-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ww+RaPPMgZ9HaKHIzc8BqSmChi6Lft0qwuYCFGKZ6d2Tiw8xvywZ51ol+pqWa2aw tv2jDBprbkFPZ1lBNmH4XQ== 0000950147-99-000511.txt : 19990518 0000950147-99-000511.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950147-99-000511 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER ADJUSTERS OF AMERICA INC CENTRAL INDEX KEY: 0000735349 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 860477573 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12902 FILM NUMBER: 99627485 BUSINESS ADDRESS: STREET 1: 45 E MONTEREY WAY STREET 2: STE 202 CITY: PHOENIX STATE: AZ ZIP: 85012 BUSINESS PHONE: 6022641061 MAIL ADDRESS: STREET 1: P O BOX 7610 CITY: PHOENIX STATE: AZ ZIP: 85011 FORMER COMPANY: FORMER CONFORMED NAME: FRONTIER FINANCIAL CORP /AZ DATE OF NAME CHANGE: 19861114 10-Q 1 QUARTERLY REPORT CONFORMED FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _______________________ to ___________________________ Commission File Number 1-12902 ----------- FRONTIER ADJUSTERS OF AMERICA, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Arizona 86-0477573 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 45 East Monterey Way, Phoenix, AZ 85012 - -------------------------------------------------------------------------------- (Address of principal executive offices) (602) 264-1061 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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. Yes X No --- --- Number of shares of Common Stock outstanding on May 14, 1999 4,605,358 ------------ --------- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS - ----------------------------- FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 1999 June 30, 1998 -------------- ------------- (unaudited) (*) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,636,723 $ 929,364 Investments 1,305,717 1,289,519 Receivables 1,466,679 1,582,020 Prepaid expenses 257,200 317,454 Other 328,567 439,638 ----------- ----------- TOTAL CURRENT ASSETS 4,994,886 4,557,995 ----------- ----------- PROPERTY AND EQUIPMENT 2,615,763 2,543,631 Less accumulated depreciation and amortization (915,339) (819,302) ----------- ----------- 1,700,424 1,724,329 ----------- ----------- OTHER ASSETS Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817 Less accumulated amortization (180,862) (179,129) ----------- ----------- 32,955 34,688 Receivables (Long term) 400,000 431,000 Investments (Long term) 695,042 694,724 Other 437,340 357,964 ----------- ----------- 1,565,337 1,518,376 ----------- ----------- TOTAL ASSETS $ 8,260,647 $ 7,800,700 =========== =========== LIABILITIES CURRENT LIABILITIES Accounts payable $ 72,506 $ 62,118 Accrued expenses 406,444 513,365 Franchisee/licensee remittance payable 638,287 545,830 Current portion long term liability -- 28,509 Other 216,833 193,684 ----------- ----------- TOTAL CURRENT LIABILITIES 1,334,070 1,343,506 ----------- ----------- LONG TERM LIABILITY -- 4,953 ----------- ----------- STOCKHOLDERS' EQUITY Common stock 47,820 47,820 Additional paid in capital 2,148,470 2,148,470 Treasury stock (529,584) (529,584) Other 53,006 49,600 Retained earnings 5,206,865 4,735,935 ----------- ----------- 6,926,577 6,452,241 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 8,260,647 $ 7,800,700 =========== =========== * Condensed from audited financial statements. The accompanying notes are an integral part of these condensed statements. 2 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months Ended Three Months Ended March 31, March 31, ----------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- REVENUE Continuing licensee and franchisee fees $3,670,645 $3,436,123 $1,212,145 $1,094,217 Adjusting fees 1,059,009 899,259 360,027 346,215 ---------- ---------- ---------- ---------- 4,729,654 4,335,382 1,572,172 1,440,432 ---------- ---------- ---------- ---------- COST AND EXPENSES Compensation and employee benefits 2,108,759 2,036,412 690,975 712,261 Office 316,169 299,019 120,134 116,600 Advertising and promotion 207,497 240,281 98,707 115,698 Depreciation and amortization 198,064 192,083 70,577 66,986 Provision for doubtful accounts 152,845 144,000 56,845 48,000 Other 778,003 481,800 222,361 147,030 ---------- ---------- ---------- ---------- 3,761,337 3,393,595 1,259,599 1,206,575 ---------- ---------- ---------- ---------- INCOME FROM OPERATIONS 968,317 941,787 312,573 233,857 ---------- ---------- ---------- ---------- OTHER INCOME Interest income 86,848 101,405 29,573 31,555 Other (Net) 12,138 44,596 5,805 9,488 ---------- ---------- ---------- ---------- TOTAL OTHER INCOME 98,986 146,001 35,378 41,043 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 1,067,303 1,087,788 347,951 274,900 INCOME TAXES 423,672 427,938 139,735 108,083 ---------- ---------- ---------- ---------- NET INCOME $ 643,631 $ 659,850 $ 208,216 $ 166,817 ========== ========== ========== ========== EARNINGS PER SHARE Basic $ .14 $ .14 $ .05 $ .04 ========== ========== ========== ========== Diluted $ .14 $ .14 $ .05 $ .04 ========== ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 4,605,358 4,605,358 4,605,358 4,605,358 ========== ========== ========== ========== Diluted 4,606,776 4,615,112 4,605,784 4,611,934 ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed statements. 3 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Nine Months Ended Three Months Ended March 31, March 31, ----------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- $ 643,631 $ 659,850 $ 208,216 $ 166,817 NET INCOME OTHER COMPREHENSIVE INCOME, NET OF TAX: Foreign currency translation adjustment -- 75 -- -- Unrealized gain (loss) on securities 3,406 (12,414) 3,222 20,251 --------- --------- --------- --------- 3,406 (12,339) 3,222 20,251 --------- --------- --------- --------- COMPREHENSIVE INCOME $ 647,037 $ 647,511 $ 211,438 $ 187,068 ========= ========= ========= =========
The accompanying notes are an integral part of these condensed statements. 4 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) NINE MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998 ----------- ----------- NET INCOME $ 643,631 $ 659,850 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization: Operations 198,064 192,083 Other 546 1,639 (Gain) on sale of investments -- (4,042) (Gain) loss on disposition of property and equipment 3,640 (6,708) Allowance for doubtful accounts 152,845 144,000 Change in assets and liabilities: (Increase) decrease in: Receivables (80,127) 131,763 Prepaid expenses 60,254 51,248 Other 70,532 (59,949) Increase (decrease) in: Accounts payable 10,388 39,896 Accrued expenses (106,921) 221,790 Franchisee and licensee remittance payable 92,457 39,045 Other 20,907 (486,027) ----------- ----------- Total adjustments 422,585 264,738 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,066,216 924,588 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (132,749) (151,434) Investments purchased (2,970,329) (1,992,855) Proceeds on sale of fixed assets 26,761 16,200 Proceeds from sales of investments 3,000,000 2,040,000 License acquisition (150,000) (5,000) Payments on license acquisition (33,462) (19,710) Advances to licensees and franchisees (3,180,151) (3,092,505) Collections of advances to licensees and franchisees 3,253,774 2,868,177 ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (186,156) (337,127) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends (172,701) (518,104) ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (172,701) (518,104) ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 124 ----------- ----------- NET INCREASE (DECREASE) IN CASH 707,359 69,481 Cash at beginning of the period 929,364 1,012,233 ----------- ----------- Cash at the end of the period $ 1,636,723 $ 1,081,714 =========== =========== Supplemental disclosures of Cash Flow information Cash paid during the period Income taxes $ 313,215 $ 506,413 Interest $ 1,538 $ 2,833
The accompanying notes are an integral part of these condensed statements. 5 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results of operations for the interim periods. The dilutive effect on weighted average shares outstanding is due to stock options in the amounts of 43,435 and 165,153 for the nine months ended March 31, 1999 and 1998 respectively, and 21,718 and 86,870 for the three months ended March 31, 1999 and 1998, respectively. The results of operations for the three and nine month periods ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year. (2)Financial Accounting Standards Board Statement No. 130, REPORTING COMPREHENSIVE INCOME Effective September 30, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 130, REPORTING COMPREHENSIVE INCOME. Statement No. 130 established standards for reporting and displaying comprehensive income and its components in the full set of financial statements. Accordingly, the Company's comprehensive income was $647,037 and $647,511 for the nine months ended March 31, 1999 and 1998, respectively, and $211,438 and $187,068 for the three months ended March 31, 1999 and 1998, respectively. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Report on Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the Company's "expectations", "anticipation", "intentions", "beliefs", or "strategies" regarding the future. Forward looking statements include statements regarding revenue, margins, expenses, and earnings analysis with regard to the Company or with regard to the Company's licensees and franchisees for the remainder of fiscal 1999 and thereafter; improvement of, and growth in the number of, licensees and franchisees; future spending on marketing and product development strategy; the transaction with United Financial Company described below, statements regarding Year 2000 readiness; and liquidity and anticipated availability of cash for operations, acquisitions, or payment of dividends. All forward looking statements included in this document are based on information available to the Company on the date of this report, and the Company assumes no obligation to update any such forward looking statement. It is important to note that the Company's actual results could differ materially from those in such forward looking statements. Among the factors that could cause actual results to differ materially are the factors discussed in this report and any other reports on file with the SEC, including but not limited to the extent and nature of natural disasters in geographic areas serviced by the Company or by its licensees and franchisees; management decisions by insurance companies and self-insureds to increase or decrease the degree to which they contract for services offered by the Company, its licensees or franchisees; the Company's ability to identify and attract new qualified licensees and franchisees; the success of the Company's promotional and marketing programs; the Company's ability to successfully manage offices reacquired from existing licensees and franchisees; and uninsured liability for acts or omissions of the Company's employees, licensees, or franchisees. On April 29, 1999 at the annual shareholders' meeting, the Company's shareholders approved the sale of 5,258,531 newly issued shares of Series A Convertible Voting Preferred stock to United Financial Adjusting Company ("UFAC"), a wholly owned subsidiary of The Progressive Corporation ("Progressive") for a price of $1.30 per share. As a result of this sale of stock, UFAC's purchase will represent a minimum of 52% of the Company's voting securities. Following the purchase the Company will make a tender offer to purchase up to 6 1,000,000 shares of common stock for a price of $2.90 per share. Shareholders not tendering their shares will receive a cash distribution of $1.60 per share. The tender offer materials were sent to shareholders in May of 1999. UFAC will not participate in the tender offer and will not be eligible to receive the cash distribution. Subsequent to the approval of the transaction by the shareholders, the Company appointed to its Board a majority of Directors nominated by UFAC and appointed Jeff Jordan of Progressive as an Executive Vice President of the Company. In connection with the sale of shares to UFAC, the Company entered into a service agreement with UFAC whereby the Company will pay UFAC $25,000 per month in exchange for certain advisory and support services related to franchise operations, strategic planning, sales and marketing, technology, human resources support, and accounting and reporting. In addition, the Company entered into agreements with William Rocke and Jean Ryberg providing for their retirement from the Company on June 30, 1999. Pursuant to these agreements, the Company will pay a retirement package to Mr. Rocke and Mrs. Ryberg valued approximately at $298,000 and $192,000, respectively. Financial Condition The Company has historically financed its growth and on going operations with cash generated from operations. In the nine months ended March 31, 1999, the Company's operations generated $1,066,216 in cash. Compared to the last fiscal year, the most significant items affecting cash provided by the Company's operations are the increases of $92,000 in franchisee and licensee payable and $80,000 in receivables, and a decrease of $107,000 in accrued expenses. The decrease in accrued expenses results from the payout of employee benefits and bonuses in the first quarter of this fiscal year. Through its capital investment program, the Company replaces obsolete or outdated equipment and invests in new equipment and furnishings to maintain or increase the productivity of the Company and its employees. The Company anticipates investing between $200,000 to $300,000 in fiscal 1999 for equipment and furnishings pursuant to its capital investment program. Without giving effect to the tender offer and cash distribution referred to above, management believes that the Company will be able to fund all of its cash requirements (i.e. current operations and capital asset acquisitions) from currently available cash funds generated from operations. Management expects to finance the tender offer and cash distribution with the proceeds from the sale of stock to UFAC and from cash on hand. The Company's ratio of current assets to current liabilities was 3.74 to 1 as of March 31, 1999 and 3.39 to 1 as of June 30, 1998. RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998 Revenue The Company's revenue increased 9% or $395,000 to $4,730,000 during the nine months ended March 31, 1999 from $4,335,000 in the same period of the prior fiscal year. This increase represents a combined $160,000 increase in adjusting and risk management fees and a $235,000 increase in continuing licensee and franchisee fees. The increase of $160,000 in adjusting and risk management fees from $899,000 in the nine months ended March 31, 1998 to $1,059,000 for the nine months ended March 31, 1999 represents an 18% increase. The Company experienced an increase of $212,000 in adjusting fees in its Phoenix office, and decreases of $35,000 and $19,000 in adjusting fees from the Las Vegas/Henderson and Tucson offices, respectively. The increase in fees from the Phoenix office primarily reflects fees generated from a client acquired in November of 1997. 7 The Company's revenue from continuing licensee and franchisee fees increased 6.8% or $235,000 from $3,436,000 in the nine months ended March 31, 1998 to $3,671,000 in the nine months ended March 31, 1999. The increase reflects the benefit to the Company's licensees and franchisees from an increase in claims assignments from insurance companies and self insureds. The Company's revenue is affected by numerous matters including the work loads of other companies and claims presented by their clients. The Company, therefore, is unable to project its future revenue. The Company has historically seen growth in licensee and franchisee fees paid. However, during the prior fiscal year, the Company experienced a decrease in revenue due primarily to the phase out of a business relationship with its then major client. The Company has responded to this loss of revenue by continuing to develop and implement sales and marketing efforts to take advantage of its geographic diversity as well as the unique strengths of its individual licensees and franchisees. Through these efforts and the addition of UFAC's marketing resources, the Company anticipates that over time the lost business will be replaced and hopes to see continued growth in licensee and franchisee fees paid from other sources. Compensation and Fringe Benefits Compensation and fringe benefits represent approximately 56% of the Company's costs and expenses and are the Company's largest single item of expense. These expenses increased 3.6% or $73,000 from $2,036,000 in the nine months ended March 31, 1998 to $2,109,000 in the current nine month period. This increase is the result of additional permanent and temporary employees hired to handle increased work loads in the Corporate and Phoenix office as well as cost of living and merit increases given to employees. Furthermore, certain adjusters in the Phoenix office are compensated by commission based on their adjusting services. As the adjusting fees in the Phoenix office increase, the wages paid to these adjusters also increase. Expenses Other Than Compensation and Fringe Benefits The Company's expenses other than compensation and fringe benefits increased $295,000 during the nine months ended March 31, 1999 as compared to the same period of the prior fiscal year. The principal items affecting these expenses are a $122,000 increase in legal fees, a $94,000 increase in audit and accounting fees, a $28,000 increase in insurance costs, a $17,000 increase in office expenses, and a $33,000 decrease in advertising and promotion. The increase in legal fees reflect the Company's increased need for legal services in connection with the transaction with UFAC. The increase in audit and accounting fees reflect the Company's decision to outsource certain income tax and financial reporting functions that were previously performed in-house. The Company believes this will enable it to more efficiently monitor compliance of the constantly changing state and federal laws and regulations. Furthermore, the Company has incurred additional accounting fees in connection with the transaction with UFAC. The increased insurance costs reflect an increase in the cost of insurance as well as expanded coverage. The balance of the Company's costs have not changed significantly from the same period of the prior year. Income Taxes The Company's income taxes for the nine months ended March 31, 1999 were 39.7% of its income before taxes, or approximately the same as they were in the same period of the prior fiscal year. Changes made in the tax laws by various states and by the federal government have not had a material effect on the Company's current overall tax rates; however, this could change at any time. Other Income The Company's other income decreased $47,000 or 32% from $146,000 in the nine months ended March 31, 1998 to $99,000 in the current nine month period. The most significant items affecting other income are decreases in dividend income of $22,000 and interest income of $15,000 and a loss of $4,000 on the disposal of fixed assets compared to a gain on the disposal of fixed assets of $7,000 in the same period of the prior year. 8 Net Income The Company's net income for the nine months ended March 31, 1999 decreased $16,000 or 2.4% from $660,000 in the nine months ended March 31, 1998 to $644,000 in the current period. The most significant items affecting net income were a $395,000 increase in revenue, a $73,000 increase in compensation and benefits, a $295,000 increase in expenses other than compensation and benefits, and a $47,000 decrease in other income. Comprehensive Income Effective September 30, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 130, REPORTING COMPREHENSIVE INCOME. Statement No. 130 establishes standards for reporting and displaying comprehensive income and its components in the full set of financial statements. Accordingly, the Company's comprehensive income for the nine months ended March 31, 1999 and 1998 was $647,037 and $647,511, respectively. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Revenue The Company's revenue increased 9.2% or $132,000 to $1,572,000 in the three months ended March 31, 1999 from $1,440,000 in the same period of the prior fiscal year. This increase represents a combined $14,000 increase in adjusting and risk management fees and a $118,000 increase in continuing licensee and franchisee fees. The increase of $14,000 in adjusting and other fees of Company owned offices from $346,000 in the three months ended March 31, 1998 to $360,000 in the three months ended March 31, 1999 represents a 4% increase. The Las Vegas/Henderson office experienced an increase of $14,000 while the Phoenix and Tucson offices remained unchanged from the same period of the prior year. The Company's revenue from continuing licensee and franchisee fees increased 10.8% or $118,000 from $1,094,000 in the three months ended March 31, 1998 to $1,212,000 in the three months ended March 31, 1999. This increase reflects the benefit to the Company's licensees and franchisees from an increase in claims assignments from insurance companies and self insureds. The Company's revenue is affected by numerous matters including the work loads of other companies and claims presented by their clients. The Company, therefore, is unable to project its future revenue. The Company has historically seen growth in licensee and franchisee fees paid. However, during the prior fiscal year, the Company experienced a decrease in revenue due primarily to the phase out of a business relationship with its then major client. The Company has responded to this loss of revenue by continuing to develop and implement sales and marketing efforts to take advantage of its geographic diversity as well as the unique strengths of its individual licensees and franchisees. Through these efforts and the addition to UFAC's marketing resources, the Company anticipates that over time the lost business will be replaced and hopes to see continued growth in licensee and franchisee fees paid from other sources. Compensation and Fringe Benefits Compensation and fringe benefits represent approximately 55% of the Company's costs and expenses and are the Company's single largest expense item. These expenses decreased 3% or $21,000 from $712,000 in the three months ended March 31, 1998 to $691,000 in the three months ended March 31, 1999. This decrease resulted primarily from the departure without replacement of certain salaried personnel. Expenses Other Than Compensation and Fringe Benefits The Company's expenses other than compensation and fringe benefits increased $74,000 during the three months ended March 31, 1999 as compared to the same quarter of the prior fiscal year. The principal items affecting these expenses are increases of $36,000 in legal fees, $25,000 in accounting and audit fees, and $20,000 in 9 miscellaneous expenses and a decrease of $17,000 in advertising and promotion expenses. The increase in legal fees reflects the Company's increased need for legal services in connection with the transaction with UFAC. The increase in audit and accounting fees reflects the Company's decision to outsource certain income tax and financial reporting functions that were previously performed in-house. The Company believes this will enable it to more efficiently monitor compliance of constantly changing state and federal laws and regulation. Furthermore, the Company has incurred additional accounting fees in connection with the transaction with UFAC. The increase in miscellaneous expenses resulted from the printing of proxy materials mailed to the shareholders in March 1999. Similar expenses were incurred in the first quarter of fiscal 1998. Income Taxes The Company's income taxes for the three months ended March 31, 1999, were 40.2% of its income before taxes, or approximately the same as they were in the same period of the prior fiscal year. Changes made in the tax laws by various states and by federal government did not have a material effect on the Company's overall tax rates; however, this could change at any time. Other Income The Company's other income decreased $6,000 or 14.6% from $41,000 in the three months ended March 31, 1998 to $35,000 in the three months ended March 31, 1999. The most significant items affecting other income was a $2,000 decrease in interest income and a gain from the sale of fixed assets in the same period of the prior year. Net Income The Company's net income for the three months ended March 31, 1999 increased 24.5% or $41,000 from $167,000 in the three months ended March 31, 1998 to $208,000 in the current quarter. The most significant items affecting net income were the $132,000 increase in revenue, the $21,000 decrease in compensation and fringe benefits, and the $74,000 increase in expenses other than compensation and fringe benefits. Comprehensive Income Effective September 30, 1998, the Company adopted Financial Accounting Standards Boards (FASB) Statement No. 130, REPORTING COMPREHENSIVE INCOME. Statement No. 130 establishes standards for reporting and displaying comprehensive income and its components in the full set of financial statements. Accordingly, the Company's comprehensive income for the three months ended March 31, 1999 and 1998 was $211,438 and $187,068, respectively. Year 2000 Compliance The "Year 2000" issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals. Many currently installed computer systems and software products are coded to accept two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Left uncorrected, time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in a computer shutdown or incorrect calculations. Failures of the Company's and/or third parties' computer systems could have a material adverse effect on the Company's ability to conduct its business. To date the Company has examined both its information technology and non-information technology systems. The Company has determined that certain of the software used by the Company is not Year 2000 compliant. The Company has identified and purchased upgraded software that is Year 2000 compliant. In addition, the Company is currently updating all custom software so that it is Year 2000 compliant. A full-time programmer is dedicating all of her efforts to this project. The Company expects to complete these upgrades by September 30, 1999. The Company has also tested its computer servers internally. An external party has tested these systems and found all but one operating system are compliant. Arrangements are currently being made to upgrade the noncompliant server. The Company hopes to finish its testing of internal systems by September 30, 1999. All of the Company's personal computers that need to be Year 2000 compliant have been updated. The Company's phone system has also been updated to be Year 2000 compliant. The Company has determined that its alarm, heating, and air conditioning systems will not be affected by the Year 2000. The Company has completed an analysis of the Company's operations to identify the remaining Year 2000 issues embodied in its operations and facilities and is developing a plan to resolve such issues. The Company expects to complete the formal plan of 10 resolution by September 30, 1999. Certain software products sold by the Company to certain of its licensees and franchisees in prior years are not Year 2000 compliant. A partial upgrade to accommodate current policy dates on or after the Year 2000 has already been developed and distributed to franchisees free of charge. The Company's computer staff is developing an upgrade of the software that will be Year 2000 compliant. The Company expects to complete development of the final Year 2000 compliant version of its software by September 30, 1999. The Company will distribute this version to purchasers of the non-compliant version, free of charge. The Company does not anticipate that the cost of this upgrade will be material to the Company's operations. Members of the Company's computer staff have sent Year 2000 readiness surveys to the Company's customers and vendors to determine the status of such customers' and vendors' computer systems for Year 2000 compliance. None of the responses received thus far have indicated any major problems. As the Company identifies potential problems, it will determine the steps necessary to minimize disruptions due to failures in Year 2000 compliance by its customers and/or vendors. The Company expects that the cost of analysis and development and implementation of plans to address its Year 2000 issues will not exceed a total of $250,000. The Company's estimate reflects assumptions regarding the extent of the Year 2000 issues embodied in the Company's operations and facilities, the availability and cost of personnel trained in this area, the compliance plans of third parties, and similar uncertainties. However, due to the complexity and pervasiveness of the Year 2000 issue, and in particular, the uncertainty regarding the compliance programs of third parties, no assurance can be given that these estimates will be achieved, and actual results could differ materially from those anticipated. If the Company is unable to address the Year 2000 issues successfully, or in a timely fashion, the Company may need to devote more resources to the process and additional costs may be incurred. This could have a material adverse effect on the Company's results of operations. The Company has purchased insurance that may offset certain losses to the Company for claims based upon non-compliance with Year 2000 issues. In its reasonable likely worst case Year 2000 scenario, the Company anticipates that the software which it uses, despite the completion of upgrades, will still fail to be Year 2000 compliant. In addition, it is possible that the software sold by the Company to certain of its licensees and franchisees will not become Year 2000 compliant despite the Company's efforts to upgrade this software. Finally, the Company anticipates the possibility that its customers' and vendors' systems will not be Year 2000 compliant. In the event that any of these scenarios materialize, the Company expects that it would experience problems processing transactions and remitting checks to licensees and franchisees. Licensees and franchisees would experience a slow-down in their processing of paperwork. In the event that the steps being implemented by the Company fail to avoid problems associated with the Year 2000, the Company is currently developing its contingency plans. Such plans may include the immediate purchase of replacement hardware or software at the beginning of the Year 2000, the switching of vendors who supply goods or services to the Company, or other alternatives. In addition, the Company plans to purchase a back-up power generator in July 1999 to prepare for the unlikely event of a power grid failure. The Company anticipates that its contingency plans will be completed no later than September 1999. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss to future earnings, fair values, or future cash flows due to potential changes in the price of a financial instrument. A financial instrument's value may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices, and other market changes. Market risk is inherent in all market risk sensitive financial instruments. The Company invests in $1,000,000 U.S. treasury bills. At March 31, 1999, the Company was invested in a 64- day Treasury bill that matured on April 22, 1999. Due to the short time to maturity, the interest income risk and market value risk are insignificant and have no material effect on the financial statements. The Company invests in various mutual funds that it holds as short-term available for sale investments. Strategies of the funds include growth, income, and capital appreciation, and the funds invest primarily in foreign and domestic equity securities. The market risk associated with these mutual funds is the potential loss in fair value resulting from a decrease in the market price of the stocks. Based on the value of the Company's investments at March 31, 1999, a 10% decrease in the fair value of these investments would not materially affect the value of these investments. The Company has a book value of $668,000 invested in municipal bonds that it carries as long term held to 11 maturity investments. An increase in interest rates would result in a decline in the market value of the bonds. These bonds mature between 2005 and 2031. As the Company has the intent and ability to hold these bonds to maturity, the market risk associated with these bonds is insignificant and has only the effect of disclosure in the financial statements. Although the Company wholly owns a Canadian subsidiary, the cash held by the Canadian subsidiary is immaterial to the Company's operations. Any foreign currency fluctuations would not have a material effect on the Company's financial statements. PART II: OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS From time to time in the normal course of its business, the Company is named as a defendant in lawsuits. The Company does not believe that it is subject to any such lawsuits or litigation or threatened lawsuits or litigation that will have a material adverse effect on the Company or its business. ITEM 2 - Not Applicable ITEM 3 - Not Applicable ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS On April 29, 1999, the Company held its 1998 annual shareholders' meeting. The shareholders approved the sale of 5,258,531 shares of Series A Convertible Voting Preferred stock to UFAC with 3,763,414 votes cast, 3,594,590 approving the transaction, 162,254 against the transaction, and 6,570 votes abstaining. The Company's Board of Directors were reelected with 4,427,884 shares being cast and 138,008 abstaining. The Directors elected and the numbers of votes each received as follows: George Hill 4,216,028 Francis J. LaPallo 4,221,044 Louis T. Mastos 4,250,048 William J. Rocke 4,245,889 James S. Rocke 4,212,206 Jean E. Ryberg 4,244,351 Merlin J. Schumann 4,252,823 William W. Strawther, Jr. 4,218,131 R. Scott Younker 4,218,356 The Company's shareholders ratified the appointment of McGladrey & Pullen, LLP, Certified Public Accountants, as the auditors of the Company for the Company's fiscal year ending June 30, 1999, with 4,342,818 affirmative votes, 24,750 against, and 314 abstaining. ITEM 5 - Not Applicable ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (b) The Company filed a Form 8-K on May 4, 1999 to report a change in control of the Company as a result of the sale of shares to UFAC and the appointment of eight persons nominated by UFAC to the Company's Board of Directors. 12 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. FRONTIER ADJUSTERS OF AMERICA, INC. Date: 5/14/99 /s/ William J. Rocke - ----------------------- --------------------------------------- William J. Rocke, Chief Executive Officer/Chairman of the Board, Director and Acting Chief Accounting Officer Date: 5/14/99 /s/ Jean E. Ryberg - ----------------------- --------------------------------------- Jean E. Ryberg, President, Director 13 EX-27 2 FDS FOR 3RD QUARTER 10-Q
5 EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 (Unaudited) AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS 1 U.S. DOLLARS 9-MOS JUN-30-1999 JUL-01-1998 MAR-31-1999 1 1,636,723 1,305,717 1,847,998 381,319 0 4,994,886 2,615,763 915,339 8,260,647 1,334,070 0 0 0 47,820 6,878,759 8,260,647 0 4,729,654 0 0 3,608,492 152,845 1,335 1,067,303 423,672 643,631 0 0 0 643,631 .14 .14
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