FORM 10-QA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 0-17637
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 of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1700 Lincoln Street, Suite 3200, Denver, CO, 80203
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(Address of principal executive offices)
(303) 860-1700
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(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The registrant had 16,871,557 shares of its $.01 par value common
stock outstanding as of February 10, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 September 30, 1996
----------------- ------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 2,680,292 2,070,320
Receivables from brokers or dealers and clearing
organizations:
Affiliate ............................................. 1,957,335 1,444,091
Other ................................................. 142,905 166,347
Trade receivables, net ...................................... 4,056,304 3,330,194
Receivable from affiliate ................................... -- 1,048,075
Other receivables ........................................... 435,986 177,120
Securities owned, at market value ........................... 1,519,047 1,882,049
Current portion of long-term notes receivable ............... 44,752 389,843
Deferred directory costs .................................... 324,662 431,436
Deferred income taxes ....................................... 196,846 196,846
Other assets ................................................ 518,043 450,830
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Total current assets ................................... 11,876,172 11,587,151
PROPERTY, FURNITURE AND EQUIPMENT, net
of accumulated depreciation .............................. 2,207,645 2,270,311
DIRECTORY PUBLISHING RIGHTS AND OTHER
net of accumulated amortization of 821,378 and 693,090 as
of December 31, 1996 and September 31, 1996,
respectively ............................................. 4,143,501 4,271,789
OTHER LONG TERM ASSETS ...................................... 172,621 55,428
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Total assets ........................................... $18,399,939 18,184,679
========== ==========
(Continued)
2
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1996 September 30, 1996
----------------- ------------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Accounts payable, accrued expenses, and other liabilities ... $ 3,549,261 3,405,723
Current portion of long-term debt ........................... 2,372,675 1,435,208
Notes payable to related parties ............................ 345,057 367,900
Deferred revenue ............................................ 424,349 623,058
Income taxes payable ........................................ 138,647 96,284
Other current liabilities ................................... 268,956 668,107
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Total current liabilities .............................. 7,098,945 6,596,280
LONG-TERM DEBT, NET OF CURRENT PORTION ...................... 1,775,043 2,575,967
DEFERRED RENT CONCESSIONS ................................... 1,766,790 1,768,827
DEFERRED INCOME TAXES ....................................... 914,062 914,062
------------ ------------
Total liabilities ...................................... 11,554,840 11,855,136
------------ ------------
MINORITY INTEREST IN SUBSIDIARY ............................. 292,761 243,997
------------ ------------
STOCKHOLDERS' EQUITY:
Series A voting cumulative preferred stock, authorized
25,000,000 shares, $0.10 par value, no shares outstanding -- --
Common stock authorized 100,000,000 shares, $0.01 par value;
16,141,944 shares issued and outstanding as of
September 30, 1996 and 16,871,557 as of December 31,
1996, net of shares held in treasury ..................... 185,067 177,871
Additional paid-in capital .................................. 12,230,872 11,515,751
Accumulated deficit ......................................... (4,233,367) (3,977,842)
Unearned ESOP shares ........................................ (350,000) (350,000)
Treasury stock, 1,645,162 shares at cost as of December 31,
1996 and September 30, 1996 .............................. (1,280,234) (1,280,234)
------------ ------------
Total stockholders' equity ............................. 6,552,338 6,085,546
------------ ------------
Total liabilities and stockholders' equity ............. $ 18,399,939 18,184,679
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Three months ended
December 31, 1996 December 31, 1995
------------------ ------------------
<S> <C> <C>
REVENUE:
Directory ....................................... $ 1,624,627 1,501,476
Brokerage commissions ........................... 3,507,720 2,469,617
Investment banking .............................. 567,214 325,895
Trading profits, net ............................ 133,243 (263,846)
Other broker/dealer ............................. 209,961 148,901
Computer hardware and software operations ....... 2,159,324 1,396,060
Telemarketing ................................... 132,935 62,782
Other ........................................... 92,939 105,590
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8,427,963 5,746,475
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COST OF SALES AND OPERATING EXPENSES:
Directory cost of sales ......................... 960,575 978,765
Broker/dealer commissions ....................... 2,267,321 1,629,242
Computer cost of sales .......................... 1,557,884 1,472,643
Telemarketing cost of sales ..................... 270,020 138,740
General and administrative ...................... 3,185,308 2,478,047
Depreciation and amortization ................... 289,446 225,278
------------ ------------
8,530,554 6,922,715
Operating loss ................................ (102,591) (1,176,240)
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OTHER INCOME (EXPENSE):
Interest income ................................. 54,410 162,267
Interest expense ................................ (61,729) (131,121)
Equity in loss of affiliate ..................... (7,891) --
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(15,210) 31,146
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Loss before minority interest and income taxes ..... (117,801) (1,145,094)
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Minority interest in earnings ...................... (48,764) (5,007)
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Loss before income taxes ........................... (166,565) (1,150,101)
Income tax expense ................................. (88,960) (1,700)
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Net loss ........................................... (255,525) (1,151,801)
Preferred stock dividends .......................... -- (19,687)
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Net loss applicable to common shareholders ......... $ (255,525) (1,171,488)
============ ============
Weighted average number of common shares outstanding 16,430,129 12,558,061
Loss per common share .............................. $ (.02) (.09)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Three months ended
December 31, 1996 December 31, 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... (255,525) (1,151,801)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ............................... 289,446 225,278
Provision for bad debts ..................................... -- 58,002
Equity in loss of affiliate ................................. 7,891 --
Minority interest in earnings ............................... 48,764 5,007
Other ....................................................... (2,037) (2,038)
Changes in operating assets and liabilities:
Increase in broker/dealer customer receivables, net ...... -- (574,215)
Increase in receivables from brokers or dealers and
clearing organizations ................................ (489,802) (648,453)
Decrease (increase) in trade receivables ................. (726,110) 51,108
Decrease (increase) in other receivables ................. (258,866) 45,987
Decrease (increase) in securities owned, net of securities
sold but not yet purchased ............................ 109,031 (606,040)
Decrease in deferred directory costs ..................... 106,774 27,627
Increase in other current assets ......................... (67,213) (7,929)
Increase in accounts payable, accrued expenses, and other
liabilities ........................................... 397,509 271,400
Decrease in broker/dealer customer payables .............. -- (921,751)
Increase in payables to brokers or dealers and clearing
organizations ......................................... -- 396,030
Increase in deposits from clearing correspondent brokers
or dealers ............................................ -- 978,179
Decrease in deferred revenue ............................. (198,709) (75,298)
Increase (decrease) in income taxes payable .............. 42,363 (160,441)
Increase (decrease) in other current liabilities ......... (399,151) 198,283
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Net cash used by operating activities .......................... (1,395,635) (1,891,065)
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(Continued)
5
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
Three months ended Three months ended
December 31, 1996 December 31, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable ............... 228,008 369,499
Purchase of property, furniture and equipment ......... (98,492) (62,274)
Proceeds from receivable from affiliate ............... 1,048,075 --
Increase in other long term assets .................... (8,001) --
Proceeds from sale of assets .......................... -- 7,465
Issuance of notes receivable .......................... -- (6,000)
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Net cash provided by investing activities ................ 1,169,590 308,690
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments to related parties ................. (22,843) (10,500)
Principal payments on long-term borrowings ............ (88,457) (193,738)
Proceeds from borrowings .............................. 225,000 --
Net proceeds from issuance of common stock ............ 722,317 --
Dividends on preferred stock .......................... -- (19,687)
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Net cash provided (used) by financing activities ......... 836,017 (223,925)
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................... 609,972 (1,806,300)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD ................................................ 2,070,320 2,148,675
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CASH AND CASH EQUIVALENTS, END OF PERIOD ................. 2,680,292 342,375
========== ==========
SUPPLEMENTAL DISCLOSURES RELATED TO STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Three months ended Three months ended
December 31, 1996 December 31, 1995
------------------ ------------------
Cash payments for:
Interest .............................................. 61,729 131,121
========== =========
Income taxes .......................................... 46,597 162,141
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Additional Unearned
Preferred Common paid-in Accumulated ESOP Treasury
stock stock capital deficit stock stock Total
--------- ------- ---------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of
September
30,1996 ................... -- 177,871 11,515,751 (3,977,842) (350,000) (1,280,234) 6,085,546
Net proceeds
from
issuance of
common
stock ..................... -- 7,196 715,121 -- -- -- 722,317
Net loss ..................... -- -- -- (255,525) -- -- (255,525)
------- -------- ---------- ---------- -------- ---------- ---------
Balances as of
December
31, 1996 .................. -- 185,067 12,230,872 (4,233,367) (350,000) (1,280,234) 6,552,338
======= ======== ========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Fronteer
Financial Holdings, Ltd. and subsidiaries (Fronteer or the Company) have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principals. In the opinion of management, these
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the results of
operations and financial position for the interim periods presented.
The preparation of interim financial statements required management to make
estimates and assumptions that effect 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 revenues and expenses
during the reporting period.
Actual results could differ from those estimates.
These interim financial statements should be read in conjunction with the Annual
Report on Form 10-K as of and for the year ended September 30, 1996. Operating
results for the three months ended December 31, 1996, are not necessarily
indicative of the results that may be expected for the year ended September 30,
1997.
NOTE 2 - ORGANIZATION AND PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include Fronteer 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 Directory Company, a trade name of 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.
8
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
NOTE 3 - PRIVATE PLACEMENT
On February 16, 1996, the Company commenced a private placement of 6,000,000
shares of its $.01 par value Common Stock at $1.00 per share, as well as
6,000,000 Class A Redeemable Common Stock Purchase Warrants at a price of $.10
per warrant (Private Placement). These warrants entitle the holder to purchase
one share of Common Stock at $1.50 per share at any time until May, 1, 2000. The
Private Placement was completed in December 1996. During the three months ended
December 31, 1996 729,613 shares of Common Stock, and warrants were issued for
proceeds of $722,317, net of issuance costs. In accordance with the Private
Placement Memorandum, the Company has agreed to issue 595,865 warrants to RAF,
the selling agent, which allows the holder to purchase one share of Common Stock
at a price of $1.50 per warrant.
NOTE 4 - CONTINGENCIES
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 the knowledge or
approval by RAF; RAF did not participate in these sales in any way, nor were any
related transactions reflected on RAF's books and records. In a spilt decision
of the arbitration panel, damages were awarded in the amount of $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 has appealed. A provision for the award has been provided
for in the accompanying consolidated financial statements.
RAF is a defendant in certain other 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Revenues for the three months ended December 31, 1996 were $8,427,963, an
increase of $2,681,488 or 46.7% over the $5,746,475 for the three months ended
December 31, 1995. The increase is primarily a result of increases in brokerage
commissions and computer hardware and software revenues.
Brokerage commissions were $3,507,720, an increase of $1,038,103 or 42.1% over
the $2,469,617 for the three months ended December 31, 1995. The increase is due
primarily to the opening of new branch offices in Chicago, Illinois, Metairie,
Louisiana, and Dallas, Texas.
9
<PAGE>
Computer hardware and software revenues for the three months ended December 31,
1996 were $2,159,324, up $763,264 or 54.7% from the $1,396,060 for the three
months ended December 31, 1995. This increase is a result of Secutron's
aggressiveness in securing new work through two new divisions. These divisions
involve international work and services on the Internet. During the three months
ended December 31, 1996, Secutron initiated a project in Central America
providing hardware and software services to a company involved in the stock
brokerage industry. During this same three month period Secutron became an
Internet Service Provider (ISP) providing Internet services.
Broker/dealer commissions expense was $2,267,321, up $638,079 or 39.2% from
$1,629,242 for the three months ended December 31, 1995. This increase
correlates to the increase in brokerage commissions as a result of the new
branch office openings.
Computer cost of sales increased to $1,557,884 for the three months ended
December 31, 1996. This represents a slight increase of $85,241 or 5.7% over the
$1,472,643 for the three months ended December 31, 1995. Secutron has increased
its emphasis on cost of sales for its computer hardware and software activity
and as a result has improved its gross margin in this area.
General and administrative expenses for the three months ended December 31, 1996
were $3,185,308, up $707,261 or 28.5% from the $2,478,047 for the three months
ended December 31, 1995. This increase results from RAF's opening of new branch
offices in Chicago, Illinois, Metairie, Louisiana, and Dallas, Texas and
increases related to the Company's telemarketing division. Additionally, RAF
opened an office in Las Vegas, Nevada in January of 1997 for which certain
expenses were being incurred during the three months ended December 31, 1996.
Depreciation and amortization for the three months ended December 31, 1996 was
$289,446, up $64,168 or 28.5% over the $225,278 for the three months ended
December 31, 1995. This increase relates to the opening of RAF's new branch
offices and the capital expenditures for the telemarketing division.
Interest income and interest expense for the three months ended December 31,
1996 were $54,410 and $61,729, respectively. These amounts represent decreases
from prior year amounts resulting from the sale of the RAF's clearing operation
in July 1996.
Equity in loss of affiliate of $7,891 for the three months ended December 31,
1996 relates to the Company's 20% interest in MultiSource Services, Inc., RAF's
clearing operation that was sold in July 1996. The minority interest in earnings
of $48,764 represents the minority shareholders' interest in earnings of
Secutron for the three months ended December 31, 1996.
Liquidity and Capital Resources
The Company, as of December 31, 1996, had $2,680,292 in cash and cash
equivalents and $4,777,227 in working capital. Its current ratio is 1.7:1.
Working capital and the current ratio remained fairly consistent with that as of
September 30, 1996. Proceeds from the issuance of common stock of $722,317, from
borrowings of $225,000, from collections on notes receivable of $228,008 and
from collections from a receivable from an affiliate of $1,048,075 were used to
fund operating activities of $1,395,635, for principal payments on borrowings of
$88,457, for principal payments to related parties of $22,843, and to acquire
property, furniture and equipment of $98,492. Cash used in operating activities
of $1,395,635 was in large part due to increases in trade receivables and
receivables from brokers or dealers and clearing organizations.
10
<PAGE>
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 December 31, 1996, $950,000 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 September
30, 1996. The Company's lender waived the event of default subject to agreement
that proceeds from sales of assets of the directory division 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
$950,000 on the line of credit is classified as current in the consolidated
balance sheet.
Management believes that with the opening of new branch offices in the
securities brokerage division, its cash flows from operations 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.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 the knowledge or
approval by RAF; RAF did not participate in these sales in any way, nor were any
related transactions reflected on RAF's books and records. In a spilt decision
of the arbitration panel, damages were awarded in the amount of $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 has appealed. A provision for the award has been provided
for in the accompanying consolidated financial statements.
Item 2. Changes in Securities
(c) 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. The Private Placement
was completed in December 1996. 5,958,658 shares of Common Stock and warrants
were issued through the Private Placement for proceeds of $5,859,5638, net of
commissions and issuance costs of $694,961. RAF is acting as the selling agent
in connection with the Private Placement and receives a sales commission of 10%
($661,942) of the gross proceeds of the Private Placement and Class B common
stock warrants to purchase one share of 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.
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. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended December
31, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: June 2, 1997 FRONTEER FINANCIAL HOLDINGS, LTD.
------------ a Colorado Corporation
By: /s/ R. A. Fitzner, Jr.
------------------------------------------
R. A. Fitzner, Jr., Chairman of the Board
By: /s/ Gary L. Cook
------------------------------------------
Gary L. Cook
Principal Accounting Officer
