-----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, F3Rt4Ar47SXyEQn+XCxoUcyk4GKv65ndYUhNN6z1fCmTlV9Yuc5025b6/jB9dUHR RqHIElArLp2xMUvtbjhDVg== 0000950147-00-000189.txt : 20000214 0000950147-00-000189.hdr.sgml : 20000214 ACCESSION NUMBER: 0000950147-00-000189 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: 536229 BUSINESS ADDRESS: STREET 1: 45 E MONTEREY WAY STREET 2: STE 202 CITY: PHOENIX STATE: AZ ZIP: 85011 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 FOR THE QTR ENDED 12/31/99 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 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 February 7, 2000 8,957,560 --------- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET December 31, 1999 June 30, 1999 ----------------- ------------- (unaudited) (*) ASSETS CURRENT ASSETS Cash $ 1,541,141 $ 6,892,851 Receivables 1,243,758 1,603,756 Prepaid expenses 187,210 344,041 Other 336,637 298,214 ----------- ----------- TOTAL CURRENT ASSETS 3,308,746 9,138,862 ----------- ----------- PROPERTY AND EQUIPMENT 2,655,895 2,540,219 Less accumulated depreciation and amortization (1,002,453) (931,283) ----------- ----------- 1,653,442 1,608,936 ----------- ----------- OTHER ASSETS Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817 Less accumulated amortization (182,596) (181,440) ----------- ----------- 31,221 32,377 Receivables (Long term) 312,000 350,000 Investments (Long term) 685,360 685,148 Other 269,654 303,661 ----------- ----------- 1,298,235 1,371,186 ----------- ----------- TOTAL ASSETS $ 6,260,423 $12,118,984 =========== =========== LIABILITIES CURRENT LIABILITIES Accounts payable $ 30,843 $ 28,005 Accrued expenses 171,787 404,325 Franchisee/licensee remittance payable -- 552,946 Service fees due to UFAC 75,000 50,000 Distribution payable -- 5,918,475 Other 359,130 111,600 ----------- ----------- TOTAL CURRENT LIABILITIES 636,760 7,065,351 ----------- ----------- STOCKHOLDERS' EQUITY Common stock 90,191 90,191 Additional paid in capital 2,104,426 2,104,426 Treasury stock (184,368) (184,368) Other 24,283 20,653 Retained earnings 3,589,131 3,022,731 ----------- ----------- 5,623,663 5,053,633 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,260,423 $12,118,984 =========== =========== * 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)
Six Months Ended Three Months Ended December 31, December 31, -------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- REVENUE Continuing licensee and franchisee fees $2,585,686 $2,458,500 $1,273,079 $1,185,377 Adjusting and Risk Management fees 657,370 698,982 293,913 338,736 ---------- ---------- ---------- ---------- 3,243,056 3,157,482 1,566,992 1,524,113 ---------- ---------- ---------- ---------- COST AND EXPENSES Compensation and employee benefits 1,286,001 1,417,784 699,624 700,018 Office 217,526 202,925 127,026 107,410 Advertising and promotion 65,807 108,790 24,373 68,203 Depreciation and amortization 114,951 127,487 57,429 65,012 Provision for doubtful accounts 135,838 96,000 82,998 48,000 Service fees paid to UFAC 150,000 -- 75,000 -- Other 430,141 548,752 210,656 275,046 ---------- ---------- ---------- ---------- 2,400,264 2,501,738 1,277,106 1,263,689 ---------- ---------- ---------- ---------- INCOME FROM OPERATIONS 842,792 655,744 289,886 260,424 ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest income 56,373 57,275 33,309 27,841 Other (Net) 30,021 6,333 22,062 7,824 ---------- ---------- ---------- ---------- TOTAL OTHER INCOME (EXPENSE) 86,394 63,608 55,371 35,665 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 929,186 719,352 345,257 296,089 INCOME TAXES 362,786 283,937 146,189 116,590 ---------- ---------- ---------- ---------- NET INCOME $ 566,400 $ 435,415 $ 199,068 $ 179,499 ========== ========== ========== ========== EARNINGS PER SHARE Basic $ .06 $ .09 $ .02 $ .04 ========== ========== ========== ========== Diluted $ .06 $ .09 $ .02 $ .04 ========== ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 8,957,560 4,605,358 8,957,560 4,605,358 ========== ========== ========== ========== Diluted 8,957,560 4,607,261 8,957,560 4,605,358 ========== ========== ========== ==========
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)
Six Months Ended Three Months Ended December 31, December 31, -------------------------- ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- NET INCOME $ 566,400 $ 435,415 $ 199,068 $ 179,499 --------- --------- --------- --------- OTHER COMPREHENSIVE INCOME, NET OF TAX: Foreign currency translation adjustments 3,630 -- 3,182 -- Unrealized gain (loss) on securities -- 160 (8,094) 28,131 --------- --------- --------- --------- 3,630 160 (4,912) 28,131 --------- --------- --------- --------- COMPREHENSIVE INCOME $ 570,030 $ 435,575 $ 194,156 $ 207,630 ========= ========= ========= =========
The accompanying notes are an integral part of these condensed statements 4 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 1999 1998 ----------- ----------- NET INCOME $ 566,400 $ 435,415 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization: Operations 114,951 127,487 Other -- 546 Gain on sale of investments (12,494) -- Loss on disposition of property and equipment -- 3,640 Bad Debt Expense 135,838 96,000 Change in assets and liabilities: (Increase) decrease in: Receivables 75,298 (9,142) Prepaid expenses 156,831 51,634 Other (57,494) 33,725 Increase (decrease) in: Accounts payable 2,838 (5,930) Accrued expenses (232,538) (220,237) Franchisee and licensee remittance payable (552,946) (545,830) Service fees due to UFAC 25,000 -- Other 244,934 6,461 ----------- ----------- Total adjustments (99,782) (461,646) ----------- ----------- NET CASH PROVIDED BY (USED) OPERATING ACTIVITIES 466,618 (26,231) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (117,132) (117,191) Investments purchased -- (1,977,829) Proceeds from sales of investments 12,494 2,000,000 Proceeds on sale of fixed assets 337 26,761 Proceeds from sales of license 25,000 -- Payments on license acquisition (13,660) (13,997) Advances to licensees and franchisees (1,875,385) (2,237,113) Collections of advances to licensees and franchisees 2,062,267 2,233,360 ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 93,921 (86,009) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends (5,918,475) (172,701) ----------- ----------- NET CASH (USED IN) FINANCING ACTIVITIES (5,918,475) (172,701) EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,226 -- NET (DECREASE) IN CASH (5,351,710) (284,941) Cash at beginning of the period 6,892,851 929,364 ----------- ----------- Cash at the end of the period $ 1,541,141 $ 644,423 =========== =========== Supplemental disclosures of Cash Flow information Cash paid during the period Income taxes $ 421,877 $ 221,060 Interest $ 1,097 $ 1,003 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 results of operations for the three and six month periods ended December 31, 1999 are not necessarily indicative of the results to be expected for the full year. (2) Reportable Segments Financial information with respect to the Company's reportable segments for the six and three months ended December 31, 1999 and 1998 is as follows: Six months ended Las Vegas/Henderson Corporate and December 31, 1999 and Tucson Offices Phoenix Office Consolidated - ----------------- -------------------- -------------- ------------ Revenue $ 247,139 $2,995,917 $3,243,056 Depreciation and Amortization 21,357 93,594 114,951 Interest Income -- 56,373 56,373 Segment Net Income 5,632 560,768 566,400 Expenditures for Segment Assets -- 117,132 117,132 Segment Assets $ 124,694 $6,135,729 $6,260,423 Six months ended December 31, 1998 - ----------------- Revenue $ 229,541 $2,927,941 $3,157,482 Depreciation and Amortization 20,789 106,698 127,487 Interest Income -- 57,275 57,275 Segment Net Income (Loss) (6,759) 442,174 435,415 Expenditures for Assets 18,545 98,646 117,191 Segment Assets $ 164,733 $7,119,411 $7,284,144 Three months ended December 31, 1999 - ----------------- Revenue $ 117,804 $1,449,188 $1,566,992 Depreciation and Amortization 10,685 46,744 57,429 Interest Income -- 33,309 33,309 Segment Net Income 1,956 197,112 199,068 Expenditures for Segment Assets -- 24,894 24,894 Three months ended December 31, 1998 - ----------------- Revenue $ 109,806 $1,414,307 $1,524,113 Depreciation and Amortization 10,534 54,478 65,012 Interest Income -- 27,841 27,841 Segment Net Income (Loss) (5,845) 185,344 179,499 Expenditures for Assets 17,532 10,162 27,694 (3) Earnings Per Share The effect of 100,000 stock options are not included in the earnings per share calculation because they are antidilutive. 6 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", "hopes", "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 2000 and thereafter; improvement of, and growth in the number of, licensees and franchisees; future spending on marketing and product development strategy; statements regarding the outcome of litigation; and liquidity and anticipated availability of cash for operations and capital expenditures. 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 statements. 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. FINANCIAL CONDITION The Company has historically financed its growth and on-going operations with cash generated from operations. In the six months ended December 31, 1999, the Company's operations generated $467,000 in cash. During the six months ended December 31, 1999, the most significant items affecting cash generated by the Company's operations are net income, a $553,000 decrease in franchisee and licensee remittance payable and the $233,000 decrease in accrued expenses. The Company, pursuant to agreements with its licensees and franchisees, acts as a collection agent for all of its licensees and franchisees. The Company remits to its licensees and franchisees the collections, less the ongoing license/franchise fee and any amounts due the Company, such as loan repayments and errors and omissions insurance premium. The day of the week that the Company's fiscal period ends, therefore, can have a significant effect on the reported amount that is due to licensees and franchisees. As December 31, 1999 fell on the day that collections were remitted to licensees and franchisees, the Company did not have a remittance payable. In comparison, the Company's financial statements as of June 30, 1999 reflects collections for four days of $553,000. The decrease in accrued expenses results from the payout of employee benefits and bonuses during the first quarter of fiscal 2000. The Company anticipates that during fiscal 2000 its operations will generate sufficient cash to fund its operations and equipment acquisitions. 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 $200,000 to $300,000 in fiscal 2000 for equipment and furnishings pursuant to its capital investment program. In June 1999, a complaint was filed in United States District Court in Nebraska against multiple defendants including the Company. The complaint arises from the alleged embezzlement by a former licensee in connection with claims services provided for the benefit of the plaintiff. The complaint seeks damages of at least $1,800,000 from the Company. As the lawsuit is still in its earliest phase, the Company cannot yet assess the merits of the complaint or the effects this litigation will have on the Company. For further discussion, see "Item 1 - Legal Proceedings". 7 The Company's ratio of current assets to current liabilities was 5.20 to 1 as of December 31, 1999 and 1.29 to 1 as of June 30, 1999. The increase is primarily the result of the decreases in distribution payable and franchisee/licensee remittance payable at December 31, 1999 as compared to June 30, 1999. RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1998 REVENUE The Company's revenue increased 2.7% or $86,000 to $3,243,000 during the six months ended December 31, 1999 from $3,157,000 in the same period of the prior fiscal year. This increase represents a $41,000 decrease in adjusting and risk management fees and a $127,000 increase in continuing licensee and franchisee fees. The decrease of $41,000 in adjusting and risk management fees from $699,000 in the six months ended December 31, 1998 to $658,000 for the six months ended December 31, 1999 represents a 5.9% decrease. The Company experienced an increase of $29,000 in adjusting fees in its Las Vegas/Henderson office, and decreases of $11,000 and $59,000 in adjusting fees from the Tucson and Phoenix offices, respectively. The increase in Las Vegas/Henderson office is primarily the result of an increase in storms this fiscal year as compared to the same period of the prior year. The decrease in the Phoenix office mainly relates to the loss of a client. The Company's revenue from continuing licensee and franchisee fees increased 5.2% or $127,000 from $2,459,000 in the six months ended December 31, 1998 to $2,586,000 in the six months ended December 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. Therefore, the Company is unable to project its future revenue. The Company has historically seen growth in licensee and franchisee fees paid. However, during fiscal 1998, 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 the 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. The Company's revenue did recover in fiscal 1999, to an amount comparable to that of fiscal 1997, which was prior to the loss of the client, and the Company hopes to see continued growth in licensee and franchisee fees paid from other sources. COMPENSATION AND FRINGE BENEFITS Compensation and fringe benefits represent approximately 53.6% of the Company's costs and expenses and represent the largest single item of expense. These expenses decreased 9.3% or $132,000 from $1,418,000 in the six months ended December 31, 1998 to $1,286,000 in the current six month period. The decrease is the result of the retirement of William J. Rocke, former CEO and former Chairman of the Board, and Jean E. Ryberg, former President, on June 30, 1999. Certain of the services provided by Mr. Rocke and Mrs. Ryberg are now provided by United Financial Adjusting Company ("UFAC") pursuant to a service agreement between the Company and UFAC. Charges for these services are reflected in a monthly fee paid to UFAC. For further discussion, see "Service Fees" below. Compensation and Fringe Benefits were also affected by the resignation of Francis J. LaPallo on January 31, 2000. In connection with his resignation, Mr. LaPallo received a severance package with a net of tax affect on net income of approximately $106,000 for the six months ended December 31, 1999. Had the Company not incurred this expense, compensation and fringe benefits for the six months ended December 31, 1999 would have experienced a greater decrease compared to the same period of the prior fiscal year. 8 SERVICE FEES On April 30, 1999, the Company entered into a service agreement with UFAC whereby the Company pays a $25,000 monthly fee for certain services provided by UFAC. Services included under this agreement are management, marketing, technology, human resource support, and accounting and reporting. For the six months ended December 31, 1999, the Company incurred $150,000 in service fees. The Company did not incur any service fees related to this agreement in the same period of the prior fiscal year. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND SERVICE FEES The Company's expenses other than compensation and fringe benefits and service fees decreased $120,000 during the six months ended December 31, 1999 as compared to the same period of the prior fiscal year. The principal items affecting these expenses are decreases of $103,000 in legal fees, $43,000 in advertising and promotion, $20,000 in Directors fees, $12,000 in depreciation and amortization, which were partially offset by increases of $40,000 in provision for doubtful accounts, $15,000 in office expenses, and $13,000 in computer consulting expenses. Legal fees decreased significantly due to the increased need for legal services during the first six months of fiscal 1999 in preparation of the UFAC transaction that was later consummated in April of 1999. As a portion of the monthly service fee paid to UFAC includes marketing resources, the Company has decreased similar services previously paid to external sources. Furthermore, a portion of this reduction is due to the non-renewal of the Company's share of a luxury suite at a sporting facility. Accordingly, advertising and promotional expenses have decreased this fiscal year as these services were provided by UFAC and recorded under Service Fees for the current period. Provision for doubtful accounts increased primarily due to the aging of larger balanced loans given to franchisees or licensees as compared to the same period of the prior fiscal year. INCOME TAXES The Company's income taxes for the six months ended December 31, 1999 were 39.0% of its income before taxes, or approximately the same as they were in 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, there is no assurance that such changes will not occur in the future. OTHER INCOME The Company's other income increased $22,000 or 34.4% from $64,000 in the six months ended December 31, 1998 to $86,000 in the current six month period. The most significant items affecting other income are increases in the gain on sale of investments and miscellaneous income of $12,000 and $11,000, respectively. NET INCOME The Company's net income for the six months ended December 31, 1999 increased $131,000 or 30.1% from $435,000 in the six months ended December 31, 1998 to $566,000 in the current period. The most significant items affecting net income were an $86,000 increase in revenue, a $132,000 decrease in compensation and benefits, a $150,000 increase in service fees, a $120,000 decrease in expenses other than compensation and fringe benefits and service fees, and an increase of $22,000 in other income. RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1998 REVENUE The Company's revenue increased 2.8% or $43,000 to $1,567,000 during the three months ended December 31, 1999 from $1,524,000 in the same period of the prior fiscal year. This increase represents a $45,000 decrease in adjusting and risk management fees and an $88,000 increase in continuing licensee and franchisee fees. The decrease of $45,000 in adjusting and risk management fees from $339,000 in the three months ended December 31, 1998 to $294,000 in the three months ended December 31, 1999 represents a 13.3% decrease. The Company experienced a 9 decrease of $53,000 in adjusting fees in its Phoenix office and increases of $1,000 and $7,000 in adjusting fees from the Las Vegas/Henderson and Tucson offices, respectively. The decrease in fees from the Phoenix office primarily reflects the loss of a client. The Company's revenue from continuing licensee and franchisee fees increased 7.4% or $88,000 from $1,185,000 in the three months ended December 31, 1998 to $1,273,000 in the three months ended December 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 factors including the work loads of other companies and claims presented by their clients. Therefore, the Company is unable to project its future revenue. The Company has historically seen growth in licensee and franchisee fees paid. However, during fiscal 1998, the Company experienced a decrease in revenue due primarily to the phase out of its business relationship with its then major client. The Company has responded to this loss 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. The Company's revenue did recover in fiscal 1999 to an amount comparable to that of fiscal 1997, which was prior to the loss of the client, and the Company hopes to see continued growth in licensee and franchisee fees paid from other sources. COMPENSATION AND FRINGE BENEFITS Compensation and fringe benefits represent approximately 54.8% of the Company's costs and expenses and represent the largest single item of expense. These expenses remained essentially flat at $700,000 in the three months ended December 31, 1998 compared to the current three month period. Compensation related expenses have declined significantly this fiscal year due to the retirement of William J. Rocke, former CEO and Chairman of the Board, and Jean E. Ryberg, former President, on June 30, 1999. However, the Company incurred expenses this quarter related to the resignation of Francis J. LaPallo, former Executive Vice President, on January 31, 2000. In connection with his resignation, Mr. LaPallo received a severance package with a net of tax affect on net income of approximately $106,000 for the three months ended December 31, 1999. Had the Company not incurred this expense, compensation and fringe benefits for the three months ended December 31, 1999 would have decreased in comparison to the same period of the prior year. Certain of the services provided by Mr. Rocke and Mrs. Ryberg are now provided by UFAC pursuant to a service agreement between the Company and UFAC. Charges for these services are reflected in a monthly fee paid to UFAC. For further discussion, see "Service Fees" below. SERVICE FEES On April 30, 1999, the Company entered into a service agreement with UFAC whereby the Company pays a $25,000 monthly fee for certain services provided by UFAC. Services included under this agreement are management, marketing, technology, human resource support, and accounting and reporting. For the three months ended December 31, 1999, the Company incurred $75,000 in service fees. The Company did not incur any service fees related to this agreement in the same quarter of the prior fiscal year. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND SERVICE FEES The Company's expenses other than compensation and fringe benefits and service fees decreased $61,000 during the three months ended December 31, 1999 as compared to the same quarter of the prior fiscal year. The principal items affecting these expenses are decreases of $91,000 in legal fees, $44,000 in advertising and promotion, and $17,000 in audit and accounting fees, which were partially offset by increases of $35,000 in provision for doubtful accounts, $23,000 in technology consulting fees, and $20,000 in office expenses. Legal fees and accounting related fees decreased significantly this quarter due to the increased need for these services during the three months ended December 31, 1998 in preparation of the UFAC transaction that was later consummated in April of 1999. Advertising and promotional expenses decreased $44,000 this quarter as a portion of the monthly service fee paid to UFAC includes marketing resources. Therefore, the Company has ceased some of the costs that were 10 previously paid to external parties. Furthermore, a portion of this reduction is due to the non-renewal of the Company's share of a luxury suite at a sporting facility. Provision for doubtful accounts increased primarily due to the aging of larger balanced loans given to franchisees or licensees as compared to the same period of the prior fiscal year. INCOME TAXES The Company's income taxes were 42.3% and 39.4% of its income before taxes for the three months ended December 31, 1999 and 1998, respectively. A difference in these rates is due to an increase in permanent differences in book and tax income between the periods. The Company's income taxes have not been significantly affected by any changes in the federal and state laws. However, tax rates can be changed at any time based upon legislation. OTHER INCOME The Company's other income increased $19,000 or 52.8% from $36,000 in the three months ended December 31, 1998 to $55,000 in the current three month period. The most significant items affecting other income include increases of $5,000 in interest income, $12,000 in the gain on sale of investments and $6,000 in miscellaneous revenue, and a decrease in dividend income of $4,000. NET INCOME The Company's net income for the three months ended December 31, 1999 increased $20,000 or 11.2% from $179,000 in the three months ended December 31, 1998 to $199,000 in the current quarter. The most significant items affecting net income were a $43,000 increase in revenue, a $75,000 increase in service fees and a $61,000 decrease in expenses other than compensation and fringe benefits and service fees. 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, exchanges rates, commodity prices, equity prices, and other market changes. Market risk is inherent in all market risk sensitive financial instruments. During the first six months of fiscal 2000, the Company did own an immaterial number of common stock shares that it sold in October 1999. Therefore, the Company is no longer exposed to any market risk associated with this investment. The Company has a book value of $668,000 invested in municipal bonds that it carries as long term held to 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 does not have a material effect on the financial statements. Although the Company wholly owns a Canadian subsidiary, the cash held by the Canadian subsidiary is not material to the Company's operations. Therefore, any foreign currency fluctuations would not have a material effect on the Company's financial statements. 11 PART II OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS In June 1999, Safeway Inc. filed a complaint against multiple defendants including the Company in the United States District Court in Nebraska. The complaint arises from the alleged embezzlement of over $1,800,000 by a former franchisee of the Company. The complaint alleges claims against the Company in connection with claims services provided for the benefit of Safeway, Inc., including breach of fiduciary duty, negligent failure to monitor or supervise, vicarious liability, and breach of contract. The complaint seeks an accounting and a recovery of compensatory damages of at least $1,800,000. As the lawsuit is still in its earliest phase, the Company cannot yet assess the merits of the complaint or the effects this litigation will have on the Company. The Company has sought coverage under various insurance policies it holds and has received denials of coverage from the carriers. As of December 31, 1999, the Company has not accrued any liability with respect to this lawsuit. From time to time in the normal course of its business, the Company is named as a defendant in lawsuits. With the exception of the complaint described above, 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 January 26, 2000, the Company held its 1999 Annual Shareholders' Meeting. The Company's Board of Directors were reelected with 8,473,719 shares being cast and 18,144 shares withholding authority. The Directors elected and the numbers of votes each received are as follows: John M. Davies 8,434,998 Jeffrey R. Harcourt 8,434,998 Troy M. Huth 8,434,998 Jeffrey C. Jordan 8,434,998 Francis J. LaPallo 8,454,626 Louis T. Mastos 8,449,826 William J. Rocke 8,392,326 Jean E. Ryberg 8,393,826 William A. White 8,455,276 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, 2000 with 8,419,419 affirmative votes, 24,278 against, and 30,022 abstaining. ITEM 5 - OTHER INFORMATION Francis J. LaPallo, a director and an Executive Vice President of the Company, resigned from his position with the Company effective January 31, 2000. To fill the vacancy on the board, the board of directors appointed Kenneth A. Sexton to the Board. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) 27 -- Financial Data Schedule (b) The Company filed a Form 8-K on December 2, 1999 to report a change in ownership of the Company's majority shareholder, UFAC. 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: 2/11/00 /s/ Troy M. Huth ---------- ---------------------------------------- Troy M. Huth, President, Chief Executive Officer and Director Date: 2/11/00 /s/ Jeffrey R. Harcourt ---------- ---------------------------------------- Jeffrey R. Harcourt, Chief Financial Officer and Director 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 (Unaudited) AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 1,541,141 0 1,689,377 445,619 0 3,308,746 2,655,895 1,002,453 6,260,423 636,760 0 90,191 0 0 5,533,472 6,260,423 0 3,243,056 0 0 2,400,264 135,838 1,097 929,186 362,786 566,400 0 0 0 566,400 .06 .06
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