UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
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 of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1700 Lincoln Street, 32nd Floor
Denver, CO 80203
--------------------------------------------------
(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 29, 1997, the aggregate market value of the Registrant's voting
stock held by non-affiliates was $6,790,515.
As of December 29, 1997, Registrant had 16,871,557 shares of its $0.01 par value
common stock issued and outstanding.
1
<PAGE>
PART I
ITEM 1. BUSINESS
Business. Fronteer Financial Holdings, Ltd. (Fronteer or the Company) is a
corporation which was organized under the laws of the state of Colorado on
September 14, 1988. The Company currently has the following wholly-owned
operating subsidiaries: R A F Financial Corporation (RAF), which operates as a
fully disclosed securities broker/dealer; RAF Services Inc. of Texas, RAF
Services Inc. of Louisiana and RAF Services Inc. (collectively, RAF Services),
which were established in order to participate in insurance brokerage activities
in certain states; and Fronteer Capital, Inc., which was formed to effectuate
transactions described below in Possible Change in Control. The Company also has
a majority owned subsidiary, Secutron Corporation (Secutron), which designs,
develops, installs, markets and supports software systems for the securities
brokerage industry. The Company sold the primary operating assets of its
directory business and two of its wholly owned subsidiaries, Fronteer Personnel
Services, Inc. (FPS) and Fronteer Marketing Group, Inc. (FMG), during the year
ended September 30, 1997. These entities have been accounted for as discontinued
operations in the accompanying consolidated financial statements. RAF, and
Secutron are Colorado corporations; Fronteer Capital, Inc. is a Delaware
corporation; FPS and FMG are North Dakota corporations and RAF Services are
Louisiana, Nevada and Texas corporation.
Possible Change in Control. In December 1997, Heng Fung Capital [S] Private
Limited (Heng Fung Private), a wholly owned subsidiary of Heng Fung Holdings
Company Limited (Heng Fung Holdings), a public company traded on the Hong Kong
Stock Exchange, purchased 1,136,364 shares of the Company's outstanding Common
Stock from Robert A. Fitzner, Jr. and Robert L. Long, officers and directors of
the Company, and from two other employees of RAF. In December 1997, Robert A.
Fitzner, Jr. and Heng Fung Private agreed that, upon regulatory approval of a
change in the beneficial ownership of 25% or more of RAF, Heng Fung Private
would purchase an additional 3,556,777 shares of the Company's outstanding
Common Stock from Mr. Fitzner. In conjunction with the transaction, the Company
entered into an agreement (Convertible Debenture Agreement) with Heng Fung
Finance Company Limited (Heng Fung Finance), a wholly owned subsidiary of Heng
Fung Private, pursuant to which the Company agreed to sell to Heng Fung Finance
a ten year $4,000,000 10% Convertible Debenture that is convertible at $.53125
per share into 7,529,411 shares of the Company's Common Stock. The purchase of
the $4,000,000 Convertible Debenture was completed on December 30, 1997. On
December 26, 1997, the Board of Directors of the Company, at the request of Heng
Fung Finance made pursuant to the terms of the Convertible Debenture Agreement,
appointed two persons selected by Heng Fung Finance to the Board of Directors of
the Company. If Heng Fung Private completes the purchase of the additional
3,556,777 shares of the Company's outstanding Common Stock from Mr. Fitzner, the
three directors of the Company not appointed at the request of Heng Fung Finance
will resign as directors of the Company and the two remaining directors
appointed at the request of Heng Fung Finance will be able to fill the vacancies
created by such resignations. In such event, it is anticipated that the
directors would appoint new officers for the Company. Further, Heng Fung
Holdings, through Heng Fung Private, will then own approximately 27.8% of the
Company's outstanding Common Stock and Heng Fung Finance will have the option to
purchase an additional ten year $11,000,000 10% Convertible Debenture that will
be convertible at $.61 per share into 18,032,786 shares of the Company's Common
Stock.
Discontinued Operations. On February 25, 1997, McLeod USA Publishing Company
(McLeod, formerly known as Telecom* USA Publishing Company) purchased six yellow
page directories located in North Dakota from the Company for approximately
$2,800,000. The purchase price was pursuant to an existing option agreement
(Option Agreement) between McLeod and the Company and was based on related
directory revenues. The purchase price consisted of $2,300,000 in cash and
$500,000 in the form of a nonrecourse loan that was applied against the price of
the six yellow page directories in accordance with the Option Agreement. On the
same date, another third party purchased another directory from the Company for
approximately $202,000 in cash. The purchase was based on related directory
revenues. These dispositions represent primarily all of the Company's remaining
directory business assets. As such, the Company has discontinued its activities
in the directory business.
2
<PAGE>
On September 15, 1997, an unaffiliated third party purchased all of the primary
operating assets of FMG for approximately $421,000. The purchase price was based
on existing financing arrangements and the cost of anticipated fixed asset
upgrades. A portion of the purchase price was paid in the form of a promissory
note in the amount of $141,344 to be paid over 28 months at $5,048 per month.
The remainder of the purchase price was paid in the form of a promissory note in
the amount equal to FMG's cost of anticipated fixed asset upgrades installed in
existing telemarketing centers. Monthly payments of principal and interest at
10% of between $3,000 and $8,000 per month will be made through December 2000 at
which time the balance will be due and payable to the Company. The third party
also assumed leases related to two telemarketing centers in North Dakota with a
combined monthly rental of $1,000 and has entered into a three-year lease for
approximately 5,500 square feet of space in a building the Company owns in
Bismarck, North Dakota for $2,752 per month. Accordingly, the Company has
discontinued its activities in the direct marketing business.
Sale of Clearing Operation. On July 23, 1996, the Company sold RAF's 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. MSI was formed by Oppenheimer Funds, Inc. (OFI) for the
purpose of acquiring the Clearing Operation, and OFI was to retain 80% of the
outstanding common stock of MSI. Fronteer received 20% of the outstanding common
stock of MSI. As a result of this transaction, RAF became a fully disclosed
clearing correspondent of MSI. The loan of $1,500,000 was recorded as a loan
payable to MSI and 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 the 28th months
following the closing date of 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.
During the year ended September 30, 1997, Fronteer and RAF were notified by OFI
that a decision had been reached by OFI that MSI and its business were not
consistent with the long term business plans of OFI. Subsequently, a new
clearing firm was selected for the customer business of RAF, and the customer
business previously cleared by MSI was moved to the new clearing firm in October
1997. MSI reached its revenue targets for the first portion of the forgivable
loan by October 1997. As result, the first $750,000 of the $1,500,000 forgivable
loan is expected to be forgiven and recognized as income during the year ended
September 30, 1998. Fronteer expects cancellation of the second and final
portion of the loan plus accrued interest payable in accordance with provisions
in the forgivable loan agreement relating to MSI's decision to cease being
engaged in the clearing business.
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 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. 5,958,658 shares of Common Stock and
warrants were issued through the Private Placement for proceeds of $5,859,563,
net of issuance costs of $694,961. In addition, the Company issued 595,865
warrants to RAF in accordance with the Private Placement which allows the holder
to purchase one share of Common Stock at a price of $1.50 per warrant until May
1, 2000.
3
<PAGE>
Description of Business
RAF FINANCIAL CORPORATION
General. RAF was incorporated in 1974 to engage in the retail stock brokerage
business in the Rocky Mountain Area of the United States. RAF is registered as a
broker/dealer with the Securities and Exchange Commission (Commission), is a
member of the National Association of Securities Dealers, Inc. (NASD) and the
Boston Stock Exchange, is an associated member of the American Stock Exchange,
and is registered as a securities broker/dealer in all 50 states. RAF is a
member of the Securities Investor Protection Corporation (SIPC) and other
regulatory and trade organizations. RAF and certain of its subsidiaries are also
licensed to sell insurance products in certain states. RAF's business consists
of providing retail securities brokerage and investment services, trading fixed
income and equity securities, providing investment banking services to corporate
and municipal clients, managing and participating in underwriting corporate and
municipal securities, and selling a range of professionally managed mutual funds
and insurance products. During 1989, RAF registered the mark RAF Financial
Corporation with the United States Patent and Trademark Office, and RAF has
registered this name in 32 states. RAF intends to maintain all of its service
mark registrations for the indefinite future in order to protect the goodwill
associated with the mark. RAF conducts its business in four operating divisions
as described below. RAF's principal executive office is located at One Norwest
Center, 1700 Lincoln Street, 32nd Floor, Denver, Colorado, 80203. RAF has branch
offices located in Colorado Springs, Colorado; Denver, Colorado; Atlanta,
Georgia; Albany, New York; Reston, Virginia; Chicago, Illinois; Metairie,
Louisiana; Las Vegas, Nevada; Dallas, Texas; West Palm Beach, Florida; and
Kansas City, Missouri.
Retail Securities Brokerage Division. RAF conducts its retail brokerage business
through its Retail Securities Brokerage Division. As of December 29, 1997, RAF
had 162 account executives and approximately 25,000 customer accounts. RAF
generates commission revenue when it acts as a broker on an agency basis, or as
a dealer on a principal basis, to effect securities transactions for individual
and institutional investors. RAF executes both listed and over the counter
agency transactions for customers, executes transactions and puts and calls on
options exchanges as agent for its customers, and sells a number of
professionally managed mutual funds and insurance products, primarily variable
annuities. RAF's revenues from its sales of insurance products were less than
$62,000 for the year ended September 30, 1997.
Corporate Finance Division. The Corporate Finance Division provides financial
advisory and capital raising services to corporate clients. Financial advisory
services involve advising clients in mergers and acquisitions and in various
types of corporate valuations. RAF acts as a dealer, underwriter and selling
group member in public and private offerings of equity securities. During the
year ended September 30, 1997, RAF raised approximately $15,766,000 through its
investment banking activities.
Trading Division. Trading securities involves the purchase and sale of
securities by RAF for its own account. Profits and losses are derived from the
spread between bid and ask prices and market increases or decreases for the
individual security during the holding period. RAF makes markets in corporate
equities and trades in municipal and corporate bonds and various government
securities. As of September 30, 1997, RAF made markets in 48 stocks.
Public Finance Division. The Public Finance Division of RAF provides
professional financial advisory services to public entities, participates in
underwriting and selling both negotiated and competitive bid municipal bond
offerings, and structures and participates in municipal bond refinancings.
During the year ended September 30, 1997, RAF's participation in offerings of
municipal securities was approximately $58,395,000 as manager of fifteen
municipal underwritings and private placements.
Financial Information. For the year ended September 30, 1997, RAF's revenues of
$18,118,271 accounted for 72% of the Company's total operating revenues from
continuing operations of $25,100,414. RAF's revenues for the year and nine
months ended September 30, 1996 and 1995 were $14,830,681 and $9,854,160,
4
<PAGE>
respectively. For the years ended September 30, 1997 and 1996 and nine months
ended September 30, 1995, RAF incurred operating losses of $2,160,897,
$2,647,327 and $1,053,916, respectively.
RAF Regulatory Net Capital. RAF, as a registered securities broker/dealer, is
subject to the Securities and Exchange Commission's Uniform Net Capital Rule
(Rule 15c3-1) (the Rule). RAF has elected to operate pursuant to the alternative
standard provided by the Rule. Under the alternative standard, RAF is required
to maintain "net capital" of not less than $250,000. As of September 30, 1997,
RAF had "net capital" of $2,104,023.
SECUTRON CORPORATION
General. Secutron was incorporated under Colorado law on May 11, 1979. The
Company owns approximately 60% of the outstanding stock of Secutron and certain
officers of Secutron own most of the remaining outstanding stock. Secutron's
business consists of designing, developing, installing, marketing, and
supporting software systems for the securities brokerage industry. Secutron
markets hardware and software to securities brokerage firms as an IBM business
partner. Secutron's IBM business partner relationship is as an industry
remarketer affiliate through Real Applications Ltd., located in Woodland Hills,
California. Secutron is also an Internet Service Provider providing Internet
services ranging from access to the Internet to development and maintenance of
Web sites. Secutron's wholly owned subsidiary, MidRange Solutions Corp. (MSC),
is a Colorado corporation formed on January 1, 1993. MSC is in the business of
selling IBM hardware and hardware manufactured by competitors of IBM, and MSC
acts as a distributor for software products which are proprietary to third
parties. MSC sells hardware and software to businesses in several different
industries, including manufacturers, distributors and health care providers.
Products and Services. Secutron offers the following software products to the
securities brokerage industry. The STARS software system is offered to
broker/dealers who clear their own transactions, and is a totally integrated
software system which performs all of the functions required by self clearing
broker/dealers. The BCATS software system is offered to broker/dealers who clear
their securities transactions on a fully disclosed basis through a clearing
broker/dealer such as MSI, and is also a fully integrated software system which
performs all of the accounting functions required by a fully disclosed
broker/dealer. The BCATS-MF software system is designed for use by
broker/dealers engaging in transactions in mutual funds. All such software
systems are designed to run on IBM computers. Both Secutron and MSC provide
consulting, programming and facilities management services to their respective
clients to support the software and hardware sold by them. The STARS and BCATS
applications are compatible to Year 2000 issues facing its clients and potential
clients.
Financial Information. Secutron's revenues for the years ended September 30,
1997 and 1996 and nine months ended September 30, 1995 were $7,436,143,
$6,975,591 and $3,628,364, respectively. Operating profits for the years ended
September 30, 1997 and 1996 and nine months ended September 30, 1995 were
$129,215 and $281,775 and $25,991, respectively.
DIRECTORY BUSINESS
General. The primary operating assets of the directory business were sold during
the year ended September 30, 1997 and have been accounted for as discontinued
operations in the consolidated financial statements.
Financial Information. Revenues for the directory business for the years ended
September 30, 1997 and 1996 and for the nine months ended September 30, 1995
were $4,894,707, $7,170,648 and $3,952,072, respectively. Operating profits
(losses) for the years ended September 30, 1997 and 1996 and for the nine months
ended September 30, 1995 were $132,594, $(486,976) and $(694,057), respectively.
5
<PAGE>
FRONTEER MARKETING GROUP, INC.
General. All of the primary operating assets of FMG were sold during the year
ended September 30, 1997 and have been accounted for as discontinued operations
in the consolidated financial statements.
Financial Information. Revenues for FMG for the years ended September 30, 1997
and 1996 and for the nine months ended September 30, 1995 were $364,652,
$317,349 and $149,780, respectively. Operating losses for the years ended
September 30, 1997 and 1996 and for the nine months ended September 30, 1995,
were $1,216,282, $635,573 and $295,465, respectively.
Employees and Employee Relations
Employees. As of December 29, 1997, the Company and its subsidiaries had 264
full time employees, 4 of whom worked in the Directory Business in the Company's
North Dakota offices; 224 of whom work for RAF; and 36 of whom work for
Secutron. RAF's headquarters are located in Denver, Colorado, however 170 of
RAF's employees work in branch offices of RAF located in Colorado Springs,
Colorado; Atlanta, Georgia; Albany, New York; Reston, Virginia; Chicago,
Illinois; Metairie, Louisiana; Las Vegas, Nevada; Dallas, Texas; West Palm
Beach, Florida; and Kansas City, Missouri. The Company considers its relations
with its employees to be good.
Competition
RAF FINANCIAL CORPORATION
The securities industry has become considerably more concentrated and more
competitive in recent periods as numerous securities firms have either ceased
operation or have been acquired by or merged with other firms. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired securities firms. The securities
industry is now dominated by relatively few very large securities firms offering
a wide variety of investment related services nationally and internationally.
Numerous commercial banks have petitioned and received approval from the Board
of Governors of the Federal Reserve System to enter into a variety of new
securities activities. Various legislative proposals, if enacted, would permit
commercial banks to engage in other types of securities related activities.
These developments or other developments of a similar nature may lead to the
creation of integrated financial service firms that offer a broader range of
financial services than those offered by RAF. These developments have created
large, well capitalized, integrated financial service firms with which RAF must
compete. The securities industry has also experienced substantial commission
discounting by broker/dealers competing for institutional and individual
brokerage business. An increasing number of specialized firms offer "discount"
services to individual customers. These firms generally effect transactions for
their customers on an "execution only" basis without offering other services
such as investment recommendations and research. Such discounting and an
increase in the number of new and existing firms offering such discounts could
adversely affect RAF's retail securities business.
SECUTRON CORPORATION
Secutron competes with numerous software and hardware distribution firms, and
hardware manufacturers, some of which are larger than Secutron and have greater
financial resources. Secutron also competes with firms that specialize in
industry specific software and those that offer a variety of software products
to businesses in various industries. MSC competes with hardware manufacturers
and other licensed distributors of IBM hardware and distributors of hardware
manufactured by competitors of IBM. Many of MSC's competitors are larger than
MSC and have greater financial resources.
6
<PAGE>
Regulation
RAF FINANCIAL CORPORATION
The securities industry in the United States is subject to extensive regulation
under federal and state laws. The Securities and Exchange Commission
(Commission) is a federal agency charged with administration of the federal
securities laws. Much of the regulation of broker/dealers has been delegated to
self regulatory organizations, principally the NASD and the exchanges. These
self regulatory organizations adopt rules (which are subject to approval by the
Commission) for governing the industry and conduct periodic examinations of
member broker/dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they do business. Broker/dealers
are subject to regulations that cover all aspects of the securities business,
including sales methods, trading practices among broker/dealers, capital
structure of securities firms, record keeping, and the conduct of directors,
officers, and employees. Additional legislation, changes in rules promulgated by
the Commission and by self regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules often directly affect
the method of operation and profitability of broker/dealers. The Commission, the
self regulatory authorities, and the state securities commissions may conduct
proceedings which can result in censure, fine, suspension, or expulsion of a
broker/dealer, its officers, or employees.
RAF is required by federal law to belong to the SIPC. When the SIPC fund falls
below a certain minimum amount, members are required to pay annual assessments.
The SIPC fund provides protection for securities held in customer accounts up to
$500,000 per customer, with a limitation of $100,000 on claims for cash
balances.
RAF is subject to the Commission's Uniform Net Capital Rule which is designed to
measure the financial integrity and liquidity of a broker/dealer and the minimum
net capital deemed necessary to meet its commitments to its customers. RAF is in
compliance with the Rule. Failure to maintain the required net capital may
subject RAF to suspension by the Commission or other regulatory bodies and may
ultimately require its liquidation. The Company is not itself a registered
broker/dealer and is not subject to the Rule. However, under the Rule, the
Company could be affected by the requirement that a broker/dealer such as RAF
may be prohibited under certain circumstances and may be temporarily restricted
under other circumstances by the Commission from the withdrawal of equity
capital by a stockholder such as the Company.
RAF is also subject to regulation under federal and state laws surrounding the
insurance industry for the insurance products, primarily variable annuities,
which its insurance licensed registered representatives sell.
See Note 13 to the Company's consolidated financial statements for financial
information pertaining to the Company's industry segments.
ITEM 2. PROPERTIES
RAF FINANCIAL CORPORATION
RAF's principal offices are located at One Norwest Center, 1700 Lincoln Street,
32nd Floor, Denver, Colorado, 80203, which consist of approximately 47,071
square feet of subleased space. The sublease expires on April 30, 2007. The
Company currently pays monthly rent of $63,800 for the space. RAF also leases
space for its branch offices pursuant to leases that have various rental rates
and expire at various dates.
SECUTRON CORPORATION
Secutron's office is located at 3773 Cherry Creek North Drive, Suite 825,
Denver, Colorado 80209, which consists of approximately 8,600 square feet of
leased space. The lease expires on July 31, 2003. Secutron currently pays
monthly rent of $9,078 for the space.
7
<PAGE>
OTHER
The Company owns a building at 216 North 23rd Street, Bismarck, North Dakota,
58501 in which it operated it's headquarters for its directory business and FMG.
Most of the primary operating assets of these operations were sold during the
year ended September 30, 1997. As such, the Company leases approximately 5,500
square feet of this building to the third party who purchased the primary
operating assets of FMG for $2,752 per month through September 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings or claims against the Company or
subsidiaries except that on December 24, 1997 NevStar Gaming & Entertainment
Corporation (NevStar) gave written notice to RAF of its claim for damages
relating to RAF's not underwriting NevStar's initial public offering. NevStar
alleges that it suffered in excess of $1,000,000 in damages as a result of RAF's
alleged breach of its alleged agreement with NevStar, as well as RAF's alleged
violation of applicable Commission and NASD regulations, and common law. It is
the opinion of the management of RAF that the claims have no merit and are not
justifiable and RAF intends to vigorously defend them.
RAF is a defendant in certain other arbitration and litigation matters arising
from its activities as a broker/dealer, none of which involves claims for
damages that exceed 10% of the Company's current assets. In the opinion of
management, these matters, including any damages awarded against the Company,
have been adequately provided for in the accompanying consolidated financial
statements, and the ultimate resolution of the other arbitration and litigation
matters will not have a significant adverse effect on the consolidated results
of operations or the consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
Company's fiscal quarter ended September 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. The Company's Common Stock has been traded on the
Nasdaq Small-Cap Market under the symbol FDIR since March 27, 1989. The
following table shows the range of high and low bid quotations for the Common
Stock, for each quarterly period since October 1, 1995, as reported by the NASD.
These quotations represent prices between dealers and do not include retail
markups, markdowns, or commissions and may not necessarily represent actual
transactions.
Common Stock
------------------------
Fiscal Quarter Ended High Low
-------------------- ---- ---
September 30, 1997 $.625 .438
June 30, 1997 1.000 .531
March 31, 1997 .875 .594
December 31,1996 .813 .531
September 30, 1996 .875 .625
June 30, 1996 1.125 .906
March 31, 1996 1.313 .750
December 31, 1995 .875 .625
8
<PAGE>
The NASD, which administers the Nasdaq Small-Cap Market, has established
criteria for securities, including the Company's Common Stock, to be included on
the Nasdaq Small-Cap Market. Effective February 23, 1998, in order for the
Company's Common Stock to continue to be included on the Nasdaq Small-Cap
Market, the Company must maintain $2,000,000 in net tangible assets, a market
capitalization of $35 million or net income of $500,000 in the most recently
completed fiscal year or in two of the last three most recently completed fiscal
years. In addition, continued inclusion requires that the Company have a public
float of at least 500,000 shares with a market value of at least $1,000,000,
that there be at least two market-makers in the Company's Common Stock and that
the Common Stock have a minimum bid price of $1 per share. The maintenance
requirements also require the Company to have at least two independent directors
and an audit committee, a majority of which are independent directors.
Management feels the Company has met or will soon meet the maintenance criteria
as explained above except the requirement for a minimum bid price of the Common
Stock of $1 per share. The Company's failure to meet the maintenance criteria in
the future may result in the discontinuance of the inclusion of the Company's
Common Stock on the Nasdaq Small-Cap Market. In such event, trading, if any, in
the Company's Common Stock may then continue to be conducted in the non-Nasdaq
over-the-counter market in what are commonly referred to as the electronic
bulletin board and the "pink sheets". As a result, an investor may find it more
difficult to dispose of or to obtain accurate quotations as to the market value
of the securities. In addition, the Company would be subject to a rule
promulgated by the Commission which provides that if the Company failed to meet
criteria set forth in such rule, various sales practice requirements would be
imposed on broker/dealers who sell securities governed by the rule to persons
other than established customers and accredited investors. For these types of
transactions, the broker/dealer would have to make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transactions prior to sale. Consequently, the rule may have an
adverse effect on the ability of broker/dealers to sell the Company's Common
Stock, which may affect the ability of purchasers to sell the Company's
securities in the market.
(b) Holders. As of December 29, 1997, the Company had approximately 400 holders
of record of its Common Stock.
(c) Dividends. The Company has not declared cash dividends on its Common Stock
since its inception and the Company does not anticipate paying any dividends in
the foreseeable future. The Company is currently precluded from paying dividends
on its Common Stock by the Convertible Debenture Agreement.
Recent Sales of Unregistered Securities. In December 1997, the Company sold Heng
Fung Finance a ten year $4,000,000 10% Convertible Debenture that is convertible
into shares of Common Stock of the Company at a price of $.53125 per share until
December 15, 2007, unless sooner paid. Upon regulatory approval of a change in
the beneficial ownership of 25% of RAF, Heng Fung Finance will also have the
option to purchase a $11,000,000 10% Convertible Debenture that is convertible
into shares of Common Stock of the Company at price of $.61 per share until ten
years from the date of issue unless sooner paid. The proceeds from the
$4,000,000 10% Convertible Debenture were advanced to Fronteer Capital, Inc. and
will be used for working capital. The sale of the $4,000,000 10% Convertible
Debenture was made in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended (Act). The purchaser had
access to full information concerning the Company and represented that it
purchased the $4,000,000 10% Convertible Debenture for the purchaser's own
account and not for the purpose of distribution. The $4,000,000 10% Convertible
Debenture contains a restrictive legend advising that the securities represented
by the $4,000,000 10% Convertible Debenture may not be offered for sale, sold or
otherwise transferred without having first been registered under the Act or
pursuant to an exemption from registration under the Act. No underwriters were
involved in the transaction.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
On February 25, 1997, McLeod purchased the primary operating assets of the
directory business for approximately $2,800,000 including the application of a
$500,000 nonrecourse loan from McLeod in accordance with the Option Agreement.
On the same date, another third party purchased another directory from the
Company for approximately $202,000 in cash. On September 15, 1997, a third party
purchased all of the primary operating assets of FMG for approximately $421,000.
As a result of these sales, the directory business and FMG have been accounted
for as discontinued operations in the consolidated financial statements.
On July 23, 1996, the Company sold RAF's Clearing Operation to MSI for
$3,000,000, including a $1,500,000 contingency in the form of a forgivable loan,
plus the net assets of the Clearing Operation.
On April 26, 1995, the Company acquired the assets of RAFCO, Ltd. (RAFCO). As a
result of this transaction, the former shareholders of RAFCO, acquired a 55%
interest in the Company. Accordingly, the transaction was accounted for as a
"reverse acquisition" of the Company by RAFCO using the purchase method of
accounting and the Company's assets and liabilities prior to the transaction
were adjusted to their fair market value as of the date of the business
combination. The Company's operations are included in the consolidated financial
statements beginning May 1, 1995, the effective date of the business
combination. As a result of the reverse acquisition accounting, historical
financial statements presented for periods prior to the business combination
date include the consolidated assets, liabilities, equity, revenues, and
expenses of RAFCO only.
The following is selected consolidated financial information (in thousands,
except per share data) for the Company as of September 30, 1997, 1996 and 1995
and for the years ended September 30, 1997 and 1996 and the nine months ended
September 30, 1995, and for RAFCO as of December 31, 1994 and 1993, and for each
of the years in the two year period ended December 31, 1994. This information
should be read in conjunction with Item 1 and the consolidated financial
statements appearing in Item 8 of this Annual Report.
<TABLE>
<CAPTION>
Nine months
ended
Year ended September 30, September 30, Year ended December 31,
----------------------- ------------ ----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ............................ $ 25,100 21,369 13,153 16,259 18,157
Loss from continuing
operations ...................... (1,990) (990) (806) (353) (23)
Loss on sale of
discontinued operations,
net of income tax benefit
of $410 ......................... (667) -- -- -- --
Loss from discontinued
operations, net of income tax
benefit of $412 ................. (799) (1,369) (1,086) -- --
Net loss applicable to
common shareholders ............. (3,456) (2,418) (1,925) (353) (23)
Loss per common share:
Continuing operations ........... (.12) (.07) (.09) ** **
Discontinued operations:
Loss on sale of
operations ................ (.04) -- -- -- --
Loss on discontinued
operations ................ (.05) (.10) (.11) -- --
----- ----- ----- ------- -------
Total ........................... $ (.21) (.17) (.20) ** **
===== ===== ===== ======= =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
---------------------------------------------- -----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital ........................... $3,595 4,991 4,130 $2,443 $3,292
Total assets .............................. 11,003 14,524 17,282 22,326 95,700
Total long term liabilities ............... 2,732 3,492 3,269 3,164 3,530
Total stockholders' equity ................ 3,352 6,086 5,442 1,188 1,594
</TABLE>
**Due to the limited number of shares outstanding during 1993 and 1994,
presentation of earnings per share is not meaningful.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Year ended September 30, 1997 compared to year ended September 30, 1996
Revenues for the year ended September 30, 1997 were $25,100,414 compared to
revenues for the year ended September 30, 1996 of $21,369,021. This represents
an increase of $3,731,393 or 18%. The increase is primarily due to the increase
in brokerage commissions and investment banking activity which increased to
$16,783,271 from $13,101,204, an increase of $3,682,067 or 28%. Brokerage
commission increases are due to new branch office openings. During the fiscal
year three new branches in Dallas, Texas; Las Vegas, Nevada; and West Palm
Beach, Florida were opened. Currently there are 53 registered representatives
working out of these offices. In addition, two branches that were opened during
the year ended September 30, 1996, in Chicago, Illinois and Metairie, Louisiana
were open for the full year. Subsequent to year end, RAF opened an office in
Kansas City, Missouri which currently has approximately eight registered
representatives.
Computer hardware and software revenues were $6,982,143 for the year ended
September 30, 1997 compared to $6,538,540 for the prior year. This represents an
increase of $443,603 or 7%. The increase primarily is due to the increased
efforts from management of Secutron to generate new business, including efforts
in providing Internet services as an Internet Service Provider.
Broker/dealer commissions expense for the year ended September 30, 1997 were
$10,268,764 compared to $8,171,445 for the prior year. The increase represents
$2,097,319 or 26% which correlates to the increase in brokerage commissions and
investment banking revenues.
Computer cost of sales for the year ended September 30, 1997 were $5,767,136
compared to $5,381,097 for the year ended September 30, 1996. This is an
increase of $386,039 or 7% which correlates to the increase in computer hardware
and software revenues.
General and administrative expenses were $11,252,747 for the year ended
September 30, 1997 compared to $9,997,828 for the prior year. The increase,
$1,254,919 or 13%, is primarily due to the increased expenses in opening and
operating new RAF branch offices.
Depreciation and amortization for the year ended September 30, 1997 was $338,945
compared to $396,203 for the prior year. The decrease reflects certain assets
being fully depreciated in the prior and current years.
Interest income for the year ended September 30, 1997 was $150,203 compared to
$642,274 for the prior year. The decrease reflects the sale of the Clearing
Operation in July 1996. Interest expense was $27,940 for the year ended
September 30, 1997 compared to $225,089 for the prior year. This decrease is
also partially attributable to the sale of the Clearing Operation as well as
decreased debt balances.
11
<PAGE>
Equity in loss of affiliate of $22,580 for the year ended September 30, 1997
related to the Company's 20% interest in the operating activity of MSI. The
minority interest in earnings of $11,331 represents the minority shareholders'
interest in earnings of Secutron for the year ended September 30, 1997.
The loss on sale of discontinued operations resulted from the loss on the sale
of the primary operating assets of the directory business net of an income tax
benefit.
The loss from discontinued operations represents the operating results for the
year for the directory business, FMG and FPG.
Year Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995
Revenues for the year ended September 30, 1996 were $21,369,021 compared to
revenues for the nine months ended September 30, 1995, of $13,152,565. Besides
the increased number of months of activity for the year ended September 30,
1996, the increase of $8,216,456 or 63% is due to increased revenues from
computer hardware and software operations and an increase in broker/dealer
commissions.
Brokerage commissions for the year ended September 30, 1996 were $10,825,987, an
increase of $3,774,621 or 53% over brokerage commissions for the nine months
ended September 30, 1995. Besides the increased number of months of activity for
the year ended September 30, 1996, the increase is primarily due to the opening
of two new branch offices in Chicago, Illinois and Metairie, Louisiana during
the second quarter of fiscal year 1996.
Computer hardware and software revenues for the year ended September 30, 1996
were $6,538,540, up $3,302,384 or 102% over revenues for the nine months ended
September 30, 1995. Besides the increased number of months of activity for the
year ended September 30, 1996, the increase is in large part due to increased
work as a result of the sale of the Clearing Operation, including programming
and other projects for MSI.
Broker/dealer commissions expense for the year ended September 30, 1996 of
$8,171,445 is up $3,122,237 or 62% over the nine months ended September 30,
1995. Besides the increased number of months of activity for the year ended
September 30, 1996, this correlates directly with the increase in brokerage
commission revenues as a result of the new branch office openings.
Computer cost of sales of $5,381,097 is up $2,450,900 or 84% over the nine
months ended September 30, 1995. Besides the increased number of months of
activity for the year ended September 30, 1996, this is consistent with the
increase in computer hardware and software revenues.
General and administrative expenses for the year ended September 30, 1996 of
$9,997,828 increased $4,138,701 or 71% over the nine months ended September 30,
1995. Besides the increased number of months of activity for the year ended
September 30, 1996, this increase results from the opening of the Chicago,
Illinois and Metairie, Louisiana offices and provisions in the consolidated
financial statements for legal arbitration judgments awarded against RAF in
December 1996 of approximately $450,000.
Depreciation and amortization for the year ended September 30, 1996 was
$396,203, up $84,416 or 27% compared to the nine months ended September 30,
1995. Besides the increased number of months of activity for the year ended
September 30, 1996, the increase is due to the opening of the Chicago, Illinois
and Metairie, Louisiana offices.
The gain on the sale of the Clearing Operation of $1,332,974 relates to the sale
of the Clearing Operation and is net of commission and transaction costs of
$167,026.
12
<PAGE>
Interest income for the year ended September 30, 1996 of $642,274 is comparable
to $480,225 for the nine months ended September 30, 1995, given the increased
number of months in the amount for the year ended September 30, 1996.
Interest expense for the year ended September 30, 1996 of $225,089 decreased
compared to the prior year due to the decrease in long-term debt, excluding the
$1,500,000 MSI forgivable loan. Interest is not being accrued on the forgivable
loan as management expects forgiveness.
Equity in loss of affiliate of $19,330 for the year ended September 30, 1996
relates to the Company's 20% interest in the operating activity of MSI since the
sale of the Clearing Operation. The minority interest in earnings of $87,626
represents the minority shareholders' interest in the earnings of Secutron for
the year ended September 30, 1996.
Liquidity and Capital Resources
The Company, as of September 30, 1997, had $2,080,722 in cash and cash
equivalents and $3,595,308 in working capital. Its current ratio is 1.8:1. The
Company's Private Placement provided net proceeds of $722,317 in 1997. These
proceeds along with proceeds from the sale of the Clearing Operation of
$1,048,075 and $2,498,472 from the sale of discontinued operations and other
investment activity from discontinued operations were used to fund operating
activities of $2,263,060, purchase property and equipment of $417,476, repay
long-term borrowings of $1,207,802 and related party borrowings of $190,900.
Most of the Company's assets are highly liquid, consisting mainly of assets that
are readily convertible into cash. These assets are financed by the Company's
equity capital, long-term debt and accounts payable. Changes in the amount of
securities owned by the Company and receivables from brokers or dealers and
clearing organizations directly affect the amount of the Company's financing
requirements.
RAF is subject to the Commission's net capital rules. RAF has historically
operated well in excess of the minimum requirements. At September 30, 1997,
RAF's net capital exceeded the Commission's minimum requirement by $1,854,023.
Continued expansion is not expected to have a significant adverse impact on
liquidity or capital.
A possible change in control could occur in January 1998 as discussed in Item 1
and elsewhere in Note 3 to the consolidated financial statements. $4,000,000 in
working capital has already been provided to the Company in conjunction with
this possible change in control. Another $11,000,000 is anticipated if the
change in control occurs.
Management believes that the Company's 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.
Recently Issued Financial Accounting Standards
In December 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Statement 127 defers the effective date of
provisions of Statement 125 relating to the recognition of collateral,
securities lending transactions, repurchase agreements, dollar-rolls, and
similar transactions until January 1, 1998. The Company does not believe that
the adoption of this statement will have a material effect on its consolidated
financial position or results of operations and will adopt it when required.
13
<PAGE>
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
Statement 128 simplifies the calculation of earnings per share (EPS) and makes
it comparable to international EPS standards. Statement 128 is effective for
both interim and annual periods ending after December 15, 1997 and earlier
application is not permitted. The Company does not believe that the adoption of
this statement will have a material effect on its calculation of earnings per
share and will adopt it when required.
In June 1997, the FASB issued Statement No 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for annual and
interim periods ending after December 15, 1997. This statement established
standards for the method that public entities use to report selected information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographical areas and major
customers. The Company does not believe that the adoption of the statement will
have a material effect on the disclosures in its consolidated financial
statements and will adopt it when required.
General
The foregoing discussion contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
are intended to be covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future operations, including
plans and objectives relating to expansion and the general development of the
business of the Company. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this Annual
Report on Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
The Company does not anticipate material costs or expenses related to Year 2000
issues which arise as a result of most computer programs having been written
using two digits rather than four digits to define the applicable year. The
Company's majority owned subsidiary, Secutron, supports the Company's accounting
and customer related accounting and reporting systems. Secutron's current
products include systems that are Year 2000 compatible. Although RAF's current
general ledger is not Year 2000 compatible, RAF intends to change, at no
material expense, to Secutron's more recent general ledger system during the
year ended September 30, 1998, which, as previously stated, is Year 2000
compatible. RAF's broker/dealer securities business is primarily conducted
through its clearing firm Correspondent Services Corporations (CSC), which if
not Year 2000 compatible, may be detrimental to RAF's broker/dealer business
activities. If so, RAF may be forced to change clearing firms, the cost of which
should not be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data that constitute
Item 8 are included at the end of this report beginning on page F-1.
14
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements of the type required to be
reported under this item between the Company and its independent accountants
during the fiscal years ended September 30, 1997 or 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The present term of office of each director
normally would expire at the next annual meeting of shareholders and when his
successor has been elected and qualified. The name, position with the Company,
age of each director and the period during which each director has served are as
follows:
Name and Position in the Company Age Director Since
-------------------------------- --- --------------
Robert A. Fitzner, Jr. 52 1995
Chairman and Director
Dennis W. Olson 57 1977
President and Director
Robert L. Long 64 1995
Secretary and Director
Fai H. Chan 53 December
Director 1997
Robert H. Trapp 42 December
Director 1997
In accordance with the Convertible Debt Agreement, and as requested by Heng Fung
Finance, the number of directors on the Company's Board of Directors was
increased from three to five and Fai H. Chan and Robert H. Trapp were appointed
to the Board of Directors of the Company. In addition, after regulatory approval
of a change in the beneficial ownership of 25% or more of RAF, Heng Fung Private
has agreed to purchase 3,556,777 shares of the outstanding Common Stock of the
Company from Robert A. Fitzner, Jr., in which case, the three directors of the
Company not appointed at the request of Heng Fung Finance will resign as
directors of the Company and the two remaining directors appointed at the
request of Heng Fung Finance will be able to fill the vacancies created by such
resignations. Heng Fung Finance has indicated that one of the new directors
would be Kwok Jen Fung who is 48 years old and has been a practicing solicitor
in Singapore for at least the last five years and a director of Heng Fung
Holdings Company Limited since May 1995. Otherwise, the present term of each
director will expire at the next annual meeting of shareholders and when his
successor has been elected and qualified.
(b) Identification of Executive Officers. Each executive officer holds office
until his successor is duly appointed and qualified, until his death or
resignation or until he shall be removed in the manner provided by the Company's
Bylaws. The Company's current executive officers, their ages, positions with the
Company and periods during which they served are as follows:
Name of Executive Officer and Position in Company Age Officer Since
------------------------------------------------- --- -------------
Robert A. Fitzner, Jr. 52 1996
Chairman of the Board of the Company 1984*
President of RAF
Dennis W. Olson 57 1977
President of the Company
Robert L. Long 64 1996
Secretary of the Company 1990*
Senior Vice President of RAF
*Messrs. Fitzner and Long have been officers of RAF for the periods indicated.
15
<PAGE>
It is anticipated that if Heng Fung Finance purchases the 3,556,777 shares of
the Company's Common Stock as described above, that the directors of the Company
will appoint new officers for the Company including Fai H. Chan,
who would become the Chairman of the Board of Directors and President of the
Company, and Robert H. Trapp, who would become Secretary of the Company.
There was no arrangement or understanding between any executive officer and any
other person pursuant to which any person was selected as an executive officer.
(c) Identification of Certain Significant Employees. Not applicable.
(d) Family Relationships. Not applicable.
(e) Business Experience.
Background. The following is a brief account of the business experience
during the past five years of each director and executive officer of the
Company:
Name of Director or
Officer Principal Occupation During the Last Five Years
Robert A. Fitzner, Jr. President and Chief Executive Officer of RAF
or RAFCO since 1984, Director of RAF since
1986, and Director of Secutron since 1986.
Mr. Fitzner has been a Director of the
Company since May of 1995, when RAF became a
wholly owned subsidiary of the Company, and
became the Chairman of the Board of Directors
of the Company in February 1996.
Dennis W. Olson President and a Director of the Company since
1977.
Robert L. Long Senior Vice President of the Corporate
Finance Division of RAF since 1990. Mr. Long
became a Director of the Company in May of
1995, when RAF became a wholly owned
subsidiary of the Company, and became the
Secretary of the Company in February 1996.
Fai H. Chan Director of the Company since December 26,
1997. Mr. Chan is the Chairman and Managing
Director of Heng Fung Holdings Company
Limited and has been a Director of Heng Fung
Holdings Company Limited since September 2,
1992. Mr. Chan was elected Managing Director
of Heng Fung Holdings Company Limited on May
1, 1995 and Chairman on June 3, 1995. Heng
Fung Holdings Company Limited's primary
business activities include real estate
investment and development, merchant banking,
the manufacturing of building material
machinery, pharmaceutical products and retail
fashion. Mr. Chan has been the President and
a Director of Heng Fai China Industries,
Inc., which owns various industrial
companies, since June 1994 and Chief
Executive Officer thereof since June 1995; a
Director of Intra-Asia Equities, Inc., a
merchant banking company, since June 1993;
Executive Director of Hua Jian International
Finance Co., Ltd. from December 1994 until
December 1996; and Chairman of the Board of
Directors of American Pacific Bank since
March 1988 and Chief Executive Officer
thereof between April 1991 and April 1993.
16
<PAGE>
Robert H. Trapp Director of the Company since December 26,
1997. Mr. Trapp has been a director of Heng
Fung Holdings Company Limited since May 1995;
a Director of Inter-Asia Equities, Inc., a
merchant banking company, since February 1995
and the Secretary thereof since April 1994;
Director, Secretary and Treasurer of Heng Fai
China Industries, Inc., which owns various
industrial companies; and the Canadian
operational manager of Pacific Concord
Holding (Canada) Ltd. of Hong Kong, which
operates in the consumer products industry,
from July 1991 until November 1997.
Directorships. No director of the Company is a director of any other entity
that has its securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, except as identified previously.
(f) Involvement in Certain Legal Proceedings. No event required to be reported
hereunder has occurred during the past five years.
(g) Promoters and Control Persons. Disclosure under this paragraph is not
applicable to the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, during the Company's fiscal year ended September 30,
1997, there were no directors or officers or more than 10% shareholder of the
Company that failed to timely file a Form 3, Form 4 or Form 5.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain information pertaining to the compensation
paid by the Company and its subsidiaries during the Company's last three fiscal
years for services rendered by Robert A. Fitzner, Jr., the Chairman of the Board
of the Company and the President of RAF, Dennis W. Olson, the President of the
Company, and Robert L. Long, the Secretary of the Company and the Senior Vice
President of RAF. RAF became a subsidiary of the Company in April of 1995.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Long Term
Compensation Awards
Other -------------------
Period Annual Securities All Other
Name and Ended Compen- Underlying Compen-
Principal Position September 30, Salary($) Bonus($) sation ($) Options (#) sation ($)
- ------------------ ------------- -------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Fitzner, Jr. 1997 172,124(a) 30,000 0 0 1,291(d)
Chairman of the 1996 162,000(a) 40,000 0 0 76,300(d)
Board of Directors, 1995 162,000(a) 40,000 0 0 1,270(d)
and President of RAF
Dennis W. Olson 1997 121,160 0 (b) 100,000 0
President of the 1996 123,500 9,000 (b) 0 0
Company 1995 119,710 10,000 (b) 0 100,000(d)
Robert L. Long 1997 414,103(c) 0 0 0 0
Secretary of the 1996 272,612(c) 0 0 800,000 667,236(d)
Company, and 1995 320,500(c) 0 0 0 0
Senior Vice
President of RAF
</TABLE>
17
<PAGE>
(a) Includes $30,000 paid as a directors fee to Mr. Fitzner by Secutron, 60% of
the outstanding stock of which is owned by the Company.
(b) The Company provided Mr. Olson with certain other benefits; however, these
benefits did not exceed 10% of his aggregate cash compensation for each of
the periods indicated.
(c) Officers of the Company are frequently responsible for conducting
transactions for which they receive commission and/or fee compensation. In
Mr. Long's case, total annual compensation is and has been transactional
commissions and/or fees. During 1997, $131,377 of fees were paid in the
form of a portion of RAF's proprietary inventory positions. The inventory
positions were transferred to Mr. Long at market value.
(d) Mr. Olson received a commission as a result of the sale of the directories
to McLeod. Mr. Fitzner received a commission as a result of the sale of the
Clearing Operation and has received an annual Company matching contribution
as a result of his contribution to a savings plan. Mr. Long received
commissions as a result of the acquisition of the assets of RAFCO and the
sale of the Clearing Operation. Mr. Long also realized a profit of $417,236
as a result of the exercise of warrants of companies that he received as
compensation for underwritings by RAF. This amount represents the
difference between the exercise price of the warrants and the sales price
of the underlying stock.
Stock Option Plans
Effective September 30, 1988, as amended September 10, 1996, the Company adopted
an Incentive Stock Option Plan (Plan), in order to attract and retain the best
available personnel for positions of responsibility, to provide additional
incentive to employees and consultants of the Company and to promote the success
of the Company's business. The Plan authorizes the granting of options to
officers, directors, and employees of the Company to purchase 600,000 shares of
the Company's Common Stock subject to adjustment for various forms of
recapitalization that may occur. No options may be granted after September 30,
1998, and the fair value of options granted to each optionee cannot exceed
$100,000 per year.
An employee must have six months of continuous employment with the Company
before he or she may exercise an option granted under the Plan. Options under
the Plan may not be granted at less than fair market value at the date of the
grant. Options granted under the Plan are nonassignable and terminate three
months after the optionee's employment ceases, except in the case of employment
termination due to disability of the optionee, in which event the option expires
twelve months from the date employment ceases. The Plan is administered by the
Company's Board of Directors or by a committee selected by the Company's Board
of Directors.
As of September 30, 1997, options to purchase 457,000 shares of the Company's
Common Stock at $.625 per share through September 8, 2006, were outstanding and
exercisable under the Plan.
On April 8, 1996, as amended on September 10, 1996, the Company adopted the 1996
Incentive and Nonstatutory Option Plan (1996 Plan) in order to attract and
retain the best available personnel for positions of responsibility, to provide
additional incentive to employees and consultants of the Company and to promote
the success of the Company's business. The 1996 Plan authorizes the granting of
options to officers, directors, employees and consultants of the Company to
purchase 1,250,000 shares of the Company's Common Stock subject to adjustment
for various forms of recapitalization that may occur. No option may be granted
after April 8, 2006.
18
<PAGE>
Under the 1996 Plan, incentive stock options may only be granted to employees
and nonstatutory stock options may be granted to employees and nonemployees.
Options may not be granted at less than fair market value at the date of the
grant. Options granted are nonassignable and terminate three months after the
optionee's employment ceases, except in the case of employment termination due
to disability of the optionee, in which event the option expires twelve months
from the date employment ceases. The 1996 Plan is administered by the Company's
Board of Directors or by a committee selected by the Company's Board of
Directors.
Effective September 9, 1996, the Company granted under the 1996 Plan to
employees options to purchase 1,250,000 shares at $.625 per share through
September 9, 2009. As of September 30, 1997, options to purchase 1,240,000
shares were outstanding and 810,000 were exercisable under the 1996 Plan.
The Company adopted the September 1996 Incentive and Nonstatutory Option Plan
(September 1996 Plan) in order to attract and retain the best available
personnel for positions of responsibility, to provide additional incentive to
employees and consultants of the Company and to promote the success of the
Company's business.
The September 1996 Plan authorizes the granting of options to purchase 2,500,000
shares of the Company's Common Stock subject to adjustment for various forms of
recapitalization that may occur. The terms and conditions of the September 1996
Plan are similar to that discussed for the 1996 Plan.
Effective September 10, 1996, the Company granted under the September 1996 Plan,
to employees, options to purchase 1,243,000 shares of the Company's Common Stock
at $.625 per share through December 31, 2009. As of September 30, 1997, options
to purchase 1,228,000 were outstanding and 748,000 shares were exercisable under
the September 1996 Plan. On December 10, 1997, 370,000 options were granted from
this plan at an exercise price of $.625. These options are exercisable and
expire December 9, 2007.
As of September 30, 1997, the Company had granted 340,000 nonqualified stock
options to certain officers and employees at an exercise price of $.95 per
share. These options are exercisable and expire August 25, 1998.
Employee Stock Ownership Plan
On September 22, 1989, the Company's Board of Directors adopted an Employee
Stock Ownership Plan (ESOP) which provides in pertinent part that the Company
may annually contribute tax deductible funds to the ESOP, at its discretion,
which are then allocated to the Company's employees based upon the employees'
wages in relation to the total wages of all employees in the ESOP.
The ESOP provides that more than half of the assets in the ESOP must consist of
the Company's Common Stock. The ESOP is administered by a board of trustees
under the supervision of an advisory committee, both of which are appointed by
the Company's Board of Directors. As of December 29, 1997, the ESOP owned
517,900 shares of the Company's Common Stock and no other marketable securities.
Employees become vested in the shares of the Company's Common Stock after six
years in the ESOP. Executive officers participate in the ESOP in the same manner
as other employees. Employees are 20% vested after two years, vesting an
additional 20% each year up to 100% after six years in the ESOP.
Savings Plans
The Company has three retirement saving plans covering all employees who are
over 21 years of age and have completed one year of eligibility service. The
plans meet the qualifications of Section 401(k) of the Internal Revenue Code.
Under the plans, eligible employees can contribute through payroll deductions up
to 15% of their base compensation. The Company makes a discretionary matching
19
<PAGE>
contribution equal to a percentage of the employee's contribution. Officers
participate in the plans in the same manner as other employees. One of the
Company's savings plans owns 170,748 shares of the Company's Common Stock.
The Company has no other bonus, profit sharing, pension, retirement, stock
purchase, deferred compensation, or other incentive plans.
Option Grants In Last Fiscal Year
The following table sets forth information concerning the grant of an option by
the Company to Dennis W. Olson during the year ended September 30, 1997. No
options were granted by the Company to Robert A. Fitzner, Jr. or to Robert L.
Long during the year ended September 30, 1997.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------
Number of %of Total
Securities Options Grant
Underlying Granted to Exercise or Date
Options Employees in Base Present
Name Granted(#) Fiscal Year Price ($/Sh) Expiration Date Value
---- ---------- ------------ ------------ --------------- -------
<S> <C> <C> <C> <C> <C>
Dennis W. Olson 100,000(1) 29.4% $0.95 8/25/98 $0(2)
</TABLE>
(1) The options granted were extensions of options that were previously granted
and that were due to expire on August 25, 1997.
(2) The options were extended at the same price at which they were previously
granted, $.95, which on the date of the extension was above market value.
Given the volatility in the price of the Company's Common Stock, the
current market value and the expiration date, the Company does not believe
the options had any value on the date they were extended.
Aggregated Option Exercises in Last Fiscal Year or Fiscal Year End Option Values
The following table sets forth information with respect to Dennis W. Olson and
Robert L. Long concerning the unexercised options held by them as of September
30, 1997. Neither Dennis W. Olson nor Robert L. Long exercised any options
during the year ended September 30, 1997. Robert A. Fitzner, Jr. does not own
any options to purchase securities of the Company.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options at Options at
September 30, 1997(#) September 30, 1997($)(1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dennis W. Olson 100,000 -0- -0- -0-
Robert L. Long 320,000 480,000 -0- -0-
</TABLE>
(1) Value of unexercised in-the-money options is the market price of the
underlying shares of Common Stock at September 30, 1997, less the exercise
price of the options.
20
<PAGE>
Compensation of Directors-Standard Arrangement
Directors of the Company receive no compensation for their services as
directors. Directors of Secutron, including Robert A. Fitzner, Jr., who are not
also officers or employees of Secutron received $30,000 during the year ended
September 30, 1997.
Employment Contracts and Termination of
Employment and Change-In-Control Arrangements
There is no employment contract between the Company or RAF and Robert A.
Fitzner, Jr. Robert L. Long and RAF have an agreement whereby Mr. Long receives
commissions based on a percentage of the dollar amount of his clients'
transactions and the dollar amount of all RAF corporate finance transactions and
he receives one fourth of all warrants received by RAF as compensation for
corporate finance transactions. The Company has an employment contract with Mr.
Olson that expires January 1, 1998 with no further obligation beyond that date.
Compensation Committee Interlocks and Insider Participation
The Company has no compensation committee and no officer or employee or former
officer of the Company or any of its subsidiaries during the fiscal year ended
September 30, 1997, participated in deliberations with the Company's Board of
Directors concerning executive officer compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)(b) Security Ownership of Certain Beneficial Owners and Management. The
following table sets forth as of December 29, 1997, the number of shares of the
Company's outstanding Common Stock beneficially owned by each of the Company's
current directors and officers, sets forth the number of shares of the Company's
Common Stock beneficially owned by all of the Company's current directors and
officers as a group and sets forth the number of shares of the Company's Common
Stock owned by each person who owned of record, or was known to own
beneficially, more than 5% of the Company's outstanding shares of Common Stock
respectively:
Name and Address of Amount and Nature
Beneficial Owner or Name of Beneficial
of Officer or Director Ownership(l) Percent of Class
------------------------ ------------------ ----------------
Robert A. Fitzner, Jr. 4,236,444 (2) 25.1%
Robert L. Long 530,000 (3) 3.1%
Dennis W. Olson 683,925 (4) 3.9%
Fai H. Chan 30,255,338 (5) 71.3%
Robert H. Trapp 0 (6) 0%
All officers and directors 32,148,930 (2)(5)(7)(8) 74.7%
as a group (5 persons)
Heng Fung Holdings Company 30,255,338 (2)(8) 71.3%
Limited
Lippo Protective Tower
10th Floor
231-235 Gloucester Road
Wanchai, Hong Kong
(1) Except as indicated below, each person has the sole voting and investment
power over the shares indicated.
21
<PAGE>
(2) Includes shares underlying options Mr. Fitzner has given to two persons to
purchase 300,000 shares from Mr. Fitzner's personal holdings. After
regulatory approval of a change in beneficial ownership of 25% or more of
RAF, 3,556,777 shares are to be purchased from Mr. Fitzner by Heng Fung
Private.
(3) Includes 480,000 shares underlying stock options currently exercisable, or
exercisable within 60 days.
(4) Includes 100,000 shares of Common Stock underlying stock options, 6,534
shares held in the Company's ESOP Plan, 2,172 shares held in the Company's
401(k) Plan, and 70,495 shares underlying Mr. Olson's 50% share in 140,990
shares jointly held by a former employee of the Company.
(5) Consists of shares beneficially owned by Heng Fung Holdings Company
Limited. Mr. Chan is an executive officer, a director and an 11.8%
shareholder of Heng Fung Holdings Company Limited.
(6) Mr. Trapp is a director of Heng Fung Holdings Company Limited. Mr. Trapp
disclaims beneficial ownership of the shares beneficially owned by Heng
Fung Holdings Company Limited.
(7) Includes shares underlying the stock options held by Mr. Olson and the
options held by Mr. Long
(8) Heng Fung Holdings Company Limited is the parent of Heng Fung Private. Hung
Fung Private has purchased 1,136,364 shares of the Company's outstanding
Common Stock and has agreed that, upon regulatory approval of change of
ownership of 25% or more of RAF, Heng Fung Private would purchase an
additional 3,556,777 shares of the Company's outstanding Common Stock from
Mr. Fitzner. Also, pursuant to the Convertible Debenture Agreement, Heng
Fung Finance, a wholly owned subsidiary of Heng Fung Private, beneficially
owns 25,562,197 shares of the Company's outstanding Common Stock.
(c) Possible Change in Control. In December 1997, Heng Fung Private, a wholly
owned subsidiary of Heng Fung Holdings, a public company traded on the Hong Kong
Stock Exchange, purchased 1,136,364 shares of the Company's outstanding Common
Stock from Robert A. Fitzner, Jr. and Robert L. Long, officers and directors of
the Company, and from two other employees of RAF. In December 1997, Robert A.
Fitzner, Jr. and Heng Fung Private agreed that, upon regulatory approval of a
change in the beneficial ownership of 25% or more of RAF, Heng Fung Private
would purchase an additional 3,556,777 shares of the Company's outstanding
Common Stock from Mr. Fitzner. In conjunction with the transaction, the Company
entered into an agreement (Convertible Debenture Agreement) with Heng Fung
Finance, a wholly owned subsidiary of Heng Fung Private, pursuant to which the
Company agreed to sell to Heng Fung Finance a ten year $4,000,000 10%
Convertible Debenture that is convertible at $.53125 per share into 7,529,411
shares of the Company's Common Stock. The purchase of the $4,000,000 Convertible
Debenture was completed on December 30, 1997. On December 26, 1997, the Board of
Directors of the Company, at the request of Heng Fung Finance made pursuant to
the terms of the Convertible Debenture Agreement, appointed two persons selected
by Heng Fung Finance to the Board to Directors of the Company. If Heng Fung
Private completes the purchase of the additional 3,556,777 shares of the
Company's outstanding Common Stock from Mr. Fitzner, the three directors of the
Company not appointed at the request of Heng Fung Finance will resign as
directors of the Company and the two remaining directors appointed at the
request of Heng Fung Finance will be able to fill the vacancies created by such
resignations. Further, Heng Fung Holdings, through Heng Fung Private, will then
own approximately 27.8% of the Company's outstanding Common Stock and Heng Fung
Finance will have the option to purchase an additional ten year $11,000,000 10%
Convertible Debenture that will be convertible at $.61 per share into 18,032,786
shares of the Company's Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)(b) Transactions With Management and Others and Certain Business
Relationships. Certain officers and directors of the Company made personal loans
to the Company when it was in need of short term financing. Dennis Olson made
personal demand loans to the Company of which $100,000 remained outstanding as
22
<PAGE>
of September 30, 1997. The entire balance was paid to Mr. Olson subsequent to
September 30, 1997. Interest was paid to Mr. Olson by the Company at 11.5% per
annum. All loan transactions with related persons were on terms no less
favorable than those available from third parties. Management has no intentions
to engage in such borrowing activities in the future.
Dennis W. Olson is currently an officer and a director of the Company. On
February 25, 1997, the Company entered into an agreement to sell certain of its
directory business assets to McLeod. Pursuant to the agreement with McLeod, Mr.
Olson and certain other employees of the Company entered into agreements not to
compete with McLeod. As compensation for this noncompetition agreement, McLeod
paid Mr. Olson $334,000 in total noncompetition compensation.
Robert L. Long is currently the Secretary and a director of the Company. Mr.
Long received consulting fees of $131,377 during the year ended September 30,
1997 in the form of a portion of RAF's inventory positions. The inventory
positions were transferred to Mr. Long at market value.
In December 1997, the Company entered into the Convertible Debenture Agreement
with Heng Fung Finance described in Item 1 and Item 12 of this Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. (Beginning on page F-1)
Independent Auditors' Report
Consolidated Balance Sheets September 30, 1997 and 1996
Consolidated Statements of Operations-Years ended September 30, 1997 and 1996,
Nine months ended September 30, 1995
Consolidated Statements of Changes in Stockholders' Equity-Years ended September
30, 1997 and 1996, Nine Months Ended September 30, 1995
Consolidated Statements of Cash Flows-Years ended September 30, 1997 and 1996,
Nine Months Ended September 30, 1995
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules. None
(b) Current Reports on Form 8-K: During the fiscal quarter ended September 30,
1997, one Current Report on Form 8-K dated September 15, 1997 was filed on
September 30, 1997. The Current Report contained information under Item 2
relating to the sale of the primary operating assets of the directory business
and FMG as discussed in Item 1 of this Annual Report and pursuant to Item 7
filed exhibits relating to such sale.
(c) Exhibits: Included as exhibits are the items in the Exhibit Index.
23
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
FRONTEER FINANCIAL HOLDINGS, LTD.
24
<PAGE>
EXHIBIT INDEX
Exhibit 2.1 Asset Sale and Purchase Agreement between McLeod USA Publishing
and Fronteer Marketing Group, Inc. and Contact America dated
September 15, 1997 (incorporated by reference to Exhibit 2.1
Registrant's Current Report on Form 8-K dated September 15,
1997).
Exhibit 2.2 Sale and Purchase Agreement by and between McLeod USA Publishing
Company and Fronteer Financial Holdings, Ltd., Classified
Directories, Inc. Larry A. Scott, James Greff, Randall L. Gowin,
Edwin Dressler and certain directors, officers and shareholders
of Fronteer dated January 27, 1997 (incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K dated
February 25, 1997).
Exhibit 2.3 Agreement for Sale and Purchase of Certain of the Business and
Assets of RAF Financial Corporation dated January 29, 1996, by
and among Fronteer Directory Company, Inc., RAF Financial
Corporation and MultiSource Services, Inc. (incorporated by
reference to Exhibit 10.1 to Registrant's Current Report on Form
8-K dated July 23, 1996, as originally filed).
Exhibit 2.4 Stock Subscription Agreement dated January 29, 1996, by and among
Fronteer Directory Company, Oppenheimer Funds, Inc. and
MultiSource Services, Inc. (incorporated by reference to Exhibit
10.1 to Registrant's Current Report on Form 8-K dated July 23,
1996, as originally filed).
Exhibit 3.0 Articles of Incorporation of Registrant (incorporated by
reference to Exhibit 3.0 to Registrant's Annual Report on Form
10-K for the year ended September 30, 1995).
Exhibit 3.0(i) Articles of Amendment to the Registrant's Articles of
Incorporation dated April 28, 1995 (incorporated by reference to
Exhibit 3.0(i) to Registrant's Current Report on Form 8-K dated
May 9, 1995).
Exhibit 3.0(ii)Articles of Amendment to the Registrant's Articles of
Incorporation as filed with the Colorado Secretary of State on
June 27, 1995 (incorporated by reference to Exhibit 3.0(ii) to
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1996).
Exhibit 3.2 Restated Bylaws of Registrant adopted February 14, 1996
(incorporated by reference to Exhibit 3.2 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1996).
Exhibit 10.1 Amended and Restated 1988 Incentive and NonStatutory Stock Option
Plan as amended September 10, 1996 (incorporated by reference to
Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the
year ended September 30, 1996).
Exhibit 10.2 Employee Stock Ownership Plan (incorporated by reference to
Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995).
Exhibit 10.3 401(k) Plan and Amendment I thereto (incorporated by reference to
Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995).
25
<PAGE>
Exhibit 10.4 Employees/Officers/Directors Form of Non-Competition Agreement;
Covenant Not to Compete and Confidentiality Agreement.
(incorporated by reference to Exhibit 2.2 to Registrant's Current
Report on Form 8-K dated May 9, 1995).
Exhibit 10.5 Amended and Restated 1996 Incentive and Nonstatutory Stock Option
Plan, as amended September 10, 1996 (incorporated by reference to
Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the
year ended September 30, 1996).
Exhibit 10.6 September 1996 Incentive and Nonstatutory Stock Option Plan
(incorporated by reference to Exhibit 10.7 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1996).
Exhibit 10.7 $4,000,000 10% Convertible Debenture Purchase Agreement between
the Company and Heng Fung Finance Company Limited dated December
17, 1997.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 27 Financial Data Schedule
26
<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. and subsidiaries as of September 30, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended September 30, 1997 and 1996 and the nine months
ended September 30, 1995. 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, 1997 and 1996, and the
results of their operations and their cash flows for the years ended September
30, 1997 and 1996 and the nine months ended September 30, 1995, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
January 5, 1998
F-1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 8. Financial Statements.
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
--------------------
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ............................. $ 2,080,722 2,017,489
Receivables from brokers or dealers and clearing
organizations:
Affiliate ................................................... 2,045,134 1,444,091
Other ....................................................... -- 166,347
Trade receivables .............................................. 786,971 1,005,080
Receivable from affiliate ...................................... -- 1,048,075
Other receivables .............................................. 2,600 7,125
Securities owned, at market value (Note 4) ..................... 871,322 1,882,049
Current portion of long-term notes receivable (Note 5).......... -- 274,752
Deferred income taxes (Note 9) ................................. -- 196,846
Other assets ................................................... 948,244 140,206
Net current assets of discontinued operations (Note 2).......... 1,523,706 1,511,395
---------- ----------
Total current assets ........................................ 8,258,699 9,693,455
PROPERTY, FURNITURE AND EQUIUPMENT, net
of accumulated depreciation (Note 6) ........................... 1,466,814 1,388,283
DEFERRED INCOME TAXES (Note 9) .................................... 613,784 471,938
OTHER LONG TERM ASSETS ............................................ 247,241 55,428
NET LONG TERM ASSETS OF DISCONTINUED
OPERATIONS (Note 2) ............................................ 416,544 2,915,016
---------- ----------
Total assets ................................................ $11,003,082 14,524,120
========== ==========
(Continued)
F-2
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ---- ----
<S> <C> <C>
LIABILITIES:
Accounts payable, accrued expenses,
and other liabilities ....................................... $ 3,373,672 2,507,353
Current portion of long-term debt (Note 8) ..................... 863,164 1,275,643
Notes payable to related parties ............................... 177,000 367,900
Deferred revenue ............................................... -- 24,400
Income taxes payable ........................................... -- 96,284
Other current liabilities ..................................... 249,555 431,004
---------- ----------
Total current liabilities ................................... 4,663,391 4,702,584
LONG-TERM DEBT, net of current portion
(Note 8) ....................................................... 927,843 1,723,166
DEFERRED RENT CONCESSIONS ......................................... 1,716,529 1,768,827
OTHER LIABILITIES ................................................. 88,000 --
---------- ----------
Total liabilities ........................................... 7,395,763 8,194,577
---------- ----------
MINORITY INTEREST IN SUBSIDIARY ................................... 255,328 243,997
---------- ----------
STOCKHOLDERS' EQUITY (Note 3):
Series A voting cumulative preferred stock, authorized
25,000,000 shares, $0.10 par value .......................... -- --
Common stock; authorized 100,000,000 shares, $0.01 par
value; 16,871,557 and 16,141,944 shares issued and
outstanding as of September 30, 1997 and 1996,
respectively ................................................ 185,167 177,871
Additional paid-in capital ..................................... 12,230,772 11,515,751
Accumulated deficit ............................................ (7,433,714) (3,977,842)
Unearned ESOP shares (Note 11) ................................. (350,000) (350,000)
Treasury stock, 1,645,162 shares at cost as of
September 30, 1997 and 1996 ................................. (1,280,234) (1,280,234)
---------- ----------
Total stockholders' equity ............................... 3,351,991 6,085,546
---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 3, 8, 10 and 12)
Total liabilities and stockholders' equity ..................... $ 11,003,082 14,524,120
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
------------------------ Nine Months Ended
1997 1996 September 30, 1995
---- ---- ------------------
<S> <C> <C> <C>
REVENUE:
Brokerage commissions ............................................ $ 13,779,477 10,825,987 7,051,366
Investment banking ............................................... 3,003,794 2,275,217 1,340,573
Trading profits, net ............................................. 274,563 453,144 830,551
Other broker/dealer .............................................. 774,329 791,001 506,733
Computer hardware and software operations ........................ 6,982,143 6,538,540 3,236,156
Other ............................................................ 286,108 485,132 187,186
----------- ----------- -----------
25,100,414 21,369,021 13,152,565
----------- ----------- -----------
COST OF SALES AND OPERATING EXPENSES:
Broker/dealer commissions ........................................ 10,268,764 8,171,445 5,049,208
Computer cost of sales .......................................... 5,767,136 5,381,097 2,930,197
General and administrative ....................................... 11,252,747 9,997,828 5,859,127
Depreciation and amortization .................................... 338,945 396,203 311,787
----------- ----------- -----------
27,627,592 23,946,573 14,150,319
----------- ----------- -----------
Operating loss ................................................... (2,527,178) (2,577,552) (997,754)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of Clearing Operation (Note 2) ...................... -- 1,332,974 --
Interest income .................................................. 150,203 642,274 480,225
Interest expense ................................................. (27,940) (225,089) (283,130)
Equity in loss of affiliate ...................................... (22,580) (19,330) --
----------- ----------- -----------
99,683 1,730,829 197,095
----------- ----------- -----------
Loss before minority interest and income taxes ................... (2,427,495) (846,723) (800,659)
----------- ----------- -----------
Minority interest in earnings .................................... (11,331) (87,626) (5,136)
----------- ----------- -----------
Loss from continuing operations before income taxes .............. (2,438,826) (934,349) (805,795)
Income tax benefit (expense)...................................... 448,524 (55,799) --
----------- ----------- -----------
Loss from continuing operations .................................. (1,990,302) (990,148) (805,795)
Loss on sale of discontinued operations, net of
income tax benefit of $409,692 (Note 2) ....................... (666,522) -- --
Loss from discontinued operations, net of income
tax benefit of $411,631 (Note 2) .............................. (799,048) (1,368,533) (1,086,078)
----------- ----------- -----------
Net loss from discontinued operations ............................ (1,465,570) (1,368,533) (1,086,078)
----------- ----------- -----------
Net loss ......................................................... (3,455,872) (2,358,681) (1,891,873)
Preferred stock dividends ........................................ -- (59,061) (32,812)
----------- ----------- -----------
Net loss applicable to common shareholders ....................... $ (3,455,872) (2,417,742) (1,924,685)
=========== =========== ===========
Weighted average number of common shares
outstanding ................................................... 16,760,597 13,858,963 9,408,431
Loss per common share:
Continuing operations ......................................... $ (.12) (.07) (.09)
Discontinued operations:
Loss on sale of discontinued operations .................... (.04) -- --
Loss from discontinued operations .......................... (.05) (.10) (.11)
----------- ----------- -----------
Total ................................................... $ (.21) (.17) (.20)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Preferred Common paid-in
stock* stock capital
--------- ------ ----------
<S> <C> <C> <C>
Balances at December 31, 1994 ............ $ 823,750 1 99
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 .............................. -- -- --
Net loss ................................. -- -- --
--------- --------- ----------
Balances at September 30, 1995............ 875,000 125,581 6,431,343
Series A preferred stock
dividend .............................. -- -- --
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 ................................. -- -- --
--------- --------- ----------
Balances at September 30, 1996 ........... -- 177,871 11,515,751
Proceeds from shares issued
through private placement,
net of issue costs of $80,257 ......... -- 7,296 715,021
Net loss ................................. -- -- --
--------- --------- ----------
Balances at September 30, 1997 ........... $ -- 185,167 12,230,772
========= ========= ==========
<CAPTION>
Accumulated
earnings Unearned Treasury
(deficit) ESOP stock stock Total
----------- ---------- -------- -----
<S> <C> <C> <C> <C>
Balances at December 31, 1994 ............ 364,585 -- -- 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) -- -- (32,812)
Net loss ................................. (1,891,873) -- -- (1,891,873)
---------- --------- --------- ----------
Balances at September 30, 1995 ........... (1,560,100) (350,000) (80,234) 5,441,590
Series A preferred stock
dividend .............................. (59,061) -- -- (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) -- -- (2,358,681)
---------- --------- --------- ----------
Balances at September 30, 1996 ........... (3,977,842) (350,000) (1,280,234) 6,085,546
Proceeds from shares issued
through private placement,
net of issue costs of $80,257 ......... -- -- -- 722,317
Net loss ................................. (3,455,872) -- -- (3,455,872)
---------- --------- --------- ----------
Balances at September 30, 1997 ........... (7,433,714) (350,000) (1,280,234) 3,351,991
========== ========= ========= ==========
</TABLE>
*Includes both outstanding preferred shares issued in connection with the RAFCO,
Ltd. business combination discussed in Note 2 and the previously issued RAFCO,
Ltd. preferred shares canceled in connection with the transaction.
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, Nine Months Ended
------------------------ September 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
---- ---- -----------------
<S> <C> <C> <C>
Loss from continuing operations ...................................................... $(1,990,302) (990,148) (805,795)
Adjustments to reconcile net loss from continuing
operations to net cash used by continuing operations:
Gain on sale of Clearing Operation ................................................ -- (1,332,974) --
Depreciation and amortization ..................................................... 338,945 396,203 311,787
Amortization of deferred rent ..................................................... (52,298) (25,804) (14,264)
Provision for bad debts ........................................................... 274,752 -- 598,132
Equity in loss of affiliate ....................................................... 22,580 19,330 --
Minority interest in earnings ..................................................... 11,331 87,626 5,136
Other ............................................................................. 55,000 (15,886) 93,226
Changes in operating assets and liabilities, net of
effects from sale of clearing operation:
Decrease (increase) in broker/dealer customer
receivables, net ............................................................... -- (5,069,631) 8,700,341
Decrease (increase) in receivables from brokers or
dealers and clearing organizations ............................................. (434,696) (1,555,209) 405,265
Decrease (increase) in trade receivables .......................................... 218,109 (661,822) 122,162
Decrease (increase) in other receivables ......................................... 4,525 76,210 (83,335)
Decrease (increase) in securities owned, net of
securities sold but not yet purchased ......................................... 837,238 (507,324) 69,590
Decrease (increase) in other assets ............................................... (808,038) (41,155) 60,724
Increase in accounts payable, accrued
expenses, and other liabilities ................................................ 866,319 552,723 289,422
Decrease in broker/dealer customer payables ....................................... -- (284,451) (586,477)
Increase (decrease) in payables to brokers or dealers
and clearing organizations ..................................................... -- 7,590,197 (10,282,393)
Increase (decrease) in deferred revenue ........................................... (24,400) 24,400 --
Increase (decrease) in income taxes payable ....................................... (96,284) (111,359) 207,643
Increase (decrease) in other current liabilities .................................. (7,960) 375,710 --
----------- ---------- ----------
Net cash used by continuing operations ............................................ (785,179) (1,473,364) (908,836)
Net cash used by discontinued operations .......................................... (1,477,881) (364,027) (1,086,078)
----------- ---------- ----------
Net cash used by operating activities ............................................. (2,263,060) (1,837,391) (1,994,914)
----------- ---------- ----------
(Continued)
F-6
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Year Ended September 30, Nine Months Ended
------------------------ September 30,
CASH FLOWS FROM INVESTING ACTIVITIES: 1997 1996 1995
---- ---- -----------------
<S> <C> <C> <C>
Purchase of property, furniture and equipment ..................................... (417,476) (519,999) (214,026)
Proceeds from sale of Clearing Operation, net ..................................... 1,048,075 312,133 --
Proceeds from sale of assets ...................................................... -- -- 331,991
Other investing activities ........................................................ (214,393) (116,403) 114,270
Net cash provided by discontinued operations ...................................... 2,498,472 210,518 536,405
----------- ---------- ----------
Net cash provided (used) by investing activities .................................. 2,914,678 (113,751) 768,640
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt ................................................................ -- 732,110 1,005,606
Net (payments) borrowings from related parties .................................... (190,900) (181,000) 483,000
Principal payments on borrowings .................................................. (1,207,802) (1,647,233) (444,605)
Net proceeds from issuance of common stock ........................................ 722,317 5,137,246 --
Dividends on preferred stock ...................................................... -- (59,061) (32,812)
Purchase of preferred stock ....................................................... -- (875,000) --
Purchase of common stock .......................................................... -- (1,200,000) --
Other financing activities ........................................................ 88,000 -- --
----------- ---------- ----------
Net cash provided (used) by financing activities .................................. (588,385) 1,907,062 1,011,189
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................................................... 63,233 (44,080) (215,085)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD ............................................................................ 2,017,489 2,061,569 2,276,654
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................. $ 2,080,722 2,017,489 2,061,569
=========== ========== ==========
(Continued)
F-7
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SUPPLEMENTAL DISCLOSURES RELATED TO STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Year Ended September 30, Nine Months Ended
------------------------ September 30,
CASH FLOWS FROM INVESTING ACTIVITIES: 1997 1996 1995
---- ---- -----------------
<S> <C> <C> <C>
Cash payments for:
Interest:
Continued operations ............................................... $ 27,940 225,089 283,130
Discontinued operations ............................................ 142,508 254,275 115,031
--------- --------- ----------
$ 170,448 479,364 398,161
========= ========= ==========
Income taxes:
Continued operations ............................................... $ 129,831 177,079 135,060
Discontinued operations ............................................ -- -- --
--------- --------- ----------
$ 129,831 177,079 135,060
========= ========= ==========
Sale of Clearing Operation (See Note 2):
Sales Price ........................................................... -- 3,351,352 --
Less: Transition costs ............................................... -- (167,026) --
Receivable from MSI ........................................ $1,048,075 (1,048,075) --
Cash sold .................................................. -- (1,824,118) --
--------- --------- ----------
Cash proceeds from sale of Clearing Operation ......................... $1,048,075 312,133 --
========= ========= ==========
McLeod note payable applied against purchase price of
directories ........................................................... $ 500,000 -- --
========= ========= ==========
</TABLE>
See Note 2 for additional non-cash investing and financing activities.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Fronteer Financial
Holdings, Ltd. (Fronteer or the Company) and its wholly-owned subsidiaries
Fronteer Personnel Services, Inc. (FPS), Fronteer Marketing Group, Inc. (FMG), R
A F Financial Corporation (RAF) and RAF Services Inc. of Texas, RAF Services
Inc. of Louisiana and RAF Services Inc. (collectively, RAF Services). 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 was engaged in the publishing and distribution of telephone
directories, while FPS was engaged in employee leasing, and FMG was engaged in
the telemarketing business. As discussed in Note 2, these entities sold their
primary operating assets during the year ended September 30, 1997. RAF operates
as a registered securities broker/dealer. Secutron is engaged in industry
specific software development and provides consulting services. RAF Services are
subsidiaries established in order to participate in insurance brokerage
activities in certain states.
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 were $1,740,131 and $110,198, respectively, as
of September 30, 1997.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is maintained at a level adequate to absorb
probable losses and credit losses inherent in the business based upon the
Company'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.
SECURITIES
Securities transactions and related revenue and expense 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.
F-9
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,1997 AND 1996, CONTINUED
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.
Statement of Financial Accounting Standards (FASB) No. 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,
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.
REVENUE AND COST RECOGNITION
Revenues from advertising sales were recognized at the point individual
directories were published. Costs of selling and production were recorded as
deferred directory costs when incurred and charged to cost of sales in the
period during which the related directory was published. Deferred directory
costs were 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 were charged to cost of sales in
the period during which the related directory was published. Costs of
distribution were charged to cost of sales 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. General and administrative
costs are charged to expenses as incurred.
PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment are recorded 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-10
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
DIRECTORY PUBLISHING RIGHTS AND AMORTIZATION
Directory publishing rights were amortized over ten years using the
straight-line method.
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.
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.
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.
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,
1997 and 1996 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.
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. RAF's 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.
F-11
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,1997 AND 1996, CONTINUED
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's consolidated financial
statements to conform to current year's presentation.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Statement 127 defers the effective date of
provisions of Statement 125 relating to the recognition of collateral,
securities lending transactions, repurchase agreements, dollar-rolls, and
similar transactions until January 1, 1998. The Company does not believe that
the adoption of this statement will have a material effect on its consolidated
financial position or results of operations and will adopt it when required.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
Statement 128 simplifies the calculation of earnings per share (EPS) and makes
it comparable to international EPS standards. Statement 128 is effective for
both interim and annual periods ending after December 15, 1997 and earlier
application is not permitted. The Company does not believe that the adoption of
this statement will have a material effect on its calculation of earnings per
share and will adopt it when required.
In June 1997, the FASB issued Statement No 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for annual and
interim periods ending after December 15, 1997. This statement established
standards for the method that public entities use to report selected information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographical areas and major
customers. The Company does not believe that the adoption of the statement will
have a material effect on the disclosures in its consolidated financial
statements and will adopt it when required.
NOTE 2 - DISCONTINUED OPERATIONS AND OTHER SIGNIFICANT BUSINESS ACTIVITIES
DISCONTINUED OPERATIONS
On February 25, 1997, McLeod USA Publishing Company (McLeod, formerly known as
Telecom* USA Publishing Company) purchased six yellow page directories located
in North Dakota from the Company for approximately $2,800,000. The purchase
price was pursuant to an existing option agreement (Option Agreement) between
McLeod and the Company and was based on related directory revenues. The purchase
price consisted of $2,300,000 in cash and $500,000 in the form of a nonrecourse
loan that was applied against the price of the six yellow page directories in
accordance with the Option Agreement. On the same date, another third party
purchased another directory from the Company for approximately $202,000 in cash.
The purchase price was based on related directory revenues. These dispositions
represent primarily all of the Company's remaining directory business assets. As
such, the Company has discontinued its activities in the directory business.
F-12
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,1997 AND 1996, CONTINUED
On September 15, 1997, a third party purchased all of the primary operating
assets of FMG for approximately $421,000. The purchase price was based on
existing financing arrangements and the cost of anticipated fixed asset
upgrades. A portion of the purchase price was paid in the form of a promissory
note in the amount of $141,344 to be paid over 28 months at $5,048 per month.
The remainder of the purchase price was paid in the form of a promissory note in
the amount equal to FMG's cost of anticipated fixed asset upgrades installed in
existing telemarketing centers. Monthly payments of principal and interest at
10% of between $3,000 and $8,000 per month will be made through December 2000 at
which time the balance will be due and payable to the Company. The third party
also assumed leases related to two telemarketing centers in North Dakota with a
combined monthly rental of $1,000 and has entered into a three-year lease for
approximately 5,500 square feet of space in a building the Company owns in
Bismarck, North Dakota for $2,752 per month. Accordingly, the Company has
discontinued its activities in the direct marketing business.
Effective April 1, 1997, the Company sold all of its primary operating assets
related to FPS. One of the principals is a former employee of the Company. The
purchase price was determined by the Board of Directors of the Company and
represented an assumption of certain liabilities of FPS by the acquiring entity.
The assumed liabilities were reflected at their fair values on the books of FPS
and were less than $20,000. Accordingly, the Company has discontinued its
activities in the employee leasing business. Separate disclosures of FPS have
not been made due to the immateriality of its operations and associated assets
and liabilities in relation to the consolidated financial statements. The assets
and liabilities and results of operations for FPS are included in the amounts
disclosed for the directory business.
Information relating to the loss from discontinued operations is as follows:
<TABLE>
<CAPTION>
Year Ended September 30, Nine Months ended September 30,
---------------------------------------------------------------- -----------------------------------
1997 1996 1995
------------------------------ ------------------------------ -----------------------------------
Directory Directory Directory
business FMG Total business FMG Total business FMG Total
-------- --- ----- --------- --- ----- --------- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ......... $ 4,866,454 364,652 5,231,106 7,100,335 317,549 7,417,884 3,867,409 149,780 4,017,189
Cost of
sales and
operating
expenses ..... 4,733,860 1,580,934 6,314,794 7,587,311 953,122 8,540,433 4,561,466 445,245 5,006,711
---------- ---------- ---------- --------- -------- ---------- --------- --------- ----------
132,594 (1,216,282) (1,083,688) (486,976) (635,573) (1,122,549) (694,057) (295,465) (989,522)
---------- ---------- ---------- --------- -------- ---------- --------- --------- ----------
Non operating
costs ........ (28,848) (98,143) (126,991) (156,877) (89,107) (245,984) (88,234) (8,322) (96,556)
---------- ---------- ---------- --------- -------- ---------- --------- --------- ----------
Earnings
(loss) before
income
taxes ........ 103,746 (1,314,425) (1,210,679) (643,853) (724,680) (1,368,533) (782,291) (303,787) (1,086,078)
Income tax benefit
(expense) ..... (35,274) 446,905 411,631 -- -- -- -- -- --
---------- ---------- ---------- --------- -------- ---------- --------- --------- ----------
Net earnings
(loss) from
discontinued
operations ... $ 68,472 (867,520) (799,048) (643,853) (724,680) (1,368,533) (782,291) (303,787) (1,086,078)
========== ========== ========== ========= ======== ========== ========= ========= ==========
Loss on sale of
discontinued
operations,
net of income
tax benefit of
$409,692 ..... $ (458,181) (208,341) (666,522) -- -- -- -- -- --
========== ========== ========== ========= ======== ========== ========= ========= ==========
</TABLE>
F-13
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,1997 AND 1996, CONTINUED
The net assets and liabilities of the discontinued operations included in the
accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------
1997 1996
---------------------------------- -----------------------------------
Directory Directory
business FMG Total business FMG Total
<S> <C> <C> <C> <C> <C> <C>
Current assets: --------- --- ----- --------- --- -----
Cash ........................................... $ 140,939 (16,323) 124,616 47,606 5,225 52,831
Trade receivables .............................. 1,367,960 103,909 1,471,869 2,289,761 94,562 2,384,323
Allowance for doubtful trade receivables ....... (122,928) (34,667) (157,595) (59,209) -- (59,209)
Other receivables .............................. 336,726 -- 336,726 169,995 -- 169,995
Current portion of long-term notes receivable... 55,000 66,576 121,576 109,091 6,000 115,091
Deferred directory costs ....................... -- -- -- 431,436 -- 431,436
Other Assets ................................... 236,415 -- 236,415 303,069 7,555 310,624
---------- --------- ---------- ---------- -------- ----------
Total current assets ........................ 2,014,112 119,495 2,133,607 3,291,749 113,342 3,405,091
---------- --------- ---------- ---------- -------- ----------
Current liabilities:
Accounts payable, accrued expenses and other
liabilities ................................. 469,974 29,243 499,217 783,964 114,406 898,370
Current portion of long-term debt .............. -- 69,949 69,949 -- 159,565 159,565
Deferred revenue ............................... -- 350 350 598,658 -- 598,658
Income taxes payable ........................... -- -- -- -- -- --
Other current liabilities ...................... 37,818 2,567 40,385 190,766 46,337 237,103
---------- --------- ---------- ---------- -------- ----------
Total current liabilities ................... 507,792 102,109 609,901 1,573,388 320,308 1,893,696
---------- --------- ---------- ---------- -------- ----------
Net current assets (liabilities) ......... $ 1,506,320 17,386 1,523,706 1,718,361 (206,966) 1,511,395
========== ========= ========== ========== ======== ==========
Long-term assets:
Property, furniture and equipment, net ......... $ 66,570 91,456 158,026 198,880 683,148 882,028
Directory publishing rights and other, net ..... -- -- -- 4,113,793 157,996 4,271,789
Long-term notes receivable ..................... 250,000 80,768 330,768 -- -- --
---------- --------- ---------- ---------- -------- ----------
Total long-term assets ...................... 316,570 172,224 488,794 4,312,673 841,144 5,153,817
---------- --------- ---------- ---------- -------- ----------
Long-term liabilities:
Long term debt, net of current portion ......... -- 72,250 72,250 500,000 352,801 852,801
Deferred income taxes .......................... -- -- -- 1,386,000 -- 1,386,000
---------- --------- ---------- ---------- -------- ----------
Total long term liabilities ................. -- 72,250 72,250 1,886,000 352,801 2,238,801
---------- --------- ---------- ---------- -------- ----------
Net long term assets ..................... $ 316,570 99,974 416,544 2,426,673 488,343 2,915,016
========== ========= ========== ========== ======== ==========
</TABLE>
SALE OF CLEARING OPERATION
On July 23, 1996, the Company sold RAF's 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. MSI
was formed by Oppenheimer Funds, Inc. (OFI) for the purpose of acquiring the
Clearing Operation, and OFI was to retain 80% of the outstanding common stock of
MSI. Fronteer received 20% of the outstanding common stock of MSI. As a result
of this transaction, RAF became a fully disclosed clearing correspondent of MSI.
The loan of $1,500,000 was recorded as a loan payable to MSI and is forgivable
based on MSI's revenues during the 28 months following the closing date. If
F-14
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
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 the 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.
During the year ended September 30, 1997, Fronteer and RAF were notified by OFI
that a decision had been reached by OFI that MSI and its business were not
consistent with the long term business plans of OFI. Subsequently, a new
clearing firm was selected for the customer business of RAF, and the customer
business previously cleared by MSI was moved to the new clearing firm in October
1997. MSI reached its revenue targets for the first portion of the forgivable
loan by October 1997. As a result, the first $750,000 of the $1,500,000
forgivable loan is expected to be forgiven and recognized as income during the
year ended September 30, 1998. Fronteer expects cancellation of the second and
final portion of the loan plus accrued interest payable in accordance with
provisions in the forgivable loan agreement relating to MSI's decision to cease
being engaged in the clearing business.
PRIOR BUSINESS COMBINATION
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 dissolved as a corporation and 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 was accounted for as a "reverse acquisition" of
Fronteer by RAFCO using the purchase method of accounting and Fronteer's assets
and liabilities were adjusted to their market value as of the date of the
business combination. 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.
NOTE 3 - STOCKHOLDERS' EQUITY
In December 1997, Heng Fung Capital [S] Private Limited (Heng Fung Private), a
wholly owned subsidiary of Heng Fung Holdings Company Limited (Heng Fung
Holdings), a public company traded on the Hong Kong Stock Exchange, purchased
1,136,364 shares of the Company's outstanding Common Stock from Robert A.
Fitzner, Jr. and Robert L. Long, officers and directors of the Company, and from
two other employees of RAF. In December 1997, Robert A. Fitzner, Jr. and Heng
Fung Private agreed that, upon regulatory approval of a change in the beneficial
ownership of 25% or more of RAF, Heng Fung Private would purchase an additional
3,556,777 shares of the Company's outstanding Common Stock from Mr. Fitzner. In
conjunction with the transaction, the Company entered into an agreement
(Convertible Debenture Agreement) with Heng Fung Finance Company Limited (Heng
Fung Finance), a wholly owned subsidiary of Heng Fung Private, pursuant to which
the Company agreed to sell to Heng Fung Finance a ten year $4,000,000 10%
Convertible Debenture that is convertible at $.53125 per share into 7,529,411
shares of the Company's Common Stock. The purchase of the $4,000,000 Convertible
Debenture was completed on December 30, 1997. On December 26, 1997, the Board of
F-15
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
Directors of the Company, at the request of Heng Fung Finance made pursuant to
the terms of the Convertible Debenture Agreement, appointed two persons selected
by Heng Fung Finance to the Board to Directors of the Company. If Heng Fung
Private completes the purchase of the additional 3,556,777 shares of the
Company's outstanding Common Stock from Mr. Fitzner, the three directors of the
Company not appointed at the request of Heng Fung Finance will resign as
directors of the Company and the two remaining directors appointed at the
request of Heng Fung Finance will be able to fill the vacancies created by such
resignations. Further, Heng Fung Holdings, through Heng Fung Private, will then
own approximately 27.8% of the Company's outstanding Common Stock and Heng Fung
Finance will have the option to purchase an additional ten year $11,000,000 10%
Convertible Debenture that will be convertible at $0.61 per share into
18,032,786 shares of the Company's Common Stock.
On February 16, 1996, the Company commenced a private placement of 6,000,000
shares of its $.0l 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 (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. 5,958,658 shares of Common Stock and warrants were issued
through the Private Placement for proceeds of $5,859,563, net of issuance costs
of $694,961. In addition, the Company issued 595,865 warrants to RAF in
accordance with the Private Placement which allows the holder to purchase one
share of Common Stock at a price of $1.50 per warrant until May 1, 2000.
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. 2,015,000 options are exercisable as of
September 30, 1997. 320,000, 320,000 and 270,000 options become exercisable
during the years ended September 30, 1998, 1999 and 2000, respectively. On
December 10, 1997, in accordance with prior agreements, 370,000 options were
granted from these plans at an exercise price of $.625. These options are
exercisable and expire December 9, 2007. As of September 30, 1997, the Company
had also granted 340,000 of non qualified stock options to certain officers and
employees at an exercise price of $.95 per share. These options were to expire
on August 25, 1997 but were extended by approval by the Board of Directors until
August 25, 1998, and are currently exercisable. These options were treated as a
grant in the information presented below. The following represents additional
information relative to stock option activity:
<TABLE>
<CAPTION>
September
Total 1988 Plan 1996 Plan 1996 Plan Non Qualified
----- --------- --------- --------- -------------
Outstanding as of
September 30, 1995
<S> <C> <C> <C> <C> <C>
and 1994 ........................................ 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
Expired ...................................... (340,000) -- -- -- (340,000)
Granted ...................................... 340,000 -- -- -- 340,000
Canceled ..................................... (125,000) (100,000) (10,000) (15,000) --
---------- --------- --------- --------- --------
Outstanding as of
September 30, 1997 .............................. 3,265,000 457,000 1,240,000 1,228,000 340,000
========== ========= ========= ========= ========
F-16
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
<CAPTION>
September
Total 1988 Plan 1996 Plan 1996 Plan Non Qualified
----- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Expiration dates:
August 25, 1998 ................................. 340,000 -- -- -- 340,000
September 9, through
December 31, 2006 ............................ 1,655,000 457,000 650,000 548,000 --
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, 1997 .............................. 3,265,000 457,000 1,240,000 1,228,000 340,000
========== ========= ========= ========= ========
</TABLE>
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," rather than the fair value method in Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation." Accordingly,
no compensation costs were charged to earnings for options granted under the
Company's plans. Management considers the difference between the pro forma net
loss or loss per share under the fair value method and that as calculated by the
Company per the consolidated statements of operations to be immaterial based on
the fair value of the underlying common stock and the recent activity related
thereto.
NOTE 4 - SECURITIES OWNED
Securities owned by the Company consist of the following:
September 30,
----------------------------
1997 1996
---- ----
Corporate securities $490,505 1,584,307
U.S. government obligations 30,549 91,281
Municipal obligations 350,268 206,461
--------- ---------
$871,322 1,882,049
======== =========
F-17
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
NOTE 5 - NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
September 30,
Maturity Interest ----------------------
date rate 1997 1996
-------- -------- ---- ----
<S> <C> <C> <C> <C>
Contact America 12-31-00 10.0% $ 280,000 ---
Contact America 12-01-00 0% 141,344 ---
Phone Directories Company, Inc. 11-01-96 10.0% --- 109,091
Former employees, net (1) various various --- 290,561
Other notes receivable various various 31,000 34,943
--------- ---------
452,344 434,595
Less current portion (121,576) (389,843)
--------- ---------
$ 330,768 44,752
========= =========
Notes receivable included in
current and long-term assets of
discontinued operations:
Current portion of long-term
notes receivable $ 121,576 115,091
Long-term notes receivable 330,768 ---
--------- ---------
$ 452,344 115,091
========= =========
</TABLE>
(1) During the year ended September 30, 1997, the Company wroteoff as bad debts
$274,752 relating to these notes receivable.
F-18
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
NOTE 6 - PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment is comprised of the following:
September 30,
---------------------------
1997 1996
---- ----
Real Property $ 565,658 561,558
Furniture and Equipment 3,083,863 3,446,511
Vehicles 125,073 163,888
Leasehold improvements 426,863 360,602
---------- -----------
4,201,457 4,532,559
Less accumulated depreciation (2,576,617) (2,262,248)
---------- -----------
$ 1,624,840 2,270,311
========== ===========
Property, furniture and equipment,
net, included in long-term assets
of discontinued operations $ 158,026 882,028
========== ===========
NOTE 7 - RELATED PARTY ACTIVITY
The Company has various notes payable to related parties in the amount of
$177,000 and $367,900 as of September 30, 1997 and 1996, 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 previous line of credit
with BNC National Bank. As of September 30, 1997, the interest rate was 11.5%.
As a clearing correspondent of MSI, the Company paid MSI $1,096,690 in clearing
fees for the year ended September 30, 1997. The Company's $2,045,134 receivable
from brokers or dealers and clearing organizations-- affiliate, primarily
relates to broker commissions outstanding from MSI as of September 30, 1997. For
the year ended September 30, 1997, Secutron recorded revenues of $275,699 for
services performed for MSI.
In accordance with an investment banking agreement, merger and acquisition fees
of $100,000 relating to the acquisition of the assets of RAFCO were paid to an
officer of the Company during the year ended September 30, 1996. This same
officer received consulting fees of $131,377, during the year ended September
30, 1997, in the form of a portion of one of RAF's inventory positions. The
inventory positions were transferred to the officer at market value.
During the year ended September 30, 1997, an officer of the Company received
$334,000 in noncompetition compensation from the purchaser in conjunction with
the sale of the primary assets of the directory business as discussed in Note 2.
As of September 30, 1997 and 1996, the Company had notes payable to the same
officer of $100,000 and $50,000, respectively. These amounts were subsequently
repaid.
During the year ended September 30, 1996 and nine months ended September 30,
1995, the Company paid fees for legal services of approximately $209,000 and
$316,000, 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 at the time the services
were performed.
F-19
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
NOTE 8 - LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
September 30,
Maturity Interest -----------------------
Payee Collateral date rate 1997 1996
----- ---------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
MSI (1) (1) (1) (1) $1,500,000 1,500,000
Guaranty Bank Real Property 3-01-01 8.50% 156,667 196,667
Wilton State Bank Equipment 2-15-00 9.75% 125,949 --
BNC National Bank (2) 4-15-97 (2) -- 750,000
McLeod (3) 6-15-97 (3) -- 500,000
BNC National Bank ESOP Stock 4-15-97 10.5% -- 350,000
Other Notes Equipment Various Various 150,590 714,508
----------- -----------
Total 1,933,206 4,011,175
Less current portion (933,113) (1,435,208)
----------- -----------
$1,000,093 2,575,967
=========== ===========
Long-term debt included in
current and long-term liabilities
of discontinued operations:
Current portion of long-term
debt $ 69,949 159,565
Long-term debt 72,250 852,801
----------- -----------
$ 142,199 1,012,366
=========== ===========
</TABLE>
(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) This amount represents the line of credit agreement that existed with BNC
National Bank. Outstanding balances on the line of credit were paid during
the year end September 30, 1997 and the line was not renewed by the
Company.
(3) This note resulted from an Option Agreement between the Company and McLeod
as discussed in Note 2. McLeod made a noninterest bearing and nonrecourse
loan to the Company as consideration for the Option Agreement. In
accordance with the Option Agreement, the loan was applied against the
sales price of directories acquired by McLeod from the Company during the
year ended September 30, 1997. See Note 2.
F-20
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
Minimum principal payments required on long-term debt are as follows for the
years ended September 30:
1998 $ 933,113
1999 $ 880,212
2000 $ 60,926
2001 $ 50,860
2002 $ 8,095
The $1,500,000 loan payable to MSI has been included in the 1998 and 1999
scheduled minimum principal payments, although, as discussed in Note 2, the
first $750,000 of the $1,500,000 forgivable loan is expected to be forgiven and
recognized as income, and the remainder of the forgivable loan is expected to be
canceled, both during the year ended September 30, 1998.
NOTE 9 - INCOME TAXES
Income tax (benefit) expense for the years ended September 30, 1997 and 1996,
and the nine months ended September 30, 1995, consisted of the following:
1997 1996 1995
---- ---- ----
Current $ 99,956 70,799 --
Deferred (548,480) (15,000) --
-------- ------- --------
$(448,524) 55,799 --
======== ======= ========
Income tax expense for the years ended September 30, 1997 and 1996, differs from
the amounts computed by applying the U.S. Federal income tax rate of 34% to loss
from continuing operations before income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computed "expected" income tax benefit $(829,201) (317,679)
Increase in income taxes resulting from:
Nondeductible expenses 10,158 19,998
State taxes, net of Federal benefit (82,000) 11,000
Unconsolidated subsidiaries for tax purposes 99,956 55,799
Change in valuation allowance for deferred tax assets 505,000 286,681
Other (152,437) --
---------- ---------
Income tax expense $ (448,524) 55,799
========== =========
</TABLE>
Income tax expense for the nine months ended September 30, 1995 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 expenses and state income taxes.
F-21
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
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:
<TABLE>
<CAPTION>
September 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred rent concessions $652,000 682,000
Forgivable loan 570,000 570,000
Accrued expenses 301,000 255,000
Allowance for doubtful accounts 210,000 26,000
Investments in subsidiaries and affiliates 97,000 100,000
Contribution and operating loss
carryforwards 425,000 187,000
----------- -----------
Gross deferred tax assets 2,255,000 1,820,000
Valuation allowance (1,591,216) (1,086,216)
----------- -----------
Deferred tax assets after valuation allowance 663,784 733,784
Deferred tax liabilities:
Property and equipment (50,000) (65,000)
----------- -----------
Gross deferred tax liabilities (50,000) (65,000)
----------- -----------
Net deferred tax asset $613,784 668,784
========== ===========
</TABLE>
The net deferred tax asset is presented in the accompanying consolidated balance
sheets as follows:
September 30,
----------------------------
1997 1996
---- ----
Net current deferred tax asset $ -- 196,846
Net long-term deferred tax asset 613,784 471,938
-------- --------
Net deferred tax asset $613,784 668,784
======== ========
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, 1997.
Net operating losses of approximately $1,100,000 expire in 2010 and 2011.
Contribution carryforwards of approximately $150,000 expire in 2001.
F-22
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
NOTE 10 - 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 for the years ended September 30:
1998 $1,409,824
1999 $1,522,790
2000 $1,398,806
2001 $1,401,186
2002 $1,169,546
Thereafter $4,986,746
Under the terms of the sale of the Clearing Operation, MSI pays RAF, in
accordance with a sublease agreement, monthly rental fees of $11,000. Also, in
accordance with the sale of the primary operating assets of FMG the Company
receives $2,752 per month from a third party for leased space. The MSI sublease
will terminate as MSI gives notice and cancels the sublease expected to occur
effective March 31, 1998. Expected amounts from MSI and the third party have
been offset against minimum future rental payments.
Rental expense included in the consolidated statements of operations was
$1,387,125 and $1,178,024 for the years ended September 30, 1997 and 1996, and
$917,963 for the nine months ended September 30, 1995, respectively.
The Company has an agreement with a former employee for consulting services for
which one of the Company's subsidiaries pays $10,000 per month through 2010.
The Company is a defendant in certain arbitration and litigation matters arising
from its activities as a broker/dealer. In the opinion of management, these
matters including any damages awarded against the Company have been adequately
provided for in the accompanying consolidated financial statements, and the
ultimate resolution of the other arbitration and litigation will not have a
significant adverse effect on the consolidated results of operations or the
consolidated financial position of the Company.
F-23
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
NOTE 11 - 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 ESOP
is administered by a board of trustees under the supervision of an advisory
committee, both of which are appointed by the Company 's Board of Directors.
Employees are 20% vested after two years, vesting an additional 20% each year up
to 100% after six years in the ESOP. The ESOP has a loan to the Company of
$350,000 representing the payment during the year by the Company of the ESOP's
debt. The loan is secured by 436,840 shares of the Company's common stock and is
recorded in unearned ESOP shares in the consolidated financial statements. The
board of trustees has not determined the method of repayment of the loan to the
Company. Any allocation of shares within the ESOP is at the discretion of the
board of trustees and is based on employee wages. For the years ended September
30, 1997 and 1996, and nine months ended September 30, 1995, the Company
contributed $24,898, $10,500 and $10,000, respectively, to the plan. The ESOP
owns 517,900 shares of the Company's Common Stock as of September 30, 1997.
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 $82,890, $67,079 and $44,934 for the years ended September 30, 1997
and 1996, and nine months ended September 30, 1995, respectively. One of the
Company's savings plans owns 170,748 shares of the Company's Common Stock as of
September 30, 1997.
The Company does not provide any post employment benefits to retired or
terminated employees.
NOTE 12 - 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, 1997, RAF had "net capital" of
$2,104,023.
F-24
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
NOTE 13 - SEGMENT REPORTING
Information regarding business segments is summarized below.
<TABLE>
<CAPTION>
Year ended September 30, 1997
-----------------------------
Directory
Business FMG RAF Secutron
--------- --- --- --------
<S> <C> <C> <C> <C>
Revenues from
unaffiliated customers .......................................... $ 4,866,454 364,652 18,118,271 6,982,143
Intersegment revenues .............................................. 28,253 -- -- 454,000
---------- --------- ---------- ---------
Total revenues ..................................................... 4,894,707 364,652 18,118,271 7,436,143
---------- --------- ---------- ---------
Operating profit (loss) ............................................ 132,594 (1,216,282) (2,160,897) 129,215
Other income (expense), net ........................................ (28,848) (98,143) 123,499 (931)
---------- --------- ---------- ---------
Earnings (loss) from operations
before income taxes ............................................. 103,746 (1,314,425) (2,037,398) 128,284
========== ========= ========== =========
Loss on sale of discontinued operations,
net of income tax benefit of $409,692 ........................... (458,181) (208,341) -- --
========== ========= ========== =========
Depreciation and amortization ...................................... 302,288 450,270 258,227 71,667
========== ========= ========== =========
Capital expenditures ............................................... $ 8,457 60,012 390,403 27,073
========== ========= ========== =========
Identifiable assets at
September 30, 1997 .............................................. $ 1,822,890 117,360 6,839,443 1,868,317
========== ========= ========== =========
<CAPTION>
Adj. and
Others Eliminations Consolidated
------ ------------ ------------
<S> <C> <C> <C>
Revenues from
unaffiliated customers .......................................... -- -- 30,331,520
Intersegment revenues .............................................. -- (482,253) --
---------- --------- ----------
Total revenues ..................................................... -- (482,253) 30,331,520
---------- --------- ----------
Operating profit (loss) ............................................ (495,496) -- (3,610,866)
Other income (expense), net ........................................ (34,216) -- (38,639)
---------- --------- ----------
Earnings (loss) from operations
before income taxes ............................................. (529,712) -- (3,649,505)
========== ========= ==========
Loss on sale of discontinued operations,
net of income tax benefit of $409,692 ........................... -- -- (666,522)
========== ========= ==========
Depreciation and amortization ...................................... 9,051 -- 1,091,503
========== ========= ==========
Capital expenditures ............................................... -- -- 485,945
========== ========= ==========
Identifiable assets at
September 30, 1997 .............................................. 513,339 (158,267) 11,003,082
========== ========= ==========
F-25
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, CONTINUED
<CAPTION>
Year ended September 30, 1996
-----------------------------
Directory
Business FMG RAF Secutron
--------- --- --- --------
<S> <C> <C> <C> <C>
Revenues from
unaffiliated customers .......................................... $ 7,100,335 317,349 14,830,681 6,538,540
Intersegment revenues .............................................. 70,313 -- -- 437,051
---------- --------- ---------- ---------
Total revenues ..................................................... 7,170,648 317,349 14,830,681 6,975,591
---------- --------- ---------- ---------
Operating profit (loss) ............................................ (486,976) (635,573) (2,647,327) 281,775
Other income (expense), net ........................................ (156,877) (89,107) 404,597 (6,742)
Gain on sale of Clearing
Operation ....................................................... -- -- 1,332,974 --
---------- --------- ---------- ---------
Loss before income taxes ........................................... (643,853) (724,680) (909,756) 275,033
========== ========= ========== =========
Depreciation and amortization ...................................... 637,738 186,201 270,419 116,733
========== ========= ========== =========
Capital expenditures ............................................... 81,345 793,250 480,004 54,493
========== ========= ========== =========
Identifiable assets at
September 30, 1996 .............................................. $ 4,145,034 281,377 8,729,572 1,456,302
========== ========= ========== =========
<CAPTION>
Adj. and
Others Eliminations Consolidated
------ ------------ ------------
<S> <C> <C> <C>
Revenues from
unaffiliated customers .......................................... -- -- $ 28,786,905
Intersegment revenues .............................................. -- (507,364) --
---------- --------- ----------
Total revenues ..................................................... -- (507,364) 28,786,905
---------- --------- ----------
Operating profit (loss) ............................................ (212,000) -- (3,700,101)
Other income (expense), net ........................................ (87,626) -- 64,245
Gain on sale of Clearing
Operation ....................................................... -- -- 1,332,974
---------- --------- ----------
Loss before income taxes ........................................... (299,626) -- $ (2,302,882)
========== ========= ==========
Depreciation and amortization ...................................... 9,051 -- $ 1,220,142
========== ========= ==========
Capital expenditures ............................................... -- -- $ 1,409,092
========== ========= ==========
Identifiable assets at
September 30, 1996 .............................................. 522,390 (610,555) $ 14,524,120
========== ========= ==========
</TABLE>
Identifiable assets by industry are those assets that are used in the Company's
operations in each industry. See Note 2 relating to discontinued operations.
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.
Date: January 13, 1998 FRONTEER FINANCIAL HOLDINGS, LTD.
By: /s/ Gary L. Cook
------------------------------------------
Gary L. Cook
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange 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.
Chairman of the Board /s/ R. A. Fitzner, Jr.
Date: January 13, 1998 -----------------------------------------------
R. A. Fitzner, Jr.
Director /s/ R. L. Long
Date: January 13, 1998 -----------------------------------------------
R. L. Long
Director /s/ D. W. Olson
Date: January 13, 1998 -----------------------------------------------
D. W. Olson
Director
Date: January 13, 1998 -----------------------------------------------
Fai H. Chan
Director
Date: January 13, 1998 -----------------------------------------------
Robert H. Trapp
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
2.1 Asset Sale and Purchase Agreement between McLeod USA Publishing N/A
and Fronteer Marketing Group, Inc. and Contact America dated
September 15, 1997 (incorporated by reference to Exhibit 2.1
Registrant's Current Report on Form 8-K dated September 15,
1997).
2.2 Sale and Purchase Agreement by and between McLeod USA Publishing N/A
Company and Fronteer Financial Holdings, Ltd., Classified
Directories, Inc. Larry A. Scott, James Greff, Randall L. Gowin,
Edwin Dressler and certain directors, officers and shareholders
of Fronteer dated January 27, 1997 (incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K dated
February 25, 1997).
2.3 Agreement for Sale and Purchase of Certain of the Business and N/A
Assets of RAF Financial Corporation dated January 29, 1996, by
and among Fronteer Directory Company, Inc., RAF Financial
Corporation and MultiSource Services, Inc. (incorporated by
reference to Exhibit 10.1 to Registrant's Current Report on Form
8-K dated July 23, 1996, as originally filed).
2.4 Stock Subscription Agreement dated January 29, 1996, by and N/A
among Fronteer Directory Company, Oppenheimer Funds, Inc. and
MultiSource Services, Inc. (incorporated by reference to Exhibit
10.1 to Registrant's Current Report on Form 8-K dated July 23,
1996, as originally filed).
3.0 Articles of Incorporation of Registrant (incorporated by N/A
reference to Exhibit 3.0 to Registrant's Annual Report on Form
10-K for the year ended September 30, 1995).
3.0(i) Articles of Amendment to the Registrant's Articles of N/A
Incorporation dated April 28, 1995 (incorporated by reference to
Exhibit 3.0(i) to Registrant's Current Report on Form 8-K dated
May 9, 1995).
3.0(ii) Articles of Amendment to the Registrant's Articles of N/A
Incorporation as filed with the Colorado Secretary of State on
June 27, 1995 (incorporated by reference to Exhibit 3.0(ii) to
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1996).
3.2 Restated Bylaws of Registrant adopted February 14, 1996 N/A
(incorporated by reference to Exhibit 3.2 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1996).
10.1 Amended and Restated 1988 Incentive and NonStatutory Stock N/A
Option Plan as amended September 10, 1996 (incorporated by
reference to Exhibit 10.1 to Registrant's Annual Report on Form
10-K for the year ended September 30, 1996).
10.2 Employee Stock Ownership Plan (incorporated by reference to N/A
Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995).
10.3 401(k) Plan and Amendment I thereto (incorporated by reference N/A
to Exhibit 10.3 to Registrant's Annual Report on Form 10-K for
the year ended September 30, 1995).
<PAGE>
10.4 Employees/Officers/Directors Form of Non-Competition Agreement; N/A
Covenant Not to Compete and Confidentiality Agreement.
(incorporated by reference to Exhibit 2.2 to Registrant's
Current Report on Form 8-K dated May 9, 1995).
10.5 Amended and Restated 1996 Incentive and Nonstatutory Stock N/A
Option Plan, as amended September 10, 1996 (incorporated by
reference to Exhibit 10.6 to Registrant's Annual Report on Form
10-K for the year ended September 30, 1996).
10.6 September 1996 Incentive and Nonstatutory Stock Option Plan N/A
(incorporated by reference to Exhibit 10.7 to Registrant's
Annual Report on Form 10-K for the year ended September 30,
1996).
10.7 $4,000,000 10% Convertible Debenture Purchase Agreement between
the Company and Heng Fung Finance Company Limited dated December
17, 1997.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
$4,000,000.00 10% CONVERTIBLE DEBENTURE
PURCHASE AGREEMENT
THIS $4,000,000.00 10% CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
("Agreement") is made and entered into this ____ day of December, 1997, by and
between Fronteer Financial Holdings, Ltd. ("Seller") and Heng Fung Finance
Company Limited ("Purchaser").
RECITALS
A. Seller is a corporation duly organized and existing under the laws of
the State of Colorado.
B. Seller desires to sell and Purchaser desires to purchase a $4,000,000.00
10% Convertible Debenture from the Seller in accordance with the terms and
conditions stated below.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements contained herein, the parties hereto do hereby represent,
warrant, covenant and agree as follows:
ARTICLE 1.
TERMS OF TRANSACTION
1.1. Purchase and Sale. Purchaser hereby agrees, subject to the terms and
conditions of this Agreement, to purchase from Seller, and Seller hereby agrees,
subject to the terms and conditions of this Agreement, to sell to Purchaser a
$4,000,000.00 10% Convertible Debenture ("Debenture") due on the 15th day of
December, 2007, provided, however that the Purchaser shall have the right to
accelerate the repayment of the Debenture to June 15, 1998, if final approval of
the proposed acquisition of more than twenty-five percent (25%) of the equity
ownership of RAF Financial Corp. by Purchaser is not received from the NASD
pursuant to Rule 1018 of the National Association of Securities Dealers, Inc.
("NASD") Membership and Registration Rules and, if required, from any other
regulatory authorities by June 15, 1998.
1.2. Purchase Price. The total consideration ("Purchase Price") to be paid
by Purchaser to Seller for the Debenture is $4,000,000.00 and shall be paid in
cash or certified funds by December 31, 1997.
1.3. Terms of Debenture. The terms of the Debenture shall be as provided in
the form of Debenture attached hereto as Exhibit A and incorporated herein by
reference.
<PAGE>
1.4. Conversion. The Debenture shall be convertible into shares of Common
Stock of the Seller as specified in the Debenture attached hereto.
1.5. Option. Upon Heng Fung Capital [S] Private Limited's ("Capital")
purchase of the balance of Robert A. Fitzner's stock to be sold to Capital,
Purchaser shall have the right, exercisable at Purchaser's option at any time up
to and including the earlier of the Maturity Date, as defined in the Debenture,
or the business day next preceding the date fixed for prepayment in full of the
Debenture, (so long as the Seller provides the notice of prepayment in full
required by the Debenture and shall not thereafter default in the making of the
prepayment) to purchase an additional Convertible Debenture in the form as is
attached hereto as Exhibit B. Seller may exercise such option by delivering
written notice of the exercise thereof together with payment therefor by
cashier's or certified check to Seller on or before the expiration date of
Seller's option. Purchaser agrees that the representations and warranties of
Purchaser contained in Article 3 hereof again will be required from Purchaser
upon exercise of Purchaser's option and will be a pre-condition to the exercise
thereof.
ARTICLE 2.
CLOSING
The transaction contemplated herein shall be closed in escrow (the
"Closing") at the offices of Seller, 1700 Lincoln Street, 32nd Floor, Denver,
Colorado 80203, at 10:00 a.m. MST on December __, 1997, or at such other place
and time as the parties hereto may mutually agree.
ARTICLE 3.
A. REPRESENTATIONS AND WARRANTIES OF PURCHASER
As an inducement to Seller to enter into this Agreement and to consummate
the transactions contemplated hereby, Purchaser represents and warrants to
Seller as follows:
3.1. Investment Intent. Purchaser acknowledges that the sale of the
Debenture will not be registered under the Securities Act of 1933, as amended
("Act"). Purchaser affirms that Purchaser is acquiring the Debenture for
Purchaser's own account for investment and not with a view to, or for sale or
other disposition in connection with, any distribution thereof, nor with any
present intention of selling or otherwise disposing thereof.
3.2. Information Available. The Purchaser understands that all documents,
records, and books pertaining to this investment have been made available for
inspection by the Purchaser and the Purchaser's attorney and/or accountant
including, but not limited to, the Seller's Annual Reports on Form 10-K and Form
10-K/A for the fiscal year ended September 30, 1996, the Seller's Quarterly
Reports on Form 10-Q and Form 10-Q/A for the quarterly periods ending December
2
<PAGE>
31, 1996, March 31, 1997, and June 30, 1997, the Seller's Current Reports on
Form 8-K, and Form 8-K/A dated July 23, 1996, February 25, 1997, and September
15, 1997, the Annual Report of RAF Financial Corporation ("RAF") and the
unaudited monthly balance sheet and statement of operations as of and for the
month ended October 31, 1997 for RAF, the Fronteer Directory Division, Fronteer
Marketing Group and Secutron Corporation.
3.3. Accredited Investor. The Purchaser is an "accredited investor" as
defined in Rule 501 of Regulation D adopted under the Act.
3.4. Independent Investigation. Purchaser has made an independent
investigation of the financial condition and business of the Seller. Other than
as set forth herein, Purchaser is relying on its own independent investigation
and not on any representations and warranties made by any other party.
3.5. Risks. The Purchaser recognizes that an investment in the Debenture
involves a number of significant risks and that the Purchaser could lose the
Purchaser's entire investment. The Purchaser is able to bear the substantial
economic risks of an investment in the Debenture for an indefinite period of
time, has no need for liquidity in such investment and, at the present time,
could afford a complete loss of such investment.
3.6. Solicitation. The Purchaser is not subscribing for the Debenture as a
result of or subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or broadcast
over television or radio, or any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising, or any solicitation
of a subscription by a person not previously known to the Purchaser in
connection with investments in securities generally.
3.7. Experts. The Purchaser has or together with the Purchaser's advisor(s)
has such knowledge and experience in financial, tax and business matters so as
to enable the Purchaser to utilize the information made available to the
Purchaser in connection with the sale of the Debenture in order to evaluate the
merits and risks of an investment in the Debenture and to make an informed
investment decision with respect thereto.
3.8. No Transfer. The Purchaser will not sell or otherwise transfer the
Debenture, without registration under the Act or an exemption therefrom and
fully understands and agrees that the Purchaser must bear the economic risk of
the Purchaser's purchase for an indefinite period of time because, among other
reasons, the Debenture has not been registered under the Act or under the
securities laws of any state and, therefore, cannot be resold, pledged, assigned
or otherwise disposed of unless the Debenture is subsequently registered under
the Act and under the applicable securities laws of such states or unless an
exemption from such registration is available.
3
<PAGE>
3.9. No Registration. The Purchaser understands that the Company is under
no obligation to register the Debenture on the Purchaser's behalf or to assist
the Purchaser in complying with any exemption from registration under the Act.
3.10. Restrictive Legend. The Purchaser understands that a legend
restricting the transfer of the Debenture will appear on the Debenture.
3.11. Authority. Purchaser has full power and authority to make, execute
and perform this Agreement and the transactions contemplated hereby. This
Agreement is a valid and binding obligation of Purchaser enforceable in
accordance with its terms.
3.12. No Default Resulting From Agreement. Neither the execution and
delivery of this Agreement nor the performance of its terms by Purchaser will
result in any material breach of the terms and conditions of, or constitute a
default under any material agreement, lease, mortgage, note, instrument,
undertaking, judgment, decree, governmental order or other restriction or
obligation to which Purchaser is a party which prohibits Purchaser's ability to
perform its obligations pursuant to this Agreement.
3.13. Brokers or Finders. No broker or finder has acted on Purchaser's
behalf in connection with this Agreement or the transaction contemplated hereby.
3.14. Required Consents and Approvals. No application, notice, order,
registration, qualification, waiver, consent, approval, or other action is
required to be filed, given, obtained, or taken by Purchaser by virtue of the
execution, delivery, and performance of this Agreement or the consummation of
the transactions contemplated hereby.
B. REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Purchaser to enter into this Agreement and to
consummate the transactions contemplated hereby, Seller represents and warrants
to Purchaser as follows:
3.15. Organization and Qualification of Seller.
Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Colorado and, except in such
jurisdictions where the failure to qualify would not have a material adverse
effect on Seller, is duly qualified and authorized to do business and is in good
standing in each jurisdiction in which the nature of the business conducted by
it or the properties owned, leased or operated by it makes such qualification
necessary. Seller has all requisite corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. The copies of
the Articles of Incorporation and Bylaws of Seller which have been delivered to
Purchaser are complete and correct, and Seller is not in default under or in
violation of any provision of the Articles of Incorporation or Bylaws.
4
<PAGE>
3.16. Equity Structure.
(a) The authorized capital stock of the Seller consists solely of (i)
100,000,000 shares of Common Stock of which, as of the date of the Agreement,
16,871,557 shares were issued and outstanding and (ii) 25,000,000 shares of
Series A Voting Cumulative Preferred Stock, none of which is issued or
outstanding. All of the outstanding shares of Common Stock have been validly
issued and are fully paid, nonassessable and free of preemptive rights. As of
the date of this Agreement, 10,189,523 shares of Common Stock were reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of outstanding options, warrants or other rights or securities
convertible into shares of Common Stock ("Company Options"), which Company
Options are listed (including type and amount of Company Option, option holder's
name and option price) in Exhibit 3.16(a). Except as set forth above, there are
outstanding: (i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company or its subsidiaries convertible into
or exchangeable for shares of capital stock or voting securities of the Company,
(iii) no options, warrants, subscriptions, calls, rights or other agreements to
acquire from the Company or its subsidiaries, and no obligations of the Company
or its subsidiaries to issue, any capital stock, voting securities or securities
of the Company and (iv) no equity equivalent interests or rights to acquire
equity equivalent interests in the ownership or earnings of the Company or its
subsidiaries other similar rights (collectively "Company Securities"). As of the
date hereof, there are no outstanding obligations of the Company or its
subsidiaries to repurchase, redeem or otherwise acquire any Company Securities.
There are no stockholder agreements, voting trusts or other agreements or
understandings to which the Company is a party or by which it is bound relating
to the voting or registration of any shares of capital stock of the Company or
other Company Securities, and to the knowledge of the Company, no such
agreements have been entered into by shareholders of the Company.
(b) All of the outstanding capital stock of the Company's direct and
indirect subsidiaries (except for Secutron Corporation, approximately sixty
percent (60%) of which is owned by the Company) is owned by the Company,
directly or indirectly, free and clear of any Lien (as defined below) or any
other limitation or restriction (including any restriction on the right to vote
or sell the same except as may be provided as a matter of law). There are no
securities of the Company or its subsidiaries convertible into or exchangeable
for, options or other rights to acquire from the Company or its subsidiaries and
no other contract, understanding, arrangement or obligation (whether or not
contingent) providing for, the issuance or sale, directly or indirectly, of any
capital stock or other ownership interests in or any other securities of any
subsidiary of the Company. There are no outstanding contractual obligations of
the Company or its subsidiaries to repurchase, redeem or otherwise acquire any
outstanding shares of capital stock or other ownership interests in any
subsidiary of the Company. For purposes of this Agreement, "Lien" means, with
respect to any asset (including without limitation any security), any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such asset. For purposes of this Agreement, a "subsidiary" means a corporation
over fifty percent (50%) of the outstanding voting securities of which are owned
by Seller.
5
<PAGE>
(c) None of the awards, grants or other agreements with respect to the
Company Options have provisions which accelerate the vesting or right to
exercise such options upon the execution of this Agreement, the consummation of
the transactions contemplated hereby (or thereby) or any other "change of
control" events.
(d) The Company's Common Stock constitutes the only class of equity
securities of the Company or its subsidiaries registered or required to be
registered under the Securities Exchange Act o 1934, as amended (the "Exchange
Act").
3.17. Authorization. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Seller and this Agreement constitutes the valid and binding
obligation of the Seller enforceable in accordance with its terms. Attached
hereto as Exhibit 3.17 is a Certificate which evidences the approval and
authorization of this Agreement by the Board of Directors of the Seller.
3.18. No Conflicting Agreements. Standing alone, the execution and delivery
of this Agreement by the Seller does not, and consummation by the Seller of the
transactions contemplated hereby will not, (a) violate any existing term or
provision of any law, regulation, order, writ, judgment, injunction or decree
applicable to Seller, or (b) conflict with or result in a breach of any of the
terms, conditions or provisions of the charter documents of Seller or of any
agreement or instrument to which Seller is a party.
3.19. Compliance with Applicable Law. The Seller has not received any
notice or information of any violation, probable violation or default by the
Seller under any applicable law, regulation or order of any governmental
department, commission, board or agency or instrumentality, domestic or foreign,
having jurisdiction over the Seller's operations which could materially
adversely affect the Seller's business, operations, financial condition,
properties or assets, or the ability to consummate the transactions contemplated
hereby.
3.20. Material Misstatements or Omissions. No representation or warranty of
the Seller in this Agreement nor in any document set forth in paragraph 3.2
contains any untrue statement of a material fact, or omits to state any material
fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they were made, not misleading.
3.21. Consents and Approvals. Standing alone, the execution and delivery by
the Seller of this Agreement, and the performance by the Seller of its
obligations hereunder, do not require the Seller or any subsidiary of Seller to
obtain any consent, approval, agreement, or action of, or make any filing with
or give any notice to, any corporation, person, entity, or firm or any public,
governmental or judicial authority except (i) such as have been duly obtained or
made, as the case may be, and or will be duly obtained and made as required by
law, and (ii) those as to which the failure to obtain would have no material
adverse effect on the transactions contemplated hereby.
6
<PAGE>
3.22. Subsidiaries. Except for securities owned by and in the inventory of
RAF Financial Corporation, the Seller does not own, have an ownership interest
in, or control any corporation, partnership, proprietorship or other entity,
other than as shown on the attached Exhibit 3.22.
3.23. Litigation. Except as described in Exhibit 3.23 attached hereto,
there are no actions, proceedings or investigations pending or, to the Seller's
knowledge, threatened against the Seller or any subsidiary before any court or
administrative agency which could result in any material adverse change in the
operations or financial condition of the Seller other than as identified
therein.
3.24. Ownership. The Seller is the owner, beneficially and of record, of
all of the property and equipment identified on Exhibit 3.24 hereto, free and
clear of all liens, encumbrances, security agreements, equities, options,
claims, charges and restrictions, except those disclosed as liabilities in the
Seller's Financial Statements as defined in paragraph 3.27 below.
3.25. Brokers. No broker or finder has acted on Seller's behalf in
connection with this Agreement or the transaction contemplated hereby.
3.26. Leases. Exhibit 3.26 is a list of all of Seller's office leases.
3.27. Financial Statements. The Seller has delivered to the Purchaser
copies of the Seller's financial statements contained in the reports described
in paragraph 3.2, above, and the unaudited monthly balance sheet and statement
of operations as of and for the month ended October 31, 1997 for RAF, the
Fronteer Directory Division, Fronteer Marketing Group and Secutron Corporation,
described in paragraph 3.2, above (collectively, the "Seller's Financial
Statements"). The Seller's Financial Statements are based upon the information
contained in the books and records of the Seller and fairly present the
financial condition of the Seller as at the respective dates thereof and results
of operations for the periods referred to therein, all in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except that the unaudited statements do not include notes and
are subject to consolidating adjustments and to year-end and audit adjustments.
Monthly unaudited financial statements will be generated by the Seller from and
after December 31, 1997, and will be prepared on a basis consistent with the
methods and procedures used to prepare the Seller's Financial Statements. For so
7
<PAGE>
long as any portion of the Debenture remains unpaid, if requested by the
Purchaser, the Seller will deliver such monthly unaudited financial statements
to the Purchaser from and after the period ended December 31, 1997, within 30
days after the end of each month from the date hereof.
3.28. SEC Reports. Since April, 1995, the Seller has filed all required
forms, reports and documents (the "SEC Reports") with the Securities and
Exchange Commission ("SEC"), each of which has complied in all material respects
with all applicable requirements of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended, each as in effect on the dates
such SEC Report was filed. None of such SEC Reports, including (without
limitation) any financial statement or schedule included or incorporated by
reference therein, contained when filed any untrue statement of a material fact
or omitted to state a material fact required to be stated or incorporated by
reference therein or necessary in order to make the statements therein in light
of the circumstances under which they were made not misleading. Seller will
promptly deliver to Purchaser a complete and correct copy of any amendments or
modifications which are required to be filed with the SEC but have not yet been
filed with the SEC to the SEC Reports or to agreements, documents or other
instruments which previously had been filed by the Seller with the SEC.
3.29. Absence of Undisclosed or Contingent Liabilities. To the Seller's
knowledge, the Seller has no liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, or due or to become due of the type required to be
reflected on a balance sheet prepared in accordance with generally accepted
accounting principles) except current liabilities incurred in the ordinary
course of business or as otherwise set forth in the Seller's Financial
Statements. Neither the Seller nor any of its subsidiaries, nor their respective
employees or agents, has made or agreed to make gifts of money, other property
or similar benefits (other than incidental gifts of articles of nominal value)
to any actual or potential customer, supplier, governmental employee, political
party, candidate for office, governmental agency or instrumentality or any other
person.
3.30. No Material Adverse Changes. Since October 31, 1997, neither the
Seller nor any subsidiary has (i) made any distribution or payment of cash or
other assets to its shareholders, other than as shown on the Seller's Financial
Statements, (ii) suffered or permitted a materially adverse change in its
assets, financial condition, gross profit, operating results, customer, employee
or supplier relations or business condition, or (iii) paid any bonus to any
officer, director, shareholder or employee of Seller or any subsidiary, other
than as shown on the Seller's Financial Statements. For purposes of this
paragraph, a materially adverse change includes an uninsured loss or liability
exceeding $20,000.
3.31. Employees. To Seller's knowledge, (a) no executive employee of the
Seller and no group of the Seller's employees has any plan or intention to
terminate his, her or its employment following the Closing (except as set forth
in the Stock Purchase Agreement of Robert A. Fitzner, signed contemporaneously
herewith); (b) the Seller has complied in all material respects with all laws
relating to the employment of labor, including provisions thereof relating to
wages, hours, equal opportunity, collective bargaining and the payment of social
8
<PAGE>
security and other taxes; (c) the Seller has no known material labor relations
problem pending and believes that its labor relations are satisfactory; (d)
there are no workmen's compensation, sexual harassment, discrimination or claims
pending against the Seller nor is the Seller aware of any facts that would give
rise to such claims; (e) to Seller's actual knowledge, no employee or former
employee of the Partnership has any claim with respect to any intellectual
property rights of the Seller.
3.32. Representations as to Knowledge. The representations and warranties
contained in this Article 3 which are made to the "knowledge" of a specified
person are required to be made in good faith.
ARTICLE 4.
SELLER'S COVENANTS
So long as the Debenture is outstanding, the Seller shall comply with the
following covenants.
A. AFFIRMATIVE COVENANTS
4.1. Formation and Capitalization of Fronteer Capital Inc. On or before the
Closing, Seller, at Purchaser's sole cost and expense, shall form a new
wholly-owned subsidiary named "Fronteer Capital, Inc." (hereinafter "Capital"),
which shall be a Delaware corporation in form and substance satisfactory to
Purchaser. All of the proceeds from the Purchaser's acquisition of the Debenture
shall be deposited, $1,000 as capital and $3,999,000 as an advance (bearing no
interest), to Capital's bank account, which bank account shall be and remain
separate from the bank accounts of Seller or any affiliate of Seller. Upon
failure or refusal of the NASD to approve the proposed change in control of RAF
Financial Corp., as described in paragraph 1.1 above, by June 15, 1998, the
Purchaser's sole and only remedy shall be a strict foreclosure of the stock of
Capital in satisfaction of principal and accrued and unpaid interest on this
Debenture, and any debt owed by Capital to Seller shall be cancelled and deemed
satisfied.
4.2. Control of Fronteer Capital Inc. Contemporaneous with the purchase of
the Debenture, the Purchaser or an affiliate thereof is acquiring stock of the
Seller. In connection with that purchase, Seller shall increase its Board of
Directors to five (5) members, admit two of Purchaser's nominees to the Seller's
Board, and appoint Purchaser's nominees as the directors of Capital, which
appointments to Capital shall be irrevocable so long as the Debenture remains in
effect.
4.3. Security Agreement. At the Closing, Seller agrees to execute the form
of Security Agreement attached hereto as Exhibit "C", which security agreement
conveys 100% of the capital stock of Capital to Purchaser to further secure the
Debenture. The security agreement creates certain rights in Purchaser beyond
9
<PAGE>
those set forth in the Debenture, including (without limitation) the right to
vote and to strictly foreclose on the pledged stock in satisfaction of the
Debenture.
4.4. Ongoing Operation. Seller will use all reasonable efforts to carry on
its business diligently and substantially in the manner as heretofore conducted
and solely in the ordinary course, to keep available the services of the present
employees, and to preserve the relationship of the Seller with its customers and
others having business relations with it.
B. NEGATIVE COVENANTS
4.5. Other Contracts. Neither Seller nor its subsidiaries shall become
subject to any agreement, transaction or commitment which would restrict or in
any way impair the obligation or ability of Seller to comply with all of the
terms of this Agreement or the Debenture.
4.6. Employee Benefits. Seller shall not (a) grant salary increases to its
directors, officers or employees, or (b) enter into, amend or alter any savings,
retirement, pension, severance, insurance, death benefit or other benefit plan,
trust agreement or arrangement or any employment, agency, brokerage or
consulting agreement.
4.7. Indebtedness. Seller shall not create, incur, assume, guarantee or
otherwise become liable with respect to any indebtedness, except in the ordinary
course of business.
4.8. Articles and Bylaws. Neither Seller nor any subsidiary shall amend
their articles or certificate of incorporation or bylaws, or take any action
with respect to such amendment, and shall take all steps necessary to maintain
their corporate existence, powers and licenses.
4.9. Acquisition or Disposal of Assets. The Seller and its subsidiaries
shall refrain from acquiring any property or disposing of or encumbering any of
their properties or assets, other than in the ordinary course of business of RAF
Financial Corporation.
4.10. Issuance of Shares. Except with the Purchaser's prior written
consent, neither Seller nor any subsidiary shall authorize or issue any shares
of capital stock or enter into any contract or grant any option, warrant, or
right calling for the issuance of any such shares, or any securities convertible
into any such shares, options, warrants or rights.
4.11. Dividends. Neither Seller nor any subsidiary shall declare or pay any
dividends, make any distributions on shares of capital stock or repurchase any
shares of its capital stock.
10
<PAGE>
ARTICLE 5.
CONDITIONS PRECEDENT
Each party's obligations under this Agreement are subject to the
fulfillment prior to or at the Closing of each of the following conditions by
the other party, any one or more of which may be waived in writing:
5.1. Accuracy of Representations and Warranties. The representations and
warranties of the other party contained herein or in any certificate, schedule,
exhibit or other document delivered by the other party pursuant to the
provisions hereof, or in connection herewith, shall be true and correct in all
material respects as of the Closing, with the same effect as though such
representations and warranties had been made at the Closing, except to the
extent such representations and warranties expressly relate only to an earlier
date, and except for changes contemplated by this Agreement or approved in
writing.
5.2. Compliance With Conditions. The other party shall have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing.
5.3. Closing Documents. Purchaser shall have delivered to Seller the
Purchase Price, and Seller shall have delivered an attorney's opinion letter
addressed to Purchaser in form and content satisfactory to Purchaser opining on
the due authorization and capacity of the Seller to into this transaction, the
accuracy of certain representations hereunder.
ARTICLE 6.
TERMINATION
This Agreement may be terminated at any time by Seller prior to the
Closing, upon written notice, if the terms, covenants or conditions of this
Agreement to be complied with or performed by Purchaser at or before the Closing
shall not by that time have been complied with or performed in all material
respects and such noncompliance or nonperformance shall not have been waived in
writing by Seller. Upon any such termination Seller shall not have any liability
to Purchaser.
ARTICLE 7.
MISCELLANEOUS
7.1. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed, first class, certified mail, postage
prepaid, return receipt requested:
11
<PAGE>
a. To Purchaser at: Heng Fung Finance Company Limited
10th Floor Lippo Protective Tower
231-235 Gloucester Road
Wanchai, Hong Kong
Attn: Chan Heng Fai
with a copy to: Larry D. Gallegos, Esq.
David C. Roos, Esq.
Berliner Zisser Walter & Gallegos, P.C.
1700 Lincoln St., Suite 4700
Denver, CO 80203
b. To Seller at: Fronteer Financial Holdings, Ltd
1700 Lincoln Street, Suite 3200
Denver, Colorado 80203
Attn: R. A. Fitzner, Jr.
with a copy to: Thomas S. Smith, Esq.
Smith McCullough, P.C.
4643 South Ulster Street, Suite 900
Denver, CO 80237
7.2. Entire Agreement. This Agreement and the Exhibits hereto supersedes
all prior discussions and agreements between Purchaser and Seller with respect
to the matters contained herein.
7.3. Amendments and Waivers. This Agreement may be amended only by an
instrument in writing executed by the party against whom enforcement of the
amendment is sought. Seller and Purchaser may, by a signed writing, give any
consent, take any action, waive any inaccuracies in representations or other
compliance to the other party to any of the covenants or conditions herein,
modify the terms of this Agreement, or take any other action deemed by either
party to be necessary or appropriate to consummate the transactions contemplated
by this Agreement.
7.4. Counterparts; Headings. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument. The headings herein set out are
for convenience of reference only and shall not be deemed a part of this
Agreement.
7.5. Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs,
representatives, successors and assigns, but no party may assign, delegate or
otherwise transfer any of such party's rights, duties or obligations hereunder
or interest herein without the written consent of the other party hereto.
12
<PAGE>
7.6. Further Assurances. After the Closing, each party, at the request of
the other party, shall execute, deliver and acknowledge where necessary from
time to time such other and further acts and things as may be reasonably
necessary to more fully and effectively consummate the transactions contemplated
by this Agreement.
7.7. Governing Law. The validity and effect of this Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Colorado.
IN WITNESS WHEREOF, the parties have caused this Agreement to be made
effective on the day and year first above written.
SELLER:
FRONTEER FINANCIAL HOLDINGS, LTD.,
a Colorado corporation
By:
--------------------------------------
R. A. Fitzner, Jr., Chairman
PURCHASER:
HENG FUNG FINANCE COMPANY LTD.,
a Hong Kong corporation
By:
--------------------------------------
13
<PAGE>
EXHIBIT A
TO $4,000,000.00 10% CONVERTIBLE DEBENTURE
PURCHASE AGREEMENT
THE SECURITIES REPRESENTED BY THIS DEBENTURE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO
THE SATISFACTION OF THE CORPORATION.
FRONTEER FINANCIAL HOLDINGS, LTD.
10% Convertible Debenture Due December 15, 2007
$ 4,000,000.00 December ___, 1997
FOR VALUE RECEIVED, Fronteer Financial Holdings, Ltd., a corporation duly
organized and existing under the laws of the State of Colorado (the
"Corporation"), hereby promises to pay to the order of Heng Fung Finance Company
Limited, ("Holder") the principal sum of $4,000,000.00, with interest from the
date hereof at the rate of 10% per annum, amortized over ten (10) years, and
payable in equal quarterly installments of principal and interest of One Hundred
and Fifty-Nine Thousand, Three Hundred Forty-Five Dollars ($159,345.00), with
the first of such payments due and payable on the 31st day of March, 1998,
successive payments due and payable on the last day of each calendar quarter
thereafter, with the final payment of the entire unpaid principal balance and
all accrued and unpaid interest, if not sooner paid, due and payable on the 15th
day of December, 2007 (the "Maturity Date"). At Holder's option, interest may be
paid in stock of the Corporation at the Conversion Price (described below).
The unpaid principal amount of this Convertible Debenture ("Debenture") and
all accrued and unpaid interest hereon shall be due and payable by the
Corporation to the Holder on the Maturity Date.
The Holder shall have the right, exercisable at the Holder's option at any
time and from time to time up to and including the Maturity Date (except that,
if this Debenture shall be called for prepayment in full by the Corporation and
the Corporation shall not thereafter default in the making of the prepayment,
such right shall terminate at the close of business on the business day next
preceding the date fixed for prepayment), to convert all or any part of the
unpaid principal amount hereof into fully paid and non-assessable shares of
Common Stock of the Corporation at the Conversion Price, as defined below, upon
surrender or partial surrender of this Debenture to the Corporation at its
principal place of business. If so required by the Corporation, this Debenture,
upon surrender or partial surrender for conversion as aforesaid, shall be duly
endorsed by or accompanied by instruments of transfer, in form satisfactory to
the Corporation, duly executed by the Holder or by Holder's duly authorized
attorney. The Corporation shall not be required to issue fractional shares of
Common Stock of the Corporation, but shall make adjustment therefor in cash
<PAGE>
based upon the Conversion Price of the Common Stock of the Corporation as of the
date of conversion. The certificate representing the shares of Common Stock
issued upon conversion or partial conversion shall contain a legend restricting
the transfer thereof similar to the legend that appears on the top of this
Debenture.
The term "Conversion Price", as used with reference to any share of Common
Stock on any specified date, shall mean $0.53125 per share of Common Stock.
If any payment of interest or any payment of principal and interest, as the
case may be, is not paid by the Corporation within five (5) business days after
the date on which such payment shall have become due and payable under this
Debenture or upon the bankruptcy or receivership of the Corporation (each, an
"Event of Default"), the Holder may, by giving written notice to the
Corporation, declare the unpaid principal amount hereof and all accrued and
unpaid interest hereon to be immediately due and payable and upon such
declaration, the unpaid principal amount hereof and all accrued and unpaid
interest hereon shall be and become immediately due and payable. Upon the
occurrence and continuance of an Event of Default and upon notice from Holder to
the Corporation, the rate of interest on this Debenture shall increase from 10%
per annum to 18% per annum, and Holder shall be entitled (but not required) to
exercise any and all remedies available under Colorado law, including (without
limitation) strict foreclosure upon the stock of Fronteer Capital, Inc. pursuant
to the Security Agreement between the Corporation and the Holder.
Should the indebtedness represented by this Debenture or any part thereof
be collected at law or in equity, or in bankruptcy, receivership or any other
court proceedings (whether at the trial or appellate level), or should this
Debenture be placed in the hands of attorneys for collection upon the occurrence
of an Event of Default, the Corporation agrees to pay, in addition to the
principal and interest due and payable hereon, all costs of collection,
including reasonable attorneys' fees.
This Debenture may not be prepaid before December 15, 1998. Thereafter,
this Debenture may be prepaid, in part or in whole, at the option of the
Corporation, at any time or from time to time prior to the Maturity Date, to the
Holder without premium or penalty, together with accrued interest to the date
fixed for prepayment; provided, however, that prepayment in full of this
Debenture by the Corporation shall require not less than 30 nor more than 60
days prior notice of prepayment to the Holder.
Subject to compliance with the provisions of the Securities Act of 1933, as
amended, this Debenture is transferable in the manner authorized by law. Upon
surrender of this Debenture for transfer, accompanied by a written instrument of
transfer in form satisfactory to the Corporation, a new Debenture or Debentures,
for a like aggregate principal amount, will be issued to the transferee.
2
<PAGE>
Prior to the transfer of this Debenture, the Corporation may deem and treat
the Holder hereof as the absolute owner hereof (whether or not this Debenture
shall be overdue) for the purpose of receiving payment of or on account of the
principal hereof and interest hereon, and for all other purposes, and the
Corporation shall not be affected by any notice to the contrary.
Except as expressly provided for herein, the Corporation hereby waives
presentment, demand, notice of demand, protest, notice of protest and notice of
dishonor and any other notice required to be given by law in connection with the
delivery, acceptance, performance, default or enforcement.
This Debenture shall be governed and construed in accordance with the laws
of the State of Colorado.
IN WITNESS WHEREOF, Fronteer Financial Holdings, Ltd. has caused this
Debenture to be signed by its President on the date first above written.
FRONTEER FINANCIAL HOLDINGS, LTD.
By:
-----------------------------------
R. A. Fitzner, Jr., Chairman
3
<PAGE>
EXHIBIT B
TO $11,000,000.00 10% CONVERTIBLE DEBENTURE
PURCHASE AGREEMENT
THE SECURITIES REPRESENTED BY THIS DEBENTURE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO
THE SATISFACTION OF THE CORPORATION.
FRONTEER FINANCIAL HOLDINGS, LTD.
10% Convertible Debenture [10 years from purchase]
$ 11,000,000.00 __________, 1997
FOR VALUE RECEIVED, Fronteer Financial Holdings, Ltd., a corporation duly
organized and existing under the laws of the State of Colorado (the
"Corporation"), hereby promises to pay to the order of Heng Fung Finance Company
Limited, ("Holder") the principal sum of $11,000,000.00, with interest from the
date hereof at the rate of 10% per annum, amortized over ten (10) years, and
payable in equal quarterly installments of principal and interest of Four
Hundred Thirty Eight Thousand, One Hundred Ninety-Nine Dollars
($438,199.00),with the first of such payments due and payable on the last day of
each calendar quarter, with the final payment of the entire unpaid principal
balance and all accrued and unpaid interest, if not sooner paid, due and payable
on the _____ day or [10 years from purchase] (the "Maturity Date").
The unpaid principal amount of this Convertible Debenture ("Debenture") and
all accrued and unpaid interest hereon shall be due and payable by the
Corporation to the Holder on the Maturity Date.
The Holder shall have the right, exercisable at the Holder's option at any
time and from time to time up to and including the Maturity Date (except that,
if this Debenture shall be called for prepayment in full by the Corporation and
the Corporation shall not thereafter default in the making of the prepayment,
such right shall terminate at the close of business on the business day next
preceding the date fixed for prepayment), to convert all or any part of the
unpaid principal amount hereof into fully paid and non-assessable shares of
Common Stock of the Corporation at the Conversion Price, as defined below, upon
surrender or partial surrender of this Debenture to the Corporation at its
principal place of business. If so required by the Corporation, this Debenture,
upon surrender or partial surrender for conversion as aforesaid, shall be duly
endorsed by or accompanied by instruments of transfer, in form satisfactory to
the Corporation, duly executed by the Holder or by Holder's duly authorized
attorney. The Corporation shall not be required to issue fractional shares of
Common Stock of the Corporation, but shall make adjustment therefor in cash
based upon the Conversion Price of the Common Stock of the Corporation as of the
date of conversion. The certificate representing the shares of Common Stock
issued upon conversion or partial conversion shall contain a legend restricting
the transfer thereof similar to the legend that appears on the top of this
Debenture.
<PAGE>
The term "Conversion Price", as used with reference to any share of Common
Stock on any specified date, shall mean $0.61 per share of Common Stock.
If any payment of interest or any payment of principal and interest, as the
case may be, is not paid by the Corporation within five (5) business days after
the date on which such payment shall have become due and payable under this
Debenture or upon the bankruptcy or receivership of the Corporation (each, an
"Event of Default"), the Holder may, by giving written notice to the
Corporation, declare the unpaid principal amount hereof and all accrued and
unpaid interest hereon to be immediately due and payable and upon such
declaration, the unpaid principal amount hereof and all accrued and unpaid
interest hereon shall be and become immediately due and payable. Upon the
occurrence and continuance of an Event of Default and upon notice from Holder to
the Corporation, the rate of interest on this Debenture shall increase from 10%
per annum to 18% per annum, and Holder shall be entitled (but not required) to
exercise any and all remedies available under Colorado law, including (without
limitation) strict foreclosure upon the stock of Fronteer Capital, Inc. pursuant
to the Security Agreement between the Corporation and the Holder.
Should the indebtedness represented by this Debenture or any part thereof
be collected at law or in equity, or in bankruptcy, receivership or any other
court proceedings (whether at the trial or appellate level), or should this
Debenture be placed in the hands of attorneys for collection upon the occurrence
of an Event of Default, the Corporation agrees to pay, in addition to the
principal and interest due and payable hereon, all costs of collection,
including reasonable attorneys' fees.
This Debenture may not be prepaid before one year from the date of
purchase. Thereafter, this Debenture may be prepaid, in part or in whole, at the
option of the Corporation, at any time or from time to time prior to the
Maturity Date, to the Holder without premium or penalty, together with accrued
interest to the date fixed for prepayment; provided, however, that prepayment in
full of this Debenture by the Corporation shall require not less than 30 nor
more than 60 days prior notice of prepayment to the Holder.
Subject to compliance with the provisions of the Securities Act of 1933, as
amended, this Debenture is transferable in the manner authorized by law. Upon
surrender of this Debenture for transfer, accompanied by a written instrument of
transfer in form satisfactory to the Corporation, a new Debenture or Debentures,
for a like aggregate principal amount, will be issued to the transferee.
2
<PAGE>
Prior to the transfer of this Debenture, the Corporation may deem and treat
the Holder hereof as the absolute owner hereof (whether or not this Debenture
shall be overdue) for the purpose of receiving payment of or on account of the
principal hereof and interest hereon, and for all other purposes, and the
Corporation shall not be affected by any notice to the contrary.
Except as expressly provided for herein, the Corporation hereby waives
presentment, demand, notice of demand, protest, notice of protest and notice of
dishonor and any other notice required to be given by law in connection with the
delivery, acceptance, performance, default or enforcement.
This Debenture shall be governed and construed in accordance with the laws
of the State of Colorado.
IN WITNESS WHEREOF, Fronteer Financial Holdings, Ltd. has caused this
Debenture to be signed by its President on the date first above written.
FRONTEER FINANCIAL HOLDINGS, LTD.
By:
-------------------------------
R. A. Fitzner, Jr., Chairman
3
<PAGE>
EXHIBIT "C"
SECURITY AGREEMENT
THIS AGREEMENT, made this _____ day of December, 1997, by and between
Fronteer Financial Holdings, Ltd., hereinafter referred to as "Debtor" and Heng
Fung Finance Limited, hereinafter referred to as "Secured Party";
WHEREAS, Debtor is the holder of the following hereinafter referred to
"collateral":
One Certificate for 1,000 shares of voting common stock,
representing 100% of the issued and outstanding capital
stock of Fronteer Capital, Inc., a Delaware corporation,
together with a noncancellable assignment, endorsed in
blank, of the certificate for such stock duly signed by
Debtor.
WHEREAS, to induce Secured Party to accept a $4,000,000.00 10% Convertible
Debenture (the "Debenture") of even date herewith, Debtor intends to grant to
Secured Party a security interest in said collateral;
NOW, THEREFORE, it is hereby agreed as follows:
1. Debtor does hereby deliver, assign and grant to Secured Party a security
interest in said collateral to secure the payment of all principal and interest
as provided in said Debenture, and all other indebtedness of Debtor to Secured
Party, however or whenever arising, whether due or to become due. So long as any
portion of the Debenture remains unpaid, Secured Party alone shall have the
right to cast any and all votes and receive any distributions pertaining to the
collateral.
2. Secured Party shall have the right to record and file its lien and, at
any time, to notify any and all third parties of the security interest of
Secured Party in said collateral and, in the event of a default, to cause said
collateral to be transferred to the name of the Secured Party or to the name of
any other person or corporation; and Secured Party or such transferee may
exercise all the rights and privileges in connection with said collateral to
which transferor would have been entitled by virtue of being record holder
thereof.
3. Debtor does hereby constitute and appoint Secured Party as its
attorney-in-fact to, upon default, endorse Debtor's name on said collateral, on
any check or any other instrument of payment to be received therefrom, or on any
other document or instrument which would facilitate the collection or payment of
said collateral; to give receipts therefor in the name of Debtor for any amounts
which may be received thereon; and to apply the amount so collected to any
indebtedness of Debtor to Secured Party. If Secured Party elects to accelerate
the indebtedness represented by the Debenture due to the failure or refusal of
the NASD to consent to the change in control of RAF Financial Corp. by June 15,
1997, the Secured Party's sole and only remedy will be to take the Collateral in
satisfaction of the balance due on the Debenture, without any public notice of
foreclosure sale or public sale of the Collateral.
<PAGE>
4. Debtor does hereby warrant and represent that at the time of execution
of this Security Agreement, Debtor has full and complete capacity and authority
to grant the aforesaid security interest to Secured Party, and that the security
interest granted herein to Secured Party is free and clear of any superior
security interest, claim or lien. Debtor further agrees that, so long as this
Security Agreement is in effect, no other lien, security interest, claim or
encumbrance shall be permitted to attach to the Collateral or any part thereof,
and no transfer, assignment, pledge or hypothecation (other than as set forth
herein) of the Collateral or any part thereof shall be permitted.
5. In the event of the default by Debtor in the payment of any sum when due
pursuant to said Debenture or otherwise, then all indebtedness of Debtor to
Secured Party hereby secured shall become due and payable as provided in said
Debenture at the option of Secured Party, its successors and assigns, and Debtor
does hereby authorize, empower and instruct Secured Party, as its
attorney-in-fact, to collect said collateral, to retain such collateral in
satisfaction of the Debenture or to sell the same, the whole or part of said
collateral, at public or private sale, at its discretion after ten (10) days'
prior written notice thereof to Debtor, without advertisement or notice of
public sale, for cash or on credit, for such price and upon such terms as
Secured Party shall determine, delivering said collateral to the purchaser
thereof, Secured Party retaining the right to become the purchaser at such sale;
the proceeds received shall first be applied to expenses, costs and charges,
including (without limitation) attorneys' fees, incurred in the collection,
sale, or delivery of said collateral, then to the payment of all indebtedness of
Debtor to Secured Party, paying any surplus to Debtor.
Debtor waives any right to require Secured Party to proceed against any
person, exhaust any collateral, or pursue any other remedy which Secured Party
may now or hereafter have. Debtor authorizes Secured Party, without notice or
demand, to renew, extend the time of payment of, or accelerate the terms of any
indebtedness due or to become due from Debtor to Secured Party, or to take and
hold additional security for the payment of said indebtedness, or exchange,
enforce, release or substitute any of said collateral.
6. At such time as the Debenture has been fully repaid and satisfied,
Secured Party shall release its security interest in said collateral and deliver
said collateral to Debtor.
7. The rights and liabilities of the parties hereto shall be governed and
construed by the Uniform Commercial Code, as enacted in the State of Colorado.
IN WITNESS WHEREOF, this Agreement has been executed the day and year first
above written.
DEBTOR: SECURED PARTY:
FRONTEER FINANCIAL HOLDINGS, LTD., HENG FUNG FINANCE COMPANY
a Colorado corporation LIMITED, a Hong Kong corporation
By: By:
-------------------------------------- -------------------------------
-2-
<PAGE>
Subsidiaries Incorporation
------------ -------------
RAF Financial Corporation Colorado
RAF Services, Inc. of Texas Texas
RAF Services, Inc. of Louisiana Louisiana
RAF Services, Inc. Nevada
Fronteer Capital, Inc. Delaware
Fronteer Personnel Services, Inc. North Dakota
Fronteer Marketing Group, Inc. North Dakota
Secutron Corporation Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,080,722
<SECURITIES> 871,322
<RECEIVABLES> 2,834,705
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,258,699
<PP&E> 3,437,386
<DEPRECIATION> (1,970,572)
<TOTAL-ASSETS> 11,003,082
<CURRENT-LIABILITIES> 8,258,699
<BONDS> 927,843
0
0
<COMMON> 185,167
<OTHER-SE> 3,166,824
<TOTAL-LIABILITY-AND-EQUITY> 11,003,082
<SALES> 0
<TOTAL-REVENUES> 25,100,414
<CGS> 0
<TOTAL-COSTS> 27,627,592
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 274,752
<INTEREST-EXPENSE> 27,940
<INCOME-PRETAX> (2,438,826)
<INCOME-TAX> (448,524)
<INCOME-CONTINUING> (1,990,302)
<DISCONTINUED> (799,048)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,455,872)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
