FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17637
Fronteer Financial Holdings, Ltd.
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(Exact name of registrant as specified in its charter)
Colorado 45-0411501
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(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1700 Lincoln Street, Suite 3200, Denver, CO, 80203
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(Address of principal executive offices)
(303) 860-1700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The registrant had 16,920,475 shares of its $.01 par value common stock
outstanding as of May 13, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 1998 September 30, 1997
-------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 3,325,247 2,080,722
Receivables from brokers or dealers and clearing
organizations ................................................................. 475,879 2,045,134
Trade receivables ................................................................ 1,065,732 786,971
Other receivables ................................................................ 269,495 382,208
Securities owned, at market value ................................................ 3,495,465 871,322
Other assets ..................................................................... 75,860 824,056
Net current assets of discontinued operations .................................... -- 1,268,286
------------ ------------
Total current assets ........................................................ 8,707,678 8,258,699
PROPERTY, FURNITURE AND EQUIPMENT, net
of accumulated depreciation ................................................... 1,280,228 1,167,883
DEFERRED INCOME TAXES ............................................................ 613,784 613,784
OTHER LONG TERM ASSETS ........................................................... 755,888 247,241
NET LONG TERM ASSETS OF DISCONTINUED
OPERATIONS .................................................................... -- 715,475
------------ ------------
Total assets ................................................................ $ 11,357,578 11,003,082
============ ============
(Continued)
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 1998 September 30, 1997
-------------- ------------------
(Unaudited)
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LIABILITIES:
Accounts payable, accrued expenses, and other liabilities ........................ $ 2,443,312 3,373,672
Current portion of long-term debt ................................................ 115,784 863,164
Deferred revenue ................................................................. 251,200 --
Other current liabilities ........................................................ 140,563 426,555
------------ ------------
Total current liabilities ................................................... 2,950,859 4,663,391
LONG-TERM DEBT, NET OF CURRENT PORTION ........................................... 102,943 927,843
CONVERTIBLE DEBENTURE ............................................................ 4,000,000 --
DEFERRED RENT CONCESSIONS..... ................................................... 1,688,014 1,716,529
OTHER LIABILITIES ................................................................ 316,403 88,000
------------ ------------
Total liabilities ........................................................... 9,058,219 7,395,763
------------ ------------
MINORITY INTEREST IN SUBSIDIARY .................................................. 267,874 255,328
------------ ------------
STOCKHOLDERS' EQUITY:
Series A voting cumulative preferred stock, authorized
25,000,000 shares, $0.10 par value, no shares outstanding ..................... -- --
Common stock; authorized 100,000,000 shares, $0.01 par value;
16,378,057 and 16,871,557 shares issued and outstanding
as of March 31, 1998 and September 30, 1997, respectively ..................... 185,167 185,167
Additional paid-in capital ....................................................... 12,230,772 12,230,772
Accumulated deficit .............................................................. (8,260,720) (7,433,714)
Unearned ESOP shares ............................................................. (350,000) (350,000)
Treasury stock, 2,138,662 and 1,645,162 shares at cost as
of March 31, 1998 and September 30, 1997, respectively ........................ (1,773,734) (1,280,234)
------------ ------------
Total stockholders' equity .................................................. 2,031,485 3,351,991
------------ ------------
Total liabilities and stockholders' equity .................................. $ 11,357,578 11,003,082
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended March 31, Three months ended March 31,
------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Brokerage commissions ................................... $ 6,848,614 7,191,802 3,560,080 3,684,082
Investment banking ...................................... 1,557,974 999,699 1,201,470 432,485
Trading profits, net .................................... 283,763 105,695 205,911 (27,548)
Other broker/dealer ..................................... 462,806 458,001 229,520 248,040
Computer hardware and software operations ............... 5,087,822 3,995,178 1,818,107 1,835,854
Other ................................................... -- 41,912 -- --
------------ ------------ ------------ ------------
14,240,979 12,792,287 7,015,088 6,172,913
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Broker/dealer commissions ............................... 5,216,489 4,820,259 2,877,626 2,552,938
Computer cost of sales .................................. 4,383,746 3,111,220 1,991,472 1,553,336
General and administrative .............................. 6,233,642 5,557,664 3,352,740 2,783,174
Depreciation and amortization ........................... 178,758 310,318 91,287 87,431
------------ ------------ ------------ ------------
16,012,635 13,799,461 8,313,125 6,976,879
------------ ------------ ------------ ------------
Operating loss ........................................ (1,771,656) (1,007,174) (1,298,037) (803,966)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ......................................... 140,721 88,960 68,480 34,957
Interest expense ........................................ (119,733) (28,661) (110,267) (5,034)
Other ................................................... (26,435) (51,768) (26,435) (43,877)
------------ ------------ ------------ ------------
(5,447) 8,531 (68,222) (13,954)
------------ ------------ ------------ ------------
Loss before minority interest and income taxes ............. (1,777,103) (998,643) (1,366,259) (817,920)
Minority interest in (earnings) loss ....................... (12,546) (7,092) 133,135 41,672
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes ........ (1,789,649) (1,005,735) (1,233,124) (776,248)
Income tax (expense) benefit ............................... (32,871) (25,519) 180,328 63,441
------------ ------------ ------------ ------------
Loss from continuing operations ............................ (1,822,520) (1,031,254) (1,052,796) (712,807)
Discontinued operations:
Loss on sale of discontinued operations, net ............ (317,905) (226,872) (317,905) (226,872)
Loss from discontinued operations, net .................. (186,581) (2,314) (94,877) (65,236)
------------ ------------ ------------ ------------
Net loss from discontinued operations ...................... (504,486) (229,186) (412,782) (292,108)
Net loss before extraordinary item, net .................... (2,327,006) (1,260,440) (1,465,578) (1,004,915)
Extraordinary item, net .................................... 1,500,000 -- -- --
------------ ------------ ------------ ------------
Net loss ................................................... $ (827,006) (1,260,440) (1,465,578) (1,004,915)
============ ============ ============ ============
Weighted average number of common shares outstanding ....... 16,849,865 16,648,417 16,827,690 16,871,557
============ ============ ============ ============
Basic and diluted loss per common share:
Continuing operations ................................... $ (.11) (.06) (.06) (.04)
Discontinued operations:
Loss on sale of discontinued operations .............. (.02) (.02) (.02) (.02)
Loss from discontinued operations .................... (.01) -- (.01) --
Extraordinary item ...................................... .09 -- -- --
------------ ------------ ------------ ------------
Total ...................................................... $ (.05) (.08) (.09) (.06)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional Unearned
Preferred Common paid-in Accumulated ESOP Treasury
stock stock capital deficit stock stock Total
--------- ------ ------- ----------- -------- -------- -----
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Balances as of
September
30, 1997 ............... $ -- 185,167 12,230,772 (7,433,714) (350,000) (1,280,234) 3,351,991
Treasury stock
received in
disposition of
net assets of
discontinued
operations ............. -- -- -- -- -- (493,500) (493,500)
Net loss .................. -- -- -- (827,006) -- -- (827,006)
------------ ---------- ---------- ---------- ---------- ---------- ----------
Balances as of
March 31, 1998 ......... $ -- 185,167 12,230,772 (8,260,720) (350,000) (1,773,734) 2,031,485
============ ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
Six months ended March 31,
--------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations .............................................. (1,822,520) (1,031,254)
Adjustments to reconcile net loss from continuing operations
to net cash used in continuing operations:
Depreciation and amortization ............................................. 178,758 310,318
Change in deferred taxes .................................................. -- (1,208,000)
Minority interest in earnings ............................................. 12,546 7,092
Other ..................................................................... (28,515) 239,563
Changes in operating assets and liabilities:
Decrease in receivables from brokers or dealers
and clearing organizations .......................................... 1,569,255 515,990
Decrease (increase) in trade receivables ............................... (278,761) 247,751
Decrease (increase) in other receivables ............................... 112,713 (126,915)
Increase in securities owned, net of securities
sold but not yet purchased .......................................... (2,643,899) (283,636)
Decrease (increase) in other assets .................................... 748,196 (504,811)
Increase (decrease) in accounts payable, accrued expenses,
and other liabilities ............................................... (930,360) (350,839)
Increase in deferred revenue ........................................... 251,200 53,591
Decrease in other current liabilities .................................. (266,236) (232,937)
----------- -----------
Net cash used in continuing operations ................................. (3,097,623) (2,364,087)
Net cash provided by discontinued operations ........................... 763,800 460,871
----------- -----------
Net cash used in operating activities .................................. (2,333,823) (1,903,216)
----------- -----------
(Continued)
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
Six months ended March 31,
--------------------------
1998 1997
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, furniture and equipment .............................. (291,103) (212,939)
Proceeds from sale of Clearing Operation, net .............................. -- 1,048,075
Other investing activities ................................................. (508,647) (24,006)
Net cash provided by discontinued operations ............................... 221,975 717,256
----------- -----------
Net cash provided (used) by investing activities ........................... (577,775) 1,528,386
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt ......................................................... 260,113 227,157
Principal payments on borrowings ........................................... (332,393) (556,001)
Net proceeds from issuance of convertible debenture ........................ 4,000,000 --
Net proceeds from issuance of common stock ................................. -- 722,317
Other financing activities ................................................. 228,403 --
----------- -----------
Net cash provided by financing activities .................................. 4,156,123 393,473
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................................... 1,244,525 18,643
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD ..................................................................... 2,080,722 2,070,320
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... 3,325,247 2,088,963
=========== ===========
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
Six months ended March 31,
--------------------------
1998 1997
---- ----
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SUPPLEMENTAL DISCLOSURES RELATED TO STATEMENTS OF CASH FLOWS
Cash payments for:
Interest:
Continued operations .................................................... $ 8,161 14,605
Discontinued operations ................................................. 9,350 79,909
----------- -----------
$ 17,511 94,514
=========== ===========
Income taxes:
Continued operations .................................................... $ 7,047 128,422
Discontinued operations ................................................. -- 1,409
----------- -----------
$ 7,047 129,831
=========== ===========
Other investing and financing activities:
Forgivable loan recognized as extraordinary item, net ...................... $ 1,500,000 --
=========== ===========
Treasury Stock received in disposition of net assets of
discontinued operations .................................................... $ 493,500 --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Fronteer
Financial Holdings, Ltd. and subsidiaries (Fronteer or the Company) have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principals. In the opinion of management, these
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the results of
operations and financial position for the interim periods presented.
The preparation of interim financial statements required management to make
estimates and assumptions that 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
These interim financial statements should be read in conjunction with the Annual
Report on Form 10-K as of and for the year ended September 30, 1997. Operating
results for the six or three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ended September 30,
1998.
NOTE 2 - ORGANIZATION AND PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include Fronteer and its wholly-owned
subsidiaries, RAF Financial Corporation (RAF), RAF Services Inc. of Texas, RAF
Services Inc. of Louisiana, RAF Services Inc. (collectively, RAF Services) and
Fronteer Capital, Inc. (Fronteer Capital). 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.
RAF operates as a registered securities broker/dealer. RAF Services are
subsidiaries established in order to participate in insurance brokerage
activities in certain states. Fronteer Capital was formed to effectuate the
transactions described below in Note 4. Secutron is engaged in industry specific
software development and provides consulting services.
NOTE 3 - EARNINGS PER SHARE
Basic 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. Diluted loss per common share would
not be different than basic loss per common share due to the fact that including
the potential common shares would result in antidilution as a result of the loss
from continuing operations.
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, CONTINUED
NOTE 4 - STOCKHOLDERS' EQUITY
In December 1997, Heng Fung Capital [S] Private Limited (Heng Fung Private), a
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 the regulatory approval of the National Association of Securities Dealers,
Inc. (NASD) 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 Fronteer's
outstanding Common Stock from Mr. Fitzner. In conjunction with the transaction,
Fronteer 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 Fronteer agreed to sell 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 Fronteer Common Stock. The purchase of the
$4,000,000 Convertible Debenture was completed on December 30, 1997. The
directors of Fronteer Capital, Inc. are appointed by Heng Fung Finance and all
of the outstanding stock of Fronteer Capital, Inc. is pledged as collateral for
the convertible debenture. On December 26, 1997, the Board of Directors of
Fronteer, at the request of Heng Fung Finance made pursuant to the terms of the
Convertible Debenture Agreement, appointed Mr. Fai Chan and Mr. Robert Trapp as
selected by Heng Fung Finance, to the Board of Directors of Fronteer.
On January 29, 1998, the NASD approved (subject to certain restrictions that
were subsequently agreed to by RAF) the change in the beneficial ownership of
25% or more of RAF, and on February 18, 1998 Heng Fung Private purchased the
additional 3,556,777 shares of Fronteer's outstanding Common Stock from Mr.
Fitzner. Contemporaneously with that purchase, Mr. Fitzner, Mr. Long and Mr.
Dennis Olson resigned as directors of Fronteer and Mr. Chan and Mr. Trapp, the
two remaining directors appointed at the request of Heng Fung Finance Mr. Kwok
Jen Fong, a practicing solicitor in Singapore as a director of Fronteer. On
February 20, 1998, the Board of Directors of Fronteer appointed Jeffrey Busch
and Robert Jeffers, Jr., both practicing attorneys, as directors of Fronteer.
After giving effect to the transactions described above, Heng Fung Holdings,
through Heng Fung Private and Heng Fung Finance, owns approximately 27.8% of
Fronteer's outstanding Common Stock, owns the $4,000,000 Convertible Debenture
that is convertible at $.53125 per share into 7,529,411 of Fronteer's Common
Stock and has the option to purchase one or more ten year 10% Convertible
Debentures of such amounts as desired in multiples of $100,000 up to an
aggregate of $11,000,000 that will be convertible at $.61 per share into an
aggregate of 18,032,786 shares of Fronteer's Common Stock. On May 18, 1998, Heng
Fung exercised its option and purchased $1,500,000 of the possible $11,000,000.
The $1,500,000 will be used by Fronteer as working capital.
On April 25, 1998, the Board of Directors approved a resolution to compensate
Heng Fung Finance for it's time, efforts, capital costs and expenses in setting
up and operating a New York City office which was transferred to Fronteer to be
operated as an RAF institutional sales location upon final NASD approval.
Compensation, as agreed to by the Board of Directors and determined based upon
actual capital costs and expenses incurred, as well as certain estimates, was
$350,000 payable in 350,000 shares of common stock of Fronteer.
Subsequent to March 31, 1998, in accordance with the Convertible Debenture
Agreement, the Company issued 192,418 shares of common stock of Fronteer to Heng
Fung Finance as consideration for the accrued interest expense as of March 31,
1998 on the Convertible Debenture.
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, CONTINUED
NOTE 5 - DISCONTINUED OPERATIONS
During the year ended September 30, 1997, the Company disposed of most of it's
remaining assets used in it's directory and telemarketing related businesses and
accordingly accounted for the related activity in these businesses in the
consolidated financial statements as discontinued operations.
On March 20, 1998, the Company entered into an agreement with North Country
Yellow Pages, Inc. (North Country) to sell the remaining net assets used in the
directory and telemarketing operations for 493,500 shares of the Company's
common stock held by the principals of North Country, Dennis Olson and Lance
Olson, former employees of the Company. Mr. Dennis Olson is the former president
and director of the Company. The purchase price was based on third party
appraisals and management's estimates relating to specific assets and
liabilities. The Board of Directors approved the sale on May 14, 1998. Closing
is anticipated to be on May 20, 1998. The Company has included as of and for the
six and three months ended March 31, 1998, the loss on disposition related to
the sale of the net assets to North Country in it's consolidated financial
statements and has accounted for the 493,500 shares of common stock to be
received as treasury stock. Loss on the sale of net assets was approximately
$318,000.
NOTE 6 - EXTRAORDINARY ITEM
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 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 was recognized as income during the six months ended March 31,
1998. The second and final portion of the loan plus accrued interest payable was
canceled in accordance with provisions in the forgivable loan agreement relating
to MSI's decision to cease being engaged in the clearing business. The remaining
$750,000 was also recognized as income during the six months ended March 31,
1998.
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, CONTINUED
NOTE 7 - COMMITMENTS AND CONTINGENCIES
On April 14, 1998, Fronteer Capital and Heng Fung Finance committed to provide
to Global Med Technologies, Inc. (Global) lines of credit for up to $1,500,000
each for a total combined loan commitment of $3,000,000 over the following
twelve months. The loans will bear interest calculated at a rate of 12% per
annum and will mature 366 days after April 14, 1998.
Pursuant to the loan commitment provided by Heng Fung Finance, Global has agreed
that Global's board of directors will not exceed nine and that Heng Fung Finance
has the right to appoint five members to the board of directors of Global and
has the option to cancel all Global management and employee contracts. Global
has the right to call the $1,500,000 from Heng Fung Finance as needed by Global.
For issuing the commitment, Heng Fung Finance earned warrants to purchase
6,000,000 shares of Global's common stock. The warrants are exercisable at $0.25
per share for up to 10 years and Global has agreed to register by July 14, 1998,
the shares for resale under the Securities Act of 1933. As long as Global has
used it's best efforts to file such registration statement covering such shares
with the Securities and Exchange Commission and responded to any comments from
the Securities and Exchange Commission in a timely manner, Global will not be
deemed to be in default under the Heng Fung Finance loan if the shares are not
registered for resale by July 14, 1998.
The loan commitment provided by Fronteer Capital has substantially the same
terms and conditions as the loan commitment provided by Heng Fung Finance except
that, if Heng Fung Finance does not appoint directors to Global's board of
directors, Fronteer Capital has the right to appoint a maximum of three members
to the board of directors of Global, Global has the right to call the $1,500,000
from Fronteer after the total loan from Heng Fung Finance is drawn down, and if
the loan provided by Fronteer is draw down, Fronteer will earn warrants to
purchase 6,000,000 shares of Global's common stock upon the same terms and
conditions as the warrants to purchase 6,000,000 shares of Global's common stock
earned by Heng Fung Finance. Further, Michael I. Ruxin, the Chief Executive
Officer of Global, has agreed to personally guarantee the repayment of
$1,500,000 of the Fronteer Capital loan. The guarantee is limited to certain of
Dr. Ruxin's assets. For issuing the commitment, Fronteer Capital has earned
warrants to purchase 1,000,000 of the 6,000,000 shares of Global's common stock.
If Global defaults on the repayment of any amount borrowed by Global pursuant to
the Heng Fung Finance commitment, all existing members of the board of directors
of Global will have to resign and Heng Fung Finance will have the right to
appoint all new members to the board of directors, Heng Fung will have the right
to convert the outstanding amount of the loan into shares of Global's common
stock at a conversion price of $0.05 per share and all employment contracts of
the management and officers of Global will be invalid immediately and their
employment will be subject to reconfirmation by Heng Fung Finance. If there is
no default on the repayment to Heng Fung Finance, or if there is a default and
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, CONTINUED
Heng Fung Finance does not exercise its rights on default, Fronteer Capital will
have the same rights on default on the repayment of any amounts borrowed
pursuant to the Fronteer Capital commitment as Heng Fung Finance as are
specified above.
RAF will receive a fee of 9% of the amount drawn down by Global under the
commitments.
RAF is a defendant in certain arbitration and litigation matters arising from
its activities as a broker/dealer. In the opinion of management, these matters
have been adequately provided for in the accompanying consolidated financial
statements, and the ultimate resolution of the arbitration and litigation will
not have a significant adverse effect on the consolidated results of operations
or the consolidated financial position of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Six months ended March 31, 1998 compared to six months ended March 31, 1997.
Revenues for the six months ended March 31, 1998 were $14,240,979, an increase
of $1,448,692 or 11.3% over the $12,792,287 for the six months ended March 31,
1997. The increase primarily relates to increased investment banking activity,
an increase in computer hardware and software sales and an increase in trading
profits.
Computer hardware and software revenues for the six months ended March 31, 1998
were $5,087,822, a $1,092,644 or 27.3% increase over the $3,995,178 for the six
months ended March 31, 1997. Most of the increase occurred in the first quarter
and is attributable to new contracts secured by Secutron for software
development, and an increase in computer equipment sales.
The increase in broker/dealer commission expense of $396,230 or 8.2% over the
prior period correlates to the increase in investment banking revenues.
The increase in general and administrative expenses for the six months ended
March 31, 1997 of $675,978 or 12.2% over the comparable period reflects
increased expenses associated with new branch openings in West Palm Beach,
Kansas City, San Francisco, Dallas, and Las Vegas.
Interest expense increased from the prior period as a result of the $4,000,000
Convertible Debenture issued to Heng Fung Finance in December 1997.
The minority interest in (earnings) loss represents the minority interest
investment in Secutron.
The loss from discontinued operations represents the loss on sale and net loss
from operating activity of the Company's directory and telemarketing businesses
for which all of the primary operating assets were sold.
The extraordinary item represents the recognition of the forgivable loan with
MSI in accordance with the terms and conditions of the forgivable loan
agreement. These terms and conditions included the forgiveness of the loan based
on revenue targets for MSI. MSI reached the target for forgiveness of $750,000
and thus it was recognized as income. The remaining $750,000 was recognized as
income as MSI discontinued operating as a clearing firm in the securities
industry which allowed the Company to recognize the remainder in accordance with
the agreement.
Three months ended March 31, 1998 compared to three months ended March 31, 1997.
Revenues for the three months ended March 31, 1998 were $7,015,088, an increase
of $842,175 or 13.6% over the $6,172,913 for the three months ended March 31,
1996. The increase is primarily a result of an increase in investment banking
activity and trading profits.
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, CONTINUED
Revenues from computer hardware and software activities were consistent for the
three months ended March 31, 1998 compared to the prior period 1997. This
consistency versus the first quarter increase reflects Secutron's time and
efforts with current clients making sure proprietary software is Year 2000
compliant. The increase in computer costs of sales of $438,136 or 28% compared
to the consistent revenue comparison for the quarter comparison also reflects
Secutron's emphasis on year 2000 compliance for it's proprietary software users.
The increase in broker/dealer commissions expense for the three months ended
March 31, 1998 compared to the prior period 1997 of $324,688 or 12.7% correlates
to the increase in investment banking revenues.
The increase in general and administrative expense for the quarter ended March
31, 1998 over the quarter ended March 31, 1997 of $569,566 or 20%, reflects the
increased expenses associated with the new branch openings in West Palm Beach,
Kansas City and San Francisco.
Interest expense increased for the prior period as a result of the $4,000,000
Convertible Debenture issued to Heng Fung Finance in December 1997.
The minority interest in (earnings) losses represents the minority interest
investment in Secutron.
The loss from discontinued operations represents the loss on sale and net loss
from operating activity of the Company's directory and telemarketing businesses
for which all of the primary operating assets were sold.
The extraordinary item represents the recognition of the forgivable loan with
MSI in accordance with the terms and conditions of the forgivable loan
agreement. These terms and conditions included the forgiveness of the loan based
on revenue targets for MSI. MSI reached the target for forgiveness of $750,000
and thus it was recognized as income. The remaining $750,000 was recognized as
income as MSI discontinued operating as a clearing firm in the securities
industry which allowed the Company to recognize the remainder in accordance with
the agreement.
Liquidity and Capital Resources
The Company, as of March 31, 1998, had $3,325,247 in cash and cash equivalents
and $5,576,819 in working capital. The issuance of the convertible debenture
provided proceeds of $4,000,000 in December 1997. Proceeds from discontinued
operations of $985,775, borrowings on debt of $260,113and other financing
activities of $228,403 were used to fund the purchase of property and equipment
of $291,103, to repay borrowings of $332,393 and in other investing activities
of $508,647.
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.
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, CONTINUED
In February 1998, as discussed in Item 4 to the consolidated financial
statements, Heng Fung Private gained control of the Company. $4,000,000 in
working capital was provided to the Company in conjunction with this change in
control. Additionally, on May 18, 1998, Heng Fung Finance exercised its option
and purchased $1,500,000 of a possible $11,000,000 in the aggregate of 10%
Convertible Debentures. The %1,500,000 will be used by the Company as working
capital.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Data.
Not Applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended March 31, 1998 the Company filed a Current Report
on Form 8-K dated February 18, 1998 reporting the change in control of the
Company under Item 1.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 18, 1998 FRONTEER FINANCIAL HOLDINGS, LTD.
a Colorado Corporation
By: /s/ Robert H. Trapp
---------------------------------
Robert H. Trapp
Managing Director
By: /s/ Gary L. Cook
---------------------------------
Gary L. Cook
Chief Financial Officer and
Principal Accounting Officer
<PAGE>
Exhibit Index
Exhibit Description
- ------- -----------
27.0 Financial Data Schedule
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,325,247
<SECURITIES> 3,495,465
<RECEIVABLES> 1,811,106
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,707,678
<PP&E> 3,429,558
<DEPRECIATION> (2,149,330)
<TOTAL-ASSETS> 11,357,578
<CURRENT-LIABILITIES> 2,950,859
<BONDS> 4,102,943
0
0
<COMMON> 185,167
<OTHER-SE> 1,846,318
<TOTAL-LIABILITY-AND-EQUITY> 11,357,578
<SALES> 0
<TOTAL-REVENUES> 7,015,088
<CGS> 0
<TOTAL-COSTS> 8,313,125
<OTHER-EXPENSES> 26,435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,267
<INCOME-PRETAX> (1,233,124)
<INCOME-TAX> (180,328)
<INCOME-CONTINUING> (1,052,796)
<DISCONTINUED> (412,782)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,465,578)
<EPS-PRIMARY> (.09)
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