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, 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: 000-17637
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 (I.R.S. Employer Identification No.)
incorporation or organization)
1700 Lincoln Street, 32nd Floor
Denver, CO 80203
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 860-1700
Securities registered pursuant to Section 12(g) of the Act:
$0.01 Par Value common stock OTC Bulletin Board
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(Title of Class) (Name of exchange on which registered)
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 15, 1998, the aggregate market value of the Registrant's voting
stock held by non-affiliates was $1,284,314.
As of December 15, 1998, Registrant had 17,140,857 shares of its $0.01 par value
common stock issued and outstanding.
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TABLE OF CONTENTS
PART I
Item Page
1. Business 3
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters 12
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
7A. Quantitative and Qualitative Disclosures About Market Risk 22
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 23
PART III
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 27
12. Security Ownership of Certain Beneficial Owners and Management 29
13. Certain Relationships and Related Transactions 31
PART IV
14. Exhibits, Financial Schedules, and Reports on Form 8-K 32
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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: American Fronteer Financial Corporation (AFFC), formerly
known as RAF Financial Corporation, 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; Fronteer Capital, Inc., which was formed to operate as a holding company
of investment opportunities in "small cap" companies; Corporate Net Solutions,
Inc., which was formed to invest in computer and Internet related opportunities;
and Fronteer Corporate Services, Inc., a Colorado corporation, which was formed
to provide corporate administrative services to Fronteer subsidiaries and other
companies. The Company also has a majority owned subsidiary, Secutron Corp.
(Secutron), which designs, develops, installs, markets and supports software
systems for the securities brokerage industry. The Company owns approximately
73% of Secutron. Secutron has a wholly owned subsidiary, MidRange Solutions
Corp., which is a seller of hardware and software products. AFFC and Secutron
are Colorado corporations; Fronteer Capital, Inc. is a Delaware corporation; and
RAF Services are Louisiana, Nevada and Texas corporations. During the year ended
September 30, 1998, Fronteer Asset Management Corporate, Inc., a wholly owned
subsidiary of Fronteer, was formed to provide asset management services and was
incorporated in Delaware. Corporate Net Solutions, Inc. and Fronteer Asset
Management Corporate, Inc. which were incorporated in Delaware May 13, 1998, and
June 3, 1998, respectively, have not commenced operations.
Fronteer Development Finance Inc. (FDFI), a Delaware corporation, was
incorporated March 27, 1998, to operate as a finance company to take advantage
of high-yield and other lending opportunities. The Company controls
approximately 96% of the voting power and approximately 46% of the outstanding
common shares of FDFI. FDFI has a wholly owned subsidiary, Fronteer Income
Growth, Inc. which was formed for the purpose of making investments. This
subsidiary was incorporated under the International Business Companies
Ordinances of the Territory of the British Virgin Islands.
Private Placements. On May 26, 1998, FDFI commenced a private placement of
30,000 units (Units) each consisting of (i) one $1,000 convertible debenture,
due August 1, 2008, paying 10% per annum; (ii) 100 Class A common shares; and
(iii) warrants exercisable at $3.00 per share for 500 Class A common shares
(FDFI Private Placement). The convertible debentures are convertible into Class
A common shares at a conversion price of $5.00 per share. As of September 30,
1998, 7,308 Units were issued through the FDFI Private Placement for proceeds of
$6,297,898, net of issuance costs of $1,010,102. Subsequent to September 30,
1998, 650 additional Units were sold for proceeds of $575,250, net of issuance
costs of $74,750. The Offering Memorandum for the FDFI Private Placement
included 3,000,000 shares of authorized Class B common stock, and required
Fronteer to purchase Class B common stock in the amount of no less than 26.67%
of the amount of Units purchased by outside investors. As of December 15, 1998,
the Company has purchased 666,666 shares of the Class B common stock for
$2,000,000, half of which was purchased as of September 30, 1998. There were no
commissions or expenses associated with the Class B common issuance.
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On October 16, 1998, the Company commenced a private placement of 1,500,000
shares of its Series B preferred stock at a price of $10.00 per share. The
Series B preferred stock has a cumulative annual dividend rate of 8% in cash and
7% in shares of Series B preferred stock (1998 Private Offering). AFFC, acting
as placing agent, in accordance with the 1998 Private Offering, will be issued
between 150,000 and 200,000 warrants, depending on the proceeds of the 1998
Private Offering which allows the holder to purchase shares of the Company's
Series B preferred stock at a purchase price of $12.00 per share for five years.
AFFC also is to receive a commission of 10% and a non-accountable expense
allowance of 3% of the total amount sold. The Series B preferred stock is
redeemable by the Company on and after October 2003 at a price of $12.50 per
share plus accrued and unpaid dividends. The cash portion of the dividend is
guaranteed by Heng Fung Holdings Company Ltd. through October 2003.
Change in Control. 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, then officers and directors of the Company, and
from two other employees of AFFC. In December 1997, Robert A. Fitzner, Jr. and
Heng Fung Private agreed that, upon th regulatory approval of the National
Association of Securities Dealers, Inc. (NASD) of a change in the beneficial
ownership of 25% or more of AFFC, 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. 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 Fai H. Chan and Robert H. Trapp, to the Board of
Directors of Fronteer.
In December 1997, the Company sold Heng Fung Finance the ten year $4,000,000 10%
Convertible Debenture that is convertible into shares of common stock of the
Company at a price of $0.53125 per share until December 15, 2007, unless sooner
paid, and an option to purchase a $11,000,000 10% Convertible Debenture that is
convertible into shares of common stock of the Company at a price of $0.61 per
share until ten years from the date of issue unless sooner paid. Subsequently,
Heng Fung Finance partially exercised the option and purchased additional 10%
Convertible Debentures totaling $2,500,000. On September 23, 1998, Heng Fung
Finance and the Company agreed to amend the terms of the remaining $8,500,000 of
the $11,000,000 10% Convertible Debenture by increasing the interest rate to
12%, changing the conversion price to the lower of $0.35 or the fair market
value per share, and changing the default conversion price to $0.10 per share.
On September 25, 1998, Heng Fung Finance partially exercised its option to
purchase $8,500,000 of 12% Convertible Debentures by purchasing a $500,000 12%
Convertible Debenture from the Company. As of September 30, 1998, Heng Fung
Finance had purchased a total of $7,000,000 in convertible debentures. The
interest on the convertible debentures was paid through June 30, 1998 with
412,800 shares of the Company's common stock. Subsequent to September 30, 1998,
an additional 283,618 common shares of the Company were issued to pay accrued
interest payable as of September 30, 1998.
On January 29, 1998, the NASD approved the change in the beneficial ownership of
25% or more of AFFC, 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 Dennis
W. Olson resigned as directors of the Company and its subsidiaries. Also, Mr.
Fitzner resigned as the Chairman of the Company and as the President and Chief
Executive Officer of AFFC, Mr. Long resigned as the Secretary of the Company and
Mr. Olson resigned as the President of the Company. At the same time, Mr. Chan
and Mr. Trapp, the two remaining directors appointed at the request of Heng Fung
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Finance, reduced the number of directors on the Company's Board of Directors to
three and appointed Kwok Jen Fong, a practicing solicitor in Singapore, as a
director of the Company to fill the remaining vacancy. The directors also
appointed Mr. Chan as the Chairman of the Board and the President of the
Company, Mr. Trapp as Managing Director of the Company and Gary L. Cook as the
Secretary and Treasurer of the Company. Messrs. Chan, Trapp and Brian F. Zucker
also became directors of AFFC. Mr. Trapp was appointed the President of AFFC,
Mr. Zucker was appointed the Managing Director of AFFC and Mr. Cook was
appointed the Treasurer of AFFC. Mr. Cook also remained as the Secretary of
AFFC. On February 20, 1998, the Board of Directors of Fronteer appointed Jeffrey
M. Busch and Robert Jeffers, Jr., both practicing attorneys, as directors of
Fronteer. In addition, because Heng Fung Finance purchased the additional
3,556,777 shares, it received the option to purchase an additional 10 year
$11,000,000 10% Convertible Debenture, convertible at $0.61 per share of the
Company's common stock, pursuant to the Convertible Debenture Agreement.
On April 25, 1998, the Board of Directors approved a resolution to give
consideration to 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. Consideration, 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 that was paid by th issuance of 350,000 shares
of common stock of Fronteer.
Discontinued Operations. During the year ended September 30, 1997, the Company
disposed of its net assets used in its directory and telemarketing related
businesses, Fronteer Personnel Services, Inc. (FPS) and Fronteer Marketing
Group, Inc. (FMG). Accordingly, the related activity in these businesses has
been accounted for in the consolidated financial statements as discontinued
operations. FPS and FMG are North Dakota corporations. Net assets not previously
identified for sale pertaining to the discontinued operations were identified
and sold as described below during the year ended September 30, 1998.
On March 20, 1998, the Company entered into an agreement with North Country
Yellow Pages, Inc. (North Country) to sell the remaining net assets pertaining
to the directory and telemarketing operations for the return of 493,500 shares
of the Company's common stock held by the principals of North Country, Dennis W.
Olson and Lance Olson, former employees of the Company. Dennis W. Olson is the
former president and a former 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 loss on disposition related to the sale of the net assets to North
Country is reflected in the Company's consolidated financial statements as
discontinued operations. Loss on the sale of net assets was $249,861, net of
income tax benefit of $159,748. These dispositions represent all the remaining
directory and telemarketing business assets that were not previously identified
as part of discontinued operations by the Company in 1997. As such, the Company
has discontinued its activities in the directory business.
Clearing Activities. 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. MSI was formed by OppenheimerFunds, 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, AFFC became a fully disclosed
clearing correspondent of MSI. 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.
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During the year ended September 30, 1997, Fronteer and AFFC 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 AFFC, 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 $750,000 of the loan, and as
a result of this and MSI's decision to no longer be in the clearing business,
the entire $1,500,000 loan was forgiven and was recognized as an extraordinary
item during the year ended September 30, 1998.
Subsequent to September 30, 1998, the Company and AFFC entered into an agreement
with MSI and OFI to which MSI would withdraw as a registered broker/dealer with
the SEC, resign as a member of the NASD and pay the Company a total of $430,000.
As a result of the agreement and closing which occurred on December 16, 1998,
OFI would own 100% of the outstanding common stock of MSI. Both the Company and
AFFC, and OFI and MSI released each other from any claims as part of the
agreement.
Description of Business
AMERICAN FRONTEER FINANCIAL CORPORATION
General. AFFC was incorporated in 1974 to engage in the retail stock brokerage
business in the Rocky Mountain Area of the United States. AFFC is registered as
a broker/dealer with the Securities and Exchange Commission (SEC), is a member
of the National Association of Securities Dealers, Inc. (NASD) and the Boston
Stock Exchange, is an associate member of the American Stock Exchange, and is
registered as a securities broker/dealer in all 50 states. AFFC is a member of
the Securities Investor Protection Corporation (SIPC) and other regulatory and
trade organizations. AFFC and certain of its subsidiaries are also licensed to
sell insurance products in certain states. AFFC'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.
AFFC conducts its business in four operating divisions as described below.
AFFC's principal executive office is located at One Norwest Center, 1700 Lincoln
Street, 32nd Floor, Denver, Colorado 80203. AFFC 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; New York, New York and San
Francisco, California.
Retail Securities Brokerage Division. AFFC conducts its retail brokerage
business through its Retail Securities Brokerage Division. As of December 15,
1998, AFFC had 148 account executives and approximately 21,500 customer
accounts. AFFC 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. AFFC 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. AFFC's revenues from its sales of
insurance products were approximately $126,000 for the year ended September 30,
1998.
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. AFFC acts as a dealer, underwriter and selling
group member in public and private offerings of equity securities. During the
year ended September 30, 1998, AFFC earned revenues of approximately $710,000
from its investment banking activities.
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Trading Division. Trading securities involves the purchase and sale of
securities by AFFC 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. AFFC makes markets in corporate
equities and trades in municipal and corporate bonds and various government
securities. As of December 15, 1998, AFFC made markets in 39 stocks.
Public Finance Division. The Public Finance Division of AFFC 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, 1998, AFFC's participation in offerings of
municipal securities was approximately $692,000 as manager of 13 municipal
underwritings and private placements.
Financial Information. For the year ended September 30, 1998, AFFC's revenues of
$18,886,391 accounted for 69% of the Company's total operating revenues from
continuing operations of $27,387,304. AFFC's revenues for the years ended
September 30, 1997 and 1996 were $18,118,271 and $14,830,681, respectively. For
the years ended September 30, 1998, 1997 and 1996, AFFC incurred operating
losses of $3,910,741, $2,160,897 and $2,647,327, respectively.
AFFC Regulatory Net Capital. AFFC, as a registered securities broker/dealer, is
subject to the Securities and Exchange Commission's Uniform Net Capital Rule
(Rule 15c3-1) (the Rule). AFFC has elected to operate pursuant to the
alternative standard provided by the Rule. Under the alternative standard, AFFC
is required to maintain "net capital" of not less than $250,000. As of September
30, 1998, AFFC had "net capital" of $408,204.
Business Combination. On September 28, 1998, the Company signed a letter of
intent with Auerbach Financial Group, Inc. (Auerbach) in which it is proposed
that Auerbach, Pollak & Richardson, Inc. (APR), a securities broker/dealer
subsidiary of Auerbach, and AFFC be combined into one securities broker/dealer.
On October 28, 1998 the Company entered into a letter of commitment with
Auerbach in which the Company and Auerbach have outlined the terms that will
result in the Company's owning an interest in Auerbach, in Auerbach's acquiring
a portion of the business assets of AFFC, and in AFFC and APR forming a
strategic alliance. The Company and Auerbach are still discussing the portion of
AFFC that will be acquired by Auerbach and the final terms thereof. It is
currently contemplated that Auerbach would issue the Company a convertible
promissory note and a percentage of the outstanding common stock of Auerbach in
exchange for the portion of AFFC acquired by Auerbach from the Company. It is
also contemplated that the Company would have the ability to eventually own a
majority of Auerbach. The final terms of the transaction have not been agreed
upon and any such transaction would be subject to the execution and consummation
of a final agreement and obtaining required regulatory approvals.
APR is a full service investment bank headquartered in Stamford, Connecticut,
with branch and satellite offices in Princeton, New Jersey; Hampton, New
Hampshire; New York City; and Paris, France. APR has approximately 25 registered
representatives actively engaged in selling securities; approximately 12
corporate finance and research employees; and 5 equity and fixed-income traders.
In addition to APR, Auerbach, which was established in 1908, has wholly owned
subsidiaries consisting of Auerbach International, LDC, a Cayman Island Exempted
Company which provides clients with the opportunity to invest in small
companies, and Auerbach Investment Management, LLC, an asset management company.
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FRONTER DEVELOPMENT FINANCE INC.
General. FDFI was incorporated on March 27, 1998, to operate as a finance
company to take advantage of high-yield and other lending opportunities.
Fronteer Income Growth, Inc. (FIG), a wholly owned subsidiary of FDFI, was
incorporated September 24, 1998, under the International Business Companies
Ordinances of the Territory of the British Virgin Islands.
Operations. At this time, FDFI intends to provide debt financing for private and
public companies in the small cap to mid cap range. Such debt financing may,
without limitation, take the form of senior debt, mezzanine debt, subordinated
debt, convertible debt and bridge loans, with or without collateral, in various
types of lending transactions, including, without limitation, leveraged buyouts,
management buyouts and recapitalizations. FDFI also expects to make loans to
holders of "restricted securitie of public companies in the United States, with
such restricted securities serving as collateral for those loans.
Financial Information. On May 26, 1998, FDFI commenced a private placement of
30,000 units (Units) each consisting of (i) one $1,000 convertible debenture,
due August 1, 2008, paying 10% per annum; (ii) 100 Class A common shares; and
(iii) warrants exercisable at $3.00 per share for 500 Class A common shares
(FDFI Private Placement). The convertible debentures are convertible into Class
A common shares at a conversion price of $5.00 per share. As of September 30,
1998, 7,308 units were issued through th FDFI Private Placement for proceeds of
$6,297,898, net of issuance costs of $1,010,102.
Per the terms of the FDFI Private Placement, the portion of the cost per Unit
allocable to the convertible debentures is 83.4%. Therefore, the convertible
debentures were recorded at 83.4% of $7,308,000 or $6,094,872. Original issue
discount amortization of $6,576 has been recognized through September 30, 1998.
The convertible debentures are scheduled to mature on August 1, 2008, and
generally are not callable by FDFI subsequent to maturity. Interest is at 10%
per annum, payable each January 31 and July 31. These debentures are convertible
into shares of Class A common stock of FDFI at a conversion price of $5.00 per
share. Accrued interest expense at September 30, 1998, was $77,454.
Subsequent to September 30, 1998, 650 additional Units were sold for proceeds of
$575,250, net of issuance costs of $74,750.
The Offering Memorandum for the FDFI Private Placement included 3,000,000 shares
of authorized Class B common stock, and required Fronteer to purchase Class B
common stock in the amount of no less than 26.67% of the amount of Units
purchased by outside investors. As of December 15, 1998, the Company has
purchased 666,666 shares of the Class B common stock for $2,000,000, half of
which was purchased as of September 30, 1998. There were no commissions or
expenses associated with the Class B common issuance. The operating loss for
FDFI for the year ended September 30, 1998, was $46,255 on revenues of $37,923.
SECUTRON CORP.
General. Secutron was incorporated under Colorado law on May 11, 1979. During
September 1998, the Company purchased an additional 9% of the outstanding common
shares of Secutron resulting in an ownership by the Company of approximately 69%
of the outstanding common shares of Secutron. Subsequent to year end, the
Company purchased an additional 4% of the outstanding common shares of Secutron.
An officer of Secutron owns 10% and former employees of Secutron own most of the
remaining outstanding common 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. 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. (MidRange), is a Colorado corporation formed on January 1, 1993
MidRange is an IBM business partner selling IBM hardware and hardware
manufactured by competitors of IBM, and acts as a distributor for software
products which are proprietary to third parties. MidRange sells hardware and
software to businesses in several different industries, including manufacturers,
distributors and health care providers.
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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, and is also a fully integrate 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 MidRange provide consulting, programming and
facilities management services to their respective clients to support the
software and hardware sold by them. As a result of internal testing results, the
Company has determined the STARS and BCATS applications are Year 2000 compliant.
The Company is in the process of converting existing customers to ensure their
compliance.
Financial Information. Secutron's revenues for the years ended September 30,
1998, 1997 and 1996 were $8,866,606, $7,436,143 and, $6,975,591, respectively.
Operating (loss) profits for the years ended September 30, 1998, 1997 and 1996
were $(281,785), $129,215 and $281,775, 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. On March 20, 1998, the
Company entered into an agreement with North Country Yellow Pages, Inc. (North
Country) to sell remaining net assets not previously identified as used in the
directory and telemarketing operations for the return of 493,500 shares of the
Company's common stock held by the principals of North Country, Dennis W. Olson
and Lance Olson, former employees of the Company. Dennis W. Olson is the former
president and director of the Company.
The Board of Directors approved the sale on May 14, 1998. The loss on
disposition related to the sale of the net assets to North Country is reported
in the consolidated financial statements as a discontinued operation. Loss on
the sale of net assets was $249,861, net of an income tax benefit of $159,748.
Financial Information. Revenues for the directory business for the years ended
September 30, 1997 and 1996 were $4,894,707 and $7,170,648, respectively.
Operating profits (losses) for the periods ended September 30, 1998, 1997 and
1996 were $(236,502), $132,594 and $(486,976), respectively.
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 were $364,652 and $317,349, respectively. Operating losses for the
years ended September 30, 1997 and 1996, were $1,216,282 and $635,573,
respectively. During the year ended September 30, 1998, the Company incurred
miscellaneous expenses relating to this business disposition of $24,493.
Employees and Employee Relations
Employees. As of December 15, 1998, the Company and its subsidiaries had 222
full time employees, 193 of whom are employed by AFFC; 5 of whom are employed by
Fronteer Corporate Services; and 24 of whom are employed by Secutron and
MidRange. AFFC's headquarters and a branch office are located in Denver,
Colorado; 120 of AFFC's employees are employed in branch offices of AFFC located
in Colorado Springs, Colorado; Atlanta, Georgia; Albany, New York; Reston,
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Virginia; Chicago, Illinois; Metairie, Louisiana Las Vegas, Nevada; Dallas,
Texas; West Palm Beach, Florida; New York, New York; and San Francisco,
California. The Company considers its relations with its employees to be good.
Competition
AMERICAN FRONTEER FINANCIAL CORPORATION
The securities industry has become considerably more concentrated and more
competitive in recent periods as numerous securities firms have either ceased
operations 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 AFFC. These developments have created large, well capitalized,
integrated financial service firms with which AFFC 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. Many of these services are offered over the Internet for little or no
transaction fees. 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 AFFC's retail securities
business.
FRONTEER DEVELOPMENT FINANCE INC.
FDFI is engaged in a highly competitive business. FDFI competes for lending
opportunities with many companies, including numerous financial institutions,
which have been in existence for longer periods of time. Many of FDFI's
competitors are significantly larger than FDFI, have established operating
histories and procedures, have access to significantly greater capital and other
resources, have management personnel with more experience than the management of
FDFI and have other advantages over FDFI in conducting certain businesses and
providing certain services.
SECUTRON CORP.
Secutron competes with numerous software distribution firms, 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.
MidRange competes with hardware manufacturers and other licensed distributors of
IBM hardware and distributors of hardware manufactured by competitors of IBM.
Many of MidRange's competitors are larger than MidRange and have greater
financial resources.
10
<PAGE>
Regulation
AMERICAN FRONTEER FINANCIAL CORPORATION
The securities industry in the United States is subject to extensive regulation
under federal and state laws. The SEC 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 SEC) 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 SEC 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
SEC, 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.
AFFC 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.
AFFC is subject to the SEC's Uniform Net Capital Rule (the 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. AFFC is in compliance with the Rule. Failure to maintain the required
net capital may subject AFFC to suspension by the SEC 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 AFFC may be prohibited under certain circumstances and may be temporarily
restricted under other circumstances by the SEC from the withdrawal of equity
capital by a stockholder such as the Company.
AFFC 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.
ITEM 2. PROPERTIES
Offices for the Company, its wholly owned subsidiaries and FDFI 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. AFFC also leases space for its branch offices pursuant to
leases that have various rental rates and expire at various dates.
The offices of Secutron and MidRange are located at 3773 Cherry Creek North
Drive, Suite 825, Denver, Colorado 80209, which consists of approximately 6,300
square feet of leased space. The lease expires on July 31, 2003. Secutron
currently pays monthly rent of $6,785 for the space.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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,
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.
Anthony R. Kay, former officer, director and shareholder of Secutron;
individually, and in conjunction with his consulting company, ARK Consulting
Services Inc., filed claims on July 30, 1998, in the District Court for the City
and County of Denver, Colorado against the Company, Secutron and MidRange and
against certain current and former officers, directors, shareholders and
affiliates of the Company. The claims assert that these entities and individuals
breached their fiduciary duties, breached contracts, approved an illegal
distribution and participated in a fraudulent conveyance. In total, there are
twelve asserted claims for relief, which seek actual, exemplary damages, costs
and attorneys' fees, an injunction and other similar relief. The vast majority
of claims for relief are based upon a transaction which was not completed. The
Company and its counsel anticipate the filing of a motion for summary judgment
regarding those claims on the basis that the transaction assumed to have taken
place in the complaint did not, in fact, take place. However, the remaining
claims are based upon a written contract entitled Settlement Agreement between
Secutron, the claimant and his consulting company. The settlement agreement
provides for Secutron to pay $10,000 per month through January 2011 to the
consulting company for which $1,500,000 on the breach of contract have been
claimed. Little discovery has been conducted at this time. Management is of the
opinion that the ultimate outcome will not adversely affect the consolidated
financial position or consolidated results of operations 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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) Market Information. The Company's common stock was traded on the Nasdaq
SmallCap Market under the symbol FDIR from March 27, 1989 to October 21, 1998,
when it moved to trading on the OTC Bulletin Board. The following table shows
the range of high and low bid quotations for the common stock, for each
quarterly period since October 1, 1996. 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, 1998 $ 0.813 0.313
June 30, 1998 1.031 0.688
March 31, 1998 1.281 0.656
December 31, 1997 0.750 0.406
September 30, 1997 0.625 0.438
June 30, 1997 1.000 0.531
March 31, 1997 0.875 0.594
December 31, 1996 0.813 0.531
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<PAGE>
The NASD, which administers the Nasdaq SmallCap Market, has established criteria
for securities, including the Company's common stock, to be included on the
Nasdaq SmallCap Market. Effective February 23, 1998, in order for the Company's
common stock to continue to be included on the Nasdaq SmallCap Market, the
Company had to maintain $2 million 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 required that the Company have a public
float of at least 500,000 shares with a market value of at least $1 million,
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 required the Company to have at least two independent
directors and an audit committee, a majority of which are independent directors.
The Company's failure to meet the maintenance requirements resulted in the
discontinuance of the inclusion of the Company's common stock on the Nasdaq
SmallCap Market effective at the close of trading October 21, 1998.
Trading in the Company's common stock has continued 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 Company's common stock. In addition, the Company is subject
to a rule promulgated by the SEC which provides that if the Company failed to
meet criteria set forth in such rule, s various sales practice requirements are
imposed on broker/dealers who sell the Company's common stock to persons other
than established customers and accredited investors. For these types of
transactions, the broker/dealer has 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 common stock in the
market.
(b) Holders. As of December 15, 1998, the Company had approximately 700 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.
(d) 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 $0.53125
per share until December 15, 2007, unless sooner paid, and an option to purchase
a $11,000,000 10% Convertible Debenture that is convertible into shares of
common stock of the Company at a price of $0.61 per share until ten years from
the date of issue unless sooner paid. Subsequently, Heng Fung Finance partially
exercised the option and purchased additional 10% Convertible Debentures
totaling $2,500,000. On September 23, 1998, Heng Fung Finance and the Company
agreed to amend the terms of the remaining $8,500,000 of the $11,000,000 10%
Convertible Debenture by increasing the interest rate to 12%, changing the
conversion price to the lower of $0.35 or the fair market value per share, and
changing the default conversion price to $0.10 per share. On September 25, 1998,
Heng Fung Finance partially exercised its option to purchase $8,500,000 of 12%
Convertible Debentures by purchasing a $500,000 12% Convertible Debenture from
the Company. As of September 30, 1998, Heng Fung Finance had purchased a total
of $7,000,000 in convertible debentures. The interest on the convertible
debentures was paid through June 30, 1998, with 412,800 shares of the Company's
common stock. Subsequent to September 30, 1998, an additional 283,618 common
shares of the Company were issued to pay accrued interest payable as of
September 30, 1998.
13
<PAGE>
The sales of the convertible debentures and issuance of shares for interest were
made in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended (1933 Act). The purchaser had access
to full information concerning the Company and represented that it purchased the
shares and the convertible debentures for the purchaser's own account and not
for the purpose of distribution. The shares and the convertible debentures
contain a restrictive legend advising that the securities represented by the
shares and the convertible debentures may not be offered for sale, sold or
otherwise transferred without having first been registered under the 1933 Act or
pursuant to an exemption from registration under the 1933 Act. No underwriters
were involved in the transaction.
On April 25, 1998, the Board of Directors approved a resolution to give
consideration to 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. Consideration, 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 which was paid by issuing 350,000 shares of
common stock of Fronteer. The issuance of the common stock was made in reliance
upon the exemption from registration provided by Section 4(2) of the 1933 Act.
The purchaser had access to full information concerning the Company and
represented that it purchased the common stock for the purchaser's own account
and not for the purpose of distribution. The common stock contains a restrictive
legend advising that the securities represented by the common stock may not be
offered for sale, sold or otherwise transferred without having first been
registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. No underwriters were involved in the transaction.
In October of 1998, the Company issued 250,000 shares of its common stock to an
affiliate of Heng Fung Holdings in exchange for Heng Fung Holdings' guaranty of
the payment by the Company of the 8% cash dividend on the shares of Series B
preferred stock offered in the 1998 Private Offering. The sale of the common
stock was made in reliance upon the exemption from registration provided by
Section 4(2) of the 1933 Act. The purchaser had access to full information
concerning the Company and represented that it purchased the common stock for
the purchaser's own account and not for the purpose of distribution. The common
stock contains a restrictive legend advising that the securities represented by
the common stock may not be offered for sale, sold or otherwise transferred
without having first been registered under the 1933 Act or pursuant to an
exemption from registration under the 1933 Act. No underwriters were involved in
the transaction.
ITEM 6. SELECTED FINANCIAL DATA
On February 25, 1997, McLeod USA Publishing Company (McLeod) purchased the
primary operating assets of the directory business for approximately $2,800,000
including the application of a $500,000 non-recourse 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.
On March 20, 1998, the Company sold remaining net assets which were not
previously identified by the Company as part of discontinued operations for the
return of 493,500 shares of the Company's common stock. 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 AFFC'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. The loan was forgiven and
recognized as an extraordinary item during the year ended September 30, 1998.
14
<PAGE>
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, 1998, 1997 and 1996
and for the years then ended and as of and for the nine months ended September
30, 1995, and for RAFCO as of and for the year 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
Year ended September 30, September 30, December 31,
----------------------------------- ------------- ------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ................................................. $ 27,387 25,100 21,369 13,153 16,259
Loss from continuing operations ......................... (6,979) (1,990) (990) (806) (353)
Loss on sale of discontinued operations, net of
income tax benefit of $160 and $410 for 1998
and 1997, respectively ................................. (250) (667) -- -- --
Loss from discontinued operations, net of
income tax benefit of $102 and $412 for 1998
and 1997, respectively ................................. (159) (799) (1,369) (1,086) --
Net loss applicable to common shareholders .............. (6,473) (3,456) (2,418) (1,925) (353)
Basic loss per common share:
Continuing operations ................................ $ (.42) (.12) (.07) (.09) **
Discontinued operations:
Loss on sale of discontinued operations .......... (.02) (.04) -- -- --
Loss from discontinued operations ................ (.01) (.05) (.10) (.11) --
Extraordinary item ................................... .06 -- -- -- --
-------- -------- -------- -------- --------
Total ............................................ $ (.39) (.21) (.17) (.20) **
======== ======== ======== ======== ========
Working capital ......................................... $ 10,076 3,595 4,991 4,130 2,443
Total assets ............................................ 15,371 11,003 14,524 17,282 22,326
Total long-term liabilities ............................. 14,864 2,732 3,492 3,269 3,164
Total stockholders' equity (deficit) .................... (3,043) 3,352 6,086 5,442 1,188
</TABLE>
**Due to the limited number of shares outstanding during 1994, presentation of
earnings per share is not meaningful.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Year ended September 30, 1998 compared to year ended September 30, 1997
Revenues for the year ended September 30, 1998 were $27,387,304 compared to
revenues for the year ended September 30, 1997 of $25,100,414. This represents
an increase of $2,286,890 or 9%.
The increase is primarily due to the increase in brokerage commissions of
$983,810 or 7%, an increase of $1,472,136 or 21% in computer hardware and
software sales offset by a decrease in investment banking activity of $776,505.
The increase in brokerage commissions is primarily the result of the additional
offices opened during the previous fiscal year being open for the entire year
ended September 30, 1998. The increase in computer hardware and software
revenues is primarily due to additional contracts for software development and
increased hardware sales. Certain of the software development contracts were for
the purposes of ensuring customers are Year 2000 compliant.
Broker/dealer commissions expense for the year ended September 30, 1998 were
$10,521,902, an increase of $253,138 or 2% over expenses of $10,268,764 for the
year ended September 30, 1997. This increase correlates to the increase in
broker commissions. The 2% increase in commission expense versus the 7% increase
in commission revenue partly reflects adjustments made to branch manager
overrides and broker payouts.
Computer cost of sales for the year ended September 30, 1998 were $7,979,162
compared to $5,767,136 for the prior year. This increase of $2,212,026 or 38%
relates to increased sales and costs associated with assuring that proprietary
software is Year 2000 compliant.
General and administrative expenses were $13,359,245 for the year ended
September 30, 1998 or $2,106,498 greater than for the year ended September 30,
1997. This increase of 19% over the year ended September 30, 1997 of $11,252,747
is primarily attributable to the prior year branch openings being in operation
for the entire year ended September 30, 1998, and the new branches opened during
the current year. During the year, the Kansas City, San Francisco and New York
City branches were opened. The increase in general and administrative expenses
is partially offset by a decrease in legal fee expense and arbitration
settlements of $974,872 in 1998.
A portion of the proceeds of the $4,000,000 Convertible Debenture purchased by
Heng Fung Private in December 1997 was used to purchase approximately
116,430,000 shares of the common stock of Heng Fung Holdings in open market
transactions on the Hong Kong Stock Exchange at an average price of
approximately $0.02 per share. For the year ended September 30, 1998, the
Company had recognized an unrealized loss of $1,573,793 on the investment in
Heng Fung Holdings.
Depreciation and amortization expense for the year ended September 30, 1998 of
$389,234 represents an increase of $50,289 or 15% over the amount for the prior
year of $338,945. The increase is primarily due to the addition of the new
branch offices.
Interest income increased $150,502 or 100% from $150,203 for the year ended
September 30, 1997 to $300,705 for the year ended September 30, 1998. This is
due to increased cash balances resulting from the convertible debenture issues
during the current year. Interest expense to a related party relates to the
convertible debentures payable to Heng Fung related entities.
16
<PAGE>
The loss from discontinued operations and loss on sale of discontinued
operations represents activity for the remaining assets of the directory and
telemarketing business and the final sale of the assets of these businesses
which were not previously identified by the Company as part of discontinued
operations.
The minority interest in (earnings) loss of $129,363 for the year ended
September 30, 1998 represents the minority shareholders' interest in Secutron's
loss for the year.
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. 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.
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 AFFC 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.
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 Fronteer Personnel Services, Inc.
17
<PAGE>
Liquidity and Capital Resources
The Company, as of September 30, 1998, had $9,112,652 in cash and cash
equivalents and $10,076,326 in working capital. Its current ratio is 4.1:1. The
FDFI Private Placement provided net proceeds of $6,297,898 which constitutes the
majority of cash and cash equivalents and working capital in the balance sheet
at September 30, 1998. The funds are on deposit or invested in accordance with
the terms of the FDFI Private Placement. Proceeds from the issuance of
convertible debentures to a related party of $7,000,000 were used primarily to
fund operating activities of $5,132,037 and investing activities of $809,463.
As of September 30, 1998, the Company had a commitment to provide an affiliated
company $1,650,000 in the form of a line of credit. Subsequently, $1,200,000 has
been drawn and the commitment of the $450,000 is expected to be drawn during the
second quarter of the year ending September 30, 1999. The entire line of credit
amount of $1,650,000 is due and payable to the Company in April 1999.
The Company has $500,000 due and payable to Heng Fung Finance in September 1999
under the terms of the Convertible Debenture Agreement.
On October 16, 1998, the Company commenced a private placement of 1,500,000
shares of its Series B preferred stock at a price of $10.00 per share for
proceeds before issuance costs of $15,000,000. The net proceeds of the issuance
are intended to be used to fund working capital and acquire other securities
broker/dealers, some of which may be in connection with the proposed business
combination with Auerbach.
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.
AFFC is subject to the SEC's net capital rules. AFFC has historically operated
well in excess of the minimum requirements. At September 30, 1998, AFFC's net
capital exceeded the SEC's minimum requirement by $158,204.
Management believes that the Company's cash flows from operations, the
commitments from Heng Fung, proceeds to be received from the 1998 Private
Offering 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.
18
<PAGE>
Recently Issued Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which is effective for periods beginning 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 significant effect on the disclosures in its consolidated financial
statements and will adopt it when required.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Accounting. This statement is effective for all fiscal
quarters beginning after June 15, 1999. The Company does not currently
participate in these activities and consequently does not believe adoption will
have an effect on the consolidated financial statements.
Year 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and applications
are corrected to be Year 2000 compliant, computers and the devices they control
could generate miscalculations and create operational problems. Various systems
could be affected ranging from complex information technology (IT) computer
systems to non-IT devices such as an individual machine's programmable logic
controller.
To address this issue, the Company developed a corporate plan including the
formation of a team consisting of internal resources and, as deemed necessary,
third-party experts. The phases of the plan include: conducting inventory of the
affected technology and assessing the impact of the Year 2000 issue; developing
solution plans; modification or replacement; testing and certification; and
developing contingency plans. All components of software and hardware of the
Company are presently in various phases. The Company expects to have critical IT
systems tested and installed, and expects to be Year 2000 compliant by
mid-calendar year 1999.
The Company relies on third-party suppliers for many services and the Company
will be adversely impacted if these suppliers do not make the necessary changes
to their own systems and products successfully and in a timely manner. The
Company is working with the Securities Industry Association to ascertain the
state of Year 2000 readiness and/or compliance of the Company's suppliers. The
Company has implemented a plan to communicate with its customers and suppliers
on this issue in an effort to minimize any potential Year 2000 compliance
impact; however, it is not possible to guarantee their compliance.
The total cost of the program is estimated to be less than $50,000, of which
less than approximately $20,000 has been spent through September 30, 1998.
19
<PAGE>
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issues. Nevertheless, since it is not possible to
anticipate all possible future outcomes, especially when third parties are
involved, there could be circumstances in which the Company would be unable to
take customer orders, or collect payments. In addition, disruptions in the
economy generally resulting from Year 2000 issues could materially adversely
affect the Company. The Company could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to properly
date transaction records. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
The Company has an informal contingency plan for its applications. The Company
is working continually with the third-party suppliers of software and related
services in resolving Year 2000 issues. The Company's formal contingency plans
are currently being developed in conjunction with these suppliers. Testing will
be performed and completed by mid-calendar year 1999. The Company will continue
to monitor the progress of the suppliers in the resolution of Year 2000 issues
and continue to evaluate the necessity of an independent contingency plan.
Commitments
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, for a total combined loan commitment of $3,150,000
over the following twelve months. The loans bear interest calculated at a rate
of 12% per annum and 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 Heng Fung Finance has
the option to cancel all Global then existing management and employee contracts.
Heng Fung Finance has appointed five members to the board of directors of
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 agreed to register by July 14,
1998, the underlying shares for resale under the 1933 Act.
As long as Global has used its best efforts to file such registration statement
covering such shares with the SEC and responded to any comments from the SEC in
a timely manner, Global will not be deemed to be in default under the loans as
the shares were 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 had not appointed directors to Global's board of
directors, Fronteer Capital had the right to appoint a maximum of three members
to the board of directors of Global. Global has the right to draw the $1,650,000
from Fronteer Capital after the total loan from Heng Fung Finance is drawn, and
if the loan provided by Fronteer Capital is drawn, Fronteer Capital 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. Dr. Michael I. Ruxin, the Chief
Executive Officer of Global, has agreed to personally guarantee the repayment of
$1,650,000 of the Fronteer Capital line of credit. 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.
20
<PAGE>
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 Finance will also
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, all employment
contracts of the management and officer 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.
On September 11, 1998, Fronteer Capital entered into an agreement with FDFI,
whereby Fronteer Capital agreed to assign to FDFI its rights to and obligations
in the loan commitment to Global. Subsequent to September 30, 1998, Global drew
$1,200,000, and as a result, FDFI earned the additional 5,000,000 warrants to
purchase 5,000,000 shares of Global's common stock at $0.25 per share.
In December 1997, the Company sold Heng Fung Finance the ten year $4,000,000 10%
Convertible Debenture that is convertible into shares of common stock of the
Company at a price of $0.53125 per share until December 15, 2007, unless sooner
paid, and an option to purchase a $11,000,000 10% Convertible Debenture that is
convertible into shares of common stock of the Company at a price of $0.61 per
share until ten years from the date of issue unless sooner paid. Subsequently,
Heng Fung Finance partially exercised the option and purchased additional 10%
Convertible Debentures totaling $2,500,000. On September 23, 1998, Heng Fung
Finance and the Company agreed to amend the terms of the remaining $8,500,000 of
the $11,000,000 10% Convertible Debenture by increasing the interest rate to
12%, changing the conversion price to the lower of $0.35 or the fair market
value per share, and changing the default conversion price to $0.10 per share.
On September 25, 1998, Heng Fung Finance partially exercised its option to
purchase $8,500,000 of 12% Convertible Debentures by purchasing a $500,000 12%
Convertible Debenture from the Company. As of September 30, 1998, Heng Fung
Finance had purchased a total of $7,000,000 in convertible debentures. The
interest on the convertible debentures has been paid with 412,800 shares of the
Company's common stock. Subsequent to September 30, 1998, an additional 283,618
common shares of the Company were issued to pay accrued interest payable as of
September 30, 1998.
On October 7, 1998, FDFI, Heng Fung Finance, and Global entered into an
agreement whereby FDFI purchased, Heng Fung Finance sold and Global consented to
the sale of $1,000,000 principal amount of loans made by Heng Fung Finance to
Global along with a warrant to purchase an aggregate of 4,000,000 shares of
Global's common stock. FDFI paid Heng Fung Finance $1,100,000 for the loans and
warrants. The loans and warrants purchased by FDFI were a portion of loans and
warrants given pursuant to a joint loan commitment made by Heng Fung Finance and
Fronteer Capital (subsequently transferred to FDFI) for the benefit of Global.
The consolidated tax return of the Company for the year ended September 30, 1996
is currently being examined by the Internal Revenue Service. The Company has not
received any correspondence from the examiner regarding the status of the
examination or any possible adjustments.
21
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer of the financial instrument or its related country of origin.
Market risk is inherent to many non-derivative financia instruments, and
accordingly, the scope of the Company's market risk management procedures
includes all market risk sensitive financial instruments. The Company's exposure
to market risk is directly related to its role as a financial intermediary in
customer-related transactions and to its proprietary trading activities.
The Company is an active market-maker and conducts block trading activities in
the listed and over-the-counter equity markets. In connection with these
activities, the Company may be required to maintain significant inventories in
order to ensure availability and to facilitate customer order flow.
The Company faces two types of market risk: foreign exchange rate risk and
equity price risk.
Foreign Exchange Rate Risk. Foreign exchange rate risk arises from the
possibility that changes in foreign exchange rates will impact the value of
financial instruments. When the Company buys or sells a financial instrument
denominated in a currency other than US dollars, exposure exists from a net open
currency position. The Company is then exposed to a risk that the exchange rate
may move against it. At September 30, 1998, the currency creating foreign
currency risk for the Company was the Hong Kong dollar.
Equity Price Risk. The Company is exposed to equity price risk as a consequence
of making markets in equity securities. Equity price risk results from changes
in the level or volatility of equity prices, which affect the value of equity
securities or instruments that derive their value from a particular stock, a
basket of stocks or a stock index. The Company attempts to reduce the risk of
loss inherent in its inventory of equity securities by entering into
transactions designed to mitigate the Company' market risk profile.
The Company utilizes a wide variety of market risk management methods,
including: limits for each trading activity; marking all positions to market on
a daily basis; daily profit and loss statements; position reports; aged
inventory position reports; and independent verification of inventory pricing.
Additionally, management of each trading department reports positions, profits
and losses, and trading strategies to management on a weekly basis. The Company
believes that these procedures, which stress timely communication between
trading department management and senior management, are the most important
elements of the risk management process.
22
<PAGE>
Efforts to further strengthen the Company's management of market risk are
continuous, and the enhancement of risk management systems is a priority of the
Company. This includes the development of quantitative methods, profit and loss
and variance reports, and the review and approval of pricing models.
The table below provides a comparison of the carrying amount to the fair value
of the securities owned by the Company that are classified as trading
securities.
September 30, 1998
Carrying Amount Fair Value
--------------- ----------
Foreign Exchange Rate Risk:
Equity securities denominated in
Hong Kong dollars .................. $1,066,972 $1,066,972
Equity Price Risk:
Equity securities* .................... 1,688,085 1,688,085
*Includes equity securities denominated in Hong Kong dollars.
In accordance with generally accepted accounting principles, securities
classified as trading securities are marked-to-market and the resulting
unrealized gain or loss is reflected in the statement of operations. For the
year ended September 30, 1998, the Company recognized unrealized losses of
$1,730,917 on the equity securities denominated in Hong Kong dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements that constitute Item 8 are attached at the
end of this Annual Report on Form 10-K. An Index to these Consolidated Financial
Statements is also included in Item 14 (a) of this Annual Report on Form 10-K.
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.
23
<PAGE>
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
-------------------------------- --- --------------
Fai H. Chan 54 1997
Chairman, President and Director
Robert H. Trapp 43 1997
Managing Director,
President of American Fronteer
Financial Corporation
Jeffrey M. Busch 41 1998
Director
Robert Jeffers, Jr. 50 1998
Director
Kwok Jen Fong 48 1998
Director
In accordance with the Convertible Debenture 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 AFFC and the Heng Fung
Private purchase of 3,556,777 shares of the outstanding common stock of the
Company from Robert A. Fitzner, Jr., three directors of the Company that were
not appointed at the request of Heng Fung Finance resigned and the two remaining
directors appointed at the request of Heng Fung Finance filled the vacancies
created by such resignations. The directors appointed were Jeffrey M. Busch,
Robert Jeffers, Jr. and Kwok Jen Fong. All of the directors appointed by Heng
Fung Finance were subsequently elected by the shareholders at the Company's
Annual Meeting on June 30, 1998. 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
------------------------------------------------- --- -------------
Fai H. Chan 54 February
Chairman of the Board and President of the Company 1998
Robert H. Trapp 43 February
Managing Director and President of AFFC 1998
Gary L. Cook 40 February
Chief Financial Officer, Secretary and Treasurer 1998
24
<PAGE>
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
---------------- -----------------------------------------------
Fai H. Chan Director of the Company since December 26, 1997;
Chairman and President since February 1998. 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 rea merchant
banking, the manufacturing of building material
machinery, pharmaceutical products and retail
fashion. Mr. Chan has been the President and a
Director of Powersoft Technologies, Inc.
(formerly 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
In 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. Mr. Chan is also a director of
Global Med Technologies, Inc.
Robert H. Trapp Director of the Company since December 26, 1997,
and the Managing Director and member of the
audit committee of the Company since February
1998, and the President of American Fronteer
Financial Corporation. 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 Pow 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. Mr. Trapp is also
a director of Global Med Technologies, Inc.
25
<PAGE>
Jeffrey M. Busch Director of the Company since February 1998. Mr.
Busch is a member of the Company's audit
committee and has been a practicing attorney for
at least the last five years. Mr. Busch is also
a director of Global Med Technologies, Inc.
Robert Jeffers, Jr. Director of the Company since February 1998. Mr.
Jeffers is a member of the Company's audit
committee and has been a practicing attorney for
at least the last five years.
Kwok Jen Fong Director of the Company since February 1998. Mr.
Fong has been a director of Heng Fung Holdings
Company Limited since 1995. Mr. Fong has been a
practicing solicitor in Singapore for at least
the last five years. Mr. Fong is also a director
of Global Med Technologies, Inc.
Gary L. Cook Secretary and Treasurer of the Company since
February 1998, and Chief Financial Officer of
the Company since September 1998. From 1994 to
1996, Mr. Cook was a principal of a small
venture in which he had majority ownership, and
from 1982 to 1994, was a Senior Manager for KPMG
LLP where he managed all auditing services for
several clients in various financial and other
industries, and developed and implemented
accounting, financial reporting and SEC
reporting systems for growth companies. Mr. Cook
is a director of Global Med Technologies, Inc.
Directorships. No director of the Company is a director of any other
entity that has its securities registered pursuant to Section 12 of the
1934 Act, or subject to the requirements of Section 15(d) of the 1934 Act
except Messrs. Chan, Trapp, Busch, Fong and Cook who are directors of
Global Med Technologies, Inc.
(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 year ended September 30, 1998,
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, other than Fai H. Chan
who failed to timely file a Form 3 and Form 4, and Jeffrey Busch who failed to
timely file a Form 3, Robert Jeffers, Jr. who failed to timely file a Form 3,
and Robert H. Trapp who timely failed to file a Form 3, and Heng Fung Holdings
Company Limited, Heng Fung Finance Company Limited, and Heng Fung Capital
Private Limited who failed to timely file a Form 4.
26
<PAGE>
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 Fai H. Chan, the Chairman of the Board and the
President of the Company, and Gary L. Cook, the Chief Financial Officer,
Secretary and Treasurer of the Company. Also included is the former Chairman of
the Board, Robert A. Fitzner, Jr.
<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>
Fai H. Chan ...................... 1998 --- -- -- -- --
Chairman of the 1997 --- -- -- -- --
Board of Directors 1996 --- -- -- -- --
and President of the
Company
Gary L. Cook ..................... 1998 100,728 -- -- -- 4,092(a)
Chief Financial 1997 90,000 -- -- -- 3,344(a)
Officer, Secretary 1996 28,423 10,000 -- -- --
and Treasurer of the
Company and AFFC
Robert A. Fitzner, Jr ............ 1998 81,214 -- -- -- 609(a)
Chairman of the 1997 172,124(b) 30,000 -- -- 1,291(a)
Board (through 1996 162,000(b) 40,000 -- -- 76,300(c)
February 10, 1998)
</TABLE>
(a) Officers of the Company receive additional compensation for matching
contributions to a 401(k) savings plan, health club dues and disability
insurance premiums.
(b) Includes $30,000 paid as a director's fee to Mr. Fitzner by Secutron.
(c) 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.
Stock Option Plans
Effective September 30, 1988, as amended September 10, 1996, the Company adopted
an Incentive Stock Option Plan (Plan). 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. No options may be granted after September
30, 1998. As of September 30, 1998, 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). 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. No option
may be granted after April 8, 2006.
27
<PAGE>
Under the 1996 Plan as of September 30, 1998, options to purchase 1,205,000
shares of the Company's common stock at $.625 per share through September 9,
2009 were outstanding, of which options to purchase 935,000 were exercisable.
On April 8, 1996, as amended on February 19, 1997, the Company adopted the
September 1996 Incentive and Nonstatutory Option Plan (September 1996 Plan). The
September 1996 Plan authorizes the granting of options to purchase 2,500,000
shares of the Company's common stock. No options may be granted after April 8,
2006.
Under the September 1996 Plan as of September 30, 1998, options to purchase
2,468,000 shares of the Company's common stock at $.625 to $1.00 per share
through December 31, 2010 were outstanding, of which options to purchase
1,188,000 shares were exercisable.
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 expired August 25, 1998.
As of September 30, 1998, the Company had also granted 700,000 nonqualified
stock options to certain employees at an exercise price of $1.00 per share.
These options expire April 2, 2008 and are exercisable 50,000 per year beginning
March 18, 1999, plus an additional 20,000 shares per year if branch where
employees work meets projected profits each year for five years.
On November 25, 1998, the Board of Directors granted the holders of 2,930,000
incentive stock options the opportunity to cancel their existing options and
receive new grants at $.20 per share which was equal to the closing price of the
common stock as reported on the OTC Bulletin Board on that date. The employees
have until February 1, 1999 to decide whether to keep their existing options or
elect to receive the replacement options. The replacement options will vest
one-third on January 30, 1999, one-thi on November 25, 1999 and one-third on
November 25, 2000.
Also, on November 25, 1998, the Company granted 2,800,000 nonqualified stock
options to purchase shares of common stock to members of the Board of Directors
at a price of $.20 per share which was equal to the closing price of the common
stock as reported on the OTC Bulletin Board on that date. The options vest at
the rate of 20% per year through November 25, 2003 and expire on the anniversary
date in 2008; provided, that no option shall be exercisable until and unless
basic earnings per share for any fiscal year commencing with the fiscal year
ending September 30, 1999, are equal to or exceed $0.10 per share. On this same
date, 1,793,500 options were granted to officers and employees from the
September 1996 Plan with the same terms except that 1,093,500 of such options do
not have the basic earnings per share requirement. These latter grants are
subject to shareholder approval to increase the number of shares available for
grant pursuant to the September 1996 Plan. If shareholder approval is not
obtained, then they become nonqualified options.
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 15,1998, the ESOP owned 448,682
shares of the Company's common stock and no other marketable securities. The
shares are committed at the discretion of the Board of Directors. As of
September 30, 1998, no shares have been committed. Employees become vested in
the shares of the Company's common stock after six years in the ESOP once the
shares have been committed to be released. Employees are 20% vested after two
years, vesting an additional 20% each year up to 100% after six years in the
ESOP.
28
<PAGE>
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
contribution equal to a percentage of the employee's contribution. Officers
participate in the plans in the same manner as other employees.
The Company has no other bonus, profit sharing, pension, retirement, stock
purchase, deferred compensation, or other incentive plans.
Aggregated Option Exercises in Last Fiscal Year or
Fiscal Year End Option Values
No options were granted by the Company to Fai H. Chan, Robert H. Trapp, Gary L.
Cook or Robert A. Fitzner, Jr. during the year ended September 30, 1998.
Long-Term Incentive Plan Awards
No long term incentive plan awards were granted by the company to Fai H. Chan,
Robert H. Trapp, Gary L. Cook or Robert A. Fitzner, Jr. during the year ended
September 30, 1998.
Compensation of Directors-Standard Arrangement
Directors of the Company receive no compensation for their services as
directors.
Employment Contracts and Termination of Employment
and Change-In-Control Arrangements
The Company had an employment contract with Mr. Olson that expired January 1,
1998 with no further obligation beyond that date. There are no employment
contracts between the Company and its executive officers.
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, 1998 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 15, 1998, 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:
29
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature
Beneficial Owner or Name of Beneficial
of Officer or Director Ownership (l) Percent of Class
- ------------------------ ---------------- ----------------
<S> <C> <C>
Fai H. Chan ................................. 74,533,998(2)(6) 87.2%
Lippo Protective Tower
10th Floor
231-235 Gloucester Road
Wanchai, Hong Kong 040
Robert H. Trapp ............................. ---(3)(6) ---%
1700 Lincoln Street
32nd Floor
Denver, Colorado 80203
Kwok Jen Fong ............................... ---(3)(6) ---%
7 Temasek Blvd
#43-03 Suntec
Tower One
Singapore 038987
Jeffrey M. Busch ............................ ---(6) ---%
Suite 204B
Oxford Bldg.
University Office Bldg.
Newark, DE 19702
Robert Jeffers, Jr .......................... ---(6) ---%
6101 16th St. SW
Suite 511
Washington, DC 20011
Gary L. Cook ................................ 100,000(4)(6) **%
1700 Lincoln Street, 32nd Floor
Denver, Colorado 80203
All officers and directors .................. 74,633,998(2)(3)(4)(5)(6) 87.2%
as a group (6 persons)
Heng Fung Holdings Company .................. 74,533,998(4)(5) 87.2%
Limited
Lippo Protective Tower
10th Floor
231-235 Gloucester Road
Wanchai, Hong Kong
</TABLE>
**Less than 1%
1) Except as indicated below, each person has the sole voting and investment
power over the shares indicated.
2) Consists of shares beneficially owned by Heng Fung Holdings Company
Limited. Mr. Chan is an executive officer, a director and a 10.73%
shareholder of Heng Fung Holdings Company Limited.
3) Mr. Trapp and Mr. Fong are directors of Heng Fung Holdings Company Limited.
Mr. Trapp and Mr. Fong disclaim beneficial ownership of the shares
beneficially owned by Heng Fung Holdings Company Limited.
4) Represents 100,000 shares underlying stock options currently exercisable,
or exercisable within 60 days.
30
<PAGE>
5) Heng Fung Holdings Company Limited is the parent of Heng Fung Private. Heng
Fung Private is the parent of Heng Fung Finance. 74,283,998 of the shares
beneficially owned by Heng Fung Holdings are owned by Heng Fung Private, of
which 69,590,857 of the shares are beneficially owned by Heng Fung Finance.
Of the 69,590,857 shares beneficially owned by Heng Fung Finance,
68,294,439 of the shares are beneficially owned pursuant to the Convertible
Debenture Agreement.
6) Does not include stock options granted to such individuals on November 25,
1998, which do not vest until November 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)(b) Transactions with Management and Others and Certain Business
Relationships. In December 1997, the Company entered into the Convertible
Debenture Agreement with Heng Fung Finance, which was subsequently amended and
is described in Item 1 and Item 5 of this Annual Report.
Since January 1, 1998, Fronteer Capital, which received the proceeds of the
$4,000,000 Convertible Debenture purchased by Heng Fung Private in December 1997
pursuant to the Convertible Debenture Agreement, that is described in Item 1 of
this Annual Report, used a portion of the proceeds to purchase approximately
116,430,000 shares of the common stock of Heng Fung Holdings in open market
transactions on the Hong Kong Stock Exchange at an average price of
approximately $0.02 per share. The shares of the common stock of Heng Fung
Holdings had a market price of approximately $0.01 per share on October 12,
1998. Fai H. Chan and Robert H. Trapp are the directors and officers of Fronteer
Capital and are directors of Heng Fung Holdings. In addition, Mr. Chan
beneficially owns approximately 10% of the outstanding common stock of Heng Fung
Holdings.
Heng Fung Holdings has guaranteed the payment of each annual 8% cash dividend on
the Series B preferred stock offered by the Company in the 1998 Private Offering
if such dividend is not paid by the Company. In consideration for making such
guaranty, the Company issued an affiliate of Heng Fung Holdings 250,000 shares
of the Company's common stock subsequent to year end. If Heng Fung Holdings is
required to make payment as a result of its guaranty, Heng Fung Holdings or its
designee will receive a 12% convertible debenture equivalent to the amount that
Heng Fung Holdings is required to pay on the guaranty unless the act of the
Company in giving Heng Fung Holdings or its designee the 12% convertible
debenture would be deemed to be an illegal distribution under the Colorado
Business Corporation Act.
In such event, Heng Fung Holdings or its designee would receive such number of
shares of the Company's common stock as is equal to 90% of the market price of
the common stock as of the close of business on October 31 or the next business
day, if October 31 is not a business day, on which the dividend is payable
divided into the amount of the dividend.
Each 12% convertible debenture that Heng Fung Holdings or its designee receives
will bear interest at a rate of 12% per annum and interest only will be payable
quarterly with the final payment of the entire unpaid principal balance and all
accrued and unpaid interest, if not sooner paid, due and payable on October 1,
2003. Interest is payable in cash or in shares of the Company's common stock at
the election of Heng Fung Holdings or its designee. Each 12% convertible
debenture will be convertible into shares of the Company's common stock at a
price equal to the lower of $0.35 or the market price of the Company's common
stock at the time of conversion. In the case of default, the conversion price
will be $0.10 per share of the Company's common stock. Heng Fung Holdings has
advised the Company that Heng Fung Holdings would, at this time, have sufficient
liquid assets to pay on its guaranty if it were required to do so. There are no
assurances, however that Heng Fung Holdings will have sufficient asset to pay on
its guaranty if it were required to do so in the future.
On April 25, 1998 the Board of Directors approved a resolution to give 350,000
shares of its common stock to Heng Fung Finance for its time, efforts, captial
costs and expenses in setting up and operating a New York City office which was
transferred to the Company to be operated as an AFFC institutional sales
location.
31
<PAGE>
On October 7, 1998, FDFI, Heng Fung Finance, and Global entered into an
agreement whereby FDFI purchased, Heng Fung Finance sold and Global consented to
the sale of $1,000,000 principal amount of loans made by Heng Fung Finance to
Global along with a warrant to purchase an aggregate of 4,000,000 shares of
Global's common stock. FDFI paid Heng Fung Finance $1,100,000 for the loans and
warrants. The loans and warrants purchased by FDFI were a portion of loans and
warrants given pursuant to a joint loan commitment made by Heng Fung Finance and
Fronteer Capital (subsequently transferred to FDFI) for the benefit of Global.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Financial Statement Schedules
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of September 30, 1998 and 1997 F-2
Consolidated Statements of Operations for each of the years
in the three year period ended September 30, 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the
years in the three year period ended September 30, 1998 F-6
Consolidated Statements of Cash Flows for each of the years
in the three year period ended September 30, 1998 F-7
Notes to Consolidated Financial Statements F-10
All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements and
Notes thereto.
(a)(2) Financial Statement Schedules. None.
(a)(3) Exhibits.
See "EXHIBIT INDEX" on page 33.
(a) Current Reports on Form 8-K:
A Current Report on Form 8-K dated September 11, 1998, was filed on October 7,
1998. The Current Report contained information under Item 2 relating to
amendments to the loan commitment to Global Med Technologies, Inc. and to the
terms of the $11,000,000 Convertible Debenture. The Current Report also
contained information regarding a letter of intent between the Company and
Auerbach, Pollak and Richardson, Inc.
A Current Report on Form 8-K dated October 7, 1998, was filed on October 13,
1998. The Current Report contained information under Item 5 relating to the
purchase of a loan and warrants by FDFI from Heng Fung Finance Company Limited.
(c) Exhibits: Included as exhibits are the items in the Exhibit Index.
32
<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 11, 1999 FRONTEER FINANCIAL HOLDINGS, LTD.
By: /s/ Gary L. Cook
------------------------------------------
Gary L. Cook, Secretary, Treasurer and
Chief Financial 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.
/s/ Fai H. Chan
Date: January 11, 1999 -----------------------------------------------
Fai H. Chan, Director
/s/ Robert H. Trapp
Date: January 11, 1999 -----------------------------------------------
Robert H. Trapp, Director
/s/ Jeffrey M. Busch
Date: January 11, 1999 -----------------------------------------------
Jeffrey M. Busch, Director
/s/ Kwok Jen Fong
Date: January 11, 1999 -----------------------------------------------
Kwok Jen Fong, Director
/s/ Robert Jeffers, Jr.
Date: January 11, 1999 -----------------------------------------------
Robert Jeffers, Jr., Director
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
FRONTEER FINANCIAL HOLDINGS, LTD.
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
Exhibit 2.1 Asset Sale and Purchase Agreement by and 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 the Registrant
McLeod USA Publishing Company, Classified Directories, Inc.
Larry A. Scott, James Greff, Randall L. Gowin, Edwin
Dressler and certain directors, officers and shareholders of
the Registrant 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 between 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
between 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 2.5 Asset Purchase Agreement dated March 1, 1998, by and between
the Registrant and Fronteer Marketing Group, Inc. and North
Country Yellow Pages, Inc. and Dennis W. Olson (incorporated
by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated June 22, 1998).
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 dated May 1, 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 3.0(iii) Articles of Amendment to the Registrant's Articles of
Incorporation dated October 13, 1998.
Exhibit 3.0(iv) Articles of Amendment to the Registrant's Articles of
Incorporation dated November 13, 1998.
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).
33
<PAGE>
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).
Exhibit 10.4 Employees/Officers/Directors Form of Noncompetition
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 by
and between the Registrant and Heng Fung Finance Company
Limited dated December 17, 1997 (incorporated by reference
to Exhibit 10.7 to Registrant's Annual Report on Form 10-K
for the year ended September 30, 1998).
Exhibit 10.8 Amendment No. 1 to $4,000,000 10% Convertible Debenture
Purchase Agreement by and between the Registrant and Heng
Fung Finance Company Limited dated September 23, 1998,
(incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K dated September 11, 1998).
Exhibit 10.9 Amendment to the $4,000,000 10% Convertible Debenture
Purchase Agreement dated December 17, 1997, (incorporated by
reference to Exhibit 10.0 to the Registrant's Form 10-Q/A
for the quarter ended March 31, 1998).
Exhibit 10.10 Loan and Warrant Purchase Agreement by and between Heng Fung
Finance Company Limited, Fronteer Development Finance Inc.
and Global Med Technologies, Inc. dated October 7, 1998.
Exhibit 10.11 Assignment, Assumption and Consent Agreement by and between
Global Med Technologies, Inc., Dr. Michael F. Ruxin, M.D.,
Fronteer Capital Inc. and Fronteer Development Finance Inc.
dated September 11, 1998.
Exhibit 10.12 First Amendment to Fronteer Financial Holdings, Ltd.
September 1996 Incentive and Nonstatutory Stock option Plan
dated February 19, 1997.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 27 Financial Data Schedule.
<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, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three year period ended
September 30, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
Denver, Colorado
December 30, 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 1998 1997
- ------
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ............................ $ 9,112,652 2,080,722
Receivables from brokers or dealers and clearing organizations:
Affiliated organization (Note 7) ........................... -- 2,045,134
Other ...................................................... 410,069 --
Trade receivables ............................................. 1,157,841 786,971
Other receivables ............................................. 667,425 382,208
Securities owned, at market value (Note 4) .................... 1,688,085 871,322
Other assets .................................................. 261,606 824,056
Net current assets of discontinued operations (Note 2) ........ -- 1,268,286
----------- -----------
Total current assets ....................................... 13,297,678 8,258,699
PROPERTY, FURNITURE AND EQUIPMENT, net (Note 5) .................. 1,541,131 1,167,883
DEFERRED INCOME TAXES (Note 11) .................................. -- 613,784
OTHER LONG-TERM ASSETS ........................................... 532,103 247,241
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS
(Note 2) ................................................... -- 715,475
----------- -----------
Total assets ............................................... $15,370,912 11,003,082
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30,
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
- ---------------------------------------------- ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 6) .................. $ 2,514,860 3,373,672
Current portion of long-term debt (Note 8) ...................... 124,007 863,164
Accrued interest payable to related party (Note 10) ............. 157,111 --
Notes payable to related parties (Note 7) ....................... -- 177,000
Deferred revenue ................................................ 118,800 --
Other current liabilities ....................................... 306,574 249,555
------------ ------------
Total current liabilities .................................... 3,221,352 4,663,391
LONG-TERM DEBT, net of current portion (Note 8) .................... 107,532 927,843
CONVERTIBLE DEBENTURES (Note 9) .................................... 6,101,448 --
CONVERTIBLE DEBENTURES TO RELATED PARTY
(Notes 3 and 10) ............................................... 7,000,000 --
DEFERRED RENT CONCESSIONS .......................................... 1,654,766 1,716,529
OTHER LIABILITIES .................................................. -- 88,000
------------ ------------
Total liabilities ............................................ 18,085,098 7,395,763
------------ ------------
MINORITY INTEREST IN SUBSIDIARIES .................................. 328,991 255,328
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT) (Note 3):
Preferred stock, authorized
25,000,000 shares, $0.10 par value ........................... -- --
Common stock; authorized 100,000,000 shares, $0.01 par
value; 17,140,857 and 16,871,557 shares issued and outstanding
as of September 30, 1998 and 1997, respectively .............. 171,408 168,715
Additional paid-in capital ...................................... 11,042,464 10,966,990
Accumulated deficit ............................................. (13,907,049) (7,433,714)
Unearned ESOP shares (Note 13) .................................. (350,000) (350,000)
------------ ------------
Total stockholders' equity (deficit) ...................... (3,043,177) 3,351,991
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 3, 9, 10, 11, 12 and 16)
Total liabilities and stockholders' equity (deficit) ...... $ 15,370,912 11,003,082
============ ============
</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,
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
REVENUE:
Brokerage commissions ............................... $ 14,763,287 13,779,477 10,825,987
Investment banking .................................. 2,227,289 3,003,794 2,275,217
Trading profits, net ................................ 405,962 274,563 453,144
Other broker/dealer ................................. 1,489,853 774,329 791,001
Computer hardware and software operations ........... 8,454,279 6,982,143 6,538,540
Other ............................................... 46,634 286,108 485,132
------------ ------------ ------------
Total revenue ................................ 27,387,304 25,100,414 21,369,021
------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Broker/dealer commissions ........................... 10,521,902 10,268,764 8,171,445
Computer cost of sales ............................. 7,979,162 5,767,136 5,381,097
Unrealized loss on securities (Notes 4 and 7) ....... 1,751,792 -- --
Interest expense on convertible debentures (Note 9).. 84,031 -- --
General and administrative .......................... 13,359,245 11,252,747 9,997,828
Depreciation and amortization ....................... 389,234 338,945 396,203
------------ ------------ ------------
Total cost of sales and operating expenses .. 34,085,366 27,627,592 23,946,573
------------ ------------ ------------
Operating loss ...................................... (6,698,062) (2,527,178) (2,577,552)
OTHER INCOME (EXPENSE):
Gain on sale of Clearing Operation (Note 2) ......... -- -- 1,332,974
Interest income ..................................... 300,705 150,203 642,274
Interest expense .................................... (17,390) (27,940) (225,089)
Interest expense to related party (Notes 3 and 10) .. (388,129) -- --
Other ............................................... (15,434) (22,580) (19,330)
------------ ------------ ------------
Total other income (expense) ................. (120,248) 99,683 1,730,829
Loss before minority interest and income taxes ...... (6,818,310) (2,427,495) (846,723)
Minority interest in (earnings) loss ................ 129,363 (11,331) (87,626)
------------ ------------ ------------
Loss from continuing operations before income taxes . (6,688,947) (2,438,826) (934,349)
Income tax (expense) benefit ........................ (290,320) 448,524 (55,799)
------------ ------------ ------------
Loss from continuing operations ..................... (6,979,267) (1,990,302) (990,148)
------------ ------------ ------------
(Continued)
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Year Ended September 30,
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Loss from continuing operations ..................... (6,979,267) (1,990,302) (990,148)
Loss on sale of discontinued operations, net of
income tax benefit of $159,748 and $409,692
in 1998 and 1997, respectively (Note 2) .......... (249,861) (666,522) --
Loss from discontinued operations, net of income tax
benefit of $101,788 and $411,631 in 1998 and 1997,
respectively (Note 2) ............................ (159,207) (799,048) (1,368,533)
------------ ------------ ------------
Loss from discontinued operations ................... (409,068) (1,465,570) (1,368,533)
------------ ------------ ------------
Loss before extraordinary item ...................... (7,388,335) (3,455,872) (2,358,681)
Extraordinary item-forgiveness of debt, net of income
tax expense of $585,000 (Note 2) ................. 915,000 -- --
------------ ------------ ------------
Net loss ............................................ (6,473,335) (3,455,872) (2,358,681)
Preferred stock dividends ........................... -- -- (59,061)
------------ ------------ ------------
Net loss applicable to common shareholders .......... $ (6,473,335) (3,455,872) (2,417,742)
============ ============ ============
Weighted average number of common shares
outstanding ...................................... 16,459,515 16,760,597 13,858,963
============ ============ ============
Basic earnings (loss) per common share:
Continuing operations ............................ $ (.42) (.12) (.07)
Discontinued operations:
Sale of discontinued operations ............ (.02) (.04) --
Discontinued operations .................... (.01) (.05) (.10)
Extraordinary item ............................... .06 -- --
------------ ------------ ------------
Total ...................................... $ (.39) (.21) (.17)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional
Preferred Common paid-in Accumulated Unearned
stock stock capital deficit ESOP stock Total
--------- ------- ---------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1995 ..... $ 875,000 109,129 6,367,561 (1,560,100) (350,000) 5,441,590
Series A preferred stock dividend . -- -- -- (59,061) -- (59,061)
Purchase of subsidiary shares ...... -- -- (548) -- -- (548)
Purchase and cancellation of
preferred stock ................. (875,000) -- -- -- -- (875,000)
Proceeds from shares issued
through private placement, net
of issuance costs of $614,704 ... -- 52,290 5,084,956 -- -- 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 ..... -- 161,419 10,251,969 (3,977,842) (350,000) 6,085,546
Proceeds from shares issued
through private placement, net
of issuance costs of $80,257 .... -- 7,296 715,021 -- -- 722,317
Net loss ........................... -- -- -- (3,455,872) -- (3,455,872)
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 1997 ..... -- 168,715 10,966,990 (7,433,714) (350,000) 3,351,991
Issuance of common shares for
interest (Note 10) .............. -- 4,128 217,539 -- -- 221,667
Common stock received and
cancelled in disposition of net
assets of discontinued operations
(Note 2) ........................ -- (4,935) (488,565) -- -- (493,500)
Issuance of common shares for
branch office ................... -- 3,500 346,500 -- -- 350,000
Net loss ........................... -- -- -- (6,473,335) -- (6,473,335)
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 1998 ..... $ -- 171,408 11,042,464 (13,907,049) (350,000) (3,043,177)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
<S> <C> <C> <C>
Net loss ..................................................... $ (6,473,335) (3,455,872) (2,358,681)
Adjustments to reconcile net loss to net cash used by
continuing operations:
Consideration relating to issuance of common shares
for branch office .................................. 334,094 -- --
Gain on sale of Clearing Operation ..................... -- -- (1,332,974)
Loss from Discontinued Operations ...................... 409,068 1,465,570 1,368,533
Depreciation and amortization .......................... 389,234 338,945 396,203
Extraordinary item, net of income tax of $585,000 ...... (915,000) -- --
Amortization of deferred rent .......................... (61,763) (52,298) (25,804)
Provision for bad debts ................................ -- 274,752 --
Accretion on convertible bonds ......................... 6,576 -- --
Equity in loss of affiliate ............................ -- 22,580 19,330
Minority interest in earnings (loss) ................... (129,363) 11,331 87,626
Unrealized loss on securities .......................... 1,751,792 -- --
Other .................................................. 290,320 55,000 (15,886)
Changes in operating assets and liabilities, net of
effects from sale of clearing operation:
Increase in broker/dealer customer
receivables, net ................................ -- -- (5,069,631)
Decrease (increase) in receivables from brokers or
dealers and clearing organizations .............. 1,635,065 (434,696) (1,555,209)
(Increase) decrease in trade receivables ............ (370,870) 218,109 (661,822)
(Increase) decrease in other receivables ............ (285,217) (375,083) 76,210
(Increase) decrease in securities owned, net of
securities sold but not yet purchased .......... (2,568,555) 837,238 (507,324)
Decrease (increase) in other assets ................. 562,450 (683,850) (41,155)
(Decrease) increase in accounts payable and accrued
liabilities ..................................... (858,812) 770,035 441,364
Decrease in broker/dealer customer payables ......... -- -- (284,451)
Increase in payables to brokers or dealers
and clearing organizations ...................... -- -- 7,590,197
Increase (decrease) in deferred revenue ............. 118,800 (24,400) 24,400
Increase (decrease) in other current liabilities .... 435,797 (7,960) 375,710
------------ ------------ ------------
Net cash used by continuing operations ........... (5,729,719) (1,040,599) (1,473,364)
Net cash provided (used) by discontinued
operations ................................... 597,682 (1,222,461) (364,027)
------------ ------------ ------------
Net cash used by operating activities ............ (5,132,037) (2,263,060) (1,837,391)
------------ ------------ ------------
(Continued)
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Year Ended September 30,
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES: 1998 1997 1996
<S> <C> <C> <C>
Purchase of property, furniture and equipment ............. (746,576) (417,476) (519,999)
Proceeds from sale of Clearing Operation, net ............. -- 1,048,075 312,133
Other investing activities ................................ (284,862) (214,393) (116,403)
Net cash provided by discontinued operations .............. 221,975 2,498,472 210,518
------------ ------------ ------------
Net cash provided (used) by investing activities ...... (809,463) 2,914,678 (113,751)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures,
net of offering costs ................................ 6,297,898 -- --
Proceeds from issuance of convertible debentures
to related party ..................................... 7,000,000 -- --
Borrowings on debt ......................................... -- -- 732,110
Net payments on borrowings from related parties ............ (150,102) (190,900) (181,000)
Principal payments on borrowings ........................... (86,366) (1,207,802) (1,647,233)
Net proceeds from issuance of common stock ................. -- 722,317 5,137,246
Dividends on preferred stock ............................... -- -- (59,061)
Purchase of preferred stock ................................ -- -- (875,000)
Purchase of common stock ................................... -- -- (1,200,000)
Other financing activities ................................. (88,000) 88,000 --
------------ ------------ ------------
Net cash provided (used) by financing activities ..... 12,973,430 (588,385) 1,907,062
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... 7,031,930 63,233 (44,080)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................. 2,080,722 2,017,489 2,061,569
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ....................... $ 9,112,652 2,080,722 2,017,489
============ ============ ============
(Continued)
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SUPPLEMENTAL DISCLOSURES RELATED TO STATEMENTS OF CASH FLOWS:
Year Ended September 30,
--------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash payments for:
Interest:
Continuing operations .................................. $ 22,425 27,940 225,089
Discontinued operations ................................ 9,350 142,508 254,275
---------- ---------- ----------
$ 31,775 170,448 479,364
========== ========== ==========
Income taxes:
Continuing operations .................................. $ 7,047 129,831 177,079
========== ========== ==========
Sale of Clearing Operation (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
========== ========== ==========
OTHER NONCASH INVESTING AND FINANCING ACTIVITIES:
McLeod note payable applied against purchase
price of directories (Note 2) .......................... $ -- 500,000 --
========== ========== ==========
Common stock received for sale of discontinued
operations (Note 2) .................................... $ 493,500 -- --
========== ========== ==========
Interest paid by issuance of common stock (Note 10)........ $ 221,667 -- --
========== ========== ==========
Acquisition of furniture and equipment by issuance
of common stock ....................................... $ 15,906 -- --
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 majority owned and wholly owned
subsidiaries. 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: American Fronteer Financial
Corporation (AFFC), formerly known as RAF Financial Corporation, 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; Fronteer Capital, Inc., which was formed to operate as a
holding company of investment opportunities in "small cap" companies; Corporate
Net Solutions, Inc., which was formed to invest in computer and Internet related
opportunities; and Fronteer Corporate Services, Inc., a Colorado Corporation,
which was formed to provide corporate administrative services to Fronteer
subsidiaries and other companies. The Company also has a majority owned
subsidiary, Secutron Corp. (Secutron), which designs, develops, installs,
markets and supports software systems for the securities brokerage industry.
Secutron has a wholly owned subsidiary, MidRange Solutions Corp., which is a
seller of hardware and software products. AFFC and Secutron are Colorado
corporations; Fronteer Capital, Inc. is a Delaware corporation; and RAF Services
are Louisiana, Nevada and Texas Corporations. During the year ended September
30, 1998, Fronteer Asset Management Corporate, Inc., a wholly owned subsidiary
of Fronteer, was formed to provide asset management services. Corporate Net
Solutions, Inc. and Fronteer Asset Management Corporate, Inc., which were
incorporated in Delaware in May and June of 1998, respectively, have not
commenced operations.
Fronteer Development Finance Inc. (FDFI), is another majority owned subsidiary
included in the consolidated financial statements. FDFI is a Delaware
corporation, incorporated March 1998 to operate as a finance company to take
advantage of high-yield and other lending opportunities. The Company controls
approximately 96% of the voting power and approximately 46% of the outstanding
common shares of FDFI. FDFI has a wholly owned subsidiary, Fronteer Income
Growth, Inc. which was formed for the purpose of making investments. This
subsidiary was incorporated under the International Business Companies
Ordinances of the Territory of the British Virgin Islands.
During September 1998, the Company purchased an additional 9% of the outstanding
common shares of Secutron resulting in an ownership of approximately 69% of
outstanding common shares of Secutron. Subsequent to September 30, 1998, the
Company purchased an additional 4% of the outstanding common shares resulting in
ownership of approximately 73% of the outstanding stock of Secutron.
AFFC operates as a fully disclosed securities broker/dealer and has offices in
twelve cities throughout the United States. As a registered securities
broker/dealer, AFFC is subject to regulation by the National Association of
Securities Dealers (NASD) and the Securities and Exchange Commission (SEC).
Periodically, regulatory bodies may conduct examinations or investigations of
AFFC and/or the Company. All significant intercompany accounts and transactions
have been eliminated in the preparation of the consolidated financial
statements.
F-10
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CASH AND 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 excess of Federal Deposit Insurance
Corporation limits was $3,108,678 and $1,866,520, as of September 30, 1998 and
1997, respectively. There was no restricted cash as of September 30, 1998.
Included in cash and cash equivalents as of September 30, 1998 and 1997 was
$5,705,696 and $1,347,203, respectively, which were on deposit in U.S.
Government obligation funds. The U.S. Government obligation funds invest in U.S.
Treasury and agency obligations and in repurchase agreements, which have these
securities as collateral.
TRADE RECEIVABLES 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.
OTHER RECEIVABLES
Other receivables includes net receivables from employees of $485,000 for loans
made to retail brokers. Such loans bear interest at 8% per annum and generally
are due within two to five years from the date the broker joins AFFC. The loans
are amortized on a straight-line basis through a charge to commissions expense
and are forgiven ratably over the term of the loans. To the extent a broker
leaves AFFC prior to the end of the loan term, the unamortized balance is
collected from the broker.
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.
In accordance with financial reporting requirements for broker/dealers, AFFC'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 (SFAS) 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 the
Company 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.
F-11
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
REVENUE AND COST RECOGNITION
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.
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.
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.
Real property has an estimated useful life of forty years; furniture and
vehicles of three to five years; and equipment has estimated lives ranging from
five to ten years.
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.
F-12
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the "disclosure method" provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation. As permitted under SFAS No. 123, the Company continues
to recognize stock-based compensation costs under the intrinsic value based
method of accounting as prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees.
LOSS PER COMMON SHARE
During the year ended September 30, 1998, the Company adopted SFAS No. 128,
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 share due to the fact that including the potential
common shares would result in antidilution as a result of the loss from
continuing operations.
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
SFAS 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, 1998 and 1997 for financial instruments
approximate their fair values due to the short maturity of these instruments or
because the related interest rates of long-term instruments approximate current
market rates.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
As a securities broker/dealer, AFFC is engaged in various securities trading and
brokerage activities. A portion of AFFC's transactions are collateralized and
are executed with and on behalf of institutional investors including other
broker/dealers. AFFC'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' abilities to satisfy their obligations
to AFFC. AFFC's principal activities are also subject to the risk of
counterparty nonperformance.
F-13
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR 2000 (UNAUDITED)
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 has completed its Year 2000
assessment and has begun the correction and replacement steps in its Year 2000
Plan. The total cost of the Year 2000 Plan is estimated to be less than $50,000,
of which less than approximately $20,000 has been spent through September 30,
1998. The Company's formal contingency plans are currently being developed and
are expected to be completed by June 1999. 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' consolidated financial
statements to conform to current year's presentation.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which
is effective for periods beginning 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 significant effect on the disclosures in its consolidated financial
statements and will adopt it when required.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued which is effective for all fiscal years beginning after
June 15, 1999. The Company currently does not participate in these activities
and consequently does not believe adoption of the statement will have an effect
on the consolidated financial statements.
F-14
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2 - DISCONTINUED OPERATIONS AND OTHER SIGNIFICANT
BUSINESS ACTIVITIES
DISCONTINUED OPERATIONS
On March 20, 1998, the Company sold the remaining net assets pertaining to the
directory business and Fronteer Marketing Group (FMG), which operations were
discontinued during the year ended September 30, 1997, as described below. The
net assets had not previously been identified as part of discontinued
operations. The net assets were sold for the return by former officers of the
Company of 493,500 shares of the Company's common stock. The net assets were
valued by the Board of Directors based on appraisals, existing financing
arrangements and estimates. The loss on the sale of the net assets was $249,861,
net of an income tax benefit of $159,748.
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 represented most all of the
Company's remaining directory business assets. As such, the Company had
discontinued its activities in the directory business.
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 were to be made through December 2000
at which time the balance was due and payable to the Company. On March 20, 1998,
the promissory notes were sold as part of the sale of the remaining net assets
of discontinued operations as mentioned above. Accordingly, the Company has
discontinued its activities in the direct marketing business.
Effective April 1, 1997, the Company sold all of the stock of Fronteer Personnel
Services (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.
F-15
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
Information relating to the loss from discontinued operations is as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1998: Directory
Business FMG Total
--------- --- -----
<S> <C> <C> <C>
Revenue .................................... $ -- -- --
Cost of sales and operating expenses ....... 236,502 24,493 260,995
----------- ----------- -----------
(236,502) (24,493) (260,995)
----------- ----------- -----------
Nonoperating costs ......................... -- -- --
----------- ----------- -----------
Loss before income taxes ................... (236,502) (24,493) (260,995)
Income tax benefit ......................... 92,236 9,552 101,788
----------- ----------- -----------
Net loss from discontinued operations ..... $ (144,266) (14,941) (159,207)
=========== =========== ===========
Loss on sale of discontinued operations, net
of income tax benefit of $159,748 ..... $ (249,861) -- (249,861)
=========== =========== ===========
<CAPTION>
Year Ended September 30, 1997 Directory
Business FMG Total
--------- --- -----
<S> <C> <C> <C>
Revenue .................................... $ 4,866,454 364,652 5,231,106
Cost of sales and operating expenses ....... 4,733,860 1,580,934 6,314,794
----------- ----------- -----------
132,594 (1,216,282) (1,083,688)
----------- ----------- -----------
Nonoperating costs ......................... (28,848) (98,143) (126,991)
----------- ----------- -----------
Earnings (loss) before income taxes ........ 103,746 (1,314,425) (1,210,679)
Income tax benefit (expense) ............... (35,274) 446,905 411,631
----------- ----------- -----------
Net earnings (loss) from discontinued
operations ............................ $ 68,472 (867,520) (799,048)
=========== =========== ===========
Loss on sale of discontinued operations, net
of income tax benefit of $409,692 ..... $ (458,181) (208,341) (666,522)
=========== =========== ===========
(Continued)
F-16
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
<CAPTION>
Year Ended September 30, 1996 Directory
Business FMG Total
--------- --- -----
<S> <C> <C> <C>
Revenue .................................... $ 7,100,335 317,549 7,417,884
Cost of sales and operating expenses ....... 7,587,311 953,122 8,540,433
----------- ----------- -----------
(486,976) (635,573) (1,122,549)
----------- ----------- -----------
Nonoperating costs ......................... (156,877) (89,107) (245,984)
----------- ----------- -----------
Loss before income taxes ................... (643,853) (724,680) (1,368,533)
Income tax expense ......................... -- -- --
----------- ----------- -----------
Loss from discontinued operations .......... $ (643,853) (724,680) (1,368,533)
=========== =========== ===========
</TABLE>
F-17
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The net assets and liabilities of the discontinued operations included in the
accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
September 30, 1997
------------------------------------
Directory
business FMG Total
<S> <C> <C> <C>
Current assets:
Cash ............................................. $ 140,939 (16,323) 124,616
Trade receivables ................................ 1,367,960 103,909 1,471,869
Allowance for doubtful trade receivables ......... (122,928) (34,667) (157,595)
Other receivables ................................ 81,306 -- 81,306
Current portion of long-term notes receivable..... 55,000 66,576 121,576
Other assets ..................................... 236,415 -- 236,415
----------- ----------- -----------
Total current assets .......................... 1,758,692 119,495 1,878,187
----------- ----------- -----------
Current liabilities:
Accounts payable, accrued expenses and
other liabilities ............................ 469,974 29,243 499,217
Current portion of long-term debt ................ -- 69,949 69,949
Deferred revenue ................................. -- 350 350
Other current liabilities ........................ 37,818 2,567 40,385
----------- ----------- -----------
Total current liabilities ..................... 507,792 102,109 609,901
----------- ----------- -----------
Net current assets ......................... $ 1,250,900 17,386 1,268,286
=========== =========== ===========
Long-term assets:
Property, furniture and equipment, net ........... $ 365,501 91,456 456,957
Long-term notes receivable ....................... 250,000 80,768 330,768
----------- ----------- -----------
Total long-term assets ........................ 615,501 172,224 787,725
----------- ----------- -----------
Long-term liabilities:
Long-term debt, net of current portion ........... -- 72,250 72,250
----------- ----------- -----------
Total long-term liabilities ................... -- 72,250 72,250
----------- ----------- -----------
Net long-term assets ....................... $ 615,501 $ 99,974 $ 715,475
=========== =========== ===========
</TABLE>
F-18
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CLEARING ACTIVITIES
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. 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, AFFC became a fully disclosed clearing correspondent of
MSI. 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.
During the year ended September 30, 1997, Fronteer and AFFC 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 AFFC, 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 $750,000 of the loan, and as
a result of this and MSI's decision to no longer be in the clearing business,
the entire $1,500,000 loan was forgiven and was recognized as an extraordinary
item during the year ended September 30, 1998.
Subsequent to September 30, 1998, the Company and AFFC entered into an agreement
with MSI and OFI to which MSI would withdraw as a registered broker/dealer with
the SEC, resign as a member of the NASD and pay the Company a total of $430,000.
As a result of the agreement and closing which occurred on December 16, 1998,
OFI owns 100% of the outstanding common stock of MSI. Both the Company and AFFC,
and OFI and MSI released each other from any claims as part of the agreement.
NOTE 3 - STOCKHOLDERS' EQUITY
On October 16, 1998, the Company commenced a private placement of 1,500,000
shares of its Series B preferred stock, which was authorized by the Board of
Directors on October 13, 1998, at a price of $10.00 per share and has a
cumulative annual dividend rate of 8% in cash and 7% in shares of Series B
preferred stock (1998 Private Offering). The cash portion of the dividend is
guaranteed by Fronteer's parent company, Heng Fung Holdings Company Limited
(Heng Fung Holdings) through October 2003. The Series B preferred stock is
redeemable by the Company on and after October 2003 at a price of $12.50 per
share plus accrued and unpaid dividends. The Company agreed to issue warrants to
purchase a certain variable number of shares of Series B preferred stock at a
purchase price of $12.00 per share for five years. The 1998 Private Offering
terminates February 1999. There have been no issuances of Series B preferred
stock under the 1998 Private Offering.
In December 1997, Heng Fung Capital [S] Private Limited (Heng Fung Private), a
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 AFFC. 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 AFFC, 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
F-19
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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. 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 H. Chan and Mr. Robert H.
Trapp, to the Board of Directors of Fronteer.
On January 29, 1998, the NASD approved the change in the beneficial ownership of
25% or more of AFFC, 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 the Company and its subsidiaries. Also,
Mr. Fitzner resigned as the Chairman of the Company and as the President and
Chief Executive Officer of AFFC, Mr. Long resigned as the Secretary of the
Company and Mr. Olson resigned as the President of the Company. At the same
time, Mr. Chan and Mr. Trapp, the two remaining directors appointed at the
request of Heng Fung Finance, reduced the number of directors on the Company's
Board of Directors to three and appointed Mr. Kwok Jen Fong , a practicing
solicitor in Singapore, as a director of the Company to fill the remaining
vacancy. The directors also appointed Mr. Chan as the Chairman of the Board and
the President of the Company, Mr. Trapp as Managing Director of the Company and
Gary L. Cook as the Secretary and Treasurer of the Company. Messrs. Chan and
Trapp and Mr. Zucker also became directors of AFFC, Mr. Trapp was appointed the
President of AFFC, Brian F. Zucker was appointed the Managing Director of AFFC
and Mr. Cook was appointed the Treasurer of AFFC. Mr. Cook also remains as the
Secretary of AFFC. On February 20, 1998, the Board of Directors of Fronteer
appointed Jeffrey Busch and Robert Jeffers, Jr., both practicing attorneys, as
directors of Fronteer. In addition, because Heng Fung Finance purchased the
additional 3,556,777 shares, it received the option to purchase an additional 10
year $11,000,000 10% convertible debenture, convertible at $0.61 per share of
the Company's common stock, pursuant to the Convertible Debenture Agreement.
Subsequently, Heng Fung Finance exercised its option and purchased $2,500,000 of
the $11,000,000 10% convertible debenture. On September 23, 1998, the Company
agreed to amend the terms of the Convertible Debenture Agreement for the
remaining $8,500,000 available. The amendment changed the conversion price to
the lower of $0.35 or the market value of the Company's common stock at the time
of conversion and increased the interest rate to 12%. In addition, the revision
changed the conversion price, upon default, to $0.10 per share of the Company's
common stock. On September 25, 1998, Heng Fung Finance purchased a $500,000 12%
convertible debenture. The quarterly interest payments on the convertible
debentures purchased pursuant to the Convertible Debenture Agreement are
currently being made in shares of the Company's common stock and resulted in
412,800 shares being issued through September 30, 1998 to Heng Fung Finance. As
of September 30, 1998, Heng Fung Finance had purchased $7,000,000 in convertible
debentures. Subsequent to September 30, 1998, Heng Fung Finance purchased an
additional $1,000,000 12% convertible debenture in order for the company to
acquire Class B common shares of FDFI in accordance with the FDFI Offering
Memorandum described in Note 9.
F-20
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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.
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 AFFC 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 exercise prices ranging from $.625 to $1.00 per share. As of September 30,
1998 2,580,000 options are exercisable. During the years ending September 30,
1999, 2000, 2001, 2002 and 2003, 732,333, 457,333 142,334, 109,000 and 109,000
options become exercisable. As of September 30, 1998, the Company had also
granted 700,000 nonqualified stock options to certain employees at an exercise
price of $1.00 per share. These options expire April 2, 2008 and are exercisable
50,000 per year beginning March 18, 1999, plus an additional 20,000 shares per
year if branch where employees work meets projected profits each year for five
years.
F-21
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following represents additional information relative to stock option
activity:
<TABLE>
<CAPTION>
September
Total 1988 Plan 1996 Plan 1996 Plan Nonqualified
----- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
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
Expired ............ (340,000) -- -- -- (340,000)
Granted ............ 2,070,000 -- -- 1,370,000 700,000
Canceled ........... (165,000) -- (35,000) (130,000) --
---------- ---------- ---------- ---------- ----------
Outstanding as of
September 30, 1998..... 4,830,000 457,000 1,205,000 2,468,000 700,000
========== ========== ========== ========== ==========
Expiration dates:
2006 .......... 1,530,000 457,000 615,000 458,000 --
2007 .......... 360,000 -- 160,000 200,000 --
2008 .......... 2,350,000 -- 160,000 1,490,000 700,000
2009 .......... 320,000 -- 160,000 160,000 --
2010 .......... 270,000 -- 110,000 160,000 --
---------- ---------- ---------- ---------- ----------
Outstanding as of
September 30, 1998..... 4,830,000 457,000 1,205,000 2,468,000 700,000
========== ========== ========== ========== ==========
</TABLE>
On November 25, 1998, the Board of Directors granted the holders of 2,930,000
incentive stock options the opportunity to cancel their existing options and
receive new grants at $.20 per share which was equal to the closing price of the
common stock as reported on the OTC Bulletin Board on that date. The employees
have until February 1, 1999 to decide whether to keep their existing options or
elect to receive the replacement options. The replacement options will vest
one-third on January 30, 1999, one-third on November 25, 1999 and one-third on
November 25, 2000.
Also, on November 25, 1998, the Company granted 2,800,000 nonqualified stock
options to purchase shares of common stock to members of the Board of Directors
at a price of $.20 per share which was equal to the closing price of the common
stock as reported on the OTC Bulletin Board on that date. The options vest at
the rate of 20% per year through November 25, 2003 and expire on the anniversary
date in 2008; provided, that no option shall be exercisable until and unless
basic earnings per share for any fiscal year commencing with the fiscal year
ending September 30, 1999, are equal to or exceed $0.10 per share. On this same
date, 1,793,500 options were granted to officers and employees from the
September 1996 Plan with the same terms except that 1,093,500 of such options do
not have the basic earnings per share requirement. These grants are based on
shareholder approval to increase the number of shares available for grant
pursuant to the September 1996 Plan. If shareholder approval is not obtained,
then they become nonqualified options.
F-22
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 consisted of the following:
September 30,
----------------------
1998 1997
---- ----
Corporate securities ..................... $1,401,672 490,505
U.S. government obligations .............. 3,978 30,549
Municipal obligations .................... 282,435 350,268
---------- ----------
$1,688,085 871,322
========== ==========
Corporate securities includes $1,066,972 invested in Heng Fung related entities.
(See Note 7.)
NOTE 5 - PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment consisted of the following:
September 30,
----------------------
1998 1997
---- ----
Real property .................................... $ 245,100 565,658
Furniture and equipment .......................... 2,923,665 3,083,863
Automobiles ...................................... -- 125,073
Leasehold improvements ........................... 558,520 426,863
----------- -----------
3,727,285 4,201,457
Less accumulated depreciation and amortization ... (2,186,154) (2,576,617)
----------- -----------
$ 1,541,131 1,624,840
=========== ===========
Property, furniture and equipment, net, included in long-term assets of
discontinued operations was $456,957 as of September 30, 1997.
F-23
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
September 30,
-----------------
1998 1997
Trade accounts payable ......... $1,313,225 1,783,812
Accrued legal reserves ......... 500,000 575,000
Payroll related accounts ....... 553,197 997,110
Other accrued expenses ......... 148,438 17,750
---------- ----------
$2,514,860 3,373,672
========== ==========
NOTE 7 - RELATED PARTY ACTIVITY
Since January 1, 1998, Fronteer Capital, Inc., which received the proceeds of
the $4,000,000 Convertible Debenture purchased by Heng Fung Private in December
1997 pursuant to the Convertible Debenture Agreement, that is described in Notes
3 and 10, used a portion of the proceeds to purchase approximately 116,430,000
shares of the common stock of Heng Fung Holdings in open market transactions on
the Hong Kong Stock Exchange at an average price of approximately $0.02 per
share. During the year ended September 30, 1998, the Company recognized an
unrealized loss of $1,573,793 on these securities. Two officers and directors of
the Company are directors of Heng Fung Holdings. In addition, Mr. Chan
beneficially owns approximately 10% of the outstanding common stock of Heng Fung
Holdings.
During the year ended September 30, 1998, the Company paid an outside director
$50,000 for legal services.
The Company had various notes payable to related parties in the amount of
$177,000 as of September 30, 1997. Such notes payable were unsecured, payable on
demand, and had interest at a variable rate not to exceed the interest rate on
the Company's previous line of credit with a financial institution. As of
September 30, 1997, the interest rate was 11.5%. The notes were paid in full
during the year ended September 30, 1998.
As a clearing correspondent of MSI, the Company paid MSI clearing fees of
$111,512 and $1,096,690 for the years ended September 30, 1998 and 1997,
respectively. The Company's $2,045,134 receivable from brokers or dealers and
clearing organizations--affiliated organization, 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.
F-24
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In accordance with an investment banking agreement, merger and acquisition fees
of $100,000 relating to the acquisition of the assets of RAFCO, Ltd. (RAFCO)
were paid to a then 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 AFFC's inventory
positions. The inventory positions were transferred to the officer at market
value. The officer resigned as an officer of the Company during the year ended
September 30, 1998, but remains an employee of the Company.
During the year ended September 30, 1997, a then 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, the Company had notes payable to the same officer of
$100,000. The officer resigned and these amounts were repaid during the year
ended September 30, 1998.
During the year ended September 30, 1996, the Company paid fees for legal
services of approximately $209,000, to a legal firm partially owned for most of
the year 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.
NOTE 8 - LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
September 30,
Maturity Interest -------------------
Payee Collateral date rate 1998 1997
----- ---------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
MSI (1) .................... (1) (1) (1) $ -- 1,500,000
Guaranty Bank .............. Real Property 3-01-01 8.50% 116,667 156,667
Wilton State Bank .......... Equipment 2-15-00 9.75% -- 125,949
Other Notes ................ Equipment Various Various 114,872 150,590
------- -------
231,539 1,933,206
Less current portion ...... (124,007) (933,113)
-------- ---------
$ 107,532 1,000,093
======== =========
</TABLE>
(1) The loan was payable to MSI and was issued in conjunction with the
sale of the Clearing Operation as discussed in Note 2. The $1,500,000
loan was forgiven and recognized as an extraordinary item during the
year ended September 30, 1998.
Included in current and long-term liabilities of discontinued operations as of
September 30, 1997 was debt in the total amount of $142,199, of which $69,949
was the current portion.
F-25
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Minimum principal payments required on long-term debt are as follows for the
years ending September 30:
1999 $124,007
2000 48,004
2001 44,683
2002 14,845
-------
Total $231,539
=======
NOTE 9 - CONVERTIBLE DEBENTURES
On May 26, 1998, FDFI commenced a private placement of 30,000 units (Unit) each
consisting of (i) one $1,000 convertible debenture, due August 1, 2008, paying
10% per annum; (ii) 100 Class A common shares; and (iii) warrants exercisable at
$3.00 per share for 500 Class A common shares (FDFI Private Placement). The
convertible debentures are convertible into Class A common shares at a
conversion price of $5.00 per share. As of September 30, 1998, 7,308 units were
issued through the FDFI Private Placement for proceeds of $6,297,898, net of
issuance costs of $1,010,102.
Per the terms of the FDFI Private Placement, the portion of the cost per Unit
allocable to the convertible debentures is 83.4%. Therefore, the convertible
debentures were recorded at 83.4% of the face amount of the convertible
debentures of $7,308,000 or $6,094,872. The discount on the convertible
debentures is being amortized as an adjustment to the stated interest rate of
10% using the interest method. Original issue discount amortization of $6,576
has been recognized through September 30, 1998.
The convertible debentures are scheduled to mature on August 1, 2008 and
generally are not callable by FDFI prior to maturity. Interest is at 10% per
annum, payable each January 31st and July 31st. These debentures are convertible
into shares of Class A common stock of FDFI at a conversion price of $5.00 per
share. Accrued interest expense on the convertible debentures at September 30,
1998 was $77,454.
Subsequent to September 30, 1998, 650 additional Units were sold for proceeds of
$575,250, net of issuance costs of $74,750.
The Offering Memorandum for the FDFI Private Placement included 3,000,000 shares
of authorized Class B common stock, and required Fronteer to purchase Class B
common stock in the amount of no less than 26.67% of the amount of Units
purchased by outside investors. As of December 15, 1998, the Company has
purchased 666,666 shares of the Class B common stock for $2,000,000, half of
which was purchased as of September 30, 1998. There were no commissions or
expenses associated with the Class B common stock issuance.
F-26
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 10 - CONVERTIBLE DEBENTURES TO RELATED PARTY
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 $0.53125 per share until December 15, 2007, unless sooner
paid, and an option to purchase a $11,000,000 10% Convertible Debenture that is
convertible into shares of common stock of the Company at a price of $0.61 per
share until ten years from the date of issue unless sooner paid. Heng Fung
Finance partially exercised the option and purchased additional 10% Convertible
Debentures totaling $2,500,000. On September 23, 1998, Heng Fung Finance and the
Company agreed to amend the terms of the remaining $8,500,000 of the $11,000,000
10% Convertible Debenture by increasing the interest rate to 12%, changing the
conversion price to the lower of $0.35 or the fair market value per share, and
changing the default conversion price to $0.10 per share. On September 25, 1998,
Heng Fung Finance partially exercised its option to purchase $8,500,000 of 12%
Convertible Debentures by purchasing a $500,000 12% Convertible Debenture from
the Company. As of September 30, 1998, Heng Fung Finance had purchased a total
of $7,000,000 in convertible debentures.
The quarterly interest payments on the convertible debentures purchased pursuant
to the Convertible Debenture Agreement are currently being made in shares of the
Company's common stock and resulted in 412,800 shares being issued through
September 30, 1998 to Heng Fung Finance. Subsequent to September 30, 1998, an
additional 283,618 common shares of the Company were issued to pay the accrued
interest payable at September 30, 1998. Also, subsequent to September 30, 1998,
Heng Fung Finance purchased an additional $1,000,000 12% convertible debenture
in order for the Company to acquire Class B common shares of FDFI in accordance
with the FDFI Offering Memorandum described in Note 9.
NOTE 11 - INCOME TAXES
Income tax expense (benefit) relating to the loss from continuing operations for
the three years in the period ended September 30, consisted of the following:
1998 1997 1996
---- ---- ----
Current ............................. $ -- 99,956 70,799
Deferred ............................ 290,320 (548,480) (15,000)
------- ------- -------
$ 290,320 (448,524) 55,799
======= ======= =======
F-27
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Income tax expense (benefit) for the years ended September 30, 1998, 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit .......... $(2,274,242) (829,201) (317,679)
Increase (decrease) in income taxes resulting
from:
Nondeductible expenses ....................... 159,948 10,158 19,998
State taxes, net of Federal benefit .......... (150,268) (82,000) 11,000
Unconsolidated subsidiaries for tax purposes . (111,476) 99,956 55,799
Change in valuation allowance for deferred tax
assets ..................................... 2,504,784 505,000 286,681
Other ........................................ 161,574 (152,437) --
----------- ----------- -----------
Income tax expense (benefit) ................. $ 290,320 (448,524) 55,799
=========== =========== ===========
</TABLE>
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,
-------------------
1998 1997
<S> <C> <C>
Deferred tax assets:
Deferred rent concessions ............................. $ 645,000 652,000
Forgivable loan ....................................... -- 585,000
Accrued expenses ...................................... 459,000 301,000
Allowance for doubtful accounts ....................... 136,000 210,000
Unamortized employee loans ............................ 135,000 35,000
Unrealized loss on investments ........................ 683,000 --
Investments in subsidiaries and affiliates ............ 97,000 97,000
Contribution and operating loss carryforwards ......... 1,992,000 375,000
----------- -----------
Gross deferred tax assets ............................. 4,147,000 2,255,000
Valuation allowance ................................... (4,096,000) (1,591,216)
----------- -----------
Deferred tax assets after valuation allowance ............ 51,000 663,784
Deferred tax liabilities:
Property and equipment ................................ (51,000) (50,000)
----------- -----------
Gross deferred tax liabilities ........................ (51,000) (50,000)
Net deferred tax asset ................................ $ -- $ 613,784
=========== ===========
</TABLE>
F-28
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The net deferred tax assets as of September 30, 1997 have been presented in the
accompanying consolidated balance sheet as a net long-term deferred asset. Net
operating losses of approximately $5,066,000 expire during the years from 2011
to 2013.
The consolidated tax return of the Company for the year ended September 30, 1996
is currently being examined by the Internal Revenue Service. The Company has not
received any correspondence from the examiner regarding the status of the
examination or any possible adjustments.
In assessing the realizability of deferred tax assets, management considered
whether it is more likely than not that the deferred tax asset would 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. The Company has established a valuation allowance
for deferred taxes due to the uncertainty that the full amount of the deferred
tax asset will be utilized. In determining the valuation allowance, management
considered factors including the reversal of existing temporary differences and
estimates of future taxable income.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Fronteer and AFFC 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:
1999 $1,829,758
2000 1,817,651
2001 1,746,355
2002 1,581,817
2003 1,312,086
Thereafter 3,673,388
Rent expense included in the consolidated statements of operations was
$1,809,255, $1,387,125 and $1,178,024 for the years ended September 30, 1998,
1997 and 1996.
F-29
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A former officer, director and shareholder; individually, and in conjunction
with his consulting company filed claims on July 30, 1998 in the District Court
for the City and County of Denver, Colorado against the Company, Secutron and
MidRange and against certain current and former officers, directors,
shareholders and affiliates. The claims asserted that these entities and
individuals breached their fiduciary duties, breached contracts, approved an
illegal distribution and participated in a fraudulent conveyance. In total,
there are twelve asserted claims for relief which seek actual, exemplary
damages, costs and attorneys' fees, an injunction and other similar relief. The
vast majority of claims for relief are based upon a transaction which was not
completed. The Company and its counsel anticipate the filing of a motion for
summary judgement regarding those claims on the basis that the transaction
assumed to have taken place in the complaint did not, in fact, take place.
However, the remaining claims are based upon a written contract entitled
Settlement Agreement between Secutron, the claimant and his consulting company.
The settlement agreement provided for Secutron to pay $10,000 per month through
January 2011 to the consulting company for which $1,500,000 on the breach of
contract has been claimed. Little discovery has been conducted at this time.
Management is of the opinion that the ultimate outcome will not adversely affect
the consolidated financial position or consolidated results of operations of the
Company.
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.
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, for a total combined loan commitment of $3,150,000
over the following twelve months. The loans 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 to the Board of Directors of Global, Global has
agreed that Global's Board of Directors will not exceed nine and Heng Fung
Finance has the option to cancel all Global then existing 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 SEC and responded to any comments from the SEC in
a timely manner, Global will not be deemed to be in default under the Heng Fung
Finance loan as the shares were not registered for resale by July 14, 1998.
F-30
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 had not appointed 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 had the right to draw the $1,650,000
from Fronteer Capital after the total loan from Heng Fung Finance is drawn and
if the loan provided by Fronteer Capital is drawn Fronteer Capital 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. Dr. Michael I. Ruxin, the Chief
Executive Officer of Global, has agreed to personally guarantee the repayment of
$1,650,000 of the Fronteer Capital line of credit. 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 Finance will also
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, 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.
On September 11, 1998, Fronteer Capital, entered into an agreement with FDFI,
whereby Fronteer Capital agreed to assign to FDFI its rights to and obligations
in the loan commitment to Global. Subsequent to September 30, 1998, Global drew
$1,200,000 and as a result, FDFI earned the additional 5,000,000 warrants to
purchase 5,000,000 shares of Global's common stock at $0.25 per share.
On September 23, 1998, the Company agreed to amend the terms of the $4,000,000
10% Convertible Debenture Purchase Agreement (Convertible Debenture Agreement)
it had entered into with Heng Fung Finance (See Notes 3 and 10). The amendment
changed the conversion price to the lower of $0.35 or the market value of the
Company's common stock at the time of conversion and increased the interest rate
to 12% on the remaining $8,500,000 of the $11,000,000 10% Convertible Debenture.
In addition, the amendment changed the conversion price, upon default, to $0.10
per share of the Company's common stock. On September 25, 1998, Heng Fung
Finance partially exercised its option to purchase $8,500,000 of 12% Convertible
Debentures by purchasing a $500,000 12% Convertible Debenture. As of September
30, 1998, Heng Fung Finance had purchased a total of $7,000,000 of convertible
debentures.
F-31
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On October 7, 1998, FDFI, Heng Fung Finance, and Global entered into an
agreement whereby FDFI purchased, Heng Fung Finance sold and Global consented to
the sale of $1,000,000 principal amount of loans made by Heng Fung Finance to
Global along with a warrant to purchase an aggregate of 4,000,000 shares of
Global's common stock. FDFI paid Heng Fung Finance $1,100,000 for the loans and
warrants. The loans and warrants purchased by FDFI were a portion of loans and
warrants given pursuant to a joint loan commitment made by Heng Fung Finance and
Fronteer Capital (subsequently transferred to FDFI) for the benefit of Global.
NOTE 13 - 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 Board of
Directors. 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 20% vest in ESOP contributions 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 ended September 30, 1997 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.
Once the board of trustees has determined the method of the loan repayment, the
allocation of shares within the ESOP to employees is based on employees wages.
For the years ended September 30, 1997 and 1996, the Company contributed $24,898
and $10,500, respectively, to the plan. The Company did not contribute to the
plan nor did the Board of Directors commit any shares to the ESOP during the
year ended September 30, 1998. The ESOP owns 448,682 shares of the Company's
common stock as of September 30, 1998.
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 $83,894, $82,890, and $67,079 for the years ended September 30,
1998, 1997 and 1996, respectively. One of the Company's savings plans owns 2,973
shares of the Company's common stock as of September 30, 1998.
The Company does not provide any post employment benefits to retired or
terminated employees.
F-32
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 14 - MINIMUM NET CAPITAL REQUIREMENTS
AFFC, as a registered securities broker/dealer, is subject to the Securities and
Exchange Commission Uniform Net Capital Rule (Rule 15c3-1) (the Rule). AFFC has
elected to operate pursuant to the alternative standard provided by the Rule.
Under the alternative standard, AFFC is required to maintain "net capital" of
not less than $250,000. As of September 30, 1998, AFFC had "net capital" of $
408,204.
F-33
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 15 - SEGMENT REPORTING
<TABLE>
<CAPTION>
Year ended September 30, 1998
-----------------------------------------------------------------------------------------------
Discontinued *
Operations AFFC Secutron FDFI Others Eliminations Total
---------- ---- -------- ---- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Revenues from
unaffiliated customers ...... $ -- 18,886,391 8,454,279 37,923 8,711 -- 27,387,304
Intersegment revenues .......... -- -- 412,327 -- 72,672 (484,999) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues ................. -- 18,886,391 8,866,606 37,923 81,383 (484,999) 27,387,304
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss ................. (260,995) (3,910,741) (281,785) (46,255) (2,459,281) -- (6,959,057)
Other income (expense), net .... -- 250,304 170 -- (370,722) -- (120,248)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations before
minority interest and
income taxes ................ (260,995) (3,660,437) (281,615) (46,255) (2,830,003) -- (7,079,305)
=========== =========== =========== =========== =========== =========== ===========
Loss on sale of discontinued
operations, net of income
tax benefit of $159,748 .... (249,861) -- -- -- -- -- (249,861)
=========== =========== =========== =========== =========== =========== ===========
Depreciation and
amortization ................ 55,409 323,033 29,802 -- 36,399 -- 444,643
=========== =========== =========== =========== =========== =========== ===========
Capital expenditures ........... $ -- 722,887 34,392 -- 5,203 -- 762,482
=========== =========== =========== =========== =========== =========== ===========
Identifiable assets as of
September 30, 1998 .......... $ -- 5,274,716 1,408,056 7,174,173 6,523,283 (5,009,316) 15,370,912
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
Year ended September 30, 1997
-----------------------------------------------------------------------------------------------
Discontinued *
Operations AFFC Secutron FDFI Others Eliminations Total
---------- ---- -------- ---- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Revenues from
unaffiliated customers ...... $ 5,231,106 18,118,271 6,982,143 -- -- 30,331,520
Intersegment revenues .......... 28,253 -- 454,000 -- (482,253) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues ................. 5,259,359 18,118,271 7,436,143 -- (482,253) 30,331,520
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating profit (loss) ........ (1,083,688) (2,160,897) 129,215 (495,496) -- (3,610,866)
Other income (expense), net .... (126,991) 123,499 (931) (22,885) -- (27,308)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations
before minority interest
and income taxes ............ (1,210,679) (2,037,398) 128,284 (518,381) -- (3,638,174)
=========== =========== =========== =========== =========== =========== ===========
Loss on sale of discontinued
operations, net of income tax
benefit of $409,692 ......... (666,522) -- -- -- -- (666,522)
=========== =========== =========== =========== =========== =========== ===========
Depreciation and amortization .. 752,558 258,227 71,667 9,051 -- 1,091,503
=========== =========== =========== =========== =========== =========== ===========
Capital expenditures ........... $ 68,469 390,403 27,073 -- -- 485,945
=========== =========== =========== =========== =========== =========== ===========
Identifiable assets as of
September 30, 1997 .......... $ 1,983,761 6,839,443 1,868,317 469,828 (158,267) 11,003,082
=========== =========== =========== =========== =========== =========== ===========
F-34
<PAGE>
<CAPTION>
Year ended September 30, 1996
-----------------------------------------------------------------------------------------------
Discontinued *
Operations AFFC Secutron FDFI Others Eliminations Total
---------- ---- -------- ---- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Revenues from
unaffiliated customers ...... $ 7,417,684 14,830,681 6,538,540 -- -- -- 28,786,905
Intersegment revenues .......... 70,313 -- 437,051 -- -- (507,364) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues ................. 7,487,997 14,830,681 6,975,591 -- -- (507,364) 28,786,905
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating profit (loss) ........ (1,122,549) (2,647,329) 281,775 -- (212,000) -- (3,700,101)
Other income (expense), net .... (245,984) 404,597 (6,742) -- -- -- 151,871
Gain on sale of Clearing
Operation ................... -- 1,332,974 -- -- -- -- 1,332,974
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations
before minority interest
and income taxes ............ (1,368,533) (909,756) 275,033 -- (212,000) -- (2,215,256)
=========== =========== =========== =========== =========== =========== ===========
Depreciation and amortization .. 823,939 270,419 116,733 -- 9,051 -- 1,220,142
=========== =========== =========== =========== =========== =========== ===========
Capital expenditures ........... $ 874,595 480,004 54,493 -- -- -- 1,409,092
=========== =========== =========== =========== =========== =========== ===========
Identifiable assets as of
September 30, 1996 .......... $ 4,426,411 8,729,572 1,456,302 -- 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 segment. See Note 2 relating to discontinued operations.
*The information in this column is for both the directory business and FMG.
F-35
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 16- SUBSEQUENT EVENTS
The Company signed a letter of intent dated September 23, 1998 with Auerbach
Financial Group, Inc. (Auerbach) in which it is proposed that Auerbach, Pollak &
Richardson, Inc. (APR), a securities broker/dealer subsidiary of Auerbach, and
AFFC, be combined into one securities broker/dealer. On October 28, 1998, the
Company entered into a letter of commitment with Auerbach in which the Company
and Auerbach have outlined the terms that will result in the Company's owning an
interest in Auerbach, in Auerbach's acquiring a portion of the business assets
of AFFC, and in AFFC and APR forming a strategic alliance. The Company and
Auerbach are still discussing the portion of AFFC that will be acquired by
Auerbach and the final terms thereof. It is currently contemplated that Auerbach
would issue the Company a convertible promissory note and a percentage of the
outstanding common stock of Auerbach in exchange for the portion of AFFC
acquired by Auerbach from the Company. It is also contemplated that the Company
would have the ability to eventually own a majority of Auerbach. The final terms
of the transaction have not been agreed upon and any such transaction would be
subject to the execution and consummation of a final agreement and obtaining
required regulatory approvals.
With respect to the 1998 Private Offering discussed in Note 3, Heng Fung
Holdings has guaranteed the payment of each annual 8% cash dividend on the
Series B preferred stock sold by the Company if such dividend is not paid by the
Company. In consideration for making such guaranty, the Company issued Heng Fung
Holdings 250,000 shares of the Company's common stock subsequent to year end. If
Heng Fung Holdings is required to make payment as a result of its guaranty, Heng
Fung Holdings or its designee will receive a 12% convertible debenture
equivalent to the amount that Heng Fung Holdings is required to pay on the
guaranty unless the act of the Company in giving Heng Fung Holdings or its
designee the 12% convertible debenture would be deemed to be an illegal
distribution under the Colorado Business Corporation Act. In such event, Heng
Fung Holdings or its designee would receive such number of shares of the
Company's common stock as is equal to 90% of the market price of the common
stock as of the close of business on October 31 or the next business day, if
October 31 is not a business day, on which the dividend is payable divided into
the amount of the dividend.
The NASD, which administers the Nasdaq SmallCap Market, has established criteria
for securities, including the Company's common stock, to be included on the
Nasdaq SmallCap Market. Effective February 23, 1998, in order for the Company's
common stock to continue to be included on the Nasdaq SmallCap Market, the
Company had to maintain $2 million 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 required that the Company have a public
float of at least 500,000 shares with a market value of at least $1 million,
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 required the Company to have at least two independent
directors and an audit committee, a majority of which are independent directors.
The Company's failure to meet the maintenance requirements resulted in the
discontinuance of the inclusion of the Company's common stock on the Nasdaq
SmallCap Market effective at the close of trading October 21, 1998.
F-36
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Trading in the Company's common stock has continued 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 Company's common stock. In addition, the Company is subject
to a rule promulgated by the SEC which provides that if the Company fails to
meet criteria set forth in such rule, various sales practice requirements are
imposed on broker/dealers who sell the Company's common stock to persons other
than established customers and accredited investors. For these types of
transactions, the broker/dealer has 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 common stock in the
market.
F-37
Exhibit 3.0(iii) - Article of Amendment
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
FRONTEER FINANCIAL HOLDINGS, LTD.
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to it's
Articles of Incorporation:
FIRST: The name of the Corporation is Fronteer Financial Holdings, Ltd.
SECOND: The following amendments to the Articles of Incorporation were duly
adopted by the board of directors on October 13, 1998, in accordance with
Section 7-106-102 of the Colorado Business Corporation Act.
Article VII of the Articles of Incorporation is hereby amended by adding the
following Section 7.4:
Section 7.4 Series B Preferred stock. 3,000,000 shares of the Corporation's
preferred stock shall consist of Series B Preferred stock ("Series B"). The
rights, preferences, privileges and restrictions imposed upon the Series B are
set forth in this Section 7.4 of this Article VII.
(a) Dividends. The Series B is entitled to receive, out of funds
legally available therefor, cumulative dividends at the rate of 8% percent
per annum in cash and 7% per annum in shares of Series B, when and if
declared by the Board of Directors. The dividend payable in shares of
Series B will be equivalent to.07 share of Series B for each outstanding
share of Series B. The dividend on the Series B is payable annually
beginning October 31, 1999, when and if declared by the Board of Directors.
Any dividends earned on the Series B prior to October 31, 1999, shall be
earned pro rata from the Original Issue Date. The Series B is not
convertible at any time. The Series B is redeemable by the Company on and
after October 1, 2003, at a price of $10.00 per share plus any accrued and
unpaid dividends.
If any dividends payable on the Series B are not paid for any reason,
the right of the holders of the Series B to receive payment of such
dividends shall not lapse or terminate, but said unpaid dividends shall
accumulate and shall be paid without interest to the holders of the Series
B, when and if declared by the Board of Directors of the Corporation,
before any sum or sums shall be set aside for or applied to the purchase or
redemption of the Series B or the purchase, redemption or other acquisition
for value of the Common Stock and before any dividend shall be paid or
declared, or any other distribution shall be ordered or made, upon the
Common Stock. After cumulative dividends on the Series B for all past
dividend periods and for the then current year dividend period shall have
been declared and paid or set apart, if the Board of Directors shall
declare dividends out of funds legally available therefor, such additional
dividends may be declared on the Common Stock.
<PAGE>
(b) Liquidation and Dissolution. Upon the voluntary or involuntary
liquidation, winding up or dissolution of the Corporation, out of the
assets available for distribution to shareholders each share of Series B
shall be entitled to receive, in preference to any payment on the Common
Stock only, an amount equal to Ten Dollars ($10.00) per share, plus
cumulative dividends as provided in Section 7.4(a) of this Article VII
accrued and unpaid to the date payment is made available to the Series B.
After the full preferential liquidation amount has been paid to, or
determined and set apart for, Series B, the remaining assets shall be
payable to the holders of the Common Stock. In the event the assets of the
Corporation are insufficient to pay the full preferential liquidation
amount required to be paid to the Series B, the Series B shall receive such
funds pro rata on a share for share basis until the full liquidating
preference on the Series B is paid in full, and the balance, if any, to the
Common Stock.
A reorganization shall not be considered to be a liquidation, winding
up or dissolution within the meaning of this Section 7.4(b) of this Article
VII and the Series B shall be entitled only to the rights provided in the
plan of reorganization.
(c) Voting. A holder of a share of Series B shall be entitled to one
vote on any and all matters, including the election of directors, and
shall, except as otherwise may be provided by law, vote as a class with the
holders of outstanding Common Stock.
(d) No Conversion Rights. The holders of Series B have no conversion
rights.
(e) Special Definitions. For purposes of this Section 7.4 of this
Article VII, the term "Original Issue Date" shall mean, the original date
on which a share of Series B was first issued.
(f) No Preemptive Rights. No holder of the Series B shall be entitled
as of right to subscribe for, purchase, or receive any part of any new or
additional shares of any class, whether now or hereafter authorized, or of
bonds, debentures, or other evidences of indebtedness convertible into or
exchangeable for shares of any class, but all such new or additional shares
of any class, or bonds, debentures, or other evidences of indebtedness
convertible into or exchangeable for shares, may be issued and disposed of
by the Board of Directors on such terms and for such consideration (to the
extent permitted by law), and to such person or persons as the Board of
Directors in their absolute discretion may deem advisable.
(g) Optional Redemption of Series B.
(i) On and after October 1, 2003, the Series B is subject to
redemption, out of funds legally available therefor, in whole, or from
time to time, in part, at the option of the Board of Directors. If
only a part of the shares of Series B is to be redeemed, the
redemption shall be carried out pro rata subject to adjustment to
avoid redemption of fractional shares. The redemption price shall be
Ten Dollars ($10.00) per share plus cumulative dividends as provided
in Section 7.4(a) of this Article VII accrued and unpaid to the date
fixed for redemption.
(ii) Adjustment for Stock Splits and Combinations. If the
Corporation shall at any time or from time to time after the Original
Issue Date applicable to Series B effect a subdivision of the
outstanding Series B, the applicable Series B redemption price then in
effect immediately before that subdivision shall be proportionately
2
<PAGE>
decreased and, conversely, if the Corporation shall at any time or
from time to time after the Original Issue Date applicable to Series
combine the outstanding shares of Series B, the applicable Series B
redemption price then in effect immediately before the combination
shall be proportionately increased. Any adjustments under this Section
7.4(g)(ii) of this Article VII shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(iii) At least 45 days before the date fixed for redemption
(hereinafter referred to as the "Redemption Date"), written notice
(hereinafter referred to as the "Redemption Notice") shall be mailed
postage prepaid, to each holder of record of the Series B which is to
be redeemed, at the holder's address shown on the records of the
Corporation. The Redemption Notice shall contain the following
information:
(a) the number of shares of Series B held by the holder
which are to be redeemed by the Corporation, and the total number
of shares of Series B held by all holders to be so redeemed;
(b) the Redemption Date and the applicable Redemption Price;
and
(c) that the holder is to surrender to the Corporation, at
the place designated therein, the holder's certificate or
certificates representing the shares of Series B to be redeemed.
(iv) Each holder of shares of Series B to be redeemed shall
surrender the certificate or certificates representing such shares to
the Corporation at the place designated in the Redemption Notice, and
thereupon the applicable redemption price for such shares as set forth
herein shall be paid to the order of the person or entity whose name
appears on such certificate or certificates and each surrendered
certificate shall be canceled and retired.
(v) From and after the later of the Redemption Date or 45 days
from the date the Corporation shall have given the Redemption Notice,
no shares of Series B thereupon subject to redemption shall be
entitled to any further accrual of any dividends.
(vi) The Corporation's deliverance of payment of the redemption
price shall be good and sufficient discharge to the Corporation of the
holder's investment in the Series B. If less than the full amount of
the investment of the holder in the Series B is redeemed, the
Corporation shall deliver to the holder a new Series B certificate
representing the balance of the investment by the holder in the Series
B, which remains outstanding.
Dated: October 10, 1998
FRONTEER FINANCIAL HOLDINGS, LTD.,
a Colorado corporation
By: /s/ Gary L. Cook
-------------------------------------
Gary L. Cook, Secretary and Treasurer
Exhibit 3.0(iv) - Article of Amendment
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
FRONTEER FINANCIAL HOLDINGS, LTD.
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to it's
Articles of Incorporation:
FIRST: The name of the Corporation is Fronteer Financial Holdings, Ltd.
SECOND: The following amendments to the Articles of Incorporation were duly
adopted by the board of directors on November 13, 1998, in accordance with
Section 7-106-102 of the Colorado Business Corporation Act.
The last sentence of the first paragraph of Paragraph (a) of Section 7.4 of
Article VII of the Articles of Incorporation is hereby amended by replacing it
with a sentence that reads as follows:
"The Series B is redeemable by the Company on and after
October 1, 2003, at a price of $12.50 per share plus any
accrued and unpaid dividends."
The last sentence of Paragraph (g)(i) of Section 7.4 of Article VII of the
Articles of Incorporation is hereby amended by replacing it with a sentence that
reads as follows:
"The redemption price shall be Twelve Dollars and Fifty
Cents ($12.50) per share plus cumulative dividends as
provided in Section 7.4(a) of this Article VII accrued and
unpaid to the date fixed for redemption."
Dated: November 19, 1998
FRONTEER FINANCIAL HOLDINGS, LTD.,
a Colorado corporation
By: /s/ Gary L. Cook
-------------------------------------
Gary L. Cook, Secretary and Treasurer
Exhibit 10.10 -Loan and Warrant Purchase and Sale Agreement
LOAN AND WARRANT PURCHASE AND SALE AGREEMENT
THIS LOAN AND WARRANT PURCHASE AND SALE AGREEMENT ("Agreement") is made and
entered into this 7th day of October, 1998 by and between HENG FUNG FINANCE
COMPANY LIMITED, a Hong Kong corporation ("Heng Fung Finance"), FRONTEER
DEVELOPMENT FINANCE, INC., a Delaware corporation ("Development"), and GLOBAL
MED TECHNOLOGIES, INC., a Colorado corporation.
WHEREAS, Heng Fung Finance entered into that certain Loan Agreement dated April
14, 1998 with Global whereby Heng Fung Finance agreed, subject to certain terms,
provisions and conditions, among other things, to make available to Global a
loan in the maximum principal amount of $1,500,000 ("Loan") pursuant to one or
more promissory notes from Global to Heng Fung Finance;
WHEREAS, pursuant to the Loan Agreement, Heng Fung Finance was granted a warrant
to purchase 6,000,000 shares of Global's common stock ("Original Warrant");
WHEREAS, Global borrowed at least $1,150,000 of the maximum principal amount of
the Loan, evidenced by a series of promissory notes dated May 7, 1998 for
$250,000, June 4, 1998 for $400,000, June 30, 1998 for $250,000 and August 5,
1998 for $250,000 ("Original Notes"); and
WHEREAS, Heng Fung Finance desires to sell and Development desires to purchase a
portion of the Loan which is evidenced by the Original Notes and a portion of
the Original Warrant.
NOW THEREFORE, in consideration of the premises, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt, sufficiency and adequacy of which are hereby acknowledged, the parties
hereto agree as follows:
1. Purchase and Sale. Heng Fung Finance agrees to sell and Development
agrees to purchase: (i) the Original Notes dated May 7, 1998 for
$250,000, June 4, 1998 for $400,000, June 30, 1998 for $250,000 and
$100,000 out of the $250,000 Original Note dated August 5, 1998 which
is equal to the right to payment of $1,000,000 in principal amount,
together with interest accruing thereon out of the Original Notes
("Development Note") and (ii) a portion of the Original Warrant which
is equal to a warrant to purchase 4,000,000 common shares of Global
("Development Warrant").
2. Issue of Notes and Warrants. Upon receipt of the Original Notes and
Original Warrant, Global agrees to issue two new promissory notes and
two new warrants, under the same terms and conditions as the Original
Notes and Original Warrant, as follows:
(a). Warrant to Heng Fung Finance to purchase an aggregate of
2,000,000 shares of Global's common shares;
<PAGE>
(b). Warrant to Development to purchase an aggregate of 4,000,000
shares of Global's common shares;
(c). Promissory note evidencing a loan from Heng Fung Finance to
Global representing $150,000; and
(d). Promissory note evidencing a loan from Development to Global in
the amount of $1,000,000.
3. Payment for Loan. Upon receipt of the Development Warrant and
Development Note from Global, Development agrees to pay to Heng Fung
Finance, the sum of $1,100,000.
4. Confirmation of Terms of Loan Agreement. In all respects, the Loan
Agreement, described above, shall remain unaffected, unchanged and
unimpaired by reason of this Agreement.
Executed as of the day and year first above written.
FRONTEER DEVELOPMENT FINANCE, INC.,
a Delaware corporation
By: /s/ Gary L. Cook
------------------------------
Its: Treasurer
HENG FUNG FINANCE COMPANY LIMITED,
a Hong Kong corporation
By: /s/ Fai H. Chan
--------------------------------
Its: Chairman and Managing Director
GLOBAL MED TECHNOLOGIES, INC.
a Colorado corporation
By: /s/ Dr. Michael I. Ruxin
------------------------------
Its: Chief Executive Officer
Exhibit 10.11 - Assignment, Assumption and Consent Agreement
ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT
THIS ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT ("Agreement") is made and
entered into this 11 day of September, 1998 by and between GLOBAL MED
TECHNOLOGIES, INC., a Colorado corporation ("Global"), MICHAEL I. RUXIN, M.D.,
an individual ("Ruxin"), FRONTEER CAPITAL, INC., a Delaware corporation
("Capital"), and FRONTEER DEVELOPMENT FINANCE, INC., a Delaware corporation
("Development").
WHEREAS, Global and Capital entered into that certain Loan Agreement dated
August 12, 1998 ("Loan Agreement") whereby Capital agreed, subject to certain
terms, provisions and conditions, among other things, to make available to
Global a loan in the maximum principal balance of $1,650,000.00 pursuant to one
or more Promissory Notes ("Notes") from Global to Capital;
WHEREAS, the obligations of Global to Capital under the Loan Agreement and Notes
are guaranteed by Ruxin pursuant to that certain Personal Guaranty dated August
12, 1998 ("Guaranty");
WHEREAS, Capital desires to assign and Development desires to assume all of the
rights, duties and obligations under the Loan Agreement, Notes and Guaranty;
WHEREAS, Global and Ruxin desire to consent to the assignment of Capital's
rights, duties and obligations to Development under the Loan Agreement, Notes
and Guaranty; and
WHEREAS, capitalized terms not defined in this Assignment, Assumption and
Guaranty Agreement which are defined in the Loan Agreement shall have the
meanings set forth in the Loan Agreement.
NOW THEREFORE, in consideration of the premises, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt, sufficiency and adequacy of which are hereby acknowledged, the parties
hereto agree as follows:
1. Assignment. For value received, Capital hereby assigns, transfers and
conveys to Development all of Capital's rights, duties and obligations under the
Loan Agreement, Notes and Guaranty.
2. Assumption. Development hereby agrees to assume and be bound by and
perform all covenants, conditions, obligations and duties of Capital under the
Loan Agreement, including, but not limited to, funding the loan evidenced by the
Loan Agreement and Notes.
3. Consent. Global and Ruxin hereby consent to the assignment of Capital's
rights, duties and obligations under the Loan Agreement, Notes and Guaranty to
Development, agree to look solely to Development for all covenants, conditions,
obligations and duties of Capital under said agreements and instruments and
shall treat Development as the Lender under the Loan Agreement, the Holder under
the Notes, and the Beneficiary under the Guaranty for all purposes as if
Developer was an original party to such agreements and instruments in such
capacities.
<PAGE>
4. Release. The parties hereto agree that Capital hereby forever waives all
of its rights under the Loan Agreement, Notes and Guaranty and is therefore
forever released from any further duty or obligation under the Loan Agreement.
The parties hereto further agree that Development, as Lender under the Loan
Agreement, as modified, shall be subject to all of the duties and obligations as
Lender under the Loan Agreement, as modified, and therefore shall enjoy all of
the rights of Lender under the Loan Agreement, Notes and Guaranty, as modified.
5. Warrant. The parties hereto agree that the warrant granted to Capital,
effective April 20, 1998, shall remain the property of Capital.
6. Confirmation of Terms of Loan Agreement. In all other respects, the Loan
Agreement and Guaranty, described above, shall remain unaffected, unchanged and
unimpaired by reason of this Agreement. All Notes assigned by Global under the
Loan Agreement shall be modified to comply with the terms of this Agreement.
Executed as of the day and year first above written.
FRONTEER CAPITAL, INC.,
a Delaware corporation
By: /s/ Fai H. Chan
------------------------------------
Its: Chairman and Managing Director
FRONTEER DEVELOPMENT FINANCE, INC.,
a Delaware corporation
By: /s/ Gary L. Cook
------------------------------------
Its: Treasurer
GLOBAL MED TECHNOLOGIES, INC.,
a Colorado corporation
By: /s/ Dr. Michael I. Ruxin
------------------------------------
Its: Chief Executive Officer
Dr. Michael I. Ruxin
----------------------------------------
Michael I. Ruxin, M.D., individually
Exhibit 10.12 - First Amendment
FIRST AMENDMENT TO FRONTEER FINANCIAL HOLDINGS, LTD.
SEPTEMBER 1996 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
THIS FIRST AMENDMENT ("Amendment") is made as of this 19th day of February, 1997
to the Fronteer Financial Holdings, Ltd. ("Company") September 1996 Incentive
and Nonstatutory Stock Option Plan ("Plan"). In the event of any conflict
between the terms of this Amendment and the terms of the Plan, the terms of this
Amendment shall control. All capitalized terms not defined in this Amendment
shall have their respective meanings set forth in the Plan.
The Plan shall be amended as follows:
1. Stock Subject to the Plan. The first sentence of Section 3 of the Plan
is hereby deleted and replaced with the following sentence:
"Subject to the provisions of Section 11 of the Plan, the maximum
aggregate numbers of Shares which may be optioned and sold under
the Plan is 2,500,000 shares of Common Stock."
2. Amendment and Termination of the Plan. Subsection 13.a.(i) of the Plan
is hereby deleted and replaced with the following:
"(i) An increase in the number of Shares subject to the Plan
above 2,500,000 Shares, other than in connection with an
adjustment under Section 11 of the Plan;"
3. Ratification. Except as modified herein, the terms and conditions of the
Plan are hereby ratified by this Amendment.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Amendment effective as of the date first set forth above.
FRONTEER FINANCIAL HOLDINGS, LTD.,
A Colorado corporation
By: /s/ R.A. Fitzner, Jr.
-----------------------------------------
R. A. Fitzner, Jr., Chairman of the Board
Exhibit 21 - Subsidiaries of Registrant
SUBSIDIARIES OF REGISTRANT
Jurisdiction of Subsidiaries Incorporation
---------------------------- -------------
American Fronteer Financial Corporation Colorado
RAF Services, Inc. of Texas Texas
RAF Services, Inc. of Louisiana Louisiana
RAF Services, Inc. Nevada
Fronteer Capital, Inc. Delaware
Secutron Corp. Colorado
MidRange Solutions Corp. Colorado
Fronteer Development Finance Inc. Delaware
Fronteer Income Growth, Inc. Foreign
Corporate Net Solutions, Inc. Delaware
Fronteer Corporate Services, Inc. Colorado
Fronteer Asset Management Corporate, Inc. Delaware
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