Company will be asked to consider and vote upon the Merger Agreement dated May
__, 2000 between the Company, UFAC and Netrex and the transactions contemplated
by the Merger Agreement regarding the merger with UFAC in exchange for the
issuance of 16,840,000 shares of Frontier's Common Stock, par value $.01 per
15
<PAGE>
share (the "Merger Shares") (the "Transaction"). Upon the satisfaction of the
conditions to the closing (the "Closing") as set forth in the Merger Agreement,
the Company will deliver the Merger Shares to Netrex, Netrex will deliver all of
the outstanding shares of UFAC to Frontier and the 5,258,513 shares of Frontier
common stock owned by UFAC prior to the Transaction will be cancelled. If the
Transaction is consummated, Netrex will own a controlling interest of
approximately 82% of Frontier's outstanding Common Stock (from approximately 59%
owned by UFAC prior to the Transaction).
The following charts set forth the ownership structure of the Company before and
after the Transaction, assuming that no outstanding options or warrants are
exercised:
Before the After the
Transaction Transaction
----------- -----------
% of shares owned by UFAC 58.70% 81.99%
% of shares owned by directors and executive officers 9.78 4.26
% of shares owned by the public 31.52 13.75
------ ------
100.00% 100.00%
====== ======
The following information concerning the Transaction, insofar as it relates to
matters contained in the Merger Agreement, describes the material aspects of the
Transaction but does not purport to be a complete description and is qualified
in its entirety by reference to the Merger Agreement which is incorporated
herein by reference and attached hereto as Annex A. Frontier shareholders are
urged to read carefully and in its entirety the Merger Agreement.
EFFECTS OF THE TRANSACTION
Pursuant to the terms of the Merger Agreement, subject to the satisfaction or
waiver (where permissible) of certain conditions and the approval of the Merger
Agreement by the requisite vote of the shareholders of Frontier. UFAC will be
merged into Frontier. Frontier will be the surviving corporation owning all of
its assets and those of UFAC, and DBG and JW will become wholly-owned
subsidiaries of Frontier. Each share of Frontier Common Stock (other than those
owned by UFAC prior to the Transaction) outstanding prior to the Transaction
will remain outstanding and unchanged as a result of the Transaction.
ACCOUNTING AND TAX TREATMENT
The Transaction will be accounted for under the purchase method of accounting.
Under the purchase method of accounting, the acquiring enterprise, for
accounting purposes in a business combination effected through the exchange of
stock, is presumptively the enterprise whose former common shareholders either
retain or receive the larger portion of the voting rights in the combined
enterprise. Upon completion of the Transaction, Netrex will own approximately
82% of the voting rights of the combined company and is presumptively the
accounting acquirer. Accordingly, the assets and liabilities of UFAC, JW and DBG
will be brought forward at their net book values, and a new basis will be
established for Frontier's assets and liabilities based upon their fair values.
The Company, based on financial and legal advice, believes that the Transaction
will not result in Federal tax liabilities to the Company, to UFAC or to either
company's shareholders.
EXCHANGE RATIO
At the Closing, all of the issued and outstanding shares of Common Stock of UFAC
will be exchanged for 16,840,000 shares of Frontier Common Stock and the
5,258,513 shares of common stock of Frontier owned by UFAC prior to the
Transaction will be cancelled.
It is expected that the market price of Frontier Common Stock will fluctuate
between the date of this Proxy Statement and the date on which the Transaction
is consummated and thereafter. Because the number of shares of Frontier Common
Stock to be received by Netrex in the Transaction is fixed and because the
market price of the Frontier Common Stock is subject to fluctuation, the value
of the shares of Frontier Common Stock that Netrex will receive in the
Transaction may increase or decrease prior to the Closing of the Transaction. No
assurance can be given concerning the market price of the Frontier Common Stock
before or after the Closing.
16
<PAGE>
As a result of the Transaction, each outstanding and unexercised option to
purchase shares of UFAC will be converted to an option to purchase Frontier
common stock at a ratio consistent with the conversion ratio as used in the
Transaction. After the Transaction there will be such options to purchase
approximately 1,209,112 shares of Frontier Common Stock at an average exercise
price of $1.19 per share of Frontier Common Stock. There are no outstanding and
unexercised options to purchase shares of JW or DBG.
EFFECTIVE TIME
The Transaction will become effective at the date and time set forth in the
Merger Agreement, after all conditions, including approval by the shareholders,
have been met.
BACKGROUND OF THE TRANSACTION
On January 26, 2000, Frontier's Board of Directors held a special meeting to
consider a strategic transaction involving UFAC, DBG and JW proposed by John M.
Davies, the Chairman of the Board. The Board was interested in broadening
Frontier's technology base and operations and in expanding into e-commerce
activities. Because Mr. Davies was an officer and director of UFAC, Mr. Davies
was familiar with the operations of UFAC, DBG and JW. Mr. Davies believed that
the purchase of these companies would help Frontier achieve its interests. The
Board appointed a committee of independent directors to consider the matter. The
committee of independent directors consisted of William J. Rocke, Jean E. Ryberg
and Louis T. Mastos (the "Committee").
On January 27, 2000, ComStock Valuation Advisors, Inc. ("ComStock") was formally
retained by Frontier's Board, at the recommendation of the Committee, to
evaluate and prepare a fairness opinion for the Board, which opinion includes an
appraisal of each of UFAC, JW and DBG, and the proposed exchange ratio for the
Transaction (the "ComStock Opinion"). During the four weeks after the Board
meeting, members of Frontier's senior management met with representatives of
ComStock to discuss issues of valuation.
From January 27, 2000 through May 2, 2000, Frontier and Netrex, in conjunction
with their respective legal and tax advisors, negotiated the definitive Merger
Agreement.
From January 27, 2000 through May 2, 2000, Frontier conducted a due diligence
review of UFAC, DBG and JW with assistance from representatives of ComStock.
On March 2, 2000 Frontier's Board met to consider the draft ComStock Opinion, as
well as the draft Merger Agreement. The Board reviewed the draft ComStock
Opinion, as well as a draft purchase agreement, and participated in extensive
discussions regarding the Transaction. It was the sense the Board to enter into
the Transaction. The Board authorized Management to negotiate, execute the
Merger Agreement and to draft and file the appropriate proxy statement and to
take such other actions as are necessary to consummate the Transaction.
On March 2, 2000, Frontier's Board (including all of the independent directors)
unanimously approved in principle, the Merger Agreement and the transactions
contemplated thereunder and, subject to review by the Committee, recommended its
approval to the shareholders. Subsequently, Netrex and Frontier issued a joint
press release announcing the proposed Transaction.
On April 6, 2000, the Committee met with representatives of ComStock to discuss
the ComStock Opinion. The Committee reported to the Board that it had completed
its deliberations, and recommended that ComStock conduct a brief study of the
valuation of Frontier in light of the fluctuations in the trading price of
Frontier's stock. Subject to the results of the study, the Committee recommended
the transaction to the Board.
On May 2, 2000, Frontier's board met to consider the recommendation of the
committee of independent directors. The Board received the final forms of Merger
Agreement and proxy statement and approved the execution and delivery of the
Merger Agreement and the filing of the proxy statement with the SEC, as well as
approved certain other related matters necessary to consummate the Transaction.
On May __, 2000, the Merger Agreement was executed and delivered to Frontier,
UFAC and Netrex.
17
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE TRANSACTION
The Frontier Board has approved unanimously the Merger Agreement, has determined
unanimously that the Transaction is fair and in the best interests of Frontier
and its shareholders and recommends unanimously that the shareholders of
Frontier vote FOR the approval and adoption of the Merger Agreement and the
consummation of the transactions contemplated thereby.
The Frontier Board believes that the consummation of the Transaction is an
important step towards Frontier's long-range strategic goal of expanding into
business-to-business services and developing and marketing both software and
e-commerce business applications.
Prior to approving the Transaction, the Frontier Board received, analyzed and
considered information regarding, and was favorably influenced by, the
following:
(i) The potential efficiencies and synergies and cross marketing
opportunities that could be realized by combining the operations of Frontier,
UFAC, DBG and JW, due to the complementary nature of their product and service
lines;
(ii) The opportunity for Frontier's shareholders to participate, as holders
of the consolidated company, in the anticipated growth of the combined company's
business, which growth may provide Frontier's shareholders with a greater
opportunity for long-term appreciation and liquidity than if the Transaction
were not consummated;
(iii) An analysis of the Transaction conducted by Frontier's financial
advisor, ComStock, as well as ComStock's opinion as to the fairness of the
Transaction to Frontier's shareholders from a financial point of view (see "The
Transaction - Opinion of Financial Advisor"); and
(iv) The results of its extensive due diligence review of the business and
operations of UFAC, JW and DBG.
The Frontier Board also considered various potential negative factors relating
to the Transaction but concluded that these factors were outweighed by the
potential benefits to be gained by the Transaction. The negative factors
considered by the Frontier Board included the following:
(i) The risk that the business synergies and operating efficiencies sought
in the Transaction would not be fully achieved; and
(ii) The risk that the trading price of the Frontier Common Stock might be
adversely affected by the announcement of the Transaction and the value received
in the Transaction by Frontier's shareholders would decrease accordingly.
POTENTIAL BENEFITS OF THE TRANSACTION
Frontier believes that the Transaction, if consummated, primarily represents an
opportunity for Frontier to expand its focus into business-to-business services
and develop and market both software and e-commerce business applications.
Although the Transaction will not result in any direct return to shareholders of
cash or other consideration, Frontier believes that the Transaction offers
shareholders an opportunity to realize long-term value. It should be noted,
however, that there is no assurance that Frontier will realize all or any of the
potential benefits described above, all of which are forward-looking statements
that are subject to numerous risks and uncertainty. Frontier's ability to
enhance shareholder value will depend upon a number of circumstances, many of
which are outside the control of management.
POTENTIAL ADVERSE EFFECTS OF THE TRANSACTION
Frontier believes that the Transaction, if consummated, could have certain
adverse effects on Frontier and its shareholders, in that the concentration of
ownership of shares of Frontier's common stock will increase from the
approximately 59% currently owned by UFAC to approximately 82% of Frontier's
common stock to be owned by Netrex after the Transaction. Assuming no other
changes in the number of outstanding shares of Common Stock, Netrex would
continue to be in a position to control the election of the Board or the outcome
of any corporate transaction or other matter submitted to the shareholders for
approval. This continued and enhanced concentration of ownership could make it
more difficult for other shareholders to challenge Frontier's director nominees,
18
<PAGE>
to elect their own nominees as directors or to remove incumbent directors and
may render Frontier a less attractive target for an unsolicited acquisition by
an outsider. In addition, under Arizona law, a merger or consolidation involving
Frontier requires the affirmative approval of a majority of the shares entitled
to vote. Accordingly, Netrex will have sufficient voting power to block any such
transaction.
DISCUSSION OF FINANCIAL ANALYSIS
The Company retained ComStock, an independent third party, to advise the Board
and to conduct a financial analysis of the Transaction. In addition, the Board
of Directors appointed a committee of independent directors to analyze the
financial terms and the consideration to be received in the Transaction.
The members of the Board evaluated the factors referred to above in light of
their knowledge of the business and operations of the Company, Netrex, UFAC, JW
and DBG, their business judgment and consultations with the Board's independent
advisor. In view of the wide variety of factors considered in connection with
the Board's evaluation of the Transaction, the Board did not find it practicable
to, and did not, quantify or attempt to assign relative weights to the specific
factors considered in reaching its determination. In addition, individual
members of the Frontier Board may have given different weights to different
factors. For a discussion of the interests of the executive officers and
directors of Frontier in the Transaction, see "Interests of Certain Persons in
the Transaction."
OPINION OF FINANCIAL ADVISOR
On March 2, 2000, ComStock delivered a draft opinion to Frontier's Board of
Directors dated February 29, 2000 that the Transaction was fair from a financial
point of view to the shareholders of Frontier. A draft of ComStock's financial
analysis was distributed to the Board and used as the basis of discussions at a
special meeting of the Board held on March 2, 2000. The Frontier Board was given
a detailed written report setting forth the financial analysis underlying the
ComStock Opinion. This analysis, as presented to the Board, is summarized below.
All of the members of the Board were present at the meeting and each Board
member had the opportunity to discuss the report. The Board discussed the
information in the report, and the financial data and other factors considered
by ComStock in conducting its analysis, all of which are summarized herein.
In requesting the ComStock Opinion, the Frontier Board did not give any special
instructions to ComStock or impose any limitation upon the scope of the
investigation that ComStock deemed necessary to enable it to deliver the
ComStock Opinion. The ComStock Opinion is directed only to the fairness of the
Transaction to the shareholders of Frontier from a financial point of view and
does not constitute a recommendation to any shareholder as to how such
shareholder should vote at the Special Meeting.
Frontier selected ComStock to provide a fairness opinion because it is a
nationally recognized valuation firm engaged in the valuation of "small cap"
businesses and their securities in connection with mergers and acquisitions and
for other purposes and has substantial experience in transactions similar to the
Transaction. The engagement letter with ComStock provides that Frontier will pay
ComStock an advisory fee of $35,000, reimburse ComStock for its out-of-pocket
expenses and will indemnify ComStock and certain related persons against certain
liabilities, including liabilities under securities laws, arising out of the
Transaction or its engagement.
In conducting its analysis and arriving at the ComStock Opinion, ComStock
reviewed such information and considered such financial data and other factors
as ComStock deemed relevant under the circumstances, including, among others,
the following: (i) a draft of the Merger Agreement; (ii) certain historical
financial and operating data that are publicly available concerning Frontier,
including, but not limited to, the Annual Report to Shareholders and Annual
Report on Form 10-K of Frontier for the fiscal years ended June 30, 1997, 1998
and 1999, the Quarterly Report on Form 10-Q of Frontier for the quarter ended
December 31, 1999, the Proxy Statement for the Annual Meeting of Shareholders
held on January 26, 2000; (iii) certain historical financial and operating data
that are not publicly available concerning UFAC, DBG and JW including, but not
limited to, the applicable annual financial statements for the years ended
December 31, 1997, 1998 and 1999; (iv) certain information of UFAC, DBG and JW,
including written financial forecasts for future fiscal years, prepared by their
management; (v) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses ComStock deemed comparable to
Frontier or otherwise relevant to its inquiry; (vi) publicly available
financial, operating and stock market data concerning certain companies engaged
in businesses ComStock deemed comparable to UFAC, DBG and JW or otherwise
relevant to its inquiry; and (vii) such other financial studies, analyses and
investigations that ComStock deemed appropriate. ComStock assumed, with
Frontier's consent, that the draft of the Merger Agreement which ComStock
reviewed would conform in all material respects to that document when in final
form.
19
<PAGE>
Representatives of ComStock met with the senior management of Frontier, UFAC,
DBG and JW to discuss (i) the prospects for their respective businesses, (ii)
their estimates of such businesses' future financial performance, (iii) the
financial impact of the Transaction on the respective companies, including
potential incremental earnings and cost savings, and (iv) such other matters
that ComStock deemed relevant.
In connection with its review and analysis and in arriving at its opinion,
ComStock assumed and relied upon the accuracy and completeness of the financial
and other information provided to it by Frontier, UFAC, DBG and JW and did not
undertake any independent verification of such information or any independent
valuation or appraisal of any of the assets of Frontier, UFAC, DBG or JW. With
respect to certain financial forecasts provided to ComStock by Frontier, UFAC,
DBG and JW, ComStock assumed that the information represents each respective
management's best currently available estimate as to the future financial
performance of such companies.
In arriving at the conclusions set forth in the ComStock Opinion, ComStock
performed a variety of financial analyses, including those summarized herein.
The summary set forth below of the analyses presented to the Frontier Board at
its March 2, 2000 meeting does not purport to be a complete description of the
analyses performed. The preparation of a fairness opinion is a complex process
that involves various determinations as to the most appropriate and relevant
methods of financial analyses and the application of these methods to the
particular circumstance and, therefore, such an opinion is not necessarily
susceptible to partial analysis or summary description.
CAPITALIZED CASH FLOW METHOD
The Capitalized Cash Flow method relies on an estimate of next year's earnings
to develop a representative cash flow for UFAC, JW and DBG. Estimated working
capital and capital expenditure requirements (net of depreciation) were deducted
from the earnings estimate to produce an expected cash flow for each UFAC, JW
and DBG. For UFAC, due to the availability of historical financial information,
ComStock estimated next year's earnings by multiplying a normalized adjusted
historical cash flow by an expected growth rate (incorporated in the
capitalization multiple). For JW and DBG, ComStock relied on the estimates of
next year's earnings provided by the management for JW and DBG to develop next
year's cash flow estimate. For UFAC, the impact of its stock option program was
then subtracted to derive a value for UFAC's equity.
Because the ownership interest in UFAC being appraised provides its owners with
the right to control UFAC's operations, ComStock then applied a control premium
to calculate UFAC's equity value on a controlling interest basis. For JW and
DBG, the cash flow estimate used in this method reflected the operating
efficiencies that could be implemented by a controlling interest shareholder
Therefore, no further control premium was deemed warranted in the calculation of
the equity values of JW and DBG.
Since the cash flow multiple for each company was derived in part from the
performance of publicly-traded securities, it produces an equity value that
incorporates the presumption of liquidity equal to publicly-traded markets. As
privately-held enterprises, UFAC, JW and DBG do not offer their shareholders the
same level of liquidity as shareholders of the publicly-traded securities that
were used to support the cash flow multiples. To reflect this distinction,
ComStock applied a discount for lack of marketability of 5% to derive an equity
value for UFAC, JW and DBG on a privately-held controlling interest basis.
GUIDELINE COMPANY METHOD
The Guideline Company Method uses pricing multiples developed from
publicly-traded stocks of similar businesses to estimate values for UFAC, JW and
DBG. The pricing multiples were applied to appropriate financial data for UFAC,
JW and DBG to create an array of values on a marketable minority interest basis.
Current market pricing multiples were developed that incorporated the following
financial data for UFAC: (i) adjusted book capital; (ii) sales; (iii) earnings
before interest and taxes ("EBIT"); (iv) earnings before interest, depreciation,
amortization and taxes ("EBITDA"); (v) adjusted net income; and (vi) adjusted
cash flow. For JW and DBG, a market pricing multiple based only on sales was
utilized. A marketable or freely-traded minority interest equity value for UFAC,
JW and DBG was estimated by selecting a representative value derived from the
various pricing multiples. For UFAC, the impact of UFAC's stock option program
was also deducted to derive its equity value.
20
<PAGE>
Because the ownership interests being appraised provide their owners with the
right to control the operations of UFAC, JW and DBG, ComStock then applied a
control premium to derive an estimate of the fair market value of UFAC, JW and
DBG's equity on a controlling interest basis.
As with the other valuation methods, an adjustment was also made to account for
differences in liquidity between freely-traded and privately-held common stocks
by applying a 5% discount for lack of marketability.
MERGER AND ACQUISITION METHOD
The Merger and Acquisition Method utilizes price/sales multiples from published
news reports of actual transactions involving the sale of a controlling equity
interest in similar privately-held companies to determine a market-based
estimate of UFAC, JW and DBG's equity value appropriate for a strategic buyer.
After examining the industry type, transaction components, and computed sales
multiples for reported transactions, a representative revenue multiple was
selected and applied to the total revenue of each of UFAC, JW and DBG. A
discount was applied to the resulting market-based estimate of UFAC, JW and
DBG's equity value appropriate for a strategic buyer to eliminate the impact of
strategic buyer premiums reflected in the market data from which the revenue
multiples were derived. A discount for lack of liquidity was then applied to
estimate the fair market value of each UFAC, JW and DBG on a privately-held
controlling interest basis.
DISCOUNTED CASH FLOW METHOD (USED ONLY FOR UFAC)
The Discounted Cash Flow Method uses projected financial performance and
risk-adjusted discount rates to estimate value, based on the view that the price
of a security is a function of an investor's perception of expected future cash
flows relative to expected cash flows from alternative investments of perceived
comparable risk.
In deploying this method, ComStock considered the fair market value of UFAC by
examining a cash flow forecast over a five-year period. The expected annual free
cash flows were then discounted to their present value using a market-based,
risk adjusted discount rate. A residual value was also computed and discounted
to its present value using an assumption of constant cash flow growth at the end
of the forecast period.
The present value of the forecasted cash flow stream was combined with the
present value of the residual value to derive an estimate of UFAC's equity
value. The impact of UFAC's stock option program was also subtracted to derive
UFAC's equity value.
Because the discount rate was derived from the performance of publicly-traded
securities, the resulting equity value incorporates the presumption of liquidity
equal to publicly-traded markets. As a privately-held enterprise, UFAC does not
offer its shareholders the same level of liquidity as shareholders in
publicly-traded securities that were used to support the discount rate. To
reflect this distinction, ComStock applied a discount for lack of marketability
of 5% to derive an equity value for UFAC on a privately-held controlling
interest basis.
VENTURE CAPITAL METHOD (USED FOR JW AND DBG ONLY)
For JW and DBG only, ComStock employed the Venture Capital Method, which is a
simplified approach for start-up companies that places a significant weight on
the expected cash-out point of a prospective investor. ComStock analyzed three
different cash-out scenarios: (i) the "Success Scenario" under which a sale to a
strategic buyer or an Initial Public Offering is the cash-out assumption, and
current revenue is grown at an expected growth rate for three years, at which
time the cash-out occurs; (ii) the "Return of Capital Scenario" under which the
shareholders receive the total amount of capital invested to date, with no
incremental return on their investment; and (iii) the "Liquidation Scenario"
under which investors receive no positive cash return. Each of the resulting
cash-out amounts was discounted at the investor's estimated required rate of
return to arrive at a value of JW's and DBG's equity. A control premium was then
added to reflect the shareholder rights associated with the ownership interests
being appraised. A discount for lack of marketability was also deducted to
arrive at an estimate of the net equity values for JW and DBG, calculated on a
privately-held controlling interest basis.
VALUE PER SHARE FOR FRONTIER
The common stock of Frontier is traded on the American Stock Exchange under the
ticker symbol FAJ. Although Frontier's common stock trades on almost a daily
basis, its daily trading volume is relatively low. During the last 20 trading
days preceding February 28, 2000 (the most recent date for which ComStock
received market data used in its valuation analysis), the daily closing price of
21
<PAGE>
Frontier's stock ranged from a low of $1.50 per share to a high of $1.88 per
share. ComStock selected an average of the closing prices for Frontier's common
stock for the 20-day period preceding its valuation and fairness analysis, or
$1.68 per share, as a representative indication of the current fair market value
of Frontier's stock for the purpose of the Transaction.
ComStock's analysis was updated to include various market data available to
ComStock as of the date of its Opinion, April 19, 2000. ComStock concluded that
no material changes to its initial conclusions were required based on this
updated data. On April __, 2000, ComStock issued its final report and fairness
opinion to the Board.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Certain members of Frontier's management and the Frontier Board may be deemed to
have certain interests in the Transaction that are in addition to their
interests as shareholders of Frontier generally. The Frontier Board was aware of
these interests when it approved the Merger Agreement and the Transaction. As
provided for in Arizona law, a majority (but in any event not less than two) of
Frontier's disinterested directors are required to approve the Transaction. On
May 2, 2000 the Transaction was unanimously approved by the Board, including by
all four of the independent directors.
John M. Davies, Frontier's Chairman of the Board, owns approximately 9% of the
outstanding equity of Netrex LLC, which is the parent of Netrex Capital Group,
LLC, which is the parent of Netrex. Mr. Davies disclaims any beneficial interest
in the Frontier shares held by UFAC prior to the Transaction, and to be held by
Netrex after the Transaction, for purposes of Section 13(d) or (g) of the
Securities Exchange Act of 1934, as amended.
Certain executive officers and directors of Frontier are also executive officers
and directors of Netrex, UFAC, JW and/or DBG. See "Proposal One - Management"
for a description of the officers and directors of UFAC, JW and DBG. The
following chart lists the executive officers and/or directors of Frontier who
are also directors and/or officers of Netrex, UFAC, JW and/or DBG.
John M. Davies Director and Officer of Frontier, Netrex and UFAC
Director of Frontier, DBG and JW
Troy M. Huth Officer of Frontier, UFAC, JW and DBG
Director of Frontier and DBG
Jeffrey R. Harcourt Officer of Frontier, Netrex, UFAC, JW and DBG
Peter I. Cavallaro Officer of Frontier, Netrex, UFAC, JW and DBG
William A. White Director of Frontier, DBG and JW
Other than as set forth above, no director or executive officer of Frontier has
any direct or indirect material interest in the Transaction, except insofar as
ownership of Frontier Common Stock and Frontier or UFAC options might be deemed
such an interest.
22
<PAGE>
PRO FORMA CONDENSED FINANCIAL DATA
The unaudited pro forma information set forth below gives effects to the merger
of UFAC with and into Frontier as if it had been completed on July 1, 1998 for
purposes of the statements of operations, and as if it had been completed on
December 31, 1999 for balance sheet purposes, subject to the assumptions and
adjustments in the accompanying notes to the pro forma information. The
unaudited pro forma condensed combined financial information is derived from the
historical financial statements of Frontier and UFAC.
UFAC will account for the merger under the purchase method of accounting. Under
the purchase method of accounting, the acquiring enterprise for accounting
purposes in a business combination effected through the exchange of stock is
presumptively the enterprise whose former common shareholders either retain or
receive the larger portion of the voting rights in the combined enterprise. UFAC
shareholders will receive approximately 82% of the voting rights of the combined
company and is presumptively the accounting acquirer. Management has analyzed
the factors that may indicate UFAC should not be deemed to be the accounting
acquirer, including (1) UFAC's level of representation of the Board of Directors
of the combined company; (2) UFAC's representation in the surviving company
management team; (3) the market value of the shares held by UFAC and Frontier
shareholders; (4) the relative size of the financial measures (for example,
revenues, total assets, net income and so forth) of UFAC and Frontier; and (5)
the relative size of non-financial measures of UFAC and Frontier (for example,
customers, employees and so forth). Management has concluded that none of these
factors, either individually or in the aggregate, is sufficient to rebut the
presumption that UFAC should be deemed the accounting acquirer. Accordingly,
UFAC will be deemed the acquirer for accounting purposes and its assets and
liabilities will be brought forward at their net book values. A new basis will
be established for Frontier's assets and liabilities based upon the fair values
thereof. The purchase accounting adjustments made in connection with the
development of the pro forma condensed combined financial information are
preliminary and have been made solely for purposes of developing such pro forma
condensed combined financial information.
The pro forma adjustments do not reflect any operating efficiency and cost
savings that may be achieved with respect to the combined companies nor do they
include any adjustments to historical sales for any future price changes. Upon
closing of the merger, the combined company may incur certain integration
related expenses not reflected in the pro forma financial information as a
result of the elimination of duplicate facilities, operational realignment and
related workforce reductions. Such costs would generally be recognized as a
liability assumed as of the merger date resulting in additional goodwill if they
relate to facilities or workforce previously aligned with Frontier, and would be
expensed if they relate to facilities or workforce previously aligned with UFAC.
The assessment of integration related expenses is ongoing. The following pro
forma information is not necessarily indicative of the financial position or
operating results that would have occurred had the merger been consummated on
the dates discussed above, or at the beginning of the periods, for which such
transactions are being given effect. The pro forma adjustments reflecting the
consummation of the merger are based upon the assumptions set forth in the notes
hereto, including the conversion of all of the outstanding shares of UFAC for
16,840,000 shares of Frontier common stock.
Frontier and UFAC are unaware of events other than those disclosed in these pro
forma notes that would require a material change to the preliminary purchase
price allocation. However, a final determination of necessary purchase
accounting adjustments will be made upon the completion of a study to be
undertaken to determine the fair value of certain of its assets and liabilities,
including intangible assets. Assuming completion of the merger, the actual
financial position and results of operations will differ, perhaps significantly,
from the pro forma amounts reflected herein because of as variety of factors,
including access to additional information, changes in value not currently
identified and changes in operating results between the dates of the pro forma
financial data and the date on which the merger takes place.
See accompanying notes to unaudited pro forma condensed
combined financial information
23
<PAGE>
Frontier Adjusters of America, Inc. and Subsidiaries
and United Financial Adjusting Company and Subsidiaries
Pro Forma Condensed Combined Balance Sheet
<TABLE>
<CAPTION>
As of December 31, 1999 Pro Forma Pro Forma
Unaudited UFAC (1) Frontier (1) Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 230,724 $ 1,541,141 $ -- $ 1,771,865
Accounts receivable, net 2,355,720 1,243,758 -- 3,599,478
Receivables from parent and affiliates 12,302,685 -- -- 12,302,685
Other Assets -- 336,637 -- 336,637
Prepaid expenses 96,820 187,210 -- 284,030
------------ ------------ ------------ ------------
Total current assets 14,985,949 3,308,746 -- 18,294,695
Property and equipment, net 2,734,098 1,653,442 -- 4,387,540
Receivables (Long Term) -- 312,000 -- 312,000
Investments (Long Term) 685,360 -- 685,360
Other assets -- 269,654 -- 269,654
Goodwill, net of amortization 4,013,628 31,221 5,815,597 (2) 9,860,446
------------ ------------ ------------ ------------
Total assets $ 21,733,675 $ 6,260,423 $ 5,815,597 $ 33,809,695
============ ============ ============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities $ 14,773,793 $ 636,760 $ -- $ 15,410,553
Deferred tax liability 492,804 -- -- 492,804
Deferred revenue 764,723 764,723
Minority interest 62,996 -- -- 62,996
------------ ------------ ------------ ------------
Total Liabilities 16,094,316 636,760 -- 16,731,076
Commitments and contingencies
Shareholders' equity:
Common stock 10,000 90,191 105,815 (3) 206,006
Paid-in capital 7,050,667 2,104,426 9,298,913 (3) 18,454,006
Treasury stock -- (184,368) -- (184,368)
Other -- 24,283 -- 24,283
Retained earnings (deficit) (1,421,308) 3,589,131 (3,589,131)(3) (1,421,308)
------------ ------------ ------------ ------------
Total shareholders' equity 5,639,359 5,623,663 5,815,597 17,078,619
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 21,733,675 $ 6,260,423 $ 5,815,597 $ 33,809,695
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial information
24
<PAGE>
Frontier Adjusters of America, Inc. and Subsidiaries
and United Financial Adjusting Company and Subsidiaries
Pro Forma Condensed Combined Statement of Operations
<TABLE>
<CAPTION>
For the six months ended December 31, 1999 Pro Forma Pro Forma
Unaudited UFAC (1) Frontier (1) Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 10,225,112 $ 3,243,056 $ -- $ 13,468,168
Cost and expenses
Compensation and employee benefits 5,531,533 1,286,001 -- 6,817,534
Office and overhead expenses 3,401,570 849,312 -- 4,250,882
Direct claims adjustment expense 883,217 -- -- 883,217
Depreciation and amortization 397,587 114,951 145,389(4) 657,927
------------ ------------ ------------ ------------
Total costs and expenses 10,213,907 2,250,264 145,389 12,609,560
Income from operations 11,205 992,792 (145,389) 858,608
Other income (expense)
Misc gains/losses 1,106,810 30,021 -- 1,136,831
Interest income (expense) (184,226) 56,373 -- (127,853)
Frontier service fees 150,000 (150,000) -- --
Rental income 98,047 -- -- 98,047
------------ ------------ ------------ ------------
Total other income (loss) 1,170,631 (63,606) -- 1,107,025
Income before taxes and minority interest 1,181,836 929,186 (145,389) 1,965,633
Income taxes 631,339 362,786 -- 994,125
------------ ------------ ------------ ------------
Income before minority interest 550,497 566,400 (145,389) 971,508
Minority interest 31,850 -- -- 31,850
------------ ------------ ------------ ------------
Net income $ 582,347 $ 566,400 $ (145,389) $ 1,003,358
============ ============ ============ ============
Net earnings per share - basic $ 0.05(5) $ 0.06 $ 0.05(5)
============ ============ ============
Net earnings per share - diluted $ 0.05(5) $ 0.06 $ 0.05(5)
============ ============ ============
Weighted average shares outstanding - basic 11,581,487(5) 8,957,560(5) 20,539,047(5)
============ ============ ============
Weighted average shares outstanding - diluted 11,581,487(5) 8,957,560(5) 20,539,047(5)
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial information
25
<PAGE>
Frontier Adjusters of America, Inc. and Subsidiaries
and United Financial Adjusting Company and Subsidiaries
Pro Forma Condensed Combined Statement of Operations
<TABLE>
<CAPTION>
For the twelve months ended June 30, 1999 Pro Forma Pro Forma
Unaudited UFAC (1) Frontier (1) Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 11,030,367 $ 6,341,584 $ -- $ 17,371,951
Cost and expenses
Compensation and employee benefits 3,914,771 3,248,276 -- 7,163,047
Office and overhead expenses 4,122,780 2,017,847 -- 6,140,627
Direct claims adjustment expense 2,523,857 -- -- 2,523,857
Depreciation and amortization 515,063 271,884 290,779(4) 1,077,726
------------ ------------ ------------ ------------
Total costs and expenses 11,076,471 5,538,007 290,779 16,905,257
(Loss) income from operations (46,104) 803,577 (290,779) 466,694
Other income (expense)
Misc gains/losses -- 63,293 -- 63,293
Interest income (expense) (300,196) 165,272 -- (134,924)
Frontier service fees 50,000 (50,000) -- --
Rental income 412,438 -- -- 412,438
------------ ------------ ------------ ------------
Total other income 162,242 178,565 -- 340,807
Income before taxes and minority interest 116,138 982,142 (290,779) 807,501
Income taxes 52,262 435,690 -- 487,952
------------ ------------ ------------ ------------
Income before minority interest 63,876 546,452 (290,779) 319,549
Minority interest 171,483 -- -- 171,483
------------ ------------ ------------ ------------
Net income $ 235,359 $ 546,452 $ (290,779) $ 491,032
============ ============ ============ ============
Net earnings per share - basic $ 0.02(5) $ 0.06 $ 0.02(5)
============ ============ ============
Net earnings per share - diluted $ 0.02(5) $ 0.06 $ 0.02(5)
============ ============ ============
Weighted average shares outstanding - basic 11,581,487(5) 8,957,560(5) 20,539,047(5)
============ ============ ============
Weighted average shares outstanding - diluted 11,581,487(5) 8,957,560(5) 20,539,047(5)
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial information
26
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(1) These columns represent the historical results of operations and financial
position of the respective companies. The financial statements of UFAC and
subsidiaries have been prepared to reflect the financial position and
results of operations of UFAC, JW and DBG on a carve-out basis and not to
reflect UFAC and all majority-owned subsidiaries on a consolidated basis.
Accordingly, Frontier and Vehicle Inspection Services, Inc. have been
excluded.
(2) This adjustment reflects the merger of Frontier with UFAC including the
issuance of 16,840,000 shares of Frontier common stock, par value $0.01 per
share and the cancellation of 5,258,513 shares of Frontier common stock
owned by UFAC prior to the Transaction. UFAC will be deemed the acquirer
for accounting purposes and its assets and liabilities will be brought
forward at their net book values. A new basis will be established for
Frontier's assets and liabilities by relating the total merger
consideration to the fair values thereof.
This adjustment reflects the step-up of Frontier's assets and liabilities
to fair value:
Equivalent per share merger consideration $ 2.20
Shares of non-UFAC owned Frontier common stock ownership 3,699,047
-----------
$ 8,137,903
Historical net book value of Frontier, net of UFAC ownership $(2,322,306)
-----------
Step-up of Frontier assets and liabilities to fair value $ 5,815,597
===========
Upon the closing of the merger, the step-up in the fair value of Frontier's
assets and liabilities will be allocated to its specific tangible and
intangible assets and liabilities.. A preliminary allocation has been made
entirely to goodwill based upon information available to management at the
date of the preparation of the accompanying pro forma condensed combined
financial information.
(3) Represents the recasting of pro forma combined equity and the increase in
common stock and additional paid-in capital for the step-up of Frontier
fair value as follows:
Increase in additional paid-in capital $ 5,815,597
Decrease in additional paid-in capital
due to increase in common stock (115,815)
Elimination of Frontier retained earnings 3,589,131
Elimination of UFAC common stock 10,000
-----------
$ 9,298,913
===========
(4) The entry represents the amortization of goodwill resulting from the
preliminary allocation of the merger consideration over the fair value of
Frontier's identifiable net assets. Frontier expects the amount of excess
consideration allocated to goodwill to be amortized over 20 years. The
factors considered in determining the appropriate amortization period
included the expected market demand for Frontier's diversified services,
competition, and legal and regulatory issues. Assuming goodwill is
amortized over 20 years, Frontier's net income would be decreased by
$290,779 ($0.01 per share) and $145,389 ($0.01 per share) for the year
ended June 30, 1999 and the six month period ended December 31, 1999,
respectively.
(5) The pro forma earnings per share assumes the exchange of UFAC shares for
Frontier shares at a conversion ratio of 11.581 Frontier shares for each
UFAC share. This conversion ratio excludes the 5,258,513 shares of Frontier
common stock that will be cancelled upon the Merger and that are presently
reflected in the Frontier column. UFAC's historical earnings per share have
been restated to reflect the number of equivalent shares to be received in
the merger.
27
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK PRIOR TO
AND AFTER THE TRANSACTION
As of the close of business on the Record Date, there were 8,957,660 shares of
Common Stock outstanding. The following table sets forth information regarding
the beneficial ownership of shares of the Common Stock outstanding as of April
15, 2000 and immediately following the Closing, by (i) each person or group
known to the Company who owns or who will own more than 5% of the outstanding
shares of Common Stock, (ii) each of the directors and the executive officers of
the Company and (iii) by all directors and executive officers of the Company as
a group. Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person has sole voting and investment power.
The number of shares represents the number of shares of Common Stock the person
holds, including shares that may be issued upon the exercise of options that are
exercisable as of June 15, 2000. Information presented in the table and related
notes has been obtained from the beneficial owner and/or from reports filed by
the beneficial owner with the Securities and Exchange Commission pursuant to
Section 13 of the Exchange Act.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially Owned
Owned on April 1, 2000 Adjusted for Closing
--------------------------- ---------------------------
Amount and Amount and
Nature of Nature of
Beneficial Percent Beneficial Percent
Name of Beneficial Owner Ownership (1) of Class (2) Ownership (1) of Class (2)
- ------------------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
OFFICERS AND DIRECTORS
Peter I. Cavallaro -- * -- *
John M. Davies (3) 500 * 500 *
Jeffrey R. Harcourt -- * -- *
Troy M. Huth -- * -- *
Jeffrey C. Jordan -- * -- *
Louis T. Mastos and Eva B. Mastos,
his wife (4) 207,103 2.31% 207,103 1.01
Laurel A. Park -- * -- *
William J. Rocke and Garnet Rocke,
his wife (5) 415,332 4.64% 415,332 2.02
James S. Rocke and Kelly Rocke, his
wife (6) 444,867 4.97% 444,867 2.17
Jean E. Ryberg (7) 97,960 1.09% 97,960 *
Kenneth A. Sexton -- * -- *
William A. White -- * -- *
All officers and directors as a
group (twelve persons) (8) 875,762 9.78% 875,762 4.26
FIVE PERCENT SHAREHOLDERS
United Financial Adjusting Company (9) 5,258,513 58.7% -- --
Netrex Holdings, LLC (10) -- -- 16,840,000 81.99%
</TABLE>
* Less than 1%
(1) Includes, when applicable, shares owned of record by such person's minor
children and spouse and by other related individuals and entities over
whose shares of Common Stock such person has custody, voting control or
power of disposition. Also includes shares of Common Stock that the
identified person had the right to acquire within 60 days after April 15,
2000 by the exercise of stock options.
(2) The percentages shown include the shares of Common Stock that the person
had the right to acquire within 60 days after April 15, 2000. In
calculating the percentage of ownership, all shares of Common Stock that
the identified person had the right to acquire within 60 days after April
15, 2000 are deemed to be outstanding for the purpose of computing the
percentage of the shares of Common Stock owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of
shares of Common Stock owned by any other shareholders.
28
<PAGE>
(3) Does not include 5,258,513 shares owned by UFAC before the Transaction and
16,840,000 shares owned by Netrex after the Transaction to which Mr. Davies
disclaims any beneficial interest for purposes of Section 13(d) or (g) of
the Securities Exchange Act of 1934, as amended.
(4) Includes 183,180 shares held in a trust under an agreement dated February
10, 1981, in which Mr. and Mrs. Mastos hold equal beneficial interests, and
23,523 shares which are held by Louis T. Mastos in an Individual Retirement
Account.
(5) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona,
of which William J. Rocke and Garnet Rocke hold 51% of the outstanding
stock.
(6) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona of
which James S. Rocke holds 49% of the outstanding stock.
(7) Excludes 28,000 shares held by Mrs. Ryberg's sons and grandchildren, in
which she disclaims any beneficial interest.
(8) Excludes all duplication of shared holdings required to be reported by more
than one officer or director.
(9) Includes 5,258,513 shares owned by UFAC. UFAC is a wholly owned subsidiary
of Netrex. Netrex is owned 51.4% by The Progressive Corporation and 48.6%
by Netrex Capital Group, LLC ("NCGI") which is wholly-owned by Netrex LLC.
The Progressive Corporation, NCGI, Netrex LLC and Netrex each disclaims
that it is the beneficial owner of the Company's shares owned by UFAC for
purposes of Section 13(d) or (g) of the Securities Exchange Act of 1934, as
amended.
(10) Includes 16,840,000 shares issued to Netrex in connection with the
Transaction. Does not include 5,258,513 shares owned by UFAC prior to the
Transaction and cancelled upon the Transaction being affected. The
Progressive Corporation, NCGI, Netrex LLC and Netrex each disclaims that it
is the beneficial owner of the Company's shares owned by Netrex for
purposes of Section 13(d) or (g) of the Securities Exchange Act of 1934, as
amended.
To the best knowledge of the Company, no person or groups of persons, other than
officers, directors and UFAC beneficially own more than five percent of the
Common Stock (based upon present records of the transfer agent).
29
<PAGE>
------------
PROPOSAL TWO
------------
PROPOSAL TO AMEND AND RESTATE THE COMPANY'S ARTICLES OF INCORPORATION
On May 2, 2000, the Board of Directors unanimously approved a proposal to amend
and restate the Company's Articles of Incorporation as amended (the "Articles")
to change the Company's name to "Netrex Business Services, Inc.," to conform the
Articles to certain changes enacted under Arizona law and to reflect other
technical revisions. The Board of Directors recommends a vote FOR the proposal
to amend and restate the Articles. The full text of the proposed Amended and
Restated Articles is included as Annex C to this Proxy Statement. If approved by
the Company's shareholders, the proposed Amended and Restated Articles will
become effective upon filing of the Amended and Restated Articles with the
Arizona Corporation Commission, which will occur as soon as practicable
following the Special Meeting.
BACKGROUND
The Company became an Arizona corporation in 1983, when its Articles of
Incorporation were filed with the Arizona Corporation Commission on October 7,
1983. On October 20, 1986, the Company amended its Articles of Incorporation to
change its corporate name to Frontier Adjusters of America, Inc. On November 12,
1987, the Company filed a second amendment to provide for a limitation of the
personal liability of directors for breaches of fiduciary duty as a director, as
permitted by Arizona law, and to provide for indemnification of directors and
officers to the fullest extent permitted by applicable law. On October 24, 1991,
the Company filed a third amendment that added an exemption from the Arizona
Takeover Act. On April 26, 1999, the Company filed a certificate establishing
and designating the class and fixing and determining their respective
preferences, privileges, voting powers, restrictions and qualifications of
6,000,000 shares of Series A Convertible Voting Preferred Stock.
On January 1, 1996, significant revisions to Arizona law governing corporations
went into effect (the "Business Corporation Act"). The Business Corporation Act
automatically applied to the Company without any further action by the Company.
However, certain provisions of the Articles are inconsistent with certain
provisions of the Business Corporation Act. As a result, the Board of Directors
determined that it is in the best interests of the Company to amend and restate
the Articles to the extent necessary to make them more consistent with the
Business Corporation Act. In addition, because the Articles currently consist of
the Company's original Articles of Incorporation and subsequent amendments as
described above, the Board of Directors deemed it advisable to amend and restate
the Articles in their entirety to provide one integrated document, which is
easier to read and which will avoid confusion.
CHANGE OF NAME
The Company, through the Transaction, will have broadened its technology base
and operations and expanded its business into e-commerce activities. The Board
has determined that if the Transaction is approved, the name "Frontier Adjusters
of America, Inc." will too narrowly describe the nature of the Company's
business in the mind of investors and the general public. Therefore, the Board
adopted the proposal to change the Company's name to "Netrex Business Services,
Inc." to emphasize the change in the Company's focus.
LIMITATION OF LIABILITY
The Articles currently eliminate the personal liability of directors to the
Company or its shareholders for monetary damages incurred as the result of the
breach of their fiduciary duty as a director except for: (i) any breach of the
director's duty of loyalty to the Corporation or its members; (ii) acts or
omissions that are not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) any transaction from which the director derived
an improper personal benefit. The proposed Amended and Restated Articles
eliminate the personal liability of any director of the Company to the Company
or its shareholders for money damages for any action taken or failure to take
any action as a director of the Company, to the fullest extent allowed by law.
Under the Business Corporation Act, the Company may not indemnify a director for
liability for any of the following: (a) the amount of a financial benefit
received by the director to which the director is not entitled; (b) the
intentional infliction of harm on the Company or its shareholders; (c) certain
unlawful distributions to shareholders; and (d) an intentional violation of
criminal law. The effect of these provisions in the proposed Amended and
30
<PAGE>
Restated Articles is to eliminate the right of the Company and its shareholders
(through shareholders' derivative suits on behalf of the Company) to recover
money damages from a director for all actions or omissions as a director,
including breaches resulting from negligent or grossly negligent behavior
(except in the situations described in clauses (a) through (d) above). These
provisions do not limit or eliminate the right of the Company or any shareholder
to seek nonmonetary relief such as an injunction or rescission to the extent of
a breach of a director's duty of care. The provisions in the proposed Amended
and Restated Articles described above are needed to eliminate potential
inconsistencies between the Articles and the Business Corporation Act. In
addition, the proposed revisions will provide broader limitation of liability to
the Company's directors. The board of directors believes that these revisions
respecting the limitation of directors' liabilities are necessary to enable the
Company to attract and retain qualified persons to serve as directors of the
Company.
INDEMNIFICATION
The proposed Amended and Restated Articles include provisions that are intended
to conform to current indemnification provisions of the Articles with the
Business Corporation Act and that, in conjunction with the Business Corporation
Act, will enable the Company to provide broader indemnification to its
directors, officers, employees and agents than the Articles currently permit. In
particular, certain provisions permitted by the Business Corporation Act and
included in the proposed Amended and Restated Articles will permit and, in
certain instances, require the Company to pay for or reimburse expenses to its
directors, officers, employees and agents in advance of a final disposition of
legal proceedings to which such persons may be parties as a result of their
serving as directors, officers, employees or agents of the Company. The Articles
currently do not permit the Company to make such advances. The Board of
Directors believes that the ability to advance expenses to such persons will
better enable them to successfully defend legal proceedings to which they become
parties as the result of having served on behalf of the Company. The Board of
Directors believes that the broader indemnification provisions permitted by the
Business Corporation Act and included in the proposed Amended and Restated
Articles are necessary to enable the Company to attract and retain qualified
persons to serve as directors, officers, employees and agents.
REQUIRED INDEMNIFICATION
The proposed Amended and Restated Articles and the Business Corporation Act will
require the Company to indemnify all directors and officers of the Company who
are not directors against "liability" as defined below. The proposed Amended and
Restated Articles and the Business Corporation Act also will require the Company
to indemnify against reasonable "expenses," as defined below, any director or
officer who is the prevailing party in a defense of any proceeding to which the
director or officer is a party because such person is or was a director or
officer of the Company. In addition, the Business Corporation Act requires the
Company to pay expenses to "Outside Directors," as defined below, in advance of
a final disposition of the proceeding if: (i) the Director furnishes to the
Company a written affirmation ("Affirmation") of his or her good faith belief
that: (a) his or her conduct was in good faith: (b) he or she reasonably
believes that the conduct was in the best interests of the Company, or at least
not opposed the Company's best interests, and (c) in the case of any criminal
proceeding, he or she had no reasonable cause to believe the conduct was
unlawful (the "Standard of Conduct"); and (ii) the director provided the Company
with a written undertaking (the "Undertaking") to repay the advance if it
ultimately is determined that the director did not meet the Standard of Conduct.
However, the Business Corporation Act prohibits the Company from advancing
expenses to an Outside Director if a court determines, before payment, that the
director failed to meet the Standard of Conduct, and the court does not
otherwise authorize indemnification.
The proposed Amended and Restated Articles and the Business Corporation Act also
will require the Company to indemnify a director who is not an Outside Director
against liability, but only if the Company is advised in the specific case after
a determination has been made by either (i) a majority of the members of the
Board of Directors who are not at the time parties to the proceeding, (ii)
special legal counsel, or (iii) the shareholders of the Company, excluding
shares owned by or voted under the control of directors who are at the time
parties to the proceeding) that the director has met the Standard of Conduct (a
"Determination"). In addition, the Business Corporation Act prohibits the
Company from indemnifying a director who is not an Outside Director in
connection with a proceeding by or in the rights of the Company in which the
director is adjudged liable to the Company or in connection with a proceeding in
which the director was adjudged liable on the basis that the director improperly
received a personal benefit. As permitted by the Business Corporation Act, the
proposed Amended and Restated Articles also will require the Company to pay for
or reimburse the reasonable expenses of a director who is not an Outside
Director in advance of the final disposition of a proceeding if a director
furnishes the Company with an Affirmation, an Undertaking, and a Determination
is made that the facts then known to the persons making the Determination would
not preclude indemnification under the Business Corporation Act.
31
<PAGE>
OPTIONAL INDEMNIFICATION
The proposed Amended and Restated Articles and the Business Corporation Act will
permit the Company, in its sole discretion, to indemnify against liability and
advance expenses to, employees or agents who are not an officer or director to
the same extent as an officer or director. However, the Business Corporation Act
prohibits the Company from indemnifying such persons against liability unless a
Determination is made that indemnification is permissible because the person has
met the Standard of Conduct. The Business Corporation Act permits the Company to
pay for or reimburse expenses to an employee or agent who is not a director in
advance of a formal disposition of the proceeding, but only if the person
furnishes to the Company an Affirmation and an Undertaking and a Determination
is made that the facts then known to the persons making the Determination would
not otherwise preclude indemnification.
COURT-ORDERED INDEMNIFICATION
The proposed Articles and the Business Corporation Act will permit a director or
officer of the Company to apply to a court for indemnification, in which case
the court may, subject to certain conditions, order the Company to indemnify
such person for all or part of the person's liability and expenses.
DEFINITIONS
The Business Corporation Act defines "Outside Director" to mean a director who,
when serving as a director, was not an officer, employee or holder of more than
five percent (5%) of the outstanding shares of any class of stock of the
Company. "Liability" under the Business Corporation Act means the obligation to
pay a judgment, settlement, penalty or fine, including an excise tax assessed
with respect to an employee benefit plan, or reasonable expenses incurred with
respect to a proceeding, and includes obligations and expenses that have not yet
been paid by the indemnified person but that have been or may be incurred. The
Business Corporation Act defines "expenses" as attorneys' fees and all other
costs and expenses reasonably related to a proceeding.
OTHER SUBSTANTIVE AMENDMENTS
The proposed Amended and Restated Articles also include substantive amendments
that (i) update the description of the purpose for which the Company is
organized and the character of business that the Company conducts; (ii) delete
provisions regarding directors' conflicts of interest because the Business
Corporation Act's provisions regarding this item are inconsistent with the
Articles; and (iii) update the provisions in Article 4 regarding serial
preferred stock.
The Amended and Restated Articles do not include the rights and preferences of
the Series A Convertible Voting Preferred Stock of the Company. The Series A
Preferred Stock was established and designated by the Company's Board on April
26, 1999, by filing a Certificate with the Arizona Corporation Commission,
establishing and designating the class and fixing and determining the relative
preferences, rights, voting powers, restrictions and qualifications of the
Series A Convertible Voting Preferred Stock. There are no shares presently
outstanding, nor does the Company anticipate issuing any Series A Convertible
Voting Preferred Stock. All formerly issued and outstanding shares of Series A
Convertible Voting Preferred Stock have been converted into Common Stock of the
Company. Pursuant to the rights and preferences of the Series A Convertible
Voting Preferred Stock, all shares that were issued and reacquired in any manner
by the Company were restored to the status of authorized, but unissued preferred
stock, without designation as to series. Furthermore, the rights and preferences
of the Series A Convertible Voting Preferred Stock allow the Company to retire
any unissued shares of Series A Convertible Voting Preferred Stock and require
that such shares shall then be restored to the status of authorized but unissued
preferred stock, without designation as to series. The Board of Directors of the
Company has adopted a resolution retiring all unissued Series A Convertible
Voting Preferred Stock. Accordingly, such unissued shares, as well as all
converted shares of Series A Convertible Voting Preferred Stock, have been
restored to the status of authorized but unissued preferred stock, without
designation as to series, and the establishment and designation of the class and
fixing and determining of the relative preferences, privileges, voting powers,
restrictions and qualifications of any Series A Convertible Voting Preferred
Stock, which was part of the Articles, has been removed from the Amended and
Restated Articles.
The Business Corporation Act provides that the Company may acquire its own
shares or issue rights, options, or warrants to purchase shares of the Company.
Accordingly, provisions in the current Articles that authorize the Company to
take such actions have been deleted from the proposed Amended and Restated
Articles. The Business Corporation Act provides that companies may issue bonds,
debentures or debt securities. Accordingly, provisions in the current Articles
that authorize the Company to issue such securities have been deleted from the
proposed Amended and Restated Articles.
32
<PAGE>
The Business Corporation Act prohibits the Company from issuing shares of one
class or series of its capital stock as a dividend in respect of another class
or series of its capital stock unless either (i) the articles of incorporation
authorize such a dividend; (ii) a majority of the votes entitled to be cast by
the class or series to be issued as a dividend approves the issuance; or (iii)
no shares of the class or series to be issued are outstanding. The proposed
Amended and Restated Articles authorize the Company to pay to holders of one
class or series of the Company's capital stock dividends payable in shares of
another class or series of the Company's capital stock, without approval or
ratification by the Company's shareholders.
The Business Corporation Act requires the Company or its agent to maintain
certain corporate records. The proposed Amended and Restated Articles provide
that, unless the Bylaws of the Company provide otherwise and the Company's
statutory agent expressly consents thereto in writing, all records required
pursuant to the Business Corporation Act to be kept by the Company or its agents
shall be kept by the Company at the known place of business of the Company. The
Board of Directors believes that this provision of the Amended and Restated
Articles is necessary to eliminate potential administrative burdens that might
deter qualified persons from serving as the Company's statutory agent.
OTHER CHANGES
The approval of the proposed Amended and Restated Articles will also result in
the amendment and restatement of the Articles in their entirety to reflect the
foregoing substantive changes as well as several nonsubstantive ministerial
changes as contained in Annex C.. These changes include the elimination of the
names and addresses of the original incorporators of the Company, reflection of
the fact that the Articles of Incorporation have been restated, restatement and
renumbering of certain articles, and reflection of the names of the persons
currently serving as directors, as required by the Business Corporation Act.
REQUIRED VOTE, EFFECT OF SHAREHOLDER APPROVAL, AND RELATED MATTERS
The affirmative vote of a majority of the shares present in person or
represented by proxy at the Special Meeting, provided that the total number of
shares present in person or represented by proxy at the Special Meeting
represents over 50% of the shares of Common Stock issued and outstanding, is
required to approve the Merger Agreement and the transactions contemplated
thereby and the Amended and Restated Articles. UFAC and the shareholder
directors, which collectively represent 68.5% of the issued and outstanding
shares of Common Stock of Frontier, have sufficient votes to approve each of the
Proposals.
Approval of the Transaction by the shareholders will constitute approval of the
issuance by the Company of 16,840,000 additional shares of Common Stock to
Netrex. Upon issuance of these shares the Company will cancel 5,258,513 shares
of common stock owned by UFAC prior to the Transaction.
Approval of the Transaction by the requisite vote of the shareholders of the
Company is a condition to consummation of the Transaction. If the Transaction is
not approved, the Transaction will not be consummated.
33
<PAGE>
ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP are expected to be present at the
Special Meeting and available to answer questions relating to the consolidated
financial statements of United Financial Adjusting Company and Subsidiaries at
December 31, 1999 and 1998.
OTHER MATTERS
Management of the Company knows of no other matters that will come before the
Special Meeting. However, if any other matters should properly come before the
Meeting, it is the intention of the persons named in the enclosed proxy to vote
each proxy in accordance with his best judgment on such matter.
By Order of the Board of Directors,
Peter I. Cavallaro, Esq.
Secretary
Phoenix, Arizona
_________, 2000
34
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
FRONTIER ADJUSTERS OF AMERICA, INC.
UNITED FINANCIAL ADJUSTING COMPANY
AND
NETREX HOLDINGS LLC
DATED AS OF
__________, 2000
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of __________, 2000, is made by and
among FRONTIER ADJUSTERS OF AMERICA, INC., an Arizona corporation ("FAJ"),
UNITED FINANCIAL ADJUSTING COMPANY, an Ohio corporation ("UFAC"), and NETREX
HOLDINGS LLC, a Delaware limited liability company ("NETREX").
RECITALS
A. UFAC is the holder of approximately 58.7% of the issued and outstanding
capital stock of FAJ.
B. UFAC is also the holder of 100% of the issued and outstanding capital
stock of DBG Technologies, Inc., an Ohio corporation ("DBG"), and 100% of the
issued and outstanding capital stock of JW Software, Inc., a Missouri
corporation ("JWS").
C. NETREX is the holder of 100% of the issued and outstanding capital stock
of UFAC.
D. The parties hereto desire that UFAC be merged with and into FAJ upon the
terms and conditions of this Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby approve and adopt this Agreement
as a Plan of Merger and do mutually covenant and agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms have the following
respective meanings:
"ACTION" means any actual or, to a Person's knowledge, threatened action,
claim, suit, litigation, arbitration, inquiry, proceeding or investigation by or
before any Government Authority.
"ADDITIONAL DOCUMENTS" has the meaning set forth in SECTION 11.1.
"AFFILIATE" has the meaning ascribed thereto in Rule 12b-2 promulgated
under the Exchange Act, as in effect on the date hereof.
"AGREEMENT" means this Agreement and Plan of Merger.
"AMEX" means the American Stock Exchange, Inc.
<PAGE>
"BENEFICIAL OWNERSHIP" has the meaning set forth in Rule 13d-3 promulgated
under the Exchange Act.
"BLUE SKY LAWS" has the meaning set forth in SECTION 4.4(E).
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a bank
holiday in Cleveland, Ohio or Phoenix, Arizona.
"CERCLA" means the federal Comprehensive, Environmental Response,
Compensation, and Liability Act, 42 U.S.C.ss.9601 ET SEQ., as amended.
"CERTIFICATE OF MERGER" has the meaning as set forth in SECTION 2.1.
"CLOSING" has the meaning set forth in SECTION 8.1.
"CODE" means the Internal Revenue Code of 1986, as amended, and any
successor thereto, including all of the rules and regulations promulgated
thereunder.
"COMMITMENT" means any commitment, contractual obligation, agreement,
borrowing, capital expenditure or material transaction entered into by a party
or any of its Subsidiaries.
"CURRENT REPORTS" has the meaning set forth in SECTION 5.6(B).
"DBG" means DBG Technologies, Inc., an Ohio corporation.
"EFFECTIVE DATE" has the meaning set forth in SECTION 2.8.
"EMPLOYEES" means all current, former and retired employees, officers and
directors of a Person or any of its Subsidiaries, including current, former and
retired employees, officers and directors on disability, layoff or leave status.
"ENVIRONMENTAL CLAIM" means any claim, investigation or written notice by
any Person alleging potential liability (including potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries or fatalities, or
penalties) arising out of, based on or resulting from (A) the presence,
generation, transportation, treatment, use, storage, disposal or release of
Materials of Environment Concern or the threatened release of Materials of
Environmental Concern at any location, or (B) activities or conditions forming
the basis of any violation, or alleged violation of, or liability or alleged
liability under, any Environmental Law.
"ENVIRONMENTAL LAWS" means any federal, state, or local statute, law,
ordinance, code, order, injunction, decree or ruling, and any regulation
promulgated thereunder, which regulates or controls (i) pollution,
contamination, or the condition of groundwater, surface water, soil, sediment or
air, or (ii) a spill, leak, emission, discharge, release or disposal into
groundwater, surface water, soil, sediment or air, including without limitation
CERCLA; the Federal Resource Conservation and Recovery Act, 42 U.S.C.ss.6901 ET
SEQ., as amended; the Hazardous Materials Transportation Act, 49 U.S.C.ss.1801
ET seq., as amended; the Toxic Substances Control Act, 15 U.S.C.ss.2601 ET SEQ.,
as amended; the Clean Air Act, 42 U.S.C.ss.7401 ET seq., as amended; the Clean
Water Act, 33 U.S.C.ss.1251 ET SEQ., as amended; the Safe Drinking Water Act, 42
U.S.C.ss.300f ET SEQ., as amended; the Emergency Planning and Community Right to
Know Act, 42 U.S.C.ss.11001 ET SEQ., as amended; the Federal Insecticide,
3
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Fungicide and Rodenticide Act, 7 U.S.C.ss.136 ET SEQ., as amended; the National
Environmental Policy Act, 42 U.S.C.ss.4321 ET SEQ., as amended; any similar
state or local statutes or ordinances, and the regulations promulgated
thereunder.
"ERISA" means the Employee Income Security Act of 1974, as amended, and any
successor thereto, including all of the rules and regulations promulgated
thereunder.
"ERISA AFFILIATE" means, with respect to any entity, trade or business, any
other entity, trade or business that is a member of a group described in Section
414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes
the first entity, trade or business, or that is a member of the same "controlled
group" as the first entity, trade or business within the meaning of Section
4001(a)(14) of ERISA.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAJ" means Frontier Adjusters of America, Inc., an Arizona corporation.
"FAJ COMMON STOCK" has the meaning set forth in SECTION 2.5(A).
"FAJ PERMITS" has the meaning set forth in SECTION 5.9(A).
"FAJ REPORTS" has the meaning set forth in SECTION 5.6(A).
"FAJ SHARES" has the meaning set forth in SECTION 2.6.
"FILINGS" has the meaning set forth in SECTION 4.4(E).
"FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.5(A).
"FORM 10-K" has the meaning set forth in SECTION 5.6(A).
"GAAP" has the meaning set forth in SECTION 4.5(B).
"GOVERNMENT AUTHORITY" means any government or state (or any subdivision
thereof) of or in the United States or Canada, or any agency, authority, bureau,
commission, department or similar body or instrumentality thereof, or any
governmental court or tribunal.
"INDEMNIFIED PARTY" has the meaning set forth in SECTION 11.3.
"INDEMNIFYING PARTY" has the meaning set forth in SECTION 11.3.
"INDEMNITY THRESHOLD" has the meaning set forth in SECTION 11.4(A).
"INSURANCE POLICIES" has the meaning set forth in SECTION 4.16.
"IRS" means the Internal Revenue Service or any successor thereto.
"JWS" means JW Software, Inc., a Missouri corporation.
"LIABILITIES" means, as to any Person, all debts, adverse claims,
liabilities, direct, indirect, absolute or contingent of such Person, whether
accrued, vested or otherwise.
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"LIENS" means all liens, mortgages, deeds of a Person, title retention
arrangements, security interests, pledges, claims, charges, easements and other
encumbrances of any nature whatsoever.
"LOSS AND EXPENSE" has the meaning set forth in SECTION 10.2(A).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the financial
condition, results of operations or business of a Person or any of its
Subsidiaries.
"MATERIALS OF ENVIRONMENTAL CONCERN" means all chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum or any fraction thereof,
petroleum products hazardous substances (as defined in Section 101(14) of
CERCLA, 42 U.S.C. ss. 6601(14)), or solid or hazardous wastes as now defined and
regulated under any Environmental Laws.
"MATERIAL TRANSACTION" means any transaction between a Person and its
Affiliates, that would be required to be disclosed in such Person's reports or
proxy materials filed under the Exchange Act by Item 404 of Regulation S-K.
"MERGER" has the meaning set forth in SECTION 2.1.
"NETREX" means Netrex Holdings LLC, a Delaware limited liability company.
"OTHER FILINGS" has the meaning set forth in SECTION 3.2.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, trust, unincorporated organization, other form of
business or legal entity or Government Authority.
"PERMITTED LIENS" means: (A) statutory liens for obligations which are not
overdue, or are being contested in good faith; (B) rights of way disclosed on an
ALTA survey of any property; and (C) items listed on SCHEDULE 4.11.
"PROPRIETARY RIGHTS" has the meaning set forth in SECTION 4.15.
"PROXY STATEMENT" has the meaning set forth in SECTION 3.2.
"REAL PROPERTY" means the land owned, leased, or occupied by any UFAC or
any of the UFAC Subsidiaries.
"SEC" means United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES LAWS" has the meaning set forth in SECTION 5.6(A).
"SUBSIDIARY" means each entity of which a Person, directly or through one
or more intermediary entities (i) has the right to elect a majority of the board
of directors or other governing body, (ii) owns a majority of the issued and
outstanding common stock, or (iii) has the right to receive 50% or more of the
economic value of any business or activity in which such entity is engaged;
PROVIDED, HOWEVER, that FAJ shall not be deemed a Subsidiary of NETREX or UFAC
for any purposes hereof.
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"TAX" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 54A),
customs duties, capital stock, profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not. The term "Tax" also includes any
amount payable pursuant to any tax sharing agreement to which any relevant party
is liable and any amount payable pursuant to any similar contract.
"TAX RETURN" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"UFAC" means United Financial Adjusting Company, an Ohio corporation.
"UFAC COMMON STOCK" has the meaning set forth in SECTION 2.5(A).
"UFAC PLANS" means, collectively, each of UFAC's or any of the UFAC
Subsidiaries' benefit, bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other employee benefit arrangements, understandings
or plans (whether under Section 414(b), (c), (m) or (o) of the Code or
otherwise) applicable to any Employee or any Person affiliated with UFAC or any
of the UFAC Subsidiaries.
"UFAC STOCK OPTIONS" has the meaning set forth in SECTION 2.5(D).
"UFAC SUBSIDIARIES" means JWS and DBG.
"UFAC AND SUBSIDIARIES' PERMITS" has the meaning set forth in SECTION
4.18(A).
"UFAC AND SUBSIDIARIES' PROPERTIES" has the meaning set forth in SECTION
4.11.
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ARTICLE 2
MERGER
2.1 MERGER. On the Effective Date, UFAC shall be merged with and into FAJ,
which shall be the surviving corporation, pursuant to the terms hereof and the
Certificate and Articles of Merger (the "Certificate of Merger"), attached as
EXHIBIT 1 hereto (the "Merger").
2.2 EFFECT OF THE MERGER. On the Effective Date, the separate existence of
UFAC shall cease, and FAJ shall succeed to and possess all the properties,
rights, privileges, powers, franchises and immunities, of a public as well as of
a private nature, and be subject to all the debts, liabilities, obligations,
restrictions, disabilities and duties of FAJ, all without further act or deed,
as provided in the Arizona Business Corporation Act and the Ohio General
Corporation Law.
2.3 NAME AND DIRECTORS OF FAJ. On the Effective Date, the name of FAJ shall
be "NETREX Business Services, Inc." and the directors and executive officers of
FAJ shall be as listed on SCHEDULE A.
2.4 ARTICLES OF INCORPORATION AND BYLAWS. On the Effective Date, the
Articles of Incorporation of FAJ shall be amended and restated as set forth on
SCHEDULE B. The ByLaws of FAJ shall be as set forth on SCHEDULE C.
2.5 STATUS AND CONVERSION OF SECURITIES.
(a) CONVERSION OF UFAC COMMON STOCK INTO FAJ COMMON STOCK. Upon the merger
becoming effective, the shares of Common Stock, par value $.01 per share, of
UFAC ("UFAC Common Stock") issued and outstanding on the Effective Date, by
reason of the Merger and without any action on the part of the holders thereof,
shall be converted into a total of 16,840,000 shares of FAJ Common Stock, par
value $.01 per share ("FAJ Common Stock"), except that any shares of UFAC Common
Stock held in the treasury of UFAC shall be cancelled and all rights in respect
thereof shall cease to exist and no cash or securities or other property shall
be issued in respect thereof.
(b) CANCELLATION OF FAJ COMMON STOCK HELD BY UFAC. All shares of FAJ Common
Stock previously held by UFAC will be cancelled as of the Effective Date.
(c) FRACTIONAL SHARES. Notwithstanding the foregoing, in lieu of the
issuance or recognition of fractional shares of FAJ Common Stock or interests or
rights therein, any fractional shares that otherwise would be issuable as a
result of the Merger, shall be rounded up to the next whole share of FAJ Common
Stock.
(d) EXCHANGE OF CERTIFICATES. From and after the Effective Date, each
holder other than FAJ of an outstanding certificate or certificates theretofore
representing shares of UFAC Common Stock, upon surrender thereof to such bank,
trust company or other person as shall be designated by FAJ ("Exchange Agent"),
shall be entitled to receive in exchange therefor a certificate or certificates
representing the number of whole shares of FAJ Common Stock into which the
shares of UFAC Common Stock theretofore represented by such surrendered
certificate or certificates shall have been converted. Until so surrendered,
each outstanding certificate theretofore representing shares of UFAC Common
Stock shall be deemed for all purposes, other than the payment of dividends or
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other distributions, if any, in respect of FAJ Common Stock, to represent the
number of whole shares of FAJ Common Stock into which the shares of UFAC Common
Stock theretofore represented thereby shall have been converted. No dividend,
distribution or interest, if any, payable to holders of shares of FAJ Common
Stock shall be paid to the holders of certificates theretofore representing
shares of UFAC Common Stock; provided, however, that upon surrender and exchange
of such UFAC Stock Certificates, there shall be paid to the record holders of
the stock certificate or certificates issued in exchange therefor, the amount,
without interest thereon, of dividends or other distributions, if any, that
theretofore but after the Effective Date have been declared and become payable
with respect to the number of whole shares of FAJ Common Stock into which the
shares of UFAC Common Stock theretofore represented thereby shall have been
converted.
(e) OPTIONS TO PURCHASE UFAC COMMON STOCK. Each outstanding option to
purchase UFAC Common Stock ("UFAC Stock Options") shall be substituted for and
become, on the Effective Date, an option to purchase from FAJ 16.84 shares of
FAJ Common Stock for each share of UFAC Common Stock purchasable upon the
exercise of such option immediately prior to the Effective Date, and the
exercise price per share of FAJ Common Stock shall be equal to the exercise
price per share of UFAC Common Stock immediately prior to the Effective Date,
divided by 16.84.
2.6 FAJ TO MAKE SHARES AVAILABLE. By the Effective Date, FAJ shall make
available, by transferring directly to the Exchange Agent, for the benefit of
NETREX, as the sole UFAC shareholder, such number of shares of FAJ Common Stock
as shall be required for conversion of UFAC Common Stock in accordance with this
Agreement.
2.7 FURTHER DOCUMENTS. From time to time, on and after the Effective Date,
as and when requested by FAJ or its successors or assigns, the appropriate
officers and directors of UFAC as of the Effective Date shall, for and on behalf
and in the name of UFAC or otherwise, execute and deliver all such deeds, bills
of sale, assignments and other instruments, and shall take or cause to be taken
such further or other actions as FAJ or its successors or assigns may deem
necessary or desirable in order to confirm of record or otherwise to FAJ title
to and possession of all of the properties, rights, privileges, powers,
franchises and immunities of UFAC and otherwise to carry out fully the
provisions and purposes of this Agreement.
2.8 EFFECTIVE DATE. The Merger shall become effective on such date (the
"Effective Date") as of which all applicable legal requirements have been
fulfilled to consummate the Merger, including the filing and effectiveness of
the Certificate of Merger with the applicable authorities in the states of
Arizona and Ohio. The parties shall use their best efforts to consummate the
Merger at the earliest practicable date following the Closing.
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ARTICLE 3
SHAREHOLDER APPROVALS; PROXY FILINGS
3.1 SHAREHOLDER APPROVALS. Meetings of the shareholders of FAJ and UFAC
shall be held in accordance with the laws of their respective states of
incorporation, on or before the Closing Date, in each case, among other things,
to consider and act upon the adoption of this Agreement and the Merger.
3.2 PROXY STATEMENT. As promptly as practicable after the execution of this
Agreement, FAJ shall prepare and file with the SEC a preliminary proxy statement
by which the shareholders of FAJ will be asked to approve, in accordance with
the rules of the AMEX and any applicable laws, the Merger, as well as a name
change of FAJ to Netrex Business Services, Inc. and such other amendments to the
Articles of Incorporation of FAJ as the FAJ Board of Directors deems
appropriate. The preliminary proxy statement, as initially filed with the SEC,
as it may be amended and refiled with the SEC, and the definitive proxy
statement filed with the SEC and mailed to the FAJ shareholders (such definitive
proxy statement, the "Proxy Statement"), shall be in form and substance
reasonably satisfactory to UFAC. FAJ shall respond to any comments of the SEC,
shall mail the Proxy Statement to the FAJ shareholders, and shall cause any
meeting of the FAJ Board of Directors or the FAJ shareholders required to be
held to consider the Merger and the transactions contemplated hereby at the
earliest practicable time. As promptly as practicable after the date hereof, FAJ
shall prepare and file any other filings required under the Exchange Act, the
Securities Act or any other federal, state or local laws relating to this
Agreement and the transactions contemplated hereby, including any state takeover
laws (the "Other Filings"). FAJ will notify UFAC promptly of the receipt of any
comments from the SEC or its staff or any other governmental official and of any
request by the SEC or its staff or any other government official for amendments
or supplements to the Proxy Statement or any Other Filing or for additional
information and will supply UFAC with copies of all correspondence between FAJ
or any of its representatives, on the one hand, and the SEC or its staff or any
other government official, on the other hand, with respect to the Proxy
Statement or any Other Filing. FAJ shall cause the Proxy Statement and any Other
Filing to comply in all material respects with all applicable requirements of
law. UFAC shall provide FAJ all information about UFAC and the UFAC Subsidiaries
required to be included or incorporated by reference in the Proxy Statement or
any Other Filing and shall otherwise cooperate with FAJ in taking the actions
described in this Section. Whenever any event occurs that is required to be set
forth in an amendment or supplement to the Proxy Statement or any Other Filing,
each party, as applicable, shall promptly inform the other party of such
occurrence and cooperate in the preparation and filing with the SEC or its staff
or any other government officials, or mailing to the FAJ shareholders, as
required, such amendment or supplement.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF NETREX AND UFAC
NETREX and UFAC represent and warrant to FAJ as follows:
4.1 ORGANIZATION AND QUALIFICATION, SUBSIDIARIES.
(a) Each of UFAC and the UFAC Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation. Each of UFAC and the UFAC Subsidiaries has all requisite
corporate power and authority to own, operate, lease and encumber its properties
and carry on its business as now conducted.
(b) Each of UFAC and the UFAC Subsidiaries is duly qualified to do business
and is in good standing in each jurisdiction in which the ownership or lease of
its properties or the conduct of its business requires such qualification,
except for any such failures to so qualify that would not have a Material
Adverse Effect with respect to UFAC or any UFAC Subsidiary.
(c) All of the outstanding shares of capital stock of, or other equity
interests in, each of the UFAC Subsidiaries are owned, directly or indirectly,
by UFAC in compliance with all applicable securities laws, free and clear of all
Liens.
(d) The issued and outstanding shares of each of UFAC and the UFAC
Subsidiaries have been duly authorized and are validly issued, fully paid and
nonassessable and free of preemptive rights. On the Effective Date, UFAC will
have good and marketable title to the UFAC Subsidiaries' shares, free and clear
of all Liens, except for Liens created as a result of the actions of FAJ.
(e) The Merger will not give any Person any dissenters, appraisal or
similar rights or any preemptive or similar right to purchase additional shares
of capital stock of UFAC or any of the UFAC Subsidiaries, or any rights under
any shareholders' rights, "poison pill" or similar plan.
4.2 DUE AUTHORIZATION. The execution, delivery and performance of this
Agreement and of all of the documents and instruments delivered in connection
herewith by UFAC and NETREX has been duly and validly authorized by all
necessary corporate action on the part of UFAC and NETREX. This Agreement has
been duly executed and delivered on behalf of UFAC and NETREX. This Agreement
is, and the other documents and instruments required hereby will be, when
executed and delivered by UFAC and NETREX, the valid and binding obligation of
UFAC and NETREX, enforceable against UFAC and NETREX in accordance with their
respective terms, subject only to bankruptcy, insolvency, reorganization,
moratorium or similar laws at the time in effect affecting the enforceability or
right of creditors generally and to general equitable principles which may limit
the right to obtain equitable remedies.
4.3 CAPITAL STOCK.
(a) As of the date hereof, there are 2,000,000, 500 and 100 shares of
common stock authorized and 1,000,000, 500 and 100 issued and outstanding of
each of UFAC, DBG and JWS, respectively, and except with respect to the 250
shares of Serial Preferred Stock of DBG and 250 shares of Voting Preferred Stock
of DBG (none of which are issued or outstanding), no shares of preferred stock
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are authorized, issued or outstanding. Neither UFAC nor any of the UFAC
Subsidiaries has any outstanding securities or bonds, debentures, notes or other
obligations, the holders of which have the right to vote (or that are
convertible into or exercisable for securities the holders of which have the
right to vote) with respect to the transactions contemplated hereby. All issued
and outstanding shares of UFAC and the UFAC Subsidiaries were issued in
compliance with all applicable state and federal securities laws. Except as set
forth on SCHEDULE 4.3(A), there are no existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments that obligate UFAC or any UFAC Subsidiary to issue, transfer or sell
any shares of capital stock or other equity interests in UFAC or any UFAC
Subsidiary.
(b) Neither UFAC nor any of the UFAC Subsidiaries has issued or granted
securities convertible into or exchangeable for interests in UFAC or any UFAC
Subsidiary, and, except as set forth on SCHEDULE 4.3(A), neither UFAC nor any
UFAC Subsidiary is a party to any outstanding commitment of any kind relating
to, or any presently effective agreement or understanding with respect to,
interests in UFAC or any UFAC Subsidiary, whether issued or unissued.
(c) Neither UFAC nor any of the UFAC Subsidiaries owns directly or
indirectly any material interest or investment (whether equity or debt) in any
corporation, partnership, joint business venture, trust or other legal entity
(other than the list set forth on SCHEDULE 4.3(C), which is a list of all of the
investments of UFAC and the UFAC Subsidiaries).
4.4 NO CONFLICTS; NO DEFAULTS; REQUIRED FILINGS AND CONSENTS. Neither the
execution and delivery by UFAC or NETREX of this Agreement, nor the consummation
by UFAC or NETREX of the transactions contemplated hereby in accordance with the
terms hereof, will:
(a) conflict with or result in a breach of any provisions of the
organizational documents of NETREX, UFAC or any of the UFAC Subsidiaries;
(b) result in a breach or violation of, a default under, or the triggering
of any payment or other obligation pursuant to, or accelerate vesting or have
any other consequence under, any stock option plan, option plan or similar
compensation plan of NETREX, UFAC or any of the UFAC Subsidiaries or any grant
or award made under any of the foregoing;
(c) violate or conflict with any statute, regulation, judgment, order,
writ, decree or injunction applicable to NETREX, UFAC or to any of the UFAC
Subsidiaries;
(d) violate or conflict with or result in a breach of any provision of, or
constitute a default (or any event that, with notice or lapse of time or both,
would constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any Lien upon any of the properties of NETREX, UFAC or
any of the UFAC Subsidiaries under, or result in being declared void, voidable
or without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed or any franchise, license, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which NETREX, UFAC or any UFAC Subsidiary is a party, or by which NETREX, UFAC
or any UFAC Subsidiary or any of their properties is bound or affected; or
(e) require any consent, approval or authorization of, or declaration,
filing or registration with, any Government Authority or private organization,
other than any filings required under the Securities Act, the Exchange Act, or
state securities laws ("Blue Sky Laws") (collectively, the "Filings") except
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with respect to clauses (b), (c), (d) and (e) above as would not reasonably be
expected to result in a Material Adverse Effect with respect to NETREX, UFAC or
any UFAC Subsidiary.
4.5 FINANCIAL STATEMENTS AND ABSENCE OF UNDISCLOSED LIABILITIES.
(a) UFAC has delivered to FAJ audited financial statements for UFAC, JWS,
and DBG (the "Financial Statements") for the two calendar years prior to the
date of this Agreement or for the period of its incorporation if such period is
shorter, which are attached as SCHEDULE 4.5.
(b) The consolidated balance sheet of UFAC (including the related notes and
schedules), included in the Financial Statements , have been prepared to reflect
the financial position and results of operations of UFAC, JWS and DBG on a
carve-out basis and not to reflect UFAC and all majority-owned subsidiaries on a
consolidated basis. Accordingly, FAJ and Progressive Vehicle Inspection
Services, Inc. have been excluded. Such statements fairly present the financial
position of each of UFAC and its subsidiaries (JWS and DBG) as of its date, and
the consolidated statement of operations, shareholders' equity (deficit) and
cash flows included in the Financial Statements (including any related notes and
schedules) fairly present the results of operations, retained earnings or cash
flows, as the case may be, of UFAC and its subsidiaries (JWS and DBG) for the
periods covered thereby, in each case in accordance with United States generally
accepted accounting principles ("GAAP"), consistently applied during the periods
involved, except as may be noted therein or that would not, individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect
with respect to UFAC or any UFAC Subsidiary. All such balance sheets and
statements are free of errors, omissions and misstatements except for such
errors, omissions and misstatements that would not, individually or in the
aggregate, have, or reasonably be expected to have, a Material Adverse Effect
with respect to UFAC or any UFAC Subsidiary. None of the receivables of each of
UFAC and the UFAC Subsidiaries are materially overstated, and no payables and
other liabilities of UFAC and each of the UFAC Subsidiaries are materially
understated, on any such balance sheet or statement.
(c) Except as and to the extent set forth in the Financial Statements or in
any Schedule hereto, to NETREX's knowledge, none of UFAC, JWS, or DBG has any
material Liabilities, nor do there exist any circumstances that would,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect with respect to UFAC or any UFAC Subsidiary.
(d) Except as and to the extent set forth in SCHEDULE 4.5(D) hereto, there
are no intercompany transactions that would be eliminated in consolidation
should a consolidated financial statement, consolidating UFAC and FAJ, be
prepared for each of the two calendar years prior to the date of this Agreement,
the date hereof, or the Closing Date.
4.6 LITIGATION; COMPLIANCE WITH LAW.
(a) SCHEDULE 4.6 sets forth a list and a brief description of all pending
Actions against UFAC and any of the UFAC Subsidiaries or the UFAC Shares of
which NETREX, UFAC or any of the UFAC Subsidiaries have notice, in which the
amount of damages prayed for in any complaint or pleading exceeds $150,000 or
that is reasonably likely to result in damages of $150,000 or more.
(b) Except as set forth on SCHEDULE 4.6, there are no Actions pending or,
to the knowledge of NETREX threatened, against UFAC or any of the UFAC
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Subsidiaries, or any property (including proprietary rights) of UFAC or any of
the UFAC Subsidiaries in any court or other forum or before any arbitrator of
any kind or before or by any Governmental Authority of which NETREX, UFAC or any
of the UFAC Subsidiaries have notice, in which the amount of damages prayed for
in any complaint or pleading exceeds $150,000 or that is reasonably likely to
result in damages of $150,000 or more.
(c) To the knowledge of NETREX, neither UFAC nor any of the UFAC
Subsidiaries is in violation of any statute, rule, regulation, order, writ,
decree or injunction of any Government Authority or any body having jurisdiction
over them or any of their respective properties. SCHEDULE 4.6 sets forth all
such violations known to NETREX, UFAC or the UFAC Subsidiaries except for
violations that would not, individually or in the aggregate, have, or reasonably
be expected to have, a Material Adverse Effect.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in SCHEDULE
4.7 or in any other Schedule hereto, since December 31, 1999, UFAC and each of
the UFAC Subsidiaries has conducted its business only in the ordinary course of
business, and there has not been (a) any change, circumstance or event that had
or that could reasonably be expected to have a Material Adverse Effect or (b)
any change in any accounting principles, practices or methods, except as
required by changes in GAAP.
4.8 TAX MATTERS.
(a) UFAC and each of the UFAC Subsidiaries has timely filed with the
appropriate taxing authority all Tax Returns required to be filed by it or has
timely requested extensions and any such request has been granted and has not
expired. Each such Tax Return is complete and accurate in all material respects
and all information shown thereon is correct in all material respects. All Taxes
required to have been paid by UFAC or any of the UFAC Subsidiaries have been
paid when due, except for Taxes contested in good faith and for which adequate
reserves as required by GAAP have been taken and which are listed on SCHEDULE
4.8. UFAC and each of the UFAC Subsidiaries have properly accrued their
liability for all Taxes for periods subsequent to the periods covered by such
Tax Returns as required by GAAP. Neither UFAC nor any of the UFAC Subsidiaries
has executed or filed with the IRS or any other taxing authority any agreement
now in effect extending the period for assessment or collection of any Tax.
Except as set forth on SCHEDULE 4.8, neither UFAC nor any of the UFAC
Subsidiaries is a party to any pending action or proceeding by any taxing
authority for assessment or collection of any Tax, and no claim for assessment
or collection of any Tax has been asserted against any of them. Except as set
forth on SCHEDULE 4.8, no claim has been made by any authority in a jurisdiction
where UFAC or any of the UFAC Subsidiaries does not file Tax Returns that it is
or may be subject to taxation or reporting in that jurisdiction. There is no
dispute or claim concerning any information, reporting or tax liability of UFAC
or any of the UFAC Subsidiaries, (i) claimed or raised by any taxing authority
in writing or (ii) as to which NETREX, UFAC or any of the UFAC Subsidiaries has
knowledge. Except as set forth on SCHEDULE 4.8, neither UFAC nor any of the UFAC
Subsidiaries has had its tax returns audited by any Government Authority within
the last four years.
(b) No amount or other entitlement that could be received (whether in cash
or property or the vesting of property) as a result of any of the transactions
contemplated hereby by any Employee of UFAC or any of the UFAC Subsidiaries or
of any of their Affiliates who is a "disqualified individual" (as such term is
defined in proposed Treasury Regulation Section 1.280G-1) under any employment,
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severance or termination agreement, other compensation arrangement or plan
currently in effect would be characterized as an "excess parachute payment" (as
such term is defined in Section 280G(b)(2) of the Code).
4.9 COMPLIANCE WITH AGREEMENTS.
(a) Neither UFAC nor any of the UFAC Subsidiaries is in default under or in
violation of any provision of its articles of incorporation or organization, or
bylaws or operating agreement or any similar organizational document.
(b) UFAC and each of the UFAC Subsidiaries has filed all material reports,
registrations, documents and statements, together with any amendments and
supporting materials required with respect thereto, that it was required to file
with any Government Authority and all other material reports, documents,
materials and statements required to be filed by it, and has paid all fees or
assessments due and payable in connection therewith. There is no unresolved
violation asserted by any Government Authority against UFAC or any of the UFAC
Subsidiaries of which NETREX, UFAC or any of the UFAC Subsidiaries has received
notice.
(c) Neither UFAC nor any of the UFAC Subsidiaries is in default, and, to
NETREX's knowledge, no event has occurred that, with the giving of notice or the
lapse of time or both, would constitute a default, under any Commitment to which
UFAC or any of the UFAC Subsidiaries are bound, whether as a party or otherwise
or in respect of any payment obligations thereunder except for defaults that
would not, individually or in the aggregate, have, or reasonably be expected to
have, a Material Adverse Effect with respect to UFAC or any UFAC Subsidiary.
Except as set forth in SCHEDULE 4.9(C), neither UFAC nor any of the UFAC
Subsidiaries is a party to any joint venture or partnership agreements. To
NETREX's knowledge, there is no condition with respect to UFAC or the UFAC
Subsidiaries that, individually or in the aggregate, could reasonably be
expected to result in a Material Adverse Effect with respect to UFAC or any UFAC
Subsidiary.
(d) SCHEDULE 4.9(D) sets forth a complete and accurate list of all material
agreements of UFAC and each of the UFAC Subsidiaries in effect on the date
hereof. Each agreement or policy listed on SCHEDULE 4.9(D) is in full force and
effect, and UFAC and each of the UFAC Subsidiaries and, to NETREX's knowledge,
the other parties thereto, are in compliance with such agreements or policies.
Solely for purposes of this Section, material agreements shall mean agreements
that involve an expense to UFAC or any of the UFAC Subsidiaries or annual
revenue over $500,000.
4.10 FINANCIAL RECORDS; ARTICLES AND BYLAWS, CORPORATE RECORDS.
(a) The books of account and other financial records of UFAC and the UFAC
Subsidiaries are true and complete in all material respects, and have been
maintained in accordance with GAAP.
(b) NETREX has delivered or made available to FAJ true and complete copies
of the Articles and the Bylaws of UFAC and each of the UFAC Subsidiaries, as
amended to date, and the Articles of Organization, organizational documents and
joint venture agreements of UFAC and each of the UFAC Subsidiaries, and all
amendments thereto.
(c) The corporate minute books and other records of proceedings of UFAC and
the UFAC Subsidiaries contain accurate records of all meetings and consents of
the equity holders, directors and other governing bodies thereof and accurately
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reflect in all material respects all other corporate action of the directors and
shareholders and any committees of the board of directors of UFAC and the UFAC
Subsidiaries.
4.11 TITLE TO ASSETS; LIENS. UFAC and each UFAC Subsidiary has good and
marketable title (insurable and indefeasible fee simple title in the case of
owned Real Property), to all of the respective property, equipment and other
assets owned by it (the "UFAC and Subsidiaries' Properties"), and, except as set
forth on SCHEDULE 4.11, such assets are free and clear of any and all mortgages,
liens, security interests, charges, encumbrances or title defects of any nature
whatsoever other than Permitted Liens and liens that would not, individually or
in the aggregate, materially impair the use of such UFAC and Subsidiaries'
Properties. SCHEDULE 4.11 contains a complete and accurate list of each parcel
of Real Property owned, leased or used by UFAC and any UFAC Subsidiary in the
conduct of its business. There are no pending or, to the best knowledge of
NETREX, threatened zoning, condemnation or eminent domain proceedings, building,
utility or other moratoria, or injunctions or court orders which would
materially adversely affect such Real Property. To knowledge of NETREX, the
current use of the owned Real Property is permissible and in material compliance
with all applicable zoning ordinances and other regulations of any Government
Authority.
4.12 ENVIRONMENTAL MATTERS.
(a) UFAC and each of the UFAC Subsidiaries' ownership, operation and use of
its respective property have been and currently are in compliance in all
material respects with all applicable Environmental Laws.
(b) No Environmental Claim with respect to the operations or the businesses
of the UFAC or the UFAC Subsidiaries, or with respect to any Real Property, has
been asserted or, to NETREX's knowledge, threatened, and, to NETREX's knowledge,
no circumstances exist with respect to UFAC or any of the UFAC Subsidiaries or
any Real Property that would reasonably be expected to result in any
Environmental Claim being asserted, in any such case, against (i) UFAC or any of
the UFAC Subsidiaries, or (ii) any Person whose liability for any Environmental
Claims UFAC or any of the UFAC Subsidiaries has or may have retained or assumed
either contractually or by operation of law.
(c) (i) Neither UFAC nor any of the UFAC Subsidiaries has been notified, or
has reason to anticipate being notified, of potential responsibility in
connection with any site that has been placed on, or proposed to be placed on,
the National Priorities List or its state or foreign equivalent pursuant CERCLA,
or analogous state or foreign laws, (ii) no Materials of Environmental Concern
are present on, in or under any Real Property, (iii) neither UFAC nor any UFAC
Subsidiary nor, to the knowledge of NETREX, any tenant of any Real Property has
released or arranged for the release of any Materials of Environmental Concern
at or on any Real Property, (iv) no underground storage tanks, surface disposal
areas, pits, ponds, lagoons or open trenches are present at any Real Property,
(v) no transformers, capacitors or other equipment containing fluid with more
than 50 parts per million polychlorinated biphenyls are present at, on or under
any Real Property, except for any such transformers, capacitors or other
equipment owned by any utility company, and (vi) to NETREX's knowledge, no
employee, agent, contractor, subcontractor or tenant of UFAC or any of the UFAC
Subsidiaries is now or has in the past been exposed to friable asbestos or
asbestos-containing material at any Real Property whether now or previously
owned or occupied by UFAC or any of the UFAC Subsidiaries.
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4.13 EMPLOYEES AND BENEFIT PLANS.
(a) SCHEDULE 4.13(A) sets forth a complete and accurate list of all
employment agreements with Employees of UFAC and each of the UFAC Subsidiaries.
Except for the Employees who are parties to such employment agreements, all of
the Employees of UFAC and the UFAC Subsidiaries are employed in an at-will
status (except for restrictions or limitations on the at-will status of such
employees imposed by general principles of law or equity).
(b) SCHEDULE 4.13(B) sets forth a complete and accurate list of each of the
UFAC Plans. Since April 1, 2000, there has been no adoption, modification,
amendment or alteration of any UFAC Plan by UFAC or any of the UFAC
Subsidiaries. All UFAC Plans, including any such plan that is an "employee
benefit plan" as defined in Section 3(3) of ERISA, are in compliance, in all
material respects, with all applicable requirements of law, including ERISA and
the Code, and neither UFAC nor any of the UFAC Subsidiaries has any liabilities
or obligations with respect to any UFAC Plan, whether accrued, contingent or
otherwise.
4.14 LABOR MATTERS. Except as disclosed in SCHEDULE 4.14, there are no
pending or, to the knowledge of NETREX, threatened Actions or work stoppages
relating to any Employee of UFAC or any UFAC Subsidiary. Neither UFAC nor any of
the UFAC Subsidiaries is a party to any collective bargaining agreement with
respect to Employees, and, to the knowledge of NETREX, there are no activities
of any labor union seeking to represent or organize the employees of UFAC or any
of the UFAC Subsidiaries. No unfair labor practice or labor arbitration, or
race, sex, age, disability or other discrimination complaint is pending, nor is
any such complaint, to the knowledge of NETREX, threatened against UFAC or any
of the UFAC Subsidiaries before the National Labor Relations Board, Equal
Employment Opportunity Commission, Department of Labor or any other Governmental
Authority, and no grievance is pending, nor is any grievance, to the knowledge
of NETREX, threatened against UFAC or any of the UFAC Subsidiaries. UFAC and
each of the UFAC Subsidiaries is in compliance in all material respects with all
applicable federal, state and local laws relating to employment, including
without limitation, the provisions thereof relating to wages, non-discriminatory
hiring and employment practices, collective bargaining, and payment of Social
Security and Unemployment Compensation taxes or similar taxes, and neither UFAC
nor any of the UFAC Subsidiaries is liable for any arrears of wages or subject
to any liabilities or penalties for failure to comply with any of the foregoing
laws.
4.15 PROPRIETARY RIGHTS. Attached as SCHEDULE 4.15 is a list of (a) all
trademark, service mark or trade name registrations and all pending applications
for any such registration; (b) all patent and copyright registrations and all
pending applications therefor; (c) all other trademarks, service marks, domain
names, or trade names, whether or not registered; and (d) all licenses with
respect thereto as well as rights or licenses to use any proprietary rights
(including software licenses) of any other entities (the items in clauses (a),
(b), (c) and (d) collectively, the "Proprietary Rights"), that are owned or used
by UFAC or any of the UFAC Subsidiaries. To the knowledge of NETREX, the use of
any of the Proprietary Rights by UFAC or any of the UFAC Subsidiaries has not
infringed, is not infringing upon, and is not otherwise violating the rights of
any Person or other entity in or to such Proprietary Rights or the asserted
Proprietary Rights of others. No notices have been received by UFAC or any of
the UFAC Subsidiaries that the use of the Proprietary Rights by UFAC or any of
the UFAC Subsidiaries infringes upon or otherwise materially violates any rights
of a person or other entity in or to such Proprietary Rights or the proprietary
rights of others. To the knowledge of NETREX, no person or other entity is
infringing on the Proprietary Rights owned by UFAC or any of the UFAC
Subsidiaries. The Proprietary Rights include all Proprietary Rights used in, or
necessary to, the conduct of the business of UFAC and each of the UFAC
Subsidiaries.
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4.16 INSURANCE. UFAC and each of the UFAC Subsidiaries maintains insurance
policies covering the assets, business, equipment, properties, operations and
Employees of it (collectively, the "Insurance Policies") each of which Insurance
Policies are of a type and in amounts customarily carried by Persons similar in
size to UFAC or the UFAC Subsidiaries conducting businesses similar to those of
UFAC or the UFAC Subsidiaries. SCHEDULE 4.16 sets forth a list of all insurance
coverage or policies currently maintained by UFAC and the UFAC Subsidiaries. All
such coverage or policies shall be maintained in full force and effect until the
Closing. There is no material claim by UFAC or any of the UFAC Subsidiaries
pending under any of the Insurance Policies as to which coverage has been
questioned, denied or disputed by the underwriters of such policies.
4.17 INTENTIONALLY OMITTED.
4.18 GOVERNMENT APPROVALS; COMPLIANCE WITH LAWS AND ORDERS.
(a) UFAC and each of the UFAC Subsidiaries has obtained from the
appropriate Government Authority that is charged with regulating or supervising
any business conducted by UFAC or any of the UFAC Subsidiaries all material
permits, variances, exemptions, orders, approvals, certificates of authority and
licenses necessary for the conduct of its business and operations as and to the
extent currently conducted (the "UFAC and Subsidiaries' Permits"), which UFAC
and Subsidiaries' Permits are valid and remain in full force and effect. UFAC
and the UFAC Subsidiaries are in compliance in all material respects with the
terms of all such UFAC and Subsidiaries' Permits.
(b) Neither UFAC nor any of the UFAC Subsidiaries has received notice of
or, to the knowledge of NETREX, is subject to any Action, order or any
complaint, proceeding or investigation of any Government Authority that is
charged with regulating or supervising any business conducted by UFAC or any of
the UFAC Subsidiaries, that is pending or threatened, that affects or that could
affect the effectiveness or validity of any UFAC and Subsidiaries' Permit or
that could impair the renewal thereof or that is likely to result in any such
Action, agreement, consent decree or order or in any fine, penalty or other
liability in excess of $20,000 or the forfeiture of a certificate of authority
of UFAC or any of the UFAC Subsidiaries. As of the date hereof, neither UFAC nor
any of the UFAC Subsidiaries is a party or subject to any Action, agreement,
consent decree or order, or other understanding or arrangement with, or any
directive of, any Government Authority that is charged with regulating or
supervising any business conducted by UFAC or any of the UFAC Subsidiaries that
imposes any material restrictions on or otherwise affects in any material way
the conduct of the business of UFAC or any of the UFAC Subsidiaries, as
currently conducted.
4.19 TAKEOVER STATUTES. No "fair price," "moratorium," "business
combination," "control share acquisition" or other anti-takeover statute or
similar statute or regulation enacted by the state of Ohio applies to the
transactions contemplated by this Agreement. All actions have been taken to
ensure that no statute or regulation of the state of Ohio, including any
"business combination act," limits UFAC's ability to engage in further
transactions with FAJ.
4.20 BROKERS AND FINDERS. No agent, broker, investment banker or other
Person, including any of the foregoing that is an Affiliate of NETREX, UFAC or
any of the UFAC Subsidiaries, is or will be entitled to any broker's or finder's
fee or any other commission or similar fee agreed to or arranged by NETREX, UFAC
or any of the UFAC Subsidiaries in connection with this Agreement or any of the
transactions contemplated hereby.
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4.21 KNOWLEDGE DEFINED. As used herein, the phrase "to NETREX's knowledge"
(or words of similar import) means the actual knowledge, after reasonable
inquiry, of any of the chief executive officers, chief financial officers or
directors of each of NETREX, UFAC and the UFAC Subsidiaries.
4.22 PRIVATE PLACEMENT.
(a) NETREX acknowledges that, in issuing its securities hereunder, FAJ is
relying on exemptions from the registration requirements of the Securities Act
and on applicable state statutes and regulations with respect to the exchange of
FAJ Shares contemplated hereby. NETREX hereby affirms that it is an "accredited
investor" as defined in Regulation D promulgated by the SEC under the Securities
Act.
(b) NETREX (together with its Affiliates) (i) can bear the economic risk of
the acquisition of the FAJ Shares, and (ii) has such knowledge and experience in
business and financial matters as to be capable of evaluating the merits and
risks of the transaction.
(c) NETREX warrants that any financial information relating to UFAC, or the
UFAC Subsidiaries that is provided herewith by UFAC, or the UFAC Subsidiaries,
or is subsequently submitted by UFAC or the UFAC Subsidiaries at the request of
FAJ, does or will fairly and accurately reflect the financial condition of such
entity as of the date thereof with respect to which NETREX does not anticipate
any material adverse change.
(d) NETREX has been provided the opportunity to ask questions with respect
to the business, operations and financial condition of FAJ, and the terms and
conditions of the plan of reorganization and the issuance of the FAJ Shares.
(e) NETREX understands that the FAJ Shares have not been registered under
the Securities Act, or the securities laws of any state and are subject to
certain restrictions on transfer.
(f) NETREX acknowledges that the FAJ Shares being acquired are being
acquired for NETREX's own account without a view to public distribution or
resale and that NETREX has no contract, undertaking, agreement, or arrangement
to sell or otherwise transfer or dispose of the FAJ Shares or any portion
thereof to any other person or entity.
(g) NETREX agrees that it will not sell or otherwise transfer or dispose of
the FAJ Shares, or any portion thereof, unless such FAJ Shares are registered
under the Securities Act and any applicable state securities laws or NETREX
obtains an opinion of reputable securities counsel that such FAJ Shares may be
sold in reliance on an exemption from such registration requirements.
(h) NETREX understands that no federal or state agency including the SEC,
the Arizona Corporation Commission or the securities commission or authorities
of any other state has approved or disapproved the FAJ Shares, passed upon or
endorsed the merits of the Merger or the adequacy of the disclosure given in
connection with the offering, or made any finding or determination as to the
fairness of the FAJ Shares for investment.
4.23 NO CONFLICTING INFORMATION. UFAC acknowledges that it owns a majority
of the issued and outstanding capital stock of FAJ. In addition, pursuant to a
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Services Agreement between FAJ and UFAC, UFAC manages certain day-to-day matters
for FAJ. Accordingly, UFAC has, and has access to, certain information regarding
the business, operations and financial condition of FAJ.
4.24 PROXY STATEMENT. None of the information in this Agreement or
otherwise supplied or to be supplied by NETREX, UFAC, or any of the UFAC
Subsidiaries, including information for inclusion or incorporation by reference
in the Proxy Statement, as of the date hereof and as of the date such
information was provided to FAJ for inclusion in the Proxy Statement to be
mailed to the FAJ's shareholders, contains or will contain any untrue statement
of a material fact or omit to state any material fact required to be stated
herein or therein or necessary to make the statements herein or therein, in
light of the circumstances under which they are made, not misleading. UFAC will
advise FAJ in writing of any material changes in any such information or if any
such information contains any untrue statements of material facts or omits to
state any material facts required to be stated herein or therein or necessary to
make the statements herein or therein, in light of the circumstances under which
they are made, not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF FAJ
FAJ hereby represents and warrants to NETREX and UFAC as follows:
5.1 ORGANIZATION. FAJ is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Arizona. FAJ has all
requisite corporate power and authority to own, operate, lease and encumber its
properties and carry on its business as now conducted, and to enter into this
Agreement and to perform its obligations hereunder.
5.2 DUE AUTHORIZATION. The execution, delivery and performance of this
Agreement and of all of the documents and instruments delivered in connection
herewith by FAJ has been duly and validly authorized by all necessary corporate
action on the part of FAJ. This Agreement has been duly executed and delivered
on behalf of FAJ. This Agreement is, and the other documents and instruments
required hereby will be, when executed and delivered by FAJ, the valid and
binding obligations of FAJ, enforceable against FAJ in accordance with their
respective terms, subject only to bankruptcy, insolvency, reorganization,
moratorium or similar laws at the time in effect affecting the enforceability or
right of creditors generally and to general equitable principles which may limit
the right to obtain equitable remedies.
5.3 CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution and
delivery by FAJ of this Agreement nor the consummation by FAJ of the
transactions contemplated hereby in accordance with the terms hereof will
conflict with or result in a breach of any of the provisions of the Articles of
Incorporation or By-Laws of FAJ or result in a breach of the terms, conditions
or provisions of, constitute a default (or any event that, with notice or lapse
of time or both, would constitute a default), under, result in the creation of
any Lien upon any of the properties or assets of FAJ pursuant to, or require any
consent, approval or other action by or any notice to or filing with any
Government Authority pursuant to, the organizational documents of FAJ or any
agreement, instrument, order, judgment, decree, statute, law, rule or regulation
by which FAJ is bound, except for any filings required by Sections 13(d) and 16
of the Exchange Act.
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5.4 APPROVAL; STOCK.
(a) The Board of Directors of FAJ and a committee of "disinterested
directors" (as defined in Chapter 23, Section 10-2741(d) of the Arizona Business
Corporation Act) have approved the Merger, and this Agreement, and the
transactions contemplated hereby and have determined to recommend that the
shareholders of FAJ vote in favor of and approve this Agreement and the Merger.
(b) The FAJ Shares to be issued pursuant to this Agreement have been duly
authorized, and upon issuance on the terms set forth in this Agreement will be
duly and validly issued, fully paid and nonassessable. On the Effective Date and
subject to the restrictions described herein, FAJ will deliver to UFAC good and
marketable title to the FAJ Shares, free and clear of all Liens (other than
Liens created as a result of actions of UFAC).
(c) The issuance of the FAJ Common Stock pursuant to this Agreement will
not give any shareholder of FAJ the right to demand payment for that
shareholder's shares under the laws of the State of Arizona; any appraisal or
similar rights under the laws of the State of Arizona; any dissenters' or
similar rights under the laws of the State of Arizona; any preemptive or similar
right to purchase additional shares of FAJ's capital stock; or any rights under
any shareholders' rights, "poison pill" or similar plan adopted by the FAJ Board
of Directors or the FAJ shareholders or contained in FAJ's Articles of
Incorporation or other organizational documents.
5.5 CAPITALIZATION. FAJ is authorized to issue 100,000,000 shares of common
stock, $.01 par value per share, of which 8,957,660 shares are issued and
outstanding. Other than pursuant to its 1996 Stock Option Plan, FAJ has not
entered into any agreement or commitment to issue, deliver or sell any
additional shares of its capital stock of any class, or any securities or rights
which are convertible into, exchangeable for, or evidencing the right to
subscribe for any shares of its capital stock, or any rights, warrants, options,
calls, commitments or any other agreements to purchase or acquire any shares of
its capital stock or any securities or rights convertible into, exchangeable
for, or evidencing the right to subscribe for, any shares of its capital stock.
FAJ has not agreed to split, combine, subdivide, reclassify, redeem, repurchase
or otherwise acquire or take similar action with respect to any shares of its
capital stock. FAJ has not declared, set aside for payment or paid any dividend,
or make any other distribution in respect of any shares of its capital stock or
other outstanding securities or made any payments to shareholders in their
capacity as such, other than in a manner and amount consistent with prior
business practices.
5.6 SEC MATTERS AND ABSENCE OF UNDISCLOSED LIABILITIES
(a) FAJ has delivered or made available to UFAC, FAJ's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999 filed by FAJ with the SEC and
all exhibits, amendments and supplements thereto, including all documents
incorporated by reference therein (collectively, the "Form 10-K"), and each
registration statement, report, proxy statement or information statement and all
exhibits thereto prepared by or relating to FAJ for the three years prior to the
date of this Agreement, each in the form (including exhibits and any amendments
thereto) filed with the SEC (collectively the "FAJ Reports"). The FAJ Reports
were filed with the SEC in a timely manner and constitute all forms, reports and
documents required to be filed by FAJ under the Securities Act and the Exchange
Act and the rules and regulations promulgated thereunder (the "Securities
Laws"). As of their respective dates, the FAJ Reports: (i) complied as to form
in all material respects with the applicable requirements of the Securities
Laws; and (ii) did 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 made therein, in the light of the circumstances under which they were
made, not misleading. There has been no violation asserted by any Government
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Authority with respect to any of the FAJ Reports that has not been resolved and,
to FAJ's knowledge, there have been no written threatened assertions of
violations.
(b) Each of the balance sheets (including the related notes and schedules)
included in or incorporated by reference into the Form 10-K and each Exchange
Act report filed between the date such annual report was filed with the SEC and
the Closing Date (the Form 10-K and such reports collectively, the "Current
Reports") fairly present the consolidated financial position of FAJ and its
Subsidiaries as of its date and each of the statements of operations,
shareholders' equity (deficit) and cash flows included in or incorporated by
reference into the Current Reports (including any related notes and schedules)
fairly present the consolidated results of operations, retained earnings or cash
flows, as the case may be, of FAJ and its Subsidiaries for the period covered
thereby, in each case in accordance with GAAP and in accordance with Regulation
S-X promulgated by the SEC, except as may be noted therein and except, in the
case of the unaudited statements, for normal recurring year-end adjustments
which would not, individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect. All such balance sheets and statements are
free of errors, omissions and misstatements, except for such errors, omissions
and misstatements that would not, individually or in the aggregate, have or,
reasonably be expected to have, a Material Adverse Effect. None of the
receivables of FAJ and its Subsidiaries are materially overstated, and no
payables and other liabilities of FAJ and its Subsidiaries are materially
understated, on any such balance sheet or statement.
(c) Except as and to the extent set forth in the Current Reports or in any
Schedule hereto, to FAJ's knowledge, none of FAJ or any of its Subsidiaries has
any material Liabilities, nor do there exist any circumstances that would,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.
5.7 BROKERS OR FINDERS. No agent, broker, investment banker or other firm
or Person, including any of the foregoing that is an Affiliate of FAJ, is or
will be entitled to any broker's or finder's fee or any other commission or
similar fee agreed to or arranged by FAJ in connection with this Agreement or
any of the transactions contemplated hereby.
5.8 VIOLATIONS. To the knowledge of FAJ, FAJ is not in material violation
of any statute, rule, regulation, order, writ, decree or injunction of any
Government Authority or any body having jurisdiction over FAJ or any of its
properties.
5.9 GOVERNMENT APPROVALS; COMPLIANCE WITH LAWS AND ORDERS.
(a) FAJ has obtained from the appropriate Government Authorities that are
charged with regulating or supervising any business conducted by FAJ all
permits, variances, exemptions, orders, approvals, certificates of authority and
licenses necessary for the conduct of its business and operations as and to the
extent currently conducted (the "FAJ Permits"), which FAJ Permits are valid and
remain in full force and effect. FAJ is in compliance in all material respects
with the terms of all such FAJ Permits.
(b) FAJ has not received notice of or, to the knowledge of FAJ, is not
subject to any Action, order or any complaint, proceeding or investigation of
any Government Authority which is charged with regulating or supervising any
business conducted by FAJ, that is pending or threatened, that affects or which
could affect the effectiveness or validity of any such FAJ Permit or that could
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impair the renewal thereof or that is likely to result in any such Action,
agreement, consent decree or order or in any fine, penalty or other liability in
excess of $20,000 or the forfeiture of the certificate of authority of authority
of FAJ. As of the date hereof, FAJ is not a party or subject to any Action,
agreement, consent decree or order, or other understanding or arrangement with,
or any directive of, any Government Authority that is charged with regulating or
supervising any business conducted FAJ that imposes any material restrictions on
or otherwise affects in any material way the conduct of the business of FAJ.
5.10 ABSENCE OF INDUCEMENT. In entering into this Agreement, FAJ has not
been induced by or relied upon any representations, warranties or statements of
UFAC or NETREX that are not set forth in this Agreement or in any written
information provided for the Proxy Statement, whether or not such
representations, warranties or statements have actually been made in writing or
orally, concerning (a) the earnings, assets, net worth, physical condition,
general business or business prospects of UFAC or any UFAC Subsidiary, (b) the
status of UFAC's or any UFAC Subsidiary's relationship with its customers,
suppliers or agents, both public and private or (c) any other matter, and FAJ
acknowledges that, in entering into this Agreement, UFAC and NETREX have been
induced by and relied upon the representation and warranty of FAJ set forth in
this SECTION 5.10.
ARTICLE 6
COVENANTS RELATING TO THE CLOSING
6.1 TAKING OF NECESSARY ACTION. Each party hereto agrees to use its
commercially reasonable best efforts promptly to take or cause to be taken all
action and promptly to do or cause to be done all things reasonably necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, subject to the terms
and conditions of this Agreement.
6.2 PUBLIC ANNOUNCEMENT; CONFIDENTIALITY.
(a) For as long as this Agreement is in effect, neither party shall issue
or cause the publication of any press release or any other announcement with
respect to this Agreement, or the transactions contemplated hereby or thereby
without the consent of the other (which consent shall not be unreasonably
withheld or delayed), except when, in the reasonable judgment of FAJ, such
release or announcement is required by applicable law or pursuant to any listing
agreement with, or the rules or regulations of, any securities exchange or any
other regulatory requirement.
(b) Each party agrees that all information provided to such party or any of
its representatives pursuant to this Agreement shall be kept confidential, and
shall not disclose such information to any Persons other than the directors,
officers, employees, financial advisors, legal advisors, accountants,
consultants and affiliates of such party who reasonably need to have access to
the confidential information and who are advised of the confidential nature of
such information, but the foregoing obligation shall not (i) relate to any
information that (A) is or becomes generally available other than as a result of
unauthorized disclosure by the receiving party or by Persons to whom the
receiving party has made such information available, (B) is or becomes available
to the receiving party on a nonconfidential basis from a third party that is
not, to the receiving party's knowledge, bound by any other confidentiality
agreement with the disclosing party, or (C) is independently developed or
already known to the receiving party prior to disclosure by the disclosing
party, or (ii) prohibit disclosure of any information if required by law, rule,
regulation, court order or other legal or governmental process.
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6.3 CONDUCT OF BUSINESS. Except as agreed to by the other parties and set
forth on Schedule 6.3, during the period from the date of this Agreement to the
Effective Date: (i) each of FAJ and each of UFAC and the UFAC Subsidiaries will,
and FAJ and NETREX will cause each of their respective Subsidiaries to, conduct
its business only in the ordinary course consistent with past practice; (ii)
none of UFAC, the UFAC Subsidiaries and FAJ will, and FAJ and UFAC will cause
each of their respective Subsidiaries not to, take any action or enter into any
material transaction other than in the ordinary course of business consistent
with past practice; and (iii) to the extent consistent with the foregoing, each
of FAJ, UFAC and the UFAC Subsidiaries will, and FAJ and UFAC will cause each of
their respective Subsidiaries to, use its commercially reasonable best efforts
to preserve intact its current business organization and reputation, existing
relationships with customers, franchisees, licensees, suppliers, government
officials, regulatory authorities and others having business dealings with it or
regulatory authority over it and shall comply in all material respects with all
laws and orders of each Governmental Authority and regulatory authority having
jurisdiction over it. Without limiting the generality of the foregoing and
except as otherwise expressly permitted in this Agreement, prior to the Closing
Date, none of FAJ, UFAC and the UFAC Subsidiaries (as the case may be) will, and
FAJ and UFAC will not permit any of their respective Subsidiaries to, without
the prior written consent of the other:
(a) (i) issue, deliver or sell, or authorize or enter into any agreement or
commitment to issue, deliver or sell (y) any additional shares of its capital
stock of any class, or any securities or rights which are convertible into,
exchangeable for, or evidencing the right to subscribe for any shares of its
capital stock, or any rights, warrants, options, calls, commitments or any other
agreements to purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for, or evidencing the right
to subscribe for, any shares of its capital stock, or (z) any other of its
securities or the securities of any of its Subsidiaries; (ii) split, combine,
subdivide, reclassify, redeem, repurchase or otherwise acquire or take similar
action with respect to any shares of its capital stock, or (iii) declare, set
aside for payment or pay any dividend, or make any other distribution in respect
of any shares of its capital stock or other. outstanding securities or make any
payments to shareholders in their capacity as such, other than in a manner and
amount consistent with prior business practices;
(b) (i) create, increase the benefits payable or accruing under, or modify
in any manner any UFAC Plan or the compensation, pension, welfare, medical or
fringe benefits of any of its directors, officers or Employees, except for
normal increases in the ordinary course of business consistent with past
practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense to FAJ, UFAC or the UFAC Subsidiaries, or (ii)
enter into any new, or amend any existing, employment, severance, "golden
parachute" or other similar agreement with any such director, officer or
Employee, except as may be approved in writing by the other party;
(c) make any acquisition, by means of merger, consolidation, purchase of a
substantial equity interest in or a substantial portion of the assets of, or
otherwise, of any business or corporation, partnership, association or other
business organization or division thereof (except as herein contemplated);
(d) adopt any amendments to its articles of incorporation, bylaws or
similar organizational documents, or alter through merger with any entity,
liquidation, reorganization, restructuring or in any other fashion the corporate
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structure or ownership of it or any of its Subsidiaries, or encumber, dispose
of, sell or lease any material amount of the assets of FAJ or any of the FAJ,
UFAC or any of the UFAC Subsidiaries except as herein authorized;
(e) enter into any contract, arrangement or understanding requiring the
expenditure of greater than $150,000;
(f) in the event that a claim is made for damages during the period prior
to the Closing Date that is reasonably likely to have a Material Adverse Effect,
fail to promptly notify the other party of the pendency of such claim; or
(g) authorize, recommend, propose or announce an intention to do any of the
foregoing, or enter into any agreement, contract or commitment to do any of the
foregoing.
6.4 NOTIFICATION OF CERTAIN MATTERS. Each of the parties shall notify the
other parties in writing of its discovery of any matter that would render any of
such party's or the other party's representations and warranties contained
herein untrue or incorrect in any material respect, but the failure of any party
to so notify another party of the inaccuracy of that other party's
representations and warranties does not constitute a breach of this Agreement.
6.5 PROVISION OF CERTAIN DOCUMENTS. Each party shall, upon reasonable
request by another party, deliver true and complete copies of any documents
related to such party or any of its Subsidiaries that are reasonably requested
within five Business Days after the date of such request.
ARTICLE 7
CERTAIN ADDITIONAL COVENANTS
7.1 RESALE. NETREX acknowledges and agrees that the shares of FAJ Shares to
be acquired pursuant to the transactions hereby contemplated will not, as of the
Closing Date or the Effective Date, be registered under the Securities Act or
the Blue Sky Laws of any state and that they may be sold or otherwise disposed
of only in one or more transactions registered under the Securities Act and,
where applicable, such Blue Sky Laws or as to which an exemption from the
registration requirements of the Securities Act and, where applicable, such Blue
Sky Laws is available.
7.2 LEGENDS; STOP-TRANSFER ORDERS.
(a) The certificates for the FAJ shares to be acquired pursuant to the
Merger will bear legends in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT AND ARE
"RESTRICTED SECURITIES" WITHIN THE MEANING OF SUCH ACTS. THE SHARES MAY NOT
BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISTRIBUTED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION UNDER SUCH ACTS OR THE RECEIPT OF AN OPINION
OF REPUTABLE SECURITIES COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. THE
CORPORATION WILL FURNISH TO ANY SHAREHOLDER, UPON REQUEST AND WITHOUT
CHARGE, A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND
RELATIVE RIGHTS OF THE SHARES OF EACH CLASS AUTHORIZED TO BE ISSUED.
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(b) The certificates for the FAJ Shares may also bear any legend required
by any applicable Blue Sky Laws.
(c) FAJ may impose appropriate stop-transfer instructions relating to the
restrictions set forth herein.
7.3 ACCESS TO INFORMATION. From the date of this Agreement until the
Effective Date, each party shall provide the other and its representatives with
such financial and other information regarding such party's or any of the
Subsidiaries' business, operations, properties and financial statements a party
or its representatives shall reasonably request and shall provide the other
party or its representatives access to all of the properties, assets, books,
records, tax returns, contracts and personnel during the normal business hours
of the party providing the information.
7.4 NETREX TO CONTINUE EXISTENCE. Until all representations and warranties
of NETREX have expired pursuant to SECTION 11.1: NETREX will (a) remain in good
standing under the laws of the state of Delaware, and (b) remain solvent and
able to satisfy all of its obligations under this Agreement.
ARTICLE 8
CLOSING; CLOSING DELIVERIES
8.1 CLOSING; TERMINATION. The Closing shall take place at 10:00 a.m., local
time, at the offices of FAJ, 45 East Monterey Way, Phoenix, Arizona 85012, on
the Business Day following the satisfaction or waiver of the last to be
satisfied or waived of the conditions set forth in SECTIONS 9.1 AND 9.2 (other
than those conditions that are to be satisfied concurrently with the Closing),
or on such other date or at such other time and place as the parties shall agree
on in writing (the "Closing Date"). If the Closing has not occurred on or before
the first anniversary of this Agreement and this Agreement has not been
previously terminated under ARTICLE 10, this Agreement shall terminate on such
anniversary without further action by the parties hereto, and this Agreement
shall be null and void and have no further effect.
8.2 FAJ CLOSING DELIVERIES. At the Closing, FAJ shall deliver, or cause to
be delivered, to NETREX and UFAC each of the following:
(a) the certificates, dated the Closing Date and validly executed on behalf
of FAJ, required by each of SECTIONS 9.1 (A) AND (D);
(b) resolutions of the Board of Directors of FAJ, certified by the
Secretary of FAJ, authorizing the execution and delivery of this Agreement, and
the transactions contemplated hereby, including the Merger;
(c) the legal opinion of FAJ's counsel required by SECTION 9.1(F);
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(d) evidence or copies of any consents, approvals, orders, qualifications
or waivers required by SECTION 9.1;
(e) supplemental listing application executed by FAJ and the AMEX
authorizing the listing of the FAJ Shares (subject to official notice of
issuance);
(f) the Certificate of Merger executed by FAJ;
(g) the Articles of Incorporation or similar organizational documents of
FAJ, certified as of a recent date by a duly authorized official of the Arizona
Corporation Commission, and the bylaws or similar organizational documents of
FAJ, each certified as of a recent date by the Secretary or similar officer of
FAJ, together with Articles of Amendment to, among other things, change the name
of FAJ to Netrex Business Services, Inc.;
(h) certificates of a duly authorized official of the Arizona Corporation
Commission or a duly authorized official of the jurisdiction of its
organization, dated as of a recent date, as to the good standing of FAJ in
Arizona;
(i) if not previously delivered, all other certificates and instruments and
documents required pursuant this Agreement to be delivered by FAJ to UFAC or
NETREX at or prior to the Closing; and
(j) such other instruments reasonably requested by UFAC or NETREX as may be
necessary or appropriate to confirm or carry out the provisions of this
Agreement.
8.3 UFAC AND NETREX CLOSING DELIVERIES. At the Closing, UFAC or NETREX
shall deliver, or cause to be delivered, to FAJ the following:
(a) the certificate, dated the Closing Date and validly executed required
by SECTION 9.2(A);
(b) the legal opinion of counsel required by SECTION 9.2(G);
(c) the Articles of Incorporation or similar organizational documents of
each of UFAC and the UFAC Subsidiaries, each certified as of a recent date by a
duly authorized official of the jurisdiction of its incorporation or
organization, and the bylaws or similar organizational documents of each of UFAC
and the UFAC Subsidiaries, each certified as of a recent date by the Secretary
or similar officer of the entity;
(d) certificates of a duly authorized official of the jurisdiction of its
organization, dated as of a recent date, as to the good standing of each of UFAC
and the UFAC Subsidiaries in the jurisdiction of its organization or
incorporation;
(e) if not previously delivered to FAJ, all other certificates, documents,
instruments and writings required pursuant to this Agreement to be delivered by
or on behalf of NETREX or UFAC at or before the Closing;
(f) the Certificate of Merger executed by UFAC; and
(g) such other instruments reasonably requested by FAJ as may be necessary
or appropriate to confirm or carry out the provisions of this Agreement.
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ARTICLE 9
CONDITIONS TO CLOSING
9.1 CONDITIONS TO UFAC AND NETREX CLOSING. The obligations of UFAC and
NETREX hereunder are subject to the satisfaction or waiver by UFAC or NETREX of
each of the following conditions precedent:
(a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and
warranties of FAJ contained herein that are not qualified as to materiality
shall have been true and correct in all material respects on and as of the date
hereof, and shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of the Closing Date, and the representations and
warranties already qualified with respect to materiality shall have been true
and correct in all respects at each such date without regard to the materiality
qualification contained in this Section. The covenants and agreements of FAJ to
be performed on or before the Closing Date in accordance with this Agreement
shall have been duly performed in all material respects. FAJ shall have
delivered to UFAC and NETREX at the Closing a certificate of an appropriate
officer in form and substance satisfactory to UFAC and NETREX, dated the Closing
Date to such effect.
(b) NO MATERIAL ADVERSE CHANGE. Since December 31, 1999, there shall not
have been any change, circumstance or event with respect to FAJ has had or could
reasonably be expected to have a Material Adverse Effect.
(c) NO LIMITATION. There is (i) no Action, suit, investigation or
proceeding instituted (x) by any Government Authority or any Person that seeks
to prevent the consummation of the transactions contemplated hereby or (y) that
is reasonably likely to result in material damages to UFAC or any of the UFAC
Subsidiaries or FAJ in connection with the transactions contemplated hereby,
which, in either case, continues to be outstanding and (ii) no injunction or
restraining order (temporary or permanent) in effect to stay, prevent or delay
the consummation of the transactions provided for herein, which continues to be
outstanding.
(d) SHAREHOLDER APPROVAL. The shareholders of FAJ shall have approved this
Agreement and the transactions contemplated hereby, including the Merger, by a
vote of a majority of the FAJ Shares present, in person or by proxy, at a
special meeting of FAJ shareholders, including the Merger. FAJ shall have
delivered to UFAC and NETREX at the Closing a certificate of the Secretary of
FAJ in form and substance satisfactory to UFAC dated the Closing Date to such
effect.
(e) PROCEEDINGS. All corporate and other proceedings to be taken by FAJ
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory to UFAC and NETREX,
and UFAC and NETREX shall have received all such counterpart originals or other
copies of such documents as it has reasonably requested.
(f) OPINION OF COUNSEL. UFAC and NETREX shall have received a legal opinion
from Gallagher & Kennedy, counsel to FAJ, dated the Closing Date concerning,
FAJ's existence, authority, capitalization, SEC filings (excluding financial and
statistical data contained therein), compliance with law, and confirming that
the FAJ Shares issued pursuant to the Merger are validly issued, fully paid and
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nonassessable, and such other legal matters within the scope of the Report of
the State Bar of Arizona, Corporate, Banking and Business Law Section
Subcommittee on Rendering Legal Opinions in Business Transactions, dated
February 1, 1989 (the "Arizona Bar Opinion Report"), as UFAC and NETREX may
request, in form and substance reasonably satisfactory to UFAC and NETREX.
9.2 CONDITIONS TO FAJ CLOSING. The obligations of FAJ hereunder are subject
to the satisfaction or waiver by FAJ of each of the following conditions
precedent:
(a) REPRESENTATIONS AND WARRANTIES, COVENANTS. The representations and
warranties of UFAC and NETREX contained herein that are not qualified as to
materiality shall have been true and correct in all material respects on and as
of the date hereof, and shall be true and correct in all material respects on
and as of the Closing Date with the same effect as though such representations
and warranties had been made on and as of the Closing Date, and the
representations and warranties already qualified with respect to materiality
shall have been true and correct in all respects at each such date without
regard to the materiality qualification contained in this Section. The covenants
and agreements of UFAC and NETREX to be performed on or before the Closing Date
in accordance with this Agreement shall have been duly performed in all material
respects. UFAC and NETREX shall have delivered to FAJ at the Closing a
certificate of an appropriate officer in form and substance reasonably
satisfactory to FAJ dated the Closing Date to such effect.
(b) NO MATERIAL ADVERSE CHANGE. Since December 31, 1999, there shall not
have been any change, circumstance or event with respect to any of the UFAC or
the UFAC Subsidiaries that has had or could reasonably be expected to have a
Material Adverse Effect.
(c) NO LIMITATION. There is (i) no Action, suit, investigation or
proceeding instituted (x) by any Government Authority or any Person that seeks
to prevent the consummation of the transactions contemplated hereby or (y) that
is reasonably likely to result in material damages to UFAC, or any of the UFAC
Subsidiaries or FAJ in connection with the transactions contemplated hereby,
which, in either case, continues to be outstanding and (ii) no injunction or
restraining order (temporary or permanent) in effect to stay, prevent or delay
the consummation of the transactions provided for herein, which continues to be
outstanding.
(d) SHAREHOLDER APPROVAL. The shareholders of FAJ shall have approved this
Agreement and the transactions contemplated hereby, including the Merger, by the
requisite vote.
(e) PROCEEDINGS. All corporate and other proceedings to be taken by UFAC in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to FAJ and FAJ shall have received all such counterpart originals or
certified or other copies of such documents as they may reasonably request.
(f) FAIRNESS OPINION. The Board of Directors of FAJ shall have received a
fairness opinion from ComStock Valuation Advisors, Inc. satisfactory to the
Board of Directors of FAJ in its reasonable discretion.
(g) OPINION OF COUNSEL. FAJ shall have received a legal opinion from
counsel to NETREX and UFAC, dated the Closing Date, concerning the existence and
authority of NETREX and the existence, authority, capitalization, and compliance
with law of each of UFAC and the UFAC Subsidiaries, and such other legal matters
as FAJ may reasonably request, in form and substance reasonably satisfactory to
FAJ.
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ARTICLE 10
WAIVER, MODIFICATION, ABANDONMENT
10.1 WAIVERS. The failure of UFAC to comply with any of its obligations,
agreements or conditions as set forth herein may be waived expressly in writing
by FAJ, by action of its Board of Directors without the requirement for a vote
of shareholders. The failure of FAJ to comply with any of its obligations,
agreements or conditions as set forth herein may be waived expressly in writing
by UFAC, by action of its Board of Directors, without the vote of shareholders.
10.2 MODIFICATION. This Agreement may be modified at any time in any
respect by the mutual consent of all of the parties, notwithstanding prior
approval by the shareholders. Any such modification may be approved for any
party by its Board of Directors, without further shareholder approval, except
that the number of shares of FAJ Common Stock to be issued in exchange for the
shares of UFAC Common Stock may not be increased without the consent of the FAJ
shareholders and may not be decreased without the consent of the UFAC
shareholders given, in each case, by the same vote as is required under
applicable state law for approval of this Agreement.
10.3 ABANDONMENT. The Merger may be abandoned on or before the Effective
Date notwithstanding adoption of this Agreement by the shareholders of the
parties hereto:
(a) By the mutual agreement of the Board of Directors of FAJ and UFAC;
(b) By the Board of Director of FAJ, if any of the conditions provided in
SECTION 9.1 shall not have been satisfied, complied with or performed in any
material respect, and FAJ shall not have waived such failure of satisfaction,
noncompliance or nonperformance;
(c) By the Board of Directors of UFAC, if any of the conditions provided in
SECTION 9.2 shall not have been satisfied, complied with or performed in any
material respect, and UFAC shall not have waived such failure of satisfaction,
noncompliance or nonperformance; or
(d) At the option of FAJ and UFAC, if there shall have been instituted and
be pending or threatened any legal proceeding before any court or governmental
agency seeking to restrain or prohibit or to obtain damages in respect of this
Agreement or the consummation of the Merger contemplated by this Agreement, or
if any order restraining or prohibiting the Merger shall have been issued by any
court or governmental agency and shall be in effect.
In the event of any termination pursuant to this Section (other than
pursuant to subparagraph (a) hereof) written notice setting forth the reasons
thereof shall forthwith be given by UFAC, if it is the terminating party, to
FAJ, or by FAJ, if it is the terminating party, to UFAC.
ARTICLE 11
SURVIVAL; INDEMNIFICATION
11.1 SURVIVAL. Subject to the limitations set forth in this Article and
notwithstanding any investigation conducted at any time by or on behalf of any
party, all representations and warranties, and, except as otherwise provided in
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this Agreement, covenants and agreements of the parties (as applicable) in this
Agreement and in any Schedule hereto, or any certificate, document or other
instrument delivered in connection herewith ("Additional Documents"), shall
survive the execution, delivery and performance of this Agreement and shall be
deemed to have been made again by the parties (as applicable) at and as of the
Closing. Such representations and warranties, and the rights of any party to
seek indemnification with respect thereto pursuant to SECTION 11.2, shall
expire, except with respect to claims asserted prior to and pending at the time
of such expiration, on the first anniversary of the Effective Date; PROVIDED,
HOWEVER, that the representations and warranties set forth in SECTIONS 4.1, 4.8,
4.12 AND 4.13 shall expire on the third anniversary of the Effective Date. All
statements contained in any Exhibit, Schedule or Additional Document shall be
deemed representations and warranties of the parties (as applicable) set forth
in this Agreement within the meaning of this Article. Without duplication of
Loss and Expense (as hereinafter defined), FAJ or NETREX, as the case may be,
shall be deemed to have suffered Loss and Expense arising out of or resulting
from the matters referred to herein if the same shall be suffered by any parent,
Subsidiary or Affiliate of FAJ or NETREX; PROVIDED, HOWEVER, that FAJ shall not
be deemed to have suffered any Loss and Expense arising out of or resulting from
any Loss and Expense suffered by UFAC.
11.2 INDEMNIFICATION.
(a) Subject to SECTION 11.4, from and after the Effective Date, FAJ shall
indemnify, defend and hold harmless NETREX (and its officers, directors or
members) and their successors and assigns, for, from and against any and all
damages, claims, losses, expenses, costs, obligations and Liabilities, including
Liabilities for all reasonable attorneys' fees and expenses (collectively, "Loss
and Expense"), suffered, directly or indirectly, by NETREX by reason of, or
arising out of, (i) any breach of any representation or warranty made by FAJ in
this Agreement, or (ii) any failure by FAJ to perform or fulfill any of its
covenants or agreements set forth herein.
(b) Subject to SECTION 11.4, from and after the Effective Date, NETREX
shall indemnify, defend and hold harmless FAJ and its officers and directors),
its successors and assigns, for, from and against any and all Loss and Expense,
suffered, directly or indirectly, by FAJ by reason of, or arising out of, (i)
any breach of any representation or warranty made by NETREX or UFAC in this
Agreement and, (ii) any failure by NETREX or UFAC to perform or fulfill any of
its covenants or agreements set forth herein.
11.3 THIRD-PARTY CLAIMS. If a claim by a third party is made against a
party and if such party intends to seek indemnity with respect thereto under
this Article, such party (the "Indemnified Party") shall promptly notify the
party required to provide such indemnity (the "Indemnifying Party") in writing
of such claim setting forth such claim in reasonable detail and shall otherwise
make available to the indemnifying party all relevant information which is
material to the claim and which is in the possession of the Indemnified Party.
The Indemnifying Party shall have 30 days after receipt of such notice (or such
shorter time period as required so that the interests of the Indemnified Party
would not be materially prejudiced as a result of the failure to have received
such notice) to undertake, through counsel of its own choosing and at its own
expense, the settlement or defense thereof, and the Indemnified Party shall
cooperate with it in connection therewith. The Indemnified Party may participate
in such settlement or defense through counsel chosen by such Indemnified Party,
so long as the fees and expenses of such counsel are borne by that Indemnified
Party. The Indemnified Party shall not pay or settle any claim which the
Indemnifying Party is diligently contesting, as herein required, without the
prior written consent of the Indemnifying Party. Notwithstanding the foregoing,
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the Indemnified Party shall have the right to pay or settle any such claim
without such consent, but in such event it shall waive any right to indemnity
therefor by the Indemnifying Party. However, if the Indemnifying Party does not
notify the Indemnified Party within 30 days after the receipt of the Indemnified
Party's notice of a claim for indemnity hereunder that it elects to undertake
the defense thereof or if the Indemnifying Party fails to undertake or pursue
the defense, the Indemnified Party shall have the right to contest or compromise
and may settle or pay the claim and no such contesting, compromise, settlement
or payment will constitute a waiver of any right to indemnity therefor pursuant
to this Agreement.
11.4 LIMITATIONS ON INDEMNIFICATION, SURVIVAL. Rights to indemnification
under this Agreement are subject to the following limitations:
(a) No party shall be entitled to indemnification hereunder with respect to
any Loss and Expense (or if more than one claim for indemnification is asserted,
with respect to all such Loss and Expense), until the cumulative aggregate
amount of all Loss and Expense incurred by such party with respect to such claim
or claims exceeds $250,000 (the "Indemnity Threshold"), in which case the
Indemnifying Party shall then be liable for the full amount of all such Loss and
Expense, without regard to the Indemnity Threshold.
(b) The obligation of indemnity provided for in this Agreement with respect
to the representations and warranties set forth herein has no expiration or
termination date.
(c) Except with respect to third-party claims being defended in good faith
or claims for indemnification with respect to which there exists a good faith
dispute, the Indemnifying Party shall satisfy its obligations hereunder within
30 days of receipt of a notice of claim under this ARTICLE 11.
(d) The amount of any Loss and Expense otherwise recoverable under this
Article by an Indemnified Party shall be reduced by any amounts recovered by the
Indemnified Party under insurance policies (net of any costs incurred in
connection with the collection thereof), it being understood that none of the
parties shall have any obligation to, but each agrees to use commercially
reasonable efforts to, timely pursue all reasonable remedies against applicable
insurers. The parties agree to treat, to the extent possible, any payment made
under this Article as an adjustment to the value of the FAJ Shares. To the
extent any payment under this Article cannot properly be treated as an
adjustment to the value of the FAJ Shares for federal income tax purposes, then
any such amount shall be (i) increased to take account of any net Tax benefit
actually realized by the Indemnified Party in respect of the taxable year in
which such Loss and Expense is incurred or paid and, with respect to a Tax
benefit arising in a year subsequent to the year in which the Loss and Expense
is paid or incurred, the Indemnified Party shall pay to the Indemnifying Party
the amount of such Tax benefit when such Tax benefit is actually realized. In
computing the amount of any such Tax cost or benefit, the Indemnified Party
shall be deemed to recognize all other items of income, gain, loss, deduction or
credit before recognizing any item arising from the receipt of any indemnity
payment hereunder or the incurrence or payment of any indemnified loss,
liability, claim, damage or expense.
(e) The indemnification provisions of this Article shall be the sole
monetary remedy available to each of the parties. Equitable remedies shall
remain available to each of the parties, provided that no unjust enrichment
results from the enforcement of such remedies.
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ARTICLE 12
MISCELLANEOUS
12.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other party. Copies of executed counterparts
transmitted by telecopy, telefax or other electronic transmission service shall
be considered original executed counterparts for purposes of this Section,
provided receipt of copies of such counterparts is confirmed.
12.2 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE THE LAWS OF THE STATE OF ARIZONA WITHOUT REFERENCE TO THE CHOICE OF
LAW PRINCIPLES THEREOF.
12.3 JURISDICTION. Each party to this Agreement hereby irrevocably agrees
that any legal action or proceeding arising out of or relating to this Agreement
or any agreements or transactions contemplated hereby may be brought only in a
United States District Court sitting in Phoenix, Arizona, or in the United
States District that encompasses Phoenix, Arizona, and hereby expressly submits
to the personal jurisdiction and venue of any such court of proper jurisdiction
for the purposes thereof and expressly waives any claim of improper venue and
any claim that such court is an inconvenient forum. TO THE EXTENT NOT PROHIBITED
BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTY HEREBY WAIVES, AND
COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR
OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE,
CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS
AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE.
12.4 ENTIRE AGREEMENT. This Agreement (including the agreements
incorporated or referred to herein and prior confidentiality agreements between
the parties hereto) and the Schedules and Exhibits hereto contain the entire
agreement between the parties with respect to the subject matter hereof and
supersede prior agreements, understandings, representations or warranties
between the parties. This Agreement is not intended to confer upon any Person
not a party hereto (and their successors and assigns) any rights or remedies
hereunder.
12.5 NOTICES. All notices and other communications hereunder shall be
sufficiently given for all purposes hereunder if in writing and delivered
personally, sent by documented overnight delivery service or, to the extent
receipt is confirmed, telefax or other electronic transmission service to the
appropriate address or number as set forth below, unless and until either of
such parties notifies the other in accordance with this section of a change of
address or change of telecopy number:
If to NETREX: Netrex Holdings LLC
270 South Service Road, Suite 45
Melville, New York 11747
Attn: President
Fax No.: (631) 777-8443
32
<PAGE>
With a copy to: Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attn: Joseph L. Getraer, Esq.
Fax No.: (212) 940-8563
If to UFAC: United Financial Adjusting Company
747 Alpha Drive
Highland Heights, Ohio 44143
Attn: President
Fax No.: (440) 442-4251
With a copy to: Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attn: Joseph L. Getraer, Esq.
Fax No.: (212) 940-8563
If to FAJ: Frontier Adjusters of America, Inc.
45 East Monterey Way
Phoenix, Arizona 85012
Attention: President
Fax Number: (602) 279-5813
with a copy to: Gallagher & Kennedy, P.A.
2575 East Camelback Road
Phoenix, Arizona 85016-9225
Attention: Karen L. Liepmann, Esq.
Fax Number: (602) 530-8500
12.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder may be assigned by either of the parties hereto without
the prior written consent of the other party.
12.7 AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended
except by an instrument in writing signed by the party against whom enforcement
of any such modification or amendment is sought. Either party hereto may, only
by an instrument in writing, waive compliance by the other party hereto with any
term or provision hereof on the part of such other party hereto to be performed
or complied with. The waiver by any party hereto of a breach of any term or
provision hereof shall not be construed as a waiver of any subsequent breach
thereof.
12.8 INTERPRETATION; ABSENCE OF PRESUMPTION.
(a) For the purposes hereof, (i) words in the singular shall be held to
include the plural and vice versa and words of one gender shall be held to
include the other gender as the context requires, (ii) the terms "hereof,"
"herein," and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement as a whole (including all of the
Schedules and Exhibits hereto) and not to any particular provision of this
33
<PAGE>
Agreement, and Article, Section, paragraph, Exhibit and Schedule references are
to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement
unless otherwise specified, (iii) the word "including" and words of similar
import when used in this Agreement shall mean "including, without limitation,"
unless otherwise specified, and (iv) the word "or" shall not be exclusive, but
shall be interpreted as "and/or."
(b) This Agreement will be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
12.9 SEVERABILITY. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted by a court of competent
jurisdiction rather than voided, if possible, in order to achieve the intent of
the parties to this Agreement to the fullest extent possible. In any event, all
other provisions of this Agreement shall be deemed valid and enforceable to the
fullest extent permitted.
12.10 FURTHER ASSURANCES. The parties agree that, from time to time,
whether before, at or after the Closing Date, each of them will execute and
deliver such further instruments and take such other actions as may be necessary
to carry out the purposes and intents hereof.
12.11 SPECIFIC PERFORMANCE. The parties each acknowledge that, in view of
the uniqueness of the Merger, the parties hereto would not have an adequate
remedy at law for money damages if this Agreement were not performed in
accordance with its terms, and therefore agree that the parties hereto shall be
entitled to specific enforcement of the terms hereof in addition to any other
remedy to which the parties hereto be entitled at law or in equity.
34
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each
of the parties hereto as of the date first above written.
FRONTIER ADJUSTERS OF AMERICA,
INC., an Arizona corporation
By:
------------------------------------
Name:
Title:
UNITED FINANCIAL ADJUSTING
COMPANY, an Ohio corporation
By:
------------------------------------
Name:
Title:
NETREX HOLDINGS LLC, a Delaware
limited liability company
By:
------------------------------------
Name:
Title:
35
<PAGE>
Exhibit 1 - Certificate of Merger
SCHEDULES
Schedule A Directors and Executive Officers of FAJ
Schedule B Amended and Restated Articles of Incorporation of FAJ
Schedule C Bylaws of FAJ
Schedule 4.3(a) Outstanding Options in UFAC or UFAC Subsidiaries
Schedule 4.3(c) UFAC and Subsidiary Investments
Schedule 4.5 Audited Financials of UFAC, JWS and DBG
Schedule 4.5(d) Intercompany Transactions
Schedule 4.6 Actions and Violations
Schedule 4.7 Changes since December 31, 1999
Schedule 4.8 Tax Issues
Schedule 4.9(c) Joint Venture or Partnership Agreements
Schedule 4.9(d) Material Agreements
Schedule 4.11 UFAC Properties and Permitted Liens
Schedule 4.13(a) Employment Agreements
Schedule 4.13(b) UFAC Plans
Schedule 4.14 Labor Matters
Schedule 4.15 Proprietary Rights
Schedule 4.16 Insurance
Schedule 6.3 Conduct of Business
36
<PAGE>
ANNEX B
REPORT OF INDEPENDENT ACCOUNTANTS
To the board of directors and shareholders:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows present fairly, in all material respects, the
financial position of United Financial Adjusting Company and Subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
March 19, 2000
F-1
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31, 1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 230,724 $ 5,932
Accounts receivable, less allowance for doubtful
accounts of $53,981 in 1999 and $0 in 1998 2,355,720 2,423,976
Receivables from customers for claims disbursements -- 529,571
Receivables from parent and affiliates 12,302,685 --
Prepaid expenses 96,820 150
Deferred tax asset -- 57,037
------------ ------------
Total current assets 14,985,949 3,016,666
Property and equipment, net 2,734,098 7,669,667
Goodwill, net of amortization 4,013,628 905,414
------------ ------------
Total assets $ 21,733,675 $ 11,591,747
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Note payable $ -- $ 5,656,530
Accounts payable - trade 4,139,481 2,774,565
Agency deposits for claims disbursements 5,162,581 --
Deferred revenue 2,715,567 1,139,697
Other liabilities and accruals 933,854 985,666
Accrued vacation 723,637 --
Payables to parent and affiliates 684,000 1,630,124
Federal income taxes payable 185,650 100,185
Deferred tax liability 229,022 --
------------ ------------
Total current liabilities 14,773,792 12,286,767
Deferred tax liability 492,804 84,652
Deferred revenue 764,723 337,564
Minority interest 62,997 162,670
------------ ------------
Total liabilities 16,094,316 12,871,653
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value; authorized, 2,000,000
shares; issued and outstanding, 1,000,000 10,000 10,000
Paid-in capital 7,050,667 1,219,030
Accumulated deficit (1,421,308) (2,508,936)
------------ ------------
Total shareholders' equity (deficit) 5,639,359 (1,279,906)
------------ ------------
Total liabilities and shareholders' equity $ 21,733,675 $ 11,591,747
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Statements of Operations
For the year ended December 31, 1999 1998
------------ ------------
Revenue $ 16,976,448 $ 9,361,239
Cost and expenses
Compensation and employee benefits 9,972,053 5,077,094
Office and overhead expenses (1) 5,245,974 3,865,691
Depreciation and amortization 714,099 342,001
Outside services 337,684 42,881
------------ ------------
Total costs and expenses 16,269,810 9,327,667
------------ ------------
Income from operations 706,638 33,572
------------ ------------
Other income (expense)
Gain on disposition of assets 1,106,810 --
Interest expense (440,975) (256,766)
Management fees charged to Frontier 200,000 --
Rental income 295,344 435,728
------------ ------------
Total other income 1,161,179 178,962
------------ ------------
Income before taxes and minority interest 1,867,817 212,534
Income taxes 879,862 97,737
------------ ------------
Income before minority interest 987,955 114,797
Minority interest 99,673 63,549
------------ ------------
Net income $ 1,087,628 $ 178,346
============ ============
(1) Charges from Progressive relating to certain general and administrative
expenses allocated to the company were $ 2,442,463 and $2,822,000 in 1999
and 1998, respectively.
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
For the year ended December 31, 1999 1998
----------- -----------
Common stock
Balance, beginning of year $ 10,000 $ 10,000
Shares issued -- --
Shares redeemed -- --
----------- -----------
Balance, end of year $ 10,000 $ 10,000
----------- -----------
Paid-in capital
Balance, beginning of year $ 1,219,030 $ 1,150,037
Capital contributions 5,831,637 68,993
----------- -----------
Balance, end of year $ 7,050,667 $ 1,219,030
----------- -----------
Accumulated deficit
Balance, beginning of year $(2,508,936) $(2,687,282)
Net income 1,087,628 178,346
----------- -----------
Balance, end of year $(1,421,308) $(2,508,936)
----------- -----------
Total shareholders' equity (deficit) $ 5,639,359 $(1,279,906)
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the year ended December 31, 1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,087,628 $ 178,346
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 369,710 288,741
Amortization 344,389 53,260
Gain on disposition of assets (1,106,810) --
Deferred taxes 694,211 (2,448)
Minority interest (99,673) (63,549)
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable-net 597,827 439,010
Prepaid expenses (96,670) --
Increase (decrease) in:
Deferred revenue 2,003,029 (136,700)
Accounts payable 1,364,916 83,754
Agency deposits for claims disbursements 5,162,581 --
Other liabilities and accruals 671,825 439,195
Income taxes payable/receivable 85,465 100,185
------------ ------------
Net cash provided by operating activities 11,078,428 1,379,794
Cash flows from investing activities
Purchase of JW Software -- (1,188,459)
Purchase of property and fixed assets (1,277,990) (136,769)
Capitalized software (786,621) (794,481)
------------ ------------
Net cash used in investing activities (2,064,611) (2,119,709)
Cash flows from financing activities
Change in receivable/payable parent and affiliates (8,789,025) 745,847
------------ ------------
Net cash (used in) provided by financing activities (8,789,025) 745,847
------------ ------------
Net increase in cash 224,792 5,932
Cash at beginning of the year 5,932 --
------------ ------------
Cash at end of the year $ 230,724 $ 5,932
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 440,975 $ 256,766
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
UNITED FINANCIAL ADJUSTING COMPANY AND SUBSIDIARIES
(INCLUDES UNITED FINANCIAL ADJUSTING COMPANY, JW SOFTWARE, INC.,
AND DBG TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1: REPORTING AND ACCOUNTING POLICIES
NATURE OF OPERATIONS
Prior to November 5, 1999, United Financial Adjusting Company ("UFAC") was a
wholly owned subsidiary of The Progressive Corporation ("Progressive").
Effective November 5, 1999, Progressive contributed all of the common stock of
UFAC to Netrex Holdings LLC ("Netrex Holdings"), a Delaware limited liability
company in return for 19% of the outstanding stock of Netrex Holdings. Netrex
LLC, contributed $810,000 to Netrex Holdings and issued a put and a supplemental
put which gave Progressive the right to put its interest in Netrex Holdings to
Netrex LLC for $15 million payable on January 2, 2002 or for $50 million payable
December 31, 2011. The actual transaction on November 5, 1999 transferred 49% of
the interest in Netrex Holdings to Netrex LLC with a delayed transfer of an
additional 32%, which will take place on or about October 31, 2000, such that
Netrex LLC will hold 81% of the outstanding shares of Netrex Holdings. The 32%
automatically passes to Netrex LLC at the earlier of it becoming independent of
Progressive's computer systems or October 31, 2000. The value of the put was
pushed-down to the subsidiaries of Netrex Holdings. The portion pushed down to,
and recorded by, UFAC and certain subsidiaries ("Company") included in these
financial statements on November 5, 1999 was $3,452,604 in the aggregate, which
will be amortized by the Company over 20 years on a straight-line basis.
Subsequent to such transaction, on March 28, 2000, Netrex LLC distributed 100%
of its interest in Netrex Holdings to Netrex Capital Group LLC.
The Company provides services to the financial services and technology markets.
Subsidiary Companies include JW Software Inc. ("JW") and DBG Technologies, Inc.
("DBG"):
* UFAC provides claim management and adjusting services, primarily to
the vehicle rental market.
* JW develops and implements personal computer and server-based claim
management software.
* DBG provides maintenance and support services for JW customers and
centralized marketing and sales support for software operations. DBG
also develops specialized internet business applications.
The financial statements have been prepared to reflect the financial position
and results of operations of UFAC, JW and DBG on a carve-out basis and not to
reflect UFAC and all majority-owned subsidiaries on a consolidated basis.
Accordingly, the following subsidiary companies have been excluded from the
consolidated financial statements:
* Frontier Adjusters of America, Inc. and subsidiaries ("Frontier")
* Progressive Vehicle Inspection Services, Inc. ("VIS")
On October 31, 1998, UFAC purchased 51% of the voting common stock of JW for
$1,194,125. UFAC has accounted for the acquisition using the purchase method,
and accordingly, the operating results of JW are included in the consolidated
results of the Company from the date of acquisition. If the transaction were
recorded as if the acquisition had been consummated on January 1, 1998, results
of operations for 1998 would have been as follows:
Net Sales $10,739,555
Net Income $ 533,732
Original goodwill of $958,673 (of which $781,856 remains at December 31, 1999)
is being amortized over 3 years.
BASIS OF CONSOLIDATION AND REPORTING
All of the UFAC subsidiaries are wholly owned or controlled. All intercompany
accounts and transactions are eliminated in consolidation. Certain subsidiaries
have been carved-out (see Nature of Operations).
F-6
<PAGE>
CASH AND CASH EQUIVALENTS
Prior to November 5, 1999, the Company received treasury and cash management
services from certain Progressive subsidiaries, operating within Progressive's
centralized cash management system. Effective November 5, 1999, the Company
participates in a transitional services agreement with Progressive Casualty
Insurance Company, a wholly owned subsidiary of Progressive, which continues to
provide certain treasury and cash management services through October 31, 2000.
The Company carries a payable to or receivable from parent and affiliates
related to this centralized cash management arrangement, which receivable or
payable will be settled in cash on, if not before, October 31, 2000. Cash
recorded on the balance sheet represents cash held directly by one of the
Company's subsidiaries.
PROPERTY AND EQUIPMENT
Fixed assets are recorded at cost. Depreciation is provided over the estimated
useful lives of the assets using accelerated methods for computers and straight
line for all other fixed assets. The Company early adopted the accounting
treatment required by Statement of Position (SOP) 98-1, "ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED AND OBTAINED FOR INTERNAL USE" and, as a
result, capitalized $794,481 of computer software costs incurred during the year
ended December 31, 1998 and an additional $786,621 during the year ended
December 31, 1999.
Prior to November 1999, Progressive provided many of the fixed assets deployed
in the operations of the Company and the Company was charged monthly usage fees.
Effective November 1999, the Company acquired substantially all of these fixed
assets from Progressive.
A summary of depreciable lives follows:
Asset Description Depreciable Life
----------------- ----------------
Building and improvements 20 - 31 years
Computer and software 3 years
Furniture and fixtures 5 years
AGENCY DEPOSITS FOR CLAIM DISBURSEMENTS AND RECEIVABLE FROM CUSTOMERS FOR CLAIM
DISBURSEMENTS
During 1998, the Company's customers would pre-fund losses under an escrow
arrangement. At year-end, the Company funded certain losses that were not
pre-funded by the customers; as such, the Company has recorded a receivable for
this balance of $529,571 as of December 31, 1998. This receivable was collected
during 1999. During 1999, the Company began to require advance cash deposits or
Agency Deposits for Claims Disbursements (Agency Deposits) from customers to pay
future losses. Such Agency Deposits represent funds received by the Company in
its capacity as an agent with responsibility to disburse funds for claims and
related settlement expenses on behalf of its customers. No revenue is recognized
on agency deposits. Pre-funded Agency Deposits for Claim Disbursements at
December 31, 1999 totaled $5,162,581.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between their financial reporting and tax bases and are measured using the
enacted tax rates that will be in effect when the differences are expected to
reverse.
COMMON STOCK
On or about November 5, 1999, the Board of Directors of the Company authorized
the re-capitalization of the Company to, among other things, authorize 2,000,000
shares of Common Stock of the Company and to reserve 100,000 shares of Common
Stock for the issuance of shares upon the exercise of stock options in the
future. The Company amended its Articles of Incorporation, the effect of which
was to change the 750 authorized and issued shares of Common Stock, par value of
$1.00 per share, into 1,000,000 shares of new Common Stock, par value of $.01
per share and to change the previously authorized and unissued shares of Common
Stock, par value $1.00 per share, into 1,000,000 shares of new Common Stock, par
value $.01 per share. All prior years have been restated to reflect this
capitalization.
F-7
<PAGE>
REVENUE RECOGNITION
The Company utilizes various revenue recognition policies to properly match
revenue with related expenses in accordance with accounting principles generally
accepted in the United States:
* UFAC defers revenue and recognizes it over the expected claims
adjusting period.
* JW and DBG generally recognize software license revenues when a
customer purchase order has been received and accepted, the software
product has been shipped, there are no uncertainties surrounding
product acceptance, the fees are fixed and determinable, and
collection is considered probable. Fees related to services are
recognized as the services are performed. Customer support revenues
are deferred and recognized on a straight-line basis over the period
covered by the customer support agreements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION.. SFAS No. 131 modifies the disclosure requirements for
reportable segments and establishes standards in the way public businesses
report information about operating segments in financial statements and interim
reports issued to shareholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" (SFAS
133").. SFAS 133 establishes new accounting for reporting standards for
derivative financial instruments and for hedging activities. SFAS 133 requires
the Company to measure all derivatives at fair value and to recognize them in
the balance sheet as an asset or liability, depending on the Company's rights or
obligations under the applicable derivative contract. In June 1999, the FASB
issued SFAS No. 137, which deferred the effective date of adoption of SFAS 133
for one year. The Company will adopt SFAS 133 no later than the first quarter of
fiscal year 2001. SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1999 1998
----------- -----------
Land $ -- $ 706,423
Buildings and Improvements -- 7,533,729
Computers and Software 619,788 833,004
Construction in Process 1,581,102 --
Furniture and Fixtures 698,957 15,747
----------- -----------
2,899,847 9,088,903
Less Accumulated Depreciation (165,749) (1,419,236)
----------- -----------
$ 2,734,098 $ 7,669,667
=========== ===========
F-8
<PAGE>
NOTE 3: RELATED PARTY TRANSACTIONS
Progressive provides certain general and administrative services to the Company,
including finance, legal, systems, benefits, and facilities. These expenses are
allocated to the Company based on revenue, utilization, or other methods which
management believes to be reasonable. These allocations were $2,442,463 and
$2,822,000 in 1999 and 1998, respectively and are included in the Consolidated
Statement of Operations as "office and overhead expenses".
The expenses allocated to the Company for these services are not necessarily
indicative of the expenses that would have been incurred if the Company had been
a separate, independent entity and had managed these functions. Subsequent to
November 5, 1999, the Company will continue to receive certain of these services
through October 31, 2000 pursuant to a transitional services agreement with
Progressive. The Company will initially pay $18,500 monthly to Progressive under
this agreement, with monthly payments declining as certain services are
discontinued.
During 1999, the Company sold a certain rental property, which was not occupied
by the company, and related improvements to Progressive for $7,737,280 in a
non-cash transaction, which resulted in a gain on sale of $1,106,810. A related
demand mortgage note payable to Progressive was paid in full. Progressive had
previously rented this building from the Company.
Prior to November 5, 1999, the Company's obligation for vacation and sick time
was allocated from Progressive to the Company and is reflected in the "Payables
to Parent and Affiliates" balance as of December 31, 1998. Beginning on November
5, 1999, this obligation was separately accounted for and is reflected in the
"Accrued Vacation" balance as of December 31, 1999.
The Company was included in consolidated U.S. federal income tax returns filed
by Progressive, except for operations related to JW. The tax expense reflected
in the consolidated statement of operations and tax liabilities reflected in the
consolidated balance sheet have been prepared on a separate return basis as
though the Companies filed stand-alone income tax returns.
Through December 31, 1999, the Company participated in Progressive's two-tiered
Retirement Security Program. The first tier was a defined contribution pension
plan covering substantially all employees who meet requirements as to age and
length of service. Contributions vary from 1% to 5% of annual eligible
compensation up to the Social Security wage base, based on years of eligible
service. The second tier is a long-term savings plan under which the Company
matches amounts contributed to the plan by an employee up to a maximum of 3% of
the employee's eligible compensation. Company contributions were included in the
above mentioned allocations to the Company from Progressive for this program.
In April 1999, the Company entered into an agreement with Frontier whereby
Frontier pays UFAC $25,000 per month for marketing, managerial, technological,
financial, and other services and resources. As of December 31, 1999 the Company
showed a receivable balance of $75,000.
Progressive settled intercompany loans due from the Company with a non-cash
contribution of capital to the Company on November 5, 1999. The amount of the
loans contributed totaled $5,358,809.
NOTE 4: STOCK OPTIONS
The Company provides equity incentives to certain key employees by means of
incentive stock options and stock appreciation rights which have been provided
under various stock option plans.
Effective November 1999, the Company adopted a stock option plan to be known as
the 1999 Stock Option Plan ("1999 Plan"). The 1999 Plan has 100,000 shares
authorized. The non-qualified stock options granted are for periods up to ten
years, with portions becoming vested and exercisable over a four to five year
period after the date of grant and remaining exercisable for specific periods
thereafter. All options have an exercise price specified by the Plan
Administrator that is at least equal to or greater than fair market value at
date of grant. Stock option activity under the 1999 Plan follows:
F-9
<PAGE>
Number of Exercise
Options Outstanding Shares Price
------------------- --------- --------
Beginning of Year -- --
Granted November 5, 1999 71,800 $ 20
Exercised -- --
Cancelled -- --
---------
End of Year 71,800 $ 20
=========
Exercisable, End of Year --
---------
Available for Grant, End of Year 28,200
=========
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees
in accounting for its plans. No compensation expense has been recognized for the
November 1999 grants in which the fair value per share is equal to the exercise
price per share. Had compensation expense been determined based on the fair
value at the grant dates for awards under this plan consistent with the method
of Statement No. 123, reported net income and earnings per share would not have
been materially changed.
NOTE 5: COMMITMENTS AND CONTINGENCIES
The Company substantially operates from Progressive-owned/leased facilities;
rental agreements are short-term in nature with monthly rent payments totaling
approximately $77,975. The Company will substantially vacate all
Progressive-owned/leased facilities by October 2000, and will be leasing office
space from other non-affiliated entities.
From time to time the Company is subject to various claims and legal proceedings
arising in the normal course of business. Management believes that the ultimate
liability arising from such claims and proceedings, if any, in the aggregate is
covered by insurance or will not be material to the consolidated balance sheet,
results of operations or cash flows.
F-10
<PAGE>
NOTE 6: SEGMENT REPORTING
The Company's reportable segments are as follows (1) UFAC, which provides claim
management and adjusting services, (2) JW, which develops and implements PC and
server-based claim management software, and (3) DBG, which develops specialized
internet business applications.
Management evaluates the performance of each segment based on profit or loss
from operations before income taxes.
Financial information with respect to the reportable segments follows:
<TABLE>
<CAPTION>
1999 UFAC JW DBG Elim. Consolidated
- ---- ----------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
External revenue $15,090,701 $1,714,843 $ 170,904 $ -- $16,976,448
Inter-segment revenue $ -- $ 279,441 $ 516,856 $(796,297) $ --
----------- ---------- --------- --------- -----------
$15,090,701 $1,994,284 $ 687,760 $(796,297) $16,976,448
Depreciation and amortization $ 667,169 $ 23,746 $ -- $ -- $ 690,915
Interest expense $ 433,985 $ 3,833 $ 3,157 $ -- $ 440,975
Segment net income $ 1,390,666 $ (103,742) $(199,297) $ -- $ 1,087,627
Expenditures for segment assets $ 2,030,632 $ 33,979 $ -- $ -- $ 2,064,611
Segment assets $21,072,357 $ 562,069 $ 99,249 $ -- $21,733,675
1998
- ----
External revenue $ 9,204,731 $ 156,508 $ -- $ -- $ 9,361,239
Inter-segment revenue $ -- $ -- $ -- $ -- $ --
----------- ---------- --------- --------- -----------
$ 9,204,731 $ 156,508 $ -- $ -- $ 9,361,239
Depreciation and amortization $ 342,001 $ -- $ -- $ -- $ 342,001
Interest expense $ 256,766 $ -- $ -- $ -- $ 256,766
Segment net income $ 244,488 $ (66,142) $ -- $ -- $ 178,346
Expenditures for segment assets $ 2,119,709 $ -- $ -- $ -- $ 2,119,709
Segment assets $11,305,453 $ 286,294 $ -- $ -- $11,591,747
</TABLE>
NOTE 7: MAJOR CUSTOMERS
Included in 1999 revenue are collections received from three customers, which
provided the Company with revenue representing $4,773,448, $2,889,995 and
$6,729,998 or 85% of total revenue.
Included in 1998 revenue are collections received from two customers, which
provided the Company with revenue representing $4,838,562 and $2,524,351 or 79%
of total revenue.
NOTE 8: INCOME TAXES
The components of the provision for income taxes at December 31 are as follows:
1999 1998
--------- ---------
Federal
Current $ 161,849 87,340
Deferred 605,210 (2,134)
State
Current 23,804 12,845
Deferred 88,999 (314)
--------- ---------
Income taxes $ 879,862 $ 97,737
========= =========
F-11
<PAGE>
NOTE 8: INCOME TAXES (CONTINUED)
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate follows:
1999 1998
--------- ---------
Statutory rate 34.00% 34.00%
Increase (decrease) resulting from:
State income taxes, net 6.04% 5.90%
Goodwill 6.93% 8.52%
Other 0.13% -2.43%
--------- ---------
Effective rate 47.10% 45.99%
========= =========
Net deferred tax assets and liabilities consist of the following components:
1999 1998
--------- ---------
Deferred tax assets
Current:
Allowance for doubtful accounts $ 21,052 $ --
Other liabilities 296,723 279,977
--------- ---------
317,775 279,977
Deferred tax liabilities
Current:
Deferred revenue (546,797) (222,940)
--------- ---------
Current deferred tax (liability) asset (229,022) 57,037
--------- ---------
Deferred tax asset
Long term:
Property and equipment 4,756 --
Net operating loss benefit 144,785 40,092
--------- ---------
149,541 40,092
--------- ---------
Deferred tax liabilities
Long term:
Property and equipment (25,715) (124,744)
Computer software (616,630) --
--------- ---------
(642,345) (124,744)
--------- ---------
Long-term deferred tax liability (492,804) (84,652)
--------- ---------
Net deferred tax liability $(721,826) $ (27,615)
========= =========
The company has available net operating losses ("NOL") of $371,243, which can be
used to offset future taxable income generated by the individual subsidiaries.
These NOL's begin to expire in 2018 if not utilized.
F-12
<PAGE>
NOTE 9: SUBSEQUENT EVENTS
Transaction Between Frontier and the Company
The Company's Board of Directors has authorized management of the Company to
merge with Frontier subject to Frontier's shareholders approval. Under the
current proposal, the Company's shareholders would receive approximately 11.6
million shares of Frontier stock in exchange for the Company's common stock and
its holdings in JW and DBG. If approved, UFAC will account for the merger under
the purchase method of accounting. Under the purchase method of accounting, the
acquiring enterprise for accounting purposes in a business combination effected
through the exchange of stock is presumptively the enterprise whose former
common shareholders either retain or receive the larger portion of the voting
rights in the combined enterprise. UFAC's shareholders will receive
approximately an additional 23% of the voting rights of the combined company as
a result of the merger, which, when added to its prior ownership of Frontier
shares will total approximately 82% of Frontier's issued and outstanding share
capital and accordingly, UFAC is the accounting acquirer. Accordingly, UFAC's
assets and liabilities will be brought forward at their net book values. A new
basis will be established for Frontier's assets and liabilities based upon the
fair values thereof.
Purchase of JW:
The Company has reached definitive terms to purchase the current 49% minority
interest in JW. The purchase price is $1 million and is anticipated to close in
April 2000. Subsequent to this transaction, the company will own 100% of JW
Software Inc.
F-13
<PAGE>
ANNEX C
AMENDED AND FIRST RESTATED
ARTICLES OF INCORPORATION
OF
FRONTIER ADJUSTERS OF AMERICA, INC.
These Amended and Restated Articles of Incorporation correctly set forth,
without change, the Amended and Restated Articles adopted by the Board of
Directors and Shareholders as of ____________, 2000, and ____________, 2000,
respectively, and supersede the original Articles of Incorporation and all
amendments to the original Articles of Incorporation.
ARTICLE 1. The name of the corporation is NETREX BUSINESS SERVICES, INC.,
(the "Corporation").
ARTICLE 2. The purpose for which the Corporation is organized is the
transaction of any and all lawful business for which corporations may be
incorporated under the Arizona Business Corporation Law, as it may be amended
from time to time (the "Business Corporation Act").
ARTICLE 3. The present character of business that the Corporation conducts
in the State of Arizona is insurance adjusting, risk management, and other
businesses through wholly-owned subsidiaries, and all manner of activity related
thereto.
ARTICLE 4. The authorized capital stock of the corporation shall be divided
into 100,000,000 shares of preferred stock with a par value to be determined by
the Board of Directors prior to the issuance of the stock, and 100,000,000
shares of common stock, par value $0.01 per share. Stock shall be issued when
paid for in cash, past services, real property or personal property, and shall,
when issued, be fully paid for and forever non-assessable. The judgment of the
Board of Directors as to the value of any property or service rendered in
exchange for stock shall be conclusive in the absence of actual fraud in the
transaction.
Each issued and outstanding share of common stock will entitle the holder
thereof to one (1) vote on any matter submitted to a vote of or for consent of
shareholders.
The Board of Directors is authorized to provide from time to time for the
issuance of shares of serial preferred stock in series and to fix from time to
time before issuance the designation, preferences, privileges and voting powers
of the shares of each series of serial preferred stock and the restrictions or
qualifications thereof, including, without limiting the generality of the
foregoing, the following:
<PAGE>
i. The serial designation and authorized number of shares;
ii. The dividend rate, the date or dates on which such dividends will be
payable, and the extent to which such dividends may be cumulative;
iii. The amount or amounts to be received by the holders in the event of
voluntary or involuntary dissolution or liquidation of the Corporation;
iv. The price or prices at which shares may be redeemed and any terms,
conditions and limitations upon such redemption;
v. Any sinking fund provisions for redemption or purchase of shares of such
series; and
vi. The terms and conditions, if any, on which shares may be converted into
shares of other capital stock, or of other series of serial preferred stock of
the Corporation.
Each series of serial preferred stock, in preference to the common stock,
may be entitled to dividends, from funds or other assets legally available
therefor, at such rates, payable at such times and cumulative to such extent as
may be fixed by the Board of Directors pursuant to the authority herein
conferred upon it. In the event of dissolution or liquidation of the
Corporation, voluntary or involuntary, the holders of the serial preferred
stock, in preference to the common stock, may be entitled to receive such amount
or amounts as may be fixed by the Board of Directors pursuant to the authority
herein conferred upon it. Each issued and outstanding share of serial preferred
stock will entitle the holder thereof only to those votes, if any, which may
expressly be fixed as hereinafter provided for the respective series thereof and
to voting rights on certain matters, and in certain circumstances, as set forth
in this Article.
Preference stock of any series redeemed, converted, exchanged, purchased or
otherwise acquired by the Corporation shall be cancelled by the Corporation and
returned to the status of authorized but unissued preference stock unless
otherwise provided herein or in resolutions of the board of directors duly filed
with the Arizona Corporation Commission authorizing the issuance of the series.
All shares of any series of serial preferred stock, as between themselves,
shall rank equally and be identical; and all series of serial preferred stock,
as between themselves shall rank equally and be identical except as set forth in
resolutions of the board of directors duly filed with the Arizona Corporation
Commission authorizing the issuance of the series.
ARTICLE 5. The name and street address of the statutory agent of the
Corporation are Corporation Service Company, 3636 North Central Avenue, Phoenix,
Arizona 85012.
ARTICLE 6. The board of directors consists of 9 members. The number of
directors may be increased or decreased from time to time as set forth in the
bylaws of the Corporation. The names and addresses of each of the persons who
currently serve as the members of the board of directors are:
2
<PAGE>
Name Address
---- -------
John M. Davies 45 East Monterey Way, Phoenix, Arizona 85012
Jeffrey R. Harcourt 45 East Monterey Way, Phoenix, Arizona 85012
Troy Huth 45 East Monterey Way, Phoenix, Arizona 85012
Jeffrey C. Jordan 45 East Monterey Way, Phoenix, Arizona 85012
Louis T. Mastos 45 East Monterey Way, Phoenix, Arizona 85012
William J. Rocke 45 East Monterey Way, Phoenix, Arizona 85012
Jean E. Ryberg 45 East Monterey Way, Phoenix, Arizona 85012
Kenneth A. Sexton 45 East Monterey Way, Phoenix, Arizona 85012
William A. White 45 East Monterey Way, Phoenix, Arizona 85012
ARTICLE 7. The personal liability of any director of the Corporation to the
Corporation or its shareholders for money damages for any action or failure to
take any action as a director is hereby eliminated to the fullest extent allowed
by law.
ARTICLE 8. The Corporation shall indemnify, and advance expenses to, to the
fullest extent allowed by law, any person who incurs liability or expense by
reason of such person acting as a director or officer of the Corporation. This
indemnification with respect to directors and officers shall be mandatory,
subject to the requirements of the Business Corporation Act, in all
circumstances in which indemnification is permitted by the Business Corporation
Act. In addition, the Corporation may, in its sole discretion, indemnify, and
advance expenses to, to the fullest extent allowed by law, any person who incurs
liability or expense by reason of such person acting as an employee or agent of
the Corporation, except where indemnification is mandatory pursuant to the
Business Corporation Act, in which case the Corporation shall indemnify to the
fullest extent required by the Business Corporation Act.
ARTICLE 9. Pursuant to Arizona Revised Statutes Sections 10-2721(A)(2) and
10-2743(A)(2) and pursuant to the approval of the shareholders of this
Corporation, this Corporation shall be exempt from the provisions of A.R.S.
Section 10-2721 through 10-2743, concerning control share acquisitions (as
defined in A.R.S. Section 10-2701(9) and business combinations (as defined in
A.R.S. Section 10-2701(6)). This Article 9 shall not apply to any control share
acquisition made on or before the effective date of the Articles of Amendment to
this Corporation's Articles of Incorporation to incorporate this Article 9
herein, or to any business combination with an interested shareholder (as
defined in A.R.S. Section 10-2701(10)) whose share acquisition date (as defined
in A.R.S. Section 10-2701(14)) was on or before the effective date of the
Articles of Amendment to this Corporation's Articles of Incorporation to
incorporate this Article 9 herein.
ARTICLE 10. Unless the bylaws of the Corporation provide otherwise and the
statutory agent expressly consents thereto in writing, all records required
pursuant to the Business Corporation Act to be kept by the Corporation or its
agent shall be kept by the Corporation at the known place of business of the
Corporation.
ARTICLE 11. The Corporation shall have the right to pay dividends payable
in shares of one class of stock to holders of shares of another class or series
of stock of the Corporation, and no shareholder approval or ratification of any
such dividend shall be required.
3
<PAGE>
ARTICLE 12. The street address of the known place of business for the
Corporation is 45 East Monterey Way, Phoenix, Arizona 85012.
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FRONTIER ADJUSTERS OF AMERICA, INC.
SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints John M. Davies, Troy M. Huth and Jeffrey C.
Jordan as Proxies, each with the power to appoint his substitute, and hereby
authorizes them, or any of them, or such substitute, to represent and to vote,
as designated below, all of the shares of common stock of Frontier Adjusters of
America, Inc. (the "Company") held of record by the undersigned as of the close
of business on ____________, 2000, at the special meeting of shareholders to be
held on ______________, 2000, at ______ A.M. (Phoenix, Arizona time), and at any
adjournment thereof.
1. THE TRANSACTION. To approve the Merger Agreement and the transactions
contemplated thereby, as described in the Proxy Statement dated
___________, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. TO APPROVE THE AMENDED AND FIRST RESTATED ARTICLES OF INCORPORATION. To
approve the Amended and First Restated Articles of Incorporation as
described in the Proxy Statement dated _________, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Meeting.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this Proxy will be
voted FOR Proposal 1 and FOR Proposal 2.
Receipt of Notice of Special Meeting of Shareholders and related Proxy Statement
dated ______________, 2000, is hereby acknowledged.
Please sign exactly as the name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, or as executor, administer,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated:
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
PROMPTLY, USING THE ENCLOSED ENVELOPE
Signature:___________________________________
Signature if held jointly:___________________
