-----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, Npa6mSMFs7qQW0zbB0tZ0CXgHzTAiOc4A9KpZ8rV+NXRC8y2U7tHDa+btKoMXGDR TA2d9DD73RJKgpoR3bwC0g== 0000950147-00-000700.txt : 20000512 0000950147-00-000700.hdr.sgml : 20000512 ACCESSION NUMBER: 0000950147-00-000700 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 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: 625365 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 3/31/00 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 March 31, 2000 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 10, 2000 8,957,660 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2000 June 30, 1999 -------------- ------------- (unaudited) (*) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,159,691 $ 6,892,851 Receivables 1,061,968 1,603,756 Prepaid expenses 171,593 344,041 Other 278,336 298,214 ----------- ------------ TOTAL CURRENT ASSETS 3,671,588 9,138,862 ----------- ------------ PROPERTY AND EQUIPMENT 2,636,609 2,540,219 Less accumulated depreciation and amortization (1,003,541) (931,283) ----------- ------------ 1,633,068 1,608,936 ----------- ------------ OTHER ASSETS Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817 Less accumulated amortization (183,173) (181,440) ----------- ------------ 30,644 32,377 Receivables (long-term) 310,000 350,000 Investments (long-term) 635,466 685,148 Other 245,093 303,661 ----------- ------------ 1,221,203 1,371,186 ----------- ------------ TOTAL ASSETS $ 6,525,859 $ 12,118,984 =========== ============ LIABILITIES CURRENT LIABILITIES Accounts payable $ 28,787 $ 28,005 Accrued expenses 179,774 404,325 Franchisee/licensee remittance payable 131,560 552,946 Service fees due to UFAC 120,000 50,000 Distribution payable -- 5,918,475 Other 136,798 111,600 ----------- ------------ TOTAL CURRENT LIABILITIES 596,919 7,065,351 ----------- ------------ STOCKHOLDERS' EQUITY Common stock 90,191 90,191 Additional paid in capital 2,104,413 2,104,426 Treasury stock (184,068) (184,368) Other 24,776 20,653 Retained earnings 3,893,628 3,022,731 ----------- ------------ 5,928,940 5,053,633 ----------- ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,525,859 $ 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)
Nine Months Ended Three Months Ended March 31, March 31, ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- REVENUE Continuing licensee and franchisee fees $3,842,175 $3,670,645 $1,256,489 $1,212,145 Adjusting fees 882,979 1,059,009 225,609 360,027 ---------- ---------- ---------- ---------- 4,725,154 4,729,654 1,482,098 1,572,172 ---------- ---------- ---------- ---------- COST AND EXPENSES Compensation and employee benefits 1,682,283 2,108,759 396,282 690,975 Office 306,702 316,169 89,176 120,134 Advertising and promotion 117,312 207,497 51,505 98,707 Depreciation and amortization 166,168 198,064 51,217 70,577 Provision for doubtful accounts 227,203 152,845 91,365 56,845 Services performed by UFAC 270,000 -- 120,000 -- Other 644,950 778,003 214,809 222,361 ---------- ---------- ---------- ---------- 3,414,618 3,761,337 1,014,354 1,259,599 ---------- ---------- ---------- ---------- INCOME FROM OPERATIONS 1,310,536 968,317 467,744 312,573 ---------- ---------- ---------- ---------- OTHER INCOME Interest income 94,346 86,848 37,973 29,573 Other (Net) 33,727 12,138 3,706 5,805 ---------- ---------- ---------- ---------- TOTAL OTHER INCOME 128,073 98,986 41,679 35,378 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 1,438,609 1,067,303 509,423 347,951 INCOME TAXES 567,712 423,672 204,926 139,735 ---------- ---------- ---------- ---------- NET INCOME $ 870,897 $ 643,631 $ 304,497 $ 208,216 ========== ========== ========== ========== EARNINGS PER SHARE Basic $ .10 $ .14 $ .03 $ .05 ========== ========== ========== ========== Diluted $ .10 $ .14 $ .03 $ .05 ========== ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 8,957,561 4,605,358 8,957,564 4,605,358 ========== ========== ========== ========== Diluted 8,957,561 4,606,776 8,957,564 4,605,784 ========== ========== ========== ==========
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, -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- NET INCOME $870,897 $643,631 $304,497 $208,216 OTHER COMPREHENSIVE INCOME, NET OF TAX: Foreign currency translation adjustment 4,123 -- 350 -- Unrealized gain (loss) on securities -- 3,406 -- 3,222 -------- -------- -------- -------- 4,123 3,406 350 3,222 -------- -------- -------- -------- COMPREHENSIVE INCOME $875,020 $647,037 $304,847 $211,438 ======== ======== ======== ========
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, 2000 AND 1999
2000 1999 ----------- ----------- NET INCOME $ 870,897 $ 643,631 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization: Operations 166,168 198,064 Other -- 546 (Gain) on sale of investments (13,494) -- Loss on disposition of property and equipment 5,340 3,640 (Gain) on sale of license (267) -- Allowance for doubtful accounts 227,203 152,845 Change in assets and liabilities: (Increase) decrease in: Receivables 91,411 (80,127) Prepaid expenses 172,448 60,254 Other 962 70,532 Increase (decrease) in: Accounts payable 782 10,388 Accrued expenses (224,551) (106,921) Franchisee and licensee remittance payable (421,386) 92,457 Service fees due to UFAC 70,000 -- Other 22,509 20,907 ----------- ----------- Total adjustments 97,125 422,585 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 968,022 1,066,216 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (140,943) (132,749) Investments purchased -- (2,970,329) Proceeds on sale of fixed assets 1,209 26,761 Proceeds from sales of investments 63,494 3,000,000 Proceeds from sale of intangible assets 267,629 -- License acquisition -- (150,000) Payments on license acquisition (13,615) (33,462) Advances to licensees and franchisees (2,837,412) (3,180,151) Collections of advances to licensees and franchisees 2,869,832 3,253,774 ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 210,194 (186,156) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends (5,918,475) (172,701) Proceeds from sales of stock 287 -- ----------- ----------- NET CASH (USED IN) FINANCING ACTIVITIES (5,918,188) (172,701) EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,812 -- ----------- ----------- NET INCREASE (DECREASE) IN CASH (4,733,160) 707,359 Cash at beginning of the period 6,892,851 929,364 ----------- ----------- Cash at the end of the period $ 2,159,691 $ 1,636,723 =========== =========== Supplemental disclosures of cash flow information Cash paid during the period Income taxes $ 569,903 $ 313,215 Interest $ 1,127 $ 1,538
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 nine month periods ended March 31, 2000 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 nine and three months ended March 31, 2000 and 1999 is as follows: Nine months ended Las Vegas/Henderson Corporate and March 31, 2000 and Tucson Offices Phoenix Office Consolidated - -------------- ------------------ -------------- ------------ Revenue $ 323,441 $4,401,713 $4,725,154 Depreciation and Amortization 25,977 140,191 166,168 Interest Income -- 94,346 94,346 Segment Net Income (Loss) (2,911) 873,808 870,897 Expenditures for Segment Assets -- 140,943 140,943 Segment Assets $ 95,815 $6,412,336 $6,508,151 Nine months ended March 31, 1999 - -------------- Revenue $ 323,072 $4,406,582 $4,729,654 Depreciation and Amortization 25,698 172,366 198,064 Interest Income -- 86,848 86,848 Segment Net Income 8,756 634,875 643,631 Expenditures for Assets 18,545 114,204 132,749 Segment Assets $ 147,487 $8,113,160 $8,260,647 Three months ended March 31, 2000 - -------------- Revenue $ 76,302 $1,405,796 $1,482,098 Depreciation and Amortization 4,620 46,597 51,217 Interest Income -- 37,973 37,973 Segment Net Income (Loss) (8,543) 313,040 304,497 Expenditures for Segment Assets -- 23,830 23,830 6 Three months ended Las Vegas/Henderson Corporate and March 31, 1999 and Tucson Offices Phoenix Office Consolidated - -------------- ------------------ -------------- ------------ Revenue $ 93,531 $1,478,641 $1,572,172 Depreciation and Amortization 4,909 65,668 70,577 Interest Income -- 29,573 29,573 Segment Net Income 15,515 192,701 208,216 Expenditures for Assets -- 15,558 15,558 On January 1, 2000, the Company sold its Tucson, Arizona location to a new franchisee. Revenue and expenses from the Tucson location for the three months ended March 31, 2000, are the result of run-off business and will continue to decline in the future. (3) EARNINGS PER SHARE The effect of 99,900 stock options is not included in the earnings per share calculation because they are antidilutive. (4) DEFERRED GAIN ON SALE OF FRANCHISES On January 1, 2000, the Company sold its Tucson, Arizona office to a new franchisee for $167,629 resulting in a deferred gain of $156,021. During the three months ended March 31, 2000, the Company also sold three franchises located in the Chicago, Illinois area for $25,000 per franchise that resulted in an aggregate deferred gain of $75,000. The Company is collecting the proceeds from these sales by deducting a specified percentage of the franchisees' weekly remittances to be applied against the sales price until paid in full. The deferred gains associated with these sales are netted against the receivable for balance sheet presentation and are recorded as a gain on sale of assets when received. On March 31, 2000, the aggregate deferred gain netted against receivables was $230,754. 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; the merger transaction with United Financial Adjusting Company described below, 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. 7 In March of 2000, the Company's board of directors agreed in principle to enter into a transaction whereby the Company will exchange a net of approximately 11.5 million shares of its common stock for all of the issued and outstanding shares of stock of United Financial Adjusting Company ("UFAC") and its subsidiaries, JW Software, Inc. ("JW"), and DBG Technologies, Inc. ("DBG"). Upon consummation of the proposed transaction, the Company will merge with UFAC and will become the parent of JW and DBG. The merger will be accounted for similarly to a pooling of interest since the entities are under common control, to the extent of the common ownership. The assets and liabilities of these companies will be recorded at their fair value to the extent of the ownership interest by minority stockholders and at the historical cost for the ownership interest under common control. UFAC is an insurance claim management services company, JW develops and markets claim management software, and DBG develops and markets internet-based systems and web sites. Netrex Holdings LLC ("Netrex") currently owns all of the outstanding shares of stock in UFAC which holds approximately 59% of the Company's outstanding common stock. Consequently, after the planned transaction is consummated, Netrex would own approximately 16.4 million shares of the Company's stock, representing approximately 82% of the Company's outstanding stock. The proposed transaction is subject to, among other things, additional due diligence by the parties and execution of mutually satisfactory agreements. Assuming a definitive agreement is reached, the transaction will also be subject to approval by the shareholders of the Company and UFAC and the necessary regulatory and stock exchange approvals. In connection with this transaction, the Company will change its name to "Netrex Business Services Inc.". The Company will continue to operate the franchised and licensed claims adjusting business under the Frontier name. 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, 2000, the Company's operations generated $968,000 in cash. During the nine months ended March 31, 2000, the most significant items affecting cash generated by the Company's operations are net income of $871,000, a $421,000 decrease in franchisee and licensee remittance payable, the $225,000 decrease in accrued expenses, and the provision for doubtful accounts of $227,000. 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 the licensees and franchisees. As March 31, 2000, fell one day after the collections were remitted to licensees and franchisees, the Company's remittance payable was $132,000. In comparison, the Company's financial statements as of June 30, 1999, reflect 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 increase in allowance for doubtful accounts is due to the aging of larger balanced loans given to franchisees and licensees as compared to the same period of the prior fiscal year. 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 between $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 the 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 "Part II, Item 1 - Legal Proceedings". 8 The Company's ratio of current assets to current liabilities was 6.15 to 1 as of March 31, 2000 and 1.29 to 1 as of June 30, 1999. The increase is primarily the result of the decreases in dividend payable and franchisee/ licensee remittance payable at March 31, 2000, as compared to June 30, 1999. RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999 REVENUE The Company's revenue decreased $5,000 to $4,725,000 during the nine months ended March 31, 2000 from $4,730,000 in the same period of the prior fiscal year. This decrease represents a decrease of $176,000 in adjusting and risk management fees and an increase of $171,000 in continuing licensee and franchisee fees. The decrease of $176,000 in adjusting and risk management fees from $1,059,000 in the nine months ended March 31, 1999 to $883,000 for the nine months ended March 31, 2000 represents a 16.6% decrease. The company experienced an increase of $17,000 in adjusting fees in its Las Vegas/Henderson office, and decreases of $58,000 and $132,000 in adjusting fees from the Tucson and Phoenix offices, respectively. The remainder of the decrease, $3,000, is due to the discontinuation of risk management services provided by the Company's home office. The increase in the 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 decrease in the Tucson office is the result of the Company's sale of the Tucson office to a new franchisee on January 1, 2000. The Company's revenue from continuing licensee and franchisee fees increased 4.7% or $171,000 from $3,671,000 in the nine months ended March 31, 1999 to $3,842,000 in the nine months ended March 31, 2000. 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 the 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 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 49.3% of the Company's costs and expenses and represent the largest single item of expense. These expenses decreased 20.2% or $427,000 from $2,109,000 in the nine months ended March 31, 1999 to $1,682,000 in the current nine 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 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 9 technology, human resource support, and accounting and reporting. For the nine months ended March 31, 2000, the Company incurred $225,000 in service fees under this agreement. The Company did not incur any service fees related to this agreement in the same period of the prior fiscal year. The Company also pays UFAC for services performed beyond the scope of the service agreement. For the nine months ended March 31, 2000, the Company incurred $45,000 in computer consulting fees provided by UFAC that were not within the scope of the service agreement. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND UFAC SERVICE FEES The Company's expenses other than compensation and fringe benefits and UFAC service fees decreased $190,000 during the nine months ended March 31, 2000 as compared to the same period of the prior fiscal year. The principal items affecting these expenses are decreases of $106,000 in legal fees, $90,000 in advertising and promotion, $32,000 depreciation and amortization, and an increase of $75,000 in bad debt. Legal fees decreased significantly due to the increased need for legal services during the first nine 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. 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. 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 balance loans to franchisees or licensees as compared to the same period of the prior fiscal year. INCOME TAXES The Company's income taxes for the nine months ended March 31, 2000 were 39.5% 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 $29,000 or 29% from $99,000 in the nine months ended March 31, 1999, to $128,000 in the current period. The most significant items affecting other income are increases in the gain on sale of investments and miscellaneous income of $13,000 and $14,000, respectively. NET INCOME The Company's net income for the nine months ended March 31, 2000 increased $227,000 or 35.2% from $644,000 in the nine months ended March 31, 1999 to $871,000 in the current period. The most significant items affecting net income were a $427,000 decrease in compensation and fringe benefits, a $270,000 increase in fees for services provided by UFAC, and a $190,000 decrease in expenses other than compensation and fringe benefits and UFAC service fees. 10 RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 REVENUE The Company's revenue decreased 5.7% or $90,000 to $1,482,000 during the three months ended March 31, 2000 from $1,572,000 in the same period of the prior fiscal year. This represents a $134,000 decrease in adjusting and risk management fees and a $44,000 increase in continuing licensee and franchisee fees. The decrease of $134,000 in adjusting and risk management fees from $360,000 in the three months ended March 31, 1999 to $226,000 in the three months ended March 31, 2000 represents a 37.2% decrease. The Company experienced decreases in adjusting fees of $72,000 in its Phoenix office, $47,000 in its Tucson office, and $12,000 in its Las Vegas/Henderson office. The remainder of the decrease, $3,000, is due to a decrease in risk management fees. The decrease in the Phoenix office mainly relates to the loss of a client. The decrease in the Tucson office is the result of the Company's sale of the Tucson office to a new franchisee on January 1, 2000. Risk management fees have decreased as the Company has ceased providing these services this fiscal year. The Company's revenue from continuing licensee and franchisee fees increased 3.6% or $44,000 from $1,212,000 in the three months ended March 31, 1999 to $1,256,000 in the three months ended March 31, 2000. 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 the 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 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 39.1% of the Company's costs and expenses and represent the largest single item of expense. These expenses decreased 42.7% or $295,000 from $691,000 in the three months ended March 31, 1999 to $396,000 in the current three month period. A significant portion of this decrease is the result of the retirements of William J. Rocke, former CEO and former Chairman of the Board, and Jean E. Ryberg, former President, on June 30, 1999, and the resignation of Francis J. LaPallo, a former Executive Vice President, on January 31, 2000. Certain of the services provided by Mr. Rocke, Mrs. Ryberg, and Mr. LaPallo 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 11 months ended March 31, 2000, 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. The Company also pays UFAC for services performed beyond the scope of the service agreement. For the three months ended March 31, 2000, the Company incurred $45,000 in computer consulting fees provided by UFAC that were not within the scope of the service agreement. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND UFAC SERVICE FEES The Company's expenses other than compensation and fringe benefits and UFAC service fees decreased $71,000 during the three months ended March 31, 2000 as compared to the same quarter of the prior fiscal year. The principal items affecting these expenses are decreases of $47,000 in advertising and promotion, $31,000 in office expenses, and $20,000 in depreciation and amortization, and an increase of $34,000 in the provision for doubtful accounts. Advertising and promotional expenses decreased $47,000 this quarter as a portion of the monthly service fee paid to UFAC includes marketing resources. 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. 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. Office expenses decreased $31,000 primarily as a result of the sale of the Tucson office on January 1, 2000. Accordingly, the office expenses associated with that location have been either eliminated or have decreased substantially. Provision for doubtful accounts increased primarily due to the aging of larger balance loans to franchisees or licensees as compared to the same period fo the prior fiscal year. INCOME TAXES The Company's income taxes for the three months ended March 31, 2000 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 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 $7,000 or 20.0% from $35,000 in the three months ended March 31, 1999 to $42,000 in the current three month period. The most significant items affecting other income include increases of $8,000 in interest income, $3,000 in miscellaneous income, and $5,000 in the loss on sale of fixed assets, and a decrease of $2,000 in dividend income. NET INCOME The Company's net income for the three months ended March 31, 2000 increased $96,000 or 46.2% from $208,000 in the three months ended March 31, 1999 to $304,000 in the current quarter. The most significant items affecting net income were a $90,000 decrease in revenue, a $295,000 decrease in compensation and fringe benefits, a $120,000 increase in fees for services provided by UFAC, and a $71,000 decrease in expenses other than compensation and fringe benefits and UFAC 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, exchange rates, commodity prices, equity prices, and other market changes. Market risk is inherent in all market risk sensitive financial instruments. 12 During the first nine 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 $619,000 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. 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. The Company has denied the allegations of liability contained in the complaint. As the lawsuit is still in its earliest phase, the Company cannot yet assess the merits of the complaint or whether this suit will have a material adverse effect 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 March 31, 2000, 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 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 13 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. Subsequent to the Company's Annual Shareholders' Meeting, Mr. LaPallo resigned from the Board and from employment with the Company and Kenneth A. Sexton was appointed to the Board to fill the vacancy. ITEM 5. Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 27 - Financial Data Schedule (b) REPORTS ON FORM 8-K The Company filed a Form 8-K on December 2, 1999, to report a change in ownership of the Company's majority shareholder, UFAC. 14 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: 5/10/00 /s/ Troy M. Huth ---------------------------------------- Troy M. Huth, President, Chief Executive Officer and Director Date: 5/10/00 /s/ Jeffrey R. Harcourt ---------------------------------------- Jeffrey R. Harcourt, Chief Financial Officer and Director 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 (UNAUDITED) AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS 9-MOS JUN-30-2000 JUL-01-1999 MAR-31-2000 2,159,691 0 1,586,463 524,495 0 3,671,588 2,636,609 1,003,541 6,525,859 596,919 0 90,191 0 0 5,838,749 6,525,859 0 4,725,154 0 0 3,414,618 227,203 1,127 1,438,609 567,712 870,897 0 0 0 870,897 .10 .10
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