FORM 10-K/A
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 .
---------------- ----------------
Commission file Number: 17637
Fronteer Financial Holdings, Ltd.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Colorado 45-0411501
------------------------------ ------------------------------
(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
----------------------------
(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.
<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 (3,977,842)
========= ======== ========== ==========
<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) (1,053,916) 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: February 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
February 10, 1997 Dennis W. Olson, -----------------------------------
Director
/s/ Robert A. Fitzner, Jr.
February 10, 1997 Robert A. Fitzner, Jr. ----------------------------------
Director
/s/ Robert L. Long
February 10, 1997 Robert L. Long, ----------------------------------
Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.00
<CASH> 2,070,320
<SECURITIES> 1,882,049
<RECEIVABLES> 6,225,036
<ALLOWANCES> 57,209
<INVENTORY> 0
<CURRENT-ASSETS> 11,587,151
<PP&E> 4,532,559
<DEPRECIATION> 2,262,248
<TOTAL-ASSETS> 18,184,679
<CURRENT-LIABILITIES> 6,596,280
<BONDS> 2,575,967
0
0
<COMMON> 177,871
<OTHER-SE> 5,907,675
<TOTAL-LIABILITY-AND-EQUITY> 18,184,679
<SALES> 0
<TOTAL-REVENUES> 28,786,905
<CGS> 0
<TOTAL-COSTS> 19,147,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 488,796
<INCOME-PRETAX> (2,302,882)
<INCOME-TAX> 55,799
<INCOME-CONTINUING> (2,358,681)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,358,681)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
