FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 0-17637
Fronteer Financial Holdings, Ltd.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 45-0411501
------------------------------ -------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1700 Lincoln Street, Suite 3200, Denver, CO, 80203
--------------------------------------------------
(Address of principal executive offices)
(303) 860-1700
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The registrant had 18,117,084 shares of its $.01 par value common stock
outstanding as of February 10, 1999.
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
a. Consolidated Balance Sheets as of December 31, 1998
(unaudited) and September 30, 1998................................ 3
b. Unaudited Consolidated Statements of Operations for the three months
ended December 31, 1998 and 1997.................................. 5
c. Unaudited Consolidated Statement of Stockholders' Deficit for the
three months ended December 31, 1998.............................. 6
d. Unaudited Consolidated Statements of Cash Flows for the three months
ended December 31, 1998 and 1997.................................. 7
e. Notes to Unaudited Consolidated Financial Statements................. 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risks.......... 17
PART II - OTHER INFORMATION
Item 2. Change in Securities................................................. 17
Item 5. Other Information.................................................... 18
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits............................................................. 18
b. Reports on Form 8-K.................................................. 18
Signatures................................................................... 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
ASSETS 1998 1998
- ------ ----------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................................... $ 4,262,938 9,112,652
Receivables from brokers or dealers and clearing organizations ............................... 902,008 410,069
Trade receivables ............................................................................ 2,184,015 1,157,841
Other receivables ............................................................................ 474,446 667,425
Securities owned, at market value ............................................................ 1,827,327 1,688,085
Notes receivable ............................................................................. 2,200,000 --
Current maturities of investments in debt securities ......................................... 203,429 --
Other assets ................................................................................. 417,278 261,606
------------ ------------
Total current assets .................................................................... 12,471,441 13,297,678
PROPERTY, FURNITURE AND EQUIPMENT, net of
accumulated depreciation ................................................................. 1,496,361 1,541,131
LONG-TERM INVESTMENTS IN DEBT SECURITIES ..................................................... 3,843,783 --
OTHER LONG-TERM ASSETS ....................................................................... 619,681 532,103
------------ ------------
Total assets ............................................................................ $ 18,431,266 15,370,912
============ ============
See accompanying notes to the consolidated financial statements.
3
<PAGE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1998 1998
- ------------------------------------- ----------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses ........................................................ $ 4,782,778 2,514,860
Accrued interest payable to related party .................................................... 198,112 157,111
Current portion of long-term debt ............................................................ 109,974 124,007
Current portion of convertible debentures to related party ................................... 500,000 500,000
Deferred revenue ............................................................................. 39,600 118,800
Other current liabilities .................................................................... 101,195 306,574
------------ ------------
Total current liabilities ............................................................... 5,731,659 3,721,352
LONG-TERM DEBT, net of current portion ....................................................... 103,299 107,532
CONVERTIBLE DEBENTURES ....................................................................... 6,657,386 6,101,448
CONVERTIBLE DEBENTURES TO RELATED PARTY ...................................................... 7,500,000 6,500,000
DEFERRED RENT CONCESSIONS .................................................................... 1,626,261 1,654,766
------------ ------------
Total liabilities ....................................................................... 21,618,605 18,085,098
------------ ------------
MINORITY INTEREST IN SUBSIDIARIES ............................................................ 335,422 328,991
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred stock, authorized 21,700,000 shares, $.10 par
value, no shares outstanding .............................................................. -- --
Series B preferred stock, authorized 3,300,000 shares,
$0.10 par value, no shares outstanding .................................................... -- --
Common stock; authorized 100,000,000 shares, $0.01 par
value; 17,674,475 and 17,140,857 shares issued and
outstanding as of December 31, 1998 and September 30,
1998, respectively ........................................................................ 176,744 171,408
Additional paid-in capital ................................................................... 11,256,739 11,042,464
Accumulated deficit .......................................................................... (14,606,244) (13,907,049)
Unearned ESOP shares ......................................................................... (350,000) (350,000)
------------ ------------
Total stockholders' deficit ............................................................. (3,522,761) (3,043,177)
------------ ------------
Total liabilities and stockholders' deficit ............................................. $ 18,431,266 15,370,912
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUE:
Brokerage commissions ..................................... $ 3,975,367 3,288,534
Investment banking ........................................ 129,119 356,504
Trading profits, net ...................................... 461,399 77,852
Other broker/dealer ....................................... 555,615 233,286
Computer hardware and software operations ................. 2,959,556 3,269,715
Interest income on investments in debt securities ......... 261,260 --
Unrealized gain on securities ............................. 233,936 --
Other ..................................................... 5,257 --
------------ ------------
8,581,509 7,225,891
------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Broker/dealer commissions ................................. 2,380,054 2,338,863
Computer hardware and software cost of sales .............. 2,729,982 2,392,274
Interest expense on convertible debentures ................ 288,925 --
General and administrative ................................ 3,555,476 2,880,902
Depreciation and amortization ............................. 106,350 87,471
------------ ------------
9,060,787 7,699,510
------------ ------------
Operating loss .......................................... (479,278) (473,619)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income ........................................... 19,372 72,241
Interest expense .......................................... (6,999) (9,466)
Interest expense to related party ......................... (198,112) --
------------ ------------
(185,739) 62,775
------------ ------------
Loss before minority interest and income taxes ............... (665,017) (410,844)
Minority interest in earnings ................................ (12,778) (145,681)
------------ ------------
Loss from continuing operations before income taxes .......... (677,795) (556,525)
Income tax expense (benefit) ................................. 21,400 (371,801)
------------ ------------
Loss from continuing operations .............................. (699,195) (184,724)
Net loss from discontinued operations ........................ -- (91,704)
------------ ------------
Net loss before extraordinary item, net ...................... (699,195) (276,428)
Extraordinary item, net of income taxes of $585,000 .......... -- 915,000
------------ ------------
Net income (loss) ............................................ $ (699,195) 638,572
============ ============
Weighted average number of common shares outstanding ......... 17,639,131 16,871,557
============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations ..................................... $ (.04) (.01)
Discontinued operations ................................... -- (.01)
Extraordinary item ........................................ -- .06
------------ ------------
Total ........................................................ $ (.04) .04
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Common stock Additional Unearned
-------------------- paid-in Accumulated ESOP
Shares Amount capital deficit stock Total
------ ------ ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances as of September 30, 1998 ........... 17,140,857 $ 171,408 11,042,464 (13,907,049) (350,000) (3,043,177)
Issuance of common shares for accrued
interest (Unaudited) .................... 283,618 2,836 154,275 -- -- 157,111
Issuance of common shares for guaranty ...... 250,000 2,500 60,000 -- -- 62,500
(Note 3) (Unaudited)
Net loss (Unaudited) ........................ -- -- -- (699,195) -- (699,195)
----------- ----------- ----------- ----------- ----------- -----------
Balances as of December 31, 1998
(Unaudited) .............................. 17,674,475 $ 176,744 11,256,739 (14,606,244) (350,000) (3,522,761)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended December 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................................... $ (699,195) 638,572
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
Depreciation and amortization ....................................................... 106,350 87,471
Amortization of deferred rent ....................................................... (28,505) (28,515)
Loss from discontinued operations ................................................... -- 91,704
Extraordinary item, net of income taxes of $585,000 ................................ -- (915,000)
Accretion of investments in debt securities ......................................... (101,934) --
Accretion of original issue discount on convertible debentures ...................... 18,256 --
Unrealized gain on securities ....................................................... (233,936) --
Minority interest in earnings ....................................................... 12,778 145,681
Other ............................................................................... -- (2,001)
Changes in operating assets and liabilities:
Decrease (increase) in receivables from brokers or dealers and
clearing organizations ...................................................... (491,939) 1,308,933
Increase in trade receivables .................................................... (1,026,174) (310,315)
Decrease (increase) in other receivables ......................................... 192,979 (283,208)
Decrease in securities owned, net of securities sold but not
yet purchased ............................................................... 94,694 90,107
Decrease (increase) in other assets .............................................. (93,172) 501,260
Increase (decrease) in accounts payable and accrued expenses ..................... 2,267,918 (1,717,251)
Increase (decrease) in deferred revenue .......................................... (79,200) 252,750
Increase (decrease) in other current liabilities ................................. (7,266) 163,797
----------- -----------
Net cash provided by (used in) in continuing operations ......................... (68,346) 23,985
Net cash provided by discontinued operations ..................................... -- 570,648
----------- -----------
Net cash provided by (used in) operating activities .............................. (68,346) 594,633
----------- -----------
(Continued)
See accompanying notes to consolidated financial statements.
7
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Three months ended December 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, furniture and equipment ....................................... $ (61,580) (162,085)
Increase in investments in debt securities .......................................... (3,945,278) --
Increase in notes receivable ........................................................ (2,200,000) --
Other investing activities .......................................................... (87,578) (183,361)
Net cash provided by discontinued operations ........................................ -- 93,353
----------- -----------
Net cash used in investing activities ............................................... (6,294,436) (252,093)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt .................................................................. -- 260,113
Principal payments on borrowings .................................................... (18,266) (74,900)
Net payments to related parties ..................................................... -- (177,000)
Proceeds from issuance of convertible debentures, net of
offering costs .............................................................. 531,334 --
Net proceeds from issuance of convertible debentures to
related party ............................................................... 1,000,000 4,000,000
Other financing activities .......................................................... -- (3,474)
----------- -----------
Net cash provided by financing activities ........................................... 1,513,068 4,004,739
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... (4,849,714) 4,347,279
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................................... 9,112,652 2,080,722
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 4,262,938 6,428,001
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash payments for:
Interest:
Continuing operations ............................................................ $ 6,999 9,466
Discontinued operations .......................................................... -- 4,063
----------- -----------
$ 6,999 13,529
=========== ===========
Income taxes:
Continuing operations ............................................................ $ -- 7,047
=========== ===========
OTHER INVESTING AND FINANCING ACTIVITIES:
Forgivable loan recognized as extraordinary item,
net of income taxes .............................................................. $ -- 915,000
=========== ===========
Stock issued for interest ........................................................... $ 157,111 --
=========== ===========
Stock issued for guaranty ........................................................... $ 62,500 --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Fronteer
Financial Holdings, Ltd. and subsidiaries (Fronteer or the Company) have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, these
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the results of
operations and financial position for the interim periods presented.
The preparation of interim financial statements required management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
These interim financial statements should be read in conjunction with the Annual
Report on Form 10-K for the year ended September 30, 1998. Operating results for
the three months ended December 31, 1998, are not necessarily indicative of the
results that may be expected for the year ending September 30, 1999. Certain
reclassifications have been made to prior period's consolidated financial
statements to conform to current period presentation.
NOTE 2 - ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Fronteer Financial Holdings, Ltd. (Fronteer or the Company) is a corporation,
which was organized under the laws of the state of Colorado in September, 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 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
also incorporated in Delaware in 1998, respectively have not commenced
operations.
9
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fronteer Development Finance Inc. (Fronteer Development), a Delaware
corporation, was incorporated in 1998, to operate as a finance company to take
advantage of high-yield and other lending opportunities. The Company currently
controls approximately 96% of the voting power. Fronteer Development has two
wholly owned subsidiaries, Fronteer Income Growth, Inc. (FIGI) and
WWW.CREDITCARDWEB.COM CORPORATION (CCW). FIGI was incorporated under the
International Business Companies Ordinances of the Territory of the British
Virgin Islands and was formed for the purpose of making investments. CCW was
formed in January 1999 in Delaware to conduct the business of an Internet based
credit card company. Fronteer Development is in the process of establishing a
website and plans to expand its operations to include Internet financing
services encompassing the following: (i) secured and corporate credit cards;
(ii) securities financing; (iii) liquidity facilities; and (iv) real estate
finance.
NOTE 3 - STOCKHOLDERS' DEFICIT
On October 13, 1998, 3,300,000 shares of Class B preferred stock with a par
value of $.10 were authorized by the Board of Directors. 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 placement 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. (Heng Fung Holdings) through October 2003. There have been no
issuances of Class B preferred stock as of December 31, 1998.
With respect to the 1998 Private Offering, 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 during the quarter ended December 31, 1998. 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.
On November 25, 1998, the Board of Directors granted the holders of incentive
options to purchase 2,930,000 shares of common stock the opportunity to cancel
their existing options and receive new options to purchase an equivalent number
of shares 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 had
until February 1, 1999 to decide whether to keep their existing options or elect
to receive the replacement options. The replacement options vest one-third on
January 30, 1999, one-third on November 25, 1999 and one-third on November 25,
2000. All of the holders of incentive options to purchase 2,930,000 shares of
common stock elected to receive the replacement options.
10
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Also, on November 25, 1998, the Company granted options to purchase 2,800,000
shares of common stock to the 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 will be exercisable until and unless basic
earnings per share of the Company for any fiscal year commencing with the fiscal
year ending September 30, 1999, are equal to or exceed $.10 per share. On this
same date, options to purchase 1,793,500 shares of common stock were granted
under the September 1996 Plan to officers and employees with the same terms,
except that options relating to 1,093,500 shares do not have the basic earnings
per share requirement. These grants relating to 1,793,500 shares will be
incentive options if the shareholders approve the increase in the number of
shares available for grant pursuant to the September 1996 Plan. If shareholder
approval is not obtained, then the options will be nonqualified options.
On January 28, 1999, Mr. Fai H. Chan, Chairman of the Board of Directors and
President of the Company, was granted options to purchase 8,000,000 shares of
the Company's common stock at $.30 per share. The options are exercisable
immediately through January 27, 2009. The grant was approved by a vote of the
Board of Directors in which Mr. Chan abstained.
In February 1999, 442,609 shares of the Company's common stock were issued to
Heng Fung Finance Company Limited (Heng Fung Finance) for payment of accrued
interest of $198,412 as of December 31, 1998 on the convertible debentures to
related party.
NOTE 4 - CLEARING OPERATIONS
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. 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. During the quarter ended December 31,
1997, the loan amount of $1,500,000 was recognized as an extraordinary item, net
of income taxes of $585,000, or $915,000.
During the quarter ended December 31, 1998, the Company and AFFC entered into an
agreement with MSI and OFI pursuant 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.
11
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - INVESTMENTS IN DEBT SECURITIES
The Company, through its subsidiary Fronteer Development, has invested in debt
securities of various Asian corporations. The Company has classified these debt
securities as held-to-maturity securities. Therefore, the investments are
reported at amortized cost. The purchase discounts are being amortized to
interest income over the remaining life of the security.
As of December 31, 1998, the Company had investments in debt securities of Asian
corporations as follows:
<TABLE>
<CAPTION>
Carrying Maturity Interest Maturity
Corporation Cost Value Value Rate Date
- ----------------------------------- ---- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Paul Y-ITC ........................ $ 686,600 $ 735,968 $1,680,000 5.00% 02/03/01
China Resources ................... 842,375 856,091 1,295,000 2.00% 04/30/04
Shanghai Industrial ............... 380,000 384,615 500,000 1.00% 02/24/03
COSCO Treasury .................... 335,750 341,948 1,250,000 1.00% 03/13/03
Shum Yip .......................... 157,500 161,522 250,000 1.20% 08/08/02
First Pacific ..................... 588,750 596,616 750,000 2.00% 03/27/02
New World China Finance ........... 204,000 203,429 200,000 4.00% 12/31/99
New World Infrastructure, Ltd. .... 284,000 288,377 400,000 1.00% 04/15/03
Hon Kwok Land Capital ............. 466,300 478,646 670,000 1.00% 04/15/03
---------- ---------- ----------
$3,945,275 $4,047,212 $6,995,000
========== ==========
Less current maturities (203,429)
----------
Long-term investments in debt securities $3,843,783
==========
</TABLE>
The carrying value differs from the original cost by the amount of purchase
discount amortized to interest income since the date of purchase. The aggregate
market value of the investments in debt securities as of December 31, 1998 was
$4,537,506 as quoted on the Hong Kong Stock Exchange.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On April 14, 1998, Fronteer Capital and Heng Fung Finance committed to provide
to Global Med Technologies, Inc. (Global) lines of credit for up to $1,650,000
and $1,500,000, respectively, for a total combined loan commitment of $3,150,000
over the following twelve months. Fronteer Capital subsequently assigned its
commitment to Fronteer Development. The loans bear interest calculated at a rate
of 12% per annum and will mature 366 days after April 14, 1998. As of December
31, 1998, Global had drawn $1,200,000 with a remaining commitment of $450,000.
12
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On October 7, 1998, Fronteer Development, Heng Fung Finance, and Global entered
into an agreement whereby Fronteer Development 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. Fronteer Development paid Heng Fung
Finance $1,100,000 for the loans and warrants. The loans and warrants purchased
by Fronteer Development 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 Fronteer Development) for the benefit of Global on
April 14, 1998.
The Company previously sold Heng Fung Finance a ten year $4,000,000 10%
Convertible Debenture that is convertible into shares of common stock of the
Company and an option to purchase an $11,000,000 12% Convertible Debenture that
is convertible into shares of common stock of the Company. As of December 31,
1998, Heng Fung Finance had purchased a total of $8,000,000 of convertible
debentures, of which $1,000,000 had been purchased during the quarter ended
December 31, 1998. The option to purchase the $11,000,000 12% Convertible
Debenture has $7,000,000 available under option. The principal is due in ten
years except for one installment of $500,000 due in March 1999.
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 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 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.
13
<PAGE>
FRONTEER FINANCIAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - SUBSEQUENT EVENTS
The Company previously reported that it had signed letters with Auerbach
Financial Group, Inc. ("Auerbach") in which the Company and Auerbach outlined
the terms that would result in the Company owning an interest in Auerbach, in
Auerbach acquiring a portion of the business assets of AFFC, and in AFFC and
Auerbach, Pollak & Richardson, Inc. ("APR"), a securities broker/dealer
subsidiary of Auerbach, forming a strategic alliance. Negotiations for Auerbach
to acquire a portion of the assets of AFFC have been discontinued. It is
currently contemplated that the Company will have the opportunity to acquire for
cash a minority interest in Auerbach of 24.9%, and that APR and AFFC will form a
strategic alliance. Specific terms of the minority interest investment or the
strategic alliance have not been finalized.
The Company controls approximately 96% of the voting power and approximately 46%
of the outstanding common shares of Fronteer Development. The Boards of
Directors of Fronteer Development and the Company plan to cause the Class B
common stock to be exchanged for Class A common stock. The Class B common stock
has a voting power equivalent to 30 votes for each share. The Class A Common
Stock has one vote per share. As a result, all shares of the common stock will
have the identical rights, powers, preferences, privileges and restrictions.
The Boards of Directors of Fronteer Development and the Company also plan to
have to have Fronteer Development have authorized preferred stock. The Preferred
Stock may be issued from time to time in one or more series as the Board of
Directors of Fronteer Development may determine, without shareholder approval.
The Board is empowered to fix and determine the designations, preferences,
rights, qualifications, limitations and restrictions of the series.
The Board of Directors of Fronteer Development, with the consent of the Company,
also plans to designate one share of the Series A preferred stock. The share
will be entitled to 50% of all votes entitled to be cast in the election of
directors. Other than in the election of directors, the Series A preferred share
will have no voting rights. The share will be issued to Pleasemore, Ltd., a
British Virgin Islands company wholly owned by Mr. Fai H. Chan, Chairman of the
Board of Directors of Fronteer Development, and Chairman of the Board and
President of the Company.
As a result of the above changes, the Company will be entitled to 46% of the
votes entitled to be cast in the election of directors, and 46% of the votes
entitled to vote in other matters. Pleasemore, Ltd. will be entitled to 50% of
the votes entitled to be cast in the election of the directors of Fronteer
Development.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended December 31, 1998 were $8,581,509, an
increase of $1,355,618 or 18.5% over the $7,225,891 for the three months ended
December 31, 1997. The increase is primarily a result of increases in brokerage
commissions of $686,833, trading profits of $383,547, interest income on
Fronteer Development investments in debt securities of $261,260 and an
unrealized gain on securities of $233,936. The increase in brokerage commissions
is due to increased volume. The unrealized gain pertains to investments in Asian
securities.
Computer hardware and software revenues were $2,959,556 for the three months
ended December 31, 1998, a decrease of $310,159 or 9.5% from $3,269,715 for the
three months ended December 31, 1997. The three months in the prior year
included amounts attributable to new contracts secured by Secutron for software
development.
Computer hardware and software costs increased 14.1% or $337,708 to $2,729,982
for the three months ended December 31, 1998. The increase primarily relates to
a change in product mix. The prior year period revenues and associated costs
were concentrated more heavily in consulting contracts than in hardware and
software sales. The current year period revenues and associated costs were more
concentrated in hardware and software sales which have a lower profit margin
than does consulting. As a result, gross margin for Secutron's computer software
and hardware sales for the quarter ended December 31, 1998 of $339,574 are
$647,867 less than prior year period gross margin of $877,441.
The minority interest in earnings decreased to $12,778 for the three months
ended December 31,1998 from the prior year period amount of $145,681. The
decrease primarily relates to the lower margins on product mix for computer
hardware and software sales.
The loss from discontinued operations for the three months ended December 31,
1997 of $91,704 represents the net operating activity of the Company's marketing
and directory business for which all of the remaining operating assets were sold
during the year ended September 30, 1998.
During the quarter ended December 31, 1997, the Company recognized an
extraordinary item of $1,500,000, less income taxes of $585,000, or $915,000 net
of income taxes. The extraordinary item represents the recognition of the
forgivable loan with MSI in accordance with terms and conditions of the
forgivable loan agreement. These terms and conditions included the forgiveness
of the loan based on revenue targets for MSI. MSI reached the target for
forgiveness of $750,000 and thus it was recognized as income. The remaining
$750,000 was recognized as income as MSI discontinued operating as a clearing
firm in the securities industry which allowed the Company to recognize the
remainder in accordance with the agreement.
Interest expense on the convertible debentures issued during the year ended
September 30, 1998 by Fronteer Development was $288,925 for the quarter ended
December 31, 1998. The proceeds from the convertible debentures were primarily
invested in debt securities and notes receivable which earned $261,260 for the
quarter.
General and administrative expenses increased $674,574 for the quarter ended
December 31, 1998 from the quarter ended December 31, 1997 primarily due to the
opening of the branch offices in San Francisco, New York City and Kansas City.
The Kansas City office was closed in November of 1998.
Interest expense of $198,112 was incurred on the convertible debentures to Heng
Fung Finance for the quarter ended December 31, 1998.
15
<PAGE>
Liquidity and Capital Resources
The Company, as of December 31, 1998, had $4,262,938 in cash and cash
equivalents and $6,739,782 in working capital. Cash used in investing activities
of $6,294,436 consisted primarily of investments in debt securities of
$3,945,278 and advances on short-term notes receivable of $2,200,000. The
investments and advances were made by Fronteer Development. Proceeds from
issuance of convertible debentures of $531,334 and issuance of the convertible
debentures to related party of $1,000,000 provided cash to fund other operating
and investing activities.
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. (1998
Private Offering). The net proceeds are intended to be used to fund working
capital and acquire other securities broker /dealers.
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. Fronteer Capital subsequently assigned its
commitment to Fronteer Development. The loans bear interest calculated at a rate
of 12% per annum and will mature 366 days after April 14, 1998. As of December
31, 1998, Global had drawn $1,200,000 with a remaining commitment of $450,000.
The Company previously sold Heng Fung Finance a ten year $4,000,000 10%
Convertible Debenture that is convertible into shares of common stock of the
Company and an option to purchase an $11,000,000 12% Convertible Debenture that
is convertible into shares of common stock of the Company. As of December 31,
1998, Heng Fung Finance had purchased a total of $8,000,000 of convertible
debentures, of which $1,000,000 had been purchased during the quarter ended
December 31, 1998. The option to purchase the $11,000,000 12% Convertible
Debenture has $7,000,000 available remaining under option. The principal is due
in ten years except for one installment of $500,000 due in March 1999.
A good portion 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.
Management believes that the Company's cash flows from operations, the option of
additional purchases of convertible debentures by Heng Fung Finance, proceeds
expected to be received from the 1998 Private Offering and cash on hand will be
sufficient to fund its debt service, expected capital costs and other liquidity
requirements for the foreseeable future.
Year 2000
The Company has continued with the plans in place as reported as of the fiscal
year ended September 30, 1998. The Company has continued working with
third-party suppliers of software and related services in resolving Year 2000
issues and anticipates testing will be completed by mid-calendar year 1999. No
matters have come to the attention of management of the Company which would
indicate that the estimated total cost of the program for compliance should be
revised. The cost had been estimated to be less than $50,000. No significant
amounts were expended during the quarter ended December 31, 1998. If the Company
and the third parties on which it relies are unable to address this issue in a
timely manner, it could result in a material financial risk to the Company.
16
<PAGE>
Inflation
The effect of inflation on the Company's operations is not material and is not
anticipated to have any material effect in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 1998, the Company had investments in Asian equity
securities, which exposed the Company to foreign exchange rate risk and equity
price risk. During the quarter ended December 31, 1998, the Company purchased
debt securities of certain Asian corporations. These securities expose the
Company to exchange rate risk as well as credit risk. The following table
summarizes the market risks for the Company:
<TABLE>
<CAPTION>
December 31,1998 September 30, 1998
---------------------------- --------------------------
Fair Value Carrying Value Fair Value Carrying Value
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Foreign Exchange Rate Risk:
Equity Securities ............ $ 1,309,243 1,309,243 1,066,972 1,066,972
Debt Securities .............. 4,537,506 4,047,212 -- --
Equity Price Risk:
Equity Securities*............ 1,827,327 1,827,327 1,688,085 1,688,085
Credit Risk:
Debt Securities .............. $ 4,537,506 4,047,212 -- --
</TABLE>
*Includes the equity securities of the Asian corporations.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The Company previously sold Heng Fung Finance a ten year $4,000,000 10%
Convertible Debenture that is convertible into shares of common stock of the
Company and an option to purchase an $11,000,000 12% Convertible Debenture that
is convertible into shares of common stock of the Company. As of December 31,
1998, Heng Fung Finance had purchased a total of $8,000,000 in convertible
debentures. The interest on the convertible debentures through September 30,
1998 was paid with 283,618 shares of common stock of the Company during the
quarter ended December 31, 1998.
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.
17
<PAGE>
In October 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
until October 31, 2003 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 5. OTHER INFORMATION
The Company previously reported that it had signed letters with Auerbach
Financial Group, Inc. ("Auerbach") in which the Company and Auerbach outlined
the terms that would result in the Company owning an interest in Auerbach, in
Auerbach acquiring a portion of the business assets of AFFC, and in AFFC and
Auerbach, Pollak & Richardson, Inc. ("APR"), a securities broker/dealer
subsidiary of Auerbach, forming a strategic alliance. Negotiations for Auerbach
to acquire a portion of the assets of AFFC have been discontinued. It is
currently contemplated that the Company will have the opportunity to acquire for
cash a minority interest in Auerbach of 24.9%, and that APR and AFFC will form a
strategic alliance. Specific terms of the minority interest investment or the
strategic alliance have not been finalized.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
27.0 Financial Data Schedule
(b) 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 $4,000,000 Convertible Debenture Purchase Agreement with Heng Fung
Finance Company Limited. The Current Report also contained information regarding
the termination of the letter of intent with Freeman Holding Company, Inc. and
the entry into a letter of intent with Auerbach Financial Group, Inc. Amendment
No. 1 to the $4,000,000 Convertible Debenture Purchase Agreement was filed as an
exhibit under Item 7.
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 loans and warrants by Fronteer Development Finance Inc. from Heng
Fung Finance Company Limited. The Loan and Warrant Purchase and Sale Agreement
was filed as an exhibit under Item 7.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 15, 1999 FRONTEER FINANCIAL HOLDINGS, LTD.
a Colorado Corporation
By: /s/ Gary L. Cook
------------------------------------------------
Gary L. Cook
Secretary, Treasurer and Chief Financial Officer
19
<PAGE>
Exhibit Index
Exhibit Description
- ------- -----------
27.0 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 4,262,938
<SECURITIES> 1,827,327
<RECEIVABLES> 5,760,469
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,471,441
<PP&E> 3,796,405
<DEPRECIATION> (2,300,044)
<TOTAL-ASSETS> 18,431,266
<CURRENT-LIABILITIES> 5,731,659
<BONDS> 14,260,685
0
0
<COMMON> 176,744
<OTHER-SE> (3,699,505)
<TOTAL-LIABILITY-AND-EQUITY> 18,431,266
<SALES> 0
<TOTAL-REVENUES> 8,581,509
<CGS> 0
<TOTAL-COSTS> 9,060,797
<OTHER-EXPENSES> (19,372)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 205,111
<INCOME-PRETAX> (677,795)
<INCOME-TAX> 21,400
<INCOME-CONTINUING> (699,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (699,195)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
