FORM 10-Q/A
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 June 30, 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 August 10, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 1998 September 30,
(Unaudited) 1997
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 1,003,922 2,080,722
Receivables from brokers or dealers and clearing
organizations ............................................. 4,969 2,045,134
Trade receivables ................................................ 1,054,355 786,971
Other receivables ................................................ 366,510 382,208
Securities owned, at market value ................................ 5,369,208 871,322
Other assets ..................................................... 121,300 824,056
Net current assets of discontinued operations .................... -- 1,268,286
------------ ------------
Total current assets ........................................ 7,920,264 8,258,699
PROPERTY, FURNITURE AND EQUIPMENT, net
of accumulated depreciation .................................. 1,446,134 1,167,883
DEFERRED INCOME TAXES ............................................ 613,784 613,784
OTHER LONG TERM ASSETS ........................................... 1,405,255 247,241
NET LONG TERM ASSETS OF DISCONTINUED
OPERATIONS ................................................... -- 715,475
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Total assets ................................................ $ 11,385,437 11,003,082
============ ============
(Continued)
See accompanying notes to consolidated financial statements.
2
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<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1998 September 30,
(Unaudited) 1997
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<S> <C> <C>
LIABILITIES:
Accounts payable, accrued expenses and other liabilities ......... $ 2,817,175 3,373,672
Current portion of long-term debt ................................ 112,755 863,164
Deferred revenue ................................................. 191,500 --
Other current liabilities ........................................ 674,182 426,555
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Total current liabilities ................................... 3,795,612 4,663,391
LONG-TERM DEBT ................................................... 92,943 927,843
CONVERTIBLE DEBENTURES, RELATED PARTY ............................ 5,500,000 --
DEFERRED RENT CONCESSIONS ........................................ 1,654,766 1,716,529
OTHER LIABILITIES ................................................ 45,280 88,000
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Total liabilities ........................................... 11,088,601 7,395,763
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MINORITY INTEREST IN SUBSIDIARY .................................. 176,448 255,328
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STOCKHOLDERS' EQUITY:
Preferred stock, undesignated, authorized 24,912,500
shares, $0.10 par value, no shares outstanding ............... -- --
Series A voting cumulative preferred stock, authorized
87,500 shares, $0.10 par value, no shares outstanding ........ -- --
Common stock; authorized 100,000,000 shares, $0.01
par value; 16,920,475 and 16,871,557 shares
issued and outstanding as of June 30, 1998 and
September 30, 1997, respectively ............................ 169,205 168,716
Additional paid-in capital ....................................... 10,925,222 10,966,989
Accumulated deficit .............................................. (10,624,039) (7,433,714)
Unearned ESOP shares ............................................. (350,000) (350,000)
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Total stockholders' equity .................................. 120,388 3,351,991
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Total liabilities and stockholders' equity .................. $ 11,385,437 11,003,082
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended June 30, Three months ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Brokerage commissions ................................... $ 11,313,545 10,814,872 4,464,931 3,623,070
Investment banking ...................................... 1,814,287 1,130,594 256,313 130,895
Trading profits, net .................................... 328,077 129,078 153,349 23,383
Other broker/dealer ..................................... 855,644 861,498 392,838 403,497
Computer hardware and software operations ............... 6,556,362 5,630,246 1,468,540 1,635,068
Other ................................................... -- 28,012 -- (13,900)
------------ ------------ ------------ ------------
20,867,915 18,594,300 6,735,971 5,802,013
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Broker/dealer commissions ............................... 8,103,752 7,271,341 2,887,263 2,451,082
Computer cost of sales .................................. 5,862,072 4,323,744 1,478,326 1,212,524
General and administrative .............................. 9,743,202 8,324,987 3,509,560 2,767,323
Depreciation and amortization ........................... 326,968 396,346 148,210 86,028
------------ ------------ ------------ ------------
24,035,994 20,316,418 8,023,359 6,516,957
------------ ------------ ------------ ------------
Operating loss ........................................ (3,168,079) (1,722,118) (1,287,388) (714,944)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ......................................... 376,493 112,936 235,772 23,976
Interest expense ........................................ (470,077) (34,720) (350,344) (6,059)
Unrealized loss on investments .......................... (1,027,603) -- (1,136,638) --
Other ................................................... (2,843) (58,697) 29,331 (6,929)
------------ ------------ ------------ ------------
(1,124,030) 19,519 (1,221,879) 10,988
------------ ------------ ------------ ------------
Loss before minority interest and income taxes ............. (4,292,109) (1,702,599) (2,509,267) (703,956)
Minority interest in (earnings) loss ....................... 78,880 (10,638) 91,426 (3,546)
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes ........ (4,213,229) (1,713,237) (2,417,841) (707,502)
Income tax (expense) benefit ............................... 21,651 (36,759) 54,522 (11,240)
------------ ------------ ------------ ------------
Loss from continuing operations ............................ (4,191,578) (1,749,996) (2,363,319) (718,742)
Discontinued operations:
Gain (loss) from discontinued operations, net ............ (180,842) 65,510 -- 540,148
Loss on sale of discontinued operations, net ............. (317,905) (226,872) -- (462,324)
------------ ------------ ------------ ------------
Net loss before extraordinary item ......................... (4,690,325) (1,911,358) (2,363,319) (640,918)
Extraordinary item, net .................................... 1,500,000 -- -- --
------------ ------------ ------------ ------------
Net loss ................................................... $ (3,190,325) (1,911,358) (2,363,319) (640,918)
============ ============ ============ ============
Weighted average number of common shares
outstanding ............................................... 16,805,848 16,723,340 16,717,813 16,871,557
============ ============ ============ ============
Basic and diluted loss per common share:
Continuing operations ................................... $ (.25) (.10) (.14) (.04)
Discontinued operations:
Gain (loss) from discontinued operations .............. (.01) .00 (.00) .03
Loss on Sale of discontinued operations ............... (.02) (.01) (.00) (.03)
------------ ------------ ------------ ------------
(.28) (.11) (.14) (.04)
Extraordinary item ...................................... .09 -- -- --
------------ ------------ ------------ ------------
Total ...................................................... $ (.19) (.11) (.14) (.04)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended June 30,
-------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ............................................... $(4,191,578) (1,749,996)
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing operations:
Depreciation and amortization ................................................. 326,968 396,346
Change in deferred taxes ...................................................... -- (1,623,000)
Minority interest in earnings ................................................. (78,880) 10,638
Unrealized loss on investments ................................................ 1,027,603 --
Other ......................................................................... (61,763) (75,545)
Changes in operating assets and liabilities:
Decrease (increase) in receivables from brokers or dealers
and clearing organizations ............................................ 2,040,165 (456,194)
Decrease (increase) in trade receivables ................................... (267,384) 598,005
Decrease (increase) in other receivables ................................... 15,698 (103,755)
Decrease (increase) in securities owned, net of securities
sold but not yet purchased ............................................. (5,525,529) 340,907
Decrease (increase) in other assets ........................................ 702,796 (573,063)
Decrease in accounts payable, accrued expenses,
and other liabilities .................................................... (556,497) (277,269)
Increase (decrease) in deferred revenue .................................... 191,500 (278,928)
Increase (decrease) in other current liabilities ........................... 349,849 (342,364)
----------- -----------
Net cash used in continuing operations ..................................... (6,027,052) (4,134,218)
Net cash provided by discontinued operations ............................... 769,539 1,638,979
----------- -----------
Net cash used in operating activities ...................................... (5,257,513) (2,495,239)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, furniture and equipment ................................. (255,218) (380,394)
Proceeds from sale of assets, net ............................................. -- 702,222
Principal collected on notes receivable ....................................... -- 217,256
Proceeds from receivable from affiliate ....................................... -- 1,048,075
Other investing activities .................................................... (1,158,015) (15,326)
Net cash provided by discontinued operations .................................. 221,975 --
----------- -----------
Net cash (used) provided by investing activities .............................. (1,191,258) 1,571,833
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt ............................................................ 260,113 82,085
Principal payments on borrowings .............................................. (345,422) (601,684)
Net proceeds from issuance of Convertible Debentures .......................... 5,500,000 --
Net proceeds from issuance of common stock .................................... -- 722,317
Other financing activities .................................................... (42,720) --
----------- -----------
Net cash provided by financing activities ..................................... 5,371,971 202,718
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................................ (1,076,800) (720,688)
CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD ................................... 2,080,722 2,070,320
----------- -----------
END OF PERIOD ................................................................. $ 1,003,922 1,349,632
=========== ===========
(Continued)
5
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<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
SUPPLEMENTAL DISCLOSURES RELATED TO STATEMENTS OF CASH FLOWS
Nine months ended June 30,
-------------------------------------
1998 1997
<S> <C> <C>
Cash payments for:
Interest:
Continued operations ....................................................... $ 11,193 156,704
Discontinued operations .................................................... 9,350 --
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$ 20,543 156,704
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Income taxes:
Continued operations ....................................................... $ 7,047 129,831
Discontinued operations .................................................... -- --
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$ 7,047 129,831
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Other investing and financing activities:
Forgivable loan recognized as extraordinary item, net ......................... $ 1,500,000 --
=========== ===========
Common stock received in disposition of net assets of
discontinued operations ................................................... $ 493,500 --
=========== ===========
Common stock issued for assets ................................................ $ 350,000 --
=========== ===========
Accrued interest paid on Convertible Debentures by issuance
of common stock ............................................................ $ 102,222 --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 principles. In the opinion of management, these
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary for a fair statement of the results of
operations and financial position for the interim periods presented.
The preparation of interim financial statements 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 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 nine months ended June 30, 1998, are not necessarily indicative
of the results that may be expected for the year ending September 30, 1998.
Certain amounts in prior financial statements have been reclassified to conform
to the current presentation.
NOTE 2 - ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Fronteer and its wholly-owned
subsidiaries, American Fronteer Financial Corporation (AFFC), formerly RAF
Financial Corporation, RAF Services Inc. of Texas, RAF Services Inc. of
Louisiana, RAF Services Inc. (collectively, RAF Services), Fronteer Capital,
Inc. (Fronteer Capital), Fronteer Asset Management Corporate Inc., Fronteer
Corporate Services, Inc., and Fronteer Development Finance Inc. 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.
AFFC 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. Fronteer Asset Management Corporate Inc. was
formed to manage assets. Fronteer Corporate Services, Inc. was formed to provide
general corporate services such as payroll and other administrative services to
Fronteer entities and other affiliated entities. Fronteer Development Finance
Inc. was formed to operate as a finance company to take advantage of high yield
and other lending opportunities. Secutron is engaged in industry specific
software development and provides consulting services.
NOTE 3 - EARNINGS PER SHARE
Basic earnings (loss) per common share has been calculated based upon the net
earnings (loss) available to common stockholders divided by the weighted average
number of common shares outstanding during the period. Diluted earnings (loss)
per common share would not be different than basic earnings (loss) per common
7
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, CONTINUED
share due to the fact that including the potential common shares would result in
antidilution as a result of the loss from continuing operations.
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 two persons who were then officers
and directors of the Company, and from two other employees of AFFC. In February
1998, Heng Fung Private also purchased an additional 3,556,777 shares of
Fronteer's outstanding Common Stock from the former chairman of the Company. 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 (Convertible Debenture). The purchase of the $4,000,000
Convertible Debenture was completed on December 30, 1997. All of the outstanding
stock of Fronteer Capital, Inc. is pledged as collateral for the Convertible
Debenture.
Heng Fung Holdings also 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. The $4,000,000 10%
Convertible Debenture and the option for up to $11,000,000 of 10% Convertible
Debentures are hereinafter referred to collectively as the Convertible
Debentures. On May 18, 1998, Heng Fung Holdings exercised a portion of its
option and purchased $1,500,000 of the possible $11,000,000. The $1,500,000 was
used by Fronteer as working capital. Subsequent to June 30, 1998, Heng Fung
Holdings exercised an additional $1,000,000 as described in Note 8.
On April 25, 1998, the Board of Directors approved a resolution to compensate
Heng Fung Finance for its 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 AFFC institutional sales location upon final NASD approval, which
was received in May, 1998. 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. These shares were issued in May 1998.
During the quarter ended June 30, 1998, the Company issued 192,418 shares of the
Company's Common Stock to Heng Fung Finance to pay Heng Fung Finance for the
interest that had accrued as of March 31, 1998 on the Convertible Debenture.
8
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, CONTINUED
NOTE 5 - DISCONTINUED OPERATIONS
During the year ended September 30, 1997, the Company disposed of a good portion
of its assets used in its 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 North Country. Mr. Dennis Olson also 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. The
closing date was June 22, 1998 but effective March 1, 1998. The Company has
included for the nine months ended June 30, 1998, the loss on disposition
related to the sale of the net assets to North Country in its consolidated
financial statements and has accounted for the 493,500 shares of common stock
received as a reduction in the outstanding shares of the Company's common stock.
Loss on the sale of net assets was approximately $318,000.
NOTE 6 - EXTRAORDINARY ITEM
On July 23, 1996, the Company sold AFFC'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. The
loan of $1,500,000 was recorded as a loan payable to MSI and was forgivable
based on MSI's revenues during the 28 months following the closing date.
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 period 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 and the remaining
$750,000 was also recognized as income during the period ended March 31, 1998.
9
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 $1,650,000
and $1,500,000 respectively, each for a total combined loan commitment of
$3,150,000 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, Heng Fung Finance
has appointed five members, one of which has subsequently resigned, to the board
of directors of Global and has the option to cancel all Global management and
employee contracts. 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 agreed to register
by July 14, 1998, the shares for resale under the Securities Act of 1933. As
long as Global has used its 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 September 30, 1998, as amended.
Accordingly, Global filed a registration statement with the SEC dated May 15,
1998, but the registration statement is not yet effective.
The loan commitment provided by Fronteer Capital has substantially the same
terms and conditions as the loan commitment provided by Heng Fung. Global has
the right to call the $1,650,000 from Fronteer after the total loan from Heng
Fung Finance is drawn down, and if the loan provided by Fronteer is drawn 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, Dr.
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
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. AFFC will receive a fee of 9% of the amount drawn down by
Global under the commitment.
10
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, CONTINUED
The Internal Revenue Service is conducting an examination of the Company's
consolidated tax return for the fiscal year ended September 30, 1996. Management
does not anticipate any significant adjustments as a result of the examination.
AFFC 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.
NOTE 8 - SUBSEQUENT EVENT
During the third quarter, a wholly-owned subsidiary of the Company, Fronteer
Development Finance Inc. (FDFI) offered 30,000 ($30,000,000) units in a Private
Placement Memorandum dated May 26, 1998. Each unit consists of (1) one $1,000
Convertible Debenture, due August 1, 2008, interest at 10% per annum; (2) 100
Class A common shares of FDFI and (3) Warrants exercisable at $3.00 per share
for 500 Class A common shares of FDFI. On August 11, 1998, FDFI completed an
initial closing and received net proceeds in the amount of $5,874,580, net of
commission and issuance costs of $633,420. The initial closing included the
acquisition by Fronteer of the Class B Common shares of FDFI for $1,000,000 at
$3.00 per share which entitles the holder to 30 votes per share. The Class A
Common shares entitle the holder to one vote per share.
On August 6, 1998, Heng Fung Holdings exercised its option and purchased
$1,000,000 of the Convertible Debentures. The funds were used in accordance with
the FDFI Private Placement Memorandum and were used to acquire all the Class B
Common shares of FDFI.
In August 1998, the Company issued 220,382 shares of common stock of Fronteer to
Heng Fung Holdings in payment of accrued interest at June 30, 1998 on the
Convertible Debentures.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Nine months ended June 30, 1998 compared to nine months ended June 30, 1997
Revenues for the nine months ended June 30, 1998 were $20,867,915, an increase
of $2,273,615 or 12% over the $18,594,300 for the nine months ended June 30,
1997. The increase is primarily a result of increased commissions, increased
investment banking activity, and increased first quarter computer hardware and
software revenues.
Broker commissions increased $498,673 or 5% to $11,313,545 for the nine months
ended June 30, 1998. Broker/dealer commission expense increased $832,411 to
$8,103,752 or 11% over the prior period. Both increases are due to the new
offices opened in West Palm Beach, Kansas City, San Francisco, Dallas, and Las
Vegas.
Investment banking revenues for the nine months ended June 30, 1998 of
$11,313,545 represent an increase of $683,693 or 60% over the nine months ended
June 30, 1997. This is primarily the result of increased investment banking
activity during the second quarter.
Computer hardware and software revenues for the nine months ended June 30, 1998
were $6,556,362, or 16% over $5,630,246 for the prior period. Most of the
increase is attributable to increased work performed by Secutron for software
development during the first quarter. The increase in computer cost of sales
expense correlates to the increase in revenues.
The increase in general and administrative expenses for the nine months ended
June 30, 1998 of $1,418,215 or 17% over the comparable prior period reflects
increased expenses associated with new branch openings in West Palm Beach,
Kansas City, San Francisco, Dallas, New York and Las Vegas, offset by
streamlining processes and overcoming certain administrative inefficiencies.
Interest expense increased for the prior period, as a result of the Convertible
Debentures issued to Heng Fung Finance in December 1997 and May 1998.
Accordingly, interest income on investable funds also increased. The unrealized
loss on investment securities of $1,027,603 relates primarily to investments to
Asian securities.
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 business
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 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.
12
<PAGE>
Three months ended June 30, 1998 compared to three months ended June 30, 1997
Revenues for the three months ended June 30, 1998 were $6,735,971 an increase of
$933,958 or 16% over the $5,802,013 for the three months ended June 30, 1997.
The increase is primarily a result of an increase in brokerage commissions. The
increase results from the new branch offices in West Palm Beach, Kansas City,
and San Francisco.
The increase in broker /dealer commissions expense for the three months ended
June 30, 1998 compared to the prior period in 1997 of $436,181 or 18% correlates
to the increase in brokerage commissions revenues relating to the new branch
office openings.
Revenues from computer hardware and software decreased $166,528 or 10% for the
three months ended June 30, 1998 compared to the prior period in 1997. This
decrease 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 $265,802 or 22% compared to the decrease in revenue for the quarter
ended June 30, 1998 also reflects Secutron's emphasis on Year 2000 compliance
for its proprietary software users.
The increase in general and administrative expense for the quarter ended June
30, 1998 over the quarter ended June 30, 1997 of $742,237 or 27% reflects the
increased expenses associated with the new branch openings.
Interest expense increased for the period as a result of the Convertible
Debentures issued to Heng Fung Finance in December 1997 and May 1998. The
Company also realized increases in interest income as a result of the investment
of these funds. The unrealized loss on investments of $1,027,603 is primarily
related to investments in Asian securities.
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
of 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
as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company, as of June 30, 1998, had $1,003,922 in cash and cash equivalents
and $4,124,652 in working capital. The issuance of the Convertible Debentures
provided proceeds of $4,000,000 in December 1997 and $1,500,000 in May 1998.
These proceeds plus those from discontinued operations of $991,514, and
borrowings on debt of $260,113 were used to fund the continuing operations, to
purchase property and equipment of $255,218, to repay borrowings of $345,422 and
in other investing activities of $1,158,015.
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, Convertible Debentures 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.
13
<PAGE>
In February 1998, as discussed in Note 4 to the consolidated financial
statements, Heng Fung Private gained control of the Company. In conjunction with
this change in control, working capital was provided to the Company through the
issuance of the $4,000,000 Convertible Debenture. Additionally on May 18, 1998,
Heng Fung Finance exercised a portion of its option and purchased $1,500,000 of
a possible $11,000,000 in the aggregate of 10% Convertible Debenture. On August
6, 1998, Heng Fung Holdings exercised its option and purchased $1,000,000 of the
Convertible Debentures. The $1,000,000 in funds were used in accordance with the
FDFI Private Placement Memorandum and were used to acquire all the Class B
Common shares of FDFI.
Management believes that the Company's cash flows from operations, cash on hand
and access to commitments under the Convertible Debenture Agreement are
sufficient to fund its debt service, expected capital costs and other liquidity
requirements for the foreseeable future. Without access to commitments under the
Convertible Debenture Agreement the Company would have to seek alternative
financing which may not be available.
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation. The Company has not completed its
assessment, but currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position. However, if
the Company and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company plans to
devote all resources required to resolve any significant year 2000 issues in a
timely manner.
On July 29, 1998, the Company was notified by the NASDAQ Stock Market Inc. that
the Company's Common Stock had failed to maintain a closing bid price greater
than or equal to $1.00. The Company has been provided with ninety calendar days
in which to regain compliance with the minimum bid price requirement. The
requirement is that for ten consecutive trading days during the 90 day period a
closing bid price of $1.00 or greater for the Company's common stock must be
maintained. In the event the Company fails to meet the requirement, the common
stock will be subject to delisting.
On August 20, 1998, the Company received notification from The Nasdaq Stock
Market Inc. that the Company no longer meets the requirements for continued
listing on the Nasdaq SmallCap Market. This is due to failure to meet the
criteria contained in Marketplace Rule 4310(c)(2) pertaining to net tangible
assets, market capitalization or net income. The Company is required to provide
its proposal for achieving compliance no later than September 3, 1998. In the
event the Company's submission is not approved, the common stock may be subject
to delisting.
This Quarterly Report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements regarding the sufficiency of the Company's
liquidity and sources of capital.
Any statements contained herein which are not historical facts of which contain
the words expect, believe or anticipate, or words of similar import shall be
deemed to be forward-looking statements. These forward-looking statements are
subject to risks, uncertainties and other factors which would cause actual
results to differ materially. Additional information regarding factors that
could potentially affect the Company or its financial results may be included in
the Company's filings with the Securities and Exchange Commission.
14
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 18, 1998, Heng Fung Holdings exercised a portion of its option and
purchased $1,500,000 of the possible $11,000,000 10% Convertible Debenture that
Heng Fung Holdings had acquired an option to purchase from the Company. The
$1,500,000 Convertible Debenture is convertible into an aggregate of 2,459,016
shares of the Company's Common Stock.
On April 25, 1998, the Board of Directors of the Company 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 AFFC 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 the Company's
Common Stock, which were issued in May 1998.
During the quarter ended June 30, 1998, the Company issued 192,418 shares of the
Company's Common Stock to Heng Fung Finance to pay Heng Fung Finance for the
interest that had accrued as of March 31, 1998, on the Convertible Debenture.
The Company issued the aforementioned securities in reliance upon the exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended.
The entities acquiring the securities had available to them all material
information concerning the Company. The certificates evidencing the securities
issued bears an appropriate restrictive legend under the Securities Act of 1933,
as amended, and stop transfer instructions have been placed with the company's
stock transfer agent with respect to the shares of Common Stock issued. No
underwriter was involved in the transactions.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June 30, 1998, the
following members were elected to the Board of Directors:
For Withheld
--- --------
Fai H. Chan 11,688,584 37,500
Robert H. Trapp 11,688,584 37,500
Kwok Jen Fong 11,688,584 37,500
Jeffrey M. Busch, Esq. 11,688,584 37,500
Robert Jeffers, Jr. 11,688,584 37,500
Robert L. Long 11,688,584 37,500
15
<PAGE>
The selection of KPMG Peat Marwick LLP as independent auditors of the Company
for the fiscal year ending September 30, 1998 was ratified as follows:
11,705,085, for, and 20,999, abstained.
Item 5. Other Information.
Effective June 29, 1998, the United States Securities and Exchange Commission
adopted new rules relating to stockholder proposals which stockholders do not
request be included in the Company's proxy statement to be used in connection
with the Company's Annual Meeting of Stockholders. Under these new rules,
proxies that confer discretionary authority will not be able to be voted on a
stockholder proposal to be presented at the Annual Meeting of Stockholders if
the stockholder provides the Company with advance written notice of the
stockholder's proposal on a date in the current year that is at least 45 days
prior to the date the prior year's proxy materials were mailed to the Company's
stockholders. If a stockholder fails to so notify the Company, proxies that
confer discretionary authority will be able to be voted when the proposal is
presented at the Annual Meeting of Stockholders.
In accordance with the new rules, proxies which confer discretionary authority
will be able to be voted on stockholder proposals that the stockholders do not
request be included in the Company's proxy statement but plan to present at the
Company's next Annual Meeting of Stockholders unless the Company receives notice
of the proposals by no later than April 18, 1999.
On July 29, 1998, the Company was notified by the NASDAQ Stock Market Inc. that
the Company's Common Stock had failed to maintain a closing bid price greater
than or equal to $1.00. The Company has been provided with ninety calendar days
in which to regain compliance with the minimum bid price requirement. The
requirement is that for ten consecutive trading days during the 90 day period a
closing bid price of $1.00 or greater for the Company's Common Stock must be
maintained. In the event the Company fails to meet the requirement, the common
stock will be subject to delisting.
On August 13, 1998, Robert L. Long resigned as a director of the Company, as a
director and officer of the Company's subsidiaries and as a director of Global.
On August 20, 1998, the Company received notification from The Nasdaq Stock
Market Inc. that the Company no longer meets the requirements for continued
listing on the Nasdaq SmallCap Market. This is due to failure to meet the
criteria contained in Marketplace Rule 4310(c)(2) pertaining to net tangible
assets, market capitalization or net income. The Company is required to provide
its proposal for achieving compliance no later than September 3, 1998. In the
event the Company's submission is not approved, the common stock may be subject
to delisting.
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 June 30, 1998 the Company filed the following
Current Reports on Form 8-K:
Current Report on Form 8-K dated April 14, 1998 filed on May 5, 1998,
as amended on May 6, 1998, reporting under Item 5 the loan commitments
to Global Med Technologies, Inc.
Current Report on Form 8-K dated May 1, 1998 filed on June 11, 1998
reporting under Item 5 the signing of a letter of intent with Freeman
Holding Company, Inc.
16
<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: August 31, 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
17
<PAGE>
Exhibit Index
Exhibit Description
- ------- -----------
27.0 Financial Data Schedule
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,003,922
<SECURITIES> 5,369,208
<RECEIVABLES> 1,425,834
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<CURRENT-ASSETS> 7,920,264
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<COMMON> 169,205
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