FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file Number: 17637
Fronteer Financial Holdings, Ltd.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 45-0411501
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1700 Lincoln Street, 32nd Floor
Denver, CO 80203
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 860-1700
Securities registered pursuant to Section 12(g) of the Act:
$0.01 Par Value Common Stock
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
As of December 11, 1996, the aggregate market value of the Registrant's
voting stock held by nonaffiliates was $7,019,538.
As of December 11, 1996, Registrant had 16,871,557 shares of its $0.01 par
value common stock issued and outstanding.
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PART I
ITEM 1. BUSINESS
Business . Fronteer Financial Holdings, Ltd. (formerly Fronteer Directory
Company, Inc., the Company) is a corporation which was organized under the laws
of the state of Colorado on September 14, 1988. The Company was formed for the
purpose of assuming all of the assets and liabilities of a North Dakota
corporation, incorporated on April 1, 1977. The focus of the Company's business
changed in April of 1995, following the Company's acquisition of the assets of
RAFCO, Ltd. (RAFCO), the holding company of a Denver, Colorado based securities
broker/dealer, and the sale of 10 of the Company's 20 telephone directories to a
third party. Before April of 1995, the Company's primary business was publishing
telephone directories covering areas in the states of North Dakota, South
Dakota, Montana, Idaho, Utah, Wyoming and Minnesota. The Company's primary
source of revenue prior to April of 1995 was selling display advertisements in
the yellow pages, selling bold and color listings in the white pages, selling
advertisements on the back cover page, and selling discount coupons included as
part of the telephone directories published by the Company. Subsequent to April
of 1995, in addition to the telephone directories, the Company owned
subsidiaries, R A F Financial Corporation (RAF) which operates as a fully
disclosed securities broker/dealer, Secutron Corporation (Secutron) which
designs, develops, installs, markets and supports software systems for the
securities brokerage industry, Fronteer Personnel Services, Inc. (FPS) which
performs payroll and benefits administration, and Fronteer Marketing Group, Inc.
(FMG) which engages in inbound/outbound telemarketing. RAF and Secutron are
Colorado corporations; FPS and FMG are North Dakota corporations.
Sale of Clearing Operation. On July 23, 1996, the Company sold its
securities brokerage clearing division (Clearing Operation) to MultiSource
Services, Inc. (MSI), a new broker/dealer, for a purchase price of $3,000,000,
including a $1,500,000 contingency in the form of a forgivable loan, plus the
net assets of the Clearing Operation. In addition, the Company received 20% of
the outstanding common stock of MSI. As a result of this transaction, RAF has
become a fully disclosed clearing correspondent of MSI. The loan of $1,500,000,
which has been recorded as a loan payable to MSI, is forgivable based on MSI's
revenues during the 28 months following the closing date. If MSI's revenues
exceed $1,250,000 during the 5th through the 16th month following the closing,
$750,000 of the loan will be forgiven. If MSI's revenues exceed $1,750,000
during the 17th through the 28th month following the closing, the remaining
$750,000 will be forgiven. To the extent that such revenue targets are not met
by MSI, the subject portion of the loan or accrued interest will not be
forgiven. The loan is payable by the Company on the 30th day after the last day
of the 16th and 28th months following the closing date if the revenue targets
are not achieved by MSI. The loan is non-interest bearing if no principal
payments are in default. Interest on any amount past due will accrue at the rate
of 10% per annum. Management expects MSI to meet the revenue targets and that
the loan will be forgiven.
Private Placement. On February 16, 1996, the Company commenced a private
placement of 6,000,000 shares of its $.01 par value common stock (Common Stock)
at a price of $1.00 per share, and 6,000,000 Class A redeemable common stock
purchase warrants at a price of $.10 per warrant, (collectively, the Private
Placement). The warrants entitle the holder to purchase one share of Common
Stock at $1.50 per share at any time until May 1, 2000. As of September 30,
1996, 5,229,045 shares of Common Stock and warrants had been issued through the
Private Placement for proceeds of $5,137,246, net of $614,704 of issuance costs.
As of December 11, 1996, an additional 729,613 shares of Common Stock and
warrants have been issued for proceeds of approximately $722,000, net of
issuance costs. Consistent with the Private Placement Memorandum, the proceeds
of the Private Placement were used to purchase 1,558,078 shares of Common Stock
for $1,200,000, purchase and retire the 87,500 shares of Series A voting
cumulative preferred stock for $875,000, repayment of certain debt of
$1,325,000, and for working capital purposes.
Description of Businesses
DIRECTORY DIVISION.
General. Currently, the Company publishes 10 telephone directories, nine of
which cover areas located in North Dakota and one of which covers an area in
Utah. The Company has signed an option agreement with Telecom *USA Publishing
Company (Telecom) which granted Telecom an option (Option) to acquire the
Company's nine North Dakota telephone directories. Telecom may exercise its
Option between June 1, 1997 and June 1, 1999. If Telecom does not exercise its
Option, Telecom will forgive payment of the full amount of a $500,000 loan made
by Telecom to the Company as consideration for the Option. Nine of the Company's
employees will be required to sign agreements not to compete with Telecom if
Telecom exercises its option to buy the North Dakota directories. One of these
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employees, Dennis W. Olson, is the president and a director of the Company. In
consideration for agreeing not to compete with Telecom, these nine employees of
the Company will receive approximately 25% of the purchase price paid by Telecom
for the nine North Dakota directories. The Company's Directory Division conducts
its telephone directory publishing business and the business of two of its
subsidiaries, FPS and FMG. The Directory Division is managed by an advisory
board consisting of seven members, six of whom are former members of the
Company's board of directors and the seventh member is Dennis W. Olson.
Directory Business. The Company's directory business currently publishes
and distributes telephone directories covering areas in North Dakota and one
directory in Utah. In the areas covered by the Company's telephone directories,
consumers often receive two telephone directories which contain the same
telephone listings, one of which is published by the local telephone company and
one of which is published by the Company's directory business. The Company's
directory business competes directly with the directories published by local
telephone companies and with other independent directory publishers. In some
cases, there may be more than one independent directory publisher covering the
same area. In the areas served by the Company's directories, there are 17
competing directories, of which 15 are published by local telephone companies
and two are published by other independent directory publishers. The Company's
directory business publishes directories under contract with 13 small
independent telephone companies, several of which are consolidated into larger
directories. The Company published a total of 11 directories in fiscal year
1996. The table below shows information regarding the directories published by
the Company during the last three fiscal years.
<TABLE>
<CAPTION>
Advertising Revenue(2)
Approximate -------------------------------------
Area Circulation(1) 1996 1995 1994
---- -------------- ---- ---- ----
<S> <C> <C> <C> <C>
Central, SD ............... 27,000 (3) $ 135,924 $ 118,964
Jamestown, ND ............. 18,000 $ 128,381 120,352 109,016
Big Sky Central, MT ....... 24,000 (3) 176,896 156,791
Valley City, ND ........... 12,000 66,681 61,921 61,266
Durum Triangle, ND ........ 36,000 264,267 245,169 230,524
Williston Basin, ND ....... 66,000 525,938 500,956 455,216
Bismarck, ND .............. 140,000 1,560,182 1,336,220 1,229,907
Southeast, ND ............. 30,000 289,345 263,993 256,940
Souris River (Minot), ND... 110,000 2,013,393 2,021,701 1,965,30
Fargo, ND ................. 175,000 1,199,191 (4) 1,094,488
Badlands Consolidated
(Dickinson), ND ........... 37,000 414,262 (4) 370,487
Billings, MT .............. 118,000 (3) 1,001,878 884,054
Great Falls, MT ........... 102,000 (3) (3) 521,722
Gila County, AZ ........... 33,000 (5) (5) 160,912
Range, MT ................. 27,000 (3) 124,996 86,593
Twin Falls, ID ............ 93,000 (3) (3) 312,517
Bridgerland, UT (6) ....... 42,000 507,507 396,530 348,683
Idaho Falls, ID ........... 144,000 (3) 920,712 816,109
University of Montana ..... 11,000 (8) 65,756 68,863
Ronan, MT ................. 23,000 (3) 231,596 186,236
Bozeman, MT ............... 49,000 (3) 400,283 --
Big Horn Basin, WY ........ 40,000 (3) 263,671 --
Devils Lake, ND (7) ....... 31,000 342,456 -- --
</TABLE>
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(1) Based on the number of directories printed.
(2) Prior to discounts for early payments and national accounts.
(3) Directories sold to Telecom during fiscal year 1995.
(4) Directory was incomplete at year end and no revenue was recognized in
fiscal year 1995.
(5) Directory was sold to a third party and not published by the Company during
the fiscal years 1995 and 1996.
(6) Independent directory not owned by the Company, but published by the
Company under a publishing contract.
(7) Published under a one year contract with a local telephone company.
(8) Publishing contract not renewed for fiscal year 1996.
The Company's directory business derives revenue by selling advertisements
in the yellow pages portion of its directories, selling bold listings, selling
color listings in the white pages, selling advertisements on the back cover
page, and selling discount coupons for goods and services. The Company's
directory business employs 48 persons, including 11 full time salespersons. The
11 salespersons are compensated on a commission basis. The directory business
owns its own typesetting equipment which allows it to produce camera ready
copies of its directories. The camera ready copy is then printed by third party
printers who bid on each printing job. During fiscal year 1996, the directory
business utilized two different printers, with 90% of the printing work
performed by one printer. If this one printer were to go out of business, this
event would not have a material adverse effect on the directory business because
a number of printers are available. Further, all of the raw materials used by
the directory business are generally available and the directory business is not
dependent on any single supplier. During fiscal year 1995, a worldwide paper
shortage caused a 20% to 30% increase in the cost of the paper used in the
directories published by the Company, but paper prices have stabilized over the
last year.
The Company has seen an increase in its existing directory business as a
result of the sale by US West Communications of 68 of its North Dakota telephone
exchanges to 15 different small telephone companies. The Company's directory
business currently has publishing contracts with 11 telephone companies which
purchased a total of 43 exchanges from U S West Communications. The sale of
exchanges by U S West Communications resulted in five of the Company's existing
directories becoming the official directories for the new local telephone
companies in these areas.
Fronteer Personnel Services, Inc. Since October of 1992, the Company has
performed payroll and benefits administration for small businesses through its
wholly owned subsidiary, FPS, which was formed on October 30, 1992. FPS markets
its services to small businesses in and around the Bismarck, North Dakota
metropolitan area. FPS had six employees as of December 11, 1996, and its office
is located at 2208 East Broadway, Bismarck, North Dakota, 58501. FPS had
revenues of $188,612 and $66,374 for the year ended September 30, 1996 and for
the period from May 1, 1995 to September 30, 1995, respectively, compared with
revenues of $72,934 in fiscal year 1994. Also, FPS had operating losses of
$10,023 and $31,249 for the year ended September 30, 1996 and for the period
from May 1, 1995 to September 30, 1995, respectively, compared with operating
losses of $53,216 in fiscal year 1994. On May 9, 1996, FPS acquired 49% of the
outstanding stock of Payroll Professionals, LLC, a North Dakota limited
liability company which provides payroll services to small contractors.
Fronteer Marketing Group, Inc. On April 3, 1995, the Company formed a new
wholly owned subsidiary, FMG, which engages in the outbound telemarketing
business. In April of 1995, FMG acquired the assets of a telemarketing business
which had ceased operations due to financial difficulties. FMG conducts outbound
telemarketing which consists of soliciting consumers and businesses by
telephone. FMG has 60 full time and two part time employees. FMG markets its
services nationwide primarily through the services of a telemarketing trade
association. In May of 1996, FMG opened a 24 station inbound/outbound center in
Fronteer's Bismarck office building, which is located at 216 North 23rd Street.
In October of 1996, FMG opened a similar center in Flasher, North Dakota at 96
North Main Street. These two centers are tied together from both a computer and
phone system standpoint and allow FMG to handle not only outbound projects, but
are designed to handle incoming 800 number calls for such things as order
processing and customer service. FMG also signed a lease for a building in
Halliday, North Dakota, which will commence on January 1, 1997. FMG's other
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office is located in Beulah, North Dakota at Highway 49 South. FMG had revenues
of $317,082 and $149,780 for the year ended September 30, 1996 and period from
May 1, 1995 to September 30, 1995, respectively, and operating losses of
$724,680 and $103,244 for the year ended September 30, 1996 and for the period
from May 1, 1995 to September 30, 1995, respectively.
Financial Information. The Directory Division, including the Company's
directory business, FPS and FMG, recognized $7,487,997 and $3,925,855 in
revenues for the year ended September 30, 1996 and for the period May 1, 1995
through September 30, 1995, respectively, compared with $9,158,922 for the year
ended December 31, 1994. The Directory Division experienced operating losses of
$1,334,549 and $1,109,965 for the year ended September 30, 1996 and for the
period from May 1, 1995 to September 30, 1995, respectively, as compared with an
operating profit of $325,800 for the year ended December 31, 1994.
RAF FINANCIAL CORPORATION.
General. RAF was incorporated in 1974 to engage in the retail stock
brokerage business in the Rocky Mountain Area of the United States. RAF is
registered as a broker/dealer with the Securities and Exchange Commission
(Commission), is a member of the National Association of Securities Dealers,
Inc. (NASD) and the Boston Stock Exchange, is an associated member of the
American Stock Exchange, and is registered as a securities broker/dealer in all
50 states. RAF is a member of the Securities Investor Protection Corporation
(SIPC) and other regulatory and trade organizations. RAF's securities business
consists of providing retail securities brokerage and investment services,
trading fixed income and equity securities, providing investment banking
services to corporate and municipal clients, managing and participating in
underwriting corporate and municipal securities, and distributing mutual fund
shares. During 1989, RAF registered the mark RAF Financial Corporation with the
United States Patent and Trademark Office, and RAF has registered this name in
32 states. RAF intends to maintain all of its service mark registrations for the
indefinite future in order to protect the goodwill associated with the mark. RAF
conducts its business in six operating divisions. RAF's principal executive
office is located at One Norwest Center, 1700 Lincoln Street, 32nd Floor,
Denver, Colorado, 80203. RAF has branch offices located in Colorado Springs,
Colorado; Fort Collins, Colorado; Atlanta, Georgia; Albany, New York; Reston,
Virginia; Chicago, Illinois, Metairie, Louisiana and Dallas, Texas.
Correspondent Clearing Division. The Correspondent Clearing Division
provided clearing services on a fully disclosed basis to other broker/dealers
under the name of RFC Clearing Services. On July 23, 1996 the Company sold its
Clearing Operation to MSI. As a result, RAF became a fully disclosed clearing
correspondent of MSI. See "Business-Sale of Clearing Operation".
Retail Securities Brokerage Division. RAF conducts its retail brokerage
business through its Retail Securities Brokerage Division. As of September 30,
1996, RAF had 100 account executives and approximately 12,000 customer accounts.
RAF generates commission revenue when it acts as a broker on an agency basis, or
as a dealer on a principal basis, to effect securities transactions for
individual and institutional investors. RAF executes both listed and over the
counter agency transactions for customers, executes transactions and puts and
calls on options exchanges as agent for its customers, and sells a number of
professionally managed mutual funds.
Corporate Finance Division. The Corporate Finance Division provides
financial advisory and capital raising services to corporate clients. Financial
advisory services involve advising clients in mergers and acquisitions and in
various types of corporate valuations. RAF acts as an underwriter, dealer, and
selling group member in public and private offerings of equity and debt
securities. During the year ended September 30, 1996 RAF raised approximately
$14,200,000 through its investment banking activities.
Trading Division. Trading securities involves the purchase and sale of
securities by RAF for its own account. Profits and losses are derived from the
spread between bid and ask prices and market increases or decreases for the
individual security during the holding period. RAF makes markets in corporate
equities and trades in municipal and corporate bonds and various government
securities. As of September 30, 1996, RAF made markets in 42 stocks.
Public Finance Division. The Public Finance Division of RAF provides
professional financial advisory services to public entities, participates in
underwriting and selling both negotiated and competitive bid municipal bond
offerings, and structures and participates in municipal bond refinancings.
During the year ended September 30, 1996, RAF's participation in offerings of
municipal securities was approximately $27,000,000 as manager of nine offerings.
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Financial Information. For the year ended September 30, 1996, RAF's
revenues of $14,830,681 accounted for 51.5% of the Company's total operating
revenues of $28,786,905. RAF's revenues for the nine months ended September 30,
1995, and year ended December 31, 1994 were $9,854,160 and $12,713,456,
respectively. For the year ended September 30, 1996, nine months ended September
30, 1995 and year ended December 31, 1994, RAF incurred a operating loss of
$2,647,327, $1,053,916 and $339,873, respectively.
RAF Regulatory Net Capital. RAF, as a registered securities broker/dealer,
is subject to the Securities and Exchange Commission's Uniform Net Capital Rule
(Rule 15c3-1) (the Rule). RAF has elected to operate pursuant to the alternative
standard provided by the Rule.
Under the alternative standard, RAF is required to maintain "net capital"
of not less than $250,000. As of September 30, 1996, RAF had "net capital" of
$3,879,617.
SECUTRON CORPORATION.
General. Secutron was incorporated under Colorado law on May 11, 1979. The
Company owns approximately 60% of the outstanding stock of Secutron and certain
officers of Secutron own the remaining outstanding stock. Secutron's business
consists of designing, developing, installing, marketing, and supporting
software systems for the securities brokerage industry. Secutron markets
hardware and software to securities brokerage firms as an IBM business partner.
Secutron's IBM business partner relationship is as an industry remarketer
affiliate through Real Applications Ltd., located in Woodland Hills, California.
Secutron's wholly owned subsidiary, MidRange Solutions Corp., is a Colorado
corporation formed on January 1, 1993 (MSC). MSC is in the business of selling
IBM hardware and hardware manufactured by competitors of IBM, and MSC acts as a
distributor for software products which are proprietary to third parties. MSC
sells hardware and software to businesses in several different industries,
including manufacturers, distributors and health care providers. MSC also has a
contract with a software company under which it markets sophisticated financial
accounting software to manufacturers and distribution companies located in
specific areas in which MSC is the exclusive distributor of this software.
Products and Services. Secutron offers the following software products to
the securities brokerage industry. The STARS software system is offered to
broker/dealers who clear their own transactions, and is a totally integrated
software system which performs all of the functions required by self clearing
broker/dealers. The BCATS software system is offered to broker/dealers who clear
their securities transactions on a fully disclosed basis through a clearing
broker/dealer such as MSI, and is also a fully integrated software system which
performs all of the accounting functions required by a fully disclosed
broker/dealer. The BCATS-MF software system is designed for use by
broker/dealers engaging in transactions in mutual funds. All of such software
systems are designed to run on IBM computers. Both Secutron and MSC provide
consulting, programming and facilities management services to their respective
clients to support the software and hardware sold by them.
Financial Information. Secutron's revenues for the year ended September 30,
1996, nine months ended September 30, 1995 and year ended December 31, 1994 were
$6,975,591, $3,628,364 and $3,519,501, respectively. Operating profits for the
year ended September 30, 1996 and nine months ended September 30, 1995 were
$281,775 and $25,991 and, respectively. Secutron incurred an operating loss of
$159,694 for the year ended December 31, 1994.
Employees and Employee Relations
Employees. As of December 11, 1996, the Company had 325 full time
employees, 114 of whom worked for the Directory Division in the Company's North
Dakota offices and 176 of whom worked for RAF. As of December 11, 1996, Secutron
had 35 employees. RAF's headquarters are located in Denver, Colorado, but 91 of
RAF's employees work in branch offices of RAF located in Colorado Springs,
Colorado; Fort Collins, Colorado; Reston, Virginia; Atlanta, Georgia; Albany,
New York; Chicago, Illinois; Metairie, Louisiana; and Dallas, Texas. The Company
considers its relations with its employees to be good.
Competition
Directory Division. The Company's directory business competes primarily
with U S West Direct, which publishes telephone directories in many of the same
markets in which the Company publishes directories. U S West Direct has several
advantages that the Company's directory business does not possess, including
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greater financial resources, name recognition and an affiliation with U S West,
a large telephone company. Management believes the Company's directory business
is able to compete effectively with U S West Direct in obtaining contracts with
independent telephone companies due to the following factors: (i) some of the
Company's directories are so small they may not be of interest to U S West
Direct; (ii) the Company's directory business maintains good relations with the
telephone companies for which it publishes directories; and (iii) management
believes that the Company's directory business publishes directories which are
superior to U S West Direct's directories with respect to including information
about the community and offering more types of advertisements. In addition,
management believes the Company's directory business competes effectively with U
S West Direct in obtaining advertisements for its directories for the following
reasons: (i) in some markets, the Company's directories list special telephone
numbers for certain advertisers which consumers can call to obtain community
information and a message from the advertisers; and (ii) the Company's
directories usually charge lower advertising rates than U S West Direct. The
Company's directory business also competes less directly with other forms of
advertising media such as newspapers, magazines, television and radio, although
it is difficult to assess how the Company's directory business is affected by
other forms of advertising. FPS and FMG face considerable competition in their
lines of business.
RAF. The securities industry has become considerably more concentrated and
more competitive in recent periods as numerous securities firms have either
ceased operation or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired securities firms. The securities
industry is now dominated by relatively few very large securities firms offering
a wide variety of investment related services nationally and internationally.
Numerous commercial banks have petitioned and received approval from the Board
of Governors of the Federal Reserve System to enter into a variety of new
securities activities. Various legislative proposals, if enacted, would permit
commercial banks to engage in other types of securities related activities.
These developments or other developments of a similar nature may lead to the
creation of integrated financial service firms that offer a broader range of
financial services than those offered by RAF. These developments have created
large, well capitalized, integrated financial service firms with which RAF must
compete. The securities industry has also experienced substantial commission
discounting by broker/dealers competing for institutional and individual
brokerage business. An increasing number of specialized firms offer "discount"
services to individual customers. These firms generally effect transactions for
their customers on an "execution only" basis without offering other services
such as investment recommendations and research. Such discounting and an
increase in the number of new and existing firms offering such discounts could
adversely affect RAF's retail securities business.
Secutron. Secutron competes with numerous software and hardware
distribution firms, and hardware manufacturers, some of which are larger than
Secutron with greater financial resources than Secutron. Secutron also competes
with firms that specialize in industry specific software and those that offer a
variety of software products to businesses in various industries. MSC competes
with hardware manufacturers and other licensed distributors of IBM hardware and
distributors of hardware manufactured by competitors of IBM. Many of MSC's
competitors are larger than MSC and have greater financial resources.
Regulation
Directory Business. The Company's directory business is not subject to
material regulation by federal, state or local governments. The directory
business is a member of the Yellow Pages Publishers Association (Association)
which has its own Code of Ethics which regulates the business practices of its
members with respect to solicitation and billing of advertisers. If the
directory business were to violate this Code of Ethics, it could be expelled
from membership in the Association and lose national advertising accounts.
RAF. The securities industry in the United States is subject to extensive
regulation under federal and state laws. The Commission is a federal agency
charged with administration of the federal securities laws. Much of the
regulation of broker/dealers has been delegated to self regulatory
organizations, principally the NASD and the exchanges. These self regulatory
organizations adopt rules (which are subject to approval by the Commission) for
governing the industry and conduct periodic examinations of member
broker/dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they do business. Broker/dealers
are subject to regulations that cover all aspects of the securities business,
including sales methods, trading practices among broker/dealers, capital
structure of securities firms, record keeping, and the conduct of directors,
officers, and employees. Additional legislation, changes in rules promulgated by
the Commission and by self regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules often directly affect
the method of operation and profitability of broker/dealers. The Commission, the
self regulatory authorities, and the state securities commissions may conduct
proceedings which can result in censure, fine, suspension, or expulsion of a
broker/dealer, its officers, or employees.
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RAF is required by federal law to belong to SIPC. When the SIPC fund falls
below a certain minimum amount, members are required to pay annual assessments.
The SIPC fund provides protection for securities held in customer accounts up to
$500,000 per customer, with a limitation of $100,000 on claims for cash
balances.
RAF is subject to the Commission's Uniform Net Capital Rule which is
designed to measure the financial integrity and liquidity of a broker/dealer and
the minimum net capital deemed necessary to meet its commitments to its
customers. RAF is in compliance with the Rule. Failure to maintain the required
net capital may subject RAF to suspension by the Commission or other regulatory
bodies and may ultimately require its liquidation. The Company is not itself a
registered broker/dealer and is not subject to the Net Capital Rule. However,
under the Rule, the Company could be affected by the requirement that a
broker/dealer such as RAF under certain circumstances is prohibited, and under
other circumstances may be temporarily restricted, by the Commission from the
withdrawal of equity capital by a stockholder such as the Company.
See Note 15 to the Company's consolidated financial statements for
financial information pertaining to the Company's industry segments.
ITEM 2. PROPERTIES
Directory Division Properties. The directory business maintains its
administrative offices and production facilities in a 9,400 square foot building
owned by the Company at 216 North 23rd Street, Bismarck, North Dakota 58501. The
Company acquired the property on which the building is located for $115,000
pursuant to a contract for deed with a nonaffiliated party. The directory
business rents 600 square feet of office space at 1323 23rd Street South, Suite
E, Fargo, North Dakota. FPS rents approximately 2,200 square feet of office
space in a building located at 2208 East Broadway, Bismarck, North Dakota,
58501. FMG leases approximately 3,300 square feet of office space in a building
located at Highway 49 South, Beulah, North Dakota and approximately 3,000 square
feet of office space in a building located at 96 North Main in Flasher, North
Dakota. Noncancelable operating leases for the Directory Division approximate
$13,000 per year through the year 2001.
Secutron Properties. Secutron's office is located at 3773 Cherry Creek
North Drive, Suite 500, Denver, CO 80209, which consists of approximately 8,000
square feet of leased space. The lease expires on July 31, 2003. Secutron
currently pays monthly rent of $9,078.
RAF Properties. RAF's principal offices are located at One Norwest Center,
1700 Lincoln Street, 32nd Floor, Denver, Colorado, 80203, which consist of
approximately 47,071 square feet of space subleased. The sublease expires on
April 30, 2007. The Company currently pays monthly rent of $53,935 for the
space. Under the terms of the sale of the Clearing Operation, RAF receives
monthly rental fees of $10,000 to $12,000 through July 1999 for its occupied
space. See "Business-Sale of Clearing Operation".
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings Against the Directory Division. There are no pending
material legal proceedings against the Company's directory business, FMG, FPS or
Secutron.
Legal Proceedings Against RAF. On June 2, 1994, a lawsuit entitled Madison
Sports & Entertainment Group, Inc. v. RAF Financial Corporation was filed
against RAF in Case No. 94-2235-CA-B, in the Circuit Court for the Fifth
Judicial Circuit in Marion County, Florida. The complaint alleged damages
against RAF and others in excess of $10,000,000 arising out of the alleged
improper handling of securities by RAF and other defendants. The claims asserted
against RAF were breach of contract, negligent misrepresentation, breach of
fiduciary duty, and joint and several liability of all defendants. RAF was
dismissed from this lawsuit, with prejudice, on March 27, 1996.
On December 23, 1996, RAF received notification of an arbitration award in
NASD Arbitration No. 95- 00966, William J. Chesnut, et al. v. RAF Financial
Corporation, et al that was originally filed on March 2, 1995. The claimants in
that case alleged that RAF had fraudulently conspired to market certain
low-priced, speculative, NASDAQ stocks while misrepresenting and failing to
disclose material facts regarding these stocks to the claimants resulting in
damages in excess of $1,100,000.00. A hearing on these claims was held from
September 16-21, 1996 in Raleigh, North Carolina and, in the award mentioned
above, the arbitration panel awarded the two claimants a total of $19,874.50.
8
<PAGE>
Additionally, on December 23, 1996, RAF received notification of an
arbitration award in NASD Arbitration No. 95-05062, Chang, et al. v. RAF
Financial Corporation that was originally filed on October 21 1995. The
allegations in that case relate to a private placement sold by a former broker
at RAF all of which sales occurred prior to his employment by RAF. These sales
occurred without RAF knowledge or approval by RAF; RAF did not participate in
these sales in any way, nor were any related transactions reflected on RAF books
and records. In a split decision of the arbitration panel, damages were awarded
in the amount $424,824.00 against RAF. The chairman of the arbitration panel
dissented from this decision and stated that RAF should be required to pay no
damages. RAF believes this is an aberrant award and intends to appeal.
On December 4, 1996, Barney M. Baker et al. v. RAF Financial Corporation,
Civil Action No. 890231 L which was filed on April 3, 1992, in the United States
District Court in the Western District of New York, was dismissed in its
entirety by the court. The petitioners in that case had alleged that RAF held
over $690,000.00 which was required to be returned to them. This April 3, 1992
matter was a derivative action from a February, 1989 case, with the same 1989
plaintiffs and attorneys naming RAF, after RAF was entirely dismissed, and with
prejudice, from the 1989 matter.
RAF is a defendant in certain other arbitration and litigation matters
arising from its activities as a broker/dealer, none of which involves claims
for damages that exceed 10% of the Company's current assets. In the opinion of
management and in-house counsel, these matters have been adequately provided for
in the accompanying consolidated financial statements, and the ultimate
resolution of the arbitration and litigation will not have a significant adverse
effect on the consolidated results of operations or the consolidated financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the Company's fiscal quarter ended September 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. The Company's Common Stock has been traded on the
Nasdaq Small Cap Market under the symbol FDIR since March 27, 1989. The
following table shows the range of high and low bid quotations for the Common
Stock, for each quarterly period since October 1, 1994, as reported by the NASD.
These quotations represent prices between dealers and do not include retail
markups, markdowns, or commissions and may not necessarily represent actual
transactions.
Common Stock
-----------------
High Low
---- ---
Fiscal Quarter Ended
September 30, 1996....................................... .875 .625
June 30, 1996............................................ 1.125 .906
March 31, 1996........................................... 1.313 .75
December 31, 1995........................................ .875 .625
September 30, 1995....................................... .88 .63
June 30, 1995............................................ 1.56 .56
March 31, 1995........................................... .66 .44
December 31, 1994........................................ .53 .41
(b) Holders. As of December 11, 1996, the Company had approximately 350
holders of record of its Common Stock.
9
<PAGE>
(c) Dividends. The Company has no declared cash dividends on its Common
Stock since its inception and the Company does not anticipate paying any
dividends in the foreseeable future. The Company was precluded from paying
dividends on its Common Stock so long as shares of Preferred Stock were
outstanding and if dividends had not been paid in full on the Preferred Stock.
The Preferred Stock was purchased and retired during the year ended September
30, 1996.
(d) Recent Sales of Unregistered Securities. On February 16, 1996, the
Company commenced the Private Placement of 6,000,000 shares of its $.01 par
value Common Stock at a price of $1.00 per share, and 6,000,000 Class A
redeemable common stock purchase warrants at a price of $.10 per warrant. The
warrants entitle the holder to purchase one share of Common Stock at $1.50 per
share at any time until May 1, 2000. As of September 30, 1996, 5,229,045 shares
of Common Stock and warrants had been issued through the Private Placement for
proceeds of $5,137,246, net of commissions and issuance costs of $614,704. RAF
is acting as the selling agent in connection with the Private Placement and
receives a sales commission of 10% ($581,685 as of September 30, 1996) of the
gross proceeds of the Private Placement and Class B common stock warrants to
purchase one share of Class B common stock for each 10 shares of Common Stock
sold in the Private Placement. The exercise price of these warrants is $1.50 per
share and these warrants are exercisable until May 1, 2000. As of December 11,
1996, an additional 729,613 shares of Common Stock and warrants have been issued
for proceeds of approximately $722,000, net of issuance costs.
The offers and sales pursuant to the Private Placement were made in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, and/or Regulation D and Rule 506 adopted
thereunder. The purchasers were provided with the information required by
Regulation D and a Form D was filed. All of the purchasers have represented that
they purchased the securities for the purchaser's own account and not for the
purpose of immediate resale and agreed that the purchaser could not resell the
securities without compliance with the provisions of the Securities Act of 1933,
as amended. All certificates issued to the purchasers were impressed with a
restrictive legend advising that the securities represented by the certificates
may not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.
The Company's transfer agent will be advised to place "stop transfer"
instructions against the transfer of these certificates.
ITEM 6. SELECTED FINANCIAL DATA
As a result of the transaction whereby the Company acquired the assets of
RAFCO, the former shareholders of RAFCO acquired a 55% interest in the Company.
Accordingly, the transaction has been accounted for as a "reverse acquisition"
of the Company by RAFCO using the purchase method of accounting and the
Company's assets and liabilities prior to the transaction have been adjusted to
their fair market value as of the date of the business combination. The
adjustment to fair market value resulted in an intangible asset, directory
publishing rights, which was recorded at $7,109,378. The Company's operations
are included in the consolidated financial statements beginning May 1, 1995, the
effective date of the business combination. As a result of the reverse
acquisition accounting, historical financial statements presented for periods
prior to the business combination date include the consolidated assets,
liabilities, equity, revenues, and expenses of RAFCO only. The following is
selected consolidated financial information (in thousands, except per share
data) for the Company as of September 30, 1996 and 1995 and for the year ended
September 30, 1996 and the nine months ended September 30, 1995, and for RAFCO
as of December 31, 1994, 1993, 1992, and for each of the years in the three-year
period ended December 31, 1994. This information should be read in conjunction
with the consolidated financial statements appearing in "Financial Statements
and Supplementary Data" of this Annual Report.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
Year Ended Nine Months Ended -------------------------------
September 30, 1996 September 30, 1995* 1994 1993 1992
------------------ ------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ............................ $ 28,787 $ 17,170 $ 16,259 $ 18,157 $ 17,297
Net earnings
(loss) ........................... (2,359) (1,892) (353) (23) 451
Loss per common
share ............................ (.17) (.20) ** ** **
<CAPTION>
December 31,
-------------------------------
September 30, 1996 September 30, 1995 1994 1993 1992
------------------ ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital .................... $ 4,991 $ 4,130 $ 2,443 $ 3,292 $ 1,890
Total assets ....................... 18,185 20,720 22,326 95,700 58,249
Total long term
liabilities ...................... 5,259 4,854 3,164 3,530 3,189
Total stockholders'
equity ........................... 6,086 5,442 1,188 1,594 805
</TABLE>
*For the period January 1, 1995 through September 30, 1995. See "Business" for
information regarding changes in the Company's business which occurred in fiscal
year 1995.
**Due to the limited number of shares outstanding from 1992 through 1994,
presentation of earnings per share is not meaningful.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's acquisition of the assets of RAFCO has been accounted for as
a reverse acquisition of Fronteer by RAFCO using the purchase method of
accounting. This resulted in Fronteer adjusting its assets and liabilities to
their fair market value at the effective date of the acquisition, or May 1,
1995. As a result of the acquisition, the consolidated financial statements
reflect the Company and its consolidated subsidiaries as of September 30, 1996
and 1995 and for the year ended September 30, 1996 and the nine months ended
September 30, 1995, and for RAFCO and its consolidated subsidiaries for the year
ended December 31, 1994.
On April 27, 1995, the Company sold 10 of its telephone directories to
Telecom. These transactions were accounted for in May of 1995, subsequent to the
effective date of the business combination. The Company also granted an Option
to Telecom on the same date whereby Telecom made a noninterest bearing and
nonrecourse $500,000 loan to the Company in exchange for the Option to acquire
the Company's nine North Dakota telephone directories. Because the Company
adjusted its directories to their fair market value at the time of the
acquisition of the assets of RAFCO, no gain or loss was recognized on the sale
of the directories to Telecom. The book value of the directory publishing rights
after the sale to Telecom was $4,692,769. This amount is being amortized over 10
years.
11
<PAGE>
Results of Operations
In order to provide a more meaningful discussion related to revenues and
expenses as compared from period to period, the following amounts are presented
with certain revenues and expenses from the Consolidated Statements of
Operations for the nine months ended September 30, 1995 being annualized for
discussion purposes. All other operating activity should be referenced to the
Consolidated Statements of Operations. Brokerage and computer hardware and
software related operations included for the nine months ended September 30,
1995 have been annualized by dividing the actual amount for the nine months
ended September 30, 1995 by 9 and multiplying the result by 12. The directory
operations included since May 1, 1995 in the nine months ended September 30,
1995 have been annualized by dividing the actual amounts for the year ended
September 30, 1995 by 5 and multiplying the result by 12. Reference should be
made to the Consolidated Statements of Operations for all operating activity
discussed herein.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended Nine Months Ended September 30, 1995 Year Ended
September 30, 1996 September 30, 1995 Annualized December 31, 1994
------------------ ------------------ ------------------ -----------------
REVENUE:
<S> <C> <C> <C> <C>
Directory ................ $ 6,888,245 $ 3,625,038 $ 8,700,091 --
=========== =========== =========== ===========
Brokerage commissions .... $10,825,987 $ 7,051,366 $ 9,401,821 $ 5,792,268
=========== =========== =========== ===========
Investment banking ....... $ 2,275,217 $ 1,340,573 $ 1,787,431 $ 3,032,968
=========== =========== =========== ===========
Broker/dealer revenues (1) $14,345,349 $ 9,729,223 $12,972,297 $12,713,456
=========== =========== =========== ===========
Computer hardware and
software operations ...... $ 6,538,540 $ 3,236,156 $ 4,314,875 $ 3,515,230
=========== =========== =========== ===========
(1) Broker/dealer revenues include amounts for brokerage commissions,
investment banking, trading profits and other broker/dealer activities.
COST OF SALES AND OPERATING EXPENSES:
Directory cost of sales . $ 4,987,337 $ 3,454,454 $ 8,290,690 --
=========== =========== =========== ===========
Broker/dealer commissions $ 8,171,445 $ 5,049,208 $ 6,732,277 $ 4,263,665
=========== =========== =========== ===========
Computer cost of sales .. $ 5,381,097 $ 2,930,197 $ 3,906,929 $ 2,940,511
=========== =========== =========== ===========
General and administrative $12,118,998 $ 6,958,217 $10,852,108 $ 9,628,592
=========== =========== =========== ===========
Depreciation and
amortization ............. $ 1,220,142 $ 564,411 $ 1,001,070 $ 395,572
=========== =========== =========== ===========
</TABLE>
Year Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995
Revenues for the year ended September 30, 1996 were $28,786,905 compared to
revenues for the nine months ended September 30, 1995, annualized, of
$26,759,712. This is a 7.6% increase due in large part to increased revenues
from computer hardware and software operations and an increase in broker/dealer
revenues offset by declines in the directory business.
Directory revenues for the year ended September 30, 1996 were $6,888,245,
down $1,811,846 or 21% from the nine months ended September 30, 1995,
annualized. This decrease is primarily due to the Company's sale of 10 of its
telephone directories to Telecom.
12
<PAGE>
Broker/dealer revenues for the year ended September 30, 1996 were
$14,345,349, an increase of $1,373,052 or 10.6% over comparable amounts for the
nine months ended September 30, 1995, annualized. This increase is largely due
to the increase in brokerage commissions.
Brokerage commissions for the year ended September 30, 1996 were
$10,825,987, an increase of $1,424,166 or 15% over brokerage commissions for the
nine months ended September 30, 1995, annualized. This is primarily due to the
opening of two new branch offices in Chicago, Illinois and Metairie, Louisiana
during the second quarter of fiscal year 1996. RAF intends on continuing to
increase its sales force and has opened an office in Dallas, Texas, subsequent
to September 30, 1996. RAF intends on opening an additional office during the
second quarter of fiscal 1997.
Computer hardware and software revenues for the year ended September 30,
1996 were $6,538,540, up $2,223,665 or 51.5% over comparable revenues for the
nine months ended September 30, 1995, annualized. This increase is in large part
due to increased work as a result of the sale of the Clearing Operation,
including programming and other projects for MSI.
Directory cost of sales for the year ended September 30, 1996 was
$4,987,337, down $3,303,353 or 40% for the comparable sales for the nine months
ended September 30, 1995, annualized. The decrease is consistent with the
decrease for the comparable period in directory revenues relating primarily to
the sale of 10 telephone directories to Telecom.
Broker/dealer commissions expense for the year ended September 30, 1996 of
$8,171,445 is up $1,439,168 or 21.4% over the comparable amount for the nine
months ended September 30, 1995, annualized. This correlates directly with the
increase in brokerage commission revenues as a result of the increased office
activity.
Computer cost of sales of $5,381,097 is up $1,474,168 or 38% over the
comparable amount for the nine months ended September 30, 1995, annualized. This
is consistent with the increase in computer hardware and software revenues.
General and administrative expenses for the year ended September 30, 1996
of $12,118,998 increased $1,266,890 or 11.7% over the comparable amount for the
year ended September 30, 1995, annualized. This increase results from the
opening of the Chicago, Illinois and Metairie, Louisiana offices, increases
related to the Company's telemarketing division and legal arbitration judgments
awarded against RAF in December 1996 of approximately $450,000.
Depreciation and amortization for the year ended September 30, 1996 was
$1,220,142; up $219,072 from $1,001,070 for the nine months ended September 30,
1995, annualized. This is due to the opening of the Chicago, Illinois and
Metairie, Louisiana offices, and equipment purchased in the telemarketing
division.
The gain on the sale of the Clearing Operation of $1,332,974 relates to the
sale of the Clearing Operation and is net of commission and transaction costs of
$167,026.
Interest income and interest expense for the year ended September 30, 1996
of $659,997 and $488,796, respectively, are comparable to amounts, annualized,
for the nine months ended September 30, 1995.
Equity in loss of affiliate of $19,330 for the year ended September 30,
1996 relates to the Company's 20% interest in the operating activity of MSI
since the sale of the Clearing Operation. The minority interest in earnings of
$87,626 represents the minority shareholders' interest in the earnings of
Secutron for the year ended September 30, 1996.
Nine Months Ended September 30, 1995 Compared With 12 Months Ended December 31,
1994
Revenues for the nine months ended September 30, 1995, annualized, were
$26,759,712, an increase of $10,500,812 over revenues of $16,258,900 for the
year ended December 31, 1994. This increase is due to the accounting for the
business combination in that Directory's revenues are only reflected since May
1, 1995. Directory revenues during the nine months ended September 30, 1995,
annualized, were $8,700,091. This is comparable with Directory revenues for the
prior period not shown because of the business combination. Computer hardware
and software revenues for the nine months ended September 30, 1995, annualized,
were $4,314,875, an increase of $799,645 or 22% over revenues for the year ended
December 31, 1994. Broker/dealer revenues for the nine months ended September
30, 1995, annualized, were $12,972,297 compared to $12,713,456 for the year
ended December 31, 1994.
13
<PAGE>
Broker/dealer revenues generated by RAF are made up of several components,
which changed in their makeup and materiality from the prior year. Broker
commissions for the nine months ended September 30, 1995, annualized, were
$9,401,821 compared to $5,792,268 for the year ended December 31, 1994. This
amounts to an increase of $3,609,553, or 62%, over the year ended December 31,
1994. This increase resulted in large part from RAF's new sales offices in
Reston, Virginia and Atlanta, Georgia, which were opened during the year ended
December 31, 1994, as well as from the addition of brokers in existing sales
offices.
Various changes in the way the Company evaluates its business opportunities
took place during the nine months ended September 30, 1995. RAF's bank services
division was sold to Sheshunoff Information Services, Inc. during the nine
months ended September 30, 1995. This completely eliminated bank services as a
revenue source, while the bank services division produced revenue of over
$1,150,000 during the year ended December 31, 1994. Revenues from clearing
operations, included in other broker/dealer revenues in the consolidated
statements of operations, also declined significantly during the nine months
ended September 30, 1995 from $1,079,931 for the year ended December 31, 1994 to
annualized revenues of $242,953 for the nine months ended September 30, 1995.
Factors specifically related to the clearing business and its capital
requirements made the Company's clearing business uncompetitive during the nine
months ended September 30, 1995.
Revenues for the nine months ended September 30, 1995, annualized, of
$1,787,431 were 41% lower than revenues of $3,032,968 for the year ended
December 31, 1994. This is primarily due to a decrease in activity, the
continued unpredictable impact of interest rate fluctuation, and an amendment to
the Colorado State Constitution, which placed many restrictions on public
financing in the State of Colorado.
Broker/dealer commissions for the nine months ended September 30, 1995,
annualized, increased by $2,468,612 or 58% compared to the year ended December
31, 1994. This increase is consistent with an increase in commission revenues,
which increased 62% for this same period.
General and administrative expenses for the nine months ended September 30,
1995, annualized, were $10,852,108. This compares to $9,628,592 for the year
ended December 31, 1994. The increase primarily relates to the business
combination and the increased expenses beginning May 1, 1995.
Depreciation and amortization for the nine months ended September 30, 1995,
annualized, increased $605,498 compared to $395,572 for the year ended December
31, 1994 primarily because of amortization of directory costs.
Interest income for the nine months ended September 30, 1995 was $496,316,
a decline of $586,260 from the year ended December 31, 1994. This decrease is
attributable to a large decline in the Company's margin debit interest, which is
associated with the decline in the Company's clearing business and revenues
during the period.
Other revenues increased from $30,214 for the year ended December 31, 1994
to $429,557 in the nine months ended September 30, 1995. Revenues of $66,374 for
FPS are included for the nine months ended September 30, 1995. In addition, a
gain on the sale of a condominium of $96,094 is included in the nine months
ended September 30, 1995.
The minority interest reflected in the consolidated financial statements
relates to the ownership of Secutron stock by minority shareholders of
approximately 40%.
Liquidity and Capital Resources
The Company, as of September 30, 1996, had $2,070,320 in cash and cash
equivalents and $4,990,871 in working capital. Its current ratio is 1.8:1.
Working capital increased $860,513 and the current ratio increased .4:1 from the
prior year. The Company's Private Placement provided net proceeds of $5,137,246.
This along with proceeds from borrowings of $1,468,055, collections on notes
receivable of $457,480, and net proceeds from the sale of the Clearing Operation
of $312,133 were used to fund operating activities of $1,520,101, purchase
property and equipment of $1,409,092, repay long-term borrowings of $1,947,538
and purchase Series A voting cumulative preferred stock of $875,000 and Common
Stock of $1,200,000.
14
<PAGE>
Subsequent to September 30, 1996 and as of December 11, 1996, the Company
has issued an additional 729,613 shares of Common Stock and warrants through the
Private Placement for proceeds of approximately $722,000, net of issuance costs.
The Company currently has a $1,300,000 revolving line of credit with its
primary lender whereby the Company may borrow up to 75% of its billed directory
accounts receivable under 60 days old. As of September 30, 1996, $725,000 was
outstanding on this line. The Company failed to meet a covenant associated with
the line of credit requiring net income to be at least 2.5% of sales for the
year ended September 30, 1996. The Company's lender has waived the event of
default subject to agreement that proceeds from exercise of the Option by
Telecom be applied to the line of credit until paid in full. Consequently,
availability of additional amounts on the line of credit may be limited. The
outstanding balance of $725,000 on the line of credit is classified as current
in the consolidated balance sheet.
The sale of the Clearing Operation provided additional working capital to
the Company. Just as significant from this sale are the average operating losses
of approximately $115,000 per month that the Clearing Operation incurred during
the year ended September 30, 1996 that the Company will no longer incur. The
Company's expected capital costs for the next year center around its efforts in
increasing the volume in the securities brokerage division. Two new branch
offices are planned for fiscal year 1997, one of these offices in Dallas, Texas
opened in November 1996. Capital costs of opening these two offices are expected
to be less than $300,000.
The Company has had discussions with Telecom regarding the early exercising
of Telecom's Option to acquire the Company's nine North Dakota telephone
directories. Management's intent is to sell the remaining directories and
principally focus its efforts on increasing its volume in its securities
brokerage division and to continue to market and sell computer hardware and
software products through Secutron which has had average growth in revenues of
37% over the last two fiscal years.
Management believes that with the sale of the Clearing Operation and the
opening of two new branch offices, in the securities brokerage division, its
cash flows from operations, additional proceeds received from the Private
Placement, and cash on hand are sufficient to fund its debt service, expected
capital costs and other liquidity requirements for the foreseeable future.
Inflation
The effect of inflation on the Company's operations is not material and is
not anticipated to have any material effect in the future.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long Lived Assets to Be Disposed Of (SFAS 121) was issued in
March, 1995, by the Financial Accounting Standards Board. It requires that long
lived assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 is
required to be adopted for fiscal years beginning after December 15, 1995.
Adopting this statement by the Company is not expected to have a significant
effect on the consolidated financial statements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation (SFAS 123), was issued by the Financial Accounting Standards
Board in October, 1995. SFAS 123 establishes financial accounting and reporting
standards for stock based employee compensation plans as well as transactions in
which an entity issues its equity instruments to acquire goods or services from
nonemployees. This statement defines a fair value based method of accounting for
employee stock options or similar equity instruments, and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in Opinion 25 must
make proforma disclosures of net income and, if presented, earnings per share,
as if the fair value based method of accounting defined by SFAS 123 had been
applied. SFAS 123 is applicable to fiscal years beginning after December 15,
1995. The Company currently accounts for its equity instruments using the
accounting prescribed by Opinion 25. The Company does not currently expect to
adopt the accounting prescribed by SFAS 123; however, the Company will include
the disclosures required by SFAS 123 in future consolidated financial
statements.
15
<PAGE>
General
The foregoing discussion contains certain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. These
statements include the plans and objectives of management for future operations,
including plans and objectives relating to expansion and the general development
of the business of the Company. The forward-looking statements included herein
are based on current expectations that involve numerous risks and uncertainties.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this Annual
Report on Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data that
constitute Item 8 are included at the end of this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 1, 1995, the Company's former accountant, Eide Helmeke & Co.
(Eide), located in Bismarck, North Dakota, resigned as the Company's principal
accountant. Eide's report on the Company's consolidated financial statements for
the year ended September 30, 1994 did not contain an adverse opinion or a
disclaimer of opinion, nor was it qualified or modified as to any uncertainty,
audit, scope or accounting principles. Following the Company's acquisition of
the assets of RAFCO in April 1995, the Board of Directors recommended and
approved a change in accountants from Eide to KPMG Peat Marwick LLP. During the
Company's year ended September 30, 1994, and during the interim period from
October 1, 1994 through April 30, 1995, there were no disagreements with Eide on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to Eide's satisfaction, would have caused it to make a reference to the subject
matter of the disagreement in connection with its report. The Company engaged
KPMG Peat Marwick LLP, Denver, Colorado, as its principal accountant on
September 29, 1995.
There were no changes in accountants or disagreements of the type required
to be reported under this item between the Company and its independent
accountants during the fiscal year ended September 30, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors.
The present term of office of each director will expire at the next annual
meeting of shareholders and when his successor has been elected and qualified.
The name, position with the Company, age of each director and the period during
which each director has served are as follows:
Name and Position in the Company Age Director Since
- -------------------------------- --- --------------
Dennis W. Olson................................ 56 1977
President and Director
Robert A. Fitzner, Jr.......................... 51 1995
Director
Robert L. Long................................. 63 1995
Director
16
<PAGE>
There is no longer any understanding between any director or any other
person pursuant to which any director was selected as such.
(b) Identification of Executive Officers.
Each executive officer will hold office until his successor duly is elected
and qualified, until his death or resignation or until he shall be removed in
the manner provided by the Company's Bylaws. The Company's executive officers,
their ages, positions with the Company and periods during which they served are
as follows:
Name of Executive Officer and
Position in Company Age Officer Since
- ----------------------------- --- -------------
Dennis W. Olson................................. 56
President of the Company 1977
Robert A. Fitzner, Jr........................... 51
Chairman of the Board of the Company 1996
President of RAF 1984*
Robert L. Long................................. 63
Secretary of the Company 1996
Senior Vice President of RAF 1990*
*Messrs. Fitzner and Long have been officers of RAF or RAFCO for the periods
indicated.
There was no arrangement or understanding between any executive officer and
any other person pursuant to which any person was selected as an executive
officer.
(c) Identification of Certain Significant Employees.
Not applicable.
(d) Family Relationships.
Not applicable.
(e) Business Experience.
17
<PAGE>
Background. The following is a brief account of the business experience
during the past five years of each director and executive officer of the
Company:
Name of Director or
Officer Principal Occupation During the Last Five Years
- ------------------- -----------------------------------------------
Dennis W. Olson President and a Director of the Company since 1977.
Robert A. Fitzner, Jr. President and Chief Executive Officer of RAF or
RAFCO since 1984 and Director of RAF or RAFCO since
1986, and a Director of Secutron since 1986. Mr.
Fitzner has been a Director of the Company since May
of 1995, when RAF became a wholly owned subsidiary
of the Company, and became the Chairman of the Board
of Directors of the Company in February 1996.
Robert L. Long Senior Vice President of the Corporate Finance
Division of RAF or RAFCO since 1990. Mr. Long became
a Director of the Company in May of 1995, when RAF
became a wholly owned subsidiary of the Company, and
became the Secretary of the Company in February
1996.
Directorships.
No director of the Company is a director of any other entity that has its
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended.
(f) Involvement in Certain Legal Proceedings.
No event required to be reported hereunder has occurred during the past
five years.
(g) Promoters and Control Persons.
Disclosure under this paragraph is not applicable to the Company.
Section 16(a) Beneficial Ownership Reporting Compliance.
To the Company's knowledge, during the Company's fiscal year ended
September 30, 1996, there were no directors or officers or more than 10%
shareholder of the Company that failed to timely file a Form 3, Form 4 or Form
5.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain information pertaining to the
compensation paid by the Company and its subsidiaries for services rendered by
Dennis W. Olson, the President of the Company, Robert A. Fitzner, Jr., the
Chairman of the Board of the Company and the President of RAF, and Robert L.
Long, the Secretary of the Company and the Senior Vice President of RAF. RAF
became a subsidiary of the Company in April of 1995.
18
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
--------------------- ------------
Other
Annual Securities All Other
Name and Period Compen- Underlying Compensa-
Principal Position Ended Salary($) Bonus($) sation Options(#) tion($)
- ------------------ ------ ---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dennis W. Olson .......... 1996 123,500(a) 9,000 (c) 0 0
President of the 1995 119,710 10,000 (c) 0 100,000(e)
Company 1994 113,960 12,000 (c) 0 0
Robert A. Fitzner, Jr ... 1996 162,000(b) 40,000 0 0 76,300(e)
Chairman of the 1995 162,000(b) 40,000 0 0 1,279(e)
Board of Directors, 1994 167,500(b) 40,000 0 0 1,337(e)
and President of RAF
Robert L. Long, .......... 1996 272,612(d) 0 0 800,000 667,236(e)
Secretary of the 1995 320,500(d) 0 0 0 0
Company, and 1994 453,551(d) 0 0 0 0
Senior Vice
President of RAF
</TABLE>
(a) See "Employment Contracts and Termination of Employment and Change In
Control Arrangements" below for a description of Mr. Olson's employment
contract with the Company.
(b) Includes $30,000 paid as a directors fee to Mr. Fitzner by Secutron, 60% of
the outstanding stock of which is owned by the Company.
(c) The Company provided Mr. Olson, with certain other benefits; however, these
benefits did not exceed 10% of his aggregate cash compensation for each of
the periods indicated.
(d) Officers of the Company are frequently responsible for conducting
transactions for which they receive commission and or/fee compensation. In
Mr. Long's case, total annual compensation is and has been transactional
commissions and/or fees.
(e) Mr. Olson received a commission as a result of the sale of the directories
to Telecom. Mr. Fitzner received a commission as a result of the sale of
the Clearing Operation and has received an annual Company matching
contribution as a result of his contribution to a savings plan. Mr. Long
received commissions as a result of the acquisition of the assets of RAFCO
and the sale of the Clearing Operation. Mr. Long also realized a profit of
$417,236 as a result of the exercise of warrants of companies that he
received as compensation for underwritings by RAF. This amount represents
the difference between the exercise price of the warrants and the sales
price of the underlying stock.
Stock Option Plans. Effective September 30, 1988, as amended September 10,
1996, the Company adopted an Incentive Stock Option Plan (Plan), in order to
attract and retain the best available personnel for positions of responsibility,
to provide additional incentive to employees and consultants of the Company and
to promote the success of the Company's business. The Plan authorizes the
granting of options to officers, directors, and employees of the Company to
purchase 600,000 shares of the Company's Common Stock subject to adjustment for
various forms of recapitalization that may occur. No options may be granted
after September 30, 1998, and the fair value of options granted to each optionee
cannot exceed $100,000 per year.
An employee must have six months of continuous employment with the Company
before he or she may exercise an option granted under the Plan. Options under
the Plan may not be granted at less than fair market value at the date of the
grant. Options granted under the Plan are nonassignable and terminate three
months after the optionee's employment ceases, except in the case of employment
termination due to disability of the optionee, in which event the option expires
twelve months from the date employment ceases. The Plan is administered by the
Company's Board of Directors or by a committee selected by the Company's board
of directors.
As of September 30, 1996, options to purchase 557,000 shares of the
Company's Common Stock at $.625 per share through September 8, 2006, were
outstanding and exercisable.
19
<PAGE>
On April 8, 1996, as amended on September 10, 1996, the Company adopted the
1996 Incentive and Nonstatutory Option Plan (1996 Plan) in order to attract and
retain the best available personnel for positions of responsibility, to provide
additional incentive to employees and consultants of the Company and to promote
the success of the Company's business. The 1996 Plan authorizes the granting of
options to officers, directors, employees and consultants of the Company to
purchase 1,250,000 shares of the Company's Common Stock subject to adjustment
for various forms of recapitalization that may occur. No option may be granted
after April 8, 2006.
Under the 1996 Plan, inventive stock options may only be granted to
employees and Nonstatutory stock options may be granted to consultants. Options
may not be granted at less than fair market value at the date of the grant.
Options granted are nonassignable and terminate three months after the
optionee's employment ceases, except in the case of employment termination due
to disability of the optionee, in which event the option expires twelve months
from the date employment ceases. The 1996 Plan is administered by the Company's
Board of Directors or by a committee selected by the Company's board of
directors.
Effective September 9, 1996, the Company granted under the 1996 Plan to 22
employees options to purchase 1,250,000 shares at $.625 per share through
September 9, 2009. As of September 30, 1996, options to purchase 660,000 shares
were exercisable.
The Company has adopted, subject to shareholder approval on or before
September 9, 1997, the September 1996 Incentive and Nonstatutory Option Plan
(September 1996 Plan) in order to attract and retain the best available
personnel for positions of responsibility, to provide additional incentive to
employees and consultants of the Company and to promote the success of the
Company's business.
The September 1996 Plan authorizes the granting of options to officers,
directors, employees and consultants of the Company to purchase 1,750,000 shares
of the Company's Common Stock subject to adjustment for various forms of
recapitalization that may occur. The terms and conditions of the September 1996
Plan are similar to that discussed for the 1996 Plan.
Effective September 10, 1996, the Company granted under the September 1996
Plan, to 29 employees, subject to shareholder approval, options to purchase
1,243,000 shares of the Company's Common Stock at $.625 per share through
December 31, 2009. As of September 30, 1996, options to purchase 563,000 shares
were exercisable.
As of September 30, 1996, the Company had granted nonqualified stock
options to certain officers and employees at an exercise price of $.95 per
share. These options are exercisable and expire August 25, 1997.
Employee Stock Ownership Plan. On September 22, 1989, the Company's Board
of Directors adopted an Employee Stock Ownership Plan (ESOP) which provides in
pertinent part that the Company may annually contribute tax deductible funds to
the ESOP, at its discretion, which are then allocated to the Company's employees
based upon the employees' wages in relation to the total wages of all employees
in the ESOP.
The ESOP provides that more than half of the assets in the ESOP must
consist of the Company's Common Stock. The ESOP is administered by a board of
trustees under the supervision of an advisory committee, both of which are
appointed by the Company's board of directors. As of December 11, 1996, the ESOP
owned 517,900 shares of the Company's Common Stock and no other marketable
securities. The ESOP also had an outstanding bank loan of $350,000, which was
secured by the stock in the ESOP and was guaranteed by the Company. Employees
become vested in the shares of the Company's Common Stock after six years in the
ESOP. Executive officers participate in the ESOP in the same manner as other
employees. Employees are 20% vested after two years, vesting an additional 20%
each year up to 100% after six years in the ESOP.
Savings Plans. The Company has three retirement saving plans covering all
employees who are over 21 years of age and have completed one year of
eligibility service. The plans meet the qualifications of Section 401(k) of the
Internal Revenue Code. Under the plans, eligible employees can contribute
through payroll deductions up to 15% of their base compensation. The Company
makes a discretionary matching contribution equal to a percentage of the
employee's contribution. Officers participate in the plans in the same manner as
other employees. One of the Company's savings plans has purchased 283,700 shares
of the Company's Common Stock.
The Company has no other bonus, profit sharing, pension, retirement, stock
purchase, deferred compensation, or other incentive plans.
20
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of options
by the Company to Robert L. Long during the year ended September 30, 1996. No
options were granted by the Company to Dennis W. Olson or Robert A. Fitzner,
Jr., during the year ended September 30, 1996.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
--------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/
Underlying SARs
Options/ Granted to Exercise
Name SARs Employees or Base Expiration
---- Granted in Price Date
(#) Fiscal Year ($/Sh) ----------
---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Robert L. Long ....... 160,000(1)(2) 9% $0.625 9/09/2006
640,000(1)(3) 21% $0.625 (3)
</TABLE>
(1) The options were granted to Mr. Long on September 10, 1996.
(2) Options to purchase 160,000 shares became exercisable on September 10,
1996.
(3) The option to purchase 640,000 shares becomes exercisable according to the
following schedule: 160,000 of the shares become exercisable on January 1,
1997; 160,000 of the shares become exercisable on January 1, 1998; 160,000
of the shares become exercisable on January 1, 1999; and the remaining
160,000 shares become exercisable on January 1, 2000. The options expire
ten years from the date of grant if not exercised.
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR
END OPTION VALUES
The following table sets forth information with respect to Dennis W. Olson
and Robert L. Long concerning the exercise of options and warrants during the
year ended September 30, 1996, and unexercised options and warrants held as of
September 30, 1996. Robert A. Fitzner, Jr. does not own any options or warrants
to purchase securities of the Company.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of In-the-Money
Options at Options at
September 30, 1996(#) September 30, 1996($)(1)
Shares Acquired Value ------------------------------ ---------------------------
Name on Exercise(#) Realized($) Exercisable/ Unexercisable Exercisable/ Unexercisable
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis W. Olson ................. - 0 - - 0 - 100,000 - 0 - - 0 - - 0 -
Robert L. Long .................. - 0 - - 0 - 238,125(2) 640,000(2) - 0 - - 0 -
</TABLE>
(1) Value of unexercised in-the-money options or warrants is the market price
of the underlying shares of Common Stock at September 30, 1996, less the
exercise price of the options or warrants.
(2) Includes options granted to Mr. Long on September 10, 1996.
21
<PAGE>
Compensation of Directors--Standard Arrangement.
Directors of the Company receive no compensation for their services as
directors. Directors of Secutron, including Robert A. Fitzner, Jr., who are not
also officers or employees of Secutron receive $30,000 annually.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements.
There is no employment contract between the Company or RAF and Robert A.
Fitzner, Jr. Robert L. Long and RAF have an oral agreement whereby Mr. Long
receives commissions based on a percentage of the dollar amount of his clients'
transactions and the dollar amount of all RAF corporate finance transactions and
he receives one half of all warrants received by RAF as compensation for
corporate finance transactions.
Legally effective as of January 1, 1995, the Company entered into an
employment agreement with its president, Dennis W. Olson. The employment
agreement is for a term of three years ending January 1, 1998; provides for
annual compensation and benefits; provides that upon full disability, Mr. Olson
will be entitled to full salary for three months, two thirds salary for three
months, and one half salary for six months; provides that the employment
agreement shall be binding upon any successor to the Company; and provides that,
upon the expiration of the employment agreement, the Company shall be required,
at Mr. Olson's option, to purchase from him up to 500,000 shares of the
Company's Common Stock at $1.00 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(a)(b) Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of December 11, 1996, the number of
shares of the Company's outstanding Common Stock beneficially owned by each of
the Company's current directors and officers, sets forth the number of shares of
the Company's Common Stock beneficially owned by all of the Company's current
directors and officers as a group and sets forth the number of shares of the
Company's Common Stock owned by each person who owned of record, or was known to
own beneficially, more than 5% of the Company's outstanding shares of Common
Stock respectively:
Name and Address of Amount and Nature
Beneficial Owner or of Beneficial
Officer or Director Ownership(1) Percent of Class
------------------- ----------------- ----------------
Robert A. Fitzner, Jr. .......... 5,465,793(2) 32.4%
1700 Lincoln Street
32nd Floor
Denver, CO 80203
Robert L. Long .................. 869,792(4) 5.0%
1700 Lincoln Street
3200 Floor
Denver, CO 80203
Dennis W. Olson ................. 683,925(3) 4.0%
216 North 23rd Street
Bismarck, ND 58501
All officers and directors ...... 7,019,510(5) 40.4%
as a group (3 persons)
(1) Except as indicated below, each person has the sole voting and investment
power over the shares indicated.
(2) Includes 881,088 shares over which Mr. Fitzner has voting power pursuant to
four Voting Agreements and Irrevocable Proxies dated June 2, 1995, one each
between Mr. Fitzner and Dorothy K. Englebrecht, Steven Fishbein, Peter
O'Leary and Arlene Wilson. The irrevocable proxies expire on July 16, 1997
and the voting trust agreements expire on September 15, 1997. Also includes
shares underlying an option Mr. Fitzner has given to an employee of the
Company to purchase 250,000 shares from Mr. Fitzner's personal holdings.
22
<PAGE>
(3) Includes 100,000 shares of Common Stock underlying stock options, 6,534
shares held in the Company's ESOP Plan, 2,172 shares held in the Company's
401(k) Plan, and 70,495 shares underlying Mr. Olson's 50% share in 140,990
shares jointly held by another employee of the Company.
(4) Includes 78,125 shares underlying warrants and 320,000 shares underlying
stock options currently exercisable, or exercisable within 60 days.
(5) Includes shares underlying the stock options held by Mr. Olson and the
warrants and options held by Mr. Long.
(c) Changes in Control.
There are presently no arrangements of any kind which may at a subsequent
date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)(b) Transactions With Management and Others and Certain Business
Relationships.
Certain officers and directors of the Company have in the past made
personal loans to the Company when it was in need of short term financing.
Dennis Olson has made personal demand loans to the Company of which $50,000
remained outstanding as of September 30, 1996. Interest is paid to Mr. Olson by
the Company @11% per annum. All loan transactions with related persons have been
on terms no less favorable than those available from third parties. It is
probable that the Company will continue to engage in such borrowing activities
in the future; however, there are currently no specific plans to do so.
Robert A. Fitzner, Jr. became a director of the Company as a result of
acquisition of the assets of RAFCO in April 1995. See "Business." As a result of
the acquisition, Mr. Fitzner received 4,784,705 shares of the Company's Common
Stock and 5,000 shares of the Company's Preferred Stock. As a result of such
acquisition transaction, the Company assumed the obligation to Mr. Fitzner on a
10% senior subordinated note due December 31, 2003 in the amount of $50,000. As
a result of such acquisition transaction, the Company issued 2,500 shares of
Preferred Stock to Earlene E. Fitzner, Mr. Fitzner's mother, and the Company
assumed the obligation to pay a 10% senior subordinated note due December 31,
2003 in the principal amount of $150,000 to Mr. Fitzner's mother and assumed the
obligation to pay a 10% senior subordinated note due December 31, 2003 in the
principal amount of $50,000 to Mr. Fitzner's father, Robert A. Fitzner, Sr.
These obligations were repaid during the year ended September 30, 1996
principally from proceeds received in the Private Placement.
As a result of the acquisition of the assets of RAFCO, Kanouff Corporation
became the beneficial owner of approximately 12.4% of the Company's outstanding
Common Stock. See "Business." Patricia M. Kanouff is an officer, director, and
sole shareholder of Kanouff Corporation and John P. Kanouff, the husband of
Patricia M. Kanouff, is an officer of Kanouff Corporation. John P. Kanouff was
an officer, director, and shareholder of Hopper and Kanouff, P.C., a company
providing legal services to clients, including the Company, RAF, and Secutron.
During the year ended September 30, 1996, an aggregate of $208,720 was paid by
the Company, RAF, and Secutron to Hopper and Kanouff, P.C. for legal services.
During the fiscal year ended September 30, 1996, consistent with the Private
Placement Memorandum, the Company purchased the outstanding shares held by the
Kanouff Corporation for $1,200,000 with proceeds from the Private Placement.
During the fourth quarter of the year ended September 30, 1996, John P. Kanouff
joined RAF as the managing director of its Corporate Finance Division.
Robert L. Long became a director of the Company as a result of the
acquisition of the assets of RAFCO. See "Business." During 1992, the Company
entered into an investment banking agreement with RAF. As of April 26, 1995, RAF
became a wholly owned subsidiary of the Company. One of the terms of Mr. Long's
employment by RAF is that he will receive a percentage of any investment banking
fees received by RAF. Under the investment banking agreement, the Company would
be obligated to pay a fee to RAF as a result of the reorganization transaction
between the Company and RAFCO. RAF has agreed to waive its portion of any such
investment banking fee. On April 26, 1995, the Company agreed to pay a merger
and acquisition fee to Mr. Long in an amount to be determined by negotiation
within a reasonable time after April 26, 1995. Mr. Long received $100,000 on
December 15, 1995 representing this fee.
23
<PAGE>
Dennis W. Olson is currently an officer and a director of the Company. On
April 27, 1995, the Company entered into an agreement to sell certain of its
assets to Telecom. Pursuant to the Telecom agreement, Mr. Olson and certain
other employees of the Company entered into agreements not to compete with
Telecom. As compensation for this noncompetition agreement, Telecom has paid
$225,000 out of the total of $250,000 total noncompetition compensation to Mr.
Olson. On April 27, 1995, the Company granted an Option to Telecom to purchase
additional assets of the Company. This Option is exercisable for a period of two
years beginning on June 1, 1997. If Telecom exercises this Option, Mr. Olson and
certain other employees of the Company will be obligated to enter into
additional noncompete agreements with Telecom and will be paid additional
amounts in consideration for such noncompete agreements. The amount of such
noncompetition payments will not be determined until after Telecom exercises its
Option. The Company repaid $150,000 in obligations to Mr. Olson during fiscal
year 1996. These obligations related to short term financing provided to the
Company by Mr. Olson.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. (Beginning on page F-1)
Independent Auditors' Report
Consolidated Balance Sheets--September 30, 1996 and 1995
Consolidated Statements of Operations-- Year ended September 30, 1996,
Nine months ended September 30, 1995 and Year ended December 31, 1994
Consolidated Statement of Changes in Stockholders' Equity--Year ended
September 30, 1996, Nine Months Ended September 30, 1995 and Year
Ended December 31, 1994
Consolidated Statements of Cash Flows--Year ended September 30, 1996, Nine
Months Ended September 30, 1995 and Year Ended December 31, 1994
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
None
(b) Current Reports on Form 8-K:
During the fiscal quarter ended September 30, 1996, one Current Report on
Form 8-K dated July 23, 1996 was filed on August 7, 1996. The Current Report
contained information under Item 2 relating to the sale of the Clearing
Operation as discussed in "Business" and pursuant to Item 7 filed exhibits
relating to such sale.
(c) Exhibits.
Exhibit 2.1 Plan of Reorganization and Exchange Agreement dated April
26, 1995 with Exhibits A, B, C, F and I (incorporated by
reference to Exhibit 2.1 to Registrant's Current Report on
Form 8-K dated May 9, 1995).
Exhibit 2.2 Sale and Purchase Agreement dated April 27, 1995, with
Exhibits A and J (incorporated by reference to Exhibit 2.2 to
Registrant's Current Report on Form 8-K dated May 9, 1995).
Exhibit 2.3 Option Agreement dated April 27, 1995, with Exhibits A, B,
and D (incorporated by reference to Exhibit 2.3 to
Registrant's Current Report on Form 8-K dated May 9, 1995).
Exhibit 3.0 Articles of Incorporation of Registrant (incorporated by
reference to Exhibit 3.0 to Registrant's Annual Report on Form
10-K for the year ended September 30, 1995.
Exhibit 3.0(i) Articles of Amendment to the Registrant's Articles of
Incorporation dated April 28, 1995 (incorporated by reference
to Exhibit 3.0(i) to Registrant's Current Report on Form 8-K
dated May 9, 1995).
24
<PAGE>
Exhibit 3.0(ii) Articles of Amendment to the Registrant's Articles of
Incorporation as filed with the Colorado Secretary of State
on June 27, 1995.
Exhibit 3.2 Restated Bylaws of Registrant adopted February 14, 1996.
Exhibit 9.1 Voting Trust Agreement between Robert A. Fitzner, Jr. and
Dorothy K. Englebrecht dated June 2, 1995 (incorporated by
reference to Exhibit 9.1 to Registrant's Annual Report on Form
10-K for the year ended September 30, 1995).
Exhibit 9.2 Voting Trust Agreement between Robert A. Fitzner, Jr. and
Steven M. Fishbein dated June 2, 1995 (incorporated by
reference to Exhibit 9.2 to Registrant's Annual Report on Form
10-K for the year ended September 30, 1995).
Exhibit 9.3 Voting Trust Agreement between Robert A. Fitzner, Jr. and
Peter K. O'Leary dated June 2, 1995 (incorporated by
reference to Exhibit 9.3 to Registrant's Annual Report on
Form 10-K for the year ended September 30, 1995).
Exhibit 9.4 Voting Trust Agreement between Robert A. Fitzner, Jr. and
Arlene M. Wilson dated June 2, 1995 (incorporated by
reference to Exhibit 9.4 to Registrant's Annual Report on
Form 10-K for the year ended September 30, 1995).
Exhibit 10.1 Amended and Restated 1988 Incentive and NonStatutory Stock
Option Plan as amended September 10, 1996.
Exhibit 10.2 Employee Stock Ownership Plan (incorporated by reference to
Exhibit 10.2 to Registrant's Annual Report on Form 10-K for
the year ended September 30, 1995.)
Exhibit 10.3 401(k) Plan and Amendment I thereto (incorporated by
reference to Exhibit 10.3 to Registrant's Annual Report on
Form 10-K for the year ended September 30, 1995.)
Exhibit 10.4 Employment Agreement between Dennis W. Olson and the
Registrant dated January 1, 1995 (incorporated by reference to
Exhibit 10.4 to Registrant's Annual Report on Form 10-K for
the year ended September 30, 1995.)
Exhibit 10.5 Employees/Officers/Directors Form of Non-Competition
Agreement; Covenant Not to Compete and Confidentiality
Agreement. (incorporated by reference to Exhibit 2.2 to
Registrant's Current Report on Form 8-K dated May 9, 1995.)
Exhibit 10.6 Amended and Restated 1996 Incentive and Nonstatutory Stock
Option Plan, as amended September 10, 1996.
Exhibit 10.7 September 1996 Incentive and Nonstatutory Stock Option Plan.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 27 Financial Data Schedule
25
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Fronteer Financial Holdings, Ltd.:
We have audited the accompanying consolidated balance sheets of Fronteer
Financial Holdings, Ltd., (formerly Fronteer Directory Company, Inc.) and
subsidiaries as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended September 30, 1996, the nine months ended September 30, 1995, and the year
ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fronteer Financial
Holdings, Ltd., and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for the year ended September
30, 1996, the nine months ended September 30, 1995, and the year ended December
31, 1994, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
December 20, 1996
F-1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 2,070,320 2,148,675
Broker/dealer customer receivables ............................ -- 5,004,686
Receivables from brokers or dealers and clearing organizations:
Affiliate ................................................. 1,444,091 --
Other ..................................................... 166,347 340,995
Trade receivables, net of allowance for doubtful accounts of
$59,209 and $65,628 as of September 30, 1996 and 1995,
respectively ............................................... 3,330,194 3,323,071
Receivable from affiliate ..................................... 1,048,075 --
Other receivables ............................................. 177,120 237,489
Securities owned, at market value ............................. 1,882,049 1,374,725
Current portion of long-term notes receivable ................. 389,843 731,766
Deferred directory costs ...................................... 431,436 438,412
Deferred income taxes ......................................... 196,846 368,374
Other assets .................................................. 450,830 412,967
----------- -----------
Total current assets ..................................... 11,587,151 14,381,160
PROPERTY, FURNITURE AND EQUIPMENT, net
of accumulated depreciation ................................. 2,270,311 1,698,488
DIRECTORY PUBLISHING RIGHTS AND OTHER
Net of accumulated amortization of $693,090 and $161, 886
as of September 30, 1996 and 1995, respectively ............. 4,271,789 4,530,883
OTHER LONG TERM ASSETS .......................................... 55,428 109,091
----------- -----------
Total assets ............................................. $18,184,679 20,719,622
=========== ===========
(Continued)
F-2
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable, accrued expenses,
and other liabilities ....................................... $ 3,405,723 2,958,180
Broker/dealer customer payables ............................... -- 2,181,284
Payables to brokers or dealers and
clearing organizations ....................................... -- 1,999,687
Deposits from clearing correspondent
brokers or dealers, net ..................................... -- 483,319
Current portion of long-term debt ............................. 1,435,208 939,706
Notes payable to related parties .............................. 367,900 548,900
Deferred revenue .............................................. 623,058 639,184
Income taxes payable .......................................... 96,284 207,643
Other current liabilities ..................................... 668,107 292,899
----------- -----------
Total current liabilities ................................ 6,596,280 10,250,802
LONG-TERM DEBT, NET OF CURRENT PORTION .......................... 2,575,967 1,974,226
DEFERRED RENT CONCESSIONS ....................................... 1,768,827 1,794,631
DEFERRED INCOME TAXES ........................................... 914,062 1,085,590
----------- -----------
Total liabilities ...................................... 11,855,136 15,105,249
------------ -----------
MINORITY INTEREST IN SUBSIDIARY ............................... 243,997 172,783
------------ -----------
STOCKHOLDERS' EQUITY:
Series A voting cumulative preferred stock,
authorized 25,000,000 shares, $0.10 par value,
87,500 shares issued and outstanding at
September 30, 1995, redeemed in 1996 .................... -- 875,000
(Continued)
F-3
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Common stock; authorized 100,000,000 shares,
$0.01 par value; 16,141,944 and 12,470,977 shares issued and
outstanding at September 30, 1996 and 1995, respectively ... 177,871 125,581
Class B common stock, authorized 10,000,000 shares,
$0.02 par value; no shares issued ............................. -- --
Additional paid-in capital .................................... 11,515,751 6,431,343
Accumulated deficit ........................................... (3,977,842) (1,560,100)
Unearned ESOP shares .......................................... (350,000) (350,000)
Treasury stock, 1,645,162 and 87,084 shares at cost, as of
September 30, 1996 and 1995, respectively .................. (1,280,234) (80,234)
------------ ------------
Total stockholders' equity .......................... 6,085,546 5,441,590
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 9, 11, and 13)
Total liabilities and stockholders' equity .................. $ 18,184,679 20,719,622
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Nine Months Ended Year Ended
September 30, 1996 September 30, 1995 December 31, 1994
------------------ ------------------- -----------------
<S> <C> <C> <C>
REVENUE:
Directory .......................................... $ 6,888,245 3,625,038 --
Brokerage commissions .............................. 10,825,987 7,051,366 5,792,268
Investment banking ................................. 2,275,217 1,340,573 3,032,968
Trading profits, net ............................... 453,144 830,551 696,814
Other broker/dealer ................................ 791,001 506,733 3,191,406
Computer hardware and software operations .......... 6,538,540 3,236,156 3,515,230
Telemarketing ...................................... 317,082 149,780 --
Other .............................................. 697,689 429,557 30,214
------------ ------------ ------------
28,786,905 17,169,754 16,258,900
------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Directory cost of sales ............................ 4,987,337 3,454,454 --
Broker/dealer commissions .......................... 8,171,445 5,049,208 4,263,665
Computer cost of sales ............................. 5,381,097 2,930,197 2,940,511
Telemarketing cost of sales ........................ 607,987 200,543 --
General and administrative ......................... 12,118,998 6,958,217 9,628,592
Depreciation and amortization ...................... 1,220,142 564,411 395,572
------------ ------------ ------------
32,487,006 19,157,030 17,228,340
------------ ------------ ------------
Operating loss ..................................... (3,700,101) (1,987,276) (969,440)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain on sale of Clearing Operation, net ............ 1,332,974 -- --
Interest income .................................... 659,997 496,316 1,082,576
Interest expense ................................... (488,796) (395,777) (567,901)
Equity in loss of affiliate ........................ (19,330) -- --
------------ ------------ ------------
1,484,845 100,539 514,675
------------ ------------ ------------
Loss before minority interest and income taxes ..... (2,215,256) (1,886,737) (454,765)
------------ ------------ ------------
Minority interest in loss (earnings) ............... (87,626) (5,136) 101,339
------------ ------------ ------------
Loss before income taxes ........................... (2,302,882) (1,891,873) (353,426)
Income tax expense ................................. (55,799) -- --
------------ ------------ ------------
(Continued)
F-5
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Year Ended Nine Months Ended Year Ended
September 30, 1996 September 30, 1995 December 31, 1994
------------------ ------------------- -----------------
<S> <C> <C> <C>
Net loss ........................................... $ (2,358,681) (1,891,873) (353,426)
============
Preferred stock dividends .......................... (59,061) (32,812) *
------------ ------------
Net loss applicable to common shareholders ......... $ (2,417,742) (1,924,685) *
============ ============
Weighted average number of common shares outstanding 13,858,963 9,408,431 *
Loss per common share .............................. $(.17 ) (.20) *
============ ============
</TABLE>
*Due to the limited number of shares outstanding during 1994, presentation of
loss per share is not meaningful.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Accumulated
Preferred Common Paid-in Earnings
Stock* Stock Capital (Deficit)
--------- ------ ---------- ------------
<S> <C> <C> <C> <C>
Balances at January 1, 1994 .............. $ 823,750 1 99 770,511
Series A preferred stock dividend ........ -- -- -- (52,500)
Net loss ................................. -- -- -- (353,426)
--------- -------- --------- ---------
Balances at December 31, 1994 ............ 823,750 1 99 364,585
Cancellation of RAFCO preferred
and common stock ...................... (823,750) (1) (99) --
Shares issued in business combination .... 875,000 125,581 6,431,343 --
Series A preferred stock dividend ........ -- -- -- (32,812)
Net loss ................................. -- -- -- (1,891,873)
--------- -------- --------- ---------
Balances at September 30, 1995 ........... 875,000 125,581 6,431,343 (1,560,100)
Series A preferred stock dividend ........ -- -- -- (59,061)
Purchase of subsidiary shares ............ -- -- (548) --
Purchase and retirement of
preferred stock ...................... (875,000) -- -- --
Proceeds from shares issued through
private placement, net of issuance
costs of $614,704 .................... -- 52,290 5,084,956 --
Purchase of common stock ................. -- -- -- --
Net loss ................................. -- -- -- (2,358,681)
--------- -------- --------- ----------
Balances at September 30, 1996 ........... $ -- 177,871 11,515,751 (350,000)
========= ======== ========== ==========
<CAPTION>
Unearned Treasury
ESOP Stock Stock Total
---------- -------- -----
<S> <C> <C> <C>
Balances at January 1, 1994 .............. -- -- $ 1,594,361
Series A preferred stock dividend ........ -- -- (52,500)
Net loss ................................. -- -- (353,426)
---------- --------- ----------
Balances at December 31, 1994 ............ -- -- 1,188,435
Cancellation of RAFCO preferred
and common stock ...................... -- -- (823,850)
Shares issued in business combination .... (350,000) (80,234) 7,001,690
Series A preferred stock dividend ........ -- -- (32,812)
Net loss ................................. -- -- (1,891,873)
---------- --------- ----------
Balances at September 30, 1995 ........... (350,000) (80,234) 5,441,590
Series A preferred stock dividend ........ -- -- (59,061)
Purchase of subsidiary shares ............ -- -- (548)
Purchase and retirement of
preferred stock ....................... -- -- (875,000)
Proceeds from shares issued through
private placement, net of issuance
costs of $614,704 .................... -- -- 5,137,246
Purchase of common stock ................. -- (1,200,000) (1,200,000)
Net loss ................................. -- -- (2,358,681)
---------- ---------- -----------
Balances at September 30, 1996 ........... (350,000) (1,280,234) $ 6,085,546
========== ========== ===========
</TABLE>
*Includes both outstanding preferred shares issued in connection with the RAFCO,
Ltd. business combination discussed in note 1 and the previously issued RAFCO,
Ltd. preferred shares canceled in connection with the transaction.
See accompanying notes to consolidated
financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES: Year Ended Nine Months Ended Year Ended
September 30, 1996 September 30, 1995 December 31, 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net loss ............................................................... $(2,358,681) (1,891,873) (353,426)
Adjustments to reconcile net loss to net cash used by operating activities:
Gain on sale of Clearing Operation ..................................... (1,332,974) -- --
Depreciation ........................................................... 703,052 402,525 395,572
Amortization of directory costs ........................................ 517,090 161,886 --
Amortization of deferred rent .......................................... (25,804) 6,113 112,730
Amortization of prepaid compensation ................................... 226,736 -- --
Provision for bad debts ................................................ -- 598,132 3,550
Loss (gain) on sale of assets .......................................... 30,225 (49,965) --
Equity in loss of affiliate ............................................ 19,330 -- --
Minority interest in earnings (loss) ................................... 87,626 5,136 (101,339)
Other .................................................................. 5,566 -- --
Changes in operating assets and liabilities, net
of effects from sale of clearing operation:
Decrease (increase) in broker/dealer
customer receivables, net ........................................... (5,039,631) 8,684,925 (1,914,718)
Decrease (increase) in receivables from brokers
or dealers and clearing organizations .............................. (1,658,420) 405,265 1,006,131
Decrease (increase) in trade receivables ............................ 20,167 635,732 (31,074)
Decrease in other receivables ...................................... 30,369 358,369 205,345
Decrease (increase) in securities owned, net of
securities sold but not yet purchased .............................. (507,324) 31,489 (430,305)
Decrease in deferred directory costs ................................ 6,976 191,850 --
Increase in other assets ............................................ (267,679) (112,938) (624,434)
Increase (decrease) in accounts payable, accrued
expenses, and other liabilities ..................................... 469,806 207,323 (328,432)
Decrease in broker/dealer customer payables ......................... (284,451) (586,477) (2,671,095)
Increase (decrease) in payables to brokers or dealers
and clearing organizations .......................................... 7,590,197 (9,698,374) 7,206,342
Decrease in deposits from clearing correspondent
brokers or dealers .................................................. -- (584,019) (3,829,190)
Increase (decrease) in deferred revenue ............................. (16,126) 315,620 --
Decrease in income taxes payable .................................... (111,359) (85,060) --
Increase (decrease) in other current liabilities .................... 375,208 (27,110) 1,598
----------- ----------- -----------
Net cash used by operating activities .................................. (1,520,101) (1,031,451) (1,352,745)
----------- ----------- -----------
(Continued)
F-8
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUTED
Year Ended Nine Months Ended Year Ended
September 30, 1996 September 30, 1995 December 31, 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Principal collected on notes receivable ................................ $ 457,480 444,500 --
Proceeds from sale of assets ........................................... 14,498 331,991 --
Acquisition of other assets .......................................... (200,000) -- --
Issuance of notes receivable ......................................... (51,218) (792,425) --
Purchase of property, furniture and equipment ........................ (1,409,092) (278,977) (387,105)
Cash received from sale of directories and other assets .............. -- 1,619,622 --
Proceeds from sale of Clearing Operation,
net of cash sold of $1,824,118 ....................................... 312,133 -- --
Other investing activities ........................................... (7,797) 17,741 --
----------- ----------- -----------
Net cash provided (used) by investing activities ..................... (883,996) 1,342,452 (387,105)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on short-term borrowings ..................... 725,000 (675,000) --
Borrowings on long-term notes payable ................................ 743,055 529,800 243,542
Net (payments) borrowings from related parties ....................... (181,000) 483,000 --
Principal payments on long-term borrowings ........................... (1,947,538) (564,853) (156,103)
Net proceeds from issuance of common stock ........................... 5,137,246 -- --
Dividends on preferred stock ......................................... (59,061) (32,812) (52,500)
Purchase of preferred stock .......................................... (875,000) -- --
Purchase of common stock ............................................. (1,200,000) -- --
Other financing activities ........................................... (16,960) (179,115) --
-----------
Net cash provided (used) by financing activities ..................... 2,325,742 (438,980) 34,939
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .............................. (78,355) (127,979) (1,704,911)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................... 2,148,675 2,276,654 3,981,565
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................... $ 2,070,320 2,148,675 2,276,654
=========== =========== ===========
(Continued)
F-9
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUTED
SUPPLEMENTAL DISCLOSURES RELATED TO STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Year Ended Nine Months Ended Year Ended
September 30, 1996 September 30, 1995 December 31, 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Cash payments for:
Interest ................................................ $479,364 $398,161 $574,827
======== ======== ========
Income Taxes ................................... $177,079 $135,060 --
======== ======== ========
</TABLE>
See Note 1A, for information on non-cash investing and financing activities for
the nine months ended September 30, 1995.
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Fronteer
Financial Holdings, Ltd. (Fronteer or the Company, formerly Fronteer
Directory Company, Inc.) and its wholly-owned subsidiaries Fronteer
Personnel Services, Inc. (FPS), Fronteer Marketing Group, Inc. (FMG), and
RAF Financial Corporation (RAF). They also include a majority-owned
subsidiary, Secutron Corporation (Secutron). All significant intercompany
accounts and transactions have been eliminated in the preparation of the
consolidated financial statements.
Fronteer is engaged in the publishing and distribution of telephone
directories, while FPS is engaged in employee leasing, and FMG is engaged
in the telemarketing business. RAF operates as a registered securities
broker/dealer. Secutron is engaged in industry specific software
development and provides consulting services.
A. ORGANIZATION, BUSINESS COMBINATION, AND PRINCIPLES OF CONSOLIDATION - On
April 26, 1995, Fronteer entered into a Plan of Reorganization and Exchange
Agreement (the Agreement) with RAFCO, Ltd. (RAFCO). Under the Agreement,
Fronteer acquired all of the assets of RAFCO in exchange for the assumption
by Fronteer of the liabilities of RAFCO and the issuance by Fronteer to
RAFCO of 7,223,871 shares of $.01 par value common stock and 87,500 shares
of $.10 par value series A voting cumulative preferred stock ($10.00 per
share redemption value). RAFCO has dissolved as a corporation and has
distributed Fronteer's common and preferred stock to the shareholders of
RAFCO. As a result of the transaction, the former shareholders of RAFCO
acquired a 55% interest in Fronteer. Accordingly, the transaction has been
accounted for as a "reverse acquisition" of Fronteer by RAFCO using the
purchase method of accounting and Fronteer's assets and liabilities have
been adjusted to their market value as of the date of the business
combination. The adjustment to market value resulted in an intangible
asset, directory publishing rights, which was recorded at $7,109,378. This
amount was reduced by $2,416,609 immediately thereafter as Fronteer sold
ten of its directories to Telecom *USA Publishing Company (Telecom). No
gain or loss was recognized on the sale. Fronteer's operations have been
included in the accompanying consolidated financial statements beginning
May 1, 1995, the effective date of the transaction. As a result of the
reverse acquisition accounting, historical financial statements presented
for periods prior to the business combination date include the consolidated
assets, liabilities, equity, revenues, and expenses of RAFCO only.
In connection with the business combination, the Company sold 10 of its
telephone directories to Telecom in May 1995. The Company also granted an
option to Telecom (the Option) whereby Telecom made a noninterest bearing
and nonrecourse $500,000 loan to the Company in exchange for the Option to
acquire the Company's remaining nine North Dakota telephone directories
between June 1, 1997 and June 1, 1999. Based on the terms of the Option,
the Company would expect to recover amounts capitalized for directory
publishing rights if the Option is exercised by Telecom.
F-11
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
The Company acquired all of the assets of RAFCO in exchange for the assumption
by Fronteer of the liabilities of RAFCO and the issuance of common and
preferred stock as of May 1, 1995 outlined as follows:
Cash and cash equivalents ................ $ 17,741
Trade and notes receivable, net .......... 3,711,148
Other assets ............................. 1,153,784
Property, furniture, and equipment, net of
accumulated depreciation ................. 679,373
Directory publishing rights .............. 7,109,378
Accounts payable, accrued expenses, and
other liabilities ........................ (1,153,875)
Other current liabilities ................ (1,181,758)
Notes payable ............................ (1,664,462)
Deferred income taxes .................... (2,493,489)
Cancel RAFCO common and preferred stock .. 823,850
Issuance of common and preferred stock ... (7,001,690)
-----------
$ --
===========
B. CASH EQUIVALENTS - For purposes of reporting cash flows, the Company
considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. Cash on deposit in
unsecured accounts and restricted cash relating to an arbitration matter
was $1,791,608 and $102,754, respectively, as of September 30, 1996.
C. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - Fronteer grants
credit to customers throughout the directory market, primarily in North
Dakota. Although Fronteer has a diversified customer base, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
the economic conditions in North Dakota.
Amounts due to or from directors or officers of the Company, related to
normal cash accounts, are not classified as customer related in accordance
with the rules of the Securities and Exchange Commission.
The allowance for doubtful accounts is maintained at a level adequate to
absorb probable losses and credit losses inherent in the business based
upon Fronteer's prior history of credit losses. Management determines the
adequacy of the allowance based upon reviews of individual accounts, recent
loss experience, current economic conditions, the risk characteristics of
the various categories of accounts and other pertinent factors. Fronteer
establishes payment terms with customers ranging from a single payment due
upon publication of the directory to twelve equal monthly payments
commencing upon publication of the directory. Any accounts remaining on
Fronteer's books fifteen months following publication of the directory, due
to additional payment arrangements made with Fronteer outside of the
original contract, are charged to the allowance for doubtful accounts.
F-12
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
D. SECURITIES - Securities transactions are recorded on a settlement-date
basis, usually the third business day following the trade date. The effect
of using settlement date rather than trade date for the recording of
securities transactions is not significant.
In accordance with financial reporting requirements for broker/dealers, the
Company's financial instruments, including securities, are all recorded at
market value. Securities without a readily available market value are
recorded at estimated fair value. Securities are valued monthly and the
resulting unrealized appreciation or depreciation is included in operations
as trading profit or loss. Realized gains and losses are determined using
the average cost method.
In October 1994, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments, which
prescribes disclosure requirements for transactions in certain derivative
financial instruments including futures, forward, swap, and option
contracts, and other financial instruments with similar characteristics.
Although RAF is authorized to enter into such transactions in the ordinary
course of business, and may do so in the future, no such transactions have
been consummated.
E. REVENUE AND COST RECOGNITION - Revenues from advertising sales are
recognized at the point individual directories are published. Costs of
selling and production are recorded as deferred directory costs when
incurred and charged to cost of sales in the period during which the
related directory is published. Deferred directory costs are allocated to
incomplete directories based upon the relative percentage of contracts sold
as of year-end on incomplete directories to total current year earned
revenues. Printing costs are charged to cost of sales in the period during
which the related directory is published. Costs of distribution are charged
to cost of sales as incurred.
General administrative costs are charged to expenses as incurred.
Revenue from the sale of computer equipment and installation of software is
generally recognized when the equipment and related software is installed
and accepted by the customer.
Costs incurred in researching, designing, and planning for the development
of new software are included in computer hardware and software operations
in the accompanying consolidated financial statements. All amounts are
charged to operations as incurred until such time as the costs meet the
criteria for capitalization. Such costs have not been significant.
F. PROPERTY, FURNITURE AND EQUIPMENT - Property, furniture and equipment are
stated at cost. Additions, renewals and betterments are capitalized,
whereas expenditures for maintenance and repairs are charged to expense.
The cost and related accumulated depreciation of assets retired or sold are
removed from the appropriate asset and depreciation accounts, and the
resulting gain or loss is reflected in income.
It is the policy of the Company to provide depreciation using the
accelerated and straight-line methods based on the estimated useful lives
of the assets as follows:
Estimated
Description Useful Life
----------- ----------
Real Property ............ 40 years
Furniture & Vehicles ..... 3-5 years
Equipment ................ 5-10 years
F-13
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
G. DIRECTORY PUBLISHING RIGHTS AND AMORTIZATION - Directory publishing rights
are amortized over ten years using the straight-line method. The Company
periodically evaluates amounts capitalized for directory publishing rights
for recoverability based on expected future cash flows. Based on the
expected future cash flows of the Company's directories as of September 30,
1996, the Company believes that amounts capitalized for directory
publishing rights are recoverable.
H. INCOME TAXES - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
I. LOSS PER COMMON SHARE - Loss per common share has been calculated based
upon the net loss available to common shareholders divided by the weighted
average number of common shares outstanding during the period. Common stock
equivalents, including outstanding options and warrants, are considered in
determining the weighted average number of common shares outstanding during
the period unless antidilutive.
J. ESTIMATES - The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure 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.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments,
requires all entities to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized in the
consolidated balance sheets. The carrying amounts as of September 30, 1996
and 1995 for financial instruments approximate their fair values due to the
short maturity of these instruments or because the related interest rates
approximate current market rates.
L. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - As a securities
broker/dealer, RAF is engaged in various securities trading and brokerage
activities. A portion of RAF's transactions are collateralized and are
executed with and on behalf of institutional investors including other
broker/dealers. The RAF exposure to credit risk associated with the
nonperformance of these customers in fulfilling their contractual
obligations pursuant to securities transactions can be directly impacted by
volatile trading markets which may impair the customers' ability to satisfy
their obligations to RAF. RAF's principal activities are also subject to
the risk of counterparty nonperformance.
M. RECLASSIFICATIONS - Certain reclassifications have been made to prior
year's consolidated financial statements to conform to current year's
presentation.
N. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets To Be Disposed Of (SFAS 121) was issued in March, 1995, by the
Financial Accounting Standards Board. It requires that long lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS
121 is required to be adopted for fiscal years beginning after December 15,
1995. Adoption of this statement by the Company is not expected to have a
significant effect on the Company's consolidated financial statements.
F-14
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), was issued by the Financial Accounting
Standards Board in October, 1995. SFAS 123 establishes financial accounting
and reporting standards for stock based employee compensation plans as well
as transactions in which an entity issues its equity instruments to acquire
goods or services from nonemployees. This statement defines a fair value
based method of accounting for employee stock options or similar equity
instruments, and encourages all entities to adopt this method of accounting
for all of their employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees. Entities electing to
remain with the accounting in Opinion 25 must make proforma disclosures of
net income and, if presented, earnings per share, as if the fair value
based method of accounting defined by SFAS 123 had been applied. SFAS 123
is applicable to fiscal years beginning after December 15, 1995. The
Company currently accounts for its equity instruments using the accounting
prescribed by Opinion 25. The Company does not currently expect to adopt
the accounting prescribed by SFAS 123; however, the Company will include
the disclosures required by SFAS 123 in future consolidated financial
statements.
NOTE 2 - SALE OF CLEARING OPERATION
On July 23, 1996, the Company sold its securities brokerage clearing division
(Clearing Operation) to MultiSource Services, Inc. (MSI), a new broker/dealer,
for a purchase price of $3,000,000, including a $1,500,000 contingency in the
form of a forgivable loan, plus the net assets of the Clearing Operation. In
addition, the Company received 20% of the outstanding common stock of MSI. As a
result of this transaction, RAF has become a fully disclosed clearing
correspondent of MSI. The loan of $1,500,000, which has been recorded as a loan
payable to MSI, is forgivable based on MSI's revenues during the 28 months
following the closing date. If MSI's revenues exceed $1,250,000 during the 5th
through the 16th month following the closing, $750,000 of the loan will be
forgiven. If MSI's revenues exceed $1,750,000 during the 17th through the 28th
month following the closing, the remaining $750,000 will be forgiven. To the
extent that such revenue targets are not met by MSI, the subject portion of the
loan or accrued interest will not be forgiven. The loan is payable by the
Company on the 30th day after the last day of the 16th and 28th months following
the closing date if the revenue targets are not achieved by MSI. The loan is
non-interest bearing if no principal payments are in default. Interest on any
amount past due will accrue at the rate of 10% per annum.
A summary of the gain and certain cash flow information relating to the sale of
the Company's Clearing Operation is as follows:
Gain on Sale of Clearing Operation:
Sale Price ......................................... $ 3,000,000
Net Assets of Clearing Operation at closing date ... 351,352
-----------
Adjusted sale price .............................. 3,351,352
Less:
Net assets of Clearing Operation at closing date ... (351,352)
Transaction costs, including commissions of $125,000
paid to certain officers of the Company .......... (167,026)
Loan payable to MSI ................................ (1,500,000)
-----------
Gain on sale of Clearing Operation ............... $ 1,332,974
===========
F-15
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
Cash flow information:
Sale price .......................................... $ 3,000,000
Net assets of Clearing Operation at closing date .... 351,352
-----------
Adjusted sale price ............................... 3,351,352
Less:
Transaction costs, including commissions ............ (167,026)
Receivable from MSI ................................. (1,048,075)
Cash sold as part of net assets of Clearing Operation (1,824,118)
-----------
Cash proceeds from sale of Clearing Operation ..... $ 312,133
===========
The following unaudited condensed pro forma information presents unaudited
results of operations of the Company as if the sale of the Clearing Operation
and Plan of Reorganization and Exchange Agreement discussed in Note 1 had
occurred on January 1, 1995:
Year Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
Revenue .................. $ 27,901,000 20,681,000
============ ===========
Net loss ................. ($ 1,188,000) (612,000)
============ ===========
Loss per common share ... ($ .09) (.07)
============ ===========
The pro forma information does not necessarily represent the results that would
have occurred had the sale of the Clearing Operation and Plan of Reorganization
and Exchange Agreement taken place on January 1, 1995, nor are they necessarily
indicative of the results of future operations.
NOTE 3 - STOCKHOLDERS' EQUITY
On February 16, 1996, the Company commenced a private placement of 6,000,000
shares of its $.01 per value Common Stock at a price of $1.00 per share, and
6,000,000 Class A redeemable common stock purchase warrants at a price of $.10
per warrant (collectively, the Private Placement). The warrants entitle the
holder to purchase one share of common stock at $1.50 per share at any time
until May 1, 2000. As of September 30, 1996, 5,229,045 shares of Common Stock
and warrants had been issued through the Private Placement for proceeds of
$5,137,246, net of issuance costs of $614,704. As of December 11, 1996, an
additional 729,613 shares of Common Stock and warrants have been issued for
proceeds of approximately $722,000, net of issuance costs. Consistent with the
Private Placement Memorandum, the proceeds of the Private Placement were used to
purchase 1,558,078 outstanding common shares for $1,200,000, purchase and retire
87,500 shares of Series A voting cumulative preferred stock for $875,000,
repayment of certain debt for $1,325,000, and for working capital purposes.
F-16
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
The Company has granted options pursuant to three stock option plans, the
Incentive Stock Option Plan, (1988 Plan), the 1996 Incentive and Nonstatutory
Option Plan (1996 Plan), and the September 1996 Incentive and Nonstatutory
Option Plan (September 1996 Plan). Options were granted to certain officers and
employees of the Company in accordance with the criteria of each individual plan
at an exercise price of $.625 per share. 1,780,000 options are exercisable as of
September 30, 1996. 360,000, 320,000, 320,000 and 270,000 options become
exercisable during the years ended September 30, 1997, 1998, 1999 and 2000,
respectively. As of September 30, 1996 the Company had also granted non
qualified stock options to certain officers and employees at an exercise price
of $95 per share. These options are exercisable and expire August 25, 1997. The
following represents additional information relative to stock option activity as
of September 30, 1996 and for the year then ended:
<TABLE>
<CAPTION>
September 1996
Total 1988 Plan 1996 Plan Plan Non Qualified
----- --------- --------- -------------- -------------
Outstanding as of
<S> <C> <C> <C> <C> <C>
September 30, 1995 .. 420,000 -- -- -- 420,000
Expired ............. (80,000) -- -- -- (80,000)
Granted ............. 3,050,000 557,000 1,250,000 1,243,000 --
---------- ---------- ---------- ---------- ----------
Outstanding as of
September 30, 1996 .. 3,390,000 557,000 1,250,000 1,243,000 340,000
========== ========== ========== ========== ==========
Expiration dates:
August 25, 1997 ..... 340,000 -- -- -- 340,000
September 9, through
December 31, 2006 ... 1,780,000 557,000 660,000 563,000 --
September 9, through
December 31, 2007 .. 360,000 -- 160,000 200,000 --
September 9, through
December 31, 2008 .. 320,000 -- 160,000 160,000 --
September 9, through
December 31, 2009 .. 320,000 -- 160,000 160,000 --
September 9, 2010 ... 270,000 -- 110,000 160,000 --
---------- ---------- ---------- ---------- ----------
Outstanding as of
September 30, 1996 .. 3,390,000 557,000 1,250,000 1,243,000 340,000
========== ========== ========== ========== ==========
</TABLE>
The Company has 5,385,295 warrants outstanding as of September 30, 1996. Each
warrant allows the holder to purchase one share of Common Stock at prices
ranging from $.96 to $1.50 per share. 156,250 warrants can be exercised between
June 26, 1993 and June 26, 1997. The remaining 5,279,045 warrants can be
exercised through May 1, 2000. Upon completion of the Private Placement, the
Company has agreed to issue 600,000 warrants to RAF, the selling agent, which
allows the holder to purchase one share of Class B Common Stock at a price of
$1.50 per warrant.
F-17
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
NOTE 4 - SECURITIES OWNED
Securities owned by the Company consist of the following:
September 30, September 30,
1996 1995
------------- -------------
Corporate securities ........... $1,584,307 1,302,025
U.S. government obligations .... 91,281 53,600
Municipal obligations .......... 206,461 19,100
---------- ----------
$1,882,049 1,374,725
========== ==========
NOTE 5 - NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
Maturity Interest September 30, September 30,
Payor Date Rate 1996 1995
----- --------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Telecom *USA Publishing
Company ................... 12/31/95 0% -- 289,846
Phone Directories
Company, Inc............... 11/01/96 10.0% $109,091 208,265
Trepp Risk Management, Inc. 07/01/99 6.46% 123,974 113,242
Former employee, net ...... demand 0% 166,587 160,000
Other notes receivable .... various various 34,943 69,504
-------- --------
434,595 840,857
Less Current Portion .. (389,843) (731,766)
--------- --------
$ 44,752 109,091
========= ========
</TABLE>
NOTE 6 - DEFERRED REVENUE
Sales contracts for advertising in directories not published totaled
approximately $2,270,000 and $2,200,000 as of September 30, 1996 and 1995,
respectively. $598,658 and $639,184 of the deferred revenue balance as of
September 30, 1996 and 1995, respectively, represents advance payments received
on these contracts. These amounts together with the balances of the contracts
will be recognized as revenue when the directories are published.
F-18
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
NOTE 7 - PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment is comprised of the following:
September 30, September 30,
1996 1995
------------- -------------
Real Property ............... $ 561,558 314,048
Furniture and Equipment ..... 3,446,511 3,458,172
Vehicles .................... 163,888 173,443
Leasehold improvements ...... 360,602 286,572
---------- ----------
4,532,559 4,232,235
Accumulated depreciation .... (2,262,248) (2,533,747)
---------- ----------
$ 2,270,311 1,698,488
========== ==========
NOTE 8 - RELATED PARTY ACTIVITY
The Company has various notes payable to related parties in the amount of
$367,900 and $548,900 as of September 30, 1996 and 1995, respectively. Such
notes payable are unsecured, payable on demand, and bear interest at a variable
rate not to exceed the interest rate on the Company's line of credit with BNC
National Bank. As of September 30, 1996, the interest rate was 11.0%.
As a clearing correspondent of MSI, the Company paid MSI $162,435 in clearing
fees for the year ended September 30, 1996. The Company's $1,444,091 receivable
from brokers or dealers and clearing organizations -- affiliate, primarily
relates to broker commissions outstanding from MSI as of September 30, 1996. The
receivable from affiliate of $1,048,075 was due from MSI as of September 30,
1996, and was received in full subsequent to year end.
For the year ended September 30, 1996 Secutron recorded revenues of $684,156 for
services performed for MSI and/or its majority shareholder.
In accordance with an investment banking agreement, merger and acquisition fees
of $100,000 relating to the acquisition of the assets RAFCO were paid to an
officer of the Company during the year ended September 30, 1996.
During the year ended September 30, 1996, nine months ended September 30, 1995,
and year ended December 31, 1994, the Company paid fees for legal services of
approximately $209,000, $316,000 and $116,000, respectively, to a legal firm
partially owned for most of these periods by an affiliate of a stockholder of
the Company that held approximately 12.4% of the outstanding Common Stock of the
Company.
F-19
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
NOTE 9 - LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
Maturity Interest September 30, September 30,
Payee Collateral Date Rate 1996 1995
- ------ ---------- --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
MSI (1) ........................... (1) (1) (1) $ 1,500,000 --
BNC National Bank (2) ............. (2) 04-15-97 (2) 725,000 --
Telecom*USA Publishing Company .... (3) 06-15-99 (3) 500,000 500,000
BNC National Bank (4) ............. ESOP Stock 04-15-97 10.5% 350,000 350,000
Guaranty Bank ..................... Real Property 03-01-01 8.25% 196,667 --
Guaranty Bank ..................... Unsecured 03-01-97 8.75% 74,013 100,000
BNC National Bank ................. Equipment 3-19-99 10.5% 476,838 --
BNC National Bank ................. Equipment 6-26-99 10.5% 35,528 --
IBM ............................... Equipment 04-01-99 11.0% 30,790 --
Kirkwood Bank & Trust ............. Vehicle 12-06-97 9.0% 8,959 14,984
Other Notes ....................... Unsecured Various Various 113,380 99,856
Other debt repaid (5) ............. Unsecured Various Various -- 1,849,092
---------- ----------
Total ........................... 4,011,175 2,913,932
Less current portion ............ (1,435,208) (939,706)
---------- ----------
$ 2,575,967 1,974,226
========== ==========
</TABLE>
F-20
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
(1) The loan is payable to MSI and was issued in conjunction with the sale of
the Clearing Operation as discussed in Note 2. The loan is forgivable based
on MSI's revenues during the 28 months following the closing date. If MSI's
revenues exceed $1,250,000 during the 5th through the 16th month following
the closing, $750,000 of the loan will be forgiven. If MSI's revenues
exceed $1,750,000 during the 17th through the 28th month following the
closing, the remaining $750,000 will be forgiven. To the extent that such
revenue targets are not met by MSI, the subject portion of the loan or
accrued interest will not be forgiven. The loan is payable by the Company
on the 30th day after the last day of the 16th and 28th months following
the closing date if the revenue targets are not achieved by MSI. The loan
is non-interest bearing if no principal payments are in default. Interest
on any amount past due will accrue at the rate of 10% per annum.
(2) A line of credit agreement exists with BNC National Bank providing the
Company with loans in the total amount of $1,300,000 on a revolving basis.
The line of credit is due April 15, 1997 at which time all unpaid principal
is due and payable. Interest on unpaid principal is payable monthly at the
Wall Street Journal Prime Rate plus 2.25%.
The BNC National Bank loan agreement includes various restrictions
affecting the conduct of the Company's directory business while the
agreement is in force, including limited expansion. It also requires
maintenance of net income of 2.5% of sales, equity to total assets of not
less than 35%, and cash flow coverage of at least 100% of all debt service,
and limits the outstanding line of credit to 75% of accounts receivable
less than 60 days old. The Company failed to meet the covenant requiring
net income of 2.5% of sales for the year ended September 30, 1996. BNC
National Bank has waived this event of default subject to agreement that
proceeds from exercise of the Option Agreement be applied to the line of
credit until paid in full. The outstanding balance has been classified as
current in the consolidated balance sheet.
(3) This note results from an Option Agreement between the Company and
Telecom*USA Publishing Company. Telecom*USA Publishing Company made a
noninterest bearing and nonrecourse loan to the Company as consideration
for the Option Agreement. Telecom*USA Publishing Company has the right to
purchase nine North Dakota directories between June 1, 1997 and June 1,
1999. The amount of the loan will be applied against the sales price of the
directories. If the option is not exercised, the full amount of the loan
will be forgiven on June 1, 1999.
(4) The Company has guaranteed its ESOP's note payable, which is secured by the
shares of the Company's Common Stock owned by the ESOP.
(5) This debt was repaid during 1996. It primarily consisted of $1,325,000 in
10% Senior Subordinated promissory notes which were repaid through the
proceeds of the Private Placement discussed in Note 3.
Minimum principal payments required on long-term debt during the next five years
are as follows:
1997 $1,435,208
1998 $ 963,236
1999 $1,536,064
2000 $ 40,000
2001 $ 36,667
The $1,500,000 loan payable to MSI has been included in the 1998 and 1999
scheduled minimum principal payments, although management believes that the loan
will be forgiven as MSI revenue targets are met.
NOTE 10 - INCOME TAXES
Income tax expense for the year ended September 30, 1996, consisted of the
following:
Current $70,799
Deferred (15,000)
--------
$55,799
========
F-21
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
Income tax expense for the year ended September 30, 1996 differs from the amount
computed by applying the U.S. Federal statutory tax rate of 34% to loss before
income taxes as a result of the following:
Computed "expected" income tax benefit ............... $(782,980)
Increase in income taxes resulting from:
Nondeductible entertainment expenses .............. 19,998
State taxes, net of Federal benefit ............... 11,000
Unconsolidated subsidiaries for tax purposes ...... 55,799
Change in valuation allowance for deferred tax
assets ........................................ 751,982
---------
Income tax expense ................................ $ 55,799
=========
The components of deferred tax benefit for the year ended September 30, 1996
include an increase in the valuation allowance of $928,301 and an adjustment to
deferred taxes allocated at the date of the business combination of $176,319.
Income tax expense for the nine months ended September 30, 1995 and the year
ended December 31, 1994 differ from the amounts computed by applying the U.S.
Federal income tax rate of 34% primarily due to the effects of unconsolidated
subsidiaries for tax purposes, nondeductible entertainment expenses and state
income taxes.
Temporary differences between financial statement carrying amounts and the tax
bases of assets and liabilities that result in significant deferred tax assets
and liabilities are as follows:
September September
30, 1996 30, 1995
--------- ---------
Deferred tax assets:
Deferred rent concessions ........................ $ 682,000 685,000
Forgivable loan .................................. 570,000 --
Deferred revenue on directory sales .............. 237,000 243,000
Accrued expenses ................................. 255,000 137,000
Allowance for doubtful accounts .................. 26,000 60,000
Investments in subsidiaries and affiliates ....... 100,000 66,000
Contribution and operating loss carryforwards .... 187,000 122,693
---------- ----------
Gross deferred tax assets ........................ 2,057,000 1,313,693
Valuation allowance .............................. (1,086,216) (157,915)
----------- ----------
Deferred tax assets after valuation allowance ....... 970,784 1,155,778
Deferred tax liabilities:
Directory acquisition costs ...................... (1,623,000) (1,722,000)
Property and equipment ........................... (65,000) (80,000)
Installment sales on directories ................. -- (61,000)
Deferred directory costs and other ............... -- (9,994)
----------- ----------
Gross deferred tax liabilities ................... (1,688,000) (1,872,994)
----------- ----------
Net deferred tax liability ....................... ($ 717,216) (717,216)
=========== ==========
F-22
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
The net deferred tax liability is presented in the accompanying consolidated
balance sheets as follows:
September 30, September 30,
1996 1995
------------ ------------
Net current deferred tax asset .......... $ 196,846 368,374
Net long-term deferred tax liability .... (914,062) (1,085,590)
Net deferred tax liability .............. ($717,216) (717,216)
========== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that the deferred tax asset will be realized.
The ultimate realization of the deferred tax asset is dependent on the
generation of future taxable income in the period in which the temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based on these considerations, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences, net of the existing valuation allowance as of
September 30, 1996.
Net operating losses of approximately $340,000 and contribution carryforwards of
approximately $152,000 expire in 2010 and through 2001, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Fronteer and RAF lease office space under long-term noncancelable operating
leases. The leases for office space provide for annual escalations for
utilities, taxes, and service costs, as well as escalating rental rates over the
term of the leases. Minimum future rental payments required by such leases are
as follows:
1997 $1,033,384
1998 $1,077,857
1999 $1,090,087
2000 $1,079,836
2001 $1,053,306
Thereafter $5,059,500
Under the terms of the sale of the Clearing Operation, MSI pays RAF, in
accordance with a sub-lease agreement, monthly rental fees of $10,000 to $12,000
through July 1999 for its occupied space. This amount has been offset against
minimum future rental payments.
Rental expense included in the consolidated statements of operations was
$1,178,024 for the year ended September 30, 1996, $917,963 for the nine months
ended September 30, 1995, and $1,018,131 for the year ended December 31, 1994,
respectively.
F-23
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
The Company has guaranteed a promissory note of the Fronteer Directory Company,
Inc. Employee Stock Ownership Plan. The unpaid balance on this note was $350,000
as of September 30, 1996 and 1995 and has been included in the accompanying
consolidated balance sheets.
The Company has an agreement with a former employee for consulting services for
which the Company pays $10,000 per month through 2010.
The Company has an employment agreement with one of its officers that upon
expiration of the agreement on January 1, 1998, the Company is required at the
officer's option, to purchase from him up to 500,000 shares of the Company's
Common Stock at $1.00 per share.
The Company is a defendant in certain arbitration and litigation matters arising
from its activities as a broker/dealer. In the opinion of management and
in-house counsel, these matters have been adequately provided for in the
accompanying consolidated financial statements, and the ultimate resolution of
the arbitration and litigation will not have a significant adverse effect on the
consolidated results of operations or the consolidated financial position of the
Company.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP AND EMPLOYEE BENEFIT PLANS
The Company has adopted an employee stock ownership plan (ESOP) for its
employees. Contributions to the plan are at the discretion of the Company. All
employees as of October 1, 1989 are eligible to participate in the plan, and new
employees after that date become eligible on April 1 or October 1 which follows
the completion of one year of employment. The plan provides that more than half
of the assets in the plan must consist of the Company's common stock. The plan
has debt of $350,000 which has been used to purchase the Company's common stock.
Such debt is guaranteed by the Company and accordingly has been recorded in the
accompanying consolidated financial statements. During the year ended September
30, 1996, nine months ended September 30, 1995, and year ended December 31,
1994, the Company contributed $10,500, $10,000 and $44,680, respectively, to the
plan. The ESOP owned 517,900 shares of the Company's Common Stock as of
September 30, 1996.
The Company has three retirement saving plans covering all employees who are
over 21 years of age and have completed one year of eligibility service. The
plans meet the qualifications of Section 401(k) of the Internal Revenue Code.
Under the plans, eligible employees can contribute through payroll deductions up
to 15% of their base compensation. The Company makes a discretionary matching
contribution equal to a percentage of the employee's contribution. The Company
contributed $67,079, $44,934 and $66,031 for the year ended September 30, 1996,
the nine months ended September 30, 1995, and year ended December 31, 1994,
respectively. One of the Company's savings plans owns 283,700 shares of the
Company's Common Stock as of September 30, 1996.
The Company does not provide any post employment benefits to retired or
terminated employees.
NOTE 13 - MINIMUM NET CAPITAL REQUIREMENTS
RAF, as a registered securities broker/dealer, is subject to the Securities and
Exchange Commission Uniform Net Capital Rule (Rule 15c3-1) (the Rule). RAF has
elected to operate pursuant to the alternative standard provided by the Rule.
Under the alternative standard, RAF is required to maintain "net capital" of not
less than $250,000. As of September 30, 1996, RAF had "net capital" of
$3,879,617.
F-24
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995, CONTINUED
NOTE 14 - OFFICER LIFE INSURANCE
As of September 30, 1996, the Company is the owner-beneficiary of term life
insurance policies on the lives of two officers:
Name Face Amount of
---- Policy
--------------
Dennis Olson ......... $1,000,000
Robert A. Fitzner .... $2,500,000
NOTE 15 - SEGMENT REPORTING
Information regarding business segments is summarized below. Operations for the
Directory Division, including FPS and FMG, are included from May 1, 1995, the
effective date of the business combination. Operations for RAF and Secutron are
for the year ended September 30, 1996 and for the nine months ended September
30, 1995.
<TABLE>
<CAPTION>
Year ended September 30, 1996
-----------------------------
Directory Adj. and
Division RAF Secutron Others Eliminations Consolidated
--------- ------- -------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated customers .......... $7,417,684 14,830,681 6,538,540 -- $ 28,786,905
Intersegment revenues ............. 70,313 -- 437,051 -- (507,364) --
------------ ------------ ------------ --------- ------------ ------------
Total revenues .................... 7,487,997 14,830,681 6,975,591 -- (507,364) 28,786,905
------------ ------------ ------------ --------- ------------ ------------
Operating profit (loss) ........... (1,334,549) (2,647,327) 281,775 -- -- (3,700,101)
------------ ------------ ------------ --------- ------------ ------------
Other income (expense), net ....... (333,610) 404,597 (6,742) -- -- 64,245
Gain on sale of Clearing
Operation ........................ -- 1,332,974 -- -- -- 1,332,974
------------ ------------ ------------ --------- ------------ ------------
Loss before income taxes .......... $(1,668,159) (909,756) 275,033) -- -- $ (2,302,882)
============ ============ ============ ========= ============ ============
Depreciation and amortization ..... $ 832,990 270,419 116,733 -- -- $ 1,220,142
============ ============ ============ ========= ============ ============
Capital expenditures .............. $ 874,595 480,004 54,493 -- -- $ 1,409,092
============ ============ ============ ========= ============ ============
Identifiable assets at September
30, 1996 ......................... $ 10,746,145 8,729,572 1,456,302 -- (2,747,340) $ 18,184,679
============ ============ ============ ========= ============ ============
F-25
<PAGE>
<CAPTION>
Nine Months ended September 30, 1995
------------------------------------
Directory Adj. and
Division RAF Secutron Others Eliminations Consolidated
--------- ------- -------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated customers .......... $ 3,903,441 9,854,160 3,236,156 175,997 -- $ 17,169,754
Intersegment revenues ............. 22,414 -- 392,208 -- (414,622) --
------------ ------------ ------------ --------- ------------ ------------
Total revenues .................... 3,925,855 9,854,160 3,628,364 175,997 (414,622) 17,169,754
------------ ------------ ------------ --------- ------------ ------------
Operating profit (loss) ........... (1,109,965) 25,991 150,614 -- (1,987,276)
------------ ------------ ------------ --------- ------------ ------------
Other income, net ................. (101,692) 244,126 (7,662) (39,369) -- 95,403
------------ ------------ ------------ --------- ------------ ------------
Loss before income taxes .......... $ (1,211,657) (809,790) 18,329 111,245 -- $ (1,891,873)
============ ============ ============ ========= ============ ============
Depreciation and amortization ..... $ 237,665 248,066 63,721 14,959 -- $ 564,411
============ ============ ============ ========= ============ ============
Capital expenditures .............. $ 28,755 160,043 59,476 30,703 -- $ 278,977
============ ============ ============ ========= ============ ============
Identifiable assets at September
30, 1995 ......................... $ 10,458,467 13,787,104 711,883 -- (4,237,832) $ 20,719,622
============ ============ ============ ========= ============ ============
</TABLE>
Identifiable assets by industry are those assets that are used in the Company's
operations in each industry.
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FRONTEER FINANCIAL HOLDINGS, LTD
a Colorado corporation
By: /s/ Dennis W. Olson
Dated: January 10, 1997 -------------------------------------
Dennis W. Olson, President and
Chief Executive Officer
By: /s/ Gary L. Cook
-------------------------------------
Gary L. Cook Principal Accounting
Officer
Pursuant to the Securities Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
Date Name and Title Signature
- ---- -------------- ---------
/s/ Dennis W. Olson
January 10, 1997 Dennis W. Olson, -----------------------------------
Director
/s/ Robert A. Fitzner, Jr.
January 10, 1997 Robert A. Fitzner, Jr. ----------------------------------
Director
/s/ Robert L. Long
January 10, 1997 Robert L. Long, ----------------------------------
Director
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------ ----------- --------
Exhibit 2.1 Plan of Reorganization and Exchange Agreement
dated April 26, 1995 with Exhibits A, B, C, F and
I (incorporated by reference to Exhibit 2.1 to
Registrant's Current Report on Form 8-K dated May
9, 1995).
Exhibit 2.2 Sale and Purchase Agreement dated April 27, 1995,
with Exhibits A and J (incorporated by reference
to Exhibit 2.2 to Registrant's Current Report on
Form 8-K dated May 9, 1995).
Exhibit 2.3 Option Agreement dated April 27, 1995, with
Exhibits A, B, and D (incorporated by reference to
Exhibit 2.3 to Registrant's Current Report on Form
8-K dated May 9, 1995).
Exhibit 3.0 Articles of Incorporation of Registrant
(incorporated by reference to Exhibit 3.0 to
Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995.
Exhibit 3.0(i) Articles of Amendment to the Registrant's Articles
of Incorporation dated April 28, 1995
(incorporated by reference to Exhibit 3.0(i) to
Registrant's Current Report on Form 8-K dated May
9, 1995).
Exhibit 3.0(ii) Articles of Amendment to the Registrant's Articles
of Incorporation as filed with the Colorado
Secretary of State on June 27, 1995.
Exhibit 3.2 Restated Bylaws of Registrant adopted February 14,
1996.
Exhibit 9.1 Voting Trust Agreement between Robert A. Fitzner,
Jr. and Dorothy K. Englebrecht dated June 2, 1995
(incorporated by reference to Exhibit 9.1 to
Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995).
Exhibit 9.2 Voting Trust Agreement between Robert A. Fitzner,
Jr. and Steven M. Fishbein dated June 2, 1995
(incorporated by reference to Exhibit 9.2 to
Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995).
Exhibit 9.3 Voting Trust Agreement between Robert A. Fitzner,
Jr. and Peter K. O'Leary dated June 2, 1995
(incorporated by reference to Exhibit 9.3 to
Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995).
Exhibit 9.4 Voting Trust Agreement between Robert A. Fitzner,
Jr. and Arlene M. Wilson dated June 2, 1995
(incorporated by reference to Exhibit 9.4 to
Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995).
Exhibit 10.1 Amended and Restated 1988 Incentive and
NonStatutory Stock Option Plan as amended
September 10, 1996.
Exhibit 10.2 Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.2 to Registrant's Annual
Report on Form 10-K for the year ended September
30, 1995.)
Exhibit 10.3 401(k) Plan and Amendment I thereto (incorporated
by reference to Exhibit 10.3 to Registrant's
Annual Report on Form 10-K for the year ended
September 30, 1995.)
<PAGE>
Exhibit 10.4 Employment Agreement between Dennis W. Olson and
the Registrant dated January 1, 1995 (incorporated
by reference to Exhibit 10.4 to Registrant's
Annual Report on Form 10-K for the year ended
September 30, 1995.)
Exhibit 10.5 Employees/Officers/Directors Form of Non
-Competition Agreement; Covenant Not to Compete
and Confidentiality Agreement. (incorporated by
reference to Exhibit 2.2 to Registrant's Current
Report on Form 8-K dated May 9, 1995.)
Exhibit 10.6 Amended and Restated 1996 Incentive and
Nonstatutory Stock Option Plan, as amended
September 10, 1996.
Exhibit 10.7 September 1996 Incentive and Nonstatutory Stock
Option Plan.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 27 Financial Data Schedule
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
FRONTEER DIRECTORY COMPANY, INC.
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is FRONTEER DIRECTORY COMPANY, INC.
("Company").
SECOND: The following amendment to the Company's Articles of Incorporation was
adopted on May 3, 1996, as prescribed by the Colorado Business Corporation Act
by a vote of the shareholders. The number of shares voted for the amendment was
sufficient for approval.
The Company's Articles of Incorporation shall be amended to change the
name of the Company to a name to be determined by the Board of
Directors. Effective June 26, 1996, the Board of Directors unanimously
consented to change the name of the Company to "FRONTEER FINANCIAL
HOLDINGS, LTD." effective immediately upon filing of an amendment with
the Colorado Secretary of State.
THIRD: The amendment does not involve any exchange, reclassification, or
cancellation of issued shares.
FRONTEER DIRECTORY COMPANY, INC.
By: /s/ R.A. Fitzner, Jr.
---------------------------------------
R.A. Fitzner, Jr., Chairman of the Board
RESTATED BYLAWS
OF
FRONTEER DIRECTORY COMPANY, INC.
ARTICLE I
Offices
The principal office of the corporation shall be designated from time to
time by the corporation and may be within or outside of Colorado. The
corporation may have such other offices, either within or outside Colorado, as
the board of directors may designate or as the business of the corporation may
require from time to time. The registered office of the corporation required by
the Colorado Business Corporation Act to be maintained in Colorado may be, but
need not be, identical with the principal office, and the address of the
registered office may be changed from time to time by the board of directors.
ARTICLE II
Shareholders
Section 1. Annual Meeting. The annual meeting of the shareholders shall be
held each year on a date and at a time fixed by the board of directors of the
corporation (or by the chairman of the board in the absence of action by the
board of directors) for the purpose of electing directors and for the
transaction of such other business as may come before the meeting. If the
election of directors is not held on the day fixed as provided herein for any
annual meeting of the shareholders, or any adjournment thereof, the board of
directors shall cause the election to be held at a special meeting of the
shareholders as soon thereafter as it may conveniently be held.
A shareholder may apply to the district court in the county in Colorado
where the corporation's principal office is located or, if the corporation has
no principal office in Colorado, to the district court of the county in which
the corporation's registered office is located to seek an order that a
shareholder meeting be held (i) if an annual meeting was not held within six
months after the close of the corporation's most recently ended fiscal year or
fifteen months after its last annual meeting, whichever is earlier, or (ii) if
the shareholder participated in a proper call of or proper demand for a special
meeting and notice of the special meeting was not given within thirty days after
the date of the call or the date the last of the demands necessary to require
calling of the meeting was received by the corporation pursuant to C.R.S.
7-107-102(1)(b), or the special meeting was not held in accordance with the
notice.
<PAGE>
Section 2. Special Meetings. Unless otherwise prescribed by statute,
special meetings of the shareholders may be called for any purpose by the
chairman of the board or by the board of directors. The chairman of the board
shall call a special meeting of the shareholders if the corporation receives one
or more written demands for the meeting, stating the purpose or purposes for
which it is to be held, signed and dated by holders of shares representing at
least 10 percent of all the votes entitled to be cast on any issue proposed to
be considered at the meeting.
Section 3. Place of Meeting. The board of directors may designate any
place, either within or outside Colorado, as the place for any annual meeting or
any special meeting called by the board of directors. A waiver of notice signed
by all shareholders entitled to vote at a meeting may designate any place,
either within or outside Colorado, as the place for such meeting. If no
designation is made, or if a special meeting is called other than by the board,
the place of meeting shall be the principal office of the corporation.
Section 4. Notice of Meeting. Written notice stating the place, date, and
hour of the meeting shall be given not less than 10 nor more than 60 days before
the date of the meeting, except (i) if the number of authorized shares is to be
increased, at least 30 days' notice shall be given, or (ii) in the event that a
longer notice period is required by the Colorado Business Corporation Act.
Notice of a special meeting shall include a description of the purpose or
purposes of the meeting. Notice of an annual meeting need not include a
description of the purpose or purposes of the meeting except the purpose or
purposes shall be stated with respect to (i) an amendment to the articles of
incorporation of the corporation, (ii) a merger or share exchange in which the
corporation is a party and, with respect to a share exchange, in which the
corporation's shares will be acquired, (iii) a sale, lease, exchange or other
disposition, other than in the usual and regular course of business, of all or
substantially all of the property of the corporation or of another entity which
this corporation controls, in each case with or without the goodwill, (iv) a
dissolution of the corporation, or (v) any other purpose for which a statement
of purpose is required by the Colorado Business Corporation Act. Notice shall be
given personally or by mail, private carrier, telegraph, teletype,
electronically transmitted facsimile or other form of wire or wireless
communication by or at the direction of the president, the secretary, or the
officer or persons calling the meeting, to each shareholder of record entitled
2
<PAGE>
to vote at such meeting. If mailed and if in a comprehensible form, such notice
shall be deemed to be given and effective when deposited in the United States
mail, addressed to the shareholder at his address as it appears in the
corporation's current record of shareholders, with postage prepaid. If notice is
given other than by mail, and provided that such notice is in a comprehensible
form, the notice is given and effective on the date received by the shareholder.
If requested by the person or persons lawfully calling such meeting, the
secretary shall give notice thereof at corporate expense. No notice need be sent
to any shareholder if three successive notices mailed to the last known address
of such shareholder have been returned as undeliverable until such time as
another address for such shareholder is made known to the corporation by such
shareholder. In order to be entitled to receive notice of any meeting, a
shareholder shall advise the corporation in writing of any change in such
shareholder's mailing address as shown on the corporation's books and records.
When a meeting is adjourned to another date, time or place, notice need not
be given of the new date, time or place if the new date, time or place of such
meeting is announced before adjournment at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which may have been transacted at the original meeting. If the adjournment is
for more than 120 days, or if a new record date is fixed for the adjourned
meeting, a new notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting as of the new record date.
A shareholder may waive notice of a meeting before or after the time and
date of the meeting by a writing signed by such shareholder. Such waiver shall
be delivered to the corporation for filing with the corporate records. Further,
by attending a meeting either in person or by proxy, a shareholder waives
objection to lack of notice or defective notice of the meeting unless the
shareholder objects at the beginning of the meeting to the holding of the
meeting or the transaction of business at the meeting because of lack of notice
or defective notice. By attending the meeting, the shareholder also waives any
objection to consideration at the meeting of a particular matter not within the
purpose or purposes described in the meeting notice unless the shareholder
objects to considering the matter when it is presented.
Section 5. Fixing of Record Date. For the purpose of determining
shareholders entitled to (i) notice of or vote at any meeting of shareholders or
any adjournment thereof, (ii) receive distributions or share dividends, or (iii)
demand a special meeting, or to make a determination of shareholders for any
3
<PAGE>
other proper purpose, the board of directors may fix a future date as the record
date for any such determination of shareholders, such date in any case to be not
more than 70 days, and, in case of a meeting of shareholders, not less than 10
days, prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is fixed by the
directors, the record date shall be the date on which notice of the meeting is
mailed to shareholders, or the date on which the resolution of the board of
directors providing for a distribution is adopted, as the case may be. When a
determination of shareholders entitled to vote at any meeting of shareholders is
made as provided in this Section, such determination shall apply to any
adjournment thereof unless the board of directors fixes a new record date, which
it must do if the meeting is adjourned to a date more than 120 days after the
date fixed for the original meeting.
Notwithstanding the above, the record date for determining the shareholders
entitled to take action without a meeting or entitled to be given notice of
action so taken shall be the date a writing upon which the action is taken is
first received by the corporation. The record date for determining shareholders
entitled to demand a special meeting shall be the date of the earliest of any of
the demands pursuant to which the meeting is called.
Section 6. Voting Lists. The secretary shall make, at the earlier of 10
days before each meeting of shareholders or two business days after notice of
the meeting has been given, a complete list of the shareholders entitled to be
given notice of such meeting or any adjournment thereof. The list shall be
arranged by voting groups and within each voting group by class or series of
shares, shall be in alphabetical order within each class or series, and shall
show the address of and the number of shares of each class or series held by
each shareholder. For the period beginning the earlier of 10 days prior to the
meeting or two business days after notice of the meeting is given and continuing
through the meeting and any adjournment thereof, this list shall be kept on file
at the principal office of the corporation, or at a place (which shall be
identified in the notice) in the city where the meeting will be held. Such list
shall be available for inspection on written demand by any shareholder
(including for the purpose of this Section 6 any holder of voting trust
certificates) or his agent or attorney during regular business hours and during
the period available for inspection. The original stock transfer books shall be
prima facie evidence as to the shareholders entitled to examine such list or to
vote at any meeting of shareholders.
4
<PAGE>
Any shareholder, his agent or attorney may copy the list during regular
business hours and during the period it is available for inspection, provided
(i) the shareholder has been a shareholder for at least three months immediately
preceding the demand or holds at least five percent of all outstanding shares of
any class of shares as of the date of the demand, (ii) the demand is made in
good faith and for a purpose reasonably related to the demanding shareholder's
interest as a shareholder, (iii) the shareholder describes with reasonable
particularity the purpose and the records the shareholder desires to inspect,
(iv) the records are directly connected with the described purpose, and (v) the
shareholder pays a reasonable charge covering the costs of labor and material
for such copies, not to exceed the estimated cost of production and
reproduction.
Section 7. Recognition Procedure for Beneficial Owners. The board of
directors may adopt by resolution a procedure whereby a shareholder of the
corporation may certify in writing to the corporation that all or a portion of
the shares registered in the name of such shareholder are held for the account
of a specified person or persons. The resolution may set forth (i) the types of
nominees to which it applies, (ii) the rights or privileges that the corporation
will recognize in a beneficial owner, which may include rights and privileges
other than voting, (iii) the form of certification and the information to be
contained therein, (iv) if the certification is with respect to a record date,
the time within which the certification must be received by the corporation, (v)
the period for which the nominee's use of the procedure is effective, and (vi)
such other provisions with respect to the procedure as the board deems necessary
or desirable. Upon receipt by the corporation of a certificate complying with
the procedure established by the board of directors, the persons specified in
the certification shall be deemed, for the purpose or purposes set forth in the
certification, to be the registered holders of the number of shares specified in
place of the shareholder making the certification.
Section 8. Quorum and Manner of Acting. A majority of the votes entitled to
be cast on a matter by a voting group shall constitute a quorum of that voting
group for action on the matter. If less than a majority of such votes are
represented at a meeting, a majority of the votes so represented may adjourn the
meeting from time to time without further notice, for a period not to exceed 120
days for any one adjournment. If a quorum is present at such adjourned meeting,
any business may be transacted which might have been transacted at the meeting
as originally noticed. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum, unless the meeting is
adjourned and a new record date is set for the adjourned meeting.
5
<PAGE>
If a quorum exists, action on a matter other than the election of directors
by a voting group is approved if the votes cast within the voting group favoring
the action exceed the votes cast within the voting group opposing the action,
unless the vote of a greater number or voting by classes is required by law or
the articles of incorporation.
Section 9. Proxies. At all meetings of shareholders, a shareholder may vote
by proxy by signing an appointment form or similar writing, either personally or
by his duly authorized attorney-in-fact. A shareholder may also appoint a proxy
by transmitting or authorizing the transmission of a telegram, teletype, or
other electronic transmission providing a written statement of the appointment
to the proxy, a proxy solicitor, proxy support service organization, or other
person duly authorized by the proxy to receive appointments as agent for the
proxy, or to the corporation. The transmitted appointment shall set forth or be
transmitted with written evidence from which it can be determined that the
shareholder transmitted or authorized the transmission of the appointment. The
proxy appointment form or similar writing shall be filed with the secretary of
the corporation before or at the time of the meeting. The appointment of a proxy
is effective when received by the corporation and is valid for 11 months unless
a different period is expressly provided in the appointment form or similar
writing.
Any complete copy, including an electronically transmitted facsimile, of an
appointment of a proxy may be substituted for or used in lieu of the original
appointment for any purpose for which the original appointment could be used.
Revocation of a proxy does not affect the right of the corporation to
accept the proxy's authority unless (i) the corporation had notice that the
appointment was coupled with an interest and notice that such interest is
extinguished is received by the secretary or other officer or agent authorized
to tabulate votes before the proxy exercises his authority under the
appointment, or (ii) other notice of the revocation of the appointment is
received by the secretary or other officer or agent authorized to tabulate votes
before the proxy exercises his authority under the appointment. Other notice of
revocation may, in the discretion of the corporation, be deemed to include the
appearance at a shareholders' meeting of the shareholder who granted the proxy
and the shareholder's voting in person on any matter subject to a vote at such
meeting.
6
<PAGE>
The death or incapacity of the shareholder appointing a proxy does not
affect the right of the corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his authority
under the appointment.
The corporation shall not be required to recognize an appointment made
irrevocable if it has received a writing revoking the appointment signed by the
shareholder (including a shareholder who is a successor to the shareholder who
granted the proxy) either personally or by his attorney-in-fact, notwithstanding
that the revocation may be a breach of an obligation of the shareholder to
another person not to revoke the appointment.
Subject to Section 11 and any express limitation on the proxy's authority
appearing on the appointment form, the corporation is entitled to accept the
proxy's vote or other action as that of the shareholder making the appointment.
Section 10. Voting of Shares. Each outstanding share, regardless of class,
shall be entitled to one vote, except in the election of directors, and each
fractional share shall be entitled to a corresponding fractional vote on each
matter submitted to a vote at a meeting of shareholders, except to the extent
that the voting rights of the shares of any class or classes are limited or
denied by the articles of incorporation as permitted by the Colorado Business
Corporation Act. Cumulative voting shall not be permitted in the election of
directors or for any other purpose. Each record holder of stock shall be
entitled to vote in the election of directors and shall have as many votes for
each of the shares owned by him as there are directors to be elected and for
whose election he has the right to vote.
At each election of directors, that number of candidates equaling the
number of directors to be elected, having the highest number of votes cast in
favor of their election, shall be elected to the board of directors.
Except as otherwise ordered by a court of competent jurisdiction upon a
finding that the purpose of this Section would not be violated in the
circumstances presented to the court, the shares of the corporation are not
entitled to be voted if they are owned, directly or indirectly, by a second
corporation, domestic or foreign, and the first corporation owns, directly or
indirectly, a majority of the shares entitled to vote for directors of the
second corporation except to the extent the second corporation holds the shares
in a fiduciary capacity.
7
<PAGE>
Redeemable shares are not entitled to be voted after notice of redemption
is mailed to the holders and a sum sufficient to redeem the shares has been
deposited with a bank, trust company or other financial institution under an
irrevocable obligation to pay the holders the redemption price on surrender of
the shares.
Section 11. Corporation's Acceptance of Votes. If the name signed on a
vote, consent, waiver, proxy appointment, or proxy appointment revocation
corresponds to the name of a shareholder, the corporation, if acting in good
faith, is entitled to accept the vote, consent, waiver, proxy appointment or
proxy appointment revocation and give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, proxy appointment or proxy
appointment revocation does not correspond to the name of a shareholder, the
corporation, if acting in good faith, is nevertheless entitled to accept the
vote, consent, waiver, proxy appointment or proxy appointment revocation and to
give it effect as the act of the shareholder if:
(i) the shareholder is an entity and the name signed purports to be
that of an officer or agent of the entity;
(ii) the name signed purports to be that of an administrator,
executor, guardian or conservator representing the shareholder and, if the
corporation requests, evidence of fiduciary status acceptable to the
corporation has been presented with respect to the vote, consent, waiver,
proxy appointment or proxy appointment revocation;
(iii) the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the corporation requests, evidence of
this status acceptable to the corporation has been presented with respect
to the vote, consent, waiver, proxy appointment or proxy appointment
revocation;
(iv) the name signed purports to be that of a pledgee, beneficial
owner or attorney-in-fact of the shareholder and, if the corporation
requests, evidence acceptable to the corporation of the signatory's
authority to sign for the shareholder has been presented with respect to
the vote, consent, waiver, proxy appointment or proxy appointment
revocation;
(v) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one of
the co-tenants or fiduciaries, and the person signing appears to be acting
on behalf of all the co-tenants or fiduciaries; or
8
<PAGE>
(vi) the acceptance of the vote, consent, waiver, proxy appointment or
proxy appointment revocation is otherwise proper under rules established by
the corporation that are not inconsistent with this Section 11.
The corporation is entitled to reject a vote, consent, waiver, proxy
appointment or proxy appointment revocation if the secretary or other officer or
agent authorized to tabulate votes, acting in good faith, has reasonable basis
for doubt about the validity of the signature on it or about the signatory's
authority to sign for the shareholder.
Neither the corporation nor its officers nor any agent who accepts or
rejects a vote, consent, waiver, proxy appointment or proxy appointment
revocation in good faith and in accordance with the standards of this Section is
liable in damages for the consequences of the acceptance or rejection.
Section 12. Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if a written consent (or counterparts thereof) that sets forth the
action so taken is signed by all of the shareholders entitled to vote with
respect to the subject matter thereof and received by the corporation. Such
consent shall have the same force and effect as a unanimous vote of the
shareholders and may be stated as such in any document. Action taken under this
Section 12 is effective as of the date the last writing necessary to effect the
action is received by the corporation, unless all of the writings specify a
different effective date, in which case such specified date shall be the
effective date for such action. If any shareholder revokes his consent as
provided for herein prior to what would otherwise be the effective date, the
action proposed in the consent shall be invalid. The record date for determining
shareholders entitled to take action without a meeting is the date the
corporation first receives a writing upon which the action is taken.
Any shareholder who has signed a writing describing and consenting to
action taken pursuant to this Section 12 may revoke such consent by a writing
signed by the shareholder describing the action and stating that the
shareholder's prior consent thereto is revoked, if such writing is received by
the corporation before the effectiveness of the action.
Section 13. Meetings by Telecommunication. Any or all of the shareholders
may participate in an annual or special shareholders' meeting by, or the meeting
may be conducted through the use of, any means of communication by which all
persons participating in the meeting may hear each other during the meeting. A
shareholder participating in a meeting by this means is deemed to be present in
person at the meeting.
9
<PAGE>
ARTICLE III
Board of Directors
Section 1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation shall be
managed under the direction of its board of directors, except as otherwise
provided in the Colorado Business Corporation Act or the articles of
incorporation.
Section 2. Number, Qualifications and Tenure. The number of directors of
the corporation shall be fixed from time to time by the board of directors,
within a range of no less than one or more than seven. A director shall be a
natural person who is eighteen years of age or older. A director need not be a
resident of Colorado or a shareholder of the corporation.
Directors shall be elected at each annual meeting of shareholders. Each
director shall hold office until the next annual meeting of shareholders
following his election and thereafter until his successor shall have been
elected and qualified. Directors shall be removed in the manner provided by the
Colorado Business Corporation Act.
Section 3. Vacancies. Any director may resign at any time by giving written
notice to the corporation. Such resignation shall take effect at the time the
notice is received by the corporation unless the notice specifies a later
effective date. Unless otherwise specified in the notice of resignation, the
corporation's acceptance of such resignation shall not be necessary to make it
effective. Any vacancy on the board of directors may be filled by the
affirmative vote of a majority of the shareholders or the board of directors. If
the directors remaining in office constitute fewer than a quorum of the board,
the directors may fill the vacancy by the affirmative vote of a majority of all
the directors remaining in office. If elected by the directors, the director
shall hold office until the next annual shareholders' meeting at which directors
are elected. If elected by the shareholders, the director shall hold office for
the unexpired term of his predecessor in office; except that, if the director's
predecessor was elected by the directors to fill a vacancy, the director elected
by the shareholders shall hold office for the unexpired term of the last
predecessor elected by the shareholders.
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Section 4. Regular Meetings. A regular meeting of the board of directors
shall be held without notice immediately after and at the same place as the
annual meeting of shareholders. The board of directors may provide by resolution
the time and place, either within or outside Colorado, for the holding of
additional regular meetings without other notice.
Section 5. Special Meetings. Special meetings of the board of directors may
be called by or at the request of the president or a minimum of 40% of the
directors. The person or persons authorized to call special meetings of the
board of directors may fix any place, either within or outside Colorado, as the
place for holding any special meeting of the board of directors called by them,
provided that no meeting shall be called outside the State of Colorado unless a
majority of the board of directors has so authorized.
Section 6. Notice. Notice of any special meeting shall be given at least
two days prior to the meeting by written notice either personally delivered or
mailed to each director at his business address, or by notice transmitted by
telegraph, telex, electronically transmitted facsimile or other form of wire or
wireless communication. If mailed, such notice shall be deemed to be given and
to be effective on the earlier of (i) three days after such notice is deposited
in the United States mail, properly addressed, with postage prepaid, or (ii) the
date shown on the return receipt, if mailed by registered or certified mail
return receipt requested. If notice is given by telex, electronically
transmitted facsimile or other similar form of wire or wireless communication,
such notice shall be deemed to be given and to be effective when sent, and with
respect to a telegram, such notice shall be deemed to be given and to be
effective when the telegram is delivered to the telegraph company. If a director
has designated in writing one or more reasonable addresses or facsimile numbers
for delivery of notice to him, notice sent by mail, telegraph, telex,
electronically transmitted facsimile or other form of wire or wireless
communication shall not be deemed to have been given or to be effective unless
sent to such addresses or facsimile numbers, as the case may be.
A director may waive notice of a meeting before or after the time and date
of the meeting by a writing signed by such director. Such waiver shall be
delivered to the corporation for filing with the corporate records. Further, a
director's attendance at or participation in a meeting waives any required
notice to him of the meeting unless at the beginning of the meeting, or promptly
upon his later arrival, the director objects to holding the meeting or
transacting business at the meeting because of lack of notice or defective
notice and does not thereafter vote for or assent to action taken at the
meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
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Section 7. Quorum. A majority of the number of directors fixed by the board
of directors pursuant to Section 2 or, if no number is fixed, a majority of the
number in office immediately before the meeting begins, shall constitute a
quorum for the transaction of business at any meeting of the board of directors.
If less than such majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice, for a period not to exceed 60 days at any one adjournment.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors.
Section 9. Compensation. By resolution of the board of directors, any
director may be paid any one or more of the following: his expenses, if any, of
attendance at meetings, a fixed sum for attendance at each meeting, a stated
salary as director, or such other compensation as the corporation and the
director may reasonably agree upon. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
Section 10. Presumption of Assent. A director of the corporation who is
present at a meeting of the board of directors or committee of the board at
which action on any corporate matter is taken shall be presumed to have assented
to the action taken unless (i) the director objects at the beginning of the
meeting, or promptly upon his arrival, to the holding of the meeting or the
transaction of business at the meeting and does not thereafter vote for or
assent to any action taken at the meeting, (ii) the director contemporaneously
requests that his dissent or abstention as to any specific action taken be
entered in the minutes of the meeting, or (iii) the director causes written
notice of his dissent or abstention as to any specific action to be received by
the presiding officer of the meeting before its adjournment or by the
corporation promptly after the adjournment of the meeting. A director may
dissent to a specific action at a meeting, while assenting to others. The right
to dissent to a specific action taken at a meeting of the board of directors or
a committee of the board shall not be available to a director who voted in favor
of such action.
Section 11. Committees. By resolution adopted by a majority of all the
directors in office when the action is taken, the board of directors may
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designate from among its members an executive committee and one or more other
committees, and appoint one or more members of the board of directors to serve
on them. To the extent provided in the resolution, each committee shall have all
the authority of the board of directors, except that no such committee shall
have the authority to (i) authorize distributions, (ii) approve or propose to
shareholders actions or proposals required by the Colorado Business Corporation
Act to be approved by shareholders, (iii) fill vacancies on the board of
directors or any committee thereof, (iv) amend articles of incorporation, (v)
adopt, amend or repeal the bylaws, (vi) approve a plan of merger not requiring
shareholder approval, (vii) authorize or approve the reacquisition of shares
unless pursuant to a formula or method prescribed by the board of directors, or
(viii) authorize or approve the issuance or sale of shares, or contract for the
sale of shares or determine the designations and relative rights, preferences
and limitations of a class or series of shares, except that the board of
directors may authorize a committee or officer to do so within limits
specifically prescribed by the board of directors. The committee shall then have
full power within the limits set by the board of directors to adopt any final
resolution setting forth all preferences, limitations and relative rights of
such class or series and to authorize an amendment of the articles of
incorporation stating the preferences, limitations and relative rights of a
class or series for filing with the Secretary of State under the Colorado
Business Corporation Act.
Sections 4, 5, 6, 7, 8 and 12 of Article III, which govern meetings,
notice, waiver of notice, quorum, voting requirements and action without a
meeting of the board of directors, shall apply to committees and their members
appointed under this Section 11.
Neither the designation of any such committee, the delegation of authority
to such committee, nor any action by such committee pursuant to its authority
shall alone constitute compliance by any member of the board of directors or a
member of the committee in question with his responsibility to conform to the
standard of care set forth in Article III, Section 14 of these bylaws.
Section 12. Informal Action by Directors. Any action required or permitted
to be taken at a meeting of the directors or any committee designated by the
board of directors may be taken without a meeting if a written consent (or
counterparts thereof) that sets forth the action so taken is signed by all of
the directors entitled to vote with respect to the action taken. Such consent
shall have the same force and effect as a unanimous vote of the directors or
committee members and may be stated as such in any document. Unless the consent
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specifies a different effective date, action taken under this Section 12 is
effective at the time the last director signs a writing describing the action
taken, unless, before such time, any director has revoked his consent by a
writing signed by the director and received by the chairman of the board or the
secretary of the corporation.
Section 13. Telephonic Meetings. The board of directors may permit any
director (or any member of a committee designated by the board) to participate
in a regular or special meeting of the board of directors or a committee thereof
through the use of any means of communication by which all directors
participating in the meeting can hear each other during the meeting. A director
participating in a meeting in this manner is deemed to be present in person at
the meeting.
Section 14. Standard of Care. A director shall perform his duties as a
director, including without limitation his duties as a member of any committee
of the board, in good faith, in a manner he reasonably believes to be in the
best interests of the corporation, and with the care an ordinarily prudent
person in a like position would exercise under similar circumstances. In
performing his duties, a director shall be entitled to rely on information,
opinions, reports or statements, including financial statements and other
financial data, in each case prepared or presented by the persons herein
designated. However, he shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause such reliance
to be unwarranted. A director shall not be liable to the corporation or its
shareholders for any action he takes or omits to take as a director if, in
connection with such action or omission, he performs his duties in compliance
with this Section 14.
The designated persons on whom a director is entitled to rely are (i) one
or more officers or employees of the corporation whom the director reasonably
believes to be reliable and competent in the matters presented, (ii) legal
counsel, public accountant, or other person as to matters which the director
reasonably believes to be within such person's professional or expert
competence, or (iii) a committee of the board of directors on which the director
does not serve if the director reasonably believes the committee merits
confidence.
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ARTICLE IV
Officers and Agents
Section 1. General. The officers of the corporation shall be a chairman of
the board, a president, one or more vice presidents and a secretary, each of
whom shall be a natural person eighteen years of age or older. The officers may
also include a treasurer, as determined from time to time in the sole discretion
of the board of directors. The board of directors or an officer or officers
authorized by the board may appoint such other officers, assistant officers,
committees and agents, including assistant secretaries and assistant treasurers,
as they may consider necessary. The board of directors or the officer or
officers authorized by the board shall from time to time determine the procedure
for the appointment of officers, their term of office, their authority and
duties and their compensation. One person may hold more than one office. In all
cases where the duties of any officer, agent or employee are not prescribed by
the bylaws or by the board of directors, such officer, agent or employee shall
follow the orders and instructions of the chairman of the board of the
corporation.
Section 2. Appointment and Term of Office. The officers of the corporation
shall be appointed by the board of directors at each annual meeting of the board
held after each annual meeting of the shareholders. If the appointment of
officers is not made at such meeting or if an officer or officers are to be
appointed by another officer or officers of the corporation, such appointments
shall be made as soon thereafter as conveniently may be. Each officer shall hold
office until the first of the following occurs: his successor shall have been
duly appointed and qualified, his death, his resignation, or his removal in the
manner provided in Section 3.
Section 3. Resignation and Removal. An officer may resign at any time by
giving written notice of resignation to the corporation. The resignation is
effective when the notice is received by the corporation unless the notice
specifies a later effective date.
Any officer or agent may be removed at any time with or without cause by
the board of directors or an officer or officers authorized by the board. Such
removal does not affect the contract rights, if any, of the corporation or of
the person so removed. The appointment of an officer or agent shall not in
itself create contract rights.
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Section 4. Vacancies. A vacancy in any office, however occurring, may be
filled by the board of directors, or by the officer or officers authorized by
the board, for the unexpired portion of the officer's term. If an officer
resigns and his resignation is made effective at a later date, the board of
directors, or officer or officers authorized by the board, may permit the
officer to remain in office until the effective date and may fill the pending
vacancy before the effective date if the board of directors or officer or
officers authorized by the board provide that the successor shall not take
office until the effective date. In the alternative, the board of directors, or
officer or officers authorized by the board of directors, may remove the officer
at any time before the effective date and may fill the resulting vacancy.
Section 5. Chairman of the Board. Subject to the direction and supervision
of the board of directors, the chairman of the board shall be the chief
executive officer of the corporation, and shall have general and active control
of its affairs and business and general supervision of its officers, agents and
employees. Unless otherwise directed by the board of directors, the chairman of
the board shall attend in person or by substitute appointed by him, or shall
execute on behalf of the corporation written instruments appointing a proxy or
proxies to represent the corporation, at all meetings of the stockholders of any
other corporation in which the corporation holds any stock. On behalf of the
corporation, the chairman of the board may in person or by substitute or by
proxy execute written waivers of notice and consents with respect to any such
meetings. At all such meetings and otherwise, the chairman of the board, in
person or by substitute or proxy, may vote the stock held by the corporation,
execute written consents and other instruments with respect to such stock, and
exercise any and all rights and powers incident to the ownership of said stock,
subject to the instructions, if any, of the board of directors. The chairman of
the board shall have custody of the treasurer's bond, if any.
The chairman of the board shall also be the principal accounting officer of
the corporation. He shall prescribe and maintain the methods and systems of
accounting to be followed, keep or cause to be kept books and records of account
as required by the Colorado Business Corporation Act, prepare and file or cause
to be prepared and filed all local, state and federal tax returns, prescribe and
maintain an adequate system of internal audit and prepare and furnish to the
board of directors statements of account showing the financial position of the
corporation and the results of its operations.
Section 6. President. The president shall assist the chairman of the board
and shall perform such duties as may be assigned to him by the chairman of the
board or by the board of directors. In the absence of the chairman of the board,
the president shall have the powers and perform the duties of the chairman of
the board.
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Section 7. Vice Presidents. The vice presidents shall assist the president
and shall perform such duties as may be assigned to them by the president or by
the board of directors. In the absence of the president, the vice president, if
any (or, if more than one, the vice presidents in the order designated by the
board of directors, or if the board makes no such designation, then the vice
president designated by the president, or if neither the board nor the president
makes any such designation, the senior vice president as determined by first
election to that office), shall have the powers and perform the duties of the
president.
Section 8. Secretary. The secretary shall (i) prepare and maintain as
permanent records the minutes of the proceedings of the shareholders and the
board of directors, a record of all actions taken by the shareholders or board
of directors without a meeting, a record of all actions taken by a committee of
the board of directors in place of the board of directors on behalf of the
corporation, and a record of all waivers of notice of meetings of shareholders
and of the board of directors or any committee thereof, (ii) see that all
notices are duly given in accordance with the provisions of these bylaws and as
required by law, (iii) serve as custodian of the corporate records and of the
seal of the corporation and affix the seal to all documents when authorized by
the board of directors, (iv) keep at the corporation's registered office or
principal place of business a record containing the names and addresses of all
shareholders in a form that permits preparation of a list of shareholders
arranged by voting group and by class or series of shares within each voting
group, that is alphabetical within each class or series and that shows the
address of, and the number of shares of each class or series held by, each
shareholder, unless such a record shall be kept at the office of the
corporation's transfer agent or registrar, (v) maintain at the corporation's
principal office the originals or copies of the corporation's articles of
incorporation, bylaws, minutes of all shareholders' meetings and records of all
action taken by shareholders without a meeting for the past three years, all
written communications within the past three years to shareholders as a group or
to the holders of any class or series of shares as a group, a list of the names
and business addresses of the current directors and officers, a copy of the
corporation's most recent corporate report filed with the Secretary of State,
and financial statements showing in reasonable detail the corporation's assets
and liabilities and results of operations for the last three years, (vi) have
general charge of the stock transfer books of the corporation, unless the
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corporation has a transfer agent, (vii) authenticate records of the corporation,
and (viii) in general, perform all duties incident to the office of secretary
and such other duties as from time to time may be assigned to him by the
chairman of the board or by the board of directors. Assistant secretaries, if
any, shall have the same duties and powers, subject to supervision by the
secretary. The directors and/or shareholders may however respectively designate
a person other than the secretary or assistant secretary to keep the minutes of
their respective meetings.
Any books, records, or minutes of the corporation may be in written form or
in any form capable of being converted into written form within a reasonable
time.
Section 9. Treasurer. The treasurer shall be the principal financial
officer of the corporation, shall have the care and custody of all funds,
securities, evidences of indebtedness and other personal property of the
corporation and shall deposit the same in accordance with the instructions of
the board of directors. He shall receive and give receipts and acquittances for
money paid in on account of the corporation, and shall pay out of the
corporation's funds on hand all bills, payrolls and other just debts of the
corporation of whatever nature upon maturity. He shall perform all other duties
incident to the office of the treasurer and, upon request of the board, shall
make such reports to it as may be required at any time. He shall, if required by
the board, give the corporation a bond in such sums and with such sureties as
shall be satisfactory to the board, conditioned upon the faithful performance of
his duties and for the restoration to the corporation of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation. He shall have such other powers and
perform such other duties as may from time to time be prescribed by the board of
directors or the president. The assistant treasurers, if any, shall have the
same powers and duties, subject to the supervision of the treasurer.
ARTICLE V
Stock
Section 1. Certificates. The board of directors shall be authorized to
issue any of its classes of shares with or without certificates. The fact that
the shares are not represented by certificates shall have no effect on the
rights and obligations of shareholders. If the shares are represented by
certificates, such shares shall be represented by consecutively numbered
certificates signed, either manually or by facsimile, in the name of the
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corporation by one or more persons designated by the board of directors. In
case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, such certificate may nonetheless be issued by the
corporation with the same effect as if he were such officer at the date of its
issue. Certificates of stock shall be in such form and shall contain such
information consistent with law as shall be prescribed by the board of
directors. If shares are not represented by certificates, within a reasonable
time following the issue or transfer of such shares, the corporation shall send
the shareholder a complete written statement of all of the information required
to be provided to holders of uncertificated shares by the Colorado Business
Corporation Act.
Section 2. Consideration for Shares. Certificated or un- certificated
shares shall not be issued until the shares represented thereby are fully paid.
The board of directors may authorize the issuance of shares for consideration
consisting of any tangible or intangible property or benefit to the corporation,
including cash, promissory notes, services performed or other securities of the
corporation. Future services shall not constitute payment or partial payment for
shares of the corporation. The promissory note of a subscriber or an affiliate
of a subscriber shall not constitute payment or partial payment for shares of
the corporation unless the note is negotiable and is secured by collateral,
other than the shares being purchased, having a fair market value at least equal
to the principal amount of the note. For purposes of this Section 2, "promissory
note" means a negotiable instrument on which there is an obligation to pay
independent of collateral and does not include a non-recourse note.
Section 3. Lost Certificates. In case of the alleged loss, destruction or
mutilation of a certificate of stock, the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions in
conformity with law as the board may prescribe. The board of directors may in
its discretion require an affidavit of lost certificate and/or a bond in such
form and amount and with such surety as it may determine before issuing a new
certificate.
Section 4. Transfer of Shares. Upon surrender to the corporation or to a
transfer agent of the corporation of a certificate of stock duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, and receipt of such documentary stamps as may be required by law and
evidence of compliance with all applicable securities laws and other
restrictions, the corporation shall issue a new certificate to the person
entitled thereto, and cancel the old certificate. Every such transfer of stock
shall be entered on the stock books of the corporation which shall be kept at
its principal office or by the person and the place designated by the board of
directors.
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Except as otherwise expressly provided in Article II, Sections 7 and 11,
and except for the assertion of dissenters' rights to the extent provided in
Article 113 of the Colorado Business Corporation Act, the corporation shall be
entitled to treat the registered holder of any shares of the corporation as the
owner thereof for all purposes, and the corporation shall not be bound to
recognize any equitable or other claim to, or interest in, such shares or rights
deriving from such shares on the part of any person other than the registered
holder, including without limitation any purchaser, assignee or trans- feree of
such shares or rights deriving from such shares, unless and until such other
person becomes the registered holder of such shares, whether or not the
corporation shall have either actual or constructive notice of the claimed
interest of such other person.
Section 5. Transfer Agent, Registrars and Paying Agents. The board may at
its discretion appoint one or more transfer agents, registrars and agents for
making payment upon any class of stock, bond, debenture or other security of the
corporation. Such agents and registrars may be located either within or outside
Colorado. They shall have such rights and duties and shall be entitled to such
compensation as may be agreed.
ARTICLE VI
Indemnification of Certain Persons
Section 1. Indemnification. For purposes of this Article VI, a "Proper
Person" means any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, and whether formal or
informal, by reason of the fact that he is or was a director, officer, employee,
fiduciary or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of any foreign or domestic profit or nonprofit corporation or of any
partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company, or other enterprise or employee benefit
plan. The corporation shall indemnify any Proper Person against reasonably
incurred expenses (including attorneys' fees), judgments, penalties, fines
(including any excise tax assessed with respect to an employee benefit plan) and
amounts paid in settlement reasonably incurred by him in connection with such
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action, suit or proceeding if it is determined by the groups set forth in
Section 4 of this Article VI that he conducted himself in good faith and that he
reasonably believed (i) in the case of conduct in his official capacity with the
corporation, that his conduct was in the corporation's best interests, or (ii)
in all other cases (except criminal cases), that his conduct was at least not
opposed to the corporation's best interests, or (iii) in the case of any
criminal proceeding, that he had no reasonable cause to believe his conduct was
unlawful. A Proper Person will be deemed to be acting in his official capacity
while acting as a director, officer, employee or agent on behalf of this
corporation and not while acting on this corporation's behalf for some other
entity.
No indemnification shall be made under this Article VI to a Proper Person
with respect to any claim, issue or matter in connection with a proceeding by or
in the right of a corporation in which the Proper Person was adjudged liable to
the corporation or in connection with any proceeding charging that the Proper
Person derived an improper personal benefit, whether or not involving action in
an official capacity, in which he was adjudged liable on the basis that he
derived an improper personal benefit. Further, indemnification under this
Section in connection with a proceeding brought by or in the right of the
corporation shall be limited to reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding.
Section 2. Right to Indemnification. The corporation shall indemnify any
Proper Person who was wholly successful, on the merits or otherwise, in defense
of any action, suit, or proceeding as to which he was entitled to
indemnification under Section l of this Article VI against expenses (including
attorneys' fees) reasonably incurred by him in connection with the proceeding
without the necessity of any action by the corporation other than the
determination in good faith that the defense has been wholly successful.
Section 3. Effect of Termination of Action. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent shall not of itself create a presumption
that the person seeking indemnification did not meet the standards of conduct
described in Section l of this Article VI. Entry of a judgment by consent as
part of a settlement shall not be deemed an adjudication of liability, as
described in Section 2 of this Article VI.
Section 4. Groups Authorized to Make Indemnification Determination. Except
where there is a right to indemnification as set forth in Sections 1 or 2 of
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this Article VI or where indemnification is ordered by a court in Section 5, any
indemnification shall be made by the corporation only as authorized in the
specific case upon a determination by a proper group that indemnification of the
Proper Person is permissible under the circumstances because he has met the
applicable standards of conduct set forth in Section l of this Article. This
determination shall be made by the board of directors by a majority vote of
those present at a meeting at which a quorum is present, which quorum shall
consist of directors not parties to the proceeding ("Quorum"). If a Quorum
cannot be obtained, the determination shall be made by a majority vote of a
committee of the board of directors designated by the board, which committee
shall consist of two or more directors not parties to the proceeding, except
that directors who are parties to the proceeding may participate in the
designation of directors for the committee. If a Quorum of the board of
directors cannot be obtained and the committee cannot be established, or even if
a Quorum is obtained or the committee is designated and a majority of the
directors constituting such Quorum or committee so directs, the determination
shall be made by (i) independent legal counsel selected by a vote of the board
of directors or the committee in the manner specified in this Section 4 or, if a
Quorum of the full board of directors cannot be obtained and a committee cannot
be established, by independent legal counsel selected by a majority vote of the
full board (including directors who are parties to the action) or (ii) a vote of
the shareholders.
Section 5. Court-Ordered Indemnification. Any Proper Person may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction for mandatory indemnification under Section 2 of this
Article, including indemnification for reasonable expenses incurred to obtain
court-ordered indemnification. If the court determines that such Proper Person
is fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not he met the standards of conduct set forth in
Section l of this Article or was adjudged liable in the proceeding, the court
may order such indemnification as the court deems proper except that if the
Proper Person has been adjudged liable, indemnification shall be limited to
reasonable expenses incurred in connection with the proceeding and reasonable
expenses incurred to obtain court-ordered indemnification.
Section 6. Advance of Expenses. Reasonable expenses (including attorneys'
fees) incurred in defending an action, suit or proceeding as described in
Section 1 may be paid by the corporation to any Proper Person in advance of the
final disposition of such action, suit or proceeding upon receipt of (i) a
written affirmation of such Proper Person's good faith belief that he has met
the standards of conduct prescribed by Section l of this Article VI, (ii) a
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written undertaking, executed personally or on the Proper Person's behalf, to
repay such advances if it is ultimately determined that he did not meet the
prescribed standards of conduct (the undertaking shall be an unlimited general
obligation of the Proper Person but need not be secured and may be accepted
without reference to financial ability to make repayment), and (iii) a
determination is made by the proper group (as described in Section 4 of this
Article VI) that the facts as then known to the group would not preclude
indemnification. Determination and authorization of payments shall be made in
the same manner specified in Section 4 of this Article VI.
Section 7. Witness Expenses. The sections of this Article VI do not limit
the corporation's authority to pay or reimburse expenses incurred by a director
in connection with an appearance as a witness in a proceeding at a time when he
has not been made a named defendant or respondent in the proceeding.
Section 8. Report to Shareholders. Any indemnification of or advance of
expenses to a director in accordance with this Article VI, if arising out of a
proceeding by or on behalf of the corporation, shall be reported in writing to
the shareholders with or before the notice of the next shareholders' meeting. If
the next shareholder action is taken without a meeting at the instigation of the
board of directors, such notice shall be given to the shareholders at or before
the time the first shareholder signs a writing consenting to such action.
ARTICLE VII
Provision of Insurance
By action of the board of directors, notwithstanding any interest of the
directors in the action, the corporation may purchase and maintain insurance, in
such scope and amounts as the board of directors deems appropriate, on behalf of
any person who is or was a director, officer, employee, fiduciary or agent of
the corporation, or who, while a director, officer, employee, fiduciary or agent
of the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, fiduciary or agent of any other
foreign or domestic corporation or of any partnership, joint venture, trust,
profit or nonprofit unincorporated association, limited liability company or
other enterprise or employee benefit plan, against any liability asserted
against, or incurred by, him in that capacity or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of Article VI or applicable law.
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Any such insurance may be procured from any insurance company designated by the
board of directors of the corporation, whether such insurance company is formed
under the laws of Colorado or any other jurisdiction of the United States or
elsewhere, including any insurance company in which the corporation has an
equity interest or any other interest, through stock ownership or otherwise.
ARTICLE VIII
Miscellaneous
Section 1. Seal. The corporate seal of the corporation shall be circular in
form and shall contain the name of the corporation and the words, "Seal,
Colorado."
Section 2. Fiscal Year. The fiscal year of the corporation shall be as
established by the board of directors.
Section 3. Amendments. The board of directors shall have power, to the
maximum extent permitted by the Colorado Business Corporation Act, to make,
amend and repeal the bylaws of the corporation at any regular or special meeting
of the board unless the shareholders, in making, amending or repealing a
particular bylaw, expressly provide that the directors may not amend or repeal
such bylaw. The shareholders also shall have the power to make, amend or repeal
the bylaws of the corporation at any annual meeting or at any special meeting
called for that purpose.
Section 4. Gender. The masculine gender is used in these bylaws as a matter
of convenience only and shall be interpreted to include the feminine and neuter
genders as the circumstances indicate.
Section 5. Conflicts. In the event of any irreconcilable conflict between
these bylaws and either the corporation's articles of incorporation or
applicable law, the latter shall control.
Section 6. Definitions. Except as otherwise specifically provided in these
bylaws, all terms used in these bylaws shall have the same definition as in the
Colorado Business Corporation Act.
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FRONTEER FINANCIAL HOLDINGS, LTD.
AMENDED AND RESTATED 1988 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purpose of the Plan. The purposes of this 1988 Incentive and
Nonstatutory Stock Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to the Employees and Consultants of the Company and to promote the
success of the Company's business. Options granted hereunder may be either
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986, as amended, or "nonstatutory stock options," at the discretion of
the Board and as reflected in the terms of the written stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company if no Committee is appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended.
c. "Common Stock" shall mean the $0.01 par value common stock of the
Company.
d. "Company" shall mean Fronteer Financial Holdings, Ltd., a Colorado
corporation.
e. "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed, or the Board if no committee is appointed.
f. "Consultant" shall mean any person who is engaged by the Company or
any Subsidiary to render consulting services and is compensated for such
consulting services, but does not include a director of the Company who
receives compensation solely in his capacity as a director of the Company.
g. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
h. "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
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i. "Incentive Stock Option" shall mean an Option which is intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code and which shall be clearly identified as such in the written Stock
Option Agreement provided by the Company to each Optionee granted an
Incentive Stock Option under the Plan.
j. "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Section 16a-1(f)
of the Securities Exchange Act of 1934, as amended) of the Company or
a Parent or Subsidiary of the Company, or otherwise currently employed
by the Company or a Parent or Subsidiary of the Company.
(ii) Does not receive compensation, either directly or
indirectly, from the Company or a Parent or Subsidiary of the Company,
for services rendered as a Consultant or in any capacity other than as
a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item 404(a)
of Regulation S-K adopted by the United States Securities and Exchange
Commission.
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and Exchange
Commission.
k. "Nonstatutory Stock Option" shall mean an Option granted under this
Plan which does not qualify as an Incentive Stock Option and which shall be
clearly identified as such in the written Stock Option Agreement provided
by the Company to each Optionee granted a Nonstatutory Stock Option under
this Plan. To the extent that the aggregate fair market value of Optioned
Stock to which Incentive Stock Options granted under Options to an Employee
are exercisable for the first time during any calendar year (under the Plan
and all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such Options shall be treated as Nonstatutory Stock Options under the Plan.
The aggregate fair market value of the Optioned Stock shall be determined
as of the date of grant of each Option and the determination of which
Incentive Stock Options shall be treated as qualified incentive stock
options under Section 422 of the Code and which Incentive Stock Options
exercisable for the first time in a particular year in excess of the
$100,000 limitation shall be treated as Nonstatutory Stock Options shall be
determined based on the order in which such Options were granted in
accordance with Section 422(d) of the Code.
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l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock
Option or both as identified in a written Stock Option Agreement
representing such stock option granted pursuant to the Plan.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
n. "Optionee" shall mean an Employee or other person who is granted an
Option.
o. "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
p. "Plan" shall mean this 1988 Incentive and Nonstatutory Stock Option
Plan.
q. "Share" shall mean a share of the Common Stock of the Company, as
adjusted in accordance with Section 11 of the Plan.
r. "Stock Option Agreement" shall mean the agreement to be entered
into between the Company and each Optionee which shall set forth the terms
and conditions of each Option granted to each Optionee, including the
number of Shares underlying such Option and the exercise price of each
Option granted to such Optionee under such agreement.
s. "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 600,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
a. Committee.
(i) The Board of Directors of the Company shall appoint a Stock
Option Committee (hereinafter called the "Committee") which shall
consist of not less than two (2) members, each of whom is a
disinterested person, that is a director who is not, during the one
year prior to service on the Committee, granted an option pursuant to
the Plan except as may be permitted pursuant to Rule 16b-3 under the
Securities Exchange Act of 1934. The members of the Committee shall
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serve at the pleasure of the Board of Directors, which may remove any
or all of the members at any time. The Board of Directors may appoint
new members to fill vacancies, however caused, in the Committee;
provided, however, that at all times at least one member shall be a
Director of the Company. The Committee shall select one of its members
as its Chairman and shall hold its meetings at such times and places
as it shall deem advisable. All action of the Committee shall be taken
by majority vote of its members. Any action may be taken by a written
instrument signed by all of the members of the Committee, and action
so taken shall be fully as effective as if it had been taken by a vote
of the members at a meeting duly called and held. The Committee may
appoint a secretary to keep minutes of its meetings and shall make
such rules and regulations for the conduct of its business as it shall
deem advisable. The interpretation and construction by the Committee
with respect to any provision of the Plan or any option granted under
it shall be final. The Committee and its members shall not be liable
for any action or determination made by them in good faith with
respect to the Plan or any Option granted under it.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of the
Plan or the grant of any Options pursuant to the Plan.
b. Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion:
(i) To grant Incentive Stock Options, in accordance with Section
422 of the Code and Nonstatutory Stock Options or both as provided and
identified in a separate written Stock Option Agreement to each
Optionee granted such Option or Options under the Plan; provided
however, that in no event shall an Incentive Stock Option and a
Nonstatutory Stock Option granted to any Optionee under a single Stock
Option Agreement be subject to a "tandem" exercise arrangement such
that the exercise of one such Option affects the Optionee's right to
exercise the other Option granted under such Stock Option Agreement;
(ii) To determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the
Common Stock;
(iii) To determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan;
(iv) To determine the Employees or other persons to whom, and the
time or times at which, Options shall be granted and the number of
Shares to be represented by each Option;
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(v) To interpret the Plan;
(vi) To prescribe, amend and rescind rules and regulations
relating to the Plan;
(vii) To determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the
holder thereof, modify or amend each Option;
(viii) To accelerate or defer (with the consent of the Optionee)
the exercise date of any Option, consistent with the provisions of
Section 7 of the Plan;
(ix) To authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option
previously granted by the Board; and
(x) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
Subject to the limitations provided in this Section 4, the number of shares of
Common Stock for which Options may be granted to any officer or director of the
Company in any calendar year shall be no more than the number of shares computed
as follows:
100% of the respective annual salary of such officer or
director at the beginning of such calendar year, plus any
carryover amount, divided by the fair market value per share
of the Common Stock at the date of grant of such Option. The
carryover amount from any such calendar year shall be any
excess of 100% of the respective annual salary of such
officer or director at the beginning of such calendar year
over the aggregate fair market value of Common Stock
(determined at the date of grant) of which an employee was
granted Options during such calendar year. The carryover
amount for any calendar year may be carried forward for
three years. Options granted in any year shall be applied
against the current year limitation first and then against
the remaining unused carryovers to such year in the order of
the calendar year in which such carryover amounts arose.
For purposes of the foregoing calculation, officers and directors of the Company
who do not receive an annual salary (other than a director's fee) from the
Company shall be deemed to receive an annual salary in an amount equal to 50% of
the highest salary paid to any Company Officer at the beginning of such calendar
year.
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c. Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees
and any other permissible holders of any Options granted under the Plan.
5. Eligibility.
a. Persons Eligible. Options may be granted to any person selected by
the Board. Incentive Stock Options may be granted only to Employees. An
Employee, who is also a director of the Company, its Parent or a
Subsidiary, shall be treated as an Employee for purposes of this Section 5.
An Employee or other person who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
b. No Effect on Relationship. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or other
relationship with the Company nor shall it interfere in any way with his
right or the Company's right to terminate his employment or other
relationship at any time.
6. Term of Plan. The Plan became effective on September 30, 1988. It shall
continue in effect until September 29, 1998, unless sooner terminated under
Section 13 of the Plan.
7. Term of Option. The term of each Option shall be 10 years from the date
of grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, if the Option is an Incentive Stock Option, the term of the Option
shall be five years from the date of grant thereof or such shorter time as may
be provided in the Stock Option Agreement.
8. Exercise Price and Consideration.
a. Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is
determined by the Board, but the per Share exercise price under an
Incentive Stock Option shall be subject to the following:
(i) If granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall not be less than
110% of the fair market value per Share on the date of grant.
(ii) If granted to any other Employee, the per Share exercise
price shall not be less than 100% of the fair market value per Share
on the date of grant.
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b. Determination of Fair Market Value. The fair market value per Share
on the date of grant shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange,
the American Stock Exchange or such other securities exchange
designated by the Board, or admitted to unlisted trading privileges on
any such exchange, or if the Common Stock is quoted on a National
Association of Securities Dealers, Inc. system that reports closing
prices, the fair market value shall be the closing price of the Common
Stock as reported by such exchange or system on the day the fair
market value is to be determined, or if no such price is reported for
such day, then the determination of such closing price shall be as of
the last immediately preceding day on which the closing price is so
reported;
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the
average of the last reported highest bid and the lowest asked prices
quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or, if not so quoted, then by the National
Quotation Bureau, Inc. on the day the fair market value is determined;
or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges or so quoted, and bid and asked prices are
not reported, the fair market value shall be determined in such
reasonable manner as may be prescribed by the Board.
c. Consideration and Method of Payment. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Board and may consist
entirely of cash, check, other shares of Common Stock having a fair market
value on the date of exercise equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or any combination of
such methods of payment, or such other consideration and method of payment
for the issuance of Shares to the extent permitted under the Colorado
Business Corporation Act.
9. Exercise of Option.
a. Procedure for Exercise: Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
An Option may provide the Optionee with the right to exchange, in a
cashless transaction, all or part of the Option for Common Stock of the
Company on terms and conditions determined by the Board and included in the
Stock Option Agreement.
An Option may not be exercised for a fraction of a Share.
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An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment, as authorized by the Board, may consist of a
consideration and method of payment allowable under Section 8(c) of the
Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of the duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.
No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
b. Termination of Status as an Employee. In the case of an Incentive
Stock Option, if any Employee ceases to serve as an Employee, he may, but
only within such period of time not exceeding three months as is determined
by the Board at the time of grant of the Option after the date he ceases to
be an Employee of the Company, exercise his Option to the extent that he
was entitled to exercise it at the date of such termination. To the extent
that he was not entitled to exercise the Option at the date of such
termination, or if he does not exercise such Option (which he was entitled
to exercise) within the time specified herein, the Option shall terminate.
c. Disability of Optionee. In the case of an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue his employment with the Company as a result
of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within such period of time not exceeding 12
months as is determined by the Board at the time of grant of the Option
from the date of termination, exercise his Option to the extent he was
entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise the Option at the date of termination, or
if he does not exercise such Option (which he was entitled to exercise)
within the time specified herein, the Option shall terminate.
d. Death of Optionee. In the case of an Incentive Stock Option, in the
event of the death of the Optionee:
(i) During the term of the Option if the Optionee was at the time
of his death an Employee the Company and had been in Continuous Status
as an Employee or Consultant since the date of grant of the Option,
the Option may be exercised, at any time within 12 months following
the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous
Status as an Employee 12 months after the date of death; or
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(ii) Within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after the
termination of Continuous Status as an Employee, the Option may be
exercised, at any time within 12 months following the date of death,
by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
10. Nontransferability of Options. In the case of an Incentive Stock
Option, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent and distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Adjustments for Certain Transactions. In the event that additional
shares of Common Stock are issued pursuant to a stock split or a stock dividend,
the number of shares of Common Stock then covered by each outstanding option
granted hereunder shall be increased proportionately with no increase in the
total purchase price of the shares then so covered, and the number of shares of
Common Stock reserved for the purpose of the Plan shall be increased by the same
proportion. In the event that the shares of Common Stock of the Company from
time to time issued are outstanding are reduced by a combination of shares, the
number of shares of Common Stock then covered by each outstanding option granted
hereunder shall be reduced proportionately with no reduction in the total price
of the shares then so covered, and the number of shares of Common Stock reserved
for the purpose of the Plan shall be reduced by the same proportion. In the
event that the Company should transfer assets to another corporation and
distribute the stock of such other corporation without the surrender of Common
Stock of the Company, and if such distribution is not taxable as a dividend and
no gain or loss is recognized pursuant to the Internal Revenue Code as then in
effect, then the total purchase price of the shares covered by each outstanding
option shall be reduced by an amount which bears the same ratio to the total
purchase price then in effect as the market value of the stock distributed in
respect of a share of the Common Stock of the Company, immediately following the
distribution, bears to the aggregate of the market value at such time of a share
of the Common Stock of the Company and the stock distributed in respect thereof.
Similarly, in any change in the Common Stock of the Company shall occur as a
result of a recapitalization, reorganization, merger or consolidation, the
Committee shall make appropriate adjustments in the price of the shares and/or
number of shares reserved under the Plan and any shares then covered by each
outstanding option granted under the Plan. No fractional shares shall be issued,
and any fractional shares resulting from the computations pursuant to this
Section 11 shall be eliminated from the respective option. No adjustment shall
be made for cash dividends or the issuance to stockholders of rights to
subscribe for additional Common Stock or other securities. All such adjustments
shall be made by the Committee, whose determination upon the same shall be final
and binding upon the optionees.
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12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or other
person to whom an Option is so granted within a reasonable time after the date
of such grant. Within a reasonable time after the date of the grant of an
Option, the Company shall enter into and deliver to each Employee or other
person granted such Option a written Stock Option Agreement as provided in
Sections 2(r) and 16 hereof, setting forth the terms and conditions of such
Option and separately identifying the portion of the Option which is an
Incentive Stock Option and/or the portion of such Option which is a Nonstatutory
Stock Option.
13. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board of Directors may at any time
and from time to time terminate, modify, or amend the Plan (including any
stock option form or related document) in any respect; provided, however,
that no such modification or amendment shall, without the approval of the
holders of a majority of the Company's outstanding Common Stock: (a)
increase (except in accordance with Section 11), the maximum number of
shares for which options may be granted under the Plan either in the
aggregate or to any individual employee; or (b) reduce (except in
accordance with Section 11) the minimum option prices which may be
established under the Plan; or (c) extend the period or periods during
which options may be granted or exercised; or (d) change the provisions
relating to the determination of employees to whom options may be granted
and the number of shares to be covered by such options; or (e) change the
provisions relating to adjustments to be made upon changes in the Company's
capitalization; or (f) change the method from the selection of the
Committee as provided by Section 4 hereof.
b. Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, applicable state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of legal counsel for the Company with
respect to such compliance.
As a condition to the existence of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares and such other
representations and warranties which in the opinion of legal counsel for the
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Company, are necessary or appropriate to establish an exemption from the
registration requirements under applicable federal and state securities laws
with respect to the acquisition of such Shares.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's legal counsel to be necessary for the lawful issuance
and sale of any Share hereunder, shall relieve the Company of any liability
relating to the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Option Agreement. Each Option granted to an Employee or other persons
shall be evidenced by a written Stock Option Agreement in such form as the Board
shall approve.
17. Shareholder Approval. If shareholder approval is required under Section
13 of the Plan, it may be obtained at a duly held shareholders meeting by the
affirmative vote of the holders of a majority of the outstanding shares of the
voting stock of the Company, who are present or represented and entitled to vote
thereon, or by unanimous written consent of the shareholders in accordance with
the provisions of the Colorado Business Corporation Act.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
19. Gender. As used herein, the masculine, feminine and neuter genders
shall be deemed to include the others in all cases where they would so apply.
20. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
COLORADO.
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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Amended and Restated Plan effective as of 2:30 p.m. the 10th day of
September, 1996.
FRONTEER FINANCIAL HOLDINGS,. LTD.
a Colorado corporation
By: /s/ R. A. Fitzner, Jr.
-------------------------------------------
R. A. Fitzner, Jr., Chairman of the Board
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FRONTEER FINANCIAL HOLDINGS, LTD.
AMENDED AND RESTATED 1996 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purpose of the Plan. The purposes of this 1996 Incentive and
Nonstatutory Stock Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to the Employees and Consultants of the Company and to promote the
success of the Company's business. Options granted hereunder may be either
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986, as amended, or "nonstatutory stock options," at the discretion of
the Board and as reflected in the terms of the written stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company if no Committee is appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended.
c. "Common Stock" shall mean the $0.01 par value common stock of the
Company.
d. "Company" shall mean Fronteer Financial Holdings, Ltd., a Colorado
corporation.
e. "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed, or the Board if no committee is appointed.
f. "Consultant" shall mean any person who is engaged by the Company or
any Subsidiary to render consulting services and is compensated for such
consulting services, but does not include a director of the Company who is
compensated for services as a director only with the payment of a
director's fee by the Company.
g. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
h. "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
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i. "Incentive Stock Option" shall mean an Option which is intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code and which shall be clearly identified as such in the written Stock
Option Agreement provided by the Company to each Optionee granted an
Incentive Stock Option under the Plan.
j. "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Section 16a-1(f)
of the Securities Exchange Act of 1934, as amended) of the Company or
a Parent or Subsidiary of the Company, or otherwise currently employed
by the Company or a Parent or Subsidiary of the Company.
(ii) Does not receive compensation, either directly or
indirectly, from the Company or a Parent or Subsidiary of the Company,
for services rendered as a Consultant or in any capacity other than as
a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item 404(a)
of Regulation S-K adopted by the United States Securities and Exchange
Commission.
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and Exchange
Commission.
k. "Nonstatutory Stock Option" shall mean an Option granted under this
Plan which does not qualify as an Incentive Stock Option and which shall be
clearly identified as such in the written Stock Option Agreement provided
by the Company to each Optionee granted a Nonstatutory Stock Option under
this Plan. To the extent that the aggregate fair market value of Optioned
Stock to which Incentive Stock Options granted under Options to an Employee
are exercisable for the first time during any calendar year (under the Plan
and all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such Options shall be treated as Nonstatutory Stock Options under the Plan.
The aggregate fair market value of the Optioned Stock shall be determined
as of the date of grant of each Option and the determination of which
Incentive Stock Options shall be treated as qualified incentive stock
options under Section 422 of the Code and which Incentive Stock Options
exercisable for the first time in a particular year in excess of the
$100,000 limitation shall be treated as Nonstatutory Stock Options shall be
determined based on the order in which such Options were granted in
accordance with Section 422(d) of the Code.
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l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock
Option or both as identified in a written Stock Option Agreement
representing such stock option granted pursuant to the Plan.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
n. "Optionee" shall mean an Employee or other person who is granted an
Option.
o. "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
p. "Plan" shall mean this 1996 Incentive and Nonstatutory Stock Option
Plan.
q. "Share" shall mean a share of the Common Stock of the Company, as
adjusted in accordance with Section 11 of the Plan.
r. "Stock Option Agreement" shall mean the agreement to be entered
into between the Company and each Optionee which shall set forth the terms
and conditions of each Option granted to each Optionee, including the
number of Shares underlying such Option and the exercise price of each
Option granted to such Optionee under such agreement.
s. "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,250,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
a. Procedure. The Plan shall be administered by the Board or a
Committee appointed by the Board consisting of two or more Non-Employee
Directors to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Board may prescribe.
(i) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board (which for purposes of this paragraph
(a)(i) of this Section 4 shall be the Board of Directors of the
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Company). From time to time the the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefor,
fill vacancies however caused, or remove all members of the Committee
and thereafter directly administer the Plan.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of the
Plan or the grant of any Options pursuant to the Plan.
b. Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion:
(i) To grant Incentive Stock Options, in accordance with Section
422 of the Code and Nonstatutory Stock Options or both as provided and
identified in a separate written Stock Option Agreement to each
Optionee granted such Option or Options under the Plan; provided
however, that in no event shall an Incentive Stock Option and a
Nonstatutory Stock Option granted to any Optionee under a single Stock
Option Agreement be subject to a "tandem" exercise arrangement such
that the exercise of one such Option affects the Optionee's right to
exercise the other Option granted under such Stock Option Agreement;
(ii) To determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the
Common Stock;
(iii) To determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan;
(iv) To determine the Employees or other persons to whom, and the
time or times at which, Options shall be granted and the number of
Shares to be represented by each Option;
(v) To interpret the Plan;
(vi) To prescribe, amend and rescind rules and regulations
relating to the Plan;
(vii) To determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the
holder thereof, modify or amend each Option;
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(viii) To accelerate or defer (with the consent of the Optionee)
the exercise date of any Option, consistent with the provisions of
Section 7 of the Plan;
(ix) To authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option
previously granted by the Board; and
(x) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
c. Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees
and any other permissible holders of any Options granted under the Plan.
5. Eligibility.
a. Persons Eligible. Options may be granted to any person selected by
the Board. Incentive Stock Options may be granted only to Employees. An
Employee, who is also a director of the Company, its Parent or a
Subsidiary, shall be treated as an Employee for purposes of this Section 5.
An Employee or other person who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
b. No Effect on Relationship. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or other
relationship with the Company nor shall it interfere in any way with his
right or the Company's right to terminate his employment or other
relationship at any time.
6. Term of Plan. The Plan became effective on April 8, 1996. It shall
continue in effect until April 8, 2006, unless sooner terminated under Section
13 of the Plan.
7. Term of Option. The term of each Option shall be 10 years from the date
of grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, if the Option is an Incentive Stock Option, the term of the Option
shall be five years from the date of grant thereof or such shorter time as may
be provided in the Stock Option Agreement.
8. Exercise Price and Consideration.
a. Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is
determined by the Board, but the per Share exercise price under an
Incentive Stock Option shall be subject to the following:
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<PAGE>
(i) If granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall not be less than
110% of the fair market value per Share on the date of grant.
(ii) If granted to any other Employee, the per Share exercise
price shall not be less than 100% of the fair market value per Share
on the date of grant.
b. Determination of Fair Market Value. The fair market value per Share
on the date of grant shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange,
the American Stock Exchange or such other securities exchange
designated by the Board, or admitted to unlisted trading privileges on
any such exchange, or if the Common Stock is quoted on a National
Association of Securities Dealers, Inc. system that reports closing
prices, the fair market value shall be the closing price of the Common
Stock as reported by such exchange or system on the day the fair
market value is to be determined, or if no such price is reported for
such day, then the determination of such closing price shall be as of
the last immediately preceding day on which the closing price is so
reported;
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the
average of the last reported highest bid and the lowest asked prices
quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or, if not so quoted, then by the National
Quotation Bureau, Inc. on the day the fair market value is determined;
or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges or so quoted, and bid and asked prices are
not reported, the fair market value shall be determined in such
reasonable manner as may be prescribed by the Board.
c. Consideration and Method of Payment. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Board and may consist
entirely of cash, check, other shares of Common Stock having a fair market
value on the date of exercise equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or any combination of
such methods of payment, or such other consideration and method of payment
for the issuance of Shares to the extent permitted under the Colorado
Business Corporation Act.
9. Exercise of Option.
a. Procedure for Exercise: Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
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An Option may provide the Optionee with the right to exchange, in a
cashless transaction, all or part of the Option for Common Stock of the
Company on terms and conditions determined by the Board and included in the
Stock Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment, as authorized by the Board, may consist of a
consideration and method of payment allowable under Section 8(c) of the
Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of the duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.
No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
b. Termination of Status as an Employee. In the case of an Incentive
Stock Option, if any Employee ceases to serve as an Employee, he may, but
only within such period of time not exceeding three months as is determined
by the Board at the time of grant of the Option after the date he ceases to
be an Employee of the Company, exercise his Option to the extent that he
was entitled to exercise it at the date of such termination. To the extent
that he was not entitled to exercise the Option at the date of such
termination, or if he does not exercise such Option (which he was entitled
to exercise) within the time specified herein, the Option shall terminate.
c. Disability of Optionee. In the case of an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue his employment with the Company as a result
of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within such period of time not exceeding 12
months as is determined by the Board at the time of grant of the Option
from the date of termination, exercise his Option to the extent he was
entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise the Option at the date of termination, or
if he does not exercise such Option (which he was entitled to exercise)
within the time specified herein, the Option shall terminate.
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<PAGE>
d. Death of Optionee. In the case of an Incentive Stock Option, in the
event of the death of the Optionee:
(i) During the term of the Option if the Optionee was at the time
of his death an Employee the Company and had been in Continuous Status
as an Employee or Consultant since the date of grant of the Option,
the Option may be exercised, at any time within 12 months following
the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous
Status as an Employee 12 months after the date of death; or
(ii) Within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after the
termination of Continuous Status as an Employee, the Option may be
exercised, at any time within 12 months following the date of death,
by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
10. Nontransferability of Options. In the case of an Incentive Stock
Option, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent and distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of any
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
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<PAGE>
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of the proposed sale of all or substantially all of the assets of the Company,
or the merger of the Company with or into another corporation in a transaction
in which the Company is not the survivor, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of such a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of 30 days from the date of such notice, and the Option will terminate
upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or other
person to whom an Option is so granted within a reasonable time after the date
of such grant. Within a reasonable time after the date of the grant of an
Option, the Company shall enter into and deliver to each Employee or other
person granted such Option a written Stock Option Agreement as provided in
Sections 2(r) and 16 hereof, setting forth the terms and conditions of such
Option and separately identifying the portion of the Option which is an
Incentive Stock Option and/or the portion of such Option which is a Nonstatutory
Stock Option.
13. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval
of the shareholders of the Company in the manner described in Section 17 of
the Plan:
(i) An increase in the number of Shares subject to the Plan above
1,250,000 Shares, other than in connection with an adjustment under
Section 11 of the Plan;
(ii) Any change in the designation of the class of Employees
eligible to be granted Incentive Stock Options; or
(iii) Any material amendment under the Plan that would have to be
approved by the shareholders of the Company for the Board to continue
to be able to grant Incentive Stock Options under the Plan.
b. Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
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14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, applicable state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of legal counsel for the Company with
respect to such compliance.
As a condition to the existence of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares and such other
representations and warranties which in the opinion of legal counsel for the
Company, are necessary or appropriate to establish an exemption from the
registration requirements under applicable federal and state securities laws
with respect to the acquisition of such Shares.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's legal counsel to be necessary for the lawful issuance
and sale of any Share hereunder, shall relieve the Company of any liability
relating to the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Option Agreement. Each Option granted to an Employee or other persons
shall be evidenced by a written Stock Option Agreement in such form as the Board
shall approve.
17. Shareholder Approval. If shareholder approval is required under Section
13 of the Plan, it may be obtained at a duly held shareholders meeting by the
affirmative vote of the holders of a majority of the outstanding shares of the
voting stock of the Company, who are present or represented and entitled to vote
thereon, or by unanimous written consent of the shareholders in accordance with
the provisions of the Colorado Business Corporation Act.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
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19. Gender. As used herein, the masculine, feminine and neuter genders
shall be deemed to include the others in all cases where they would so apply.
20. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
COLORADO.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Amended and Restated Plan effective as of 2:30 p.m. the 10th day of
September, 1996.
FRONTEER FINANCIAL HOLDINGS, LTD.
a Colorado corporation
By: /s/ R. A. Fitzner, Jr.
-----------------------------------------
R. A. Fitzner, Jr., Chairman of the Board
11
FRONTEER FINANCIAL HOLDINGS, LTD.
SEPTEMBER 1996 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purpose of the Plan. The purposes of this September 1996 Incentive and
Nonstatutory Stock Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to the Employees and Consultants of the Company and to promote the
success of the Company's business. Options granted hereunder may be either
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986, as amended, or "nonstatutory stock options," at the discretion of
the Board and as reflected in the terms of the written stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company if no Committee is appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended.
c. "Common Stock" shall mean the $0.01 par value common stock of the
Company.
d. "Company" shall mean Fronteer Financial Holdings, Ltd., a Colorado
corporation.
e. "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed, or the Board if no committee is appointed.
f. "Consultant" shall mean any person who is engaged by the Company or
any Subsidiary to render consulting services and is compensated for such
consulting services, but does not include a director of the Company who
receives compensation solely in his capacity as a director of the Company.
g. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
h. "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
<PAGE>
i. "Incentive Stock Option" shall mean an Option which is intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code and which shall be clearly identified as such in the written Stock
Option Agreement provided by the Company to each Optionee granted an
Incentive Stock Option under the Plan.
j. "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Section 16a-1(f)
of the Securities Exchange Act of 1934, as amended) of the Company or
a Parent or Subsidiary of the Company, or otherwise currently employed
by the Company or a Parent or Subsidiary of the Company.
(ii) Does not receive compensation, either directly or
indirectly, from the Company or a Parent or Subsidiary of the Company,
for services rendered as a Consultant or in any capacity other than as
a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item 404(a)
of Regulation S-K adopted by the United States Securities and Exchange
Commission.
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and Exchange
Commission.
k. "Nonstatutory Stock Option" shall mean an Option granted under this
Plan which does not qualify as an Incentive Stock Option and which shall be
clearly identified as such in the written Stock Option Agreement provided
by the Company to each Optionee granted a Nonstatutory Stock Option under
this Plan. To the extent that the aggregate fair market value of Optioned
Stock to which Incentive Stock Options granted under Options to an Employee
are exercisable for the first time during any calendar year (under the Plan
and all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such Options shall be treated as Nonstatutory Stock Options under the Plan.
The aggregate fair market value of the Optioned Stock shall be determined
as of the date of grant of each Option and the determination of which
Incentive Stock Options shall be treated as qualified incentive stock
options under Section 422 of the Code and which Incentive Stock Options
exercisable for the first time in a particular year in excess of the
$100,000 limitation shall be treated as Nonstatutory Stock Options shall be
determined based on the order in which such Options were granted in
accordance with Section 422(d) of the Code.
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l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock
Option or both as identified in a written Stock Option Agreement
representing such stock option granted pursuant to the Plan.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
n. "Optionee" shall mean an Employee or other person who is granted an
Option.
o. "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
p. "Plan" shall mean this September 1996 Incentive and Nonstatutory
Stock Option Plan.
q. "Share" shall mean a share of the Common Stock of the Company, as
adjusted in accordance with Section 11 of the Plan.
r. "Stock Option Agreement" shall mean the agreement to be entered
into between the Company and each Optionee which shall set forth the terms
and conditions of each Option granted to each Optionee, including the
number of Shares underlying such Option and the exercise price of each
Option granted to such Optionee under such agreement.
s. "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,750,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
a. Procedure. The Plan shall be administered by the Board or a
Committee appointed by the Board consisting of two or more Non-Employee
Directors to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Board may prescribe.
(i) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board (which for purposes of this paragraph
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(a)(i) of this Section 4 shall be the Board of Directors of the
Company). From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefor,
fill vacancies however caused, or remove all members of the Committee
and thereafter directly administer the Plan.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of the
Plan or the grant of any Options pursuant to the Plan.
b. Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion:
(i) To grant Incentive Stock Options, in accordance with Section
422 of the Code and Nonstatutory Stock Options or both as provided and
identified in a separate written Stock Option Agreement to each
Optionee granted such Option or Options under the Plan; provided
however, that in no event shall an Incentive Stock Option and a
Nonstatutory Stock Option granted to any Optionee under a single Stock
Option Agreement be subject to a "tandem" exercise arrangement such
that the exercise of one such Option affects the Optionee's right to
exercise the other Option granted under such Stock Option Agreement;
(ii) To determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the
Common Stock;
(iii) To determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan;
(iv) To determine the Employees or other persons to whom, and the
time or times at which, Options shall be granted and the number of
Shares to be represented by each Option;
(v) To interpret the Plan;
(vi) To prescribe, amend and rescind rules and regulations
relating to the Plan;
(vii) To determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the
holder thereof, modify or amend each Option;
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(viii) To accelerate or defer (with the consent of the Optionee)
the exercise date of any Option, consistent with the provisions of
Section 7 of the Plan;
(ix) To authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option
previously granted by the Board; and
(x) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
c. Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees
and any other permissible holders of any Options granted under the Plan.
5. Eligibility.
a. Persons Eligible. Options may be granted to any person selected by
the Board. Incentive Stock Options may be granted only to Employees. An
Employee, who is also a director of the Company, its Parent or a
Subsidiary, shall be treated as an Employee for purposes of this Section 5.
An Employee or other person who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
b. No Effect on Relationship. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or other
relationship with the Company nor shall it interfere in any way with his
right or the Company's right to terminate his employment or other
relationship at any time.
6. Term of Plan. The Plan shall become effective at 2:30 p.m. on September
10, 1996. It shall continue in effect until September 9, 2006, unless sooner
terminated under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be 10 years from the date
of grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, if the Option is an Incentive Stock Option, the term of the Option
shall be five years from the date of grant thereof or such shorter time as may
be provided in the Stock Option Agreement.
5
<PAGE>
8. Exercise Price and Consideration.
a. Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is
determined by the Board, but the per Share exercise price under an
Incentive Stock Option shall be subject to the following:
(i) If granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall not be less than
110% of the fair market value per Share on the date of grant.
(ii) If granted to any other Employee, the per Share
exercise price shall not be less than 100% of the fair market
value per Share on the date of grant.
b. Determination of Fair Market Value. The fair market value per Share
on the date of grant shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange,
the American Stock Exchange or such other securities exchange
designated by the Board, or admitted to unlisted trading privileges on
any such exchange, or if the Common Stock is quoted on a National
Association of Securities Dealers, Inc. system that reports closing
prices, the fair market value shall be the closing price of the Common
Stock as reported by such exchange or system on the day the fair
market value is to be determined, or if no such price is reported for
such day, then the determination of such closing price shall be as of
the last immediately preceding day on which the closing price is so
reported;
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the
average of the last reported highest bid and the lowest asked prices
quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or, if not so quoted, then by the National
Quotation Bureau, Inc. on the day the fair market value is determined;
or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges or so quoted, and bid and asked prices are
not reported, the fair market value shall be determined in such
reasonable manner as may be prescribed by the Board.
c. Consideration and Method of Payment. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Board and may consist
entirely of cash, check, other shares of Common Stock having a fair market
value on the date of exercise equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or any combination of
such methods of payment, or such other consideration and method of payment
for the issuance of Shares to the extent permitted under the Colorado
Business Corporation Act.
6
<PAGE>
9. Exercise of Option.
a. Procedure for Exercise: Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
An Option may provide the Optionee with the right to exchange, in a
cashless transaction, all or part of the Option for Common Stock of the
Company on terms and conditions determined by the Board and included in the
Stock Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment, as authorized by the Board, may consist of a
consideration and method of payment allowable under Section 8(c) of the
Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of the duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.
No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
b. Termination of Status as an Employee. In the case of an Incentive
Stock Option, if any Employee ceases to serve as an Employee, he may, but
only within such period of time not exceeding three months as is determined
by the Board at the time of grant of the Option after the date he ceases to
be an Employee of the Company, exercise his Option to the extent that he
was entitled to exercise it at the date of such termination. To the extent
that he was not entitled to exercise the Option at the date of such
termination, or if he does not exercise such Option (which he was entitled
to exercise) within the time specified herein, the Option shall terminate.
c. Disability of Optionee. In the case of an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue his employment with the Company as a result
of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within such period of time not exceeding 12
months as is determined by the Board at the time of grant of the Option,
from the date of termination, exercise his Option to the extent he was
7
<PAGE>
entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise the Option at the date of termination, or
if he does not exercise such Option (which he was entitled to exercise)
within the time specified herein, the Option shall terminate.
d. Death of Optionee. In the case of an Incentive Stock Option, in the
event of the death of the Optionee:
(i) During the term of the Option if the Optionee was at the time
of his death an Employee the Company and had been in Continuous Status
as an Employee or Consultant since the date of grant of the Option,
the Option may be exercised, at any time within 12 months following
the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous
Status as an Employee 12 months after the date of death; or
(ii) Within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after the
termination of Continuous Status as an Employee, the Option may be
exercised, at any time within 12 months following the date of death,
by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
10. Nontransferability of Options. In the case of an Incentive Stock
Option, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent and distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of any
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
8
<PAGE>
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of the proposed sale of all or substantially all of the assets of the Company,
or the merger of the Company with or into another corporation in a transaction
in which the Company is not the survivor, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of such a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of 30 days from the date of such notice, and the Option will terminate
upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or other
person to whom an Option is so granted within a reasonable time after the date
of such grant. Within a reasonable time after the date of the grant of an
Option, the Company shall enter into and deliver to each Employee or other
person granted such Option a written Stock Option Agreement as provided in
Sections 2(r) and 16 hereof, setting forth the terms and conditions of such
Option and separately identifying the portion of the Option which is an
Incentive Stock Option and/or the portion of such Option which is a Nonstatutory
Stock Option.
13. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval
of the shareholders of the Company in the manner described in Section 17 of
the Plan:
(i) An increase in the number of Shares subject to the Plan above
1,750,000 Shares, other than in connection with an adjustment under
Section 11 of the Plan;
(ii) Any change in the designation of the class of Employees
eligible to be granted Incentive Stock Options; or
(iii) Any material amendment under the Plan that would have to be
approved by the shareholders of the Company for the Board to continue
to be able to grant Incentive Stock Options under the Plan.
9
<PAGE>
b. Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, applicable state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of legal counsel for the Company with
respect to such compliance.
As a condition to the existence of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares and such other
representations and warranties which in the opinion of legal counsel for the
Company, are necessary or appropriate to establish an exemption from the
registration requirements under applicable federal and state securities laws
with respect to the acquisition of such Shares.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's legal counsel to be necessary for the lawful issuance
and sale of any Share hereunder, shall relieve the Company of any liability
relating to the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Option Agreement. Each Option granted to an Employee or other persons
shall be evidenced by a written Stock Option Agreement in such form as the Board
shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company on or before September 9, 1997. If
such shareholder approval is obtained at a duly held shareholders meeting, it
may be obtained by the affirmative vote of the holders of a majority of the
outstanding shares of the voting stock of the Company, who are present or
represented and entitled to vote thereon, or by unanimous written consent of the
shareholders in accordance with the provisions of the Colorado Business
Corporation Act.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
10
<PAGE>
19. Gender. As used herein, the masculine, feminine and neuter genders
shall be deemed to include the others in all cases where they would so apply.
20. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
COLORADO.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Plan effective as of 2:30 p.m. the 10th day of September, 1996.
FRONTEER FINANCIAL HOLDINGS, LTD.
a Colorado corporation
By: /s/ R. A. Fitzner, Jr.
-----------------------------------------
R. A. Fitzner, Jr., Chairman of the Board
11
LIST OF SUBSIDIARIES
The subsidiaries of Fronteer Financial Holdings, Ltd. are as follows:
State of
Name Incorporation
---- -------------
RAF Financial Corporation Colorado
Fronteer Personnel Services, Inc. North Dakota
Fronteer Marketing Group, Inc. North Dakota
Secutron Corporation Colorado
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