SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. 2)
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(1)
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[X] 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:
------------------------------------------
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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(1) A filing fee of $11,788 was previously paid in connection with the filing of
this Proxy Statement.
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[FRONTIER LETTERHEAD]
________________, 2000
Dear Shareholder:
You are cordially invited to attend the annual meeting of Shareholders
(the "Annual Meeting") of Frontier Adjusters of America, Inc. ("Frontier") to be
held at 10:00 a.m., on Wednesday, October 25, 2000 at Frontier's executive
offices, located at 45 East Monterey Way, Phoenix, Arizona 85012.
At the Annual 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 to be issued to Netrex. If the Merger
Agreement is consummated, Netrex will own a controlling interest of
approximately 82% of Frontier's outstanding Common Stock (from
approximately 59% owned prior to the Merger Agreement). Based upon the
per share price for Frontier's Common Stock of $_______ per share as
quoted on the AMEX at the close of business on ____________, 2000,
this represents $________ to be paid as consideration under the Merger
Agreement.
2. To elect directors to serve until the next annual meeting of
shareholders and until their successors are elected and qualified.
3. To approve the adoption of Frontier's 2000 Stock Plan.
4. To approve the amendment to Frontier's Articles of Incorporation to
conform the current limitations of liability of Frontier's directors
with the revised Arizona Business Corporation Act.
5. To approve the amendment to Frontier's Articles of Incorporation to
conform the current indemnification provisions with the revised
Arizona Business Corporation Act.
6. To approve the amendment to Frontier's Articles of Incorporation to
conform the provisions regarding directors' conflicts of interest
provisions to the revised Arizona Business Corporation Act.
7. To approve the amendment to Frontier's Articles of Incorporation to
update the description of the purpose for which Frontier is organized
and the character of business that Frontier conducts.
8. To approve the amendment to Frontier's Articles of Incorporation to
change Frontier's name to "Netrex Business Services, Inc."
9. To approve the amendment to Frontier's Articles of Incorporation to
update the provisions of Article 4 regarding serial preferred stock.
10. To approve the amendment to Frontier's Articles of Incorporation to
maintain certain corporate records at the known place of business of
Frontier.
11. To approve amending and restating the Articles of Incorporation in the
form of the Amended and First Restated Articles of Incorporation of
Frontier (the "Amended and Restated Articles") to conform Frontier's
Articles to certain changes under the revised Arizona Business
Corporation Act, and to reflect certain other technical changes.
<PAGE>
12. To ratify the appointment of PricewaterhouseCoopers LLP as the
auditors of Frontier for the fiscal year ending June 30, 2001.
13. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
After careful consideration, your Board of Directors has unanimously
approved the Merger Agreement, each amendment to the Articles of Incorporation,
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 UNANIMOUSLY
RECOMMENDS THAT FRONTIER'S SHAREHOLDERS APPROVE THE MERGER AGREEMENT, VOTE TO
ELECT THE NOMINEES FOR DIRECTORS, APPROVE EACH OF THE AMENDMENTS TO THE ARTICLES
OF INCORPORATION, APPROVE THE AMENDED AND RESTATED ARTICLES AND RATIFY THE
APPOINTMENT OF PRICEWATERHOUSECOOPERS, LLP.
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 Annual
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
holds approximately 59% of the aggregate number of votes that may be cast by the
holders of Frontier Common Stock, which votes are sufficient to approve each of
the proposals, including the Merger Agreement. UFAC has informed Frontier that
it intends to vote its shares in favor of approving each of the proposals,
including the Merger Agreement. However, your vote is important to us and allows
you to communicate your opinion to management.
In the materials accompanying this letter, you will find a Notice of
Annual Meeting of Shareholders, a Proxy Statement relating to the actions to be
taken by Frontier's shareholders at the Annual 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 Annual Meeting, please complete,
sign, and date the enclosed proxy and return it in the envelope provided. If you
attend the Annual 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
Secretary
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 25, 2000
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The Annual Meeting of Shareholders of Frontier Adjusters of America,
Inc., an Arizona corporation ("Frontier"), will be held on Wednesday, October
25, 2000, at 10:00 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 to be issued to Netrex. If the Merger
Agreement is consummated, Netrex will own a controlling interest of
approximately 82% of Frontier's outstanding Common Stock (from
approximately 59% owned prior to the Merger Agreement). Based upon the
per share price for Frontier's Common Stock of $_______ per share as
quoted on the AMEX at the close of business on ____________, 2000,
this represents $________ to be paid as consideration under the Merger
Agreement.
2. To elect directors to serve until the next annual meeting of
shareholders and until their successors are elected and qualified.
3. To approve the adoption of Frontier's 2000 Stock Plan.
4. To approve the amendment to Frontier's Articles of Incorporation to
conform the current limitations of liability of Frontier's directors
with the revised Arizona Business Corporation Act.
5. To approve the amendment to Frontier's Articles of Incorporation to
conform the current indemnification provisions with the revised
Arizona Business Corporation Act.
6. To approve the amendment to Frontier's Articles of Incorporation to
conform the provisions regarding directors' conflicts of interest
provisions to the revised Arizona Business Corporation Act.
7. To approve the amendment to Frontier's Articles of Incorporation to
update the description of the purpose for which Frontier is organized
and the character of business that Frontier conducts.
8. To approve the amendment to Frontier's Articles of Incorporation to
change Frontier's name to "Netrex Business Services, Inc."
9. To approve the amendment to Frontier's Articles of Incorporation to
update the provisions of Article 4 regarding serial preferred stock.
10. To approve the amendment to Frontier's Articles of Incorporation to
maintain certain corporate records at the known place of business of
Frontier.
11. To approve amending and restating the Articles of Incorporation in the
form of the Amended and First Restated Articles of Incorporation of
Frontier (the "Amended and Restated Articles") to conform Frontier's
Articles to certain changes under, the revised Arizona Business
Corporation Act, and to reflect certain other technical changes.
<PAGE>
12. To ratify the appointment of PricewaterhouseCoopers LLP as the
auditors of Frontier for the fiscal year ending June 30, 2001.
13. To transact such other business as may properly come before the
Annual 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 September 18, 2000 are entitled to notice of and to vote at the
Annual Meeting.
All shareholders are cordially invited to attend the Annual Meeting in
person. To assure your representation at the Annual 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 Annual 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. IT
IS YOUR MEANS OF COMMUNICATING WITH MANAGEMENT. SHAREHOLDERS WHO DO NOT EXPECT
TO BE PRESENT AT THE ANNUAL 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
Secretary
September 25, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
General .................................................................... 1
Record Date ................................................................ 1
Revocability of Proxies .................................................... 1
Voting Securities and Voting Rights ........................................ 1
Appraisal Rights ........................................................... 2
Voting of Proxies .......................................................... 2
Solicitation ............................................................... 2
Summary Term Sheet For Proposal One ........................................ 2
Proposal One ............................................................... 4
The Transaction........................................................... 4
Effects of the Transaction.............................................. 4
Accounting and Tax Treatment............................................ 5
Exchange Ratio.......................................................... 5
Effective Date.......................................................... 5
Conditions to Consummation.............................................. 5
Amendment or Modification............................................... 5
Background of the Transaction........................................... 6
Recommendation of the Board of Directors; Reasons for the Transaction... 7
Potential Adverse Effects of the Transaction............................ 8
Potential Benefits of the Transaction................................... 8
Discussion of Financial Analysis........................................ 8
Opinion of Financial Advisor............................................ 9
Capitalized Cash Flow Method............................................ 10
Guideline Company Method................................................ 10
Merger And Acquisition Method........................................... 11
Discounted Cash Flow Method (used only for UFAC)........................ 11
Venture Capital Method (used for JW and DBG only)....................... 12
Discount for Lack of Marketability...................................... 12
Value Per Share For Frontier............................................ 13
Valuation Conclusions................................................... 14
Interests of Certain Persons in the Transaction......................... 14
Related Party Transactions.............................................. 15
Parties To The Transaction................................................ 15
Frontier................................................................ 15
General............................................................... 15
Claims Adjusting...................................................... 16
Licensing and Franchising............................................. 16
Operation of Independent Adjusters.................................... 17
Frontier-Owned Insurance Adjusting Business........................... 17
Ownership of Frontier Common Stock by UFAC............................ 18
UFAC and the UFAC Subsidiaries.......................................... 18
UFAC.................................................................... 18
Claims Adjusting...................................................... 18
Third Party Claims Administration..................................... 18
Subrogation Collections............................................... 18
Competition........................................................... 18
Major Customers....................................................... 19
Pricing and Expense Management........................................ 19
Employees............................................................. 19
Facilities............................................................ 19
JW and DBG.............................................................. 20
Products and Services................................................. 20
Competition........................................................... 20
Employees............................................................. 21
Facilities............................................................ 21
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Management's Discussion and Analysis of Financial Condition and Results
of Operations of UFAC.................................................... 21
General................................................................. 21
Six Months ended June 30, 2000 as compared to the Six Months ended
June 30, 1999.......................................................... 21
Twelve Months ended December 31, 1999 as compared to the Twelve
Months ended December 31, 1998......................................... 24
Liquidity............................................................... 25
Accounting Pronouncements............................................... 26
Certain Factors That May Affect Future Performance...................... 27
Cautionary Statement Regarding Forward-Looking Statements............... 27
Management................................................................ 28
Current Directors and Executive Officers.................................. 28
Legal Proceedings......................................................... 30
Selected Historical Financial Data........................................ 31
Market Price And Dividend Information..................................... 33
Pro Forma Condensed Financial Data........................................ 34
Beneficial Ownership of Common Stock Prior to and After the Transaction.. 39
Proposal Two................................................................ 41
Nominees.................................................................. 41
Information Concerning Nominees for Directors of Frontier................. 41
Compensation Committee Interlocks and Insider Participation............... 42
Executive Compensation.................................................... 42
Option/SAR Grants, Exercises, and Holdings................................ 42
Directors' Compensation................................................... 42
Report of the Compensation Committee...................................... 42
Compensation Policy....................................................... 43
Fiscal 2000 Compensation.................................................. 43
Compliance with Section 16(a) of the Securities Exchange Act of 1934...... 44
Proposal Three.............................................................. 44
Introduction.............................................................. 44
Description of the 2000 Plan.............................................. 44
Ratification by Shareholders and Duration of the 2000 Plan................ 46
Proposals Four Through Eleven............................................... 47
Background................................................................ 47
Proposal Four - Proposal to Conform Current Limitation of Liability
Provisions With Business Corporation Act................................... 47
Proposal Five - Proposal to Conform CurrentIndemnification Provisions
With Business Corporation Act.............................................. 48
Required Indemnification.................................................. 48
Optional Indemnification.................................................. 48
Court-Ordered Indemnification............................................. 49
Definitions............................................................... 49
Proposal Six - Proposal to Conform Current Conflict of Interest
Provisions With Business Corporation Act................................... 49
Proposal Seven - Proposal to Update Description of Purpose and
Character of Business of Frontier.......................................... 49
Proposal Eight - Proposal to Change Frontier's Name......................... 49
Proposal Nine - Proposal to Update the Provisions of Frontier's
Articles Regarding Serial Preferred Stock.................................. 50
Proposal Ten - Proposal to Maintain Certain Corporate Records at
Known Place of Business of Frontier........................................ 50
Proposal Eleven - Proposal to Amend and Restate Frontier's
Articles of Incorporation.................................................. 51
Proposal Twelve - Ratification of Appointment of Independent Auditors....... 51
Availability of Information................................................. 51
Incorporation Of Certain Information By Reference........................... 52
Required Vote, Effect of Shareholder Approval, and Related Matters.......... 52
Other Matters............................................................... 52
Deadline for Shareholder Proposals.......................................... 52
ANNEXES
Merger Agreement....................................................... Annex A
2000 Stock Option Plan................................................. Annex B
Amended And Restated Articles of Incorporation of Frontier
Adjusters of America, Inc............................................. Annex C
UFAC Financial Statements.............................................. Annex D
Audit Committee Charter................................................ Annex E
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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. 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 Annual
Meeting of Shareholders to be held on Wednesday, October 25, 2000 at 10:00 a.m.
(Phoenix, Arizona time) (the "Annual Meeting"), or at any adjournment thereof,
for the purposes set forth in this Proxy Statement and in the accompanying
Notice of Annual Meeting of Shareholders. The Annual 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 September 25,
2000 to all shareholders entitled to vote at the Annual Meeting.
The mailing address of Frontier's principal executive office is 45 East Monterey
Way, Phoenix, Arizona 85012. Frontier's telephone number is (602) 264-1061.
RECORD DATE
The Board of Directors has fixed the close of business on September 18, 2000 as
the record date (the "Record Date") for the determination of shareholders
entitled to notice of and to vote at the Annual 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 Frontier written notice of revocation or a duly executed proxy
bearing a later date, or by attending the Annual Meeting and voting in person.
VOTING SECURITIES AND VOTING RIGHTS
On the Record Date, Frontier had outstanding 8,957,660 shares of Common Stock,
par value $.01 per share (the "Common Stock or "Frontier Common Stock"). Each
holder of Common Stock voting at the Annual 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 Annual Meeting.
The presence, in person or by proxy, at the Annual 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 Frontier present in person or represented by
proxy at the Annual Meeting is required (i) to approve the Merger Agreement and
the transactions contemplated thereby, (ii) for the election of directors, (iii)
to approve the 2000 Stock Plan, (iv) to approve the Amended and Restated
Articles of Incorporation, (v) for the ratification of PricewaterhouseCoopers
LLC, as the independent auditors of Frontier for the fiscal year ending June 30,
2001 and (vi) to transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
PRIOR TO APPROVAL OF THE MERGER AGREEMENT, UFAC HOLDS APPROXIMATELY 59% OF
FRONTIER'S OUTSTANDING SHARES OF COMMON STOCK. THE FRONTIER SHARES OWNED BY UFAC
ARE SUFFICIENT TO ASSURE PASSAGE OF ALL OF THE PROPOSALS, INCLUDING PASSAGE OF
THE MERGER AGREEMENT. UFAC HAS INFORMED FRONTIER THAT IT WILL VOTE ITS SHARES IN
FAVOR OF APPROVING THE MERGER AGREEMENT WITHOUT REGARD TO HOW OTHER SHAREHOLDERS
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MAY VOTE ON THIS ISSUE. FOR THIS REASON, YOUR VOTE WILL NOT AFFECT THE PASSAGE
OF THE MERGER AGREEMENT. HOWEVER, WE ENCOURAGE YOU TO VOTE. WE BELIEVE THAT YOUR
VOTE IS IMPORTANT AS IT ALLOWS YOU THE OPPORTUNITY TO EXPRESS AGREEMENT OR
DISAGREEMENT WITH OUR ACTIONS. A VOTE BY YOU IN FAVOR OF THE MERGER AGREEMENT
SHALL PRECLUDE YOU FROM CHALLENGING THE TRANSACTION, EXCEPT IN THE CASE OF
FRAUD.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by the
election inspectors appointed for the Annual 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.
APPRAISAL RIGHTS
Shareholders are not entitled under Arizona law to appraisal rights with respect
to the Transaction. Under the Arizona Business Corporation Act, a shareholder is
entitled to dissent from certain transactions and obtain payment of the fair
value of the shareholder's shares ("Appraisal Rights"). Appraisal Rights are
available to shareholders of Arizona corporations upon certain corporate
actions, including the consummation of a plan of merger to which an Arizona
corporation is a party, if shareholder approval is required. With respect to the
Transaction, Frontier is exempted from this provision and shareholders are not
entitled to Appraisal Rights because Frontier's Common Stock is registered on a
national securities exchange.
VOTING OF PROXIES
A proxy card has been included with this proxy statement. In order to vote by
proxy, you should complete the proxy card, sign it and return it to us in the
self-addressed envelope we have provided. When a proxy is properly executed and
returned, the shares it represents will be voted at the Annual 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 Annual 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 Frontier. In addition, Frontier
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 Frontier's
directors and officers, personally or by telephone or telegram, without
additional compensation.
SUMMARY TERM SHEET FOR PROPOSAL ONE
* PARTIES TO THE TRANSACTION
"FRONTIER" means Frontier Adjusters of America, Inc., an Arizona
corporation, and/or its subsidiaries. Frontier is the registrant and
will be the surviving entity after consummation of the proposed
transaction.
"UFAC" means United Financial Adjusting Company, an Ohio corporation.
UFAC is owned 100% by Netrex Holdings LLC ("Netrex"). Prior to the
proposed transaction, UFAC owns 5,258,513 shares of Common Stock of
Frontier (or approximately 59% of the outstanding capital stock of
Frontier). After the proposed transaction, UFAC will be merged into
Frontier and will cease to exist as a separate entity.
"JW" means JW Software, Inc., a Missouri corporation. JW is owned 100%
by UFAC. After the proposed transaction, JW will be a wholly-owned
subsidiary of Frontier.
"DBG" means DBG Technologies, Inc., an Ohio corporation. DBG is owned
100% by UFAC. After the proposed transaction, DBG will be a
wholly-owned subsidiary of Frontier.
"NETrEX" means Netrex Holdings LLC, a Delaware limited liability
company. Netrex is owned by The Progressive Corporation and Netrex
Capital Group LLC. Prior to the proposed transaction, Netrex is the
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parent company of UFAC and an indirect owner, through UFAC, of
approximately 59% of Frontier. After the Transaction, Netrex will own
approximately 82% of Frontier.
"NCG" means Netrex Capital Group LLC. NCG is wholly-owned by Netrex
LLC.
NETREX LLC is owned by certain private investors, including John M.
Davies, Frontier's Chairman of the Board.
* SURVIVING CORPORATION. Upon completion of the Merger, UFAC will merge
into Frontier and will cease to exist. As a result, Frontier will own
and be subject to all the rights, privileges, powers, franchises,
property, restrictions, disabilities, duties and debts of UFAC and
Frontier. Immediately after the Merger, Netrex will own approximately
82% of Frontier. See "Proposal One - The Transaction - Effects of the
Transaction."
* OFFICERS. The officers of Frontier immediately prior to the Merger
will remain Frontier's officers immediately after the Merger. See
"Proposal One - Management - Directors and Executive Officers" and
"Proposal Two - Election of Directors."
* DIRECTORS. The directors of Frontier immediately prior to the Merger
are John M. Davies, Troy M. Huth, Jeffrey R. Harcourt, Jeffrey C.
Jordan, William A. White, Louis T. Mastos, William J. Rocke, Jean E.
Ryberg and Kenneth A. Sexton. At the Annual Meeting, you will be asked
to elect directors. If the proposed slate of directors is elected, R.
Steven Brooks, Peter I. Cavallaro, Matthew P. Lawlor and Stephen V.
Murphy, will replace William A. White, Louis T. Mastos, William J.
Rocke and Jean E. Ryberg. UFAC has indicated that it will vote its
shares in Frontier for the proposed slate of directors. Therefore, the
directors, immediately after the Merger will consist of the proposed
slate of nine directors to be elected at the Annual Meeting. See
"Proposal One - Management - Directors and Executive Officers" and
"Proposal Two - Election of Directors."
* STATUS AND CONVERSION OF SECURITIES. Upon completion of the Merger,
the shares of common stock of UFAC will convert into a total of
16,840,000 shares of Frontier Common Stock and all shares of Frontier
Common Stock previously held by UFAC will be cancelled. See "Proposal
One - The Transaction - Exchange Ratio."
* OPTIONS TO PURCHASE UFAC COMMON STOCK. Upon completion of the Merger,
each outstanding option to purchase a share of UFAC common stock will
be converted into an option to purchase 16.84 shares of Frontier
Common Stock and the exercise price per share of Frontier Common Stock
will be equal to the exercise price per share of UFAC common stock
divided by 16.84. See "Proposal One - The Transaction - Exchange
Ratio."
* FEDERAL TAX CONSEQUENCES. There are no Federal tax consequences of
the Transaction to Frontier or UFAC or their respective shareholders.
See "Proposals One - The Transaction - Accounting and Tax Treatment."
* PRIOR CORPORATE ACTS. All corporate acts, plans, policies, contracts,
approvals and authorizations of UFAC, its shareholders, board of
directors, committees elected or appointed by the board of directors,
officers and agents, that were valid and effective immediately prior
to completion of the Merger will be effective and binding on Frontier
immediately after completion of the Merger. Upon completion of the
Merger, the employees and agents of UFAC shall become the employees
and agents of Frontier. See "Proposal One - The Transaction - Effects
of the Merger."
* CONDITIONS TO CONSUMMATION. Completion of the Merger will only take
place (i) after Frontier shareholders approve the Merger, (ii)
satisfactory opinions of counsel of Frontier and UFAC, (iii) if the
representations and warranties made by UFAC and Frontier in the Merger
Agreement continue to be true, and (iv) there are no material changes
in the business and operations of Frontier. See "Proposal One - The
Transaction - Conditions to Consummation."
The above information is only a summary. For a complete description of the
Merger Agreement, we urge Frontier Shareholders to read carefully and in its
entirety the Merger Agreement. A copy of the entire Merger Agreement is attached
hereto as Annex A and is incorporated into this document.
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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..
THE TRANSACTION
At the Annual Meeting, and at any adjournments thereof, shareholders of Frontier
will be asked to consider and vote upon the Merger Agreement dated May 2, 2000
between Frontier, 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 (the "Merger Shares") (the
"Transaction"). The Merger Shares will be issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act 1933. Upon the
satisfaction of the conditions to the closing (the "Closing") as set forth in
the Merger Agreement, Frontier 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 Frontier before and
after the Transaction, assuming that no outstanding options or warrants are
exercised:
Before the After the
Transaction Transaction
----------- -----------
% of shares owned by Netrex 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%
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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. 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. At the Effective Date,
the separate existence of UFAC will cease and Frontier will possess and be
subject to all the rights, privileges, powers, franchises, property (real,
personal and mixed), restrictions, disabilities, duties and debts of UFAC and
Frontier.
All corporate acts, plans, policies, contracts, approvals and authorizations of
UFAC, its shareholders, board of directors, committees elected or appointed by
the board of directors, officers and agents, that were valid and effective
immediately prior to the Effective Date shall be, for all purposes, the acts,
plans, policies, approvals and authorizations of Frontier and shall be as
effective and binding thereon as the same were with respect to Frontier. On the
Effective Date, the employees and agents of UFAC shall become the employees and
agents of Frontier.
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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 causing UFAC to be
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.
Frontier believes, based on legal advice from the law firm of Rosenman & Colin
LLP, that the Transaction will not result in Federal tax liabilities to
Frontier, 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, except that
any shares of UFAC common stock held in the treasury of UFAC will be cancelled
and all rights in respect thereof will cease to exist and no cash or securities
or other property will be issued in respect thereof. 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 the 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.
As a result of the Transaction, each outstanding and unexercised option to
purchase shares of UFAC will be converted to an option to purchase from Frontier
16.84 shares of Frontier 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 Frontier Common Stock will be equal to
the exercise price per share of UFAC common stock immediately prior to the
Effective Date, divided by 16.84. After the Transaction there will be such
options to purchase approximately 1,249,192 shares of Frontier Common Stock at
an 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 DATE
The Transaction will become effective after all conditions, including approval
by the shareholders, have been met. Immediately after the Annual Meeting, if the
Transaction is approved and all other conditions to Closing are met, Frontier
will file the appropriate documents to effectuate the merger with both the
Arizona Corporation Commission and the Ohio Secretary of State. The Transaction
will become effective on the date of the effectiveness of the filing in both
states. Other than the approval of the SEC of the Proxy Statement and the
approval by the Arizona Corporation Commission to the amendment and restatement
of Frontier's Articles of Incorporation which include the change of Frontier's
name and the approval by the Arizona Corporation Commission and the Ohio
Secretary of State of the Articles of Merger, there are no federal, state, local
or other regulatory approvals or comments required to consummate the
Transaction.
CONDITIONS TO CONSUMMATION
The consummation of the Transaction is subject to the requisite approval of
Frontier shareholders, satisfactory opinions of counsel of Frontier and UFAC,
the continued truth and accuracy of the representations and warranties of the
parties in the Merger Agreement and the absence of material changes in the
business and operations of Frontier and UFAC.
AMENDMENT OR MODIFICATION
The merger agreement may be amended or modified with written consent of the
parties. After approval of the Transaction by the shareholders, amendment or
modification may be authorized by the parties Boards of Directors without
additional shareholder approval, other than an amendment or modification that
would increase the number of shares issued by Frontier. To the extent that the
Transaction is modified after receiving shareholder approval, the Board will
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consider obtaining additional shareholder approval, after consultation with
counsel, depending upon the extent and materiality of the amendment or
modification and the applicable requirements of law.
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 discussed and considered other alternatives to achieving Frontier's goals
of implementing this technology and e-commerce strategy, including the
possibility of making other acquisitions or the sale of Frontier to third
parties. Because the Board was familiar with UFAC and UFAC's existing technology
assets, UFAC's management and economic condition, UFAC's business plan and
personnel, the Board believed that a merger with UFAC would be more cost
effective, synergistic and efficient than identifying an unknown company with
the possibility of undiscovered liabilities. In addition, the Board was
concerned about combining with an entity that might have differing management
styles and corporate cultures. Therefore, the Board did not examine specific
alternative acquisitions in its determination that the Transaction offered the
most cost effective, efficient and immediate means to achieving Frontier's
goals. The Board did, however, appoint a committee of independent directors to
consider the purchase. The committee of independent directors consisted of
William J. Rocke, Jean E. Ryberg and Louis T. Mastos (the "Committee").
Frontier determined that it would obtain a fairness opinion in connection with
the Transaction and focused on finding a reputable company that specialized in
valuations of similarly situated, similarly size companies. ComStock Valuation
Advisors, Inc. ("ComStock") was one of several investment banking and appraisal
firms that presented proposals to Frontier to render a fairness opinion. The
proposals were presented to the Board and to the Committee. The Committee
recommended to the Board that it retain ComStock based upon the price quoted and
the substantial experience of ComStock in preparing fairness evaluations in
similar transactions.
On January 26, 2000, 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. ComStock subsequently reported to the Board that
such fluctuations were the result of the announced Transaction, and not the
result of Frontier's intrinsic value. See "Opinion of Financial Advisor Proposal
One - The Transaction."
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On May 2, 2000, Frontier's Board met to consider the recommendation of the
Committee. 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 2, 2000, the Merger Agreement was executed and delivered to Frontier,
UFAC and Netrex.
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.
The Board believes that by completing the Transaction, the combined company will
be able to better market its products and services to its combined customer
base. For example, the Board believes that the potential exists for the
combining of the sales efforts and forces of Frontier and UFAC so that a unified
and integrated sales force will be able to better sell and cross-sell the
companies' various products. In addition, the potential exists for the expansion
of business opportunities between the various clients of UFAC and Frontier. For
example, the Board believes that certain customers of UFAC could become a source
of business for Frontier and vice versa. Further, the Board believes that the
combination of the operations of UFAC and Frontier will result in the
streamlining of certain administrative functions and operations. Specifically,
purchasing, accounting, human resources, legal and other business and
administrative functions can be more easily and cost-effectively provided in the
combined organization than in the separate organizations.
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. These include the ability to combine our sales forces, to sell and
cross-sell each other's products, to combine administrative functions and
operations;
(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 as described above, 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 that confirmed to the Board that the substantial
similarities and resulting opportunities to achieve efficiency and leverage
exist between Frontier and UFAC. Frontier believes the business and services
offered by UFAC, JW and DBG are complimentary to the business and services of
Frontier. In addition Frontier believes the technology employed by UFAC, JW and
DBG is consistent with Frontier's goal to expand into technology and e-commerce
markets.
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.
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(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.
(iii) The possible conflict of interest created by the prior relationship
of John M. Davies, Frontier's Chairman, with UFAC. For this reason, the Board
appointed the Committee to analyze the Transaction and make its recommendation
to the Board.
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,
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.
It is also possible that consummation of the Transaction might adversely affect
the price of Frontier's Common Stock. Although there can be no assurance given,
based upon the affect of the announcement of the Transaction on the price of
Frontier's Common Stock, the Board believes that consummation of the Transaction
will enhance or be neutral in this regard.
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.
DISCUSSION OF FINANCIAL ANALYSIS
Frontier retained ComStock, an independent third party, to advise the Board and
to conduct a financial analysis of the Transaction. In this regard, ComStock
determined the fair market value of each of UFAC, JW and DBG. After determining
the fair market value of these companies, ComStock calculated an exchange ratio
to be used to exchange Frontier shares for UFAC shares. 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 exchange ratio was
presented to the committee of independent directors for their consideration.
The members of the Board evaluated the factors referred to above in light of
their knowledge of the business and operations of Frontier, 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."
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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 Annual 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, however, such indemnification under the federal
securities laws may not be enforceable. No portion of ComStock's fee is
contingent upon consummation of the Merger.
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.
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.
The Merger Agreement establishes a fixed exchange ratio for shares to be
exchanged in the merger. In response to the increase in the share price after
announcement of the merger, the committee of independent directors of Frontier
requested that ComStock perform a supplemental analysis as to the cause of the
increase in the stock price. As a result of this supplemental review and
analysis, ComStock advised the Board of Directors that the increase of
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Frontier's share price following the announcement of the merger was not the
result of "the fundamental performance of Frontier." Rather, ComStock opined
that "it was reasonable to conclude that the increase in the price of Frontier
stock that occurred on March 3, 2000 was likely attributable to the March 2,
2000 press release and not to significant improvements in the fundamental
performance of Frontier."
The ComStock fairness opinion is conditioned upon the accuracy of the
information provided to them by Frontier, and its officers, employees and
agents, and ComStock does not represent as to the accuracy or completeness of
such information. ComStock's opinion is based on the economic, market, financial
and other conditions as they existed on the date they rendered the opinion.
ComStock has no obligation to update, revise or reaffirm the opinion based upon
any changes in the conditions after its issuance. There has been no relationship
between Frontier, UFAC, JW and DBG on the one hand and ComStock on the other
hand during the past two years, nor is a future relationship contemplated at
this time. No compensation has been received by ComStock from Frontier, UFAC, JW
or DBG, other than the compensation for preparation of the fairness opinion.
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 of 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). Normalized adjusted historical cash flow represents an
estimate of cash flow based on an analysis of historical financial performance
after adjustments for certain items such as non-recurring expenses. 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
of 30% to calculate UFAC's equity value on a controlling interest basis.
ComStock relied on data reported by Mergerstat Review (published by Houlihan
Lokey Howard & Zukin) to estimate the control premium for UFAC. The data
indicate a median premium of 31% and an average premium of 40% for transactions
during the ten-year period ended December 31, 1998. Based upon this study, a 30%
control premium was assigned to UFAC. 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,
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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.
The Guideline Companies identified by ComStock for UFAC were Hilb Rogal &
Hamilton Co., Inspire Ins Solutions, Inc., Paula Financial, Transcend Services,
Inc., United Medicorp, Inc., Allstate Financial Corp., Crawford & Co., Dun &
Bradstreet Corp., Health Power, Inc., and Healthcare Recoveries, Inc.
The Guideline Companies identified by ComStock for JW and DBG were Cover-All
Technologies Inc., CCC Information Svcs Grp Inc, Policy Management Systems Cp,
Walker Interactive Systems, Barrister Info Systems, Exigent Intl Inc, Health
Mgmt Sys Inc, H T E Inc., Infodata Systems Inc., Manatron Inc, Network Six Inc,
Smith-Gardner & Assocs, Symix Systems Inc, and Syntel Inc.
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.
ComStock examined a broad range of third party purchases of control ownership
interests in privately held companies which it used in its analysis under the
Merger Acquisition Method.
The companies identified for comparison to UFAC were American Benefit
Administrative Services, Millennium HealthCare, Inc., American Phoenix
Corporation, Arrow Claims Management, Inc., Coverdell & Company, Inc., Dealers
Choice Automotive Plan, Health Plan Initiatives, Inc., M&N Risk Management,
Inc., S.E.A., Inc., Banking Solutions, Inc., JDR Holdings, Inc., Medaphis
Services Corporation, MedSource, Inc., Professional American Collections, Inc.,
Robert Beck & Associates, Inc., Preferred Payment Systems, Inc., and Prime
Capital Services, Inc.
The companies identified for comparison to UFAC were Vercom Software, Inc., The
Systems Consulting Group, Inc., The Long View Group, Inc., Somerset Automation,
Inc., Software Manufacturing Group, RapidFire Software, Inc., Progressive
Software, Inc., PRB Associates, Inc., Posnet Computeres, Inc., PC Business
Solutions, Inc., Open Systems Technologies, Inc., Milestone Software, Management
Solutions, Inc., Interpra Medical Imaging Networks Ltd., InfoCellular, Inc.,
Horizons Technology, Inc., Encore Systems, Inc., Customer Focus International,
Inc., Computer Age Dentist, Inc., CGI Group, Inc., Carleton Corporation,
Application Methods, Inc., and Advantage KBS, Inc.
The companies identified for comparison to DBG were Advantage KBS, Inc.,
Application Methods, Inc., Carleton Corporation, CGI Group, Inc., Computer Age
Dentist, Inc., Encore Systems, Inc., Customer Focus International, Inc.,
Horizons Technology, Inc., InfoCellular, Inc., Interpra Medical Imaging Networks
Ltd., Management Solutions, Inc., Milestone Software, Open Systems Technologies,
Inc., PC Business Solutions, Inc., Posnet Computeres, Inc., PRB Associates,
Inc., Progressive Software, Inc., RapidFire Software, Inc., Software
Manufacturing Group, Somerset Automation, Inc., The LongView Group, Inc., The
Systems Consulting Group, Inc., and Vercom Software, Inc.
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.
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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. ComStock determined an appropriate discount rate by examining
UFAC's cost of equity, cost of debt, weighted average cost of capital and
expected growth rate. The cost of equity was determined adjusting a risk-free
return of the perceived risk of the privately-held investment over the risk-free
investment alternative. Cost of debt was based upon a capital formula that
assumed a zero debt structure for UFAC. Weighted average cost of capital was
calculated based upon UFAC's historical performance and expected future
performance. ComStock assumed that interest bearing debt was unlikely to be
required in the future and that the debt/equity mix would remain at 100% equity.
Therefore, the weighted average cost of capital was determined to be 16...2
percent for UFAC. The expected growth rate was determined to be 6.2% per year
based upon UFAC's historic growth patterns and general industry and economic
conditions.
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 of 16.2%. 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.
For this method ComStock used an estimated required rate of return of 30% for
DBG and 20% for JW. The rate for JW was developed by quantifying and cumulating
a required rate of return for risk free investments, market risk premium,
leveraged beta, equity risk premium, small company premium, company specific
risk and leveraged cost of equity capital. This process resulted in a cumulative
total of 19.08%, which was rounded to 20%. The rate for DBG was increased by 10%
over that of JW to compensate for the added risk of achieving higher implied
(estimated) annual revenue growth rates. The 30% estimated rate of return for
DBG is close to the rate of return required by capital firms that invest in
start-up or emerging growth companies such as DBG given the relative level of
risk associated with DBG's cash flow forecast.
DISCOUNT FOR LACK OF MARKETABILITY
Under each of the valuation methods described above, ComStock applied a 5%
discount for lack of marketability. ComStock cited several studies that review
the price differential between restricted and non-restricted shares representing
minority interests. These studies provide a reference point for discounts of
closely-held stock using the price differential as to evidence on discounts
related to lack of marketability. These studies cover several hundred different
transactions that occurred between 1966 and 1984. The results typically fall
between a 35% and 45% discount. Other published studies use the differences in
the sales price of securities prior to an initial public offering to the price
after the offering. These studies were conducted from 1980 through 1995 and
calculated a range of marketability discounts between 40% and 66%.
12
<PAGE>
Marketability discounts for privately-held stock differ depending on whether the
stock being valued represents a controlling interest or a minority interest. The
typical discount for a controlling interest is typically much lower than for an
illiquid minority block of stock. Other factors contributing to the magnitude of
a marketability discount appropriate to a controlling interest considered by
ComStock were:
* Lack of liquidity
* Historic trading activity of stock
* Prospect of an IPO or sale of UFAC, JW and DBG
* Inherent risk of the business
* Overall priority and timing of debt claims and contingent financial
claims
* Nature of growth characteristics of UFAC, JW and DBG
* Borrowing capacity of UFAC, JW and DBG o Shareholder rights
* Financial strength of UFAC, JW and DBG
Two additional factors taken into account by ComStock were ownership rights to
100% of each of the companies and total access to reliable information regarding
the companies. Based on its analysis, ComStock determined that a reasonable lack
of marketability discount for a 100% ownership block in each of the companies
was 5%.
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. The average trading volume
for Frontier for the trading period twenty days prior to the ComStock valuation
date of February 25, 2000 was 2,495 shares per day, or slightly above the
average daily trading volume of 2,300 shares per day observed the preceding six
months. While this volume may be viewed as low relative to other publicly-traded
securities, it nevertheless represents substantial trading activity on a
consistent basis in an efficient market where unrelated parties are establishing
bid and ask prices. Therefore, the trading activity of the Frontier stock was
deemed by ComStock to be sufficient in volume to be indicative of the fair
market value of that stock.
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 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 draft Opinion. ComStock concluded that no
material changes to its initial conclusions were required based on this updated
data. On April 22, 2000, ComStock issued its final report and fairness opinion
to the Board.
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<PAGE>
VALUATION CONCLUSIONS
Following is a summary of ComStock's valuation conclusions by valuation method.
<TABLE>
<CAPTION>
UFAC JW (2) DBG
------------ ------------ ------------
<S> <C> <C> <C>
Capitalized Cash Flow Method $ 17,130,000 $ 3,480,000 $ 1,600,000
Discounted Cash Flow Method $ 13,830,000 N/A N/A
Merger & Acquisition Method $ 14,600,000 $ 3,450,000 $ 1,770,000
Venture Capital Method N/A $ 3,470,000 $ 1,790,000
Guideline Company Method $ 15,720,000 $ 3,350,000 $ 1,870,000
Average Value $ 15,320,000 $ 3,440,000 $ 1,760,000
Median Value $ 15,160,000 $ 3,460,000 $ 1,780,000
TOTAL
------------
Selected value from various methods $ 15,240,000 $ 3,450,000 $ 1,770,000 $ 20,460,000
Less debt incurred for the purchase
of 49% of JW (1) $ (1,000,000) -- -- $ (1,000,000)
Selected Equity Value $ 14,240,000 $ 3,450,000 $ 1,770,000 $ 19,460,000
</TABLE>
The valuation for Frontier was determined to be $1.68 per share of Common Stock
or aggregate consideration of $19,456,080.
----------
(1) Subsequent to ComStock's valuation, UFAC purchased the remaining 49% of JW
for $1,000,000 making UFAC the sole owner of JW. The purchase price was
funded with additional debt.
(2) Represents 100% of JW.
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 10% 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.
14
<PAGE>
John M. Davies Director and Officer of Frontier, Netrex and UFAC
Troy M. Huth Director of Frontier, DBG and JW
Officer of Frontier, UFAC, JW and DBG
Jeffrey R. Harcourt Director of Frontier and DBG
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.
RELATED PARTY TRANSACTIONS
See Note 3 to UFAC's Financial Statements, annexed hereto as Annex D, for a
description of transactions between and among Frontier, UFAC, JW and DBG.
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. Frontier is not a party to any
collective bargaining agreements with any of its employees. 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.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Gross billings by Adjusters (approximate) $44,730,000 $42,050,000 $48,060,000
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
</TABLE>
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<PAGE>
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.
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.
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<PAGE>
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.
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 March 31, 2000, Frontier had
approximately $1,357,000 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.
FRONTIER-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.
17
<PAGE>
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.
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. For a discussion of segment reporting
for UFAC and the UFAC Subsidiaries see Note 6 to the consolidated financial
statements of UFAC and subsidiaries attached as Annex D
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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<PAGE>
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., (which is not affiliated with Frontier, but has in the
past been a client of Frontier) 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. However, during
1999 Enterprise-Rent-a-Car represented four months of services only as it became
a customer of UFAC in August 1999. 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 will have replaced this lost revenue in 2001 during which
Enterprise-Rent-a-Car has contracted with UFAC for the entire year. 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 is not a party to any collective bargaining
agreements with any of its employees. UFAC believes that it has good
relationships with its employees.
FACILITIES
UFAC's operations are maintained in four leased facilities located in Highland
Heights, Ohio; Sacramento, California; Winter Park, Florida; and Memphis,
Tennessee. UFAC currently pays base monthly rent of $35,955; $3,501; $8,846 and
$23,517, respectively for these offices. The lease for the Winter Park, Florida
location expires by its terms on November 30, 2002 and the leases for the
Highland Heights, Ohio, Sacramento, California and Memphis, Tennessee locations
are on a month-to-month basis. On May 12, 2000, UFAC entered into a new lease to
relocate its Highland Heights, Ohio operations (which consists of approximately
80% of UFAC's employees) to a new single tenant building in Solon, Ohio. The
initial term of this new lease is for five years with a monthly, base rent of
$47,173 in the first year, escalating annually to $56,108 in the fifth year.
UFAC expects to move its Highland Heights, Ohio operations into this new space
in July or August, 2000. In addition, UFAC is in the process of finding new
space for its Sacramento, California operations, which is currently occupying
space leased on a month-to-month basis for a monthly rental of $3,500. UFAC
expects to move its Sacramento operations into new space by December 31, 2000.
UFAC believes that its facilities will be sufficient to meet its needs in the
foreseeable future.
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<PAGE>
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. Related agreements also offer
customer training, installation assistance and ongoing data processing support
from their respective professional staffs.
JW was formed by James T. Wieland in October 1989. On October 31, 1998, UFAC
purchased 51% of the outstanding common stock of JW from Mr. Wieland for
$1,194,124, and in April 2000 purchased the remaining 49% of JW for $1,000,000.
Mr. Wieland and Frontier have had no affiliation prior to the purchase of
Frontier by UFAC in April 1999. DBG commenced operations as a subsidiary of UFAC
in early 1999. DBG provides supporting services to JW, including centralized
management, marketing, accounting and sales support. JW paid DBG $15,000 per
month for these services through December, 1999. Additionally, JW paid DBG
commissions for JW product or service revenue generated by DBG. These
commissions ranged from 20% to 50% of revenue, depending on the nature of the
product or service sold.
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
customer assignment and tracking of the workflow of their field service teams.
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, and system design, incorporating electronic data flexibility and
data accessibility by multiple program applications and claims handling and
management business processes and systems implementation.
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 making their
software products and applications available to their customers via several
media, including over the internet. This enables their customers to most
effectively and efficiently access the products and services that they need. The
companies also benefit from their affiliation with UFAC, which provides end user
expertise for the development of their claims management software.
20
<PAGE>
EMPLOYEES
As of April 1, 2000, JW and DBG, together, employed approximately 50 employees,
consisting of 34 application programmers, four 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. Neither JW nor DBG is a party of any collective bargaining agreements
with any of their employees. JW and DBG each believe that they have good
relationships with their respective employees.
FACILITIES
JW and DBG currently share UFAC's office space in Highland Heights, Ohio.
Approximately 65% of JW and DBG employees are located at this space. These
operations will be relocated, along with UFAC's operations, upon the effective
date of the new Solon, Ohio lease agreement. See "UFAC - Facilities" above. In
addition, JW and DBG rent additional office space in St. Louis, Missouri. The
term of this lease continues through February 2001 and has a current monthly
base rental payment of $6,157. JW and DBG believe that their facilities will be
sufficient to meet its needs in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF UFAC
GENERAL
Prior to November 5, 1999 UFAC owned 100% of DBG, 51% of JW, 50.1% 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. Vehicle Inspection Services, Inc., a former subsidiary of UFAC, was
divested in 1999 and is not a party to the Transaction. Accordingly, UFAC's
interest in Vehicle Inspection Services, Inc. have been excluded. In addition,
the 59% ownership interest in Frontier has been excluded from the UFAC
Consolidated Operating Results, since Frontier's results are included in their
entirety elsewhere in the document or by reference.
SIX MONTHS ENDED JUNE 30 , 2000 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1999
The following table sets forth the consolidated operating results of UFAC, DBG
and JW for the six months ended June 30, 2000 and 1999 and reflects the minority
interest in JW held by a third party through March 2000. 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.
21
<PAGE>
Consolidated Operating Results of UFAC, DBG and JW
For the Six Months ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue $11,346,148 100.0% $ 6,535,145 100.0%
----------- ----- ----------- -----
Compensation and employee benefits 7,222,106 63.7 3,437,460 52.6
Office and overhead expenses 2,991,431 26.4 2,184,309 33.4
Other operating expenses 804,463 7.0 630,647 9.7
----------- ----- ----------- -----
Total operation expenses 11,018,000 97.1 6,252,416 95.7
----------- ----- ----------- -----
Income from operations 328,148 2.9 282,729 4.3
----------- ----- ----------- -----
Interest income 284,352 2.5 -- --
Interest expense -- -- 203,587 3.1
Rental income -- -- 197,297 3.1
Management fees charged to Frontier 150,000 1.3 50,000 0.7
Income taxes 460,365 4.0 189,625 2.9
Minority interest 33,555 0.3 63,636 1.0
----------- ----- ----------- -----
Net income $ 335,690 3.0% $ 200,450 3.1%
=========== ===== =========== =====
</TABLE>
During the six months ended June 30, 2000, UFAC's consolidated revenue increased
to $11,346,148 from $6,535,145 during the six months ended June 30, 1999. This
increase was due primarily to the full inclusion for six months of the
Enterprise-Rent-A-Car claims adjusting program which began in August, 1999 and,
to a lesser degree, to an incremental increase in volume from the claims
adjusting program for Frontier Insurance Group, Inc. These two customers
generated approximately $6,913,412 of revenue during the six months ended June
30, 2000 as compared to $1,064,785 of revenue during the six months ended June
30, 1999. Frontier Insurance Group, Inc. informed UFAC during first quarter 2000
that it would cease using UFAC's services for new claims during the second
quarter 2000. The revenue generated during the six months ended June 30, 2000
included a contract termination settlement paid by Frontier Insurance Group ,
Inc. The contract termination by Frontier Insurance Group, Inc. is not expected
to have a material impact on UFAC's revenue, results of operations or financial
position in future periods. Any potential adverse impact was substantially
eliminated due to the contract termination penalty paid by Frontier Insurance
Group, Inc., coupled with a growing program with Enterprise-Rent-a-Car; the
volume generated by the Enterprise-Rent-a-Car program provides substantial
incremental revenue to replace the loss of Frontier Insurance Group, Inc.
Compensation and employee benefits increased from $3,437,460 during the six
months ended June 30, 1999 to $7,222,106 during the six months ended June 30,
2000. This increase is attributable to additional staffing requirements due to
increased revenue, coupled with the need to hire additional employees to perform
functions previously provided by The Progressive Corporation. During the six
months ended June 30, 1999, JW licensed its claims management system to
Budget-Rent-A-Car, resulting in revenue of approximately $600,000. JW expects
that it will continue to receive license fees under this agreement.
UFAC experienced an increase in operating costs and expenses to $11,018,000
during the six months ended June 30, 2000 from $6,252,416 during the six months
ended June 30, 1999. This increase is due principally to the substantial
increase in revenue over the same periods. UFAC expects that without subsequent
increases in revenue volume, the current level of expenses will remain constant.
Office and overhead expenses consists principally of general and administrative
services provided by The Progressive Corporation, outside legal fees, rent and
utilities, telephone, and travel expenses. Office and overhead expenses
increased from $2,184,309 during the six months ended June 30, 1999 to
$2,991,431 during the six months ended June 30, 2000. This increase was due
primarily to the increase in revenue and number of employees. While total
expenses increased, expenses as a percentage of revenue decreased. This is due
to a decrease in expenses allocated from The Progressive Corporation. During the
six months ended June 30, 1999 expenses were being allocated to UFAC from The
22
<PAGE>
Progressive Corporation in the form of an inter-company management fee. The
management fee is shown in the office and overhead line of the financial
statements. After November 1999, including the six months ended June 30, 2000,
UFAC began to conduct some of the services on its own. Since UFAC had employees
performing the same services that used to be part of the management fee, the
expenses related to such services are now reflected in the compensation and
benefits line of the financial statements.
Other operating expenses, which largely relate to depreciation and amortization
and outside services, increased from $630,647 during the six months ended June
30, 1999 to $804,463 during the six months ended June 30, 2000. Depreciation and
amortization increased by $443,708, due mainly to depreciation on fixed assets
purchased and the amortization of the goodwill resulting from the "push down"
accounting implemented in November 1999. See Note 1 to UFAC's consolidated
audited financial statements. Outside services decreased by $269,892 during the
six months ended June 30, 2000 as compared to the six months ended June 30,
1999, due mainly to replacing contract programmers with full-time employees.
Operating profit increased to $328,148 during the six months ended June 30, 2000
from $282,729 during the six months ended June 30, 1999. This increase was
principally due to growth in revenue of $4,811,003, allowing UFAC to further
increase operating efficiencies and further leverage fixed costs.
During the six months ended June 30, 2000, a receivable from parent and
affiliates existed, resulting in interest income of $284,352 for the period. In
addition, UFAC began charging Frontier a monthly service fee of $25,000 in May
1999 for performance of certain administrative functions. These charges resulted
in an increase of $100,000 in management fee income for the six months ended
June 30, 2000 as compared to the six months ended June 30, 1999. The rental
income of $197,297 during the six months ended June 30, 1999 ceased to exist as
of November 5, 1999 when the rental property was sold to The Progressive
Corporation.
UFAC incurred no interest expense for the six months ended June 30, 2000 as
compared to expense of $203,587 for the six months ended June 30, 1999. During
1999, UFAC paid $125,189 of interest on a mortgage associated with a certain
rental property sold to The Progressive Corporation. The related debt was
assumed by The Progressive Corporation in November 1999. In addition, UFAC
incurred interest expense of $78,398 due on its payable to parent and
affiliates, which existed during the six months ended June 30, 1999.
Income taxes increased to $460,365 for the six months ended June 30, 2000 from
$189,625 for the six months ended June 30, 1999. The increased tax expense is
related to increases in operating income and other income. The effective tax
rate for the six months ended June 30, 2000 increased to 61% from 58% for the
six months ended June 30, 1999. The increase was driven by increased goodwill
amortization expense, which is not deductible for income tax purposes.
UFAC SEGMENT DISCLOSURE
During the six months ended June 30, 2000, UFAC's revenue increased to
$10,518,567 from $5,328,970 for the six months ended June 30, 1999. This growth
was due primarily to the Frontier Insurance Group, Inc. and to the
Enterprise-Rent-A-Car programs. Frontier Insurance Group, Inc. informed UFAC
during first quarter 2000 that it would cease using UFAC's services for new
claims during second quarter 2000. Revenue from Frontier Insurance Group, Inc.'s
program was $3,520,387 for the six months ended June 30, 2000, including
proceeds from a contract termination settlement that increased net revenue by
approximately $132,000. Any potential adverse impact was substantially
eliminated due to the contract termination penalty paid by Frontier Insurance
Group, Inc., coupled with a growing program with Enterprise-Rent-a-Car; the
volume generated by the Enterprise-Rent-a-Car program provides substantial
incremental revenue to replace the loss of Frontier Insurance Group, Inc.
Depreciation and amortization expense increased $411,728 from $306,960 during
the six months ended June 30, 1999 to $718,688 during the six months ended June
30, 2000. This increase was due principally to depreciation on fixed assets
purchased in November 1999 and the amortization of the goodwill resulting from
the "push down" accounting implemented in November 1999. Interest expense
decreased to $0 for the six months ended June 30, 2000 from $203,416 for the six
months ended June 30, 1999. This decrease was due primarily to the settlement of
a mortgage note payable to The Progressive Corporation during fourth quarter of
1999. Net income increased $496,701 from $55,027 during the six months ended
June 30, 1999 to $551,728 during the six months ended June 30, 2000. The
increase was due primarily to the above mentioned contract termination
settlement with Frontier Insurance Group, Inc. and revenue growth, allowing UFAC
to increase operating efficiencies and further leverage fixed costs.
Expenditures for segment assets increased from $355,836 for the six months ended
June 30, 1999 to $2,524,174 for the six months ended June 30, 2000. UFAC
capitalized $1,137,080 in software expenditures and $387,094 of property and
fixed assets during the six months ended June 30, 2000. UFAC also purchased the
remaining 49% interest in JW Software for $1,000,000 in April 2000.
23
<PAGE>
JW's revenue decreased by $377,407 from $1,214,115 during the six months ended
June 30, 1999 to $836,708 during the six months ended June 30, 2000. JW licensed
it claims management system to Budget-Rent-A-Car in the six months ended June
30, 1999; this was a comparatively large sale that generated approximately
$600,000 in revenue . Cash expenditures for segmented assets totaled $456,484
during the six months ended June 30, 2000. JW capitalized $48,484 of property
and fixed assets during the six months ended June 30, 2000. In May 2000 JW
acquired 100% of the stock of Vedder Software Group, Inc... for $408,000 cash
and a $392,000 three-year installment Note payable.
DBG's operating result are relatively insignificant compared to UFAC and JW.
DBG's profitability for the six months ended June 30, 1999 was largely due to
subsidized services received from UFAC and JW. Beginning in September 1999, UFAC
and JW began charging DBG for services rendered on its behalf. See Note 6 to the
UFAC Consolidated Financial Statements in Annex D.
TWELVE MONTHS ENDED DECEMBER 31, 1999 AS COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1998
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.
Consolidated Operating Results of UFAC, DBG and JW
For the Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
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 0.4
----------- ----- ----------- -----
Interest expense 440,975 2.6 256,766 2.8
Rental income 295,344 1.8 435,728 4.7
Management fees charged to Frontier 200,000 1.7 -- --
Income taxes 448,207 2.7 97,737 1.1
Minority interest 99,673 0.6 63,549 0.7
----------- ----- ----------- -----
Net income $ 412,473 2.4% $ 178,346 1.9%
=========== ===== =========== =====
</TABLE>
UFAC's consolidated revenue increased approximately 81% 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 $5,200,000 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 $600,000 in revenue during the year. UFAC does not
anticipate that it will receive any claim service revenue from Frontier
Insurance Group or any of its clients after the second quarter of 2000, except
for Budget-Rent-a-Car as a result of its purchase of a software license for JW's
claims management software.
24
<PAGE>
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 due principally to the 81% increase
in revenue over the same periods. Compensation and employee benefits increased
from $5,077,094 in the 12 months ended December 31, 1998 to $9,972,053 in the 12
months ended December 31, 1999. This increase is attributable to additional
staffing requirements due to increased revenue. Office and overhead expenses,
which largely relate to general and administrative services provided by
Progressive, outside legal fees, rent and utilities, telephone, and travel
expenses, increased from $3,865,691 in the 12 months ended December 31, 1998 to
$5,245,974 in the 12 months ended December 31, 1999. This increase was driven by
incremental legal expenses associated with the acquisition of Frontier,
increased facility costs due to additional staffing, and the addition of JW and
DBG. Other operating expenses, which largely relate to depreciation and
amortization and outside services, increased from $384,882 in the 12 months
ended December 31, 1988 to $1,051,783 in the 12 months ended December 31, 1999.
This was largely attributable to depreciation on fixed assets purchased in
November 1999 and a full year of goodwill amortization related to JW. Operating
profit increased 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 principally
due to growth in revenue of $7,615,209, allowing UFAC to increase operating
efficiencies and further leverage fixed costs.
As a result of a building sale to The Progressive Corporation, the related
interest expense and rental income decreased in 1999. Due to the sale of the
rental property in November 1999, the rental income decreased to $295,344 during
the 12 months ended December 31, 1999 from $435,728 during the 12 months ended
December 31, 1998. The interest expense related to the payable to parent and
affiliate increased $284,906 for the 12 months ended December 31, 1999 as
compared to the 12 months ended December 31, 1998. The increase was due
primarily to the purchase of Frontier for $6,836,067 which increased the payable
to parent and affiliates and the related interest expense. The net affect of the
reduction in the mortgage interest expense and the increase in interest expense
on the payable to parent and affiliates results in a net increase in interest
expense of $184,209 for the 12 months ended December 31, 1999 as compared to the
12 months ended December 31, 1998. During the 12 months ended December 31, 1999,
UFAC collected service fees of $200,000 from Frontier. In May 1999, UFAC began
charging Frontier a monthly service fee of $25,000 for the performance of
certain administrative functions.
Income taxes increased to $448,207 during the 12 months ended December 31, 1999
from $97,737 during the 12 months ended December 31, 1998. The increased tax
expense relates primarily to the increase in income from operations of $673,066.
The effective tax rate for the 12 months ended December 31, 1999 increased to
59% from 46% for the 12 months ended December 31, 1998. This increase was due
primarily to increased goodwill amortization expense that is not deductible for
income tax purposes.
UFAC SEGMENT DISCLOSURE
UFAC's revenue increased approximately 64% from $9,204,731 for the 12 months
ended December 31, 1998 to $15,090,701 for the 12 months ended December 31,
1999. This growth was driven by the Frontier Insurance Group, Inc. and
Enterprise-Rent-A-Car programs. Depreciation and amortization expense increased
$348,352 from $342,001 in the 12 months ended December 31, 1998 to $690,353 in
the 12 months ended December 31, 1999. This increase was driven by the
amortization of goodwill associated with the purchase of JW and additional
goodwill related to the "push down" accounting implemented in November 1999...
Interest expense increased $177,219 from $256,766 in the 12 months ended
December 31, 1998 to $433,985 in the 12 months ended December 31, 1999. This
increase was driven by the acquisition of Frontier for $6,836,067, which
increased the payable to parent and affiliates. Net income increased $471,024
from $244,488 in the 12 months ended December 31, 1998 to $715,512 in the 12
months ended December 31, 1999. This increase was driven by revenue growth,
allowing UFAC to increase operating efficiencies and further leverage fixed
costs.
The other reportable segments, JW and DBG, are relatively insignificant compared
to UFAC. JW's revenue increased by $1,837,776 from $156,508 for the two months
ended December 31, 1998 to $1,994,284 for the 12 months ended December 31, 1999.
This significant increase is due to the fact that UFAC acquired JW in October,
1998. During 1999, JW licensed its claims management system to
Budget-Rent-A-Car, generating approximately $600,000 in revenue. DBG began
operations in the second quarter of 1999. See Note 6 to the UFAC Consolidated
Financial Statements in Annex D.
LIQUIDITY
Net cash provided by operating activities of $1,932,354 during the six months
ended June 30, 2000 was due principally to net income and increases in other
liabilities and accruals. Net cash provided by operating activities of $958,357
during the six months ended June 30, 1999 was primarily due to net income and
increases in accounts payable and deferred revenue. Net cash provided by
operations increased to $5,632,283 during the year ended December 31, 1999 from
$1,909,365 during the year ended December 31, 1998. The increase was due
primarily to the increase in net income, deferred revenue and accounts payable.
25
<PAGE>
Net cash used in investing activities of $2,980,658 during the six months ended
June 30, 2000 was due to $1,137,080 in capitalized software , $435,578 in
property and fixed assets, the purchase of the remaining 49% interest in JW
Software and the acquisition of Vedder Software Group, Inc. 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 to develop
software. Cash used in 1998 was primarily used to purchase JW and to develop
software.
Net cash provided by financing activities of $2,834,539 during the six months
ended June 30, 2000 was the result of decreases in the receivable from parent
and affiliates, net of decreases in agency deposits for claims disbursements.
The net cash used in financing activities of $578,869 during the six months
ended June 30, 1999 was due primarily to a decrease in the receivable from
parent and affiliates, net of decreases in agency deposits for claims
disbursements. Net cash used in financing activities during the year ended
December 31, 1999 was $3,342,880. This use in financing was the result of the
settlement of intercompany loans, principally with The Progressive Corporation,
net of increases in agency deposits for claims disbursement. Net cash provided
by financing activities of $216,276 during the year ended December 31, 1998 was
the result of intercompany loans received, net of decreases in agency deposits
for claims disbursements.
During November 1999, UFAC sold a certain rental property, which was not
occupied by UFAC and related improvements to The Progressive Corporation for
$7,737,280 in a non-cash transaction. In exchange for the land and building, The
Progressive Corporation extinguished the related debt and the resulting net
proceeds were recorded through The Progressive Corporation's intercompany
account. The net difference of $1,106,810 between the sale price and the net
book value of the rental property less the related debt was recorded as
contributed capital from The Progressive Corporation.
Although Frontier Insurance Group, Inc. informed UFAC in April 2000 that it
would cease using UFAC's services for new claims, UFAC believes that the adverse
impact on liquidity was substantially eliminated due to the contract termination
penalty paid by Frontier Insurance Group, Inc., coupled with the existence of a
growing program with Enterprise-Rent-a-Car. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of UFAC - Six Months
ended June 30, 2000 as Compared to the Six Months Ended June 30, 1999."
UFAC, DBG and JW believe that their current cash balances are sufficient to meet
anticipated operating requirements for the next 12 months. As discussed in Note
1 to UFAC's consolidated financial statements included in Annex D, UFAC, DBG and
JW currently operate within Progressive's centralized cash management system
and, therefore, carry a substantial receivable from parent and affiliates
related to this centralized cash management arrangement. This balance is
adjusted based on daily cash activity (e.g. deposits to the centralized cash
management system increase the receivable, while disbursements decrease the
receivable). The total of the available cash on hand at June 30, 2000, together
with the receivable from parent and affiliates, was $6,292,616. UFAC is paid its
fees at the beginning of an engagement despite the fact that the process for
managing and adjusting a complex claim often takes three years or more, thereby
generating a strong initial cash flow. In addition, given the service nature of
the businesses, long-term working capital requirements are minimal. Although
UFAC, JW and DBG are service businesses, future capital requirements will depend
on many factors, including the level of investment made in new technologies,
improvements to existing technologies and the level of expenses required to
launch new products and services. However, 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. UFAC, DBG and JW do not currently have any material commitments for capital
expenditures, other than those disclosed in Note 5 to UFAC's Consolidated
Financial Statements included in Annex D and have sufficient liquid assets to
meet these commitments and anticipated operating requirements.
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.
26
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), Revenue Recognition in Financial Statements, which
provides guidance related to revenue recognition based on interpretations and
practices promulgated by the SEC. Before modification by SAB 101B, SAB 101 was
to be effective commencing with the first fiscal quarter of fiscal years
beginning after December 15, 1999 and required companies to report any changes
in revenue recognition as a cumulative change in accounting principles at the
time of implementation. In June 2000, the SEC issued SAB 101B, Second Amendment:
Revenue Recognition in Financial Statements, which delays implementation of SAB
101 until Frontier's fourth quarter of fiscal 2000. Frontier is currently
determining the effect, if any, that the implementation of SAB 101 will have on
its financial statements. No effect is anticipated.
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.
27
<PAGE>
MANAGEMENT
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning each of the directors and
executive officers of Frontier, UFAC, JW and DBG.
Name Age Position
---- --- --------
Frontier:
John M. Davies 43 Chairman of the Board and Director
Troy M. Huth 40 CEO, President and Director
James S. Rocke 32 Vice President
Jeffrey R. Harcourt 39 Treasurer, CFO and Director
Peter I. Cavallaro 38 Secretary
Jeffrey C. Jordan 44 Vice President and Director
William A. White 45 Vice President and Director
Laurel A. Park 27 Assistant Secretary
Louis T. Mastos 79 Director
William J. Rocke 76 Director
Jean E. Ryberg 68 Director
Kenneth A. Sexton 46 Director
UFAC:
John M. Davies 43 Sole Director
Troy M. Huth 40 President
Jeffrey R. Harcourt 39 Treasurer
Peter I. Cavallaro 38 Secretary
JW:
Troy M. Huth 40 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 40 President and Director
Jeffrey R. Harcourt 39 Treasurer and Director
Peter I. Cavallaro 38 Secretary
William A. White 45 Director
PETER I. CAVALLARO joined UFAC as Secretary and General Counsel and JW and DBG
as Secretary in November 1999. Mr. Cavallaro joined Netrex LLC, a
newly-organized financial services and technology company, in November 1999. Mr.
Cavallaro was appointed Frontier's Secretary in January 2000. From May 1990 to
March 1999, Mr. Cavallaro was employed by NationsBanc Auto Leasing, Inc.
(formerly named Oxford Resources Corp.), most recently serving as Senior Vice
President and General Counsel. 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.
JOHN M. DAVIES was appointed sole director of UFAC in November 1999. Mr. Davies
has been associated with Frontier as a director since April 1999 and Chairman of
the Board since January 2000. Since June 1999, Mr. Davies has also served as
President of Netrex LLC, a newly organized financial services and technology
company. From September 1989 through June 1999, Mr. Davies was employed by The
Progressive Corporation, most recently as Division President of Progressive's
28
<PAGE>
Diversified Business Group. Mr. Davies has an M.B.A. 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.
JEFFREY R. HARCOURT was appointed Treasurer of UFAC in November 1999, Treasurer
of JW in November 1998 and Treasurer and director of DBG in March 1999. Mr.
Harcourt has served as Chief Financial Officer of Frontier since August 1999, as
a director of Frontier since April 1999 and as Treasurer of Frontier since
January 2000. From October 1990 through November 1999, Mr. Harcourt was employed
by The Progressive Corporation, most recently as Controller of the Diversified
Business Group. Mr. Harcourt currently also serves as the Chief Financial
Officer of Netrex. Mr. Harcourt holds a B.S. 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.
TROY M. HUTH was appointed President of UFAC in June 1999 , Chairman of the
Board and director of JW in November 1999 and President and director of DBG in
November 1999. Mr. Huth has also served as President and director of Frontier
since April 1999, and was appointed CEO in January 2000. From April 1986 until
November 1999, Mr. Huth was employed by The Progressive Corporation in various
technology and management positions. Mr. Huth has a B.A. from Baldwin Wallace
College.
JEFFREY C. JORDAN has been Vice President and director of Frontier since April
1999. From September 1984 through November 1999 Mr. Jordan was employed by The
Progressive Corporation in numerous capacities, most recently as a division
claims manager. Mr. Jordan earned a B.A. degree from Rutgers University and a JD
from UCLA.
LOUIS T. MASTOS has been a director of Frontier since February 1978. From
February 1971 to present, Mr. Mastos has been the President of Louis T. Mastos &
Associates, Inc., a managing general insurance agency located in Reno, Nevada.
He is past President of the American Association of Managing General Agents. Mr.
Mastos was the Insurance Commissioner of the State of Nevada from 1965 to 1971.
LAUREL A. PARK has been employed by Frontier since June 1995 and currently
serves as Controller. In January 2000, Ms. Park was appointed as Frontier's
Assistant Secretary. Ms. Park holds a B. S. degree in accounting from Arizona
State University.
JAMES S. ROCKE has been employed by Frontier since December 1982 and has served
in various positions including Secretary and Treasurer of Frontier from January
1993 to January 2000. In January 2000, Mr. Rocke was elected a Vice President of
Frontier and currently serves in that capacity. Mr. Rocke holds a B.S. degree in
Finance from Arizona State University. Mr. Rocke is the son of William J. Rocke.
WILLIAM J. ROCKE founded Frontier in 1957 and served as an executive officer of
Frontier and its predecessor entities from May 1957 through June 2000 and has
been a director of Frontier since May 1975. Mr. Rocke holds a law degree from
the University of Denver and is a member of the Colorado Bar Association. Mr.
Rocke retired as Chairman of the Board and Chief Executive Officer of Frontier
in June 1999. Mr. Rocke is the father of James S. Rocke.
JEAN E. RYBERG was employed by the Frontier in several capacities from October
1962 through June 1999, most recently as President of Frontier from January 1993
through June 1999, when she retired. Mrs. Ryberg has been a director of Frontier
since May 1975.
KENNETH A. SEXTON was appointed as a director of Frontier in January 2000. Mr.
Sexton currently serves as Senior Vice President of Finance and Administration
and Chief Financial Officer of Merant, a worldwide technology and software
company. Mr. Sexton has served in various positions with Merant and its related
companies since 1991. Mr. Sexton holds a B.S. degree in business from Ohio State
University and is a Certified Public Accountant.
29
<PAGE>
WILLIAM A. WHITE was appointed as a director of JW and DBG in March 1999. Mr.
White has served as a director of Frontier since April 1999 and was appointed
Vice President of Frontier in January 2000. From May 1985 to November 1999, Mr.
White was employed by The Progressive Corporation, managing the Diversified
Claims Business Group. Mr. White holds a master's degree from the University of
Southern California and undergraduate degree in Business Administration from
John Carroll University.
JAMES T. WIELAND has served as the President for JW Software, Inc. from October
1990 to present. Mr. Wieland holds a B.S. degree from the University of
Missouri, St. Louis with an emphasis in Information Systems and Financial
Accounting.
Immediately following the Merger, the Board of Directors and management team of
Frontier are expected to remain substantially unchanged. The Board of Directors
may consider additional candidates to serve on the Board of Directors or to fill
vacancies that may arise prior to the next annual meeting of shareholders.
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.
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical consolidated
financial information for Frontier for the five years ended June 30, 2000. 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 four years ended June, 30, 1999 were audited by McGladrey &
Pullen, LLP. The financial information for the year ended June 30, 2000 is
unaudited and reflects in the opinion of management all adjustments necessary
for a fair presentation of such information.
FRONTIER ADJUSTERS OF AMERICA, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenue $ 6,256,896 $ 6,341,584 $ 5,825,348 $ 6,164,603 $ 5,641,984
Net income 1,240,369 546,452 612,475 979,198 1,134,519
Comprehensive income 1,246,420 517,505 578,854 1,069,110 1,113,186
Basic earnings per share 0.14 0.12 0.13 0.21 0.25
Diluted earnings per share 0.14 0.12 0.13 0.21 0.25
Weighted average number of
shares used in per share
data: Basic 8,957,586 4,569,049 4,605,358 4,607,709 4,620,101
Diluted 8,957,586 4,570,113 4,612,674 4,631,898 4,627,606
Cash dividends per share -- $ 1.6375 $ 0.15 $ 0.15 $ 0.14
BALANCE SHEET DATA
Working capital $ 3,533,324 $ 2,073,511 $ 3,214,489 $ 3,261,953 $ 3,196,562
Total assets 6,720,093 12,118,984 7,800,700 7,912,139 6,875,752
Long-term debt -- -- 4,953 33,462 59,983
Property and equipment, net 1,622,389 1,608,936 1,724,329 1,736,226 1,554,401
Stockholders' equity 6,300,340 5,053,633 6,452,241 6,564,193 6,230,799
Book value per share 0.70 0.56 1.40 1.43 1.35
Retained earnings 4,263,100 3,022,731 4,735,935 4,814,266 4,526,419
Total shares outstanding 8,957,660 8,957,560 4,605,358 4,605,358 4,619,658
</TABLE>
31
<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, and for the six-month periods ended June 30, 2000 and
June 30, 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. The financial statements for the six-month periods
ended June 30, 2000 and 1999 is unaudited and reflects, in the opinion of the
management of UFAC, 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 another interim term.
UNITED FINANCIAL ADJUSTING COMPANY AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998
------------ ------------
INCOME STATEMENT DATA
Operating revenue $ 16,976,448 $ 9,361,239
Net income 412,473 178,346
BALANCE SHEET DATA
Working capital (deficit) $ 643,814 $ (9,270,101)
Total assets 21,979,681 11,591,747
Long-term debt -- --
Property and equipment, net 2,734,098 7,669,667
Stockholders' equity
(deficit) 6,071,014 (1,279,906)
Book value per share 6.07 (1.28)
Accumulated deficit (2,096,463) (2,508,936)
SIX MONTHS ENDED JUNE 30
---------------------------------
2000 1999
------------ ------------
INCOME STATEMENT DATA
Operating revenue $ 11,346,148 $ 6,535,145
Net income 335,690 200,450
BALANCE SHEET DATA
Working capital (deficit) $ (981,700) $ (9,107,209)
Total assets 19,947,502 15,085,211
Long-term debt 261,333 --
Property and equipment, net 3,900,081 7,868,771
Stockholders' equity
(deficit) 6,406,704 (1,079,456)
Book value per share 6.41 (1.08)
Accumulated deficit 1,760,773 2,308,486
32
<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
Fourth Quarter 4.000 2.500 240,500
Fiscal 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
As of May 2, 2000, the date the Merger Agreement was signed, and as of
_____________, 2000, the closing price of Frontier Common Stock on the AMEX, was
$3.50 and $______ per share, respectively. None of the securities of UFAC, DBG
and JW are publicly traded and, therefore, no market price information is
available for these companies. Frontier has approximately 220 holders of record
and 800 beneficial holders of its Common Stock.
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
Fourth 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
Upon completion of the merger, Frontier intends to retain its earnings to
finance the development, expansion and growth of its business. Consequently, the
Board of Directors does not currently anticipate the payment of any dividends to
Frontier's shareholders in the foreseeable future.
33
<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, 1999 for
purposes of the statements of operations, and as if it had been completed on
June 30, 2000 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.
34
<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 June 30, 2000 UFAC and Pro Forma Pro Forma
Unaudited Subsidiaries(1) Frontier(1) Adjustments Combined
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 2,016,959 $ 2,132,297 $ -- $ 4,149,256
Accounts receivable, net 4,052,523 1,344,935 -- 5,397,458
Receivables from parent and affiliates 4,275,657 -- -- 4,275,657
Other Assets 149,662 264,737 -- 414,399
Prepaid expenses 114,835 211,108 -- 325,943
------------ ------------ ------------ ------------
Total current assets 10,609,636 3,953,077 -- 14,562,713
Property and equipment, net 3,900,081 1,622,389 -- 5,522,470
Receivables (Long Term) -- 200,000 -- 200,000
Investments (Long Term) -- 628,661 -- 628,661
Other assets 7,145 285,900 -- 293,045
Goodwill, net of amortization 5,430,640 30,066 5,536,159(2) 10,996,865
------------ ------------ ------------ ------------
Total assets $ 19,947,502 $ 6,720,093 $ 5,536,159 $ 32,203,754
============ ============ ============ ============
Liabilities and Shareholders' Equity
Current liabilities $ 11,591,336 $ 419,753 $ -- $ 12,011,089
Note payable 261,333 -- -- 261,333
Deferred tax liability 984,346 -- -- 984,346
Deferred revenue 703,783 -- -- 703,783
------------ ------------ ------------ ------------
Total liabilities 13,540,798 419,753 -- 13,960,551
Commitments and contingencies
Shareholders' equity:
Common stock 10,000 90,191 105,815(3) 206,006
Paid-in capital 8,157,477 2,104,413 9,693,444(3) 19,955,334
Treasury stock -- (184,068) -- (184,068)
Other -- 26,704 -- 26,704
Retained earnings (deficit) (1,760,773) 4,263,100 (4,263,100)(3) (1,760,773)
------------ ------------ ------------ ------------
Total shareholders' equity 6,406,704 6,300,340 5,536,159 18,243,203
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 19,947,502 $ 6,720,093 $ 5,536,159 $ 32,203,754
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information
35
<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, 2000 UFAC and Pro Forma Pro Forma
Unaudited Subsidiaries(1) Frontier(1) Adjustments Combined
--------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $21,571,260 $ 6,256,896 $ -- $ 27,828,156
Cost and expenses
Compensation and employee benefits 13,636,856 1,984,581 -- 15,621,437
Office and overhead expenses 6,437,243 1,810,477 -- 8,247,720
Depreciation and amortization 1,157,808 218,615 276,808(4) 1,653,231
----------- ------------ ------------ ------------
Total costs and expenses 21,231,907 4,013,673 276,808 25,522,388
Income from operations 339,353 2,243,223 (276,808) 2,305,768
Other income (expense)
Misc gains/losses -- 31,935 -- 31,935
Interest income (expense) 100,126 155,038 -- 255,164
Frontier service fees 300,000 (360,741) -- (60,741)
Rental income 98,047 -- -- 98,047
----------- ------------ ------------ ------------
Total other income (loss) 498,173 (173,768) -- 324,405
Income before taxes and minority interest 837,526 2,069,455 (276,808) 2,630,173
Income taxes 593,639 829,086 -- 1,422,725
Income before minority interest 243,887 1,240,369 (276,808) 1,207,448
Minority interest 65,405 -- -- 65,405
----------- ------------ ------------ ------------
Net income $ 309,292 $ 1,240,369 $ (276,808) $ 1,272,853
=========== ============ ============ ============
Net earnings per share - basic $ 0.03(5) $ 0.14 $ 0.06(5)
=========== ============ ============
Net earnings per share - diluted $ 0.03(5) $ 0.14 $ 0.06(5)
=========== ============ ============
Weighted average shares outstanding - basic 11,581,487(5) 8,957,586 20,539,073(5)
=========== ============ ============
Weighted average shares outstanding - diluted 11,581,487(5) 8,957,586 20,539,073(5)
=========== ============ ============
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information
36
<PAGE>
[PURPOSELY LEFT BLANK]
37
<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 on a carved-out basis and do not include
all majority-owned subsidiaries on a consolidated basis. They have been
prepared to reflect the financial position and results of operations of
only those companies that are a party to the Transaction (i.e., UFAC, JW
and DBG).
(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, to the extent of the shares not already
owned by UFAC, 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
(Average market value of Frontier's common stock for the
three days prior to and subsequent to the announced merger)
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 $(2,601,744)
-----------
Step-up of Frontier assets and liabilities to fair value $ 5,536,159
===========
Upon the closing of the merger, the step-up in the fair value of Frontier's
assets and liabilities, to the extent not already owned by UFAC, 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 $5,536,159
Decrease in additional paid-in capital due to increase
in common stock (115,815)
Elimination of Frontier retained earnings 4,263,100
Elimination of UFAC common stock 10,000
----------
$9,693,444
==========
(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 annual net income would decrease by
$276,808 $(0.01 per share).
(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.
38
<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 Frontier 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
Frontier and (iii) by all directors and executive officers of Frontier 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(3) -- * -- *
John M. Davies(3)(6) 500 * 500 *
Jeffrey R. Harcourt(3) -- * -- *
Troy M. Huth(3) -- * -- *
Jeffrey C. Jordan(3) -- * -- *
Louis T. Mastos and Eva B. Mastos, his wife(3)(7) 207,103 2.31% 207,103 1.01
Laurel A. Park(3) -- * -- *
William J. Rocke and Garnet Rocke, his wife(3)(8) 415,332 4.64% 415,332 2.02
James S. Rocke and Kelly Rocke, his wife(3)(9) 444,867 4.97% 444,867 2.17
Jean E. Ryberg(3)(10) 97,960 1.09% 97,960 *
Kenneth A. Sexton(3) -- * -- *
William A. White(3) -- * -- *
All officers and directors as a
group (twelve persons)(11) 875,762 9.78% 875,762 4.26
FIVE PERCENT SHAREHOLDERS
United Financial Adjusting Company(4)(12) 5,258,513 58.7% -- --
Netrex Holdings, LLC(5)(13) -- -- 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.
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(3) Each of such persons may be reached through Frontier at 45 East Monterey
Way, Phoenix, Arizona 85012.
(4) May be reached at 31500 Solon Road, Solon, Ohio 44139.
(5) May be reached at 270 South Service Road, Suite 45, Melville, New York
11747-2339.
(6) 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.
(7) 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.
(8) 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.
(9) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona of
which James S. Rocke holds 49% of the outstanding stock.
(10) Excludes 28,000 shares held by Mrs. Ryberg's sons and grandchildren, in
which she disclaims any beneficial interest.
(11) Excludes all duplication of shared holdings required to be reported by more
than one officer or director.
(12) Includes 5,258,513 shares owned by UFAC. These shares were purchased
directly from Frontier in April 1999. As a result there was a change in
control of Frontier. UFAC is a wholly owned subsidiary of Netrex. Netrex is
owned 51.4% by The Progressive Corporation and 48.6% by NCG which is
wholly-owned by Netrex LLC. The Progressive Corporation is a large
publicly-traded corporation. According to certain insurance regulatory
filings dated March 30, 2000 of The Progressive Corporation, Peter B.
Lewis, President and Chief Executive Officer of The Progressive
Corporation, owns approximately 13.1% of the outstanding common stock of
that company. Netrex LLC is a limited liability company, the manager of
which is Duck Pond Corp., which is a privately-held corporation having
voting control and investment power of Netrex LLC. Each of Michael C.
Pascucci, Christopher S. Pascucci and Ralph P. Pascucci owns one-third of
the outstanding stock of and each is a director of (together constituting
all of the directors of) Duck Pond Corp. The Progressive Corporation, NCG,
Netrex LLC, Netrex, Duck Pond Corp., Peter B. Lewis, Michael C. Pascucci,
Christopher S. Pascucci and Ralph P. Pascucci each disclaims that it is the
beneficial owner of Frontier's shares owned by UFAC for purposes of Section
13(d) or (g) of the Securities Exchange Act of 1934, as amended.
(13) 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, NCG, Netrex LLC, Netrex, Duck Pond Corp., Peter B.
Lewis, Michael C. Pascucci, Christopher S. Pascucci, and Ralph P. Pascucci
each disclaims that it is the beneficial owner of Frontier'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 Frontier, 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).
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--------------------------------------------------------------------------------
PROPOSAL TWO
--------------------------------------------------------------------------------
NOMINEES
A Board of nine directors is to be elected at the Annual Meeting. The nominees
for directors are R. Steven Brooks, Peter I. Cavallaro, John M. Davies, Jeffrey
R. Harcourt, Troy M. Huth, Jeffrey C. Jordan, Matthew P. Lawlor, Stephen V.
Murphy and Kenneth A. Sexton. In the absence of direction by shareholders
executing proxies, the persons named in the enclosed proxy will vote FOR the
nominees named herein. In the event that any nominee of Frontier is unable or
declines to serve as a director at the time of the Annual Meeting, the proxies
will be voted for any nominee designated by the current Board of Directors to
fill the vacancy. It is not presently expected that any nominee will be unable
or will decline to serve as director. The term of office of each person elected
as director will continue until the next annual meeting of shareholders and
until a successor has been elected and qualified.
INFORMATION CONCERNING NOMINEES FOR DIRECTORS OF FRONTIER
The following table sets forth certain information regarding Frontier's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH FRONTIER DIRECTOR SINCE
---- --- ------------------------- --------------
<S> <C> <C> <C>
R. Steven Brooks 53 Director Nominee
Peter I. Cavallaro 38 Director, Secretary and General Counsel Nominee
John M. Davies 43 Director and Chairman of the Board 1999
Jeffrey R. Harcourt 39 Director, Chief Financial Officer and Treasurer 1999
Troy M. Huth 40 Director, Chief Executive Officer and President 1999
Jeffrey C. Jordan 44 Director and Vice President 1999
Matthew P. Lawlor 52 Director Nominee
Stephen V. Murphy 55 Director Nominee
Kenneth A. Sexton 46 Director 2000
</TABLE>
Biographies of Peter I. Cavallaro, John M. Davies, Jeffrey R. Harcourt, Troy M.
Huth, Jeffrey C. Jordan, and
Kenneth A. Sexton may be found under "Proposal One - Parties to the Transaction
- Management."
R. STEVEN BROOKS has served as the President and CEO of Phoenix American
Insurance Group, a company that specializes in marketing, underwriting, claims,
and financial administration of extended service contracts, including
automobile, RV, motorcycle and marine products since 1985. Mr. Brooks holds a
B.A. degree from Duke University and holds an MBA from North American
University.
MATTHEW P. LAWLOR has been the Chairman and CEO of Online Resources since 1989.
Mr. Lawlor headed a consumer banking division of Chemical Bank in New York and
directed Chemical's international investment company from 1973 to 1980. Mr.
Lawlor holds a B.S. degree from the University of Pennsylvania and an MBA from
Harvard University.
STEPHEN V. MURPHY has been the President of S.V. Murphy & Co., Inc., an
investment banking firm providing strategic financial advisory services to
financial, retailing, electronic commerce and other corporations, since 1991.
Mr. Murphy holds a B.S. degree from Georgetown University and an M.B.A. from
Columbia University Graduate School of Business. Mr. Murphy also serves on the
Boards of Directors of UST Private Equity Investors Fund, Inc., Excelsior
Private Equity Fund II, Inc., and Holborn Corporation.
The Audit Committee of the Board for the fiscal year ended June 30, 2000
consisted of Louis T. Mastos, Jean E. Ryberg, and Kenneth A. Sexton,
non-employee directors of Frontier. The Audit Committee reviews annual financial
statements, any significant accounting issues, and the scope and results of the
audit performed by Frontier's independent auditors, and discusses with the
auditors any other audit related matters that may arise during the year. In May,
2000, the Board adopted a written charter for the Audit Committee. A copy is
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attached as Annex E. Under AMEX rules, Messrs. Mastos and Sexton are independent
directors. Ms. Ryberg is not considered independent because she was employed by
Frontier within the last four years. The Board appointed Ms. Ryberg to the Audit
Committee to help represent a consistent approach to accounting and financial
control issues during the past fiscal year in which Frontier underwent a change
in management.
Frontier's Board of Directors met five times in fiscal year 2000, and all
members attended 75% or more of the meetings of the Board and committees he or
she serves on.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Frontier's Board of Directors serves as Frontier's Compensation Committee. No
member of the current Board had any contractual or other relationships with
Frontier during the last completed fiscal year, other than their serving as
directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
during the years ended June 30, 2000, 1999 and 1998 to the chief executive
officer and each other executive officer whose aggregate compensation exceeded
$100,000 (the "Named Executives").
SUMMARY COMPENSATION TABLE (1)
ALL OTHER
ANNUAL COMPENSATION COMPENSATION
----------------------- ------------
NAME AND PRINCIPAL POSITION YEAR SALARY($)(2) BONUS($) ($)
--------------------------- ---- ------------ -------- -------
Troy M. Huth, Director, CEO 2000 (3) (3) (3)
and President 1999
1998
----------
(1) Columns (e), (f), (g) and (h) were not included as no such compensation was
granted.
(2) No perquisites were received by any person named above greater than the
lesser of $50,000 or 10% of salary plus bonus.
(3) Mr. Huth's services and the services of other executive officers of
Frontier are provided to Frontier by UFAC under a contract where Frontier
pays $25,000 per month for services consisting of management, marketing,
technology, human resource support and accounting and reporting services.
OPTION/SAR GRANTS, EXERCISES, AND HOLDINGS
Frontier did not grant any stock options during fiscal 2000 nor were there any
options outstanding as of June 30, 2000 for any of the Named Executive.
DIRECTORS' COMPENSATION
Each director, including employees of Frontier, but excluding employees of UFAC
or Netrex, is paid $1,000 per Board meeting attended ($750 per meeting prior to
March 1, 2000). During fiscal 2000, each such director, except for Kenneth A.
Sexton, received $2,750 for attendance at Board meetings. Mr. Sexton received
$2,000 for attendance at Board meetings.
REPORT OF THE COMPENSATION COMMITTEE
For the fiscal year ended June 30, 2000, the Compensation Committee was
comprised of the entire Board. The Board, acting as the Compensation Committee,
establishes policies relating to the compensation of employees. The following is
a report submitted by the Board members in their capacity as the Compensation
Committee, addressing Frontier's compensation policy as it relates to the named
executive officers for fiscal 2000.
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COMPENSATION POLICY
The goal of Frontier's executive compensation policy is to ensure that an
appropriate relationship exists between executive pay and the creation of
shareholder value, while at the same time motivating and retaining key
employees. To achieve this goal, Frontier has implemented a gainsharing program
for all employees during fiscal 2000. The program is designed to reward
employees, including executive employees, for exceptional growth and return on
revenue. Disbursements under the program are made at the discretion of the
Board, if targets set by the Board, are met. Annual cash compensation, together
with equity-based, incentive compensation is designed to attract and retain
qualified executives and to ensure that such executives have a continuing stake
in the long-term success of Frontier. All executive officers and management are
eligible to participate in Frontier's Stock Option Plan.
FISCAL 2000 COMPENSATION
Frontier's fiscal 2000 executive compensation plan consisted of (i) a base
salary and (ii) gainsharing based upon Frontier's revenue targets. No stock
options were granted by the Board during fiscal 2000.
The Board believes that linking executive compensation to corporate performance
(i.e., revenue targets and pre-tax profitability targets) provides incentive to
the executive to enhance corporate performance and the shareholders' interests.
It was with this in mind that the gainsharing portion of executive compensation
was revised to the current arrangement with Frontier's named executives.
COMPANY PERFORMANCE
The following graph reflects a five-year comparison of cumulative total returns
for the Common Stock, the American Stock Exchange ("AMEX") Market Value Index,
and Frontier's Peer Group of Stocks based on the four digit SIC Code Index. The
total cumulative return on investment (change in the year-end stock price plus
reinvested dividends) for each of the periods and indexes is based on the stock
price or composite index at the end of fiscal 1995. The graph compares the
performance of Frontier with AMEX and Peer Group Indexes with the investment
weighted based upon market capitalization.
6/30/95 6/30/96 6/30/97 6/30/98 6/30/99 6/30/00
------- ------- ------- ------- ------- -------
Frontier Adjusters 100.00 117.17 109.97 134.92 191.41 225.86
Industry 100.00 117.41 161.21 211.28 223.60 271.41
AMEX Market Index 100.00 114.50 121.78 140.79 138.50 159.25
CERTAIN TRANSACTIONS
Old Frontier Investment, Inc. of Arizona, of which William J. Rocke and Garnet
Rocke, his wife, own 51% of the issued and outstanding stock and James S. Rocke
owns the remaining 49%, has entered into a license agreement with Frontier
pursuant to which it operates, under standard terms and conditions, an insurance
adjusting and risk management business located in Scottsdale, Arizona, and is
paid a 5% royalty on gross revenue derived from services provided by certain
other licenses in other Arizona cites and towns. Frontier paid Old Frontier
Investment, Inc. $14,448 during fiscal year 2000 in connection with such 5%
royalty agreement.
George M. Hill, a shareholder and a former Vice President and Director of
Frontier, acts as outside counsel to Frontier. During the fiscal year ended June
30, 2000, Frontier paid Mr. Hill's law firm $42,774 for services rendered and
disbursements. Such fees will continue to accrue, pursuant to a retainer
agreement, at the rate of $3,000 per month effective June 1, 1999.
In April 1999, Frontier entered into an agreement with UFAC whereby Frontier
pays a $25,000 monthly fee for marketing, managerial, technological, human
resource support, financial and reporting support, the full-time services of
Jeffrey C. Jordan, and other services and resources. As of June 30, 2000,
Frontier had incurred $300,000 in service fees related to this agreement, as
well as an additional $60,741 for services performed outside of the agreement,
for an aggregate of $360,741.
Frontier believes that the cost to Frontier for all of the foregoing was and is
competitive with charges for similar services and facilities available from
third parties.
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COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of copies of such forms received by Frontier during
fiscal year ended June 30, 2000, and written representations that no such
reports were required, Frontier believes that each person who, at any time
during such fiscal year, was a director, officer or beneficial owner of more
than 10% of the Common Stock complied with Section 16(a) filing requirements
during such fiscal year.
--------------------------------------------------------------------------------
PROPOSAL THREE
--------------------------------------------------------------------------------
INTRODUCTION
On August 29, 2000, Frontier's Board of Directors adopted Frontier's 2000 Stock
Option Plan (the "2000 Plan"), subject to approval by Frontier's shareholders
within 12 months of August 29, 2000. Under the Transaction, options held by
employees of UFAC will convert to Frontier options issued under the 2000 Plan.
The 2000 Plan is intended to promote the interests of Frontier by providing key
personal (including directors and officers of Frontier, consultants, and other
independent contractors who provide valuable services to Frontier) with the
opportunity to acquire, or otherwise increase, their proprietary interests in
Frontier as an incentive to remain in service to Frontier. The full text of the
2000 Plan as proposed to be adopted is included as Annex B to this Proxy
Statement. The Board of Directors recommends a vote "for" the proposal to adopt
the 2000 Plan.
The Board of Directors believes that the 2000 Plan will aid Frontier in
attracting and retaining directors, officers, and key employees and motivating
such persons to exert their best efforts on behalf of Frontier. In addition, the
Board of Directors expect that the 2000 Plan will constitute a significant part
of the compensation program for employees and will further strengthen the
identity of interest of the directors, officers, and key employees of Frontier
with that of the Frontier's shareholders. For the reasons given above, the Board
of Directors believes that it is in the best interests of Frontier to approve
the adoption of the 2000 Plan in order to enable Frontier to continue to grant
options and/or issue shares of Common Stock to its key personnel, non-employee
directors, consultants, and other persons.
DESCRIPTION OF THE 2000 PLAN
GENERAL
The 2000 Plan provides for the grant of options to acquire Common Stock of
Frontier ("Options"), the direct grant of Common Stock ("Stock Awards"), the
grant of stock appreciation rights ("SARs"), and the grant of other cash awards
("Cash Awards") (Stock Awards, SARs, and Cash Awards are collectively referred
to herein as "Awards").
The 2000 Plan states that it is not intended to be the exclusive means by which
Frontier may issue options or warrants to acquire its Common Stock, stock
awards, or any other type of award. To the extent permitted by applicable law,
Frontier may issue any other options, warrants, or awards other than pursuant to
the 2000 Plan without stockholder approval.
SHARES SUBJECT TO THE PLAN
A maximum of 2,000,000 shares of Common Stock of Frontier may be issued under
the 2000 Plan. If any Option or SAR terminates or expires without having been
exercised in full, stock not issued under such Option or SAR will again be
available for the purposes of the 2000 Plan. If any change is made in the stock
subject to the 2000 Plan or subject to any Option or SAR granted under the 2000
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, split-up, combination of shares, exchange of shares, change in
corporate structure, or otherwise), the 2000 Plan provides that appropriate
adjustments will be made as to the maximum number of shares subject to the 2000
Plan and the number of shares and exercise price per share of stock subject to
outstanding Options or Awards.
44
<PAGE>
ELIGIBILITY AND ADMINISTRATION
Options and Awards may be granted pursuant to the Discretionary Program only to
persons ("Eligible Persons") who at the time of grant are either (i) key
personnel (including officers and directors) of Frontier or its parent or
subsidiaries or (ii) consultants and independent contractors who provide
valuable services to Frontier or its parent or subsidiaries. Options may be
incentive stock options or non-qualified stock options. Options that are
incentive stock options may be granted only to key personnel of Frontier who are
also employees of Frontier. To the extent that granted Options are incentive
stock options, the terms and conditions of those Options must be consistent with
the qualification requirements set forth in the Internal Revenue Code of 1986,
as amended.
The power to administer the 2000 Plan is vested with the Board of Directors of
Frontier or with a committee appointed by the Board of Directors. The Plan
Administrator determines (i) which of the Eligible Persons in its group with be
granted Options and Awards; (ii) the amount and timing of the grant of such
Options and Awards; and (iii) such other terms and conditions as may be imposed
by the Plan Administrator consistent with the 2000 Plan. The maximum number of
shares of stock with respect to which Options or SARs may be granted to any
employee (including officers) during the term of the 2000 Plan may not exceed
50% of the shares of Common Stock covered by the 2000 Plan.
TERMS AND CONDITIONS OF OPTIONS; EXERCISE OF OPTIONS
The Plan Administrator will determine the expiration date, maximum number of
shares purchasable, and the other provisions of the Options at the time of
grant. Options may be granted for terms of up to 10 years. Options will vest and
become exercisable in whole or in one or more installments at such time as may
be determined by the Plan Administrator upon the grant of the Options. However,
the Board of Directors has the discretion to provide for the automatic
acceleration of the vesting of any Options or Awards granted under the 2000 Plan
in the event of a "Change in Control," as defined in the 2000 Plan.
The Plan Administrator also will determine the exercise prices of Options at the
time of grant. However, the exercise price of any Option intended to be an
incentive stock option may not be less than 100% of the fair market value of the
Common Stock at the time of the grant (110% if the Option is granted to a person
who at the time the Option is granted owns stock possessing more than 10% of the
total combined voting power of all classes of stock of Frontier). On
_______________, 2000, the closing price of Frontier's Common Stock on the AMEX
was $________ per share. To exercise an Option, the optionholder will be
required to deliver to Frontier full payment of the exercise price for the
shares as to which the Option is being exercised. Generally, Options can be
exercised by delivery of cash, check, or shares of Common Stock of Frontier.
TERMINATION OF EMPLOYMENT OR SERVICES
Except as otherwise allowed by the Plan Administrator, Options and Awards
granted under the 2000 Plan are nontransferable other than by will or by the
laws of descent and distribution upon the death of the holder and, during the
lifetime of the holder, are exercisable only by such holder. In the event of the
termination of the holder's services with Frontier, other than for death or
disability, the holder may exercise any Options or SARs that are vested but
unexercised on the date his or her service is terminated until the earlier of
(i) ninety days after the date of termination of service, or (ii) the expiration
date of Options or SARs. If termination is by reason of disability, however, the
holder may exercise his or her Options or SARs until the earlier of (i) one year
after the termination of service, or (ii) the expiration of the term of the
Options or SAR. If the holder dies while in service to Frontier, the holder's
estate or successor by bequest or inheritance may exercise any Options or SARs
that the holder was entitled to exercise on the date of his or her death at any
time until the earlier of (i) the period ending one year after the holder's
death, or (ii) the expiration o the term of the Option or SAR.
AWARDS
SARs will entitle the recipient to receive a payment equal to the appreciation
in market value of a stated number of shares of Common Stock from the price on
the date the SAR was granted or became effective to the market value of the
Common Stock on the date first exercised or surrendered.. Stock Awards will
entitle the recipient to receive shares of Frontier's Common Stock directly.
Cash Awards will entitle to recipient to receive direct payments of cash
depending on the market value or the appreciation of the Common Stock or other
securities of Frontier. The Plan Administrator may determine such other terms,
conditions, or limitations, if any, on any Awards granted pursuant to the 2000
Plan.
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DURATION AND MODIFICATION
The 2000 Plan will remain in effect until August 29, 2010. The Board of
Directors of Frontier may at any time suspend, amend, or terminate the 2000
Plan, except that without approval of the shareholders of Frontier, the Board of
Directors may not (i) increase the maximum number of shares of Common Stock
subject to the 2000 Plan (except in the case of certain organic changes to
Frontier), or (ii) take such action if shareholder approval is required to
comply with Section 422 of the Code with respect to Incentive Stock Options or
for purposes of Section 162(M) of the Code. In addition, the Board may not,
without the consent of the optionholder, take any action that disqualifies any
Option previously granted under the Plan for treatment as an incentive stock
option or which adversely affects or impairs the rights of the optionholder of
any outstanding Option. Notwithstanding the foregoing, the Board of Directors
may amend the 2000 Plan from time to time as it deems necessary in order to meet
the requirements of any amendments to Rule 16b-3 under the Exchange Act without
the consent of the stockholders of Frontier.
FEDERAL INCOME TAX CONSEQUENCES
Certain Options granted under the Plan will be intended to qualify as incentive
stock options under Section 422 of the Code. Accordingly, there will be no
taxable income to an employee when an incentive stock option is granted to him
or when that option is exercised. The amount by which the fair market value of
the shares at the time of exercise exceeds the exercise price generally will be
treated as an item of preferences in computing the alternative minimum taxable
income of the optionholder. If an optionholder exercises an incentive stock
option and does not dispose of the shares within either two years after the date
of the grant of the Option or one year of the date the shares were transferred
to the optionholder, any gain realized upon disposition will be taxable to the
optionholder as a capital gain. If the optionholder does not satisfy the
applicable holding periods, however, the difference between the exercise price
and the fair market value of the shares on the date of exercise of the Option
will be taxed as ordinary income, and the balance of the gain, if any, will be
taxed on capital gain. If the shares are disposed of before the expiration of
the one-year and two-year periods and the amount realized is less than the fair
market value of the shares at the date of exercise, the employee's ordinary
income is limited to the amount realized less the exercise price paid. Frontier
will be entitled to a tax deduction only to the extent the optionholder has
ordinary income upon the sale or other disposition of the shares received when
the Option was exercised.
Certain other Options issued under the Plan, including Automatic Options issued
to non-employee members of the Board of Directors, also may be nonqualified
options. The income tax consequences of nonqualified options and Stock Awards
will be governed by Section 83 of the Code. Under Section 83, the excess of the
fair market value of the shares of Frontier's Common Stock acquired pursuant to
the grant of a Stock Award or the value of the shares of Frontier's Common Stock
acquired pursuant to the grant of a Stock Award or the exercise of any Option
over the amount paid for such stock (hereinafter referred to as "Excess Value")
must be included in the gross income of the participant in the first taxable
year in which the Common Stock acquired by the participant is not subject to a
substantial risk of forfeiture. In calculating Excess Value, fair market value
will be determined on the date that the substantial risk of forfeiture expires,
unless a Section 83(b) election is made to include the Excess Value in income
immediately after the acquisition, in which case fair market value will be
determined on the date of the acquisition. Generally, Frontier will be entitled
to a federal income tax deduction in the same taxable year that the participant
recognizes income. Frontier will be required to withhold income taxes with
respect to income reportable pursuant to Section 83 by a participant. The basis
of the shares acquired by an optionholder will be equal to the exercise price of
those shares plus any income recognized pursuant to Section 83. Subsequent sales
of the acquired shares will produce capital gain or loss. Such capital gain or
loss will be long term if the stock has been held for one year from the date the
substantial risk of forfeiture lapsed, or, if a Section 83(b) election is made,
one year from the date the shares were acquired.
Generally, all Cash Awards granted to employees will be treated as compensation
income to the employees when the cash payment is made pursuant to the award.
Such cash payment will also result in a federal income tax deduction for
Frontier.
RATIFICATION BY SHAREHOLDERS AND DURATION OF THE 2000 PLAN
Approval of the adoption of the 2000 Plan will require the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock of Frontier
present in person or by proxy at the Annual Meeting. Upon approval of the 2000
Plan by Frontier's shareholders, any Options or Awards granted pursuant to the
2000 Plan prior to stockholder approval will remain valid and unchanged and the
2000 Plan will continue in effect until August 29, 2010. In the event that the
2000 Plan is not approved by the shareholders of Frontier within 12 months after
August 29, 2000, the 2000 Plan and all Options and Awards granted pursuant to
the 2000 Plan will automatically terminate and be forfeited as though the 2000
Plan had never been adopted.
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--------------------------------------------------------------------------------
PROPOSALS FOUR THROUGH ELEVEN
--------------------------------------------------------------------------------
BACKGROUND
Frontier became an Arizona corporation in 1983, when its Articles of
Incorporation ("Articles") were filed with the Arizona Corporation Commission on
October 7, 1983. On October 20, 1986, Frontier amended its Articles of
Incorporation to change its corporate name to Frontier Adjusters of America,
Inc. On November 12, 1987, Frontier 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, Frontier filed a third amendment that added an exemption from
the Arizona Takeover Act. On April 26, 1999, Frontier 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 Frontier without any further action by Frontier.
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 Frontier 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
Frontier'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. While the effectiveness of each
of the following proposals is not conditional on the approval of the other
proposals found in this Proxy Statement, including approval of the Transaction,
they work together to conform Frontier's Articles of Incorporation to the
revised Business Corporation Act.
--------------------------------------------------------------------------------
PROPOSAL FOUR
PROPOSAL TO CONFORM CURRENT LIMITATION OF LIABILITY
PROVISIONS WITH BUSINESS CORPORATION ACT
--------------------------------------------------------------------------------
The Articles currently eliminate the personal liability of directors to Frontier
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 Frontier to Frontier or its
shareholders for money damages for any action taken or failure to take any
action as a director of Frontier, to the fullest extent allowed by law. Under
the Business Corporation Act, Frontier 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 Frontier 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
Restated Articles is to eliminate the right of Frontier and its shareholders
(through shareholders' derivative suits on behalf of Frontier) 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 Frontier 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 Frontier's directors.
The Board of Directors believes that these revisions respecting the limitation
of directors' liabilities are necessary to enable Frontier to attract and retain
qualified persons to serve as directors of Frontier. The Board of Directors
recommends a vote FOR the proposal to conform current limitation of liability
provisions with the Business Corporation Act.
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--------------------------------------------------------------------------------
PROPOSAL FIVE
PROPOSAL TO CONFORM CURRENT INDEMNIFICATION PROVISIONS WITH
BUSINESS CORPORATION ACT
--------------------------------------------------------------------------------
The proposed Amended and Restated Articles include provisions that are intended
to conform the current indemnification provisions of the Articles with the
Business Corporation Act and that, in conjunction with the Business Corporation
Act, will enable Frontier 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 Frontier 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 Frontier. The Articles
currently do not permit Frontier 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 Frontier. 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 Frontier to attract and retain qualified persons to serve as
directors, officers, employees and agents. The Board of Directors recommends a
vote FOR the proposal to conform current indemnification provisions with the
Business Corporation Act.
REQUIRED INDEMNIFICATION
The proposed Amended and Restated Articles and the Business Corporation Act will
require Frontier to indemnify all directors and officers of Frontier who are not
directors against "liability" as defined below. The proposed Amended and
Restated Articles and the Business Corporation Act also will require Frontier 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 Frontier. In addition, the Business Corporation Act requires Frontier
to pay expenses to "Outside Directors," as defined below, in advance of a final
disposition of the proceeding if: (i) the Director furnishes to Frontier 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 Frontier, or at least not opposed to
Frontier'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 Frontier 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 Frontier 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 Frontier to indemnify a director who is not an Outside Director
against liability, but only if Frontier 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 Frontier, 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 Frontier
from indemnifying a director who is not an Outside Director in connection with a
proceeding by or in the rights of Frontier in which the director is adjudged
liable to Frontier 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 Frontier 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 Frontier 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.
OPTIONAL INDEMNIFICATION
The proposed Amended and Restated Articles and the Business Corporation Act will
permit Frontier, 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
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prohibits Frontier 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 Frontier 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 Frontier 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 Frontier to apply to a court for indemnification, in which case the
court may, subject to certain conditions, order Frontier 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 Frontier.
"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.
--------------------------------------------------------------------------------
PROPOSAL SIX
PROPOSAL TO CONFORM CURRENT CONFLICT OF INTEREST PROVISIONS WITH
BUSINESS CORPORATION ACT
--------------------------------------------------------------------------------
The proposed Amended and Restated Articles include substantive amendments that
delete provisions regarding directors' conflicts of interest because the
Business Corporation Act's provisions regarding this item are inconsistent with
the Articles. The Board of Directors recommends a vote FOR the proposal to
conform current conflict of interest provisions with the Business Corporation
Act.
--------------------------------------------------------------------------------
PROPOSAL SEVEN
PROPOSAL TO UPDATE DESCRIPTION OF PURPOSE AND
CHARACTER OF BUSINESS OF FRONTIER
--------------------------------------------------------------------------------
The proposed Amended and Restated Articles include substantive amendments that
update the description of the purpose for which Frontier is organized and the
character of business that Frontier conducts. The Board of Directors recommends
a vote FOR the proposal to update the description of purpose and character of
business of Frontier.
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PROPOSAL EIGHT
PROPOSAL TO CHANGE FRONTIER'S NAME
--------------------------------------------------------------------------------
Frontier intends to broaden its technology base and operations and expand its
business into e-commerce activities upon completion of the Transaction. The
Board has determined that if the Transaction is approved, the name "Frontier
Adjusters of America, Inc." will too narrowly describe the nature of Frontier's
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business. Therefore, the Board adopted the proposal to change Frontier's name to
"Netrex Business Services, Inc." to emphasize the change in Frontier's focus.
The Board of Directors recommends a vote FOR the proposal to change Frontier's
name.
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PROPOSAL NINE
PROPOSAL TO UPDATE THE PROVISIONS OF FRONTIER'S ARTICLES
REGARDING SERIAL PREFERRED STOCK
--------------------------------------------------------------------------------
The proposed Amended and Restated Articles include substantive amendments that
update the provisions in Article 4 regarding serial preferred stock. The Board
of Directors recommends a vote FOR the proposal to update the provisions of
Frontier's Articles 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 Frontier. The Series A
Preferred Stock was established and designated by Frontier'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 Frontier 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
Frontier. 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 Frontier 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 Frontier 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
Frontier 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 Frontier may acquire its own shares
or issue rights, options, or warrants to purchase shares of Frontier.
Accordingly, provisions in the current Articles that authorize Frontier 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 Frontier to issue such securities have been deleted from the proposed
Amended and Restated Articles.
The Business Corporation Act prohibits Frontier 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 Frontier to pay to holders of one class
or series of Frontier's capital stock dividends payable in shares of another
class or series of Frontier's capital stock, without approval or ratification by
Frontier's shareholders.
--------------------------------------------------------------------------------
PROPOSAL TEN
PROPOSAL TO MAINTAIN CERTAIN CORPORATE RECORDS AT
KNOWN PLACE OF BUSINESS OF FRONTIER
--------------------------------------------------------------------------------
The Business Corporation Act requires Frontier or its agent to maintain certain
corporate records. The proposed Amended and Restated Articles provide that,
unless the Bylaws of Frontier provide otherwise and Frontier's statutory agent
expressly consents thereto in writing, all records required pursuant to the
Business Corporation Act to be kept by Frontier or its agents shall be kept by
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Frontier at the known place of business of Frontier. 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 Frontier's statutory agent. The Board of Directors recommends a
vote FOR the proposal to maintain corporate records at the known place of
business of Frontier.
--------------------------------------------------------------------------------
PROPOSAL ELEVEN
PROPOSAL TO AMEND AND RESTATE FRONTIER'S ARTICLES OF INCORPORATION
--------------------------------------------------------------------------------
On May 2, 2000, the Board of Directors unanimously approved a proposal to amend
and restate Frontier's Articles of Incorporation as amended (the "Articles"), 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 Frontier'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 Annual Meeting.
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 B... These changes include the elimination of the
names and addresses of the original incorporators of Frontier, 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.
--------------------------------------------------------------------------------
PROPOSAL TWELVE
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
The Board of Directors has appointed PricewaterhouseCoopers, LLP, independent
public accountants, as the auditors of Frontier for the year ending June 30,
2001, to serve as such at the pleasure of the Board of Directors. The Board
requests that shareholders vote to ratify this appointment at the Annual
Meeting.
Audit services for the year ended June 30, 2000 were provided by McGladrey &
Pullen, LLP, and consisted of the examination of consolidated financial
statements of Frontier and its subsidiaries, reviews of information in certain
filings with the Securities and Exchange Commission and periodic consultation
regarding accounting and financial matters. No audit services were performed by
PricewaterhouseCoopers, LLP during the year ended December 31, 1999. However
PricewaterhouseCoopers, LLP did perform audit services for UFAC during the year
ended June 30, 2000 consisting of the examination of consolidated financial
statements of UFAC and its subsidiaries and periodic consultation regarding
accounting and financial matters. Frontier is informed that neither
PricewaterhouseCoopers, LLP, nor any of its partners or associates has any
relationship with Frontier, other than as independent auditors.
Certain financial statements of Frontier appear in Frontier's 2000 Annual
Report. A representative of McGladrey & Pullen, LLP will be present at the
Annual Meeting and will be available to make a statement and to respond to
questions concerning the financial statements. A representative of
PriceWaterhouseCoopers, LLP will be present at the Annual Meeting and will be
available to make a statement and to respond to questions concerning the UFAC
financial information.
AVAILABILITY OF INFORMATION
The ComStock report and appraisal will be made available for inspection and
copying at the principal executive offices of Frontier and of UFAC during their
regular business hours by any interested equity security holder of Frontier or
of UFAC or representative who has been so designated in writing. A copy of the
ComStock report or appraisal will be transmitted by Frontier or by UFAC to any
interested equity security holder of Frontier or UFAC or representative who has
been so designated in writing upon written request and at the expense of the
requesting security holder.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Frontier's Financial Statements filed with the Commission pursuant to the
Exchange Act in Frontier's Annual Report on Form 10-K for the fiscal year ended
June 30, 2000 are incorporated herein by reference.
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 Annual Meeting, provided that the total number of
shares present in person or represented by proxy at the Annual 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 Frontier of 16,840,000 additional shares of Common Stock to Netrex.
Upon issuance of these shares Frontier 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
Frontier is a condition to consummation of the Transaction. If the Transaction
is not approved, the Transaction will not be consummated.
OTHER MATTERS
Management of Frontier knows of no other matters that will come before the
Annual Meeting. However, if any other matters should properly come before the
Annual 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.
DEADLINE FOR SHAREHOLDER PROPOSALS
Shareholder proposal that are intended to be presented by such shareholders at
Frontier's annual meeting of shareholders to be held during calendar 2001 must
be received by us no later than August 11, 2001, in order to be included in the
proxy statement and form of proxy relating to such meeting. Pursuant to Rule
14a-4 under the Exchange Act, we intend to retain discretionary authority to
vote proxies with respect to shareholder proposals which the proponent does not
seek to have included in the proxy statement for the annual meeting to be held
during calendar 2001, except in circumstances where (a) we receive notice of the
proposed matter no later than August 11, 2001 and (b) the proponent complies
with the other requirements set forth in Rule 14a-4.
By Order of the Board of Directors,
Peter I. Cavallaro
Secretary
Phoenix, Arizona
September 25, 2000
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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,
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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
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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
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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.
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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:
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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
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FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger, is dated as of ______
__, 2000 (the "First Amendment"), 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. FAJ, UFAC, and NETREX entered into an agreement dated as of May 2, 2000
titled "Agreement and Plan of Merger" (the "Agreement") whereby, among other
things, the parties agree that UFAC be merged with and into FAJ. Capitalized
terms used in this First Amendment have the meaning assigned to those terms in
the Agreement.
B. The parties desire to amend the Agreement to state that the directors of
FAJ on and after the Effective Date will be those persons elected by the
shareholders of FAJ at the 2000 annual meeting of the shareholders of FAJ.
AGREEMENT:
NOW, THEREFORE, the parties agree as follows:
1. Article 2, Section 2.3 of the Agreement is amended in its entirety to
read as follows:
2.3 NAME AND DIRECTORS OF FAJ. On the Effective Date, the name of
FAJ shall be "NETREX Business Services, Inc." and the executive
officers of FAJ shall be as listed on Schedule A. On the Effective
Date, the directors of FAJ shall continue to be those persons serving
as the directors of FAJ prior to the Effective Date, all of which
persons will have been elected by the shareholders of FAJ at the 2000
annual meeting of shareholders.
2. Except as amended in this First Amendment, the Agreement is hereby
ratified, confirmed and approved and remains in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be entered into on the day and year 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:
----------------------------------
2
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ANNEX B
FRONTIER ADJUSTERS OF AMERICA, INC.
2000 STOCK OPTION PLAN
ARTICLE I
GENERAL
1.1 PURPOSE OF PLAN; TERM
(a) ADOPTION. On August 29, 2000, the Board of Directors (the "Board")
of Frontier Adjusters of America, Inc., an Arizona corporation (the "Company"),
adopted a stock option plan to be known as the 2000 Stock Option Plan (the
"Plan").
(b) DEFINED TERMS. All initially capitalized terms used hereby shall
have the meaning set forth in Article V hereto.
(c) GENERAL PURPOSE. The purpose of the Grant Program is to further
the interests of the Company and its shareholders by encouraging key persons
associated with the Company (or Parent or Subsidiary Corporations) to acquire
shares of the Company's Stock, thereby acquiring a proprietary interest in its
business and an increased personal interest in its continued success and
progress. Such purpose shall be accomplished by providing for the granting of
options to acquire the Company's Stock ("Options"), the direct granting of the
Company's Stock ("Stock Awards"), the granting of stock appreciation rights
("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards,
SARs and Cash Awards shall be collectively referred to herein as "Awards").
(d) CHARACTER OF OPTIONS. Options granted under this Plan to employees
of the Company (or Parent or Subsidiary Corporations) that are intended to
qualify as an "incentive stock option" as defined in Code section 422
("Incentive Stock Option") will be specified in the applicable stock option
agreement. All other Options granted under this Plan will be nonqualified
options.
(e) RULE 16B-3 PLAN. The Company is subject to the reporting
requirements of the Securities Exchange Act of 1934, and the Plan is intended to
comply with all applicable conditions of Rule 16b-3 (and all subsequent
revisions thereof) promulgated under the 1934 Act. To the extent any provision
of the Plan or action by a Plan Administrator fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by
such Plan Administrator. In addition, the Board may amend the Plan from time to
time as it deems necessary in order to meet the requirements of any amendments
to Rule 16b-3 without the consent of the shareholders of the Company.
(f) DURATION OF PLAN. The term of the Plan is 10 years commencing on
the date of adoption of the original Plan by the Board as specified in Section
1.1(a) hereof. No Option or Award shall be granted under the Plan unless granted
within 10 years of the adoption of the Plan by the Board, but Options or Awards
outstanding on that date shall not be terminated or otherwise affected by virtue
of the Plan's expiration.
1.2 STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN.
(a) DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The shares of
stock subject to the provisions of the Plan and issuable upon the grant of Stock
Awards or upon the exercise of SARs or Options granted under the Plan are shares
of the Company's common stock, $0.001 par value per share (the "Stock"), which
may be either unissued or treasury shares. The Company may not issue more than
2,000,000 shares of Stock pursuant to the Plan, unless the Plan is amended as
provided in Section 1.3 or the maximum number of shares subject to the Plan is
adjusted as provided in Section 3.1.
(b) CALCULATION OF AVAILABLE SHARES. The number of shares of Stock
available under the Plan shall be reduced: (i) by any shares of Stock issued
(including any shares of Stock withheld for tax withholding requirements) upon
<PAGE>
exercise of an Option and (ii) by any shares of Stock issued (including any
shares of Stock withheld for tax withholding requirements) upon the grant of a
Stock Award or the exercise of an SAR.
(c) RESTORATION OF UNPURCHASED SHARES. If an Option or SAR expires or
terminates for any reason prior to its exercise in full and before the term of
the Plan expires, the shares of Stock subject to, but not issued under, such
Option or SAR shall, without further action or by or on behalf of the Company,
again be available under the Plan.
1.3 APPROVAL; AMENDMENTS.
(a) APPROVAL BY SHAREHOLDERS. The Plan shall be submitted to the
shareholders of the Company for their approval at a regular or special meeting
to be held within 12 months after the adoption of the Plan by the Board.
Shareholder approval shall be evidenced by the affirmative vote of the holders
of a majority of the shares of the Company's Common Stock present in person or
by proxy and voting at the meeting. The date such shareholder approval has been
obtained shall be referred to herein as the "Effective Date."
(b) COMMENCEMENT OF PROGRAMS. The Grant Program is effective
immediately, but if the Plan is not approved by the shareholders within 12
months after its adoption by the Board, the Plan and all Options and Awards made
under the Grant Program will automatically terminate and be forfeited to the
same extent and with the same effect as though the Plan had never been adopted.
(c) AMENDMENTS TO PLAN. The Board may, without action on the part of
the Company's shareholders, make such amendments to, changes in and additions to
the Plan as it may, from time to time, deem necessary or appropriate and in the
best interests of the Company; provided, the Board may not, without the consent
of the applicable Optionholder, take any action which disqualifies any Option
previously granted under the Plan for treatment as an Incentive Stock Option or
which adversely affects or impairs the rights of the Optionholder of any Option
outstanding under the Plan, and further provided that, except as provided in
Article III hereof, the Board may not, without the approval of the Company's
shareholders, (i) increase the aggregate number of shares of Stock subject to
the Plan, (ii) reduce the exercise price at which Options may be granted or the
exercise price at which any outstanding Option may be exercised, (iii) extend
the term of the Plan, (iv) change the class of persons eligible to receive
Options or Awards under the Plan, or (v) materially increase the benefits
accruing to participants under the Plan. Notwithstanding the foregoing, Options
or Awards may be granted under this Plan to purchase shares of Stock in excess
of the number of shares then available for issuance under the Plan if (A) an
amendment to increase the maximum number of shares issuable under the Plan is
adopted by the Board prior to the initial grant of any such Option or Award and
within one year thereafter such amendment is approved by the Company's
shareholders and (B) each such Option or Award granted does not become
exercisable or vested, in whole or in part, at any time prior to the obtaining
of such shareholder approval.
ARTICLE II
GRANT PROGRAM
2.1 PARTICIPANTS; ADMINISTRATION.
(a) ELIGIBILITY AND PARTICIPATION. Options and Awards may be granted
only to persons ("Eligible Persons") who at the time of grant are (i) key
personnel (including officers and directors) of the Company or Parent or
Subsidiary Corporations, or (ii) consultants or independent contractors who
provide valuable services to the Company or Parent or Subsidiary Corporations;
provided that (1) if a Senior Committee exists, the members of that Senior
Committee shall be ineligible, during their tenure on the Senior Committee, to
be granted Options or Awards under the Plan or to be granted or awarded equity
securities of the Company pursuant to any other plan of the Company or its
affiliates except as otherwise allowed by Rule 16b-3(c)(2)(i) promulgated under
the 1934 Act, and (2) Incentive Stock Options may only be granted to key
personnel of the Company (and its Parent or Subsidiary Corporation) who are also
employees of the Company (or its Parent or Subsidiary Corporation), and (3) the
maximum number of shares of stock with respect to which Options or SARs may be
granted to any employee during the term of the Plan shall not exceed 50 percent
of the shares of stock covered by the Plan. A Plan Administrator shall have full
authority to determine which Eligible Persons in its administered group are to
receive Option grants under the Plan, the number of shares to be covered by each
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<PAGE>
such grant, whether or not the granted Option is to be an Incentive Stock
Option, the time or times at which each such Option is to become exercisable,
and the maximum term for which the Option is to be outstanding. A Plan
Administrator shall also have full authority to determine which Eligible Persons
in such group are to receive Awards under the Grant Program and the conditions
relating to such Award.
(b) GENERAL ADMINISTRATION. The Eligible Persons under the Grant
Program shall be divided into two groups and there shall be a separate
administrator for each group. One group will be comprised of Eligible Persons
that are Affiliates. For purposes of this Plan, the term "Affiliates" shall mean
all "officers" (as that term is defined in Rule 16a-1(f) promulgated under the
1934 Act) and directors of the Company and all persons who own ten percent or
more of the Company's issued and outstanding equity securities. Initially, the
power to administer the Grant Program with respect to Eligible Persons that are
Affiliates shall be vested with the Board. At any time, however, the Board may
vest the power to administer the Grant Program with respect to Persons that are
Affiliates exclusively with a committee (the "Senior Committee") comprised of
two or more Disinterested Directors, which are appointed by the Board. The
administration of all Eligible Persons that are not Affiliates
("Non-Affiliates") shall be vested exclusively with the Board. The Board,
however, may at any time appoint a committee (the "Employee Committee") of two
or more persons who are members of the Board and delegate to such Employee
Committee the power to administer the Grant Program with respect to the
Non-Affiliates. In addition, the Board may establish an additional committee or
committees of persons who are members of the Board and delegate to such other
committee or committees the power to administer all or a portion of the Grant
program with respect to all or a portion of the Eligible Persons. Members of the
Senior Committee, Employee Committee or any other committee allowed hereunder
shall serve for such period of time as the Board may determine and shall be
subject to removal by the Board at any time. The Board may at any time terminate
all or a portion of the functions of the Senior Committee, the Employee
Committee, or any other committee allowed hereunder and reassume all or a
portion of powers and authority previously delegated to such committee. The
Board in its discretion may also require the members of the Senior Committee,
the Employee Committee or any other committee allowed hereunder to be "outside
directors" as that term is defined in any applicable regulations promulgated
under Code Section 162(m).
(c) PLAN ADMINISTRATORS. The Board, the Employee Committee, Senior
Committee, and/or any other committee allowed hereunder, whichever is
applicable, shall be each referred to herein as a "Plan Administrator." Each
Plan Administrator shall have the authority and discretion, with respect to its
administered group, to select which Eligible Persons shall participate in the
Grant Program, to grant Options or Awards under the Grant Program, to establish
such rules and regulations as they may deem appropriate with respect to the
proper administration of the Grant Program and to make such determinations
under, and issue such interpretations of, the Grant Program and any outstanding
Option or Award as they may deem necessary or advisable. Unless otherwise
required by law or specified by the Board with respect to any committee,
decisions among the members of a Plan Administrator shall be by majority vote.
Decisions of a Plan Administrator shall be final and binding on all parties who
have an interest in the Grant Program or any outstanding Option or Award.
(d) GUIDELINES FOR PARTICIPATION. In designating and selecting
Eligible Persons for participation in the Grant Program, a Plan Administrator
shall consult with and give consideration to the recommendations and criticisms
submitted by appropriate managerial and executive officers of the Company. A
Plan Administrator also shall take into account the duties and responsibilities
of the Eligible Persons, their past, present and potential contributions to the
success of the Company and such other factors as a Plan Administrator shall deem
relevant in connection with accomplishing the purpose of the Plan.
2.2 TERMS AND CONDITIONS OF OPTIONS
(a) ALLOTMENT OF SHARES. A Plan Administrator shall determine the
number of shares of Stock to be optioned from time to time and the number of
shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant
of an Option to a person shall neither entitle such person to, nor disqualify
such person from, participation in any other grant of Options or Stock Awards
under this Plan or any other stock option plan of the Company.
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<PAGE>
(b) EXERCISE PRICE. Upon the grant of any Option, a Plan Administrator
shall specify the option price per share. If the Option is intended to qualify
as an Incentive Stock Option under the Code, the option price per share may not
be less than 100 percent of the fair market value per share of the stock on the
date the Option is granted (110 percent if the Option is granted to a
shareholder who at the time the Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary Corporation). The
determination of the fair market value of the Stock shall be made in accordance
with the valuation provisions of Section 3.5 hereof.
(c) INDIVIDUAL STOCK OPTION AGREEMENTS. Options granted under the Plan
shall be evidenced by option agreements in such form and content as a Plan
Administrator from time to time approves, which agreements shall substantially
comply with and be subject to the terms of the Plan, including the terms and
conditions of this Section 2.2. As determined by a Plan Administrator, each
option agreement shall state (i) the total number of shares to which it
pertains, (ii) the exercise price for the shares covered by the Option, (iii)
the time at which the Options vest and become exercisable, and (iv) the Option's
scheduled expiration date. The option agreements may contain such other
provisions or conditions as a Plan Administrator deems necessary or appropriate
to effectuate the sense and purpose of the Plan, including covenants by the
Optionholder not to compete and remedies for the Company in the event of the
breach of any such covenant.
(d) OPTION PERIOD. No Option granted under the Plan that is intended
to be an Incentive Stock Option shall be exercisable for a period in excess of
10 years from the date of its grant (five years if the Option is granted to a
shareholder who at the time the Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or any Subsidiary Corporation),
subject to earlier termination in the event of termination of employment,
retirement or death of the Optionholder. An Option may be exercised in full or
in part at any time or from time to time during the term of the Option or
provide for its exercise in stated installments at stated times during the
Option's term.
(e) VESTING, LIMITATIONS. The time at which Options may be exercised
with respect to an Optionholder shall be in the discretion of that
Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent
an Option is intended to qualify as an Incentive Stock Option, the aggregate
fair market value (determined as of the respective date or dates of grant) of
the Stock for which one or more Options granted to any person under this Plan
(or any other option plan of the Company or its Parent or Subsidiary
Corporations) may for the first time become exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted. (F) NO FRACTIONAL SHARES. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Option granted under the Plan.
(g) METHOD OF EXERCISE. To exercise an Option, an Optionholder (or in
the case of an exercise after an Optionholder's death, such Optionholder's
executor, administrator, heir or legatee, as the case may be) must take the
following action:
(i) execute and deliver to the Company a written notice of
exercise signed in writing by the person exercising the Option specifying the
number of shares of Stock with respect to which the Option is being exercised;
(ii) pay the aggregate Option Price in one of the alternate forms
as set forth in Section 2.2(h) below; and
(iii) furnish appropriate documentation that the person or
persons exercising the Option (if other than the Optionholder) has the right to
exercise such Option.
4
<PAGE>
As soon as practical after the Exercise Date, the Company will mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising
this Option under the Plan) a certificate or certificates representing the Stock
acquired upon exercise of the Option.
(h) PAYMENT PRICE. The aggregate Option Price shall be payable in one
of the alternative forms specified below:
(i) Full payment in cash or check made payable to the Company's
order; or
(ii) Full payment in shares of Stock held for the requisite
period necessary to avoid a charge to the Company's reported earnings and valued
at fair market value on the Exercise Date (as determined in accordance with
Section 3.5 hereof; or
(iii) If a cashless exercise program has been implemented by the
Board, full payment through a sale and remittance procedure pursuant to which
the Optionholder (A) shall provide irrevocable written instructions to a
designated brokerage firm to effect the immediate sale of the Optioned Shares to
be purchased and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price payable
for the Optioned Shares to be purchased, and (B) shall concurrently provide
written directives to the Company to deliver the certificates for the Optioned
Shares to be purchased directly to such brokerage firm in order to complete the
sale transaction.
(i) RIGHTS OF A SHAREHOLDER. An Optionholder shall not have any of the
rights of a shareholder with respect to Optioned Shares until such individual
shall have exercised the Option and paid the Option Price for the Optioned
Shares. No adjustment will be made for dividends or other rights for which the
record date is prior to the date such stock certificate is issued.
(j) REPURCHASE RIGHT. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to an Option. Any repurchase right of the Company shall be
exercisable by the Company (or its assignees) upon such terms and conditions as
the Plan Administrator may specify in the Stock Repurchase Agreement evidencing
such right. The Plan Administrator may also in its discretion establish as a
term and condition of one or more Options granted under the Plan that the
Company shall have a right of first refusal with respect to any proposed sale or
other disposition by the Optionholder of any shares of Stock issued upon the
exercise of such Options. Any such right of first refusal shall be exercisable
by the Company (or its assigns) in accordance with the terms and conditions set
forth in the Stock Repurchase Agreement.
(k) TERMINATION OF SERVICE. If any Optionholder ceases to be in
Service to the Company for a reason other than permanent disability or death,
such Optionholder must, within 90 days after the date of termination of such
Service, but in no event after the Option's stated expiration date, exercise
some or all of the Options that the Optionholder was entitled to exercise on the
date the Optionholder's Service terminated; provided, that if the Optionholder
is discharged for Cause or commits acts detrimental to the Company's interests
after the Service of the Optionholder has been terminated, then the Option will
thereafter be void for all purposes. "Cause" shall mean a termination of Service
based upon a finding by the applicable Plan Administrator that the Optionholder:
(i) has committed a felony involving dishonesty, fraud, theft or embezzlement;
(ii) after written notice from the Company has repeatedly failed or refused, in
a material respect, to follow reasonable policies or directives established by
the Company; (iii) after written notice from the Company, has willfully and
persistently failed to attend to material duties or obligations; (iv) has
performed an act or failed to act, which, if he were prosecuted and convicted,
would constitute a theft of money or property of the Company; or (v) has
misrepresented or concealed a material fact for purposes of securing employment
with the Company. If any Optionholder ceases to be in Service to the Company by
reason of permanent disability within the meaning of Section 22(e)(3) of the
Code (as determined by the applicable Plan Administrator), the Optionholder will
have one year after the date of termination of Service, but in no event after
the stated expiration date of the Optionholder's Options, to exercise Options
that the Optionholder was entitled to exercise on the date the Optionholder's
Service terminated as a result of the disability.
(l) DEATH OF OPTIONHOLDER. If an Optionholder dies while in the
Company's Service, any Options that the Optionholder was entitled to exercise on
the date of death will be exercisable within ninety days after such date or
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until the stated expiration date of the Optionholder's Option, whichever occurs
first, by the person or persons ("successors") to whom the Optionholder's rights
pass under a will or by the laws of descent and distribution. As soon as
practicable after receipt by the Company of such notice and of payment in full
of the Option Price, a certificate or certificates representing the Optioned
Shares shall be registered in the name or names specified by the successors in
the written notice of exercise and shall be delivered to the successors.
(m) OTHER PLAN PROVISIONS STILL APPLICABLE. If an Option is exercised
upon the termination of Service or death of an Optionholder under this Section
2.2, the other provisions of the Plan will continue to apply to such exercise,
including the requirement that the Optionholder or its successor may be required
to enter into a Stock Repurchase Agreement.
(n) DEFINITION OF "SERVICE". For purposes of this Plan, unless it is
evidenced otherwise in the option agreement with the Optionholder, the
Optionholder is deemed to be in "Service" to the Company so long as such
individual renders continuous services on a periodic basis to the Company (or to
any Parent or Subsidiary Corporation) in the capacity of an employee, director,
or an independent consultant or advisor. In the discretion of the applicable
Plan Administrator, an Optionholder will be considered to be rendering
continuous services to the Company even if the type of services change, e.g.,
from employee to independent consultant. The Optionholder will be considered to
be an employee for so long as such individual remains in the employ of the
Company or one or more of its Parent or Subsidiary Corporations.
2.3 TERMS AND CONDITIONS OF STOCK AWARDS
(a) ELIGIBILITY. All Eligible Persons shall be eligible to receive
Stock Awards. The Plan Administrator of each administered group shall determine
the number of shares of Stock to be awarded from time to time to any Eligible
Person in such group. Except as provided otherwise in this Plan, the grant of a
Stock Award to a person (a "Grantee") shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) AWARD FOR SERVICES RENDERED. Stock Awards shall be granted in
recognition of an Eligible Person's services to the Company. The grantee of any
such Stock Award shall not be required to pay any consideration to the Company
upon receipt of such Stock Award, except as may be required to satisfy any
applicable Arizona corporate law, employment tax and/or income tax withholding
requirements.
(c) CONDITIONS TO AWARD. All Stock Awards shall be subject to such
terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may modify or accelerate the termination of the
restrictions applicable to any Stock Award under the circumstances as it deems
appropriate.
(d) AWARD AGREEMENTS. A Plan Administrator may require as a condition
to a Stock Award that the recipient of such Stock Award enter into an award
agreement in such form and content as that Plan Administrator from time to time
approves.
2.4 TERMS AND CONDITIONS OF SARS
(a) ELIGIBILITY. All Eligible Persons shall be eligible to receive
SARs. The Plan Administrator of each administered group shall determine the SARs
to be awarded from time to time to any Eligible Person in such group. The grant
of an SAR to a person shall neither entitle such person to, nor disqualify such
person from participation in, any other grant of options or awards by the
Company, whether under this Plan or under any other stock option or award plan
of the Company.
(b) AWARD OF SARS. Concurrently with or subsequent to the grant of any
Option to purchase one or more shares of Stock, the Plan Administrator may award
to the Optionholder with respect to each share of Stock, underlying the Option,
6
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a related SAR permitting the Optionholder to be paid any appreciation on that
Stock in lieu of exercising the Option. In addition, a Plan Administrator may
award to any Eligible Person an SAR permitting the Eligible Person to be paid
the appreciation on a designated number of shares of the Stock, whether or not
such Shares are actually issued.
(c) CONDITIONS TO SAR. All SARs shall be subject to such terms,
conditions, restrictions or limitations as the applicable Plan Administrator
deems appropriate, including, by way of illustration but not by way of
limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR AGREEMENTS. A Plan Administrator may require as a condition to
the grant of an SAR that the recipient of such SAR enter into an SAR agreement
in such form and content as that Plan Administrator from time to time approves.
(e) EXERCISE. An Eligible Person who has been granted an SAR may
exercise such SAR subject to the conditions specified in the SAR agreement by
the Plan Administrator.
(f) AMOUNT OF PAYMENT. The amount of payment to which the grantee of
an SAR shall be entitled upon the exercise of each SAR shall be equal to the
amount, if any, by which the fair market value of the specified shares of Stock
on the exercise date exceeds the fair market value of the specified shares of
Stock on the date the Option related to the SAR was granted or became effective,
or, if the SAR is not related to any Option, on the date the SAR was granted or
became effective.
(g) FORM OF PAYMENT. The SAR may be paid in either cash or Stock, as
determined in the discretion of the applicable Plan Administrator and set forth
in the SAR agreement. If the payment is in Stock, the number of shares to be
paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.4(f) by the fair market value of a
share of Stock on the exercise date of such SAR. As soon as practical after
exercise, the Company shall deliver to the SAR grantee a certificate or
certificates for such shares of Stock.
(h) TERMINATION OF EMPLOYMENT; DEATH. Sections 2.2(k) and (l),
applicable to Options, shall apply equally to SARs.
2.5 OTHER CASH AWARDS
(a) IN GENERAL. The Plan Administrator of each administered group
shall have the discretion to make other awards of cash to Eligible Persons in
such group ("Cash Awards"). Such Cash Awards may relate to existing Options or
to the appreciation in the value of the Stock or other Company securities.
(b) CONDITIONS TO AWARD. All Cash Awards shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content is the Plan Administrator from time to
time approves.
ARTICLE III
MISCELLANEOUS
3.1 CAPITAL ADJUSTMENTS. The aggregate number of shares of Stock subject to
the Plan, the number of shares of Stock covered by outstanding Options and
Awards, and the price per share stated in all outstanding Options and Awards
shall be proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of the Company resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of a
stock dividend or any other increase or decrease in the number of such shares
effected without the Company's receipt of consideration therefor in money,
services or property.
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3.2 MERGERS, ETC. If the Company is the surviving corporation in any merger
or consolidation (not including a Corporate Transaction), any Option or Award
granted under the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to the Option or Award would
have been entitled prior to the merger or consolidation. Except as provided in
Section 3.3 hereof, a dissolution or liquidation of the Company shall cause
every Option or Award outstanding hereunder to terminate.
3.3 CORPORATE TRANSACTION. In the event of shareholder approval of a
Corporate Transaction, the Plan Administrator shall have the discretion and
authority, exercisable at any time, to provide for the automatic acceleration of
one or more of the outstanding Options or Awards granted by it under the Plan.
Upon the consummation of the Corporate Transaction, all Options shall, to the
extent not previously exercised, terminate and cease to be outstanding.
3.4 CHANGE IN CONTROL.
(a) GRANT PROGRAM. In the event of a Change in Control, a Plan
Administrator shall have the discretion and authority, exercisable at any time,
whether before or after the Change in Control, to provide for the automatic
acceleration of one or more outstanding Options or Awards granted by it under
the Plan upon the occurrence of such Change in Control. A Plan Administrator may
also impose limitations upon the automatic acceleration of such Options or
Awards to the extent it deems appropriate. Any Options or Awards accelerated
upon a Change in Control will remain fully exercisable until the expiration or
sooner termination of the Option term.
(b) INCENTIVE STOCK OPTION LIMITS. The exercisability of any Options
which are intended to qualify as Incentive Stock Options and which are
accelerated by the Plan Administrator in connection with a pending Corporation
Transaction or Change in Control shall, except as otherwise provided in the
discretion of the Plan Administrator and the Optionholder, remain subject to the
$100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
3.5 CALCULATION OF FAIR MARKET VALUE OF STOCK. The fair market value of a
share of Stock on any relevant date shall be determined in accordance with the
following provisions:
(a) If the Stock is not at the time listed or admitted to trading on
any stock exchange but is traded in the over-the-counter market, the fair market
value shall be the mean between the highest bid and lowest asked prices (or, if
such information is available, the closing selling price) per share of Stock on
the date in question in the over-the-counter market, as such prices are reported
by the National Association of Securities Dealers through its Nasdaq system or
any successor system. If there are no reported bid and asked prices (or closing
selling price) for the Stock on the date in question, then the mean between the
highest bid price and lowest asked price (or the closing selling price) on the
last preceding date for which such quotations exist shall be determinative of
fair market value.
(b) If the Stock is at the time listed or admitted to trading on any
stock exchange, then the fair market value shall be the closing selling price
per share of Stock on the date in question on the stock exchange determined by
the Board to be the primary market for the Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If there is no
reported sale of Stock on such exchange on the date in question, then the fair
market value shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
(c) If the Stock at the time is neither listed nor admitted to trading
on any stock exchange nor traded in the over-the-counter market, then the fair
market value shall be determined by the Board after taking into account such
factors as the Board shall deem appropriate, including one or more independent
professional appraisals.
3.6 USE OF PROCEEDS. The proceeds received by the Company from the sale of
Stock pursuant to the exercise of Options or Awards hereunder, if any, shall be
used for general corporate purposes.
8
<PAGE>
3.7 CANCELLATION OF OPTIONS. Each Plan Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Options
granted under the Plan by that Plan Administrator and to grant in substitution
therefore new Options under the Plan covering the same or different numbers of
shares of Stock as long as such new Options have an exercise price per share of
Stock no less than the minimum exercise price as set forth in Section 2.2(b)
hereof on the new grant date.
3.8 REGULATORY APPROVALS. The implementation of the Plan, the granting of
any Option or Award hereunder, and the issuance of Stock upon the exercise of
any such Option or Award shall be subject to the procurement by the Company of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the Options or Awards granted under it and the Stock issued
pursuant to it.
3.9 INDEMNIFICATION. In addition to such other rights of indemnification as
they may have, the members of a Plan Administrator shall be indemnified and held
harmless by the Company, to the extent permitted under applicable law, for, from
and against all costs and expenses reasonably incurred by them in connection
with any action, legal proceeding to which any member thereof may be a party by
reason of any action taken, failure to act under or in connection with the Plan
or any rights granted thereunder and against all amounts paid by them in
settlement thereof or paid by them in satisfaction of a judgment of any such
action, suit or proceeding, except a judgment based upon a finding of bad faith.
3.10 PLAN NOT EXCLUSIVE. This Plan is not intended to be the exclusive
means by which the Company may issue options or warrants to acquire its Stock,
stock awards or any other type of award. To the extent permitted by applicable
law, any such other option, warrants or awards may be issued by the Company
other than pursuant to this Plan without shareholder approval.
3.11 COMPANY RIGHTS. The grants of Options shall in no way affect the right
of the Company to adjust, reclassify, reorganize or otherwise change its capital
or business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
3.12 ASSIGNMENT. The right to acquire Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any Optionholder
except as specifically provided herein. No Option or Award granted under the
Plan or any of the rights and privileges conferred thereby shall be assignable
or transferable by an Optionholder or grantee other than by will or the laws of
descent and distribution, and such Option or Award shall be exercisable during
the Optionholder's or grantee's lifetime only by the Optionholder or grantee.
Notwithstanding the foregoing, any Options or Awards granted pursuant to the
Grant Program may be assigned, encumbered or otherwise transferred by the
Optionholder or grantee if specifically allowed by the Plan Administrator upon
the grant of such Option or Award. The provisions of the Plan shall inure to the
benefit of, and be binding upon, the Company and its successors or assigns, and
the Optionholders, the legal representatives of their respective estates, their
respective heirs or legatees and their permitted assignees.
3.13 SECURITIES RESTRICTIONS
(a) LEGEND ON CERTIFICATES. All certificates representing shares of
Stock issued under the Plan shall be endorsed with a legend reading as follows:
The shares of Common Stock evidenced by this certificate have been
issued to the registered owner in reliance upon written
representations that these shares have been purchased solely for
investment. These shares may not be sold, transferred or assigned
unless in the opinion of the Company and its legal counsel such sale,
transfer or assignment will not be in violation of the Securities Act
of 1933, as amended, and the rules and regulations thereunder.
(b) PRIVATE OFFERING FOR INVESTMENT ONLY. The Options and Awards are
and shall be made available only to a limited number of present and future key
executives, directors and employees who have knowledge of the Company's
9
<PAGE>
financial condition, management and its affairs. The Plan is not intended to
provide additional capital for the Company, but to encourage ownership of Stock
among the Company's key personnel. By the act of accepting an Option or Award,
each grantee agrees (i) that, any shares of Stock acquired will be solely for
investment not with any intention to resell or redistribute those shares and
(ii) such intention will be confirmed by an appropriate certificate at the time
the Stock is acquired if requested by the Company. The neglect or failure to
execute such a certificate, however, shall not limit or negate the foregoing
agreement.
(c) REGISTRATION STATEMENT. If a Registration Statement covering the
shares of Stock issuable under the Plan as filed under the Securities Exchange
Act of 1934, as amended, and as declared effective by the Securities Exchange
Commission, the provisions of Sections 3.13(a) and (b) shall terminate during
the period of time that such Registration Statement, as periodically amended,
remains effective.
3.14 TAX WITHHOLDING.
(a) GENERAL. The Company's obligation to deliver Stock under the Plan
shall be subject to the satisfaction of all applicable federal, state and local
income tax withholding requirements.
(b) SHARES TO PAY FOR WITHHOLDING. The Board may, in its discretion
and in accordance with the provisions of this Section 3.14(b) and such
supplemental rules as it may from time to time adopt (including the applicable
safe-harbor provisions of SEC Rule 16b-3), provide any or all Optionholders or
Grantees with the right to use shares of Stock in satisfaction of all or part of
the federal, state and local income tax liabilities incurred by such
Optionholders or Grantees in connection with the receipt of Stock ("Taxes").
Such right may be provided to any such Optionholder or Grantee in either or both
of the following formats:
(i) STOCK WITHHOLDING. An Optionholder or Grantee may be provided
with the election, which may be subject to approval by the Plan Administrator,
to have the Company withhold, from the Stock otherwise issuable, a portion of
those shares of Stock with an aggregate fair market value equal to the
percentage of the applicable Taxes (not to exceed 100 percent) designated by the
Optionholder or Grantee.
(ii) STOCK DELIVERY. The Board may, in its discretion, provide
the Optionholder or Grantee with the election to deliver to the Company, at the
time the Option is exercised or Stock is awarded, one or more shares of Stock
previously acquired by such individual (other than pursuant to the transaction
triggering the Taxes) with an aggregate fair market value equal to the
percentage of the taxes incurred in connection with such Option exercise or
Stock Award (not to exceed 100 percent) designated by the Optionholder or
Grantee.
3.15 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Arizona.
ARTICLE IV
DEFINITIONS
The following capitalized terms used in this Plan shall have the meaning
described below:
"AFFILIATES" shall mean all "officers" (as that term is defined in Rule
16a-1(f) promulgated under the 1934 Act) and directors of the Company and all
persons who own ten percent or more of the Company's issued and outstanding
Stock.
"ANNUAL GRANT DATE" shall mean the date of the Company's annual shareholder
meeting.
"AWARD" shall mean a Stock Award, SAR or Cash Award under the Grant
Program.
"BOARD" shall mean the Board of Directors of the Company.
"CASH AWARD" shall mean an award to be paid in cash and granted under
Section 2.5 hereunder.
10
<PAGE>
"CHANGE IN CONTROL" shall mean and include the following transactions or
situations:
(i) A sale, transfer, or other disposition by the Company through a
single transaction or a series of transactions of securities of the Company
representing 30 percent or more of the combined voting power of the Company's
then outstanding securities to any "Unrelated Person" or "Unrelated Persons"
acting in concert with one another. For purposes of this Section, the term
"Person" shall mean and include any individual, partnership, joint venture,
association, trust corporation, or other entity (including a "group" as referred
to in Section 13(d)(3) of the 1934 Act). For purposes of this Section, the term
"Unrelated Person" shall mean and include any Person other than the Company, a
wholly-owned subsidiary of the Company, or an employee benefit plan of the
Company.
(ii) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(iii) A change in the ownership of the Company through a single
transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least 30 percent of the combined voting power of the Company's then outstanding
securities. For purposes of this Section, the term "Beneficial Owner" shall have
the same meaning as given to that term in Rule 13d-3 promulgated under the Act,
provided that any pledgee of voting securities is not deemed to be the
Beneficial Owner thereof prior to its acquisition of voting rights with respect
to such securities.
(iv) Any consolidation or merger of the Company with or into an
Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the surviving
corporation representing at least 50 percent of the combined voting power of the
surviving corporation's then outstanding securities.
(v) During any period of two years, individuals who, at the beginning
of such period, constituted the Board of Directors of the Company cease, for any
reason, to constitute at least a majority thereof, unless the election or
nomination for election of each new director was approved by the vote of at
least two-thirds of the directors then still in office who were directors at the
beginning of such period.
(vi) A change in control of the Company of a nature that would be
required to be reported in response to item 6(e) of Schedule 14A of Regulation
14A promulgated under the 1934 Act, or any successor regulation of similar
import, regardless of whether the Company is subject to such reporting
requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the General
Bankruptcy Code or any successor or other statute of similar import shall not be
deemed to be a Change of Control for purposes of this Plan.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMPANY" shall mean Frontier Adjusters of America, Inc., an Arizona
corporation.
"CORPORATE TRANSACTION" shall mean (a) a merger or consolidation in which
the Company is not the surviving entity, except for a transaction the principal
purposes of which is to change the state in which the Company is incorporated;
(b) the sale, transfer of or other disposition of all or substantially all of
the assets of the Company and complete liquidation or dissolution of the
Company, or (c) any reverse merger in which the Company is the surviving entity
but in which the securities possessing more than 50 percent of the total
combined voting power of the Company's outstanding securities are transferred to
a person or persons different from those who held such securities immediately
prior to such merger.
"DISINTERESTED DIRECTORS" shall mean those Directors who satisfy the
definition of "Disinterested Person" under Rule 16b-3(c)(2)(i) promulgated under
the 1934 Act.
11
<PAGE>
"EFFECTIVE DATE" shall mean the date that the Plan has been approved by the
shareholders as required by Section 1.3(a) hereof.
"ELIGIBLE PERSONS" shall mean, with respect to the Grant Program, those
persons who, at the time that the Option or Award is granted, are (i) key
personnel (including officers and directors) of the Company or Parent or
Subsidiary Corporations, or (ii) consultants or independent contractors who
provide valuable services to the Company or Parent or Subsidiary Corporations;
provided that if a Senior Committee is formed pursuant to Section 2.1(b) hereof,
the members of that Committee shall not be included as "Eligible Persons" under
the Grant Program during their tenure on the Senior Committee.
"EMPLOYEE COMMITTEE" shall mean that committee appointed by the Board to
administer the Plan with respect to the Non-Affiliates and comprised of one or
more persons who are members of the Board.
"EXERCISE DATE" shall be the date on which written notice of the exercise
of an Option is delivered to the Company in accordance with the requirements of
the Plan.
"GRANTEE" shall mean an Eligible Person or Eligible Director that has
received an Award.
"GRANT PROGRAM" shall mean the program described in Article II of this
Agreement pursuant to which certain Eligible Persons are granted Options or
Awards in the discretion of the Plan Administrator.
"INCENTIVE STOCK OPTION" shall mean an Option that is intended to qualify
as an "incentive stock option" under Code section 422.
"NON-AFFILIATES" shall mean all persons who are not Affiliates.
"$100,000 LIMITATION" shall mean the limitation in which the aggregate fair
market value (determined as of the respective date or dates of grant) of the
Stock for which one or more Options granted to any person under this Plan (or
any other option plan of the Company or any Parent or Subsidiary Corporation)
may for the first time be exercisable as Incentive Stock Options during any one
calendar year shall not exceed the sum of $100,000.
"OPTIONHOLDER" shall mean an Eligible Person to whom Options have been
granted.
"OPTIONED SHARES" shall be those shares of Stock to be optioned from time
to time to any Eligible Person.
"OPTION PRICE" shall mean the option price per share as specified by the
Plan Administrator or by the terms of the Plan.
"OPTIONS" shall mean options granted under the Plan to acquire Stock.
"PARENT CORPORATION" shall mean any corporation in the unbroken chain of
corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"PLAN" shall mean this stock option plan for Frontier Adjusters of America,
Inc.
"PLAN ADMINISTRATOR" shall mean (a) either the Board, the Senior Committee,
or any other committee, whichever is applicable, with respect to the
administration of the Grant Program as it relates to Affiliates and (b) either
the Board, the Employee Committee, or any other committee, whichever is
applicable, with respect to the administration of the Grant Program as it
relates to Non-Affiliates.
"REGISTRATION DATE" shall have the meaning set forth in Section 1.3(b)
hereof.
"SAR" shall mean stock appreciation rights granted pursuant to Section 2.4
hereof.
12
<PAGE>
"SENIOR COMMITTEE" shall mean that committee appointed by the Board to
administer the Grant Program with respect to the Affiliates and comprised of two
or more Disinterested Directors.
"SERVICE" shall have the meaning set forth in Section 2.2(n) hereof.
"STOCK" shall mean shares of the Company's common stock, $.001 par value
per share, which may be unissued or treasury shares, as the Board may from time
to time determine.
"STOCK AWARDS" shall mean Stock directly granted under the Grant Program.
"SUBSIDIARY CORPORATION" shall mean any corporation in the unbroken chain
of corporations starting with the employer corporation, where, at each link of
the chain, the corporation and the link above owns at least 50 percent of the
combined voting power of all classes of stock in the corporation below.
EXECUTED as of the _____ day of ______________, 2000.
FRONTIER ADJUSTERS OF AMERICA, INC.
By:
-------------------------------------
Name:
-----------------------------------
Its:
------------------------------------
ATTESTED BY:
------------------------------
Secretary
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.
ARTICLE 12. The street address of the known place of business for the
Corporation is 45 East Monterey Way, Phoenix, Arizona 85012.
3
<PAGE>
ANNEX D
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 its subsidiaries,
DBG Technologies, Inc. and JW Software, Inc., 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
Cleveland, Ohio
March 19, 2000
<PAGE>
ANNEX D
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 its subsidiaries,
DBG Technologies, Inc. and JW Software, Inc., 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
Cleveland, Ohio
March 19, 2000
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1999 1998
----------- -----------
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 12,548,691 --
Prepaid expenses 96,820 150
Deferred tax asset -- 57,037
----------- -----------
Total current assets 15,231,955 3,016,666
Property and equipment, net 2,734,098 7,669,667
Goodwill, net of amortization 4,013,628 905,414
----------- -----------
Total assets $21,979,681 $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 933,853 985,666
Accrued vacation 723,637 --
Payables to parent and affiliates 684,000 1,630,124
Federal income taxes payable -- 100,185
Deferred tax liability 229,022 --
----------- -----------
Total current liabilities 14,588,141 12,286,767
Deferred tax liability 492,806 84,652
Deferred revenue 764,723 337,564
Minority interest 62,997 162,670
----------- -----------
Total liabilities 15,908,667 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 8,157,477 1,219,030
Accumulated deficit (2,096,463) (2,508,936)
----------- -----------
Total shareholders' equity (deficit) 6,071,014 (1,279,906)
----------- -----------
Total liabilities and shareholders' equity $21,979,681 $11,591,747
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
D-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)
Interest expense (440,975) (256,766)
Management fees charged to Frontier 200,000 --
Rental income 295,344 435,728
------------ -----------
Total other income 54,369 178,962
Income before taxes and minority interest 761,007 212,534
Income taxes 448,207 97,737
------------ -----------
Income before minority interest 312,800 114,797
Minority interest 99,673 63,549
------------ -----------
Net income $ 412,473 $ 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.
D-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 6,938,447 68,993
----------- -----------
Balance, end of year $ 8,157,477 $ 1,219,030
----------- -----------
Accumulated deficit
Balance, beginning of year $(2,508,936) $(2,687,282)
Net income 412,473 178,346
----------- -----------
Balance, end of year $(2,096,463) $(2,508,936)
----------- -----------
Total shareholders' equity (deficit) $ 6,071,014 $(1,279,906)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
D-4
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Statements of Cash Flows
For the year ended December 31, 1999 1998
----------- -----------
Cash flows from operating activities
Net income $ 412,473 $ 178,346
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 369,710 288,741
Amortization 344,389 53,260
Deferred taxes 694,213 (2,448)
Minority interest (99,673) (63,549)
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable-net 68,256 968,581
Prepaid expenses (96,670) --
Increase (decrease) in:
Deferred revenue 2,003,029 (136,700)
Accounts payable 1,364,916 83,754
Other liabilities and accruals 671,825 439,195
Income taxes payable / receivable (100,185) 100,185
----------- -----------
Net cash provided by operating activities 5,632,283 1,909,365
Cash flows from investing activities
Purchase of JW Software -- (1,188,459)
Purchase of property and fixed assets (1,277,991) (136,769)
Capitalized software (786,620) (794,481)
----------- -----------
Net cash used in investing activities (2,064,611) (2,119,709)
Cash flows from financing activities
Change in agency deposits for claims disbursements 5,692,152 (529,571)
Change in receivable/payable parent and affiliates (9,035,032) 745,847
----------- -----------
Net cash (used in) provided by
financing activities (3,342,880) 216,276
----------- -----------
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
=========== ===========
D-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.
Vehicle Inspection Services, Inc., a former subsidiary of UFAC, was divested in
1999 and is not a party to the merger. 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.
D-6
<PAGE>
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).
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. The company will amortize these computer software costs on a
straight-line basis over a 60 month period once fully operational.
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.
D-7
<PAGE>
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.
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.
Software license revenue does not include revenue from maintenance and
support services. 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.
D-8
<PAGE>
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
=========== ===========
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.
Prior to November 5, 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. In exchange for the land and building,
Progressive extinguished the related debt and the resulting net proceeds were
recorded through the Progressive inter-company account. The net difference of
$1,106,810 between the sale price and the net book value of the rental property
less the related debt was recorded as contributed capital from Progressive..
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.
D-9
<PAGE>
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, exclusive of the above-mentioned
$1,106,810 related to the sale of the rental property.
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:
Options Outstanding Number of Shares Exercise 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 for 1999 would have decreased by
$4,323.
Net Income
As reported $412,473
Pro forma $408,150
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.
D-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 $ 690,353 $ 23,746 $ -- $ -- $ 714,099
Interest expense $ 433,985 $ 3,833 $ 3,157 $ -- $ 440,975
Segment net income $ 715,512 $ (103,742) $(199,297) $ -- $ 412,473
Expenditures for segment assets $ 2,030,632 $ 33,979 $ -- $ -- $ 2,064,611
Segment assets $21,318,363 $ 562,069 $ 99,249 $ -- $21,979,681
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 $ -- 87,340
Deferred 390,747 (2,134)
State
Current -- 12,845
Deferred 57,460 (314)
----------- --------
Income taxes $ 448,207 $ 97,737
=========== ========
D-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 7.55% 5.90%
Goodwill 17.02% 8.52%
Other 0.13% -2.43%
--------- ---------
Effective rate 58.70% 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 144,783 40,092
--------- ---------
149,539 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 (492,806) (84,652)
--------- ---------
Net deferred tax liability $(721,828) $ (27,615)
========= =========
The company has available net operating losses ("NOL") of $1,243,282, 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.
D-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.
D-13
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 2,016,959 $ 230,724
Accounts receivable, less allowance for doubtful
accounts of $57,444 in 2000, $53,981 in 1999 3,062,264 2,355,720
Receivables from customers for claims disbursements 990,259 --
Receivables from parent and affiliates 4,275,657 12,548,691
Federal income taxes recoverable 149,662
Prepaid expenses 114,835 96,820
------------ ------------
Total current assets 10,609,636 15,231,955
Property and equipment, net 3,900,081 2,734,098
Goodwill, net of amortization 5,430,640 4,013,628
Other assets 7,145 --
------------ ------------
Total assets $ 19,947,502 $ 21,979,681
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Note payable $ 130,667 $ --
Accounts payable - trade 4,900,346 4,139,481
Payables to parent and affiliates 684,000 684,000
Agency deposits for claims disbursements 714,345 5,162,581
Deferred tax liability 41,804 229,022
Deferred revenue 2,495,232 2,715,567
Accrued vacation 791,722 723,637
Other liabilities and accruals 1,833,220 933,853
------------ ------------
Total current liabilities 11,591,336 14,588,141
Note payable 261,333 --
Deferred tax liability 984,346 492,806
Deferred revenue 703,783 764,723
Minority interest -- 62,997
------------ ------------
Total liabilities 13,540,798 15,908,667
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 8,157,477 8,157,477
Accumulated deficit (1,760,773) (2,096,463)
------------ ------------
Total shareholders' equity 6,406,704 6,071,014
------------ ------------
Total liabilities and shareholders' equity $ 19,947,502 $ 21,979,681
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
D-14
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Statements of Operations
For the six months ended June 30, 2000 1999
----------- -----------
Revenue $11,346,148 $ 6,535,145
Cost and expenses
Compensation and employee benefits 7,222,106 3,437,460
Office and overhead expenses (1) 2,991,431 2,184,309
Depreciation and amortization 760,221 316,513
Outside services 44,242 314,134
----------- -----------
Total costs and expenses 11,018,000 6,252,416
Income from operations 328,148 282,729
Other income (expense)
Interest income (expense) 284,352 (203,587)
Management fees charged to Frontier 150,000 50,000
Rental income -- 197,297
----------- -----------
Total other income 434,352 43,710
Income before taxes and minority interest 762,500 326,439
Income taxes 460,365 189,625
----------- -----------
Income before minority interest 302,135 136,814
Minority interest 33,555 63,636
----------- -----------
Net income $ 335,690 $ 200,450
=========== ===========
----------
(1) Charges from Progressive relating to certain general and administrative
expenses allocated to the company were $1,560,205 and $1,538,593 in 2000
and 1999, respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
D-15
<PAGE>
United Financial Adjusting Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the period ended June 30, 2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 335,690 $ 200,450
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 406,675 156,732
Amortization 353,546 159,781
Deferred taxes 304,322 178,725
Minority interest (33,555) (63,636)
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable-net (706,544) (1,129,264)
Prepaid expenses (18,015) (7,120)
Other assets (7,145) --
Increase (decrease) in:
Deferred revenue (281,275) 387,443
Accounts payable 760,865 1,022,922
Other liabilities and accruals 967,452 (155,130)
Income taxes payable / receivable (149,662) 207,454
----------- -----------
Net cash provided by operating activities 1,932,354 958,357
Cash flows from investing activities
Purchase of JW Software (1,000,000) --
Purchase of Vedder Software (408,000) --
Purchase of property and fixed assets (435,578) (31,580)
Capitalized software (1,137,080) (324,256)
----------- -----------
Net cash used in investing activities (2,980,658) (355,836)
Cash flows from financing activities
Change in agency deposits for claims disbursements, net (5,438,495) (2,150,038)
Change in receivable/payable parent and affiliates 8,273,034 1,571,169
----------- -----------
Net cash used in financing activities 2,834,539 (578,869)
----------- -----------
Net increase in cash 1,786,235 23,652
Cash at beginning of the period 230,724 5,932
----------- -----------
Cash at end of the period $ 2,016,959 $ 29,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
D-16
<PAGE>
UNITED FINANCIAL ADJUSTING COMPANY AND SUBSIDIARIES
(INCLUDES UNITED FINANCIAL ADJUSTING COMPANY, JW SOFTWARE, INC.,
AND DBG TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE , 2000 AND 1999
NOTE 1: 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>
June 30, 2000 UFAC JW DBG Elim. Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
External revenue $ 10,518,567 $ 762,837 $ 64,744 $ -- $ 11,346,148
Inter-segment revenue $ -- $ 73,871 $ 77,925 $ (151,796) $ --
------------ ------------ ------------ ------------ ------------
$ 10,518,567 $ 836,708 $ 142,669 $ (151,796) $ 11,346,148
Depreciation and amortization $ 718,688 $ 41,533 $ -- $ -- $ 760,221
Interest expense $ -- $ -- $ -- $ -- $ --
Segment net income $ 551,728 $ (104,377) $ (111,661) $ -- $ 335,690
Expenditures for segment assets $ 2,524,174 $ 456,484 $ -- $ -- $ 2,980,658
Segment assets $ 17,560,274 $ 1,652,308 $ 20,575 $ -- $ 19,233,157
June 30, 1999
External revenue $ 5,328,970 $ 1,206,175 $ -- $ -- $ 6,535,145
Inter-segment revenue $ -- $ 7,940 $ 484,709 $ (492,649) $ --
------------ ------------ ------------ ------------ ------------
$ 5,328,970 $ 1,214,115 $ 484,709 $ (492,649) $ 6,535,145
Depreciation and amortization $ 306,960 $ 9,553 $ -- $ -- $ 316,513
Interest expense $ 203,416 $ 171 $ -- $ -- $ 203,587
Segment net income $ 55,027 $ (66,233) $ 211,656 $ -- $ 200,450
Expenditures for segment assets $ 355,836 $ -- $ -- $ -- $ 355,836
Segment assets $ 14,328,922 $ 532,472 $ 22,713 $ -- $ 14,884,107
</TABLE>
NOTE 2: 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.
D-17
<PAGE>
ANNEX E
FRONTIER ADJUSTERS OF AMERICA, INC.
AUDIT COMMITTEE CHARTER
MISSION STATEMENT
The audit committee will assist the board of directors in fulfilling its
oversight responsibilities. The audit committee will review the financial
reporting process, the system of internal control, the audit process, and the
company's process for monitoring compliance with laws and regulations and with
the code of conduct. In performing its duties, the committee will maintain
effective working relationships with the board of directors, management, and the
internal and external auditors. To effectively perform his or her role, each
committee member will obtain an understanding of the detailed responsibilities
of committee membership as well as the company's business, operations and risks.
ORGANIZATION
SIZE OF COMMITTEE
The committee will be comprised of a minimum of three independent directors,
each of whom is financially literate or becomes financially literate within a
reasonable period of time after his or her appointment to the audit committee.
At least one member of the audit committee will have accounting or related
financial management expertise.
MEMBER QUALIFICATIONS
Committee members will possess the following qualifications:
* Integrity
* Recognition of audit committee's significant role
* Dedication of time and energy
* Understanding of the business
* Knowledge of the company's risks and controls and the ability to offer
insights
* Inquisitiveness and independent judgement
* Ability to offer new and different perspectives and constructive
suggestions
FREQUENCY OF MEETINGS
The committee will meet regularly and carefully plan its timetable, agenda and
participants. Meeting dates will correspond with dates of board of directors'
meetings.
A written agenda will be prepared and distributed to the committee members in
advance. The committee will refer to its charter regularly to ensure that
meeting agendas are designed to meet the committee's objectives.
In addition to general meetings, the committee will meet privately with
management and with the internal auditors and external auditors at least once
during the year.
The board of directors will select a committee chairperson. This person will
possess strong leadership skills, objectivity and the ability to promote
effective working relationships (among committee members and with others such as
management and internal and external auditors).
INTERNAL AUDIT FUNCTION
Due to the size of the company's operation, the internal audit function is an
integral role in the company's finance/control organization. As such, the
company's Controller acts in the capacity of Director of Internal Audit.
Frontier Adjusters Of America, Inc. Audit Committee Charter - 1
<PAGE>
ROLES AND RESPONSIBILITIES
INTERNAL CONTROL
* Evaluate whether management is setting the appropriate tone at the top by
communicating the importance of internal control and ensuring that all
individuals possess an understanding of their roles and responsibilities;
* Focus on the extent to which internal and external auditors review computer
systems and applications, the security of such systems and applications,
and the contingency plan for processing financial information in the event
of a systems breakdown;
* Gain an understanding of whether internal control recommendations made by
internal and external auditors have been implemented by management; and
* Ensure that the external auditors keep the audit committee informed about
fraud, illegal acts, deficiencies in internal control, and certain other
matters.
FINANCIAL REPORTING
GENERAL
* Review significant accounting and reporting issues, including recent
professional and regulatory pronouncements, and understand their impact on
the financial statements; and
* Ask management and the internal and external auditors about significant
risks and exposures and the plans to minimize such risks.
ANNUAL FINANCIAL STATEMENTS
* Review the annual financial statements and determine whether they are
complete and consistent with the information known to committee members,
and assess whether the financial statements reflect appropriate accounting
principles;
* Pay particular attention to complex and/or unusual transactions such as
restructuring changes and derivative disclosures;
* Focus on judgmental areas such as those involving valuation of assets and
liabilities;
* Meet with management and the external auditors to review the financial
statements and the results of the audit;
* Consider management's handling of proposed audit adjustments identified by
the external auditors;
* Review the MD&A and other sections of the annual report before its release
and consider whether the information is adequate and consistent with
members' knowledge about the company and its operations; and
* Ensure that the external auditors communicate certain required matters to
the committee.
Frontier Adjusters Of America, Inc. Audit Committee Charter - 2
<PAGE>
INTERIM FINANCIAL STATEMENTS
* Be briefed on how management develops and summarizes quarterly financial
information, the extent of internal audit/control involvement, the extent
to which the external auditors review quarterly financial information, and
whether that review is performed on a pre- or post-issuance basis;
* Meet with management and, if a pre-issuance review was completed, with the
external auditors, either telephonically or in person, to review the
interim financial statements and the results of the review. (This may be
done by the committee chairperson or the entire committee);
* To gain insight into the fairness of the interim statements and
disclosures, obtain explanations from management and from the internal and
external auditors on whether:
* Actual financial results for the quarter or interim period varied
significantly from budgeted or projected results;
* Changes in financial ratios and relationships in the interim financial
statements are consistent with changes in the company's operations and
financing practices;
* Generally accepted accounting principles have been consistently
applied;
* There are any actual or proposed changes in accounting or financial
reporting practices;
* There are any significant or unusual events or transactions;
* The company's financial and operating controls are functioning
effectively;
* The company has complied with the terms of loan agreements or security
indentures; and
* The interim financial statements contain adequate and appropriate
disclosures.
* Ensure that the external auditors communicate certain required matters to
the committee.
COMPLIANCE WITH LAWS AND REGULATIONS
* Review the effectiveness of the system for monitoring compliance with laws
and regulations and the results of management's investigation and follow-up
(including disciplinary action) on any fraudulent acts or accounting
irregularities;
* Periodically obtain updates from management, general counsel and outside
tax accountants regarding compliance;
* Be satisfied that all regulatory compliance matters have been considered in
the preparation of the financial statements; and
* Review the findings of any examinations by regulatory agencies such as the
Securities and Exchange Commission.
COMPLIANCE WITH CODE OF CONDUCT
* Ensure that a code of conduct is formalized in writing and that all
employees are aware of it;
* Evaluate whether management is setting the appropriate tone at the top by
communicating the importance of the code of conduct and the guidelines for
acceptable business practices;
* Review the program for monitoring compliance with the code of conduct; and
* Periodically obtain updates from management and general counsel regarding
compliance.
Frontier Adjusters Of America, Inc. Audit Committee Charter - 3
<PAGE>
INTERNAL AUDIT
* Review the activities and organizational structure of the internal
audit/control function;
* Review the qualifications of the internal audit/control function and concur
in the appointment, replacement, reassignment, or dismissal of the director
of internal audit/controller; and
* Review the effectiveness of the internal audit/control function.
EXTERNAL AUDIT
* Review the external auditors' proposed audit scope and approach;
* Review the performance of the external auditors and recommend to the board
of directors the appointment or discharge of the external auditors; and
* Review and confirm the independence of the external auditors by reviewing
the nonaudit services provided and the auditors' assertion of their
independence in accordance with professional standards.
OTHER RESPONSIBILITIES
* Meet with the external auditors, director of internal audit/controller, and
management in separate executive sessions to discuss any matters that the
committee or these groups believe should be discussed privately;
* Ensure that significant findings and recommendations made by the internal
and external auditors are received and discussed on a timely basis;
* Review, with the company's counsel, any legal matters that could have a
significant impact on the company's financial statements;
* Review the policies and procedures in effect for considering officers'
expenses and perquisites;
* If necessary, institute special investigations and, if appropriate, hire
special counsel or experts to assist;
* Perform other oversight functions as requested by the full board; and
* Review and update the charter; receive approval of changes from the board.
REPORTING RESPONSIBILITIES
* Regularly update the board of directors about committee activities and make
appropriate recommendations.
Adapted: May 31, 2000
Frontier Adjusters Of America, Inc. Audit Committee Charter - 4
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FRONTIER ADJUSTERS OF AMERICA, INC.
ANNUAL 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. ("Frontier") held of record by the undersigned as of the close of
business on September 18, 2000, at the annual meeting of shareholders to be held
on October 25, 2000, at 10:00 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
September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. ELECTION OF DIRECTORS. FOR all nominees listed below WITHHOLD AUTHORITY
(except as indicated) to vote for each
nominee listed below
If you wish to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below:
R. Steven Brooks Peter I. Cavallaro John M. Davies
Jeffrey R. Harcourt Troy M. Huth Jeffrey C. Jordan
Matthew P. Lawlor Stephen V. Murphy Kenneth A. Sexton
3. TO APPROVE THE ADOPTION OF FRONTIER'S 2000 STOCK PLAN. To approve the
adoption of Frontier's 2000 Incentive Stock Plan as described in the Proxy
Statement dated September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. TO APPROVE CHANGE TO THE ARTICLES OF INCORPORATION REGARDING THE
LIMITATIONS OF LIABILITY. To approve the proposed changes to the Articles
of Incorporation regarding the limitations of liability as described in the
Proxy Statement dated September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. TO APPROVE CHANGE TO THE ARTICLES OF INCORPORATION REGARDING THE
INDEMNIFICATION PROVISIONS. To approve the proposed changes to Articles of
Incorporation regarding the indemnification provisions as described in the
Proxy Statement dated September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. TO APPROVE CHANGE TO THE ARTICLES OF INCORPORATION REGARDING THE CONFLICT
OF INTEREST PROVISIONS. To approve the proposed changes to the Articles of
Incorporation regarding the conflict of interest provisions as described in
the Proxy Statement dated September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. TO APPROVE CHANGE TO THE ARTICLES OF INCORPORATION TO UPDATE THE
DESCRIPTION OF THE PURPOSE AND THE CHARACTER OF THE BUSINESS OF FRONTIER.
To approve the proposed changes to Articles of Incorporation to update the
description of the purpose and the character of the business of Frontier as
described in the Proxy Statement dated September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE>
8. TO APPROVE CHANGE TO THE ARTICLES OF INCORPORATION TO CHANGE FRONTIER'S
NAME. To approve the proposed changes to Articles of Incorporation to
change Frontier's name as described in the Proxy Statement dated September
25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
9. TO APPROVE CHANGE TO THE ARTICLES OF INCORPORATION REGARDING THE SERIAL
PREFERRED STOCK. To approve the proposed changes to Articles of
Incorporation regarding the Serial Preferred Stock as described in the
Proxy Statement dated September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
10. TO APPROVE CHANGE TO THE ARTICLES OF INCORPORATION REGARDING THE
MAINTENANCE OF CERTAIN CORPORATE RECORDS AT THE KNOWN PLACE OF BUSINESS OF
FRONTIER. To approve the proposed changes to Articles of Incorporation
regarding the maintenance of certain corporate records at the known place
of business of Frontier as described in the Proxy Statement dated September
25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
11. TO APPROVE CHANGE TO THE AMENDED AND FIRST RESTATED ARTICLES OF
INCORPORATION. To approve the proposed changes to Amended and First
Restated Articles of Incorporation as described in the Proxy Statement
dated September 25, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
12. TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS, LLP AS AUDITORS. To
ratify the appointment of PricewaterhouseCoopers, LLP as the auditors of
Frontier for the fiscal year ended June 30, 2001.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Annual 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, FOR Proposal 2, FOR Proposal 3, FOR Proposal 4, FOR
Proposal 5, FOR Proposal 6, FOR Proposal 7, FOR Proposal 8 and , Proposal 9, FOR
Proposal 10, FOR Proposal 11 and FOR Proposal 12.
Receipt of Notice of Annual Meeting of Shareholders and related Proxy Statement
dated September 25, 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:
------------------------
